Financing A New Value Chain

Transcription

1 EASYPol Module 147 Financing A New Value Chain Divine Chocolate

2 Financing A New Value Chain Divine Chocolate by Calvin Miller, Senior Officer, Agricultural Management, Marketing and Finance Service, Rural Infrastructure and Agro-Industries Division, FAO, Rome, Italy for the FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS FAO Policy Learning Programme aims at strengthening the capacity of high level policy makers in member countries in the field of policies and strategie s for agricultural and rural development by providing cutting-edge knowledge and facilitating knowledge exchange, and by reviewing practical mechanisms to implement policy changes. About EASYPol EASYPol is a an on-line, interactive multilingual repository of downloadable resource materials for capacity development in policy making for food, agriculture and rural development. The EASYPol home page is available at: easypol. EASYPol has been developed and is maintained by the Agricultural Policy Support Service, Policy Assistance Division, FAO. The designations employed and the presentation of the material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. FAO January 2008: All rights reserved. Reproduction and dissemination of material contained on FAO's Web site for educational or other non-commercial purposes are authorized without any prior written permission from the copyright holders provided the source is fully acknowledged. Reproduction of material for resale or other commercial purposes is prohibited without the written permission of the copyright holders. Applications for such permission should be addressed to: copyright@fao.org.

3 FAO Policy Learning Programme Financing a New Value Chain: Divine Chocolate Table of contents 1. Background An evolving value chain business model Financial support at formation Difficult competition for a new market entrant Financial reorganization What Kuapa farmers get out of their relationship with Divine Questions Readers Notes EASYPol links... 4 Module metadata... 5

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5 FAO Policy Learning Programme Financing a New Value Chain: Divine Chocolate 1 1. BACKGROUND In the early 1990's, the structural adjustment programme involved the liberalization of the cocoa market in Ghana. A number of leading farmers, including a visionary farmer representative on the Ghana Cocoa Board, Nana Frimpong Abrebrese, came to realise that they had the opportunity to organize farmers, to take on the internal marketing function. This would mean that they could set up a company, to sell their own cocoa to the Cocoa Marketing Company (CMC), the state-owned company that would continue to be the single exporter of Ghana cocoa. These farmers pooled resources to set up Kuapa Kokoo, a farmers' co-op, which would trade its own cocoa, and thus manage the selling process more efficiently than the government cocoa agents. Kuapa Kokoo - which means good cocoa growers - has a mission to empower farmers in their efforts to gain a dignified livelihood, to increase women's participation in all of Kuapa's activities, and to develop environmentally friendly cultivation of cocoa. The farmers who set up Kuapa Kokoo, were supported by Twin Trading, the fair trade company that puts the coffee into Cafédirect and SNV a Dutch NGO An evolving value chain business model Kuapa Kokoo weighs, bags and transports the cocoa to market and carries out all the necessary legal paperwork for its members. Kuapa strives to ensure that all its activities are transparent, accountable and democratic. It does not cheat the farmers by using inaccurate weighing scales, as other buying agents often do, and because it operates so efficiently, it can pass on the savings to its members. After seeing the benefits Kuapa gains for its members, more and more farmers want to join and the association now has over 20,000 members organised in approximately 1200 village societies. Cocoa from Ghana is of a high quality and trades at a premium on the world market. Kuapa Kokoo's motto is pa pa paa - which means the best of the best in the local Twi language. Kuapa's premium quality cocoa is now sold to chocolate companies around the world. The cocoa farmers, who were already getting a Fairtrade price from some international customers, voted at their 1997 AGM to invest in a chocolate bar of their own. They decided that rather than aiming for the niche market where most Fairtrade products were placed, they would aim to produce a mainstream chocolate bar to compete with other major brands in the UK.

6 2 EASYPol Module 147 Applied Material 1.2. Financial support at formation Together with Twin 1, Kuapa helped set up The Day Chocolate Company with the enthusiastic support of The Body Shop, Christian Aid and Comic Relief. The Department for International Development pulled out all the stops to guarantee Day's business loan, and NatWest offered sympathetic banking facilities. Divine Fairtrade milk chocolate, made from Kuapa's best of the best fairly traded cocoa beans was launched in October 1998 and by Christmas 1998, had made it onto the supermarket shelves. The farmers' ownership stake in The Day Chocolate Company, a first in the fair trade world, means that Kuapa Kokoo has a meaningful input into decisions about how Divine is produced and sold. Two representatives from Kuapa Kokoo are Directors on the company's Board, and one out of four Board Meetings every year is held in Ghana. As shareholders, the farmers also receive a share of the profits from the sale of Divine. This innovative company structure was recognised when Divine was awarded Millennium Product status Difficult competition for a new market entrant In a ferociously competitive chocolate market worth almost 4 billion in the UK alone, being the new bar on the block can be a daunting prospect. But as so many people adore delicious chocolate, the potential for Divine's success is huge. There are hundreds of chocolate brands available in the UK, and the biggest companies spend up to 10% of their profit margins - tens of millions of pounds - in their fight to retain their brands' positions in the Chocolate Top Ten. Divine has been developed to appeal to the British public's palate, and it tests favourably against all the market leaders. The UK has one of the highest per capita levels of consumption of chocolate in the world and therefore, even capturing a small proportion of this market translates into real benefits for cocoa farmers Financial reorganization In 2006, original Day Chocolate founder The Body Shop made the decision to donate its shares in the Company to Kuapa Kokoo - so now the farmers' cooperative has an even bigger stake in Divine. The Day Chocolate Company is a private company limited by shares. From the outset its 99 ordinary shares were owned by three parties; 52% by the Fairtrade NGO Twin Trading, 33% owned by Kuapa Kokoo farmers cooperative and 14% owned by the international retailer Body Shop International. In July 2006, The Body Shop made the decision to donate its shares in Day Chocolate to Kuapa Kokoo, giving the cooperative a 47% stake in the business. In addition, the international NGO Christian Aid also own preference shares and 1 Fairtrade NGO Twin Trading.

7 FAO Policy Learning Programme Financing a New Value Chain: Divine Chocolate 3 the leading UK charity Comic Relief enthusiastically support the company and are also partners in the Dubble Fairtrade chocolate bar. The board of directors includes two people from Kuapa (Managing Director of KK Ltd and the Farmers Union President), two people from Twin and one person each from The Body Shop, Christian Aid and Comic Relief. This governance structure is unique in both the UK Fairtrade and confectionery markets and in 1999 was awarded "Millennium Product " award status from the Design Council for its innovative organisational model. The Day Chocolate Company Board meets four times a year and one of those meetings is held in Ghana What Kuapa farmers get out of their relationship with Divine Divine is made with cocoa bought from Kuapa Kokoo at the guaranteed minimum Fairtrade price of US$1600 per tonne which protects the farmers from the volatility of the market. The cooperative receives an additional premium of US$150 per tonne, which is invested in improvements to the farmers' living standards and farming productivity. A percentage of the price of Divine goes towards 'producer support and development', which Kuapa Kokoo spends on farmer education, helping also to maintain the values and vision of the cooperative as it grows. What makes the relationship even more special is that Kuapa owns a third of Day Chocolate. Kuapa Kokoo has two places on the Board so it can exercise its influence over how Divine is developed, and receive a significant share of the company profits. Less tangibly, but just as important, the Kuapa farmers are very proud that they own a company in the UK, and hearing about how well their business is doing is very motivating and exciting. 2. QUESTIONS What lessons if any can be taken away for the Divine Chocolate case that have relevance to the countries in which you operate? What were the primary obstcles faced by Kuapa farmers in organizing an alternative supply chain? What role did the government, NGO s and traditional merchandisers pay in overcoming these obstacles? Can the Divine Chocolate experience be duplicated? Why or why not?

8 4 EASYPol Module 147 Applied Material 3. READERS NOTES EASYPol links This module belongs to a set of modules which are part of the EASYPol training path Policy Learning Programme, Module 3: Investment and Resource Mobilization, Session 4: Strategies for increasing farm financing resources. Readers can follow other EASYPol documents under Module 3, which is structured as follows: Module 3: Investment and Resource Mobilization Session 1: Investment in agriculture & rural development Session 2: Environment for private investment in agriculture & rural development Session 3: Sources and uses of financial resources Session 4: Strategies for increasing farm financing resources Session 5: Risk mitigation in agricultural investment Session 6: Sector-wide approaches (SWAps) Session 7: Socio-economic & livelihood analysis

9 FAO Policy Learning Programme Financing a New Value Chain: Divine Chocolate 5 MODULE METADATA 1. EASYPol module Title in original language English FAO Policy Learning Programme French FAO Programme de formation aux politiques Spanish FAO Programa de aprendizaje sobre políticas Other language 3. Subtitle in original language English Financing a New Value Chain: Divine Chocolate French Financement d une nouvelle filière : Chocolat «Divine» Spanish Financiamiento de una nueva cadena de valor Chocolate Divine Other language 4. Summary In the early 1990's, the structural adjustment programme involved the liberalization of the cocoa market in Ghana. A number of leading farmers, including a visionary farmer representative on the Ghana Cocoa Board, Nana Frimpong Abrebrese, came to realise that they had the opportunity to organize farmers, to take on the internal marketing function. This would mean that they could set up a company, to sell their own cocoa to the Cocoa Marketing Company (CMC), the state-owned company that would continue to be the single exporter of Ghana cocoa. These farmers pooled resources to set up Kuapa Kokoo, a farmers' co-op, which would trade its own cocoa, and thus manage the selling process more efficiently than the government cocoa agents. Kuapa Kokoo - which means good cocoa growers - has a mission to empower farmers in their efforts to gain a dignified livelihood, to increase women's participation in all of Kuapa's activities, and to develop environmentally friendly cultivation of cocoa. The farmers who set up Kuapa Kokoo, were supported by Twin Trading, the fair trade company that puts the coffee into Cafédirect and SNV a Dutch NGO. 5. Date January Author(s) Calvin Miller, Senior Officer, Agricultural Management, Marketing and Finance Service, Rural Infrastructure and Agro-Industries Division, FAO, Rome, Italy 7. Module type Thematic overview Conceptual and technical materials Analytical tools Applied materials Complementary resources 8. Topics covered by the module Agriculture in the macroeconomic context Agricultural and sub-sectoral policies

10 6 EASYPol Module 147 Applied Material Agro-industry and food chain policies Environment and sustainability Institutional and organizational development Investment planning and policies Poverty and food security Regional integration and international trade Rural Development 9. Subtopics covered by the module 10. Training path FAO Policy Learning Programme 11. Keywords rural finance, value chain, fair trade, NGO, farmer coop, case study