Potential negative effects to the farmer/coop

The cost-benefit analysis in this chapter is based on costs and benefits for an archetypal farmer and conclusions show there is a business case for this archetypal farmer. Some farmers deviate from the archetypal farmer and hence the business case will be less pronounced. We will discuss some risks imposed on farmers that result from certification.

We find that farmer/coops benefit from certification because their benefits in sum are larger than their aggregated costs. A potential negative effect of certification might arise from the exclusion of cocoa from the market when certification is mainstreamed. Such concerns are raised in literature by Bacon et al. (2008); de Battisti et al. (2009); Consumers International, (2005); Nelson and Galvez (2000); Verkaart (2009). Figure 23 shows the relation between farm size and cumulative benefits in year 6. This analysis, based on respondent’s data, indicates that larger smallholder farmers benefit more from certification than smaller farmers, this finding applies especially to farmers with a plot below 1 ha. Previous research supports this finding (Romanoff, 2008, p16).

50

This figures reflects audit costs for 1000 farmers.

51

© 2012 KPMG Advisory N.V. All rights reserved. Printed in the Netherlands. ₆₃

Figure 23: Cumulative net benefit in year 6 in relation to farm size52

Another way to differentiate between farms is improvement potential. Some farmers may have more potential to increase their productivity than others. Uncertainty about their improvement potential imposes a risk on farmers. If they make an investment in inputs, such as fertilizer and pesticide, they do not know in advance how much their productivity will improve.

On the long term, we admit that productivity improvements should remain in balance with demand. The global sprawl in attention for certification could strengthen the ‘boom and bust’- cycle (Anga, 2011)53, which is a period of undersupply and high prices followed by a period of oversupply and cocoa prices falling below farmer subsistence level. In a similar fashion, supply of certified cocoa could exceed the demand for certified cocoa. To ensure the premium on certification does not disappear, supply and demand should remain in balance. This consideration applies in particular to UTZ and Rainforest Alliance, who do not define a minimum amount of premium and leave the valuation of certification to the market instead. Fairtrade defines a minimum price and a minimum premium, which could be seen as a safeguard against supply and demand imbalances.

52

In this calculation, ‘average’ is based on the farm sizes as represented in Appendix IX. Some data has been given by respondents on a per ha basis. Most schemes have higher membership fees for larger participants. The reader be aware these consideration are not included in the line ‘average’. On the contrary, the line ‘base case’ does not include any scheme specific fees.

53

Anga, J.-M., “The Future of the World Cocoa Economy: Boom and Bust?” presented at the 5th Indonesian International Cocoa Conference, Bali, 7-8 July 2011.

-200 -100 0 100 200 300 400 500 0,5 1 1,5 2 2,5 3 3,5 4 4,5 5 Average of schemes Base case

Average of FT, UTZ, RFA Base case (KPMG, 2011)

Farm size in ha Cum benefit y6 in

© 2012 KPMG Advisory N.V. All rights reserved. Printed in the Netherlands. ₆₄ In addition to farmer specific risks, there are also systemic risks which should be taken into account when assessing the costs and benefits of certification. Further analysis is required to compare the impact of systemic risk between schemes.

© 2012 KPMG Advisory N.V. All rights reserved. Printed in the Netherlands. ₆₅

5.7.2

Farm segmentation

In the previous section we found some farmers benefit more from certification than others. A high benefit per metric ton of certified cocoa, implies a lower cost of certification. From an industry perspective, it follows that some farmer segments can be certified at lower costs than other farmer segments as is illustrated in figure 24.

Figure 24: Farmer segments

To maximize total benefits from certification against the lowest total costs, investments could for instance focus on the incremental (marginal) farmer entering the population of certified farmers as they require the least investments to achieve certification requirements. However more research is necessary to conclude this, and further field research is required to

understand the relative size of groups B and C for each country.

5.7.3

Premium distribution between farmer and coop

Premium is the second most important determinant of farmer/coop level benefits. The distribution of the premium between farmer and coop is yet reported to a limited extend. We have asked scheme owners to provide an indication of the cash-to-farmer ratio as % of the farmer/coop premium.

 Rainforest Alliance indicated in Ghana 45-55% premium is paid in cash to farmers. In Côte d’Ivoire, 50% is paid to farmers.

© 2012 KPMG Advisory N.V. All rights reserved. Printed in the Netherlands. ₆₆  UTZ indicated 50% was paid in cash to farmers in Ivory Coast. In Ghana, UTZ indicated

23% was saved on the coops bank account and 24% was used for training and ICS expenses, while the remaining 53% was paid out to farmers in cash.

 Farmers certified Fairtrade decide collectively on distribution, according to the Fairtrade standard. Fairtrade reported that according to 2010 data for Ghana the premium is spend by coops as follows: 1) 75% of the premium was used as ‘cash payments’54, 2) 14% was spend on investments in inputs, equipment and training and 3) ‘business development’ represented 9% of premium.

It should be noted this anecdotal evidence requires further substantiation and might not be based on a comparable scope and definition. Hence, care should be taken when interpreting these findings. E.g. in interviews with an independent supply chain actor, it was found in some cases that the premium was saved for farmers on a bank account which was used in later years to pay for certification expenses.