Who’s taking responsibility for fair cocoa prices?

Bart Van Besien, Oxfam België | 10 October 2024

The 400USD “Living Income Differential” (LID) that the Ivorian and Ghanian governments fought hard for since its announcement in 2018, seems insignificant compared with current price levels the cocoa market. However, there are some important lessons to be learned from the experience. Chocolate companies will need to revise their purchasing practices to bring them in line with new Human Rights standards.

In October 2024, cocoa prices have stabilized around 7.000 USD per metric ton (MT). This is more than double the price that was paid just one year ago, when the rollercoaster on the cocoa market took off. The crazy ride reached its peak in April 2024 hitting 12.000 USD. The high prices are a direct consequence of an acute shortage of cocoa beans due to a significant production drop during 2023-2024 harvest in the biggest producing countries Ghana (-45%)  and Côte d’Ivoire (-28%), mainly caused by the El Niño weather phenomenon that hit the region.

Imperfect differentials

The current price dynamics make the 2018 announcement of the “Living Income Differential” (LID) feel like a far away memory. The governments of Ghana and Côte d’Ivoire had managed to find an agreement with the major cocoa companies to receive a 400 USD differential on top of every ton of cocoa sold, as a way to stabilize farmgate prices and tackle farmer poverty. Cocoa companies grudgingly accepted.

However, when the LID was introduced, one of the side effects was the drop of “country differential”, to negative values. Country differentials typically reflect the quality of the cocoa from a given country. The country differentials for Ghanian and Ivorian cocoa had been positive for decades because of their prized characteristics in terms of butter content, aroma, etc… After the LID was introduced, suddenly Ghanian and Ivorian cocoa was perceived as below standard quality.

Active undermining or systemic issue?

The question was raised by many actors and observers: Were cocoa/chocolate companies actively undermining the initiative?

It’s hard to find proof for this kind of a scheme. What our study did show, however is that downstream actors (e.g., chocolate brands, supermarkets) turn a blind eye on the purchasing practices on the ground. Some of these actors agreed that 400USD was to be paid on top of every ton of cocoa. The fact that this led to negative country differentials was perceived as “outside of their zone of influence”.

Big chocolate companies have outsourced purchasing practices almost entirely to international traders. The latter are highly specialized in hedging futures contracts at the Intercontinental Exchange (ICE) and securing a thin margin for themselves, while the former focus on the higher margins they can make from selling their products to customers.

When international traders negotiated down the country differentials, it’s because no actor was willing to secure these contracts from them and working on thin margins, it would make no business sense to pay higher for something you aren’t able to sell at a higher price.

Breaking the cycle

The reality today is that the cocoa price has raised by a multiple of the LID… and companies are paying it. The irony is that farmer poverty and the consequent bad farm management has led to this situation.

Decades of moral calls for fair prices have turned out ineffective to push companies to change their purchasing practices. The current situation shows, however that paying fair prices is very realistic and reasonable. Yet, companies only pay it when they are cornered by the market.

To turn around this vicious cycle of poverty and low prices, which is also linked with deforestation and child labor, chocolate companies need to take full responsibility for the purchasing practices that they are currently outsourcing. This should be a central aspect of their human rights and environmental due diligence (HREDD) process.

Bart Van Besien is a Policy Advisor at Oxfam België, specializing in cocoa, coffee, and fair supply chains