New rules in the Liberian cocoa market enhance smallholder power
Deregulation of the cocoa market in Liberia has opened the door for more buyers and increased competition among them. This is one of several changes since the ending of the civil war in 2003 that have improved business opportunities for smallholder cocoa farmers. Their bargaining power has been strengthened and they obtain a larger share of the world-market price. However, economist Gun Eriksson Skoog warns against over-optimism.
“The rules of the game in the cocoa market have changed in the more recent postwar period,” reports Eriksson Skoog, formerly a Nordic Africa Institute researcher and currently a senior policy specialist with the Swedish International Development Cooperation Agency (Sida).
“First, the government’s decision to deregulate the cocoa market in 2009 opened the door to more buyers. In the past, one firm accounted for some 80-90 per cent of exports. At the local level, firms were granted a sole purchasing right. Buyers with strong market power could dictate the terms of trade with farmers. Now more buyers, both national and local, have boosted competition for cocoa, helping thereby to push up the prices paid to farmers. This change has also allowed farmers to choose between buyers on the basis of the terms they offer,” she explains.
New buyers willing to invest
Another important change is that a new type of large-scale buyer, or rather investor, seeking to establish long-term relations with farmers, have entered the market. By providing the farmers with higher-yielding seeds, fertilisers and pesticides – and the know-how to use them – they help farmers to improve the quality of their cocoa beans and the productivity of their trees. These investors also offer credit to farmers, who are often too poor to pay upfront.
“However, the situation is far from ideal,” Eriksson Skoog cautions. “There is a risk that these early large investors will gain too strong a foothold in the market. To ensure continued competition, more investors should be encouraged to enter the field. There is a clear role for government here.”
New rules promote quality
In a related development, a new system for grading the quality of cocoa beans has gained momentum. In the past, the Liberian grading scale was inconsistent with international standards, enabling international buyers to rate Liberian cocoa as of poor quality. As a rule, they deducted a ‘Liberia-origin discount’ from the market price. The new three-level quality-grading system is compatible with international standards, and has, combined with national guidelines for recommended cocoa prices, created a system that rewards farmers for investing in higher quality.
“My research shows that the reforms have had some effects. They have created incentives that push the farmers in the right direction", she observerves, adding that the reformed grading system is, however, not consistently applied throughout the country. "Small and medium-scale middle buyers, who pay on spot to poor farmers, in more or less urgent need of cash, have little interest in quality. If their market share continues to grow, this will pose a major challenge to the continued development of the Liberian cocoa market,” she warns.
Eriksson Skoog also notes the important role played by cooperatives. After the end of the civil war, farmers began to re-establish cooperatives, partly with help from international development partners.
“By selling through cooperatives, smallholders bulk and trade their cocoa in larger volumes and negotiate collectively with buyers. They gain more market power and better prices,” says Eriksson Skoog.
Policy advice to the president
Eriksson Skoog hopes her research will increase the understanding of how the rules of the game in the Liberian cocoa market affect smallholder farmers. She further hopes that some of her findings may be relevant to other countries in Sub-Saharan Africa, and to other crop regimes than cocoa.
“During my last visit to Liberia I was privileged to share my findings with senior government officials, including the president’s chief economist. They were considering further reforms to the cocoa sector and I was able to offer some thoughts on the subject. In particular, I highlighted the need to strengthen incentives for long-term investors, while at the same time ensuring competition among them. We also spoke about the advantages of a system of independent quality grading throughout the Liberian cocoa market,” she notes.