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Unethical Practices in the Cacao Industry and Direct Trade as the Solution

The Cacao Market was established on the backs’ of slaves, and to this day, the injustices from its origins have continued to haunt the Cacao-Chocolate Supply Chain. With the abolishment of legal slavery in the Cacao Trade, there was indeed hope that the “Free” Market would correct some of the rampant inequalities that existed between cacao producers (farmers) and chocolate suppliers (companies). Unfortunately, economics has allowed an oligopoly to form: Big Chocolate Companies control the majority of the cacao market. These companies have the power to collude and have outsourced the production of cacao almost entirely away from South America, where cacao originated, to West Africa, where labor is much cheaper and the use of modern day slaves is not uncommon. Fortunately, there is a small group of chocolate companies that are working towards correcting the market inequalities that have become the norm in the last century, and this small group is composed is the collection of bean-to-bar chocolate companies that use Direct Trade practices. Bean-to-bar chocolate companies, and specifically, Taza Chocolate, employ unconventional business operations, in what is known as Direct Trade, in order to benefit cacao producers (the supply side of the market), by paying a premium for cacao beans and ensuring that ethical standards in production are met (e.g. no slave labor), while also benefitting chocolate consumers (the demand side of the market), by providing the public with a more rich kind of chocolate.

What is the Problem?

The issues in the cacao market are twofold: an issue of economic inequality, and as a derivative of the economic problem, the issue of unsanctioned slavery. The economic issue has developed due to the oligopoly in the cacao market, and this oligopoly has resulted in Chocolate suppliers having the ability to unfairly set prices below the market equilibrium. Slavery occurs due to the need for uncompensated labor since most cacao producers cannot make a predictable living income. For example, cacao farmers in Ghana typically receive less than $1 per day, and sometimes, these farmers receive as little as $0.50 per day. (Martin, 2017). Since the issue of unsanctioned slavery is a derivative of the economic problem, the economic problem must be solved before slavery is addressed.

How did this Economic Problem happen?

An oligopoly in the chocolate market was able to come about due to the high barriers of entry for chocolate makers. Depicted below is a graph which outlines the original chocolate making process that was used in the early 20th century:

supply

(Coe & Coe, 2013)

As it can be interpreted from the graph, chocolate making is a very complicated process and involves expensive machinery. Since only a handful of firms were able to afford this machinery, those companies quickly rose to dominate the market. These Big Chocolate Companies that quickly rose to the top (Callebaut, Cargill, Blommer, and Cemoi), have come to control over 50% of the industrial chocolate market share, as outlined in the pie chart below.

    Industrial Chocolate Market Share

Screen Shot 2017-05-05 at 4.12.10 PM

(Martin, 2017)

To have an understanding of the size of the companies: Cargill is the largest privately held company in America and had over $120 Billion in revenue for the year 2016 (Forbes). If Cargill was a publicly traded company, it would rank as Number 15 on the Fortune 500 list (Fortune).

In emerging industries, such as the chocolate industry in the late 19th Century, it is not uncommon for a monopoly or oligopoly to arise. The problem, from an economic standpoint, only occurs when a monopoly or oligopoly persists over time.

Why has the Oligopoly Persisted?

Most modern oligopolies form during the infant years of a new market that possesses high barriers of entry. Unless the oligopoly has a unique limited resource or is protected by the government, the oligopoly will usually be broken apart as technological advancements allow new firms to enter with lower barriers. However, in the market for chocolate, Big Chocolate has been able to maintain their power through the purchases bulk beans, which “account for more than 90 percent of the world’s cacao production” (Presilla 123). “Bulk cacao” refers to the practice of aggregating cheap, low-quality cacao beans from various farmers, which Big Chocolate companies use in order to produce more chocolate at once. Africa produces 75% of the world’s cacao, and almost all of this cacao is in the form of bulk beans (Martin, 2017). Bulk cacao has become the most common form of cacao because it is what almost every major chocolate company chooses to purchase, and the sale of bulk cacao has allowed various middlemen and governments to unjustly benefit from the labor of the cacao farmers.

What can YOU do?

Removing these middlemen would allow cacao producers to sell more pure, high-quality beans, make it easier to increase the wages of cacao farmers, and eliminate slavery from the market. The best way to remove these middlemen is by increasing public awareness of the ethical issues that are supported by Big Chocolate Companies, and also increasing public awareness to the bean-to-bar chocolate companies that have started to emerge. By increasing public awareness, more consumers will make the switch from big brand chocolate to the smaller, bean-to-bar companies. If enough people switch to supporting bean-to-bar over Big Chocolate (including whoever is reading this post), then the companies that support ethical practices will become more profitable, and expand through the marketplace, and the companies that directly or indirectly support unethical practices will become unprofitable, and thus be removed from the marketplace.

Bean-to-bar

Bean-to-bar chocolate companies are those that make chocolate completely in-house, as opposed to the Big Chocolate Companies which buy bulk cacao. Bean-to-bar companies are more likely to use high-quality cacao beans since it is common for bulk cacao to be composed of overly roasted and even rotten beans (Presilla, 2009). The best bean-to-bar companies are those that engage in a form of Direct Trade with cacao farmers, and although a Fair Trade Certification is better than no certification at all, Fair Trade is somewhat a misnomer as the non-profit does little to increase the welfare of farmers.

Fair Trade vs. Direct Trade

Here is a video that quickly overviews the differences between Fair Trade and Direct Trade:

(PBS Foods)

The video paints Fair Trade in a very decent manner, especially considering the high amounts of criticism that Fair Trade has received in recent years. An entire book has even been written on the issues with Fair Trade (The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla). Overall, the consensus is that companies with Direct Trade practices can be more beneficial to cacao farmers than companies with Fair Trade certifications. Taza Chocolate’s Direct Trade practices have become so transparent that consumers can actually see how cacao farmers benefit by working with Taza Chocolate. For this reason, Taza Chocolate should either expand to work with even more farmers or other bean-to-bar companies should aim to achieve Taza Chocolate Direct Trade Certification in their own practices. Both of these options are viable possibilities if more consumers make the switch from big chocolate to bean-to-bar.

Taza Chocolate

Taza Chocolate, located in Somerville, MA, is a bean-to-bar company that employs crazy transparency regarding their Direct Trade practices. These direct trade practices center around one simple belief: “We (Taza Chocolate) believe that both farmer and chocolate maker should share the reward of making a great product” (Taza). Each year, Taza publishes a Direct Trade Transparency Report, which details how their practices have benefited cacao farmers. A summary of the report can be found in the infographic below:

taza

(Taza)

Taza has “said no to predatory middlemen and abusive labor practices” (Taza) by following Direct Trade practices. It is clear that Taza does not support the unethical practices that are normal in the cacao industry, but what is amazing is how all of the economic and ethical problems of the cacao industry could be solved if all companies had a Taza Direct Trade Certification.

Removing Middlemen; Increasing Wages (Solving the Economic Problem)

There are many different types of middlemen in the cacao industry, some of these go by the name of “cacao brokers”, but another kind of middlemen is the governments themselves. Some governments have prevented the oligopoly, and thus the issue of slavery, to be solved by economic markets. For example, Ghana’s government requires all cacao to be sold to the Cocoa Marketing Board, which acts a monopoly in the marketplace. By removing these middlemen, the price of cacao beans, and thus the income of cacao farmers, can increase substantially. Taza Chocolate’s Direct Trade initiative purchases cacao beans directly from farmers. Working directly with farmers allows for farmers to focus on the quality of their beans instead of the quantity that is required to make a living in a market that favors the use of bulk beans. If all companies had Taza Direct Trade Certifications, then all middlemen would be removed and cacao farmers would make more money.

Eliminating Slavery (The Derivate of Economic Problems)

Slavery in the cacao market is sometimes simplified to one or two primary beliefs: either adult cacao farmers are exploiting children by the use of slave labor or adult cacao farmers are using slave labor because they are being exploited by the low market prices and their governments. Unfortunately, the problem is not that simple: a hybrid of both beliefs is correct. At the community level, some cultures view child labor as acceptable. In Ghana specifically, scholars write, “child labour is very much imbedded (sic) in the socio-local dynamics of Ghanaian society” (Berlan 1098). This may be true, and the belief that “it is hard to implement a slavery-free label for cocoa” (Ryan 52) may have also been true at a point in time, but this could all be changed with Direct Trade practices. If all companies had a Taza Chocolate Direct Trade Certification, then all companies would be working directly with farmers, and thus, companies could educate farmers as to why child and slave labor is unethical. In the interim, a “slavery-free label for cocao” can now exist, and with enough training at the microeconomic level, cacao farmers in Western Africa could eliminate the use of all child and slave labor. This would also now be a very realistic option since the increase in prices (by cutting out the middlemen) would allow for slave labor to no longer be a necessity in the industry.

In Conclusion– Direct Trade as the Solution

In summary, the cacao industry has been plagued by inequalities ever since the Western World found chocolate. The inequalities started with legal slave labor, and slave labor, albeit illegal, is still seen throughout some parts of the cacao industry. The reason as to why these inequalities are still prevalent is the economic market has failed to provide a competitive environment. Through public education, the market can be corrected with consumers choosing their chocolates more carefully so that Direct Trade practices become the norm for chocolate companies. Taza Chocolate has created a Direct Trade Certification which increases the wages of cacao farmers and eliminates slavery, and every chocolate company should have this certification.

References

Coe, Sophie D., and Michael D. Coe. The True History of Chocolate. New York: Thames and Hudson, 2013. Print.

Forbes. www.forbes.com/pictures/578e38dd31358e0aa22e2c6f/1-cargill/#77b379753935

Fortune. http://beta.fortune.com/fortune500/list/

Martin, Carla. Class: African Americans Studies 119x (2017)  at Harvard College.

PBS Food. “Fair Trade vs. Direct Trade | The Lexicon of Sustainability | PBS Food.” YouTube. YouTube, 08 May 2014. Web. 05 May 2017.

Presilla, Maricel E. The New Taste of Chocolate: A Cultural & Natural History of Cacao with Recipes. Revised Edition. Berkley: Ten Speed Press, 2009. Print.

Ryan, Orla. Chocolate Nations: Living and Dying for Cocoa in West Africa. London: Zed, 2012. Print.

Sylla, Ndongo Samba. The Fair Trade Scandal Marketing Poverty to Benefit the Rich. Athens, OH: Ohio UP, 2014. Print.

Taza Chocolate. https://www.tazachocolate.com/

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Dear Silicon Valley: Chocolate Entrepreneurs Wanted

When most people think of the word “entrepreneur”, they usually think of a person who works in the startup/ technology space, but entrepreneurs are best characterized by their willingness to disrupt established industries with innovations. Most theoretical economic reasoning would assume that the market for chocolate is an established and outdated market that cannot be disrupted by new ventures, but by examining the history of modern chocolate two things become clear: 1) the industrial revolution lead to a oligopoly in the Chocolate Market and 2) lucrative opportunities are currently present that would help bring chocolate back to its original roots.

Chocolate, in one of the oldest candy products known to the human race, with its origins dating beyond 1,000 BC (Coe 35), but the rise of modern chocolate has created a product that greatly differs from how our ancestors of the human race viewed Cacao. Along with the obvious differences between a processed candy and an organic food, one thing that most people do not realize is that “during nine tenths of its long history, chocolate was drunk, not eaten” (Coe 12). Even once European explorers “discovered” chocolate, it was still enjoyed as a drink throughout Europe. “The sixteenth-century Spanish conquest of Central America diffused chocolate around the world, as a hot, sweet, and mildly addictive stimulating beverage” (Clarence-Smith 6.1). Unlike most beverages, the chocolate beverage is unique insofar that “no product has ever been discovered to match the subtle taste of cocoa powder” (Clarence-Smith 6.3). Originally, the costly measures of producing the chocolate beverage were so high that it was not a drink that was enjoyed by the masses, but rather it was a drink enjoyed by the social elites. In Europe, the consumption of chocolate would take place publicly and privately by the wealthy, but in North America, the drink was less prevalent in the public. Even though chocolate was not available outside the home “despite the rarity of places of public consumption in British North America, drinking chocolate was available and was consumed by the well-to-do” (Clarence-Smith 6.9). This long history of chocolate as beverage and its scarce availability quickly changed with one man: Milton Hershey.

Milton Hershey was the first person to successfully produce candy by using technology from the industrial revolution. “The industrial revolution… changed chocolate from a costly drink to a cheap food” (Coe 232). Hershey’s success had two major implications. First, his mass production of chocolate candy allowed for chocolate to have a lower price. At this lower price, the average person was able to experience chocolate for the first time. Secondly, by being the first kind of mass produced chocolate, Hershey set a standard for the market of chocolate.

The major issue with Hershey’s industrialization of chocolate is that it created a new form of chocolate that dramatically shifted Cacao away from its original roots. The graph below depicts the complicated process in the making of chocolate.

chocolate.PNG

This complicated graph shows how far chocolate went from its origins. Chocolate was produced in this multi-step process because the industrial revolution technology could not produce a more simple method, but with our current technology, it could be possible to more easily mass produce a chocolate beverage that is closer to Cacao.

 

The tale of oligopoly is best seen from the makings of Mars company. Forrest Mars met his father, Frank Mars, in the summer of 1924 while selling cigarettes in Chicago. At the time, Frank was making $60,000 per year, which is the equivalent to $837,336 in today’s dollars (Brenner 54). Frank used his large income to start mass producing chocolate candy, which his son helped market across the country. If Frank did not have such a large income, it would have been impossible for him to invest in creating a chocolate candy bar. Since such large amounts of money were needed to buy the technology used in the industrial revolution, only a small number of firms were able to seize the opportunity to mass produce chocolate. The dramatic amounts of money made it nearly impossible for anybody else to enter this market. “The Hershey Food Corporation…. and… its arch-rival the M&M Mars Company, controls about 70 percent of the American candy market” (Coe 253). The result of the oligopoly in the Chocolate Market, produced as a consequence of the industrial revolution, is that a few firms enjoy control of the market and have produced chocolate candy instead of chocolate beverages.  The graph below depicts the global market for candy, and it is clear that a small number of firms, dubbed “the big 5”, control a majority of market share. Since technology has advanced and Venture Capital is now available to entrepreneurs, a new company that brought back the chocolate beverage could be commercially successful by penetrating the oligopoly and this could be achieved at a relatively low cost.

 

candymarket.png

Entrepreneurs should now enter the market for chocolate with a new manufacturing process that is now possible since there have been increases in technological knowledge. By disrupting the chocolate market, entrepreneurs could be successful in producing an organic chocolate beverage that is closer to Cacao, altering the real cost of chocolate so that farmers receive a larger portion of sales, and challenge the oligopoly in the market for chocolate.

realcostofchocolate

 

 

Works Cited

Brenner, Joel Glenn. The Emperors of Chocolate: Inside the Secret World on Hershey & Mars. New York: Broadway, 2000. Print.

Coe, Sophie D., and Michael D. Coe. The True History of Chocolate. New York: Thames and Hudson, 2013. Print.

Swinnen, Johan F.M., Mara P. Squicciarini, and William G. Clarence–Smith. The Economics of Chocolate. Oxford: Oxford UP, 2016. Print.

 

The Real Cost of a Chocolate Bar and Pie Graph comes from a slide show in the African Americans Studies Class 119x at Harvard College.

 

The Chocolate for the Masses image comes from the Coe book.