Challenged Chocolate: The Cocoa Industry and Climate Change

Climate change will decrease cocoa farming productivity in West Africa, shocking the chocolate industry.

In the realm of global commodities, we tend to think of oil, then everything else. I’d like to get you thinking about a commodity that’s even further off your radar, but may be an even more regular part of your daily life. We’re talking about cocoa.

Cocoa is the primary raw material in the production of chocolate candy, a $100 billion industry worldwide.(1) As a top 5 global producer of chocolate, the Hershey Company is very focused on managing and improving cocoa supply. Cocoa can be grown only in equatorial regions, and ~70% of global crop comes from West Africa, making the region almost solely responsible for serving an entire global industry.(2) West Africa is also one of the lesser developed regions in the world, and this characteristic applies to cocoa farming as well. Imagine people out in jungles in the blistering heat, holding machetes, and hacking down watermelon-sized beans that are hanging from trees. As Figure 1(3) shows, that’s the prevailing level of ‘technology’ in the cocoa industry.(4) In an environment where supply is underdeveloped and instable, and global chocolate demand is ever-growing(5), it’s no wonder that cocoa pricing has been both rising and volatile, as Figure 2 shows.(6)

Figure 1

Figure 1 

Figure 2

2a

The slow and steady onslaught of climate change compounds an already challenging supply/demand equation in the cocoa industry. According to the International Center for Tropical Agriculture, as temperatures rise by ~2C through 2050 in the two largest cocoa growing countries, Ghana and Cote d’Ivoire, vast areas of cocoa farm land will become less productive, as Figure 3 shows.(7) The amount of land where cocoa grows optimally will consolidate in the fewer areas at higher altitudes, where temperatures will remain most conducive to cocoa tree growth. Additionally, the Intergovernmental Panel on Climate Change contends that those higher temperatures will not be accompanied by an increase in rainfall, leading to moisture loss and plant starvation.(8) Overall, 90% of the locations in Ghana and Cote d’Ivoire studied by the IPCC are expected to become less suitable for cocoa growing, and thus less productive.(7)

Figure 3

3

Cocoa processors(9) and chocolate candy manufacturers are already acting to improve the cocoa farming situation, particularly in the West African nations key to the industry. Hershey has committed to sourcing 100% of its cocoa from sustainable growers by 2020, meaning from farms that are certified by third party organizations to have the highest international standards for labor, environmental and farming practices. This will result in added annual expenses in Hershey’s P&L to the order of 9-digits, or greater than 1% of net sales. Alongside this commitment, Hershey directly invests in modernizing cocoa farming in the region. This modernization plan includes a variety of initiatives, such as working with growers locally to improve farming techniques, providing mobile phones to growers as sources of real-time information, and planting more cocoa trees.(10)

It’s unclear how effective these efforts, along with similar ones undertaken by Hershey’s peers, have been in meaningfully improving the cocoa farming situation. But in my opinion, what is very clear is that in the face of climate change, the current programs are simply not enough. The solution may just be as simple as committing more resources, also known as spending more money. The collection of small-time, individual growers that make up the cocoa farming industry do not have the resources to defend against the gigantic scope of climate change. Companies like Hershey, Mars and Mondelez have those resources. They can double down on their current initiatives, aimed at increasing farmland productivity and making the industry more attractive to potential new farmers. They can invest to modernize infrastructure, lowering the immense barriers and costs associated with collecting a highly disaggregated crop and transporting it across the globe. They can fund genetic research, aiming to create more resilient cocoa plants that will withstand the temperature test. Or they can invest in a combination of all three.

For a publicly-held and budget-driven corporation like Hershey, the thought of investing heavily in a project with no associated revenue growth and a 40+ year horizon is about as unappealing as they come. But whether through investment now or higher cocoa prices later, at some point Hershey will be forced to spend money on this issue. An organization taking the long-term approach would surely decide to increase investment now to allay the potentially catastrophic risks long-term. But color me skeptical. (730 words)

 

Footnotes

(1) Euromonitor, 2015

(2) Hershey company Fact Book (https://www.thehersheycompany.com/content/dam/corporate-us/documents/investors/2016-fact-book.pdf)

(3) Clean Fig (http://cleanfig.com/pumpkins-ghouls-fair-trade-chocolate/)

(4) The cocoa industry has also received significant media scrutiny for not promoting proper labor practices, including allowing child labor to happen under its watch. For the purposes of this post, I have decided not to touch on these issues, but a simple Google search will provide myriad results. (https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=cocoa%20labor)

(5) Euromonitor, 2015

(6) Hershey Company, Investor Fact Book (https://www.thehersheycompany.com/content/dam/corporate-us/documents/investors/2016-fact-book.pdf)

(7) International Center for Tropical Agriculture. “Predicting the future climatic suitability for cocoa farming of the world’s leading producer countries, Ghana and Côte d’Ivoire”.  Climatic Change 119(3-4):841-854 · August 2013. (https://www.researchgate.net/publication/257548214_Predicting_the_future_climatic_suitability_for_cocoa_farming_of_the_world%27s_leading_producer_countries_Ghana_and_Cote_d%27Ivoire)

(8) Intergovernmental Panel on Climate Change (IPCC) Climate Change 2014: Impacts, Adaptation, and Vulnerability. (https://www.climate.gov/news-features/climate-and/climate-chocolate)

(9) Cocoa processors purchase raw cocoa beans from farmers and process them into products such as cocoa powder and cocoa butter, which are then purchased by chocolate manufacturers as inputs to producing chocolate. Example companies include Barry Callebaut and Cargill.

(10)Hershey Company, Cocoa Sustainability website. (https://www.thehersheycompany.com/en_us/responsibility/good-business/creating-goodness/cocoa-sustainability.html)

Previous:

Opportunity in the Drought: Aqua Capital Management and the Market for Tribal Water Rights

Next:

AXA: “the cost of climate change is too damn high!”

5 thoughts on “Challenged Chocolate: The Cocoa Industry and Climate Change

  1. First, I like how you bring color to the situation and shed light on the various players impacted. For instance, commonly when we consider institution-level impacts, we forget that of the individuals doing the work… you so vividly paint that image for us: “Imagine people out in jungles in the blistering heat, holding machetes, and hacking down watermelon-sized beans that are hanging from trees.” That is the existing nature of the work, only to get more extreme as climate change continues to impact our planet. Moreover, it was great that you pointed out how not only Hersey will be affected (and can mobilize its resources), but also how “the collection of small-time, individual growers that make up the cocoa farming industry” will have so much more difficult of a time given their lack of deep pockets and resources.
    Regarding the future impact to businesses, clearly the price of inputs is of large concern to chocolate producers, given the supply information provided here and the price movements in Figure 2. Do the big players (Hershey, Nestle, etc.) want to get more heavily involved in the upstream production? Is there significant money for innovation or R&D in upstream production? Is there automation efforts or climate-controlled possibilities to cocoa production? Like many of these issues, I hope this is resolved, as I cannot imagine life without chocolate, or an $8+ bar of chocolate. Thanks for illuminating this issue for us.

  2. In the article, you mention that Hershey should consider investing in genetically modified cocoa plants to help farmers improve their yields in the face of increasing temperatures. I wonder, however, how feasible that is given the negative press Hershey has gotten to date for their use of GMOs made by Monsanto [1].

    http://www.ecowatch.com/hersheys-most-popular-chocolates-will-go-gmo-free-by-end-of-the-year-1882015311.html

  3. Great Post! It’s scary to see how climate change may be affecting our chocolate supply! Since most of the supply cocoa (60%) is coming from West Africa, I’m wondering how involved do companies like Hershey get in the supply chain [1]? Do they help farmers with their land or have stakes in the land that grows cocoa? Would Hershey even be interested in buying land in West Africa as they most likely do not want to invest that heavily in a low margin product? However, since cocoa is a complex business, per Cocoa Barometer 2015, famers in West Africa have insufficient infrastructure, uncertain land ownership rights, and no modernization when it comes to farming practices [1]. With these complexities, I wonder how younger generations feel about being cocoa farmers. Hershey seems to be ahead of this issue as they have stated, “we want to take cocoa farming from being a way for farmers to subsist to being an attractive vocation for the next generation” [1]. How does Hershey reconcile these issues and accomplish this task? Do you think Hershey is taking the rest step with incentivizing the younger generation to become cocoa farmers? Will that just help with their future supply issues or will it help with reducing climate change?

    [1] Marc Gunther, “Hershey’s uses more certified sustainable cocoa, but farmers may not be seeing the benefits,” The Guardian, July 6, 2015, https://www.theguardian.com/sustainable-business/2015/jul/06/hersheys-mars-ferrero-cocoa-farming-fair-trade-global-exchange, accessed November 2016.

  4. This is a great piece. It reminds me of the IKEA case we read and how they are considering alternative sources for their lumber. I wonder if it would be feasible for Hershey to source other areas for the cocoa plant to diversify their risk, or if they are limited to the current suppliers. If possible, this would be an important measure for the company to take. They could perhaps even use vertical integration as a way of minimizing these headline risks. http://www.thedailysheeple.com/hershey-sued-for-sourcing-cocoa-from-suppliers-that-use-child-slaves_102015 Shows how this can be a significant cost to the company.

  5. Thanks for writing a great piece about one of my favorite topics! I agree with you that many actions taken by companies today are insufficient for combating climate change. For example, committing to source 100% of its cocoa from sustainable growers seems like a noteworthy initiative, but will it actually make a difference when temperature and other factors affect crop growth? I doubt it. Instead, the three paths you outlined make a lot of sense to me; while they may be more capital intensive and take a longer term lens, they are the only things that will truly address the root causes. I wonder if there is also an opportunity for plant biome technology (similar to Indigo) as an alternative to genetic engineering.

Leave a comment