Ecuador’s cocoa producers – A better ladder for small suppliers

Ethical Corporation

Integrating small producers into the supply chain of large companies is not always easy. A pilot programme in Ecuador provides an example of how ‘inclusive business' can be done.
Cocoa production is hard work. First the cocoa pods have to be harvested, then the pulp removed, and the seeds extracted and fermented for 24 hours and laid out to dry. But the really hard part is selling the end product.

For the 56 members of the Catarama cocoa growers' association, things are now a fraction easier. Every year, these farmers from Ecuador's Los Ríos province produce between 60 and 80 tonnes of cocoa. Since 2006, they have struck on a fixed market for their crates of seeds.

The Catarama associates are positioned at one end of an “inclusive business” pilot scheme. At the other end is Universal Sweets. Part of the Nobis consortium, Ecuador's second largest industrial group, the confectionary company produces chocolate, cocoa powder, cocoa liquors and consumer cocoas. In short, they need a lot of cocoa.

The two came together through the Alliance for Inclusive Business, an experimental project being run by the World Business Council for Sustainable Development (WBCSD) and SNV, the Netherlands development organisation.

“The Alliance is working with all actors from the cocoa farmers to the purchaser of the commodity, with the ultimate aim to provide a win-win for all parties involved,” explains Shona Grant, director of WBCSD's Development Focus Area.

While market access is clearly fundamental, the scheme has higher aspirations than just matching farmers with buyers. The idea is to create a sustainable, replicable, “inclusive” business model.

Price represents a vital first step. Universal Sweets has agreed a “just” price (about 20% higher than the current market rate) for the cocoa it buys. In addition, it has given the Catarama farmers a long-term purchasing commitment. They are now able to plan ahead and finance accordingly.

Related to the higher price is an improvement in productivity and quality. Here, the pipe manufacturer Amanco has a role to play. Through access to multilateral sources of credit negotiated by the Alliance, Amanco is able to provide low-cost irrigation systems to the farmers.

The benefits to the producers in terms of increased income and improved technical capacity are self-evident. Universal Sweets, on the other hand, gains a reliable and high-quality supply of cocoa, while similarly meeting its internal corporate commitment to help develop local producers.

“In addition, Universal Sweets is looking to enter the export market,” says Lourdes Luque, the Alliance facilitator in Ecuador. “This relationship will enable them to meet exporter demands about the traceability of chemicals [in the value chain].”

As for Amanco, the scheme presents it with a potentially lucrative market. The company expects to provide 14,000 such irrigation systems in Ecuador and other Latin American countries by 2015.

Direct contact with the producers also allows the buyer to cut out the middle man. This not only reduces transaction costs, but also provides greater traceability from field to final product.

The Alliance is now also pursuing similar initiatives with small Ecuadorian producers in roughly a dozen value chains, including corn growers, dairy farmers, furniture makers and the fishing industry.

“Through inclusive business, we have tried to leverage unique bottlenecks in a company's value chain to create business opportunities that reduce costs, increase profits, and improve the livelihoods of the poor,” says Robert de Jongh, Latin America regional director for SNV.

Creating successful one-off pilots is one thing. But creating whole new business models that can be copied elsewhere is a whole different ball game.

Word appears to be spreading. Rafael Correa, the current president and former economy minister of Ecuador, has publicly embedded “inclusive business” as a core pillar of his inclusive economic development agenda and pledged to develop pilots like the cocoa case in other agricultural sectors.

Scaling up

To make that happen, the Ecuadorian government earlier this year announced a package of measures, including technical assistance and a streamlined organisational structure.

Financing, however, represents by far the most important element of the government's programme. Producers interested in establishing “Inclusive Agricultural Businesses” (as the government terms these inclusive value chains) are set to benefit from new agricultural credit lines worth $87 million over the next four years.

Providing access to credit is often the key bottleneck when it comes to scaling up alliances between small producers and large companies. Meeting the quality and quantity levels required of an international company usually requires upfront investment in technology, know-how and infrastructure. It does not come cheap.

In Ecuador, before the government stepped in, the Alliance had found it difficult to gain buy-in from the financial and insurance sector. Doing business around agriculture with small producers is perceived as high risk and administratively expensive.

“The risk factor is a very sensitive issue, as no one is willing to incur any risk without sound guarantees. Obviously, the ones that have the least solid guarantees are the small cocoa producers,” says Christian Marlin, regional manager for the Alliance in Latin America.

A mere one in six of agricultural producers in Ecuador has traditionally had access to private or public sources of credit.

In theory, lending to the small producers sector should present a wider and deeper portfolio to financial institutions. But imagination is needed. Citigroup is one of the few international banks to respond. Last year, the US bank launched a $540 million risk sharing facility in conjunction with FMO, a state-run Dutch financial institution. The fund aims to provide loans to small and medium-sized companies located in low-income countries.

For inclusive business models to take off, it will require more banks and insurance companies to develop similar specialised credit lines. As the Ecuador example shows, the opportunity is there. It just requires people to take it.

Outstanding opportunities

The potential of sustainable business opportunities for low-income farmers is undeniable. Ecuador has around 120,000 cocoa producers, equivalent to one in 20 working adults. But their competitiveness is poor. Cocoa exports only amount to about £80 million a year, roughly 3% of non-petroleum exports.

What are ‘inclusive businesses'?

Inclusive businesses seek to find profitable ways to engage the low-income segment into their business operations in a way that benefits the low-income communities and creates sustainable livelihoods. Typically this comes about through:

• direct employment from this segment.
• targeted development of supply chain opportunities from this segment.
• the provision of affordable goods and services.

The World Business Council for Sustainable Development and SNV are working to promote inclusive business models in eight Latin American countries: Bolivia, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua and Peru.

There are more than 50 inclusive businesses being developed at present ranging from low-cost housing to cocoa, furniture and vegetables, all focused on ensuring both models that are good for business and good for development.