Cocoa Sustainability in Côte d Ivoire Memorandum of Understanding. Gouvernement de la République de Côte d Ivoire. & Mars, Incorporated

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1 Page 1 of 10 Cocoa Sustainability in Côte d Ivoire Memorandum of Understanding Gouvernement de la République de Côte d Ivoire & Mars, Incorporated 1. Parties to the Discussion The government of the Republic of Côte d Ivoire, represented by the Comité de Gestion de la Filière Cacao Café (CGFCC), governed by the Decree n on the December 1st, 2009 and the Minister of Agriculture, the administrative authority, is party to the present discussions and designated invariably as the Ivorian party. Mars Incorporated (thereafter designed as Mars), an American company statute, located at 6885 Elm Street, McLean, Virginia, USA and represented by Mr. Grant Reid, President of the Mars Global Chocolate Segment signing as the appointed Representative of Mars Incorporated is also party to these discussions and invariably designated as Mars. Together, the designated parties form the representatives of the present discussions. The parties agreed to consign their observations and preliminary agreements in this document, which is to be considered as the illustration of their converging points of view on the subject to follow. The parties however do not intend to be legally bound by the conclusions therein, which only paint the framework of their future engagement in general terms. Reciprocal engagements will be concluded in several conventions and contractual agreements between the parties and between the parties and their respective partners. The parties will settle on a general accord expressed in this Memorandum of Understanding in the wake of foreseen discussions and agreements. Specific accords will then follow, then conventions between the respective parties and their implementation partners to execute their commitments. 2. Strategic Interests of the Parties The cocoa sector represents a decisive portion of the Ivorian economy (at least 40% of GDP). The Ivorian production, in turn, still represents nearly 40% of global supply. The Ivorian cacao is therefore of shared significance at the nexus of action by government and actors in the cocoa value chain. 1

2 Page 2 of 10 The market has a fundamental interest in maintaining a constant supply from Côte d Ivoire and the country needs to rely on this important source of financing for its development. It is with the intent to integrate these mutual interests that the parties to this discussion met in order to better define a framework for collaboration. Conversations were initiated because of the convergence and compatibility of mutual reflections or actions already undertaken separately by the parties. These actions and reflections are known to the parties under the designation of the 2QC program on the Ivorian side and under the Vision for Change for Mars. 3. Situation, Trends & Concerns The modern economy depends on sustainable development. This reality forms the backdrop for this project which must respond to the criteria that underpin sustainable development, namely: that the necessary conditions for the generation of wealth be created, the livelihoods of the people involved improved, and the environment protected. The growth of purchasing power in emerging markets and the confirmation of the health/nutritional benefits of cocoa have led to a significant increase in demand. At the same time, the market has become more stringent in terms of quality requirements particularly around conditions surrounding pre and post harvest bean handling. Until recently, Côte d Ivoire as the main producer of cocoa, accounting for 40% of total world supply, has always met the chocolate industry s standards for quantity and quality. Even better, Côte d Ivoire shaped the industry s use of cocoa by providing highly desirable flavor characteristics which are dominant in many chocolates in the world. Despite these achievements, performance in terms of quantity and quality achieved by the national cocoa sector remains far below its true potential. In addition, significant gains in production volumes have not always been matched with the imperatives to preserve soil fertility, optimize the use of arable land and maintain biodiversity. Recent years have seen the development and the rapid progression of diseases that threaten the crop. Even worse, cocoa farmers have begun to neglect their cocoa fields. Poor post harvest handling of beans as well as the current national marketing system has created supply conditions characterized by product deficiencies never seen in prior years from the Côte d Ivoire origin. Inaction in addressing these 2

3 Page 3 of 10 trends will have harmful consequences, including reduced national tax revenues, increased rural poverty and migration that will put pressure on cities and their security, and ultimately, the loss of Côte d Ivoire s leadership position on the world cocoa market. This situation calls for urgent action with a view to expand cocoa productivity within current land use, improve quality and increase farm level economic returns. The five key challenges to address are: 1. Improve the quality of cocoa and optimize production volumes In a smallholder environment where most farmers have low or no education, a primary success factor is the near permanent presence of extension services. Today, the competent national extension services created to provide this function have insufficient capacity to cover all cocoa production zones effectively, especially given the large dispersion of cocoa growing areas and their limited funding. This deficit results in poor farm practices, characterized by premature pod harvesting and insufficient bean fermentation and drying. This situation is made worse by an internal marketing system that creates additional pressures including the need to take control of the beans before post harvest handling has been completed. Together, these factors triggered a decline in the quality of beans (mold/ffa/humidity/off flavors) and explain increasing bean rejection rates on the international market. The second important success factor around this goal is the availability of sufficient quantities of improved plant material and access to inputs such as fertilizer and pesticides. Long ensured by the state, national provision of these inputs has not occurred in a long time. Decreasing prices on the world market and the uncertainty around producer income has not encouraged farmers to invest more in their cocoa fields. Today, yields stand at kg/ha while 1000kg/ha or more are possible. 2. Improve the quality of life of the farmers to guarantee sustainable production Achieving sustainable cocoa production will require this activity to provide an acceptable and relatively predictable income to those engaged in cocoa farming. This income must allow the farmer to live, save, invest and renew his/her field and diversify his/her sources of income. On the basis of current yields, unit production 3

4 Page 4 of 10 costs are too high and leave too little margin to farmers. To meet these challenges, obtaining productivity gains on existing farms is a necessity. Cocoa growing areas also need adequate basic community infrastructure that must be continuously maintained and rehabilitated. This requires proper management of the necessary resources, and flexible, dynamic and transparent mechanisms for generating and mobilizing such resources. This can be achieved through an adequate structuring of the cocoa sector and management of the para fiscal income it generates. 3. Manage sector reforms The Ivorian coffee and cocoa sectors have been the object of successive reforms linked to national debt management. These reforms led to the liberalization of the sector. Since then and in the context of a difficult period in general for Côte d Ivoire the conditions surrounding the sector have not improved. On the contrary, a progressive deterioration in quality and the development of poor postharvest practices were observed. This situation was worsened by the lack of effective controls, and the poor deployment of the para fiscal levies raised from the sector following the latest reforms. Côte d Ivoire has demonstrated its capacity to produce sufficient quantities of cocoa, and above all, at the quality level expected by the industry, as long as it can manage resources effectively. The country is capable of realizing past level of performance in the context of a system in which it can control its essential levers. Such a system, which by definition will be multidimensional, must have an integrated and coherent management. 4. Assure the financing of reforms in line with the needs of the agricultural calendar The actions identified by the Ivorian party s 2QC program and Mars Vision for Change to address these challenges will require significant funds to be available at the right time. The mobilization of these funds is first and foremost the responsibility of the government of Côte d Ivoire. The process of mobilizing these funds needs to be fluid and adapted to the issues at hand. It must free of administrative burden and timing which do not match the demands of nature and the way it dictates the agricultural cycle. External support will surely be necessary, if not indispensable, to initiate the process, but the Ivorian cocoa sector will need take over the relay and play its role in mobilizing the bulk of needed resources. Past experience on the subject causes some hesitations among development partners of 4

5 Page 5 of 10 Côte d Ivoire in terms of putting in place a dedicated para fiscal system. These reservations will need to be dispelled by putting forward appropriate mobilization and control mechanisms within the context of a transparent and coherent management structure. 5. Ensure the stability of technical teams. The implementation of the programs envisaged in this protocol demands continuity in the action of the teams concerned. The CGFCC is a transitional structure, and will therefore create the conditions for the commitments described in this agreement to be honored with changes clearly communicated to Mars. 4. Basis for Collaboration Inaction in addressing the above challenges will lead to a progressive erosion of the quantities of cocoa offered by Côte d Ivoire to the world market. The quality of the origin will be subject to caution and rejected. A further impoverishment of the cocoa farmers will ensue. Côte d Ivoire will lose its position as world leader. National revenues will be faced with enduring loss. The global cocoa industry will be significantly impacted by the additional investments it will have to make to overcome the failure of the Ivorian cocoa sector. The importance of this issue transcends the sole interests of Côte d Ivoire. The response must be in line with the stakes at play. Concerted and coordinated action by the government, cocoa consuming industry, scientists, multi lateral donors and cocoa farmers constitutes the most effective response. Such action will create a better future characterized by sustainable cocoa production. The objective origins of this deplorable situation are known today. The solutions that are called for exist thanks to available technologies and knowledge. The required organizational needs are known and relatively easy to implement. What is left to reverse negative trends is to create the collective will of the principal actors, and to mobilize and deploy the necessary resources. This framework for such action will have to be transparent and coherent and allow each to find his interest over time, in line with consented efforts. 5

6 Page 6 of 10 Convinced of the convergence of their respective interests, the Ivorian party and Mars have agreed to work together in a manner outlined in this document and with national cocoa sector institutions, donors, industry and other stakeholders to develop a common vision, strategy and business plan to revitalize the national cocoa sector of Côte d Ivoire. The importance of this project calls for a successive set of implementation phases. The parties both see a necessity to focus initial efforts on a target and pilot region representing a significant part of national production. Contingent on available means, the results will then be replicated in other cocoaproducing zones. This document outlines the purpose, scope and anticipated outcomes defined jointly as part of the collaboration between the Ivorian party and Mars. This document will not be legally binding but will be supplemented by formal contracts that will define the mutual obligations of parties in line with specific and agreed implementation activities. 5. Purpose, Goals & Strategies The quality and quantity problems identified in the cocoa production of Côte d Ivoire are exacerbated by the new demands of the market. The solutions provided cannot ignore these new requirements. With the goal to keep its status as global leader, Côte d Ivoire has to anticipate industry needs in years to come. This is the ambition of its 2QC program. On its side, Mars, as a major actor in the chocolate industry, is aware of the future needs of the market and shaped its Vision for Change project on that basis. The conciliation of these imperatives has inspired the following five step approach: 1. Identify and formalize the needs of the cocoa consuming industry as perceived today and in light of their likely evolution. 2. Compare these needs with the current realities of a target region chosen by the parties as pilot. 3. Identify the necessary actions, skills and resources for this region to respond to these needs while keeping the concept of Farmers First at the forefront as an underlying principle of both parties. 4. Divide the responsibility for the necessary actions and support each other in their implementation. This will form the basis for so called binding contracts. 5. Extend the experience gained in the target region to other zones of production. 6

7 Page 7 of Modus Operandi To achieve the agreed objectives of this effort, it is necessary to mobilize national institutions, third party donors and other participants in the cocoa supply chain. To effectively lead and coordinate the various participants in this effort, the Ivorian party and Mars will form a joint Task Force. Members of the Task Force are appointed as representatives of their institutions and functions and not as individuals. Should members of the Task Force leave their agreed positions, they will be replaced with respect to their institutional role and with the agreement of the Ivorian party and Mars. This will ensure continuity of action despite individuals career developments. Task Force Membership: Core Members: 1 Representative of the Ministry of Agriculture and 3 persons appointed by the Coffee and Cocoa Board. Mars Director of Cocoa Supply and direct representatives, Mars Corporate Affairs in charge of cocoa sustainability issues, Mars Cocoa Science representative (today: Andy Harner, Josef Toledano, Jeff Morgan, Howard Shapiro). Associate members, tasked to assist core members (today: Marc Pfitzer and 2 persons from the Ivorian party) Task Force Principles Inclusive Partnership: It is recognized that sector transformation is only possible through a coalition of key sector participants including national and local institutions (CNRA, ANADER, FIRCA, district government etc.), industry (chocolate manufacturers, exporters), external donors (World Bank, IFAD, AFD, foundations etc.), and most importantly, farmers and their communities. Both the Ivorian party and Mars are open to further participation and support from these actors, working within an agreed framework of the Task Force. Long term Commitment: It is recognized that reviving the cocoa sector will take many years and thus requires a long term commitment. Therefore, the validity of this MoU will remain beyond the involvement of individual Task Force members. It is envisioned that the Task Force may be required to remain in place at least until However, the actions, structure and objectives of the Task Force are likely to evolve over time, requiring that the Task Force and the MOU be amended. With respect to that likely evolution, the signatories of this MOU 7

8 Page 8 of 10 agree to review the objectives and the results of the collaboration on a yearly basis and recommend whether the MOU requires any modification. It is also agreed that the MOU may be dissolved by either party at any time on the basis of prior dialogue and mutual consideration of such decision. Continuous Learning: Transforming the cocoa sector for quantity, quality & growth is a major undertaking and it is recognized that neither party possesses all the answers to this challenging undertaking at this stage. The signatories and their participants agree therefore to approach this project with an open mind and be willing to learn and adapt our strategies over time based on regular progress reviews and evaluation of activities. Standards of Operations: The parties to this agreement will strive for the application of the highest standards of practice in all areas of focus, including farming methods, planting material and inputs, environmental and land management, labor practices, extension services, rural infrastructure development and other sector support. Communications: The effective communication of the agreed objectives and the actions of the task force is a critical component for success of this activity. The Ivorian party and Mars agree that this document will remain confidential and that no communication of this agreement or the activities generated by it will take place without the agreement of both parties. It is further noted that when the need for communications is mutually agreed, the Ivorian party and Mars will work together towards a mutually beneficial form of communication to meet the specific requirement that is identified. Compliance: Each party to this MOU shall comply with all applicable laws, rules and regulations, including, in the case of Mars, US laws because it is a US corporation (e.g., the Foreign Corrupt Practices Act) and Ivorian laws because of any local activities conducted by Mars pursuant to this MOU in that jurisdiction and, in the case of the Ivorian party, Ivorian laws because it and its members are Ivorian residents/citizens. Respective Roles The Ivorian party commits to support the goals described in this document and task force in the following manner: Assure the continuity of the project beyond the duration of its mandate by creating appropriate mechanisms to do so. 8

9 Page 9 of 10 Mobilize national institutions (ANADER, CNRA, FIRCA, etc.) as well as local authorities to develop and execute on a common plan for the target district. Encourage and document key commitments made by diverse organizations to the common plan in favor of the chosen target region. Host periodic consultations with national institutions, donors, industry, and all other actors that have committed to deliver results to monitor progress and share lessons. Act as needed to maintain momentum on sector transformation and to facilitate the capturing of knowledge to ensure dissemination of insights and activities nationally. Support the effective communication of the program and its outcomes. Fully participate in the Task Force and related activities as required for success. Mars commits to support the task force in the following manner: Support the development of a common plan for the target region chosen by the parties. Facilitate wide ranging participation and a dialogue with all potential investors in the cocoa sector for execution and monitoring of progress. Facilitate the mobilization of donor investments to support key and differentiated elements of the common plan. Work to harmonize industry certification practices to enhance their effectiveness in achieving quantity, quality and growth objectives. Support change by purchasing significant quantities of certified cocoa from Côte d Ivoire as it becomes available. Invest in specific sector developments with emphasis on providing cocoa science & technology expertise to national institutions to scale up their extension and plant material distribution capacity; and set up at least one technology innovation site ( MCDC ) to demonstrate potential of yield improvements. Support the effective communication of the program and its outcomes. Fully participate in the Task Force and related activities as required for success. Support Côte d Ivoire in its effort to build a sector that has at its disposal the necessary resources to implement the actions identified by the parties. 9

10 Page 10 of 10 Both parties are committed to working towards diligent implementation upon the signing of this agreement. Accepted and Agreed: Ministry of Agriculture for the Gouvernement de la République de Côte d Ivoire Date: By: Mamadou sangafowa Coulibaly, Minister of Agriculture Accepted and Agreed: Mars, Incorporated Date: By: Grant Reid, President of Mars Global Chocolate Segment 10