Raising Farm Gate Prices
Approaches to Ensure a Living Income for Smallholder Cocoa Farmers
Introduction

Failed Market

Over the past years, the cocoa sector has come a long way.
Governments, companies and civil society have learned toengage each other in critical and constructive dialogue
around diverse topics. Which approaches to reduce childlabour work best, non-competitive collaboration on yield
increase programmes, streamlining training curriculums
and audits for certification; the sector has developed abroad and varied vocabulary in its approaches towards amore sustainble cocoa sector. On one topic, however, weseem to have far too little conversation; farm gate prices.
There is no discussion on viable options to raise farm gate
prices to the level that allows farmers to escape structural
poverty and attain a living income. The goal of this paper is
to initiate deeper discussions around cocoa farmers’
incomes. To do this, the paper outlines the challenges andpotential approaches to addressing the problem that havebeen put forward over the years.

Since the liberalisation – under pressure of the IMF andWorld Bank - of the cocoa markets in the 1980’s, the sector
has largely avoided talking about how to raise farm gate
prices. ‘The Market’ was expected to balance supply anddemand, thereby leading to the ‘right price’. However, themarket has failed for the majority of cocoa farmers; they
are extremely poor. The time has come to address some of1
the core design flaws of the system.

Executive Summary

The minimum price systems in Côte d’Ivoire and Ghana
have delayed the impact on farmers of the price decline,
but farm gate prices of cocoa have already decreased in
Côte d’Ivoire, and in Ghana they are expected to decreasesignificantly in real terms within the coming months,
posing a risk for farmers’ confidence in their governments.

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It is a matter of urgency to find ways to raise farm gate
prices, both to alleviate poverty at farm level, as well as
to make the cocoa sector sustainable in the long term.
Living income should be the aim, not just a return topre-decline price levels. This will require common
approaches to living income calculations. The focus on
productivity increases currently being pursued by mostindustry actors will not suffice.
In the short term, chocolate manufacturers can nolonger hide behind ‘the market’; prior to the next main
crop season, they have the responsibility to ensure ahigher farm gate price (implementing floor prices or
flexible premiums). In the medium-to-long term, they
have the responsibility to ensure holistic sustainability
interventions, incorporating income diversification
strategies and access to finance in their sustainability
programmes.
In the medium and longer term, governments aregoing to need develop and implement agricultural
policies commensurate to the size of the challenges.
They will have to ensure farming communities haveaccess to basic needs, and they will need to work
together to ensure a sustainable level of cocoa supply
management.
These approaches will require strong political will, bygovernments and industry alike, and will require awillingness to look beyond a business as usualapproach.
In all cases, the wellbeing of farmers and their families
should be the first priority in any decision taken, withspecific attention to be paid to gender issues andchild-rights.

Price Decline
The past months have seen the price of cocoa plunge by athousand dollars per metric ton since September, a loss invalue of over 30%. This will have disastrous results for thealready impoverished cocoa farmers of West Africa. It also
poses serious problems for the Ghanaian and Ivoriangovernments, for whom cocoa revenues are an essential
part of their GDP.

One senior sector representative mentioned under
Chatham House Rules in March 2017 “the price decline ofcocoa will de facto erase all of the sustainability gains thathave been achieved in the past ten years”. This will harmcurrent efforts to combat child labour, exacerbate genderinequality, foster deforestation, and contribute to many of
the other major challenges facing the cocoa sector.
Living Income2

Not only is it necessary to look at ways to influence farm
gate prices to protect farmers from price shocks, it is alsoessential to look at this topic to increase farm income ingeneral. Even at the price levels of mid-2016, before thedecline, almost all cocoa farmers were living well below
1

Though countervailing powers do lead to a reasonable balanceof price for most of the supply chain, the recent SEO researchstates “the main reason for the persistent poverty among cocoa
farmers is the fact that most of them are price takers, with little orno market power.” Nienke Oomes, Bert Tieben, et al. Market
Concentration and Price Formation in the Global Cocoa Value
Chain, SEO Amsterdam Economics, p.1.
2
Living income is the net income a household would need toearn to enable all members of the household to afford a decent
standard of living. Elements of a decent standard of living
include: food, water, housing, education, health care, transport,
clothing, and other essential needs including provision for
unexpected events. Definition of “Community of Practice” on
Living Income, hosted by GIZ, ISEAL, and Sustainable Food Lab

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6the poverty line. Structurally low prices (adjusted for
inflation) have reduced the attractiveness of cocoa farming3
for several decades.

which need years to reward investments. Therefore, a low
cocoa price is also a threat to future cocoa production, andto the long-term profitability of the large cocoa companies.

One of the key starting points for this conversation, as wehave advocated for several years now, is a common
approach to a living income. It is a precondition for theapproaches suggested in this paper. However, in thecocoa sector, this has turned into a largely academic
discussion, with some pilots here and there, but very little
movement, and no deliverables as of yet. Unless we cananswer the questions “what should a farmer be able toearn”, all the approaches discussed in this paper will belooking at a worryingly incomplete finish line.

Industry Responsibility

Productivity

Since the mid-1980’s, transmission of price fluctuations incocoa has been asymmetric; while retail prices rise quickly
when the price for cocoa goes up, they only drop slowly
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when cocoa prices go down. This means that with falling
prices of cocoa beans, chocolate manufacturers see an
8increase of their profit margins. As such, manufacturers
have a short-term responsibility to ensure they do notmake extra profits at the expense of extra poverty.

Current industry approaches to cocoa sustainability arealmost exclusively based on increasing productivity perhectare. Though this is an important variable, the current
productivity approach does not provide a macro solution
to farmer poverty. A recent paper commissioned by the
Dutch government argues that “initiatives to raise cocoa
sector productivity are not the solution for all farmers”, andthat “farmers need both a major price increase for theircocoa and a substantial increase in productivity in order to4
make a decent living out of cocoa” . The current global
oversupply of cocoa (arguably one of the causes of the5current price decline ) will hardly be dealt with byincreasing productivity even further. A productivity-driven
approach, therefore, might work for a few farmers but, ingeneral, only further exacerbate the problems of the
majority of farmers.
Return on Investment
Even to maintain current production capacity the ageing
farmers have to invest in the rehabilitation of their cocoa
trees, which are mostly at the end of their life cycle.
However, investment in sustaining or improving
productivity only makes business sense if the investment is
expected to pay off, especially for crops such as cocoa,
3

The 2012 and 2015 Cocoa Barometers, recent research papers,
as well as remarks by industry leaders confirm that the averagecocoa farmer earns well below $1.00 per day, far below theextreme poverty line.
Further reading; Gaëlle Balineau, Safia Bernath, Vaihei Pahuatini.
Cocoa farmers’ agricultural practices and livelihoods in Côte
d’Ivoire, AFD Paris, 2017; Oomes, Tieben, et al.; Oliver Nieburg.
ConfectioneryNews. [ONLINE] Available at:
http://www.confectionerynews.com/Commodities/Evendoubled-income-for-farmers-won-t-make-cocoa-sustainableMars.
4
Oomes, Tieben, p.11, p.76
5
According to Lionel Soulard, Managing Director, West Africa,
Cargill Cocoa & Chocolate, the “’large oversupply of cocoa
beans’ … led to a fall in [world market] prices”. Oliver Nieburg.
ConfectioneryNews. [ONLINE] Available at:
http://www.confectionerynews.com/Commodities/Cocoa-pricefor-Ivorian-farmers-may-drop-30

The simplest way to raise farm gate prices – and it almost
feels too obvious to mention – is for companies that buy
cocoa beans to simply pay more to the farmers. Paying thefarmers more is the fastest, most efficient, and simplest
way to address cocoa poverty in the short term. As long as
there are no long-term solutions, manufacturers should
start immediately.
Profit/Poverty

Price Level
What should the level of a minimum price be? Whenapproaching this from a farmer’s perspective, clearly theprice should be high enough that a farmer can earn a living
income for him/herself and his/her dependents. However,
because of the lack of a sector wide definition on how to
calculate a living income, at present we simply can’t say
how high the price should be to cover a farmer’s basic
needs. Therefore, it is essential that the sector come with aclear consensus on living income and how to calculate this,within the very short term.
Inter-Crop Parity
From a market perspective, prices that are high could leadto farmers in other commodities to switch to cocoa, as wellas to current cocoa farmers increasing production. This
overproduction would put pressure on the world market
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The Farmer Economic Model published by the World Cocoa
Foundation (WCF) is a useful tool in this regard. Parameters likefarm size, price, costs for inputs, costs for labour, etc. can bevaried. Based on these figures the model shows whichinvestments into a cocoa plantation and especially the
rejuvenation of the trees are profitable. The future price of cocoa
is the crucial and unpredictable factor in this calculation.
[ONLINE] Available at:https://hub.cocoaaction.org/econmodel/public/
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Catherine Bonjean, Jean-François Brun. Price Transmission in
the Cocoa-Cholate Chain. CERDI, Université d’Auvergne, 2007
8
This applies especially to chocolate and couverture
manufacturers such as Mondelez, Nestlé, Mars, Hershey, Ferrero,
Lindt, and Barry Callebaut. Barry Callebaut’s CEO highlighted theboost to margins from the “collapse” of bean prices. AgriMoney.
2017. [ONLINE] Available at:
http://www.agrimoney.com/news/barry-callebaut-shares-hit-alltime-high-as-cocoa-price-dip-helps-profits--10628.html

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price. This ‘inter-crop parity’ challenge will have to beaddressed.
One-Size-Fits-All
A certain price might be sufficient in one region, but too
low in another region. To set the level of the worldwide
mandatory minimum price would be a major challenge, toa large extent repeating the same mistakes as the current
one-size-fits-all world market pricing system.
Anti-Trust
Companies have been reluctant to discuss prices due toconcerns around anti-trust laws. But there are indicatorsthat competition authorities would allow conversations totake place, provided they are meant to protect humanrights and combat poverty. Meanwhile, employees ofthese companies who know the living conditions on thecocoa farms in West Africa are well aware that farm gate
prices need to significantly increase if cocoa production is
to be truly sustainable. It is time for the companies to not
use anti-trust concerns as a defence, to take the moral
imperative, and engage in conversations around how toraise farm gate prices to ensure a living income for cocoa
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farming families living in structural destitute poverty.
Though there might be concerns around collusion if thiswere to be decided upon at a collective level, there is no
reason why individual companies shouldn’t be able tounilaterally decide to pay their farmers more.

model contracts. These could be set at regional levels,
avoiding a global one-size-fits-all pricing system, althoughapproaches would need to be found to address the highly
asymmetric bargaining power of farmers.
The risk of price volatility could be shared; with an upper
limit for a premium threshold, there would be no premium
at all if prices were high enough; with a price below thatlevel, the premium would increase step by step, until aguaranteed minimum farm gate price is reached.
The fixed minimum prices in Côte d’Ivôire and Ghana
could facilitate the implementation of flexible premiums.
Currently, in both countries the minimum price is fixed at
the beginning of the harvesting season, and could serve asa stable baseline for the calculation of the premium.
However, these minimum prices would have to be
increased significantly to ensure farmers can earn a decent
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income.
A model of what such a flexible premium could look likecan be found in the table below.
Flexible Premium Model (example)
Gross Price

Premium

Farm gate$3,000$0$3,000$2,900$50$2,950$2,800$100$2,900$2,300$350$2,650$2,200$400$2,600$2,000$500$2,500*$1,800$700$2,500(Flexible) Premiums
Premiums coupled to a certification scheme generallyaren’t higher than 10% of the world market price, resulting
in a marginal impact on the cocoa farmer income. If they
are to be a tool to solve this issue, premiums will have to
be more flexible, and will have to be a lot higher thancurrent levels. Some smaller companies, such as Taza
Chocolate, Ingemann, and Tony’s Chocolonely, alreadywork with flexible premiums based on farm gate pricedevelopments.
A flexible premium system could help avoid some of the
problems connected with floor prices and how companies
could implement such a responsibility.
As premiums are a supply chain based approach, flexible
premiums
canbeincorporated
into
contracts.
Governments or regulatory bodies at the national level(such as CCC in Côte d’Ivoire, COCOBOD in Ghana), or at
the international level (such as the FCC), could set up* Minimum farm gate price reached.

Government Responsibility
If the only intervention would be price-based industry-led
solutions, within several years, there is a risk of an
oversupply of cocoa. As such, price intervention must be
coupled with a more long-term policy approach fromproducing nations’ governments looking at a coherent
agricultural policy, and at some levels of global supply
management. One simply cannot intervene in price andthen laissez faire on supply. As such, there is also a crucialrole for cocoa producing nations’ governments to taketheir responsibility on this issue much more seriously.

9Additionally, regulators are advised to re-evaluate antitrust
legislation. Current laws seem to only attempt to protect
consumers from prices that are artificially high. However, anymarket economist can explain that market power works bothways, both downstream and upstream. It is time for competition
regulation to work both ways, and to also protect first producers
from prices that are artificially low. This asymmetry is one of theprime reasons why our food system is broken, not just for cocoa
farmers.

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A full explanation of how a flexible premium system could work
has been developed by the Südwind Institut, and can be
downloaded at www.suedwind-institut.de. On May 16th, 2017,
two members of the Barometer Consortium (Südwind Institut and
Inkota Netzwerk) will be hosting a one-day conference on how
this flexible premium – as well as other various best-practicemodels in cocoa and in other sectors – could work.

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Agricultural Policies and Infrastructure
Governments of producing nations must develop andimplement agricultural policies commensurate to the sizeof the challenges. This would include the promotion of,and accessibility to, diversified sources of income andaccess to credit. In addition, this will have to include theaccess to basic needs for farming communities. Ensuringchild rights and gender equality are essential to maintain ahealthy and thriving sector and cocoa communties
National Minimum Prices
The Cocobod and the CCC offer a guaranteed minimum
price to the farmers. These have a necessary function ofprotecting farmers from day to day fluctuations in theprice. Provided there is sufficient political will, it might not
be impossible for one or both of these countries to raise
prices nationally or regionally to a level that would ensure
a decent livelihood, rather than being based on theinternational trading price.
Supply Management
Supply management has been a key element of the
agricultural policy of most industrialised countries toprotect their farmers. In fact, it has been one of the few
ways by which Europe and the United States have beenable to sustain their agricultural industries over the past
decades.
There are various approaches to limiting the supply of
cocoa, including the instalment of buffer stock funds,
quotas, the introduction of an OPEC-like collaboration
between the major cocoa producing nations, and thephysical limitation of cocoa supplies through alternative
uses of stockpiles.
Effective supply control would need to be achieved within
the individual countries, as well as on a global level. At
both national and global levels, this would require theestablishment of workable mechanisms for (re)allocating
individual production rights, monitoring quality andproduction methods, overcoming rent seeking, corruption
and avoidance, workable mechanisms for monitoring
national production and trade, (re)allocating production
rights between countries, and overcoming free rider
problems.
Clear lessons have to be learned from the internationalcommodity agreements that functioned until the 1980’s; asthese largely failed due to a combination of not properly
addressing the issues mentioned above coupled with
ideological motives to deregulate and liberalise the global
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commodities markets.

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Niek Koning, Muriel Calo, Roel Jongeneel. Fair Trade in
Tropical Crops is Possible. International Commodity Agreements
Revisited. North-South discussion paper no 3, Wageningen UR,
2004

In all situations, a supply management solution would
require significant political will. It would also require ahigher level of trust and integrity at government levels thancurrently is the situation.
Income Diversification
In addition to ensuring a sufficient farm gate price, industry
and government should promote income diversity, making
farmers far less dependent on one cash crop and hence
diminishing the risk that inter-crop parity concerns will overtime impact the prices of a single commodity. Diversified
production is also a potential useful tool within a large setof interventions for governments to implement theiragricultural policies and supply management.
Current Approaches
The authors of this paper believe that new approaches arenecessary to effectively tackle structural poverty andensure a living income in the cocoa supply chain. If
respondents believe current approaches are sufficient tothis purpose, we invite them to provide us with the data toback such claims. If cocoa cannot drive development
progress – including an end to child labour and structural
poverty – then the producing nation governments should
consider diversifying their development strategy.
About this Consultation Paper
This consultation paper is a first attempt to find new
vocabulary on a very sensitive topic. As such, there will be
mistakes and omissions in this paper. We call any and all
stakeholders in the cocoa sector to provide theirperspectives, corrections, additions, and responses to thispaper. Feedback and input to this Consultation Paper will
be used for the 2017 Cocoa Barometer, which is to bereleased in the fall. The deadline for submitting feedback
is June 30th, 2017, to antonie@voicenetwork.eu.
Citation: Fountain, A.C. and Hütz-Adams, F. (2017):
Raising Farm Gate Prices. Approaches to Ensure a Living
Income for Smallholder Cocoa Farmers. Cocoa Barometer
Consultation Paper.
Cocoa Barometer Consortium
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VOICE Network;
ABVV-FGTB Horval (Belgium)
FNV (Netherlands)
Inkota Netzwerk (Germany)
Oxfam (Netherlands, Belgium)
Public Eye (Switzerland)
Stop The Traffik (Netherlands, Australia)
Südwind Institut (Germany)
Green America (USA)
Hivos (Netherlands)
International Labor Rights Forum (USA)
Mondiaal FNV (Netherlands)
Oxfam America (USA)
Solidaridad (Netherlands)

www.cocoabarometer.org

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