Necessary Price Premiums to Incentivize Ghanaian Organic Cocoa Production: A Phased, Orchard Management Approach

Price premiums necessary to incentivize switching from conventional (inorganic) to organic cocoa (Theobroma cacao) production in Ghana are identified. Optimal, phased-replacement models for orchard management are used to determine when switching from conventional to organic is profitable. The decision is a function of orchard growth stage, price premiums, and yield loss. Results indicate that the net present value (NPV) of organic production under current market conditions is 21% lower than the NPV of conventional production. Analysis shows that, generally, the minimum price premium to convert to organic is just slightly lower, in percentage terms, than the yield reduction caused by growing organically. The mounting concerns about food safety, health, environmental, and social welfare issues have increased demand for organic cocoa products in high-income countries. Euromonitor International [as cited in International Cocoa Organization (ICCO), 2007b; Pay, 2009] estimated the sale of worldwide organic chocolate in 2002 at $171 million and increased to $304 million in 2005. Similarly, as reported by Potts et al. (2010), the sales of certified cocoa, which is produced and traded according to standard guidelines of various organizations—Fairtrade, the International Federation of Organic Agriculture Movements (IFOAM), the Rainforest Alliance, UTZ Certified, and other certification organizations—in 2008 accounted for 1.2% of total global cocoa sales. These sales have grown by 248% since 2003 to 2008 (Potts et al., 2010). Nevertheless, the total market share of organically grown cocoa is still relatively very small and accounted for less than 0.5% of the total production in 2002 to 2005 (ICCO, 2006) although demand for organic cocoa is increasing. For small-scale cocoa producers in Ghana, where 56% of the population works in the agricultural sector [Central Intelligence Agency (CIA), 2011] and 78.5% of the Ghanaians live on less than $2 (U.S. dollars) per day (The World Resources Institute, 2011), growing cocoa organically is often not a choice but a necessity as a result of the high cost of inorganic fertilizer, fungicide, and other inputs and the minimal opportunity for microfinance (Agbeniyi et al., 2010). For producers who cannot afford inorganic inputs and who currently grow organic cocoa, there is a large amount of risk (both in price and in yield) involved with an estimated 30% lower yield compared with conventional (inorganic) production (Phuoc et al., 2008; Victor et al., 2010). However, producer profits could be higher if they could afford inorganic fertilizer. Therefore, a sufficient and stable organic price premium is needed to induce producers to continue growing cocoa organically. Aside from yield loss from converting to organic farming, the aging of tree stocks also has a significant impact on diminishing cocoa yields (Fig. 1) when the trees are retained beyond their economically productive life (Asare and David, 2010; Gro-Cocoa, 2008; Hardy, 1960; Montgomery, 1981). In many parts of West Africa, cocoa trees are abandoned and not replaced after the trees become old enough in their life cycle to produce yields that are not economically viable (Vos and Krauss, as cited in Gro-Cocoa, 2008). For cocoa producers, weighing the benefits and costs of replacing trees is important because the productivity of a cocoa tree plateaus and then diminishes over time. Because cocoa trees reach peak productivity quickly (at age 12 years) and bear the fruit for up to 50 years, culling and replanting cocoa trees are practices needed to maintain maximum orchard profitability over time. This temporal aspect of yield is also problematic when producers are contemplating switching from conventional production to organic production methods. Given the life cycle of a tree, a producer must not only answer ‘‘if ’’ they should switch to organic methods but ‘‘when’’ switching becomes beneficial in the life cycle of an orchard. Several studies (Arope, 1971; Etherington, 1977; Ismail and Mamat, 2002; Manos and Papanagiotou, 1983; Tisdell and De Silva, 2008; Ward and Faris, 1968) have used replacement models to determine optimal replacement rotations of fruit trees such as plum, peach, palm oil, apple, pear, coconut, and rubber trees. Similarly, several replanting strategies have also been used in cocoa production. According to Murray (as cited in Lass, 2001), the partial replanting method (the removal all poor-yielding trees over several years) has lower yield than a complete replanting (the removal all cocoa and shade trees). However, no complete replanting study has adopted the optimal, phased-replanting method to compare organic and conventional cocoa farming. This study estimates the price premium necessary to motivate profit maximizing cocoa producers to prefer organic production over conventional cocoa production. We develop a decision tool to empirically estimate NPV using optimal, phased-replacement strategies for 1) a new cocoa farm; and 2) an existing, conventional cocoa farm contemplating converting to organic at various points in an orchard’s life cycle. By comparing the NPV of organic and conventional production systems under various scenarios, the price premiums necessary to incentivize producers to produce the lower yielding organic cocoa are identified. The modeling for an existing conventional farm accounts for the fact that when a conventional producer converts to organic production, the producer immediately suffers a yield loss. Additionally, a producer must wait three years for the organic certification that will allow him or her to be compensated with an organic price premium. This study provides 1) a decision tool for producers to determine ‘‘if ’’ and ‘‘when’’ it would be optimal to produce organic cocoa; and 2) an estimated organic premium that bulk, organic cocoa purchasers must pay to incentivize cocoa producers to continually produce organic cocoa.