Koa is a Swiss-Ghanaian business that focuses on creating a new revenue generation stream for cocoa farmers by processing cocoa pulp into juice, concentrate and Powder. Whereas cocoa farmers rely on the cocoa pulp for cocoa bean fermentation, its excesses lead to food waste and elongation of the fermentation process. So, harvesting the excess cocoa pulp and paying the farmers for it is the best thing ever happening to cocoa farmers.
After interviewing Koa’s executives to understand their business model and its impact on the ordinary cocoa farmer, we furthered the discussion on the blockchain transparency system they have set up. Whereas cocoa pulp processing is a new sub-sector within the cocoa value chain which hasn’t faced any scandal of unequal value distribution, Koa management felt there was the need to proactively tackle transparency on value distribution before it becomes an issue.
So, in this interview, we sort to learn more about what the “disruptive transparency system” was about, what influenced its development, the main stakeholders of this project, and their interests. Is this system as rosy as it’s being marketed to be?
While I appreciate and applaud Koa for setting up this proactive system to demonstrate lessons learnt from the current transparency issues within the value chain, the system shouldn’t escape scrutiny. The devil is always in the details. This article will focus on the scrutiny of the Transparency system. For each element, I will offer my opinion on their answers. At the end of the interview, I was impressed with how the team was willing to answer all the difficult questions and agreed to explore some of my pushbacks and suggestions.
What caused the need to develop this Radical Transparency Platform?
According to the press release by Koa, their transparency system will leverage blockchain technology to store transactions between them and the farmers to ensure accountability to the farmers and their customers. Most of them buy their product due to its assumed positive sustainability impact on the cocoa farmers and their communities. They added that the overreaching reason that foregrounds the development of this system is the well-known poverty of cocoa farmers- which continues to exist despite all the interventions that have been supposedly put in place.
During the interview, Koa added that their consumers wanted to trace the products’ supply chain and validate whether farmers were receiving precisely what Koa promised. From a corporate standpoint, they also felt that proving their commitment and diligence in honouring their promise would be authentic if they could demonstrate by making visible openly and in real-time the economic, social, and environmental impacts their business operations are making on their partner farmers and their communities.
Finally, they alluded that being neutral and transparent in the information delivery without any human interference to consumers about how much farmers earn from their business was keen for them. So as a newbie exploring the blue ocean within the cocoa sector, their goal was to leverage technology that allows them to be neutral in the information flow, enabling them to demonstrate radical transparency that can be trusted and validated by consumers and farmers. Koa also saw the opportunity to use the transparency system to attract investors, partners and stakeholders who are ethically focused and would like to join them in making impacts that can be evidenced transparently.
They named the system “Radical” because it is the first of its kind in the cocoa sector that only a confident firm committed to being transparent will implement. They believed that leveraging technology to enhance transparency in an industry constantly bedevilled with scandalous transparency issues was radical.
This was good because cocoa beans are commoditised compared to cocoa pulp. So, while the price is publicly known through the commodities market, its predictability and stability are always tricky. Secondly, cocoa traders, chocolate manufacturers and other players interested in the “Price” of cocoa do their best to trigger the price changes in their favour through hoarding, artificial speculation, or business-biased sustainability investment in producing countries to encourage more cocoa production.
The cocoa sector, in general, is choked with many intermediaries whose financial stake reduces the net income the farmer receives from the sale of cocoa beans. In Ghana, farmers only receive what is given to them by the government. Unlike how it’s done in Europe, Ghanaian cocoa farmers are not given any form of subsidy (neither cash nor kind) from the Government or the Ghana Cocoa board. So, Koa trading directly with the farmers and using this system to showcase how much they bought the pulp from the farmer is a big step requiring applause.
In terms of what the future holds for scaling this transparency system, they highlighted that they would continue to use it to keep their customers/consumers informed. Whereas the system is currently focused on tracing and verifying transactions relating to cocoa pulp, they look forward to using it for the other ingredients they may introduce, including cocoa beans.
How does this system function in practice?
The digital transparency platform, according to Koa, is a Verification system that connects the mobile money platform they use to pay farmers to a blockchain. The transaction details stored on a blockchain enable it to become traceable, shareable, and immutable.
Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding).
IBM
As shown in fig 1, there is a publicly accessible website, i.e., via seed trace https://products.seedtrace.org/Koa, where Koa’s customers can check how many farmers are profiting from Koa’s operations, how much money in US$ has been paid to the farmers and how much food waste in kg has been reduced. To Koa, the seed trace blockchain verification system (the system that hosts Koa’s transparency system) has multiple verification points, allowing the farmer to get notified of the data (The quantity of pulp and amount paid) that will be stored on the system. This makes it easy for the farmer to confirm consistency on the data Koa is reporting.
Source: https://products.seedtrace.org/Koa (Note that Koa’s Transparency system is dynamic and updates to reflect new information. So do not take the information on the screenshot as the current information. The information on the screenshot is as per the time I took it)
As shown in fig 1, the transparency platform displays the amount paid to Cocoa farmers, the number of cocoa farmers that received this income and the amount of cocoa pulp that has been saved from going to waste. In the first instance, what is good about this transparency system is that, unlike the Cocoa beans, the cocoa sweating/pulp is a by-product without a known economic value. Hence, being the first in Ghana to explore its economic potential in the early stages is quite a bold decision.
However, the system demonstrates a key misinformation issue. As I questioned in the previous article, Koa pays the farmers in Ghana Cedis, yet displays farmers’ earnings on the system in US$, as seen in Fig 1. In effect, knowing that an exchange rate exists between the Ghana Cedi and the US Dollar, stakeholders’ will be misinformed when they visit the transparency system to check how much money farmers have earned from Koa.
Source: Calculations by author
Graph 1 misinforms us of one thing and reveals another issue I advised Koa during the interview to fix and have also written about.
The Misinformation: Concerning Fig 1 explained with Graph 1, Koa displays the amount farmers have earned from them in “US$” even though they buy the cocoa pulp from the farmers priced in Gh¢ (Not the GH¢ equivalent of a US$ price). This emphasis is significant because when I advised Koa to consider buying the cocoa pulp from farmers in US$, it was to avoid misinformation like this.
On the transparency system, Koa has US$43,889 as the income earned by farmers so far from them. This figure is translated into Ghana Cedi using the 2021/22 US$ to GH$ Exchange rate, which means farmers made GH¢254,556.2 from Koa. Suppose this amount of US$43,889 is still displayed on the system in 2022/23.
In that case, stakeholders like me will be misinformed that the farmer was paid in Dollars or the Dollar equivalent, which will be GH¢395,001 instead of the actual payment of GH¢254,556.2 made to farmers. As referenced in the initial article, The Ghana Cedi has consistently depreciated against the US by 20% on average from 1992 to 2022 in crop years. And so, this graph shows Koa how the initial argument of their fear of farmers receiving a lower income due to the possibility of the US$ depreciation against the Ghana Cedi is extremely low and nearly impossible.
Again, why isn’t Koa showing the price at which they buy the cocoa pulp per metric ton? The transparency needed is knowing the “Price” at which Koa purchases the Cocoa Pulp than the “Aggregate amount of money paid to farmers. Below is a demonstration of what becomes transparent if Koa shows the historic price at which they buy pulp from farmers.
Data and Assumptions
- Koa buys 2.5 litres of Cocoa Pulp for Gh10 (As of 2021/22 crop year).
- Koa sells its final products in US$ and other currencies. We will use US$ for this analysis.
- Estimated annual US$: Gh¢ exchange rate has been appreciating at an average of 20% for the past 30 years (Feb 1992 to Feb 2022) – Infinitiv.
- For this analysis, we will assume Koa pays the farmers consistently Gh¢10 for 2.5 litres.
Source: Author’s Calculation
Note:
Nominal Price: the price Koa buys cocoa pulp per 2.5 litres.
Actual Price: The Actual Price Koa pays for 2.5 litres of cocoa pulp when adjusted to the annual US$: Gh¢ exchange rate of 20% (Based on the average est. US$ appreciation rate of 20% against the Gh¢ between Feb 1992 to Feb 2022).
The Right Price: This is the Right Price at which Koa should be buying 2.5litres of cocoa pulp, based on the annual estimated US$: Gh¢ exchange rate of 20% (Based on the average est. US$ appreciation rate of 20% against the Gh¢ between Feb 1992 to Feb 2022)
From Graph 2, you will realise that Koa choosing to have the cocoa pulp price in Ghana Cedi has a financial loss to Farmers and benefit Koa. If Koa decides to maintain the Purchase price at Gh¢10 per 2.5 litres, the red line in the graph shows how the exchange rate devalues the purchase price and the farmer’s income. However, suppose Koa decides to Pay the US$ equivalent of GH¢10 per 2.5 litres and maintain the US$ value for the next ten years. In that case, the US$ annual 20% appreciation against the Gh¢ will cause the Price to appreciate in Ghana Cedi for the farmer’s benefit, as shown with the green line in graph 1.
In the next article, we will talk about the unintended issues the transparency system reveals about the unilateral Koa’s gains and the implication of the interest of the various stakeholders involved in deploying and using the transparency system.
