Our Markets Today: Cacao

Andres Parizaca and her wife Juana Aliaga Luque, photographed at her home in Santa Rosa, in the Madre de Dios region of the Peruvian Amazon.

Andres Parizaca and his wife Juana Aliaga Luque, photographed at their home in Santa Rosa, in the Madre de Dios region of the Peruvian Amazon.

Juana knows firsthand the ways that current markets don’t serve farmers or buyers well. The fact that she is an award-winning native cacao farmer in Peru doesn’t mean that buyers can find her or that her traditional methods produce enough yield to meet minimum shipping requirements. Juana’s only option is to sell her precious beans for below-market prices at her farm gate to networked logistics providers hired to transport and sell beans to a market or port. Ultimately her prize-winning cacao will be combined with the yield from other small farms, its unique flavors lost in a sea of beans.

 

Meanwhile Angela, a small-batch artisan chocolate maker in San Francisco, is looking to establish direct trade relationships with small-scale farmers that meet her standards. Her customers want distinctive flavors and she values traditional methods used by farmers like Juana. When Angela began her search for high quality beans, she was shocked to find out how difficult it was. Many chocolate makers may learn of a possible source thanks to a passing mention from a Ph.D. student who happened to stumble onto a small farm during field work.  Further exploration or expensive trips are often needed to validate whether the fields held the prized beans that buyers search for, and if the farmers were a good match for building long-term business relationships, grounded in trust and consistency. Angela knew — or certainly hoped — there was a more efficient, reliable way to secure the supply required for her business.

 

Juana and Angela represent some, but not all of the gaps and challenges in growing, processing, transporting, buying and selling cacao, from farm to maker to consumer. Below is an overview of three journeys, through the eyes of the farmers, craft chocolate buyers, and service intermediaries involved to help us understand the system:

(1) First, we will follow the cacao bean in the Product Story

(2) Next, we will follow the flow of money related to the cacao market in the Finance Story

(3) And finally, we will follow the gathering and sharing of data (or lack thereof) in the Information Story

 

Let’s dive in…

 

Product Story

 

We’ll start by briefly introducing the three main characters of our story:

 

Farmers and Processors — i.e. “Origins” — grow, harvest, ferment and dry the cacao before it is shipped and sold.

Service Intermediaries support moving the product from the farmer to the buyer. Services could include transport, such as import or export services, storage, distribution or quality assessment.

Buyers represent anyone seeking to buy cacao. In our story, we begin with craft chocolate makers seeking quality cacao. To ensure standards for excellent supply can be met, they are the pioneers of a system working to improve trade relationships, and often, greater well-being for all.

PRODUCT STORY

Now let’s dive into the market gaps and challenges our characters face, in our Product Story.

Farmers and processors. Many small-scale farmers are not connected to current markets at all due to low volume of production, inconsistent quality, location or lack of coordination to reach market standards. In fact, of all of the cacao growers in the world, only a very small percentage of farmers have consistent access to markets.

Service Intermediaries. Those who handle transport, storage, distribution or quality assessment for importing or exporting face risks of product loss due to lack of coordination or spoilage due to defect, disease, pests, and other unforeseen circumstances. For a 20 metric tonnes (MT) container with typical shipping weight of cacao, the average shrinkage rate is about 30-40%. Also unwanted or rejected products often sit in warehouses without an alternative market.

Buyers. Craft buyers seek access to a steady stream of flavorful cacao that is unique and consistently excellent. Because every sourcing situation is different, buyers purchasing directly from origin face a myriad of challenges that often limit trade to a handful of known origins. Thus, cacao trade is built on a web of trusted relationships to meet production goals. Large buyers seek greater access to supply to meet increased consumption and demand.

“It’s not just the logistics, it’s finding people to buy beans from who you can trust.” Craft chocolate maker

 

Financial Story

FINANCIAL STORY

 

Now let’s take a look at the Financial Story of cacao:

 

Farmers and Processors are challenged to receive fair prices and timely payment for their cacao. Payment may occur several months after an order is processed and the beans are shipped, thus fulfilling an order requires sufficient capital reserves or financing.  Lack of market connection results in lesser negotiation power and generally lower income, as farmers need to cover costs of production. Processors and small-scale farmers are also challenged by high costs of infrastructure, certification and pre-production overhead, requiring them to bear the majority of upfront financial risk.

Service Intermediaries’ biggest challenge is pricing to stay competitive. The modern trade system relies on high volume and low margins to meet efficiencies of scale.

Buyers seeking high-quality cacao for small-batch production are challenged by scale and capacity to purchase. Shipping generally requires 6-20 MT to make sense financially. Lack of purchasing power also impacts the craft market in finding access to cacao that meets their preferences and standards.

 

Information Story

 

INFORMATION STORY

 

Our final journey focuses on the Information Story — data that is gathered, and more importantly, what is left out:

 

Farmers and processors are challenged by visibility. Farmers and processors need to understand their position in the market and current demand, and they need to be able to project and plan for future demand. The more information that farmers and processors have about buyer preferences, the more they can ensure a steady pipeline of great product. Lack of visibility or connection also leaves the farmer’s voice out of the conversation. The ability for farmers to participate leads to increasingly well managed farms, improved trading relations and more effective markets for all.

Service Intermediaries including larger importers are not able to offer a high level of customer service, restricting entry to smaller buyers who have more specialized questions, needs and preferences. Information about a farmer and the story about a particular farm is often not available through service intermediaries, limiting transparency and a buyer’s ability to discover sources for beans.  

Buyers struggle to discover new origins because that information does not have a reliable way to reach them. Transparent information is key to understanding what products are available and how they are traced to the farm source, and if quality, story, and efforts are making their way through the supply chain as intended. Ensuring a healthy product and capital flow requires information around timing, release dates, order quantity and availability in order to make purchase decisions. Infrequent response rate or poor communication of smaller or lesser known farms can challenge trading relationships.

004_YellowSeed_Current System

 

YELLOW SEED 

With all of the gaps, inefficiencies and challenges in our current market system, it’s no wonder that farmers, service intermediaries, and buyers are frustrated. Together with all of these stakeholders, Yellow Seed has created a platform for Collaborative Trade where each person impacted by this system can participate in making the system work better for everyone. Read “Yellow Seed Model” to learn more.

 

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