So Valentine’s Day is upon us so it seems worth thinking about an interesting supply chain story from Fortune (How Big Chocolate plans to save its cocoa supply, Feb 7). Apparently Hershey and other large confectionary firms are spending heavily in West Africa to help out cocoa farmers. They are targeting both working conditions (in particular, trying to eliminate child labor) and educating farmers. On the one hand, this may seem like so much corporate window dressing to avoid an Applesque avalanche of bad press on just what it takes to put chocolates in the sampler box. On the other, there are very real bottom line implications for the firms in carrying out these programs.
But there is common ground. All industry players benefit if farmers produce more cocoa. Market demand is growing. As nations like India and China grow wealthier, new members of their burgeoning middle classes have developed an appetite for luxury goods such as coffee and chocolate.
At the same time, companies are keeping an eye on environmental and political threats to cocoa yields. Space to grow cocoa is limited; it only thrives in equatorial climates. About a third of the crop grown every year is trashed because of pests and disease. Unstable political conditions in cocoa-producing nations also adds to the volatility in the market. Cote d’Ivoire, for example, produces over a third of the world’s cocoa. In 2011, political unrest surrounding a local election caused the government to cease all exports, which limited the cocoa supply and sent cocoa prices skyward.
Companies need to get on the ground to ensure their supply. Hershey, for example, introduced a program called COCOALINK in 2011. COCOALINK distributes information about climate and pest control via SMS to farmers with cell phones, which most of them already have. “We’re starting to see the benefits when you really get to the farmers and give them the best information,” says Andrew McCormick, the vice president of public affairs at Hershey. “The preliminary results are that it will double crop yields in a couple of years.”
The educational benefits to the local community can go beyond cocoa. Apparently cocoa trees deplete the soil, so it is best if other plants are also grown on the same plot. Thus successful cocoa programs need to encourage farmers to have broader sustainability agendas. The aim is to educate younger farmers so that the cocoa consuming firms have partners to work with for the next few decades.
This is an interesting supply chain story on multiple levels. It involves not only big firms but also governments and NGOs. There are a lot of moving parts that come into play. But plausibly there is a way here that everyone from the growers to the firms to those of us with a sweet tooth can benefit.
Starbucks had a similar arrangement with its “Fair Trade” coffee.
By supporting local coffee growers with upfront financing and higher than market prices (operations/finance interface), it improved its access to premium coffee (where supply shortages are not uncommon). Much of the financing was done by NGOs and non-profits, and not directly by Starbucks (that’s financial engineering for you). Finally, Starbucks gets good brand image as a socially and environmentally conscious company. So it’s a “win-win-win” for Starbucks, and a “win” for the farmers. But money has to come from someone. So there must be a couple of “lose”s to offset the “wins”.
A brief excerpt from the book “The Undercover Economist” by Tim Hartford on the Fair Trade issue (it doesn’t look so fair now). Any thoughts on this Marty/Vlad?
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Costa hit upon an elegant strategy: Costa, like most other coffee bars these days, offers “Fair Trade” coffee; theirs comes from a leading fair trade brand called Cafédirect. Cafédirect promises to offer good prices to coffee farmers in poor countries. For several years, customers who wished to support third-world farmers—and such customers are apparently not uncommon in London—were charged an extra ten pence (about eighteen cents). They may have believed that the ten pence went to the struggling coffee farmer. The evidence suggested that al- most none of that money went anywhere but Costa’s bottom line.
Cafédirect paid farmers a premium of between 40 and 55 pence (up to a dollar) per pound of coffee. That relatively small pre- mium can nearly double the income of a farmer in Guatemala, where the average income is less than $2,000 a year. But since the typical cappuccino is made with a quarter-ounce of coffee beans, the premium paid to the farmer should translate into a cost increase of less than a penny a cup.
Of the extra money that Costa charged, more than 90 percent was going missing between the customer and the farmer. So ei- ther Costa and Cafédirect were wasting the money (through higher costs) or it was being added to profits. Fair trade coffee associations make a promise to the producer, not the consumer. If you buy fair trade coffee, you are guaranteed that the producer will receive a good price. But there is no guarantee that you will receive a good price. The truth is that fair trade coffee wholesal- ers could pay two, three, or sometimes four times the market price for coffee in the developing world without adding anything noticeable to the production cost of a cappuccino, because coffee beans make up such a small proportion of that cost. Charging an extra ten pence gave a misleading impression of how much it really cost to get hold of that fair trade coffee.
There is a similar initiative by ITC’s computer kiosks in Indian villages.
I happened to read a research paper in POM Journal on this: http://onlinelibrary.wiley.com/doi/10.1111/j.1937-5956.2011.01317.x/abstract
Krishnan
I suggest to those who love coffee and chocolate to read up on these matters that way we can all pull together and a sure our selfs that we are getting what we pay for and that the small farmers get there fair share as well.
Joe
http://www.coastalroasters.com