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Market Concentration and Price Formation in
the Global Cocoa Value Chain

Amsterdam, 15 November 2016
Commissioned by the Ministry of Foreign Affairs, The Netherlands

Market Concentration and Price Formation in
the Global Cocoa Value Chain

Final Report

Nienke Oomes & Bert Tieben (Team Leaders, SEO)
Anna Laven (KIT)
Ties Ammerlaan (SEO)
Romy Appelman (SEO)
Cindy Biesenbeek (SEO)
Eelco Buunk (SEO)

Roetersstraat 29 – 1018 WB Amsterdam – T (+31) 20 525 1630 – F (+31) 020 525 1686 – www.seo.nl – secretariaat@seo.nl
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SEO-report no. 2016-79

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Copyright © 2016 SEO Amsterdam. All rights reserved. Data from this report may be used in articles, studies and syllabi, provided that
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MARKET CONCENTRATION AND PRICE FORMATION IN THE GLOBAL COCOA VALUE CHAIN

i

Executive Summary

This report explores to what extent market concentration in the cocoa value chain is responsible for the widespread
poverty of cocoa farmers. The report finds that market concentration among chocolate manufacturers and cocoa
processors is not the key cause. Instead, there are two other key reasons why most cocoa farmers live in extreme
poverty. The first is the fact that the productivity of cocoa farmers is very low, particularly in West Africa. The second
is that there are many cocoa farmers without realistic alternative income options. As a result, these farmers continue
to supply cocoa even at very low prices. While raising productivity can help individual cocoa farmers to earn a better
income, this cannot be a sustainable solution for all farmers, as this would result in an oversupply of cocoa and an
even lower cocoa price. The best solution is to create conditions that would allow cocoa farmers to earn alternative
income sources and become less dependent on cocoa.

The key question addressed in this report is whether the low level of farm-gate prices could be
related to recent increases in market concentration among large chocolate manufacturers and cocoa
processors. We find that the levels of market concentration are moderate and have increased in
some cases, driven by economies of scale, scope, and agglomeration. However, there is no evidence
that market concentration is excessive or that market power is being abused. There is some
evidence of vertical concentration, with strong links between cocoa processors and cocoa traders,
but competition still appears to be sufficient, with profit margins generally reported to be low.

While we cannot exclude the possibility that some local cocoa traders abuse their market power
vis-à-vis some farmers, for example in remote regions, this is not the key reason why farm-gate
prices are low. The main reason is that the supply of cocoa is inelastic in the short run and that
cocoa is produced by millions of small farmers. As a result, individual farmers are price takers with
little or no bargaining power vis-à-vis local cocoa buyers. In addition, most cocoa farmers have
very few options for alternative income generating activities. As a result, they will likely continue
to produce cocoa at very low prices.

There is no evidence that market concentration among processors has artificially reduced the world
cocoa price below the level that equalizes supply and demand. For most cocoa traded around the
world, the world cocoa price determined in futures markets is generally used as a benchmark price,
and therefore has a disciplining effect on local cocoa prices. Nevertheless, there are always likely
to be ‘pockets’ of local cocoa markets where cocoa traders abuse their market power and farmers
receive prices well below this benchmark price.

There is no evidence that a regulated price mechanism in producing countries leads to higher
incomes for cocoa farmers than a liberalised price system. One key reason why the average farm-
gate price is lower in regulated countries is that national boards take a high percentage of the export
price, in some cases more than 30 percent. While part of these cocoa revenues are reinvested in
the sector and in general public goods, this has not yet resulted in significantly higher productivity
for cocoa farmers in these countries. One of the problems here appears to be the lack of
transparency and efficiency of the allocated public reinvestments (e.g. input distribution).

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ii

In countries with liberalised cocoa sectors (Cameroon, Nigeria, Indonesia), there is some scope to
raise farm-gate prices through increasing cocoa farmers’ bargaining power and opportunities to
earn alternative income options, which in turn requires better access to market information,
training, infrastructure, and finance. As the case of Indonesia illustrates, having more realistic
alternatives means that farmers can opt out of cocoa, which likely is one of the reasons why cocoa
prices in Indonesia are higher.

In countries with regulated cocoa sectors (Ghana and Cote d’Ivoire), there is scope to raise farm-
gate prices by improving the transparency, efficiency and effectiveness of the regulated system.
Increasing competition among cocoa traders is less of an issue here since regulated farm-gate prices
already provide some protection for cocoa farmers. Nevertheless, an improvement in enforcement
is needed in some cases to ensure that farmers indeed receive the regulated farm-gate price, that
weights are used correctly, etc.. A more important measure is to increase transparency about the
way regulated prices and cocoa taxes are determined, and about the spending of these cocoa tax
revenues. Finally, there is scope to improve the quality of cocoa beans, and therefore potentially
the price paid for these beans, through more effective public investments and improved quality
standards.

At the micro level of the individual cocoa farmer, the most effective way to achieve a ‘living income’
from cocoa is to increase the productivity of cocoa farming. We estimate that there is still ample
scope to raise cocoa productivity through increasing cocoa-specific knowledge, cocoa-specific
training, cocoa-specific inputs, and cocoa-specific finance. However, such measures are unlikely to
work at the macro level, as raising the productivity of all cocoa farmers would lead to an oversupply
of cocoa that would cause farm-gate prices to fall.

At the macro level, the most effective way to raise cocoa farmers’ incomes is to create conditions
for them to diversify away from cocoa. This does not necessarily mean that all farmers should aim
to combine cocoa farming with other types of farming or other income generating activities.
Rather, the way forward would be a ‘dual transition’ whereby the farmers that remain in cocoa
would become (much) more productive, while many other cocoa farmers will diversify away from
cocoa. Such a transition would require significant improvements in farmers’ access to information,
training, infrastructure, and finance. Developing a good security net for farmers to make the
transition and overcome temporary drops in income will also be crucial. Most likely, cocoa
producing governments in West Africa will not be able to make this transition on their own.

Given the importance of diversification as a strategy to reduce poverty among cocoa farmers,
stakeholders in chocolate-consuming countries (governments, companies, NGOs) should review
the programmes they support that are cocoa specific, because these increase the dependence of
farmers on cocoa. Given that world market prices are volatile, this dependence could lead to lower
and more volatile farmer incomes and government revenues. The Dutch government is already
supporting institutions such as Solidaridad and IDH, the cocoa sector programmes of which
increasingly recognise the importance of diversification. Going one step further, cocoa consuming
country stakeholders should consider supporting or facilitating the development of diversification
strategies of cocoa producing countries through private sector and financial sector development,
as opposed to sector-specific development. The type of support could range from financial support
to capacity building support to farmers, SMEs, financial institutions, or national governments.

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MARKET CONCENTRATION AND PRICE FORMATION IN THE GLOBAL COCOA VALUE CHAIN

Table of contents

Executive Summary ………………………………………………………………………………………………. i

1

2

3

Introduction ………………………………………………………………………………………………… 1

Theory of Change ……………………………………………………………………………………….. 5

Market Concentration in the Global Cocoa Value Chain ………………………………….. 7
Types of market concentration ………………………………………………………………………………. 7
3.1

3.2 Driving factors behind market concentration ………………………………………………………… 9

Concentration in cocoa producing countries ……………………………………………………….. 10

Cocoa and chocolate in the Netherlands………………………………………………………………. 14

Concentration among cocoa processors ………………………………………………………………. 15

Concentration among chocolate manufacturers …………………………………………………… 18

Concentration among chocolate retailers ……………………………………………………………… 20

Conclusion ……………………………………………………………………………………………………………. 21

4

Market power and pricing ……………………………………………………………………………23
Impact of concentration on price formation ………………………………………………………… 23
4.1

Supply, demand, and the world cocoa price …………………………………………………………. 25

Price formation in the global market for cocoa ……………………………………………………. 30

Transmission of world cocoa prices to farm-gate prices ………………………………………. 33

4.5 Market structure and competitive assessment ………………………………………………………. 34

4.6

Conclusion ……………………………………………………………………………………………………………. 37

5

National cocoa pricing mechanisms ……………………………………………………………..39
Introduction …………………………………………………………………………………………………………. 39
5.1

Comparison of pricing mechanisms ……………………………………………………………………… 42

Bargaining power of cocoa farmers ……………………………………………………………………… 52

Conclusion ……………………………………………………………………………………………………………. 54

6

Alternative Determinants of Farmers’ Cocoa Income ………………………………………55
Introduction …………………………………………………………………………………………………………. 55
6.1

6.2

Cocoa farmers’ income estimates …………………………………………………………………………. 56

6.3 Effect of price/production increase on farmer income ……………………………………….. 58

6.4 Agricultural practices and potential productivity ………………………………………………….. 62

6.5 Determinants of adopting good agricultural practices ………………………………………….. 65

3.3

3.4

3.5

3.6

3.7

3.8

4.2

4.3

4.4

5.2

5.3

5.4

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7

8

6.6

6.7

6.8

Beyond the focus on productivity ………………………………………………………………………… 69

Income diversification ………………………………………………………………………………………….. 69

Conclusions ………………………………………………………………………………………………………….. 72

Current value chain initiatives to raise cocoa farmers’ incomes …………………………73
Private sector initiatives ………………………………………………………………………………………… 73
7.1

7.2

Certification ………………………………………………………………………………………………………….. 77

7.3 Dutch policies to raise cocoa farmers’ income……………………………………………………… 79

Recommendations ………………………………………………………………………………………83
8.1 Measures to increase farm-gate prices in non-regulated cocoa producing

countries ……………………………………………………………………………………………………………….. 84

8.2 Measures to increase farm-gate prices for regulated producing countries …………….. 86

8.3 Measures to increase the productivity of cocoa farming ………………………………………. 87

8.4 Measures to increase alternative opportunities for farmers ………………………………….. 89

8.5

8.6

Potential roles of Dutch and EU governments …………………………………………………….. 90

Policy recommendations that are unlikely to be effective in raising farm-gate
prices: ……………………………………………………………………………………………………………………. 93

9

Conclusions ……………………………………………………………………………………………….97
Summary of key findings ………………………………………………………………………………………. 97
9.1

9.2

Summary of key recommendations ……………………………………………………………………. 100

10

Literature ………………………………………………………………………………………………… 103

Appendix A Determination of Cocoa Prices in Cameroon, Nigeria, Ghana, Côte

d’Ivoire and Indonesia …………………………………………………………………… 113

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