The cocoa price hike, its impact on smallholder farmers and EUDR

The cocoa industry is grappling with an unprecedented crisis. As reported by BBC News, cocoa prices have skyrocketed, doubling since the beginning of the year and hitting a historic peak. The International Cocoa Organization projects a staggering supply deficit of 374,000 tons for the 2023-24 season, which will likely severely disrupt the global cocoa market.

But why the sudden spike in price and drop in supply?

Key producing countries such as Côte d’Ivoire, Cameroon, and Ghana account for the bulk of cocoa supply globally, with Côte d’Ivoire and Ghana making up 60% of global production. These countries have been hard-hit by black pod disease and swollen shoot virus, made worse by the impacts of climate change and extreme weather conditions brought on by El Niño resulting in lower yields.

In a recent Al Jazeera report, Ghana’s cocoa marketing board estimated that 1.45 million acres of plantations had been infected with swollen shoot virus. Transmitted by mealybug insects, this virus can “potentially reduce yield by approximately 30% to 50% and even cause the death of cacao trees within 2 to 3 years of infection,” according to research. This doesn’t just pose an immediate problem for cocoa farmers, but a long-term one too that will require resources they likely don’t have to combat.

Coupled with this is the fact that many cacao trees are also past their prime and yielding less and less fruit, says CNBC Africa and very little replanting is taking place. The reason? Smallholder farmers find themselves in a “low-income trap”, says the International Food Policy Research Institute. They only receive a marginal share of the high-value cocoa-based products their beans are used for, making it difficult to reinvest in plantations and replant as well as implement mitigating measures to prevent disease. According to the Forest Alliance “around two-thirds of cocoa farmers earn less than $2 a day”.

Challenges and Consequences of Underinvestment in Small-Holder Cocoa Farms

Chronic underinvestment in small-hold cocoa farms – either due to a farmer’s lack of financial resources or failed government reinvestment programmes, for example – means farmers often abandon their farms and turn to alternative means to survive. In Ghana and Cote d’Ivoire, cocoa prices are set to protect producers when international prices are too low, but when they’re high, farmers don’t benefit. This differs in liberalised markets like Cameroon and Nigeria, where prices fluctuate based on international market conditions.

The dwindling benefit to farmers means they’re looking elsewhere to sustain themselves. One way is to lease their land for illegal gold mining (particularly in Ghana), which has negative long-term effects on cacao tree growth due to dust settlement, on top of farther-reaching environmental consequences such as destroying soil mineral profiles and the pollution of natural water bodies by toxic substances like mercury which is used to amalgamate gold. In 2022, Ghana’s National Food Buffer Stock Company Limited reported that illegal mining had “affected or destroyed more than 46,950 acres of cocoa plantations”.

Another alternative for smallholder survival is redirecting their efforts into a more lucrative arena like farming rubber, which many farmers in Côte d’Ivoire have done. This also comes with its own set of challenges, which you can read about here.

However, not all farmers are poised to abandon their cocoa plantations, which highlights another area of concern – an increase in unsustainable farming practices and illegal deforestation to keep up with cocoa demand by planting new trees.

The Environmental and Market Implications of Increasing Cocoa Production Amid EU Regulations

As reported by JP Morgan’s Tracey Allen, an Agricultural Commodities Strategist, “increasing cacao plantings will be critical to boost longer-term supply,” but ensuring this boost can have devastating environmental consequences – from biodiversity loss to soil degradation and more. On top of this is the additional impact of ‘unsellable’ products due to the EU Deforestation Regulation (EUDR), which prohibits any commodity and its byproducts from being placed on the EU market if they come from previously deforested land. Cocoa traceability through geolocation, deforestation risk assessments and due diligence reporting are just some of the measures EUDR requires to certify a commodity as deforestation-free.

The EU is the largest importer of cocoa beans worldwide, accounting for 56% of global imports. If smallholder farmers are driven to expand plantations due to mounting demand illegally, they could be entirely excluded from the EU market, their efforts in vain.

Smallholders already face issues in meeting the EU Deforestation Regulation – there is an increased regulatory burden on their shoulders that they are entirely unfamiliar with, and this is often accompanied by time pressure and massive technological constraints such as limited cellphone and internet access. A lack of governmental coordination and access to data, on top of poverty pressure and other concerns like child labour all make regulatory compliance more difficult. Overlay cocoa price hikes and unstable supply and the future looks all the more uncertain.

Consumers also have a role to play in the price hike puzzle and how it impacts farmers. Chocolate manufacturers like Mondelez and Hershey’s are passing on higher cocoa prices to consumers through price hikes; last year, Mondelez increased prices by 15% to help meet their 2024 revenue growth forecasts.

The Ripple Effect of Shrinkflation: Challenges for Cocoa Farmers Amid Changing Consumer Trends

Many other manufacturers are following suit, leading to a change in consumer buying behaviour as they gravitate towards other snacks like cookies and more savoury options. Chocolate is becoming a luxury many are willing to go without.

But this purchasing slump exacerbates problems for smallholder farmers who are already facing low yields. If demand for cocoa drops because manufacturers implement shrinkflation strategies or opt to use less cocoa in their products to save on costs themselves, farmers sit with beans that don’t sell. And if beans don’t sell, then it’s back into the cycle of finding alternative means of survival that impact both land and livelihoods.

Turning things around is complex to say the least. The climate change factors impacting farmers are on a global scale, and no simple policy or one-size-fits-all intervention is going to provide relief. There may be more room to impact pricing liberalisation in price-set countries so farmers get more out, and in government initiatives to help embattled farmers implement climate-smart agriculture practices such as using shade trees, irrigation, crop diversification and climate-resilient seedlings. Senior Director of Global Programs at the Rainforest Alliance, Kwame Osei, also believes that consumers play an essential role in helping farmers survive this crisis by “backing brands that pay cocoa farmers prices that allow a decent standard of living and help cocoa farmers adopt more sustainable and regenerative practices.”

On the EUDR front, smallholders need to be taken under the wing of bigger suppliers or provided with appropriate regulatory, financial, and technological support to comply with regulations. They cannot be blindsided by sudden non-compliance and sales slumps when they’re already facing so much uncertainty.