86044 SOLOMON ISLANDS COCOA VALUE CHAIN ANALYSIS FEBRUARY 2014 Dan Vadnjal and Moses Pelomo World Bank, Australian Department of Foreign Affairs and Trade, Mondelez International TABLE OF CONTENTS EXECUTIVE SUMMARY 1. INTRODUCTION 1.1 Background 1.2 Rationale 1.3 Methodology 2. POLICIES AND STRATEGIES 2.1 Economic and National Development 2.2 Agriculture Sector and Cocoa Industry Development 2.3 Infrastructure and Transport 2.4 Institutional and Regulatory Framework 2.5 Development Partners 3. DOMESTIC AND GLOBAL MARKETS 3.1 Domestic Trends 3.2 Global Trends 4. VALUE CHAIN ANALYSIS 4.1 Overview 4.2 Methodology 4.3 Results 5. CHALLENGES 6. CONCLUSIONS AND RECOMMENDATIONS ANNEXES Annex I Gross Margins Analysis Annex II Exporter Profiles LIST OF ABBREVIATIONS ACIAR Australian Centre for International Agricultural Research AusAID Australian Agency for International Development CEMA Commodities Export Marketing Authority CIF Cost, Insurance, Freight, CLIP Cocoa Livelihoods Improvement Program CMAWG Cocoa Market Access Working Group DFAT Australian Department of Foreign Affairs and Trade DML Direct Marketing Limited EU European Union FACT Facilitating Agricultural Commodity Trade FoB Free on Board GDP Gross Domestic Product IACT Increasing Agricultural Commodity Trade ICCO International Cocoa Organisation IES International Enterprise Singapore IFAD International Fund for Agricultural Development IPDM Integrated Pest and Disease Management ITC International Trade Centre KOA Key Outcome Areas LTCM London Terminal Commodity Market MAL Ministry of Agriculture and Livestock MCILI Ministry of Commerce, Industry, Labour and Immigration MDPAC Ministry of Development Planning and Aid Coordination MAWG Market Access Working Group NCDPS National Cocoa Development Policy and Strategy NCID National Cocoa Industry Development NCS National Cocoa Secretariat NCSC National Cocoa Steering Committee NDS Solomon Islands National Development Strategy PAR Participatory Action Research PARDI Pacific Agriculture Research and Development Initiative PCCC Provincial Cocoa Coordinating Committee PHAMA Pacific Horticulture and Agriculture Market Access Program PIC Pacific Island Country PNG Papua New Guinea R&D Research and Development SBD Solomon Islands Dollar SEF Supplemental Equity Facility SIAQS Solomon Islands Agriculture Quarantine Services SICIPS Solomon Islands Cocoa Industry Policy and Strategies SIPA Solomon Islands Ports Authority SIG Solomon Islands Government SIRDP Solomon Islands Rural Development Program ToR Terms of Reference 2 EXECUTIVE SUMMARY The objective of this value chain analysis is to identify the most promising opportunities for increasing the contribution that the sale of cocoa can make to rural livelihoods and the national economy. The analysis aims to map cocoa value chains, focused on elaborating practical pathways to improving production and marketing and where feasible developing partnerships between domestic, international and other stakeholders. The results of the analysis reported here will feed into the design of agriculture sector interventions within the follow-on Solomon Islands Rural Development Program (SIRDP). There is clear commitment by the Solomon Islands Government (SIG) to the Solomon Islands cocoa industry and development partners have and continue to provide diverse technical and financial support including this report which is jointly commissioned by the World Bank, Australian Aid Programme and Mondelez as an input to the design of agriculture sector interventions within the follow-on SIRDP. There are also demonstrable benefits that could accrue with efforts to increase production of Solomon Islands cocoa. Market trends analysis demonstrates that prices have increased by on average 13% and related to this production has increased by on average 5% over the last decade to 2013; and based on forecasted price increases of between 10% and 30% annual production is realistically expected to reach what is considered to be an achievable target of around 10,000 Metric tons by 2020. Value chain analysis demonstrates that smallholder gross margins are around SBD 11 million annually, or over SBD 40 million annually including processors, and total gross margins are around SBD 55 million annually, at today’s price; and based on forecasted price increases of between 10% and 30% smallholder gross margins are expected to reach between around SBD 15 million and SBD 24 million annually, or between around SBD 35 million and SBD 45 million annually including processors, and total gross margins are expected to more than double to over SBD 90 million annually. Realising the sorts of benefits that could potentially accrue to stakeholders in the cocoa value chain, as illustrated by various price rise scenarios, will require specific measures to improve the productivity of cocoa trees, processing and handling of cocoa beans, production and the service delivery capacity of MAL. Improving productivity will require support to Research and Development (R&D) and husbandry provided to smallholders through the combined efforts of the Ministry of Agriculture and Livestock (MAL), the Ministry of Commerce, Industry, Labour and Immigration (MCILI) and exporters; improving processing and handling will require support to infrastructure and regulation provided to processors and traders through the combined efforts of the MAL, MCILI, Commodities Export Marketing Authority (CEMA) and exporters; improving production will require support to price and marketing provided to exporters through combined efforts of MAL, MCILI and exporters. Also, public and private partnerships between government, development partners and private sector enterprises including domestic and international stakeholders will offer opportunities for improving services to the cocoa industry. 3 1. INTRODUCTION The Solomon Islands Rural Development Project (SIRDP) is a US$37 million program of the Solomon Islands Government supported by the World Bank, the Australian Aid Programme, the European Union and the International Fund for Agricultural Development (IFAD). The Solomon Islands Ministry of Development Planning and Aid Coordination (MDPAC) is implementing the program. Launched in 2008, the program is now implemented in the 8 provinces of Choiseul, Western, Isabel, Central, Guadalcanal, Malaita, Makira and Temotu. The development objective of SIRDP is to increase access of rural households to high priority, small-scale economic and social infrastructure, agriculture and financial services. The Program comprises four components: local infrastructure and service delivery; improved agriculture services; rural business development; and program management. SIRDP is scheduled to end in 2015 and preparations are being made for the design of a follow-on phase. It is proposed to focus agriculture sector interventions, in the follow-on phase, on high value products in domestic and export markets, specifically on cocoa and coconut products (e.g. copra and oil) in the case of the latter. This focus is broadly in line with and supported by key Solomon Island Government (SIG) strategies and policies including: the Solomon Islands National Development Strategy (NDS) 2011-2020 which stresses the need to create an enabling environment for private sector led growth in general and promoting commercial export crops including cocoa in particular; the Ministry of Agriculture and Livestock (MAL) Corporate Plan 2011-2014 which strives to further develop the Ministry as the premier provider of information, research, extension, education, regulatory and other services to improve the agriculture sector; and the Solomon Islands Cocoa Industry Policy and Strategies (SICIPS) 2012-2020 which call upon support from foreign investors and development partners to support rural families, industry stakeholders and the nation. The cocoa industry is a significant contributor to smallholder livelihoods and national export earnings. There are more than 24,000 smallholders comprising around 133,000 family members or 26% percent of the Solomon Island population engaged in cocoa production. Cocoa growers are concentrated mainly in Guadalcanal, Malaita and Makira provinces but also in Western and Choiseul and in fewer numbers in other provinces. Current estimates suggest smallholders (and processors) living and working in rural areas capture 77% of gross margins from cocoa. Cocoa is also an important source of earnings for the national economy with total gross margins expected to reach Solomon Islands Dollar (SBD) 55 million in 2013 and potentially almost doubling to around SBD 90 million by 2020, based on forecasted price increases, due to the combined effects of an estimated production deficit and increase in demand. There have been numerous endeavours to promote the export of cocoa through Government and donor partner initiatives in Solomon Islands. More recently, in a potentially significant boost to the cocoa industry, Mondelez International (owner of Cadbury and other global brands), has expressed an interest in purchasing around 10,000 metric tons of cocoa from the Solomon Islands – c.f. current cocoa production of around 4,500 metric tons in 2012 but which reached around 6,500 metric ton in 2011. Mondelez’s interest in cocoa also provides an opportunity for building mutually beneficial partnerships with producers, government and non-government organizations, traders and buyers. Mondelez has launched its “Cocoa Life” program, which is dedicated to building partnerships focused around farmers and communities, including youth and women, their livelihoods and the environment. 4 The objective of this value chain analysis is to identify the most promising opportunities for increasing the contribution that the sale of cocoa can make to rural livelihoods and the national economy. The analysis aims to map cocoa value chains, focused on elaborating practical pathways to improving production and marketing and where feasible developing partnerships between domestic, international and other stakeholders. The results of the analysis reported here will feed into the design of agriculture sector interventions within the follow-on SIRDP program. The report comprises 5 sections: Section 2 describes Solomon Islands Government’s (SIG) national and sector policies and strategies, the state of infrastructure and transport, relevant institution and regulatory frameworks, and activities of development partners involved in the cocoa industry; Section 3 provides an overview of global and domestic trends in prices, production and productivity of cocoa beans; Section 4 provides an overview of the cocoa value chain and a snapshot of costs, revenues and gross margins accruing to smallholders, processors, traders and exporters at each stage of the value chain; Section 5 provides an overview of key challenges and opportunities in development of the Solomon Islands cocoa value chain; and Section 6 concludes the main findings of the value chain analysis and makes recommendations for future interventions in the cocoa industry. 2. POLICIES AND STRATEGIES This section describes SIG’s national and sector policies and strategies, the state of infrastructure and transport, relevant institution and regulatory frameworks activities of development partners involved in the cocoa industry 2.1 Economic and National Development The Solomon Islands economy is continuing to recover from a prolonged period of sharp contraction following civil tensions during the late 1990s and early 2000s. The average Gross Domestic Product (GDP) growth rate for the period 2003-2013 was 2.9%; expected to be around 2.5% in 2013; and forecast to be more than 4% in 2014. National development policies and strategies aimed at promoting development are elaborated in several key documents including the National Development Strategy (NDS) 2011-2020. The NDS comprises 8 objectives of which Objective 5 is especially relevant to developments of the cocoa sector: “Increase economic growth and equitably distribute income and employment benefits ”, which includes creating an enabling environment for private sector led growth and promoting commercial export crops including cocoa. 2.2 Agriculture Sector and Cocoa Industry Development Agriculture plays an important role in the Solomon Islands: 75% of the population are engaged in agriculture compared with 20% in services and 5% in industry (fishing, mining and timber); and 52% of GDP is derived from agriculture compared with 39% from services and 9% from industry. The main export earnings in the agriculture sector are from commodities including cocoa, palm oil and coconuts (copra and oil) – around 17% of total export earnings come from a combination of cocoa and copra. Sector development policies and strategies aimed at promoting agriculture development in the Solomon Islands is elaborated in the Ministry of Agriculture and Livestock (MAL) Corporate Plan 2011-2014. The MAL Corporate Plan has as its vision “to promote, improve and lead agriculture development in the Solomon Islands to a profitable and environmentally sustainable future by being the premier provider of information, research, extension, education, regulatory and other services to 5 improve the agriculture sector.” The MAL Corporate Plan comprises 10 key outcome areas (KOA) of which the following 6 are especially relevant to developments in the cocoa sector: KOA 1 poverty alleviation, enhanced food security and rural livelihood; KOA 2 sustainable growth and economic development; KOA 5 investment in agriculture research and development; KOA 7 increase agriculture investments; KOA 8 enabling environment for growth and development; KOA 9 strategic strengthening of alliances for national, regional and international cooperation. Aligned with the NDS and the MAL Corporate Plan is the Solomon Islands Cocoa Industry Policy and Strategies (SICIPS) 2012-2020. This cocoa sector specific strategy has as its mission “to guide and support the development of the Solomon Islands cocoa industry to realize its full potential through the active participation of Solomon Islanders with support from foreign investors and Development Partners that brings maximum benefits to rural families, all industry stakeholders and the nation”. The SICIPS has the following 10 policy directives:  National cocoa industry governance and coordination framework – SIG will establish a Cocoa Industry Governance and Coordination Framework and provide adequate resources, strengthen strategic planning, coordination and monitoring, and provide an enabling environment to support its implementation;  Land-use and environmental Sustainability – SIG, Development Partners, resource owners and stakeholders of the Solomon Islands and investors shall work in partnership to ensure land-use planning and environmental management and social considerations as part of the strategies and actions to develop land for cocoa;  Production – SIG and national stakeholders shall ensure that production of cocoa is increased to 20,000 Metric tons by 2020, through increasing productivity by tree, total area planted and use of improved genetic material;  Processing and storage – this will involve improving the capacity of the Commodities Export Marketing Authority (CEMA) (see below) to conduct tests and analysis on cocoa products to determine whether they meet specified standards;  Marketing – this will include maintaining an effective, efficient and regulated cocoa marketing system, ensuring all traders and exporters of wet and dry cocoa beans are supported to be compliant with CEMA and Provincial Government regulations, support given to infrastructure and updated market information made available to all stakeholders;  Extension and training – SIG shall establish partnerships with the private sector, communities and farmers to maintain and strengthen extension and training services for the cocoa industry;  Crop protection – SIG shall strengthen the capacity of the Solomon Islands Agriculture Quarantine Service (SIAQS) to provide effective border and surveillance and protection and to monitor, control and prevent inter-island movement of cocoa pests and diseases;  Down-stream processing and value-adding – SIG and private sector shall identify and implement investment strategies and initiatives to achieve down-stream processing and value adding to Solomon Islands cocoa beans;  Resource mobilization and financial services – SIG, private sector partners and national institutions shall engage effectively with Development Partners and financing institutions to mobilize and secure adequate financial and technical services; and  Monitoring and evaluation. Also, MAL has developed the National Cocoa Industry Development (NCID) 2014 – 2020 program which is aimed at the aforementioned NDS Objective 5 and achieving an ambitious target of 20,000 6 Metric tons of production by 2020 as well as addressing several of the other key policy directives in the SICIPS. The main outputs of the NCID are a national cocoa participatory action research (PAR) program comprising Integrated Pest and Disease Management (IPDM) conducted for cocoa farmers; improved planting material and new technologies made available to farmers; protection of the cocoa industry from exotic pests and diseases; establishment of the Cocoa Secretariat; and establishment of a monitoring and evaluation system. It is envisaged that the program will be financed by SIG and co- financed by beneficiaries and the private sector. 2.3 Infrastructure and Transport In general, public infrastructure (roads, bridges, electricity, telecommunications; wharves) are poorly developed in the Solomon Islands with much of that which was destroyed during the tensions having not been repaired or replaced. There are some 1,500 kilometres of roads of which only around 50 kilometres are paved. Roads are sparse, reaching less than a quarter of communities, with the rest reliant on sea transport. Many bridges are in need of repair and some are impassable. Less than 20% of the total population has access to electricity and grid supply extends only a few kilometres outside of the capital Honiara. Telecommunications, especially mobile communications, are developing rapidly but remain expensive. There are two operational export ports in the Solomon Islands at Honiara on Guadalcanal and Noro on Western Province, both of which have basic container handling facilities. A third export port used to operate at Yandina in the Russell Islands (Central Province) but has fallen into disuse following the closure of the RIPEL plantation. There are regular inter-island shipping services that transport agricultural and other commodities to and from the main ports and other destinations within the Solomon Islands. There are no dedicated cocoa industry infrastructure or transport services. At the two main ports cocoa is unloaded by hand and those buying and selling cocoa beans – processors, traders and exporters – rely almost exclusively on the regular inter-island shipping services and, locally, other sea and road transport services. Outside of the two main ports, cocoa is transported by road or sea to collection points in the main provincial centres or to pick-up points along the coasts often off beaches, stored in private facilities, before being transported by regular, or in some instances private, shipping services to the port of Honiara. In the 1980s, CEMA developed an extensive network of buying centres (around 50 spread throughout 8 provinces) including storage facilities connected to private shipping services, for copra and coconut oil, although these fell into disuse following a fall in coconut prices and the ethnic tensions. These are currently not functional although at least one has been taken over by a cocoa exporter and others are being used for other purposes. Domestic shipping services also tend to price according to the value of the commodity so that higher value commodities regardless of size and weight pay a higher transport price. For instance the average price of an 80 Kg bag of cocoa shipped to Honiara is between SBD 60-80 compared with between SBD 35-60 for copra, depending on its origin. 2.4 Institutional and Regulatory Framework The institutional frameworks governing the cocoa industry are being elaborated in accordance with the national cocoa industry governance and coordination framework policy directive of the SICIPS, which includes the following strategies: (i) formalize establishment of the National Cocoa Steering Committee (NCSC) with appropriate Terms of Reference (ToR); (ii) establish National Cocoa Secretariat (NCS) and support with adequate resources; (iii) establish provincial cocoa coordination committees with appropriate ToR; (iv) review the CEMA Act 1984 (see below) and associated regulations and develop new regulations pertaining to investments in the cocoa industry; (v) 7 strengthen the capacity of cocoa exporters and producers associations to provide services to farmers; (vi) convene a National Cocoa Summit every two years to evaluate progress in implementation of the cocoa policy and strategy; (vii) establish international linkages with research institutes, International Cocoa Organization (ICCO), organic certification and fair trade organizations; (viii) establish and strengthen Development Partner links to support the cocoa industry; and (ix) support formation and management of cocoa growers associations. Several of the strategies have been, or are in the process of being implemented, in particular, through underpinning support given to the NCSC and with the development and publication of several new regulations under the CEMA Act pertaining to investments in the cocoa sector. The ToR for the NCSC, along with a Provincial Cocoa Coordinating Committee (PCCC) and a NCS, has been developed as part of the SICIPS. The purpose of the NCSC is to provide the forum to stimulate development of the cocoa industry in Solomon Islands and provide a framework through which the industry can operate. An inaugural meeting was held in June 2012, which bought together a broad representation of stakeholders including representatives from SIG, CEMA, Donor Partners and the private sector, at which the roles and functions of the NCSC were endorsed; the NCSC has been formalized through cabinet endorsement. Also, the SICIPS has developed the outline of a National Cocoa Summit to be convened every two years beginning 2014 as a forum for industry stakeholders to discuss and share ideas on issues, challenges and opportunities in the cocoa industry and to take stock of the progress in implementation of the SICIPS. In the interim, Pacific Horticultural and Agricultural Market Access (PHAMA) (see Section 2.5) has been providing support to NCSS with the establishment of a Cocoa Market Access Industry Working Group (IWG) for cocoa whose purpose is to provide an industry specific forum for addressing quality and international market access issues affecting Solomon Islands cocoa exports. The regulatory framework governing the cocoa industry comes under CEMA, based on the CEMA Act 1984, under the authority of the Minister/y of Commerce, Industry, Labour and Immigration (MCILI), specified in Cocoa Regulations 1986 and the Cocoa (Amended) Regulations 2013.1 CEMA’s authority covers licencing, inspection and grading and management of exporters, traders and processers in the cocoa industry. CEMA has the authority to issue, renew and revoke licences to exporters and in cooperation with MAL and the relevant Provincial Government to register cocoa processing units and licence wet and dry bean traders; and in particular MAL extension officers through the Chief Field Officers in their respective provinces are responsible for enforcing the design and operational standards of trader storage facilities and processing units (see Section 4.1 for more specific details on the processor registration and trader licence arrangements). In the case of inspection and grading, in particular, CEMA is ultimately responsible for controlling the quality of cocoa beans exported from the Solomon Islands. In this capacity the Chief Inspector of CEMA has the authority to inspect storage premises to ensure they comply with specified requirements (e.g. measures are taken to prevent infestation of pests, bags are stacked to ensure sufficient passage, disinfestation by fumigation is carried out as required and contamination is prevented) and sampling beans either prior to or after bagging by conducting a “cut -test” of selected sample beans and a count of defective beans (i.e. mouldy, slaty, insect damaged, germinated or flat); 1 Solomon Island Gazette No.27 19 September 1986; and Solomon Island Gazette No.67 29 August 2013. 8 and for those consignments of beans meeting the appropriate quality standard, they are labelled and sealed and CEMA issues an export certificate. 2.5 Development Partners Development partners have supported a number of recent cocoa industry initiatives, targeted directly or indirectly at the cocoa industry, several of which have responded and in some instances informed the policy directives outlined in the SICIPS. The development objective of the Solomon Islands Rural Development Program (SIRDP) is to increase access of rural households to high priority, small-scale economic and social infrastructure, agriculture and financial services. The three main components of the Program are local infrastructure and delivery services, improved agriculture services and rural business development. Apart from general support provided by MAL extension officers especially to cocoa bean processors and traders under the improved agriculture services component, the Supplemental Equity Facility (SEF) under the rural business development component provided equity to match borrower equity and commercial bank loans. It is estimated that cocoa processors, traders and or exporters received around half of the 20 SEF grants that went to the agriculture sector. The SEF ended in 2012 following full disbursement of available funds and the Program is scheduled to close in 2015. In addition to support through SIRDP, Australia has, and continues to provide significant support to the cocoa industry through a number of initiatives, including the Cocoa Livelihoods Improvement Project (CLIP) 2009-2012, PHAMA, the Pacific Agriculture and Rural Development Initiative (PARDI), as well as funding a cocoa adviser to provide technical assistance to Research and Development (R&D) in MAL. CLIP aimed to increase sustainable rural income for those involved in cocoa enterprises by increasing the volume of improved quality cocoa and increasing access to more competitive markets, specifically increasing the volume of high quality cocoa beans for export from 4,800 Metric tons in 2009 to 10,000 Metric tons by 2014 and reducing quality and price differentials between Solomon Island cocoa and PNG cocoa being sold into the South-East Asian markets. CLIP conducted a range of training, hardware provision, information gathering and other activities, involving the various stakeholders in the cocoa value chain. PARDI aims to create sustainable livelihood development outcomes of the South Pacific forestry, fisheries and crop-based sectors; and in the Solomon Islands PARDI is focusing on niche marketing of quality cocoa to specialty chocolate manufactures. PHAMA and support to R&D are two important initiatives as they provide on-going support that responds to and has informed the policy directives outlined in the SICIPS and other key industry related documents. PHAMA aims to provide practical and targeted assistance to help Pacific Island Countries (PICs) manage the regulatory aspects associated with exporting primary products. In the Solomon Islands support to the cocoa sector aims to improve returns from cocoa exports by improving quality and supporting traceability and certification systems that add market value. PHAMA is supporting the cocoa industry in the Solomon Islands through several priority initiatives2: as noted above PHAMA has established a Cocoa Market Access IWG to address quality and 2 PHAMA has facilitated the IWG’s identification of other activities including, in order of priority: support for strengthening quality assurance systems; support development of processing quality guidelines and improve industry awareness; support industry focus on access to higher value markets; support for value adding activities to assist in marketing; and support development of traceability and certification systems that add market value. 9 international market access issues affecting Solomon Islands cocoa exports which includes coordinating and providing technical support to quarterly meetings as well as meeting facilities and reporting; and PHAMA is facilitating the establishment of a functional laboratory in CEMA which can test to recognised international standards on cocoa quality, as well as providing technical, procedural and management support to operate the facility. The R&D program is housed in the Tree Crops Section of the Agriculture Research Department within MAL and is principally aimed at increasing yields from a current low of around 340 Kg/ha by introducing improved tree management (IPDM) and then developing new genetic materials. The bulk of this work comprises a three-stage Participatory Action Programme (PAR) based on IPDM principles: the first stage (years 1-3) organises smallholders into groups of 12 to conduct pruning on 1 ha (1,000 cocoa trees) for which they are paid SBD 750/year over three years, but only after all 12 smallholders complete pruning of all 12 hectares or 12,000 trees each year. The second stage (3-7 years) identifies and removes of 80% of poor genetic materials and replacing these with 20% elite local materials through grafting. The program is also field-testing improved hybrid seeds which have been introduced from Papua New Guinea (PNG). The first stage has begun implementation at two sites in Guadalcanal and there are plans to roll this out to a total of 12 sites in each of the 8 provinces (i.e. 96 sites). 3. DOMESTIC AND INTERNATIONAL MARKETS This section provides an overview of global and domestic trends in prices, production and productivity of cocoa beans. 3.1 Global Trends World production and price of cocoa have similarly fluctuated over the last decade to 2013 - the average annual world prices and productions 2004 – 2013 are shown in Figure 3.1. Figure 3.1 Average annual world cocoa productions and prices 2004-2013 Source: ICCO and FAOSTAT Production averaged 4.1 million metric tons for the period, rising from over 4.0 million metric tons in 2004, production peaked at just over 4.3 million metric tones in 2006 before decreasing to below 4.0 million metric tons in 2007 and rising to just over 4.6 million metric tons in 2011. Cocoa production 10 was just over 4.0 million metric tons in 2012 and the International Cocoa Organization (ICCO) forecasts cocoa production in 2013 will be around 3.9 million metric tons.3 Price averaged US$ 2,100/Metric ton for the period, rising from several years of oscillating around US$ 1,500/Metric ton, prices rose sharply in 2007 to peak at over US$ 3,100/Metric ton in 2010 before decreasing to below US$ 2,500/Metric ton and remaining flat in 2012 and 2013. The latest ICCO figures show a steady rise in world cocoa prices during 2013 rising from a low of US$ 2,154 in the first quarter of 2013 through to US$ 2,773 in December 2013.4 The average annual world cocoa prices 2005 – 2013 are shown in Figure 3.2.5 The latest ICCO figures estimate a production deficit of 160,000 metric tons, driven mainly by an increase in demand (mainly from the emerging economies of Asia rather than Europe) rather than a shortfall in supply, leading to recent speculation that prices could rise to in excess of US$ 3,000/Metric ton in 2013/14.6 The bulk of the world’s cocoa production comes from Africa (72% forecast in 2012/13) mainly from the world’s largest producer Côte d'Ivoire (1,480,000 Metric tons) with lesser amounts coming from Latin America (15% forecast in 2012/13) and Asia and Oceania (13% forecast in 2012/13). In the latter region Indonesia is the largest producer (430,000 Metric tons forecast in 2012/13) followed by Papua New Guinea (45,000 Metric tons forecast in 2012/13).7 This compares with significantly small amounts of cocoa produced in the Solomon Islands, which was 4,500 Metric tons in 2012, having reached a peak of just over 6,000 Metric tons in 2011. 3.2 Domestic Trends There are a number of domestic price, production and productivity features that characterize the Solomon Islands cocoa market.8 Price trends in the Solomon Islands relate to world price trends.9 Prices averaged US$ 2,094 over the period, rising from several years of oscillating around US$ 1,200/Metric ton (SBD 8,400/Metric ton), Solomon Island prices rose sharply in 2007 to peak at just over US$ 3,000/Metric ton (SBD 21,000/Metric ton) in 2010 before decreasing to around US$ 2,100/Metric ton (SBD 14,700/Metric ton) and remaining flat through 2012 and 2013; the October 2013 Monthly Economic Bulletin of the Central Bank of Solomon Islands reported a rise in cocoa prices to a high of US$ 2,334 (SBD 16,338) in September 2013. The average annual world and Solomon Islands prices 2005 –2013 are shown in Figure 3.2. 3 International Cocoa Organization, Quarterly Bulletin of Cocoa Statistics, Vol. XXXIX - No. 3 - Cocoa year 2012/2013. 4 Ibid. 5 All world prices are sourced from the International Cocoa Organization; and are based on monthly average quotations of the New York Stock Exchange, Futures and Options Exchange (LIFFE) and ICE Futures U.S. 6 The Wall Street Journal “Cocoa prices climb but not enough to boost production, Industry says”. October 16 2013. 7 International Cocoa Organization, Quarterly Bulletin of Cocoa Statistics, Vol. XXXIX - No. 3 - Cocoa year 2012/2013. 8 All domestic prices are sourced from CEMA; and based on an average 10 year exchange rate of US$ 1 = SBD 7. 9 Correlation coefficient = 0.99. 11 Figure 3.2 Average annual world and Solomon Islands prices 2005-2013 Source: IOCC and CEMA The average annual price difference between world “London Terminal Commodity Market” (LTCM) prices and Solomon Island “free on board” (FoB) prices paid to exporters (see Section 4.1) for the period 2005 to 2013 is US$ 240/Metric ton (SBD 1,680/Metric ton) ranging between US$ 111/Metric ton (SBD 778/Metric ton) and US$ 370/Metric ton (SBD 2,584/Metric ton). There are several main reasons given for the price differential, relating to quality and contractual terms surrounding the processing and exporting of cocoa beans respectively.10 In the case of quality data provided by the Malaysian Cocoa Board on its quality assessment of the Solomon Islands cocoa reveals beans tend to be “smoke off-flavour” and in some way “defective”.11 The smoke-off flavour of Solomon Island cocoa beans is due to a combination of poor quality of processing (fermenter and drier) facilities and the lack of skills and equipment necessary to adequately ferment wet beans and test the quality of dry beans. Also, poor handling and storage can cause for instance beans to be defective (e.g. broken, salty, mouldy, insect invested), which impacts on bean quality and price, especially the buying price of beans paid by exporters. In the case of contractual terms, exporters sell cocoa beans either through an international broker or directly to an international manufacturer. In the case of brokers they generally advance pre-finance to exporters based on an agreed volume. Brokers do so to cover their own costs of finance and reduce exposure to risk. Changes in production are statistically related to changes in price.12 Following price trends, production averaged 4,855 Metric tons over the period, rising from less than 4,000 Metric tons in 2006, peaking in 2011 at over 6,000 Metric tons, and falling to 4,500 metric tons in 2012. CEMA predicts production is expected to reach around 5,000 Metric tons in 2013. The average annual cocoa prices and production 2005 – 2013 for the Solomon Island are shown in Figure 3.3.13 10 A fuller explanation of these issues and the various causes is provided in Section 4.1 11 Vinning, G. and Ramos, A. (2010a) Malaysian cocoa industry: a Solomon Islands’ perspective. Agriculture Livelihoods Program Occasional Note – Marketing: 01/10 August. 12 Correlation coefficient = 0.69. 13 There is no data available for cocoa production in the Solomon Islands. Cocoa export figures are used as a surrogate for production, which are considered adequate as all production is exported. 12 Figure 3.3 Average annual Solomon Islands cocoa prices and production 2005-2013 Source: CEMA Producers tend to be supply price inelastic, that is, as price increases production increases albeit at a slower rate. For the period 2005 to 2013 annual prices increased by, on average, 13% and annual production increased, on average, by 5%, which implies a price elasticity of supply of 0.4% (i.e. a 10% increase in prices results in 4% increase in production). Excluding the post tension years, 2005- 2007, for the period 2008 – 2013 annual prices increased by, on average, 13% and annual production increased, on average, by 5%, which implies a price elasticity of 0.3% (i.e. a 10% increase in prices results in a 3% increase in production). This pattern approximates research findings on cocoa price elasticity of supply, which estimates an elasticity of between 0.4% and 0.8% (i.e. a 10% increase in prices results in between a 5% and 8% increase in production).14 Changes in wet, dry and export bean prices are transferable, that is, as export prices increase or decrease there is a more or less proportional change in the price of wet beans and dry beans.15 For dry and export beans the average monthly dry and export bean prices for 2011 and 2012 are shown in Figure 3.4. Figure 3.4 Monthly dry and export bean prices 2011 and 2012 Source: CEMA There is a strong statistical relationship between dry and export bean prices both as prices increase in 2011 and decrease in 2012.16 The implications are that an increase or decrease in the prices paid for 14 Frankel, J. (1974) “Cocoa in Ghana: The cocoa farmers, the cocoa marketing board and the elasticity of supply”, MIT Department of Economics, University of California. 15 Export prices refer to the contractual FoB prices received by exporters in the Solomon Islands – see Section 4.1 below for a fuller explanation. 16 Correlation coefficient = 0.96 in 2011 as prices are decreasing and 0.93 in the 2012 as prices are increasing. 13 dry beans are transferred in the form of an increase or decrease in the prices paid for wet beans. In 2011 the average difference between monthly dry and export bean prices is 3.1/Kg; and in 2012 the average difference between monthly dry and export bean prices is 3.3/Kg. For wet and dry beans the average monthly wet and dry bean prices for 2011 and 2012 are shown in Figure 3.5. Figure 3.5 Monthly wet and dry bean prices 2011 and 2012 Source: CEMA There is a stronger statistical relationship between wet and dry bean prices as prices decrease in 2011 compared with when prices increase in 2012.17 The implications are that a decrease in the price paid for dry beans is transferred in the form of a larger decrease in the price paid for wet beans compared with an increase in the price paid for dry and wet beans. In 2011 the average difference between wet and dry bean prices is SBD 11/Kg; and in 2012 the average difference between wet and dry bean prices is SBD 8/Kg. There are three major producing provinces in the Solomon Islands – Guadalcanal, Malaita and Makira – have produced on average around 95% of total production over the last decade to 2012. The Solomon Islands cocoa production by province for 2003-2012 is shown in Figure 3.6. Table 3.6 Solomon Islands cocoa production 2003-2012 Source: CEMA Provincial production trends mirror trends in total production in the Solomon Islands, rising to a peak in 2011 before falling sharply; and while data for 2013 is not presently available, total and hence 17 Correlation coefficient = 0.95 in 2011 as prices are decreasing and 0.65 in the 2012 as prices are increasing. 14 provincial, production is expected to increase consistent with the trend shown in Figure 3.3 In terms of expanding production by area there is generally considered to be limited potential in the largest cocoa producing provinces of Guadalcanal and Malaita due to land availability in both provinces as well as soil suitability in Malaita; and increases in production are expected to come mainly from Makira with proportionately smaller increases coming from the other provinces. There has been a decline in yields in Indonesia and Papua New Guinea caused by Black Pod disease and more recently the devastating effect of Cocoa Pod Borer (CPB) and in Côte d'Ivoire following years of political turmoil. Yields have remained consistent albeit low in Ghana and Solomon Islands. In 2011 yields ranged between around 300 and 550 Kg/ha and averaged around 550 Kg/ha for the largest cocoa producing countries – Côte d'Ivoire, Ghana and Indonesia; and current estimated yields in the Solomon Islands are around 340 Kg/ha. The average annual yields for the three largest cocoa producing countries along with Papua New Guinea and the Solomon Islands for 2001 to 2011 are shown in Figure 3.7. Figure 3.7 Average annual yields for selected countries 2001-2011 Source: FAOSTAT In terms of expanding production by yields there is considered to be considerable potential in the Solomon Islands. The R&D program aimed at increasing yields from a current low of around 340 Kg/ha, by introducing and developing new genetic materials, anticipates a doubling or even tripling of yields, to around 1,000 Kg/ha over 3-7 years. However this is considered to be an overly ambitious target that would be more reasonably set at around the 550 Kg/ha mark, which is the average yield for the three largest cocoa producing countries over the decade to 2011, to be achieved by 2020. Finally, assuming a high-side price elasticity of supply of 0.8 and cumulative price increases of 10%, 20% and 30%, it is forecast that annual production of 5,000 Metric tons in 2013 would reach around 8,500 Metric tons, 14,100 Metric tons and 22,500 Metric tons by 2020 respectively. Price increases of 10% and 20% would fall short while the latter would achieve the NCIS aim of achieving 20,000 Metric tons by 2020. However, as with productivity, this is considered to be an overly ambitious target that would be more reasonably set at around 10,000 Metric tons mark, which accounts for a price increase of around 15% to be achieved by 2020. 4. VALUE CHAIN ANALYSIS This section provides an overview of the cocoa value chain and a snapshot of costs, revenues and gross margins accruing to smallholders, processors, traders and exporters at each stage of the value chain. 15 4.1 Overview A simplified overview of the Solomon Islands cocoa value chain, depicting functions, export market channels and support services to the main stakeholders, is presented in Figure 4.1. Figure 4.1: Solomon Island Cocoa Value Chain Export Market Channel Functions Support Services International International IMPORTER Brokers Manufacturers Commercial EXPORTER Exporters Dry Bean Registration TRADER Traders Licencing Finance Fermenter PROCESSOR Drier Technical Assistance Inputs Smallholder 1 – 3 ha. PRODUCER family farms Wholesale and Retail INPUT SUPPLIER Outlets There are six functional components of the supply chain, comprising input suppliers, producers or smallholders, processors, traders, exporters and importers, and each relate to the export market channel and support services.18 These along with the main challenges and general directions for improvement at each stage of the value chain are presented for each of the main stakeholders. Input Suppliers Input suppliers comprise wholesale and retail outlets, scattered throughout the country, mostly located in the provincial capitals, providing mainly basic tools to farmers (e.g. pruning equipment, spades, bush knives, axes) for tree maintenance and processors for fermenting and drying (e.g. wood fuelled 18 For the purposes of the value chain analysis stakeholders are functionally separated yet in actuality they tend to be grouped around a complexity of arrangements: smallholders sometimes ferment and dry their own beans and they may also source additional wet beans from others and will sell dry beans to a trader and or an exporter; processors may only ferment and dry and similarly sell dry beans to a trader and or an exporter; traders may be smallholders and processors, neither or one or the other, and may trade in either or both wet and or dry beans; and exporters will be involved in at least one and possibly most activities, including at least trading and processing, and sometimes other related or unrelated activities such as shipping and input supply services – selected exporter profiles presented in Annex II. 16 drying kilns, chimney flues, nettings and shovels). To date there are few input suppliers of agro- chemicals although this will likely change should fertilizers be required to sustain high yielding trees or insecticides be needed to contain an outbreak of disease such as Cocoa Pod Borer. Smallholders Smallholders include those with access to 1-3 hectares containing less than 3,000 trees, medium-sized holdings with access to 3-10 hectares containing 3,000 – 10,000 trees and plantations of 10 hectares containing 10,000 trees. There are currently no plantations operational in the Solomon Islands. The bulk of wet bean production comes from smallholders of whom there are estimated to be around 24,122 of which the majority (see Section 3.2) are located in the main cocoa producing provinces of Guadalcanal, Makira and Malaita.19 Smallholders – based on an average family size of 5.5 members – account for around 132,671 people or 26% of the total population of 515,870.20 Smallholders on 1-3 hectares harvest beans typically using only family rather than employed labour, bagging and selling their wet beans to processors or processing their own wet beans combined with those bought from other smallholders, bagging and selling their dry beans to traders. The main challenge facing smallholders is the current low level of cocoa tree productivity. It is estimated that yields are around 340 Kg/ha compared with a yield average of around 550 Kg/ha over the last decade to 2011 for three largest cocoa producing countries, which in the case of the latter is considered to be a realistically achievable target by 2020. Smallholders have received numerous support services from exporters, donor-funded investment projects and MAL. Exporters have provided materials such as second-hand bags and hand tools including pruning equipment and seedlings; CLIP provided a range of cocoa husbandry services including hand tools (e.g. wheelbarrows, ladders, pruning equipment and axes), Integrated Pest and Disease Management (IDPM) and business literacy training; and MAL is at present initiating a PAR program using IDPM principles and genetic improvement aimed at increasing yields. Future interventions in the cocoa industry should target smallholders through support to MAL to implement the PAR program and strengthening the delivery of cocoa husbandry services including the provision of hand tools, IDPM and business literacy training. Processors Processors ferment and dry wet beans (commonly using rudimentary wood fired kilns constructed out of discarded 200 litre fuel drums) sourced from their own smallholding and or bought from other nearby smallholders, bagging and selling their dry beans to sell to traders. The exact number of processors is unknown although anecdotal evidence suggests there are between 2,500 and 3,000 processing facilities, in various states of operation. There are no records as to the exact location of processors however it is estimated that the majority are operating in and around the main cocoa producing provinces of Guadalcanal, Makira and Malaita. In accordance with the CEMA Act21 processors are required amongst other things to have an approved standard processing unit to process (ferment and dry) cocoa beans and an approved standard storage facility with the capacity to store dry beans, have attended a cocoa processing course and have cocoa beans that meet the quality standards set by CEMA. CEMA, MAL and the appropriate 19 Solomon Islands Population and Housing Census 2009. Solomon Islands National Statistics Office 20 Household Income and Expenditure Survey (2005-06). Solomon Islands National Statistics Office 21 Solomon Island Gazette NO.67 29 August 2013 – Seventh Schedule Regulation 17 17 Provincial Government are involved in registering the storage units and CEMA is responsible for ensuring processors keep basic cocoa trading information to be provided at least to CEMA at agreed periods. A registration fee is paid to the Provincial Government and deregistered in the event of failing to meet approved standards. MAL extension officers through the Chief Field Officers in their respective provinces are responsible for enforcing the design and operational standards of processing units. These requirements were only enacted in August 2013 and little of any progress has been made in terms of their practical implementation. The main challenge facing processors is the current poor quality of cocoa bean processing. The Malaysian Cocoa Board quality assessment of the Solomon Islands cocoa indicate beans tend to be “smoke off-flavour”, which in part explains the US$ 240/Metric ton average annual price difference for the decade to 2013 between Solomon Island (US$ 2,094) and world prices (US$ 2,334). Processors have received numerous support services mainly from exporters and donor-funded investment projects. Exporters provide, for instance, second-hand bags and hand tools as well as advance payments for beans; CLIP provided technical assistance including building and construction materials to assist with the re/construction and maintenance which kilns especially the improved Kukum mini drier, support to three metal fabricators in Malaita, Mkiara and Honiara to roll steel drying kilns pipes and make improved drier chimneys and cocoa processing and marketing courses for cocoa processors (traders and exporters); and SIRDP provided financial assistance in the form of matching equity through the SEF to a number of processors – of the 20 SEF grants that went to the agriculture sector just under half went to either cocoa processors or traders. Future interventions in the cocoa industry should target processors with support to meet infrastructure standards, including processing units and storage facilities, and support to MAL and CEMA to enforce regulatory standards. Traders Traders buy and sell dry (and wet) beans, buying from processors and selling to exporters, either directly to their storage facilities in Honiara or indirectly through collection facilities. There are estimated to be 750 wet and or dry bean buyers.22 As with processors there are no records as to the exact location of traders however it is estimated that the majority are operating in and around the main cocoa producing areas of Guadalcanal, Makira and Malaita. In accordance with the CEMA Act23 wet bean traders for instance are required amongst other things to have an approved standard storage facility with capacity to store dry cocoa beans, have attended basic business and commodities trading course and maintain a provincial dry or wet bean trading licence. CEMA, MAL and the appropriate Provincial Government are involved in licencing the storage units and CEMA is responsible for ensuring bean traders keep basic cocoa trading information to be provided at least to CEMA at agreed periods. Licences are renewed annually for which fees are paid to the Provincial Government. As with processors MAL extension officers through the Chief Field Officers in their respective provinces are responsible for enforcing the design and operational standards of trader storage facilities. Also as with processors these requirements were only enacted in August 2013 and little if any progress has been made in terms of their practical implementation. 22 Monitoring and Impact Assessment Annual Report (2010) Cocoa Livelihoods Improvement Program 23 Solomon Island Gazette NO.67 29 August 2013 – Seventh Schedule Regulation 17 18 The main challenge facing traders is the current poor quality of cocoa bean handling. The Malaysian Cocoa Board quality assessment of the Solomon Islands cocoa indicate beans have been defective, which along with the smoke-off flavour feature also in part explains the US$ 240/Metric ton average annual price difference for the decade to 2013 between Solomon Island (US$ 2,094) and world prices (US$ 2,334). Traders have received some support services mainly from exporters and donor-funded investment projects. Exporters provide, for instance, second-hand bags as well as advance payments for beans; CLIP provided a range of cocoa husbandry services similar to that provided to smallholders including hand tools (e.g. wheelbarrows, ladders, pruning equipment and axes), IDPM and business literacy training; and as with processors SIRDP provided financial assistance in the form of matching equity through the SEF to a number of traders – of the 20 SEF grants that went to the agriculture sector just under half went to either cocoa traders or processors. Future interventions in the cocoa industry should target traders with support to meet infrastructure standards especially for on-site storage facilities and for off-site infrastructure that improve handling such as small access roads, wharves and storage facilities, and support to MAL and CEMA to enforce regulatory standards. Exporters Exporters buy and export dry beans, buying from traders or directly from smallholders and or processors, sorting and bagging, containerizing the beans and selling to either international brokers or manufacturers. There are 21 exporters licenced by CEMA under the CEMA Act,24 whom also have responsibility for examining consignments of cocoa for quality and issuing an export certificate. The bulk of exports are from 6 main exporters (accounting for around 70% of total exports) that export on average 719 Metric tons each. The remaining 30% of total exports are from 10 minor exporters that export on average 202 Metric tons each. There are 5 licensed exporters that are not currently exporting. Exporters generally have storage facilities in Honiara, where the final bagging, sorting and containerization take place, and in some cases they also use collection facilities in the main provincial capitals of the main cocoa producing provinces of Guadalcanal, Makira and Malaita. The contractual terms including the selling price depend on the buyers – around half of exporters sell through one of several international brokers, several sell directly to an international manufacturer while 4 exporters sell collectively as one entity directly to an international manufacturer under a “periodic volume contract”. In general those selling to international brokers are usually pre-financed based on an agreed volume, and sell at FoB prices set by the buyers at the time of sale; and those selling to international manufacturers also sell at FoB prices negotiated on a contract-by-contract basis. The latter arrangements are considered favourable – as anecdotal estimates indicate that prices for exporters dealing with international manufacturers are between 10% and 20% higher than those dealing through international brokers. Also FoB rather than “cost, insurance, freight” (CIF) arrangements are the norm in the Solomon Islands because exporters are not able to negotiate with importers and arrange shipping schedules and pay insurance due to their low volume and financial constraints. Exporters provide support services through the value chain to traders, processors and smallholders, generally aimed at improving both the quantity and quality of beans they receive. Smallholders, traders and processors receive second-hand bags, hand tools such as pruning equipment for smallholders, materials for processors to assist with the re/construction and maintenance of kilns, cash payments in advance of beans mainly to traders and processors and various forms of bonus payments related to the quantity and quality of beans. Also, some exporters pay a discounted or penalty price 24 Solomon Island Gazette NO.27 19 September 1986. 19 (around 10% below the market price) for poor quality dry beans coming from processors and traders, especially for those with high moisture content that require additional drying and as a result incur an additional cost. An important feature of these exporter services relates to what are commonly referred to as “loyal” smallholders, deemed so because they provide a regular supply of good quality beans but also because they are connected through family or community or some other relationship - exporters estimate that around 50-60% of smallholders from whom they receive beans are loyal. The presence of loyal smallholders in the cocoa value chain is important in as far as it bolsters the exporters’ ability, by providing services including price penalties, to affect the quantity and quality of the beans they receive. The main challenge facing exporters is the current lows levels of (quality) cocoa bean production. It is estimated that production will reach around 5,000 Metric tons in 2013 down from a high of over 6,000 Metric tons in 2011, while a realistically achievable target is considered to be around 10,000 Metric tons by 2020. Exporters have received some albeit selective support mainly from donor-funded projects and other initiatives. PHAMA has assisted on quality and international market access through the establishment of a MWAG and facilitated establishment and operation of a cocoa quality testing laboratory; the SIRDP provided financial assistance in the form of matching equity through the SEF to at least one exporter; and CLIP provided dedicated technical assistance to the 4 exporters who currently sell collectively as one entity directly to an international manufacturer under a “periodic volume contract”. Future interventions in the cocoa industry should target exporters with support to boost prices to improve production and strengthening the Cocoa Market Access IWG and its relationship with other representative bodies including the NCSS. 4.2 Methodology The cocoa value chain analysis estimates of gross margins are based on costs and revenues accruing to smallholders, processors, traders and exporters, based on the Solomon Islands cocoa value chain depicted in Figure 4.1; and the gross margins are presented under four scenarios including today’s price, low price, medium price and high price scenarios. The gross margin estimates include the following costs and revenues from the harvesting, processing, trading and exporting of beans: Smallholder revenue from the sale of wet beans to processors and the labour costs of harvesting and breaking cocoa pods and tree maintenance; Processor revenue from the sale of dry beans to traders, the costs of buying wet beans from smallholders, the labour costs of fermenting and drying and sorting and bagging, the costs of transporting wet beans from smallholders to processors and other costs including wood fuel and bag costs; Trader revenue from the sale of dry beans to exporters, the costs of buying dry beans from processors, the labour costs of handling and the costs of transporting dry beans from processors to exporters; and Exporter revenue from the sale of dry beans to importers, the costs of buying dry beans from traders, the labour costs of handling, the costs of transporting dry beans to and from the port in Honiara and the exporter storage facilities and other costs including Solomon Islands Agriculture Quarantine 20 Service (SIAQS) fees for containerization and phyto-sanitary certification, Solomon Islands Ports Authority (SIPA) handling fees, CEMA management fees, fumigation and customs documentation. The today’s price, low price, medium price and high price scenarios include the following volumes and prices of beans: The today’s price scenario is based on a simple transfer price whereby a smallholder sells 2,244 kg of wet beans25 (equivalent to 1,020 kg of dry beans based on a wet-to-dry conversion ratio of 2.2) to a processor for SBD 3/kg, a processor sells 1,010 kg of dry beans (equivalent to 1,020 kg of dry beans with a shrinkage rate of 1%) to a trader for SBD 13.50/kg; and a trader sells 990 kg of dry beans (equivalent to 1,010 kg of dry beans with a shrinkage rate of 2%) to an exporter for SBD 16.50/kg who in turn sells 960 kg of dry beans (equivalent to 990 kg of dry bean with a shrinkage rate of 3%) to an international manufacturer or broker for SBD 19.50/kg26; The low price scenario equivalent to today’s price plus 10% is based on a simple transfer price whereby a smallholder sells 2,244 kg of wet beans to a processor for SBD 3.18/kg, a processor sells 1010 kg of dry beans to a trader for SBD 14.31/kg and a trader sells the dry beans to an exporter for SBD17.49/kg who in turn sells 960 kg of dry beans to an international manufacturer or broker for SBD 20.70/kg; The medium price scenario equivalent to today’s price plus 20% is based on simple transfer price whereby a smallholder sells 2,244 kg of wet beans to a processor for SBD 3.36/kg, a processor sells 990 kg of dry beans to a trader for SBD 15.12/kg and a trader sells the dry beans to an exporter for SBD18.48/kg who in turn sells 960 kg of dry beans to an international manufacturer or broker for SBD 21.80/kg; and The high price scenario equivalent to today’s price plus 30% is based on a simple transfer price whereby a smallholder sells 2,244 kg of wet beans to a processor for SBD 3.72/kg, a processor sells 990 kg of dry beans to a trader for SBD 16.74/kg and the trader sells the dry beans to an exporter for SBD 20.46/kg who in turn sells 960 kg of dry beans to an international manufacturer or broker for SBD 24.18/kg.27 The cocoa value chain analysis estimates of gross margins are presented in Table 1-3 in Annex I and summarised below. 4.3 Results The revenues, costs and gross margins, under the today’s price, low price, medium price and high price scenario, are summarised in Figure 4.2. 25 Equivalent to approximately 3 ha at 340 kg/ha. 26 The export price is based on an average of today’s prices received by exporters selling FoB to international brokers and or international manufactures. 27 The price rise scenarios are based on price and production estimates in Section 3.2. 21 Figure 4.2: Costs, revenues and gross margins Table 4.1 presents a summary of the gross margins in SBD/Metric ton for today’s price, low price, medium price and high price scenarios. Table 4.1: Gross margins in SBD/Metric ton Today Low Medium High Smallholder 2,221 2,894 3,568 4,241 Processor 6,192 6,882 7,529 8,092 Trader 1,556 1,826 2,129 2,399 Exporter 943 1,182 1,334 1,486 Total 10,912 12,784 14,560 16,218 There are significant benefits in terms of gross margins accruing to smallholders, processors, traders and exporters, based on today’s bean prices. Smallholders’ capture 20% of the total gross margin compared with processors (57%), traders (14%) and exporters (9%) – smallholders and processors combined capture 77% of gross margins. The relatively large proportion of gross margins accruing to processors is due to the value-adding involved in processing beans whereby wet beans are purchased at SBD 3.0/kg, fermented, dried and bagged, and are sold as dry beans for SBD 13.50/kg. There are significant benefits to smallholders in terms of their returns to labour: based on 150 days labour/Metric ton and revenue of 6,192/Metric ton at today’s bean price the returns to labour are SBD 45/day, which compares favourably with a shadow price of labour of SBD 30/day. There are also significant benefits in terms of gross margins accruing to smallholders, processors, traders and exporters, based on an increase in bean prices, illustrated under the low, medium and high price scenarios. A 30% increase in today’s price, for instance, results in smallholder gross margins 22 increase of 91%, processors gross margins increasing by 30%, traders gross margins increasing by 54% and exporters gross margins increasing by 58%. The relatively large increase in smallholder gross margins is due to the cost of labour. As bean prices increase the smallholder cost of labour remains constant at SBD 4,500/Metric ton, compared with processors, traders and exporters costs of purchasing beans which increase with an increase in bean prices. The significant benefits to smallholders from their returns to labour also increase with an increase in bean prices: based on 150 days labour/Metric ton and revenue of SBD 7,045/Metric ton given a low price, SBD 8,078/Metric ton given a medium price and SBD 8,752 given a high price, the returns to labour are SBD 49, SBD 54 and SBD 58 respectively, which compares favourably with returns to labour of SBD 45/day at today’s price and the shadow price of labour of SBD 30/day. Table 4.2 presents the gross margins in SBD/Stakeholder for today’s price, low price, medium price and high price scenarios. The stakeholder gross margin estimates are based on total production of 5,000 metric tons assuming 24,122 smallholders, an estimated 2,500 processors and 750 traders, and 6 main exporters. Table 4.2: Gross margins in SBD/Stakeholder Today Low Medium High Smallholder 460 600 784 985 Processor 12,383 13,763 15,962 18,125 Trader 10,375 12,174 15,047 17,914 Exporter 785,773 984,970 1,178,503 1,387,255 There are considerable benefits although significant differences in the gross margins per stakeholder across the price scenarios, ranging from less than SBD 500 through to almost SBD 1,000/smallholder, over SBD 10,000 through to almost SBD 20,000/processor and trader and between around SBD 700,000 through to almost SBD 1.5 million/exporter accruing to exporters. In actuality stakeholders in the cocoa value chain tend to be grouped around a diversity of arrangements and so the gross margins are likely to vary considerably from stakeholder to stakeholder. As a result the gross margins of a smallholder who is also a processor might be close to SBD 13,000 at today’s price and rise to over SBD 19,000 given a high price; the gross margins of a processor who is also a trader might be close to SBD 24,000 at today’s price and rise to over SBD 35,000 given a high price; and the gross margins of an exporter who is also a processor and a trader might be over SBD 800,000 at today’s price and close to SBD 1.5 million given a high price. Table 4.3 presents the total gross margins in SBD millions/Stakeholders for today’s price, low price, medium price and high price scenarios. 23 Table 4.3: Total gross margins in SBD million/Stakeholders Today Low Medium High Smallholder 11.1 14.5 18.9 23.8 Processor 31.0 34.4 39.9 45.3 Trader 7.8 9.1 11.3 13.4 Exporter 4.7 5.9 7.1 8.3 Total 54.6 63.9 77.2 90.8 The total gross margin estimates are based on total production of 5,000 metric tons. At today’s price total gross margins amount to almost SBD 55 million, increasing to over SBD 90 million given a high price. There are considerable benefits although significant differences in the total gross margins per stakeholder across the price scenarios, ranging from over SBD 10 million through to over SBD 20 million/smallholders, over SBD 30 million through to more than SBD 45 million/processor, less than SBD 10 million through to over SBD 10 million/trader and between around SBD 5 million and less than SBD 10 million/exporters. However realising the sorts of potential benefits that accrue to stakeholders in the cocoa value chain, as illustrated by various price rise scenarios, will require specific improvements in the cocoa value chain. 5. CHALLENGES AND OPPORTUNITIES This section provides an overview of main stakeholder challenges and opportunities for development of the Solomon Islands cocoa value chain. The main stakeholder challenges, impacts and opportunities for the Solomon Islands cocoa industry are summarised in Table 5.1. Figure 5.1 Main stakeholder challenges, impacts and opportunities Stakeholder Challenge Impact Opportunity Smallholder Low productivity Average annual yields 340 Kg/ha c.f. potential R&D around 550 Kg/ha Husbandry Processor Poor processing Average annual Solomon Island price US$ 2,094 Infrastructure MT c.f. World price of US$ 2,334 MT Regulation Trader Poor handling Exporter Low production Average annual production 4,855 Metric tons c.f. Price potential around 10,000 Metric tons Marketing MAL Service incapacity Exporters provide selected services to mainly loyal Partnership smallholders Low productivity of cocoa trees is the main challenge facing smallholders. Average annual yields over the last decade to 2011 are estimated to be around 340 Kg/ha compared with a potential target of around 550 Kg/ha by 2020. 24 To improve productivity support should build on the ongoing R&D program aimed at increasing yields by developing new genetic materials and build on past initiatives that have provided a range of cocoa husbandry services including hand tools, IDPM and business literacy training. The R&D program is an ambitious three-stage seven-year initiative that will begin with the first state of implementation in two sites in Guadalcanal and rolled out to 96 sites in 8 provinces. This program will need to be consolidated to include fewer sites (e.g. the main producing provinces of Guadalcanal, Makira and Malaita) a clear pathway developed to ensure practical results contribute to strengthening husbandry services. There is no systematic provision of husbandry services other than those being provided by exporters to mainly “loyal” smallholders (see below). Poor processing of cocoa beans is the main challenge facing processors. The occurrence of smoke off- flavour cocoa beans in part explains the US$ 240/Metric ton average annual price difference for the decade to 2013 between Solomon Island (US$ 2,094) and world prices (US$ 2,334). To improve processing support should be given to processors to meet infrastructure standards including processing units and storage facilities that builds on past initiatives, and to MAL and CEMA to enforce regulatory standards. Infrastructure support, focused mainly on the re/construction and maintenance of processing units by CLIP, is not currently being provided. In terms of regulation SIRDP has supported MAL-wide capacity building, although the practicalities of extension officers enforcing cocoa industry regulations specifically have not been elaborated in corporate plans nor pursued in any way, and CEMA’s capacity to fulfil its regulatory responsibilities will be further strengthened by PHAMA’s facilitating the establishment and operation of a cocoa quality testing laboratory although this is yet to be completed. Poor handling of cocoa beans is the main challenge facing traders. The occurrence of defective cocoa beans also in part explains the US$ 240/Metric ton average annual price difference for the decade to 2013 between Solomon Island (US$ 2,094) and world prices (US$ 2,334). To improve handling support should be given to traders to meet infrastructure standards especially for on-site storage facilities and for small-scale economic infrastructure that improve handling such as small access roads, wharves and storage facilities, and build ongoing initiatives with MAL and CEMA to enforce regulatory standards. Infrastructure support, for on-site or small-scale economic infrastructure, is not currently nor has it in the past been provided. As above, in terms of regulation SIRDP has supported MAL-wide capacity building, although the practicalities of extension officers enforcing cocoa industry regulations specifically have not been elaborated in corporate plans nor pursued in any way, and CEMA’s capacity to fulfil its regulatory responsibilities has been further strengthened by PHAMA’s facilitating the establishment and operation of a cocoa quality testing laboratory although this is yet to be completed. Low production of cocoa beans is the main challenge facing exporters. It is estimated that production will reach around 5,000 Metric tons in 2013 down from a high of over 6,000 Metric tons in 2011, while a realistically achievable target is considered to be around 10,000 Metric tons by 2020. To improve production support should be given to exporters to boost prices and build on ongoing initiatives to strengthen the Cocoa Market Access IWG and its relationship with other representative bodies including the NCSS. Price support, whereby exporters pay a supplemental price above the market price so as to encourage cocoa bean production, has not been trialled in the Solomon Islands. 25 In terms of marketing PHAMA has established the Cocoa Market Access IWG although this is a stand-alone entity. SICIPS has developed ToR for the NCSC (PCCC and NCS) although there is no functional relationship between the IWG and these bodies and the NCSC has not been functioning despite having been formalized through cabinet endorsement. Incapacity to service the cocoa industry is the main challenge facing MAL. This has resulted in exporters, largely in the absence of any substantive support from MAL extension officers, providing selected services to mainly “loyal” smallholders. To enhance their delivery capacity MAL should engage exporters – the “private sector” – in a partnership to deliver the full array of necessary technical and financial assistance services to smallholders, as well as to processors and traders, and to exporters themselves. A “public-private partnership” is a potentially more sustainable option because it draws on the combined resources of MAL and exporters, rather than replying only on a limited number of extension officers. SIG through the NDS provides general support to private sector led growth and specifically through the MAL Corporate Plan and the SICIPS SIG stresses the importance of engaging the private sector to deliver services to smallholders as well as traders and processors; and the role of the private sector has been raised in the past especially by CLIP which recommended that future interventions should include for instance facilitating exporters to provide more embedded services. 6. CONCLUSIONS AND RECOMMENDATIONS There is clear commitment by SIG to the Solomon Islands cocoa industry through strategies and policies elaborated in the NDS and the MAL Corporate Plan as well as the SICIPS and NCID and development partners have and continue to provide diverse technical and financial support including this report which is jointly commissioned by the World Bank, Australia DFAT and Mondelez as an input to the design of agriculture sector interventions within the follow-on SIRDP. There are demonstrable benefits that could accrue with efforts to increase production of Solomon Islands cocoa. The market trends analysis demonstrates that prices have increased by on average 13% and related to this production has increased by on average 5% over the last decade to 2013; and based on forecasted price increases of between 10% and 30% annual production is realistically expected to reach what is considered to be an achievable target of around 10,000 Metric tons by 2020. The value chain analysis demonstrates that smallholder gross margins are around SBD 11 million annually, or over SBD 40 million annually including processors, and total gross margins are around SBD 55 million annually, at today’s price; and based on forecasted price increases of between 10% and 30% smallholder gross margins are expected to reach between around SBD 15 million and SBD 24 million annually, or between around SBD 35 million and SBD 45 million annually including processors, and total gross margins are expected to more than double to over SBD 90 million annually. However, realising the sorts of benefits that could potentially accrue to stakeholders in the cocoa value chain, as illustrated by various price rise scenarios, will require specific measures to improve the productivity of cocoa trees, production, processing and handling of cocoa beans and the service delivery capacity of MAL. 26 Figure 6.1 presents the main stakeholder opportunities, actions and service providers in the Solomon Islands cocoa industry. Figure 6.1 Main stakeholders opportunities, actions and service providers Stakeholder Opportunity Action Service Provider Smallholder R&D  Technical assistance to implement R&D program MAL Husbandry  Technical assistance + matching grant and or loan to MAL +MCILI + finance husbandry services Exporters Processor Infrastructure  Matching grant and or loan to finance processing and MAL + MCILI storage infrastructure Exporters Regulation  Technical assistance to implement and enforce MAL + CEMA regulatory framework Trader Infrastructure  Matching grant and or loan to finance on-site storage MAL + MCILI + and small-scale economic infrastructure Exporters Regulation  Technical assistance to implement and enforce MAL + CEMA regulatory framework Exporter Price  Matching grant and or loan to finance price MAL + MCILI + supplements Exporters Marketing  Technical assistance to strengthen Cocoa Market MAL + Exporters Access IWG and other representative bodies MAL Partnership  Technical assistance to establish and implement a MAL + MCILI partnership between MAL and Exporters Exporters 27 ANNEX I Table 1.1: Smallholder costs, revenues and gross margins No. Today's Low Medium High Notes Unit Unit Units Price Price Price Price SBD SBD SBD SBD SBD Revenue Sale of wet beans a Kg 3.0 2,244 6,732 7,405 8,078 8,752 Total 6,732 7,405 8,078 8,752 Labour costs Harvesting and breaking b P. days 30 69 2,070 2,070 2,070 2,070 Tree maintenance c P. days 30 81 2,430 2,430 2,430 2,430 Total 4,500 4,500 4,500 4,500 Gross margin 2,232 2,905 3,578 4,252 a. I.02 Metric ton x 2.2 dry-to-wet conversion ratio b. 68 Person days/Metric ton dry bean @ SBD 30/Person day c. 27 Person days/Ha/Year @ SBD 30/Person day Table 1.2: Processor costs, revenues and gross margins No. Today's Low Medium High Notes Unit Unit Units Price Price Price Price SBD SBD SBD SBD SBD Revenue Sale of dry beans a Kg 13.50 1,010 13,632 14,996 16,359 17,722 Total 13,632 14,996 16,359 17,722 Bean costs Wet beans b Kg 3.0 2,244 6,732 7,405 8,078 8,752 Labour costs Fermenting and drying c P. days 30 6 180 180 191 223 Sorting and bagging d P. days 30 1 30 30 32 37 Transport costs Wet beans e Bag 5 50 252 252 268 313 Other costs Wood fuel f P. days 30 4 120 120 127 149 Bags g Bags 10 13 126 126 134 157 Total 7,441 8,114 8,830 9,630 Gross margin 6,192 6,882 7,529 8,092 a. 1 Metric ton x 1% shrinkage b. 1 Metric ton x 2.2 dry-to-wet conversion ratio c. 6 Person days/Metric ton dry bean d. 1 Person day/Metric ton dry bean e. Freight SBD 5/bag @ 20/Kg/bag f. 4 Person days/Metric ton g. Second hand 80 Kg bags @ SBD 10/bag 28 Table 1.3: Trader costs, revenues and gross margins No. Today's Low Medium High Notes Unit Unit Units Price Price Price Price SBD SBD SBD SBD SBD Revenue Dry beans a Kg 16.50 990 16,332 17,965 19,598 21,231 Total 16,332 17,965 19,598 21,231 Bean costs Dry beans b Kg 13.50 1,010 13,632 14,996 16,359 17,722 Transport costs Dry beans c Bags 60 16 990 990 960 960 Labour costs Handling costs d 30 1 30 30 30 30 Other Costs Bags e Bags 10 12 124 124 120 120 Total 14,776 16,139 17,469 18,832 Gross margin 1,556 1,826 2,129 2,399 a. 1 Metric ton x 2% shrinkage b. 1 Metric tonne c. Freight SBD 60/bag @ 80 kg/bag d. 1 Person day/Metric ton sorting and bagging e. Second hand 80 Kg bags @ SBD 10/bag 29 Table 1.4: Exporter costs, revenues and gross margins No. Today's Low Medium High Notes Unit Unit Units Price Price Price Price SBD SBD SBD SBD SBD Revenue Dry beans a Kg 19.5 960 18,722 20,594 22,466 24,339 Total 18,722 20,594 22,466 24,339 Bean costs Dry beans b Kg 16.5 990 16,332 17,965 19,598 21,231 Transport costs Dry bean c Container 73.3 1 73 73 78 82 Container d Container 107 1 107 107 113 119 Labour costs Sorting and bagging e P. Days 30 1 30 30 32 34 Other costs Container permit f Container 33 1 33 33 35 37 Phyto-sanitary cert. g Container 10 1 10 10 11 11 SIPA handling h Shipment 87 1 87 87 92 97 CEMA management fee i Container 60 1 60 60 64 67 Container staffing j Container 20 1 20 20 21 22 Fumigation k Container 67 1 67 67 71 75 Customs documentation l Shipment 1 1 1 1 1 1 Bags and twine m Bags 22 44 960 960 1,018 1,075 Total 17,779 19,412 21,132 22,852 Gross margin 943 1,182 1,334 1,486 a. 1 Metric ton dry beans x 3% shrinkage @ 19.50/kg b. I Metric ton c. 3 tonne truck from port to storage 220/trip d. Container to storage to wharf to storage SBD 800/trip e. 1 Person day/Metric ton dry beans f. Solomon Islands Agriculture Quarantine Service @ SBD 500/container g. Solomon Islands Agriculture Quarantine Service @ SBD 150/container h. Solomon Islands Ports Authority handing @ SBD 1,300/shipment i Cocoa Export and Martketing Authority management fee @ SBD 900/container j. Container handling @ SBD 300/container k. Fumigation @ SBD 1,000/container l. Customs documentation @ SBD 10/shipment New 62.5 Kg bags @ m. 22/bag 30 ANNEX II Profile One: Exporter This is a family owned business that has been licensed to export cocoa beans since 1991. The company has its head office in Honiara. It has storage facilities and vehicles operating in Guadalcanal and Malaita, taking advantage of the extensive road networks to buy dry beans from processors, and otherwise buys dry beans from traders with whom it has long-term relations in Guadalcanal, Malaita and Makira. The company exports to bulk cocoa market through an international broker who pre-finances the purchase of cocoa beans and sells to grinders and chocolate manufacturers in the South East Asian markets of Singapore, Malaysia and Indonesia. The company is the largest exporter in the Solomon Islands having averaged around 495 metric tons annually for the last 22 years. In 2007 the company exported 817 tonnes or 19% of total exports, by 2010 exported 31% of total exports and based on current estimates is expected to remaining the largest exporter with an increasing share of the total exports. As the company is dealing in relatively large volumes of cocoa it has been able to negotiate special freight rates for the domestic transport of cocoa beans from especially Maliata and Makira to Honiara on Guadalcanal. Other than establishing an extensive trading network the company has developed a number of innovations aimed at cementing the loyalty of clients including smallholders, processors and traders. The company endeavours to offer competitive prices as well as a number of other incentives including advancing working capital to its most loyal clients; providing drying facility materials such as drums, netting and chimneys, handing out free bags, reduced freight rates, discounted prices for poor quality (especially moist and damaged) beans and annual prizes of SBD 10,000 to those trading the largest annual volumes. The most significant challenge, which constraints the company’s growth, is access to working capital. The company has taken short-term loan from a commercial bank but the company still relies on the pre-financing arrangements with its international broker. Profile Two: Exporter This is a family owned company that has been licensed to export since 2002. The company has its head office based near Honiara and is involved in both cocoa exporting and cocoa seedling supply services. The company has established a nursery for Amelonado variety of cocoa and distributing the seedlings to its smallholders assisted by its international broker by various regional and national programs including a quality standard storage shed, facilitation to enter the fair trade market, market study trips to South East Asia and financial assistance. The company exports to the bulk cocoa market through an international broker but is also endeavouring to venture into the “fair trade” market and for the last 5 years. Th e company had developed trading relationships with at least two cocoa plantations owned by church institutions east and west of Honiara and it buys dry beans from established traders in Western, Malaita and Isabel provinces most of who has received seedlings from the company. The company is a medium-sized exporter having exported around 197 metric tons in 2002 and has since averaged around 90 tonnes annually during the last 12 years. For the last 3 years, the company had exported 105, 32.5 and 45 tonnes for 2011, 2012 and 2013 respectively. Over the same period the company distributed at least 900,000 seedlings – equivalent to about 900 hectares of cocoa – of which at least 50% would be already producing. 31 Other than from supplying free seedlings, the company also assisted its smallholders with rehabilitation, provided free sacks and subsidised freight for those delivering cocoa beans to their storage shed. The company is also currently looking into developing 100 ha of titled land as an out- grower scheme, dividing the land into 1-2 ha blocks and leasing it to smallholder families to sell their wet beans to a central processing facility. Other than the challenge of insufficient working capital the company is struggling to enter into the fair trader and other niche markets for which it would earn a premium price for its cocoa beans. Profile Three: Exporter This company is a joint venture between Australian commodities trading company and landowners of a commercial plantation that was abandoned by its Belgium owner following the ethnic tension from 1999-2003. The locally registered company invested in rehabilitating over 500 hectares of over-grown plantation before commencing production. The company also operates a shipping service, freighting general cargoes and beach trading of copra, cocoa as well as timber. Managers operate the company on behalf of the foreign owner with about 50 local employees engaged in the plantation, shipping and cocoa trading activities. Initially, the company started copra trading and freighting services linking Honiara with Choiseul and Isabel provinces. It took over the former Buying Centre at Choiseul Bay from CEMA, where it traded copra as well as operated wholesale services for general goods and fuel. As its interest in trading cocoa increased, it shifted its services to Guadalcanal and Makira provinces, (where cocoa is more abundant) and sold its interest in Choiseul and closed its services to Isabel Province. After acquiring the plantation on Guadalcanal Plains, the company now concentrates its operations on the plantation and beach-trading services to Makira and eastern parts of Guadalcanal Province. Apart from a branch that it had established at Kirakira (Makira), the company also established strong partnership arrangements with cocoa grower-processors on Guadalcanal Plains close to its plantation as well as trader agents on Makira, Temotu as well as East Guadalcanal. These partners and agents also trade copra as well as cocoa. The company also has a direct trading relationship with a chocolate manufacturer with whom it has an R&D program aimed using controlled fermentation technique. More recently, it has established a subsidiary in New Zealand that processes its cocoa into cocoa mass before selling to cocoa product manufacturers. The company started exporting its first batch of 25 tonnes in 2008 and has since increased its export to an annual average of some 295 metric tons. Providing reliable and regular monthly beach-trading services to its cocoa, copra and rural traders has stimulated growth and viability of many rural enterprises including cocoa and copra growers and traders. Buying cocoa and copra at the villages saved growers freight and other associated costs to freighting to Honiara. The company also support cocoa growers-processors and agents with local freight, drier materials, sacks and other services. For more loyal and larger growers and traders, the company provides pre-financing and construction of better designed processing units as well as vehicles on hire-purchase basis with beans. It also provided training on Integrated Pest and Disease Management (IPDM) practices and quality processing (especially with its controlled fermentation method) with its key clients especially on Guadalcanal. While the company has some problems with its land-owning partners, it has diversified its business and sourcing its cocoa and marketing strategically to meet these challenges. Profile Four: Exporter This company was established only in 2011 following a market study tour, funded by the Cocoa Livelihoods Improvement Programme (CLIP) to cocoa markets in South East Asia with the aim of trading direct with the cocoa products manufacturers rather than through brokers. After discussions 32 with one importer, four out of the seven original formed a company and consolidated their exports to one international manufacturer. This resulted in the formation of this company with equal share holding for the four partners. Individually, the four partners are associations of a cocoa farmers based on Guadalcanal (300 members), Makira (300 members), Malaita (300 members) and Western (200 members). Three of these shareholders have exported cocoa – since 2004 while the other two in 2011 while the other shareholder has not been exporting but had invested in developing a 50 hectare cocoa farm for its members. The company has an office at Honiara but also has operational offices closer to their respective associations in their respective provinces. Each association has its own manager and Committee, except for the Guadalcanal group who are yet to formalise their association. The company has exported its first 60 tonnes this year. While the company sources its cocoa from its membership, each association also buys wet and dry beans from nearby smallholders and processors to add to its tonnage to meet its contractual obligations. In general, the company receives a slightly higher price (10-15%) for dealing directly with an international manufacturer. While the company received better price for dealing direct with the international manufacturer, opportunities for even better prices are often not realised because of the associations’ limited production, in-consistency of quality standards and not developing its own company quality brand. The company offers some incentives to its grower member clients with prices and purchasing at the villagers closer to their operations. They also other offer incentives to processors with volume of cocoa exceeding one metric ton. The company has identified a number of challenges: a need to strengthen the bonding loyalties of members of the each association by incentivizing their services and through transparent and accountable management of the business so that members take ownership of the company; overt cooperation and collaboration of the four associations’ management with the company management; educate and improve their members’ knowledge and skills on processing good quality cocoa to meet the obligations that the company has with the importer; develop and maintain their own “brand” of cocoa for their market; encourage their members to improve their farms productivity and where land is available, expand their plantings; and educate their members to accept short-term benefits for longer term secure market for their cocoa beans. 33 34