Fairtrade and cocoa price stability in Ghana

Introduction

A report published by Reuters Television indicates that Ghana produces fourteen percent (14%) of the total production of the world's cocoa. In spite of this glowing achievement our cocoa farmers receive a very little percentage of the revenue generated by chocolate manufacturing companies across the globe through the sales of chocolate bars (Reuters 2009). Apart from that the International Cocoa Organisation (ICO) reports reveals that West African farmers, including the young children who support their parents on the farms, supply 70 percent of all cocoa to feed the chocolate industry. The irony is while these companies create massive wealth for their shareholders the farmers live in abject penury. According to the International Institute of Tropical Agriculture annual incomes for farmers in the region average $30 to $110 per household member. The report goes on to say that only half of the international cocoa price on the world market goes to farmers in West Africa while in other countries farmers receive up to 90 percent of that price.

With statistics such as the above one could argue was what prompted well meaning organisations such as Comic Relief, Oxfam, Christian Aid, Bill & Melinda Gates Foundation etc to throw in their weight in support of the farmers in West Africa. For instance the World Cocoa Foundation started a five-year project aimed at doubling incomes of farmers by 2013. The project plans to reach about 200,000 small cocoa farming households in Cameroon, Cote d'Ivoire, Ghana, Liberia, and Nigeria (http://seattletimes.nwsource.com).

Fairtrade and the supply chain of cocoa

Fairtrade in conjunction with other organizations has contributed immensely in increasing the income level of farmers in the country. They achieved this by putting in efforts to eliminate middlemen in the supply chain of the cocoa industry. Prior to the advent of fair trade in the country the industry was very fragmented. The cocoa trade was controlled by middlemen who created so much inefficiency in the supply chain. Many of the farmers were excluded from mainstream world markets because they access these markets through long trading chains. These middlemen exploited the poor farmers leaving them with very little income. In addition to this prices paid for farm produce from these countries on the world market were not quite encouraging.

In a bid to cut out the middlemen and to boost the income of farmers in Ghana the cocoa farmers with the help of Fairtrade organisations organized themselves into farmers’ co-ops known as Kuapa. This coop which started with just a few members currently has about 48,854 farmers from 1,124 village-level farmer societies. Kuapa members produced 63,000 tons of cocoa beans in 2004, representing 8% of Ghana's total production of 736,000 tons. The farmers became empowered and gained bargaining power after becoming one unit. The coop buys cocoa beans directly from the farmers at a very fair price compared to what they were receiving from the middlemen. (http://www.fairtrade.org.uk).

Cocoa is the main cash crop in Ghana and the country currently has annual cocoa production of around 600,000. It is the second largest cocoa producer after Côte d’Ivoire. In 2005/06 Ghana produced a record level 740,000 tons of cocoa. This figure dropped to 614,000 in 2006/2007. The country’s cocoa is of high quality and attracts a premium price on the world market. In 2003, Ghana earned $715 million from the export of cocoa. Cocoa represents around 30% of Ghana's total export earnings and it is the second most important export commodity after gold (ICO annual report 2005/06). In addition to cocoa the country produces other cash crops like palm, banana, cotton, jutes etc.

Cocoa prices fluctuation on the world market

Cocoa price on the world market has been unstable over the years. The instability of cocoa price on the market poses a great challenge to farmers as well as the producing countries. According to the ICO report in 2000 cocoa price was $714 per ton. This price somewhat increased to $1,280 per ton in 2002. In 2003/04 prices went high at an average of around $1,600. According to the ICO reports the second and third quarters of the 2005/06 cocoa season were characterized by high volatility in cocoa prices. (www.fairtrade.org.uk).

The cause of this was attributed to arbitrage trading due to the depreciation of the US dollar and the interruption of supplies due to some problems in Ghana and Côte d’Ivoire. In Ghana there was a dispute between licensed buyers and COCOBOD over logistical problems and a shortage of jute sacks. The problem in Côte d’Ivoire was in relation to the political situation in the country. Average international cocoa prices, as measured by the ICO daily price, was US$1,854 per ton in 2006/2007. (ICO reports 2005/06)

One most important Fairtrade contribution to cocoa farmers in Ghana is that in spite of fluctuation of cocoa in the world market farmers are guaranteed a maximum price for their cocoa. In addition to that the farmers receive premium through Kuapa and invest in the needs of the farmers. For instance in 2004 when the world cocoa price was $1600 per ton Kuapa received the world price plus $150 per ton premium for investment in commercial, social or environmental projects. It provides higher prices to farmers than Ghana government’s guaranteed price. It also provides end of year bonus and other extra incomes to increase the income level of farmers (www.fairtrade.org.uk).

Growth of Fairtrade certified products

The Fairtrade certification system has contributed significantly to promoting Ghana’s cocoa and other Fairtrade certified crops across the globe. The certification is an independent consumer label which appears on products. The label guarantees that disadvantaged producers are paid a better deal for their products. A report by Fair Trade Foundation UK revealed sales of Fairtrade cocoa products for the quarter April to June 2008 increased from £5m to £6m for the same period last year. At the same time volume sales, the real indicator of the amount of Fairtrade premiums that go back to producer groups to spend on community development projects such as schools and clinics, have increased by 17%.

Fair Trade Foundation UK reports that total sales of Fairtrade products for the quarter April to June 2008 grew from an estimated retail value of £113m to £176m. The growth is very significant because it is estimated that more than 7.5 million people involved in agricultural sector (farmers, workers and their families) in 59 developing countries will benefit from the international Fairtrade system.

Apart from the above Fair Trade Foundation UK report indicates sales of Fairtrade goods in the UK are on high increase. Since 2001, sales volumes have grown by 40-50% on average, with one million households buying Fairtrade goods between December 2007 and December 2008, the foundation said. The value of these goods was £500m in 2007 and £700m in 2008, it added. The report went on to say that the economic recession across the globe has not affected purchases of Fairtrade goods - the rate of growth is still increasing. (Fairtrade Foundation UK).

Finally a survey conducted by CAPI OmniBus shows that the consumers’ appetite for products carrying the Fairtrade mark has increased in all areas. The survey went on to say demand for Fairtrade in schools, colleges and universities has nearly tripled from 10% to 29% and demand in other sectors such as hotels and B&Bs, cafes, restaurants, pubs, supermarkets and smaller stores continues to flourish. In the workplace the number of people wanting Fairtrade has more than doubled from 9% to 21% (Fair Trade Foundation UK).

Ghana cocoa products and Fairtrade certification

Ghana’s Fairtrade chocolates are marketed by major retail shops in the UK and the USA via Divine Chocolate Inc. Divine Chocolate Inc is a chocolate manufacturing company based in the UK. This company is partly owned by a Ghanaian farmers’ group Kuapa Kokoo. It has a direct access to cocoa beans grown by Ghanaian cocoa farmers. In 2007 alone Divine Inc used 1420 tons of Ghanaian cocoa beans to make a variety of chocolate products.

Divine Inc has its own Fairtrade brand names which are sold in most supermarkets in the UK. One brand of the chocolate is the Dubble which is reported to be the only Fairtrade chocolate created specifically for the youth market. The Dubble range includes a crunchy milk chocolate 40g bar made with caramelised crisped rice, a Dubble Easter Egg and Dubble Mini Speckled Eggs. Some of these chocolates have wrappings adorned in traditional Ghanaian Adinkra symbols. It is worth noting that the Co-op, UK has converted all its own-label chocolate to Fairtrade, through Divine and Kuapa Kokoo. Divine Inc Fairtrade brand is also sold in the USA and other countries. In the USA the company has a branch of which Kuapa owns 33% shares. (www.divinechocolate.com)

The most important thing is Ghanaian farmers have a huge share in any profit made by the company because they own 45% of the company. Kuapa Kokoo receives four income streams from Divine Chocolate. These are a Fairtrade price (this is minimum $1600 per tonne, but if world price is higher Divine pays the world price). It also receives a Fairtrade premium payment of $150 per tonne and a producer support & development which is usually 2% of Divine turnover. Finally it receives dividend payments from Divine.

Kuapa’s stakes in Divine has definitely given the farmers group a solid financial base with very good growth prospects. It has also raised the group’s status in the world market, and given it 'a seat at the table' in international cocoa forums. Through owning Divine Kuapa Kokoo has been able to develop the skills, expertise and knowledge it needs to more proactively engage with the world market. (www.divinechocolate.com)

Impact of Fairtrade on farming communities

The introduction of Fairtrade has contributed in creating a ready market for farmers. Unlike in the past when access to the market was very lengthy the farmers can now sell their beans directly to Kuapa, the farmers’ coops. Kuapa then exports it to buyers because it has export license. In addition Kuapa has trained the farmers on how to use the scale in weighing the beans. This means they do not have to depend on the purchasing clerks to do this job. These purchasing clerks most often are accused of using inaccurate scales and thus denying the farmers of their money’s worth.

Apart from the above because farmers are paid guaranteed prices for their products a drop in cocoa price on the world market will not have adverse effect on their income. The guaranteed price will in a way stabilize the market for the farmers. It is a known fact that in many developing countries, the terms of trade for their commodities which were often primary commodities were very volatile and unpredictable. Any attempt to curb this situation will definitely serve as a boost to stakeholders in the industry. A fall in price will not only affect the farmers but also have diverse implications for the economy of those countries. The presence of Fairtrade in the country has contributed in no small way in bringing some stability in what hitherto has been a volatile and unpredictable market.

One other positive impact of Fairtrade in the farming communities is the creation of awareness on the need of saving the environment. The farmers and their families depend largely on fire wood as their source of energy. Forest trees are cut down for fire wood for preparing daily meals as well as keeping themselves warm. Cutting down of trees for fire have negative effect on the environment and contributes to global warming. One of the principles of Fairtrade among other things is to protect the environment and to safeguard natural resources. Destroying the environment is definitely against this principle (www.ifat.org). The good thing is that the payment of end of year bonuses to farmers from Fairtrade premium put most of the farmers in a financial position to switch to the use of LG gases and other environmentally friendly sources of energy instead of fire wood.

In support of the Fairtrade principle which provides for gender equity and equal pay opportunities for women, Kuapa is involving more women in its activities. Currently women constitute 28% of Kuapa members across the farming communities. Women play an important role in the top management level of the group. For instance five out of the 33 members of the National Executive Committee are women. Also of the seven Management Committee members two of them are women. They are also elected into Area/Regional Executive Committees. Seminars and workshops are organized for women to help them develop skills in tie-dye textiles, soap making, palm nut production and palm oil extraction and corn milling to augment their income. (www.fairtrade.org.uk)

The payment of Fairtrade premiums has resulted in improvement in the provision of basic facilities in farming communities in the country. It has also contributed in no small way in improving the quality of life for the farmers. Places of convenience have been provided for the people of Bipoa in the Agona District of the Ashanti Region. Villages like Abepotia, Kokofu Nwineso etc have benefited from social projects like provision of wells and bore holes for drinking water. The provision of places of convenience will help curt pollution of the environment. The environment is usually polluted with human and other waste materials. Many who live in villages lack access to clean water so the provision of the bore holes will contribute in reducing water borne diseases like cholera, dysentery, guinea- worm etc.

The mobile health services introduced in the farming communities will contribute to improving their access to healthcare. We need healthy farmers to cultivate the land in order to increase production levels. Crop production would be affected if the farmers have to stay off the farms to travel long distances to attend hospitals. Bringing health services to the door steps of the farmers is a step in the right direction and the farmers group must be commended for this noble idea.

Most of these farming communities are very remote and cut off from the urban and city centers. A lot of them are not connected to the national electricity grid and therefore have no source of power. The provision of two mobile cinema vans to run education programmes and HIV/AIDS workshops for the farmers will help in providing the necessary information they require to keep them abreast with current issues (www.fairtrade.org.uk).

Conclusion

Fairtrade is becoming a world phenomenon and the organisations involved in promoting it have genuine concerns in improving the lot of farmers in the developing countries. It is up to the farmers to take up the challenge and embrace Fairtrade for their own good. Farmers who are not yet members of Kuapa Kokoo or any Fairtrade group should do the noble thing by joining in order to reap the benefit of premium payments. Currently a lot of cities in the UK have declared themselves Fairtrade cities in support of the poor farmers in developing countries. Apart from that most of the big retail shops like TESCO, Sainsbury, Waitrose etc sell Fairtrade labelled products. In fact products from Divine which is partly owned by Ghanaian farmers are available in all major supermarkets in UK except only one supermarket. (www.divinechocolate.com)

The market for Fairtrade products is rapidly expanding with more supermarkets as well as companies and organisations getting involved. Fairtrade is not a Trojan horse as a group of people wants us to believe. It really has the interest of farmers at heart and we must embrace it.

Francis Kwaku Egu (Finance & Investment Analyst)- UK Research Associate- Licensed International Financial Analyst (LIFA) – USA

kwakuhull@yahoo.com