Year In Review 2016: Let’s Talk Price
There are many reasons I enjoy sourcing cacao for Taza Chocolate. Inspecting the harvest in tropical countries while my colleagues suffer Somerville Snowmageddon is one of them. Building relationships with some of the industry's most impressive cacao growers and processors is another. Surviving death roads and sizable frogs under my pillow is an oddly exhilarating third.
Yet the part of my job that I appreciate most is the feeling of doing good, honest and above all transparent business with our cacao partners at origin. Historically, many chocolate companies have preferred to remain in the dark about the oftentimes harsh realities at the other end of the supply chain. At Taza, I’m not just permitted to ask hard questions; I’m encouraged to do so.
As I prepared for my origin visits this year, I wanted to learn more about the topic of price. Since publishing the chocolate industry’s first Transparency Report in 2012, Taza has reported annually on how much we pay each of our origin partners. In line with our Direct Trade program, we pay at least $500 per metric ton above the world market price in exchange for high quality, fermented and dried cacao beans. This is an approximately 16% premium, more than double what Fair Trade guarantees.
But how much of the money we pay our partners makes its way to individual farmers?
Having visited our partners’ processing operations, I knew not all of it could. First, there are the logistical costs involved in collecting cacao from hundreds of producers spread across the countryside. Second, processing the beans requires investment in multiple fermentation boxes and drying decks, not to mention full-time employees. Third are export expenses like freight, taxes and fees. In short, our partners - whether cooperatives, private companies or large farms - have a lot of costs besides the raw beans.
In light of all this, I wondered, how much did each of our partners pay to farmers for their cacao? Was this a good price or a bad price? Compared to what? And did the unique realities faced by our partners make a difference, things like size of their operation and the business environment in the country? Last but not least, was price the best way to calculate the value farmers received for their cacao, or were there other factors I should consider?
This year's Transparency Report documents my search for answers to these traditionally taboo questions, as well as the lessons I learned along the way.Such an in-depth look at the cacao supply chain may feel daunting. It is certainly not as readily digestible as an Instagram photo from Haiti or a blog post about Belize, which is why we seek to provide multiple entry-points into the world of cacao. Yet as a company, Taza believes that anyone who eats our chocolate deserves to know the story behind it, and this report represents our effort to tell that story as fully and faithfully as we know how. And, in pioneering a radical level of transparency down to the farm level, we hope to spark for a larger conversation between farmers, processors, chocolate makers and consumers around the creation of a chocolate industry that is seriously good and fair for all.
So dive in! If after reading our report, you have more questions than you began with, then welcome to the club, and should inspiration strike, send me a note with your thoughts. My email is email@example.com.
Yours in Transparency,
Step 1. The Search for Pricing Data: Trust and Verify
Taza’s partners in Belize, Bolivia, Haiti and the Dominican Republic purchase cacao from hundreds of farmers, ferment and dry the beans, and export them to Taza. I know how much we pay our partners for this work because as part of our Direct Trade program, we directly negotiate the price each year. However, until several months ago, I knew very little about how our partners paid the farmers for their raw cacao. I would soon discover how complicated getting this information data could be.
Our cacao beans come from over 2,000 small farms spread across four countries in Latin America and the Caribbean. If my job consisted exclusively of speaking with farmers about price,, I might be able to conduct several hundred interviews before starting over with the next harvest! Moreover, prices often fluctuate based on changes in supply and demand. If I stopped by a farm on a random week, I could easily find a much higher, or lower, price than the average one.
A more efficient and accurate approach would be to ask our partners to report on the average price they pay over the course of the season. They already collect this data as part of running their businesses. Still, I asked myself, couldn’t they just report a higher price to Taza, figuring that this is what we would want to see? I decided to trust and verify.
First, I updated our Direct Trade Agreement to include a commitment by our partners to “provide documentation demonstrating the compensation paid to farmers and / or employees, as well as facilitate conversation between farmers” and Taza. Our partners did not hesitate to sign the contract. Second, during my farm visits with each partner, I asked farmers about the price they received. I did not uncover any discrepancies.
Admittedly, my solution to collecting reliable data is an imperfect one. If a partner of ours wanted to mislead Taza, they could forge documentation or bribe a farmer. In fact, I suspect some of this behavior plagues audit-based trade systems. Direct Trade, for its part, depends less on inspections and more on collaboration. Our intention is to build relationships based on trust and transparency that difficult questions do not break.
Step 2. Orienting in a Sea of Numbers: Finding a Reference Point
As I began gathering data on what individual farmers were paid for their cacao beans, I ran into a second challenge: making sense of the numbers. My first thought was to calculate the percentage of Taza’s price to its partners that ended up with the farmers. After running the numbers, I found a wide range that stretched from 53 to 80%.
But what did this mean? If a partner paid 70% of the total price to farmers, were they receiving a great price, a terrible price, or something in between? Without context, I had a bunch of data but lacked useful information. I found a reference point at the non-profit Cocoa Barometer, a group of nonprofits that evaluates the sustainability of the world cocoa industry. Its 2015 report estimates that globally, the average cacao farmer receives 65% of the price paid to the origin exporter.
This benchmark seemed like it should shed light on how good or bad a price farmers were getting, but I wondered how much the percentage earned ultimately mattered. With most cacao farmers living at or below the poverty line of $2 per day, maybe the important number was not the percentage they received, but the absolute dollar amount.
So, I calculated 65% of the average world market price per metric ton of cacao between July 2015 and 2016. I used the result -- $2,001 -- as a new benchmark to compare the the total dollar amount our partners paid to farmers to a global average. This felt significant, and I was glad to discover that all but one of our partners were paying more than this price, some of them by even two times.
Step 3. Comparing Apples to Oranges: Context Matters (a Lot)
While the Cocoa Barometer provided a useful reference point, it could not explain the large differences in prices paid to farmers across origins. For instance, while two of our partners paid farmers more than $4,000 per metric ton, another paid slightly under half that amount.
How was this possible? What explained the significant difference?
As I looked more closely, I came to realize that price is only truly useful information when understood in context. Every enterprise that buys, processes and exports cacao confronts its own set of circumstances, and comparing the price they pay without taking these realities into account is like comparing apples to oranges.
For instance, our more established partners that process a higher volume of cacao benefit from economies of scale, while fledgling operations are burdened with startup costs and logistical challenges. Meanwhile, in areas where farms are particularly small or unproductive, a partner must invest in a larger farmer network than a partner buying from bigger or more productive farms. Finally, some of our partners operate in countries with well-maintained roads, developed infrastructure, and stable governments; some do not. Processing and exporting cacao is not easy anywhere, but it is undeniable that some of our partners face a more daunting set of challenges than others.
In other words, there is no single supply chain story. Each of our partners must navigate a unique and constantly evolving environment, and it is impossible to understand how pricing works without appreciating the different challenges and opportunities that they face.
Step 4. Beyond Price: Discovering Others Forms of Value
In looking at our partners’ operations, I also realized that the price they pay for cacao is not the only value they provide to their farmer networks. All of our partners drive to producers’ farms to pick up the cacao in its unfermented form, a service that reduces the time and cost a farmer would otherwise spend fermenting, drying, and transporting the heavy beans themselves. Several of Taza’s partners provide producers with healthy and high-yielding cacao seedlings that improve a farm’s productivity and therefore farmers’ income. Others provide agronomic training and outreach that helps increase production, as well as manage pests and diseases.
Our partners also develop unique services that meet local needs. One of our partners has developed a microfinance program that provides young farmers with the money they need to buy farms of their own. Another offers food, housing and even immigration support in addition to the wages it pays the staff that work on its medium sized farm.
Other benefits are less obvious but just as valuable. The world market for cacao is marked by high price volatility. Small-scale producers end up at the mercy of market forces entirely outside their control, resulting in boom and bust cycles that at best discourage farmers from investing in growing more cacao, and at worst, bankrupt them entirely. Some of our partners offer farmers much needed stability by paying a fixed price for their beans each year, regardless of the world market price.
Another subtle but meaningful way in which our partners deliver value involves improving a region’s, and in certain cases an entire country’s, reputation for producing high quality cacao. This can be especially impactful in countries that historically have exported lower quality, commodity grade cacao. By carefully fermenting, drying and exporting beans, these partners increase the price paid for the country’s cacao, a benefit that often extends beyond the immediate farmer network to cacao producers throughout the country.
Step 5. The Real Question: Seriously Good and Fair For All?
In looking to answer the question, “How much of the money we pay our partners makes its way to individual farmers?,” I learned a great deal. In collaboration with each of our partners, I documented the average price paid to farmers this last year, the percentage of the price paid by Taza that this number represents, and how these numbers compare to global averages. Equally importantly, I realized that this data is far more meaningful when understood in its local context. All of this information is reported as faithfully as possible in the partner updates that follow.
Ironically, I learned just as much about what price can not tell me. The price paid for cacao, I came to understand, does not necessarily reflect the full value that farmers receive from working with our partners. Services such as subsidized seedlings, agronomic training, and price stability represent other benefits that farmers may receive in exchange for their beans.
I also came to appreciate the limitations of my original question. The price paid for cacao matters, but it needs to be multiplied by the volume of cacao produced in order to reveal total income. Similarly, income tells only half the story (or less, if the farmer gets additional money from growing coffee or other work), because if a producer sells a lot of cacao but spends a fortune on fertilizer to grow it or logistics to transport it, she may end up losing money. And all this before considering a places cost of living! Clearly, the more I learned, the more questions arose.
Still, I do not dismiss the importance of paying a good price for cacao. I continue to believe that Taza’s Direct Trade program, including our commitment to paying at least $500 per metric ton of cacao above the world market price, contributes to better livelihoods for our partners and farmers across Latin America and the Caribbean. And this, I realize now, is what I actually wanted to understand from the start - how to make chocolate that is seriously good and fair for all. From farmer to consumer, I hope that this mission is one that we continue to work together to achieve.