Part Two…..
A Possible nepotism/corruption?
Mondelez is a chocolate manufacturer, whereas Olam is global cocoa sourcing and cocoa processing firm. With Mondelez’s focus on chocolate manufacturing, it will only make sense to purchase their Cocoa beans (for the bean-to-bar chocolate) or their semi-processed cocoa products for chocolate manufacturing, all from Olam. I do not know how much trade exists between both parties, so one can establish that both are not competitors. Still, potential business partnerships as their operations augment each other without overlap.
Currently, Olam source its Cocoa Beans directly and indirectly from over 2.56m farmers worldwide. This represents Olam’s massive control over an estimated 64% of cocoa farmers globally. Secondly, Olam owns about 100 cocoa-processing plants worldwide and can process their cocoa. Olam finally has 14 innovation centres close to the major cocoa-consuming market. These stats highlight how their entry into cocoa production gives them total domination over the sector.
With their domination and intention to replicate their commercial farming in other regions in Indonesia and possibly around the world, they will succeed in driving down cocoa prices with increased production while prioritising the usage of their beans. Remember that suppliers become price takers when any product is oversupplied.
The overproduction their initiative will cause wouldn’t remain in Indonesia as one may perceive but rather in the world, as oversupply supply will cause the world market price to fall. This will help even their competitors gain cost advantages, hence uniting in their effort both oppress and destroy smallholder cocoa farmers worldwide into extinction.
Olam will weaponise the oversupply caused by their initiative to keep smallholders’ cocoa farmers’ cocoa beans unsold, leading to the escalation of the already worsened poverty situation in the cocoa-producing areas. Olam already has over 100 cocoa processing factories worldwide, which is a significant number of value addition operations under the control of OLAM, hence making their commercial cocoa production objective a threat to smallholder cocoa farmers everywhere in the world.
So, if Olam is now entering into cocoa production, whose cocoa beans will be given the first right of refusal by OLAM’s cocoa sourcing representatives in OLAM’s 100 cocoa processing factories? Since this initiative is a joint effort by OLAM and Mondelez, whom do you think Mondelez will give the first right of refusal when sourcing cocoa beans or semi-processed cocoa products from trading and cocoa processing companies? Your guess is as good as mine. What is fair and sustainable about this?
Avoiding the Living Income Differential?
Whether intentional or coincidental, Mondelez/Olam’s “world’s first Single largest sustainable commercial farming” project was launched in the same year the Living Income Differential (LID) was implemented. Whereas we can’t confirm whether the project came into existence because of the potential cost pain the LID was going to inflict upon their revenues and profits, we can say that the project has the potential to dilute the effects of the LID and instead render Ghana Cocoa board’s immediate addition of the LID to farmer’s farmgate price a horrible idea.
First, the project’s primary purpose is to massively increase output on a small piece of land, causing an oversupply of cocoa beans and subsequently neutralising the effects of LID on the cost of sourcing beans from Ghana. Secondly, the LID levy operates only in Ghana and the Ivory Coast. Hence this project’s location in Indonesia is a perfect way to reduce the total LID payments they make on their global cocoa purchases.
Investing in this project in Indonesia is suitable for OLAM/Mondelez because Indonesia’s cocoa sector is not heavily regulated like Ghana, which allows them to reduce their reliance on cocoa from Ghana and Ivory Coast. So, knowing that OLAM owns over 100 processing factories, we wouldn’t need to argue about the magnitude of cocoa beans they consume and which farm they will source from for their factories when their project starts to yield.
The effects it would have on the sustainability of cocoa trade in Ghana and the Ivory Coast. Let’s not forget that the project is being trialled on 2000 hectares of land and intends to scale it throughout Indonesia.
First, you don’t “trial” technology on a 2000-hectare land if you are not 99.99% sure of its success. So, we should call it an implementation than a trial. This project will grant enormous power to OLAM/Mondelez to further assert their ability to control prices along the value chain, which in the end benefits their competitors, hurts cocoa farmers, render the LID levy unsustainable and destroy smallholder cocoa farmers globally. But I am sure you will be asking; how much rainforest Indonesia has to enable OLAM/Mondelez to produce a significant quantity of cocoa I seem to be exaggerating about?
From Graph 2 above, you would see that even though Indonesia has been deforesting rather than afforesting, they have a vast amount of rainforest cover in terms of land size compared to Ghana and Ivory Coast. In Ghana, very fertile land can yield 900kg per acre. So, if Mondelez/Olam’s project succeeds in delivering 1.5mt per acre, 100,000 acres of land, it will reduce their global LID payments by over US$60,000,000.
If this new project reduces the international cocoa market price with its over-supply abilities, Mondelez benefits further. Ghana and Ivory Coast implemented the LID to get extra income for farmers. However, this new money energised the Ghanaian cocoa farmer to produce more. A concerned OLAM/Mondelez entered cocoa production in another country where the LID levy wasn’t in force. In the end, cocoa production will drastically increase yearly; the world market price will keep falling. Mondelez will increase profits by reducing the cost of production while maintaining chocolate prices on the supermarket shelf.
Increasing Ghanaian and Ivorian Indigenous investors’ entry barriers into cocoa processing or chocolate manufacturing?
In my enquiry with Ghana Cocoa Board and the Ivorian Embassy in Ghana, both countries see themselves as fierce competitors within the cocoa space. According to Ghana, their beans are of higher quality hence the up-to $100 premium they receive per metric ton. So, Ghana does not want Ivorian beans coming into its territory and potentially risking the premium they receive.
Ivory Coast’s argument was more on Ghana being a competitor. So, with these two arguments, both countries don’t like cocoa beans from anywhere to come through their borders. Both countries produce more than enough to protect themselves from the competition by allowing local processors to import. So, whereas OLAM/Mondelez gradually reduces their reliance on Ghana and Ivorian Cocoa Beans to access their LID-free cocoa beans from their large sustainable commercial farms, the Indigenous Ghanaian and Ivorian investors will be stacked with a LID-based Cocoa Beans.
The Ghanaian and Ivorian indigenous investors wouldn’t be able to import cheap beans (i.e., Non-LID Cocoa beans) from Indonesia and other cocoa-producing countries, hence increasing the cost competitiveness of OLAM/Mondelez instead. Can you blame OLAM/Mondelez for this? Absolutely not!
Because whereas Ghana and Ivory Coast still thought like the colonialists with their minds fixating on cocoa bean price alteration as the primary source of extracting income for cocoa farmers, OLAM and Mondelez were busy developing their single most extensive sustainable commercial cocoa farming to avoid paying the LID at all as compared to indigenous Ghana and Ivorian investors.
The question on my mind is, Did Ghana and Ivory Coast consider the potential harm the LID’s implementation could have on indigenous investors entering the cocoa sector, enhancing the monopolistic features of OLAM in the cocoa processing space? As I explained in my article, “IS A POTENTIAL “COPEC” POTENT AT PROTECTING COCOA FARMERS? Price-fixing has outlived its long-term advantages today compared to its potency in the 1950s when Dr Kwame Nkrumah proposed it.
The next article will look at my concluding thoughts and advice for the essential stakeholders entangled in this project.
