How to respond to COVID-19 in the cacao sector?

The global outbreak of the COVID-19 virus is having a major impact on international trade. This study presents a quick overview of what is happening in the cacao (cocoa) market and the supply chain. It offers practical steps for small- and medium-sized enterprises (SMEs), such as farmer groups and exporters, in cacao producing countries, to deal with the immediate effects of COVID-19 on the sector. It also provides steps to take to prepare for successfully doing business in the sector after the crisis is over.

Effect on the market

Large companies are forecasting a reduction in grind of -5% for the second quarter of 2020 and -3% in the third quarter. Because of this, the supply of cacao will become higher than the demand. This could result in an excess of cacao, a so-called surplus, in warehouses. Surpluses will rise if lockdown continues. This will put pressure on quality differentials and certification premiums, such as organic or fair trade, thus affecting the price.

Confectionary demand is down. Easter saw reduced consumption and forecasts for Halloween are down as well due to lockdown. However, now that most European countries are easing their lockdown measures, the sector hopes to be back to normal by Christmas.

A hopeful sign has been the post-lockdown cocoa powder demand in China, which increased by 25%. The sector hopes this trend will continue around the world as the lockdown eases. When the worst of the coronavirus crisis is over, for example in one year, with businesses operating, possibly still with some form of social distancing, we may see a return to consumption. We can assume that consumer behaviour will return to normal post-lockdown.

However, it will take time for the surplus left in the market to be used up. At the moment, despite cocoa powder demand still being strong, cocoa butter demand is extremely weak. For this reason, the market is seeing butter stock build-up. If this continues, it will force grinders to slow down bean purchases until butter stocks are back at manageable levels.

The top segment, craft chocolatiers, speciality chocolate shops, and so on, has been hugely affected. Sales in small shops have reduced or even stopped as a result of the lockdown or social distancing measures. As indicated in our April 2020 publication on the bittersweet impact of COVID-19 on the cacao and chocolate market, 70% of small chocolate businesses saw 50% fewer sales and 20% might not survive.

However, online sales are up, and initiatives have been launched, and articles published to stimulate consumers to support small chocolate makers. Good examples of these are the Stay Home With Chocolate initiative, Moving Cocoa’s article on why you should buy a lot of good chocolate (but not in the supermarket) and the fundraiser chocolate for doctors and elderly during COVID-19.

In the longer term, Corporate Social Responsibility (CSR) will probably become an even more important market demand. More people are becoming aware that virus contamination risks increase due to the cutting down of forests and trafficking of exotic animals. Avoiding a climate crisis is also becoming more urgent. Realising that such a crisis will be much worse than the coronavirus crisis may result in a change in behaviour. This could be less flying to eating less meat, installing solar panels, or choosing a sustainably produced chocolate bar.

However, to raise enough environmental awareness to change cacao/chocolate consumption behaviour, the major confectioners really need to take the lead in increasing their sustainable offering. Until now, the best-selling products in western supermarkets are often at the cheaper end of the sector. Also, a continued recession worldwide may lead more consumers to move to lower-end products.

The health benefits of cocoa powder’s anti-influenza properties and assistance in boosting the effect of vaccines offer an opportunity. However, we have not seen confectioners use this yet with COVID-19.

Effect on the supply chain

The European cacao actors we interviewed for this study feel that local governments in producing countries and the supply chains have been extremely resilient to date, action has been swift. They think that with shrinking demand, major grinders, like Olam, Barry Callebaut, Cargill and Ecom, with large in-country operations running the supply chain, will go back to their usual channels. These are suppliers that have proven to be able to provide the quality and price these companies look for. This will make it harder for new players to sell to these companies.

Other than a short two-week period, where some ports adjusted to lockdown, the cacao sector has not had any supply chain issues in West Africa due to COVID-19. However, forwarders are sailing less frequently or excluding ports due to reduced demand for goods; this is called blank sailing. No scarcity of containers has been reported.

Flights are heavily affected, with substantial capacity problems, for example, to and from Amsterdam, Latam, Oceania and the Far East. Export to China is at a normal level, as well as import from Africa. As most cacao exports are full container load (FCL) ocean shipments, flights are not used much.

Travel restrictions to producer countries and trade fairs are making new business challenging. A lot of trust is built during face-to-face interaction. It is always beneficial when exporters visit supply chain operations, and producers visit grinders and chocolate processing facilities. When that is not possible, sampling and analysis are a good alternative. Trade fairs are a great way to introduce new staff and share information more informally. Many clients are now contacting their suppliers more regularly on the phone to discuss matters.

The following first 6 steps focus on immediate actions that your cacao company can take in the short-term to ensure its survival in the present situation.

1. Keep your farmers and workers healthy

Health experts agree the best way to avoid getting infected is by social distancing and maintaining proper hygiene. Implementing this in your cacao business will reduce the risk of your farmers, workers, trainers and office staff getting sick. This would affect not only their health but also your company’s productivity and its ability to meet your buyers’ expectations and legal obligations.

2. Increase your quality control

Cacao shipments may be delayed as a result of slower cacao evacuation, port logistics or delayed contracts from buyers and/or their clients. This may cause cacao to deteriorate either at your warehouse, in transit or in your client’s facilities. Optimally warehouse the cacao and stuff your containers to prevent losing all the work you have put into the quality.

3. Start working on long-term contracts

Establishing a long-term contract has to be done cautiously, price-wise, see Step 11 below, but it will secure your operations more efficiently. If you only buy from farmers based on incidental, outright priced contracts, you run the risk that during a crisis like this, those contracts will not be coming in. If you do not have enough activity, you will not be able to cover your running costs or the investments you have made in the processing infrastructure, warehouses, and so on.

4. Make sure you have sufficient working capital

Buyers may be slower in making payments, shipping, or even sending you the contract for the cacao you have bought from farmers. Also, their inventory, surplus, is growing. This puts pressure on their working capital. Making sure you have enough credit lines in place will thus be important. Working capital will become increasingly scarcer if there is a continued recession in Europe/the world, so the sooner you act, the better.

5. Improve your marketing

The current lockdown situation allows you to update your marketing tools and reach out to current and new clients. This could compensate for postponed trade fair participation. It could also mean you establish an attractive presence with importers, who are currently spending more time on their computers.

This may also be the time to construct a cacao lab, where you can evaluate your product properly. Samples are a great way of showing the quality you can offer. Send many samples to new clients to increase your network of potential buyers. Patience and perseverance are required. If you keep sending new samples to stay in contact with the buyer, sooner or later they may order a container.

6. Be even more client-oriented

Try to understand what your client is going through, so you can anticipate their demands. Even if your buyer’s request is to the opposite of your wishes, for example, on price or shipments, try to accommodate them as much as possible. They will appreciate you for this, solidifying your position as a valued supplier in the long term.

After these immediate actions, we now turn to the short- to medium-term actions you can take. Health experts are increasingly predicting that humanity will have to live with recurrences of the same, mutated or entirely new coronaviruses for the foreseeable future. This is despite vaccines and medicines such as virus inhibitors.

The first way to respond to this is on a personal level: increasing your immune system through a healthy lifestyle. Second, the governmental response will be important: investing in health care and helping companies economically to survive this new situation. Third, companies also have to take action. The following recommendations are sector-specific steps to prepare your company for doing business successfully after the worst of crisis is over.

7. Make sustainability an integral part of your company

Companies that invest in education, good agricultural practices, and responsible and accountable financial management are stronger during crises. The quality of your staff, the education level of your farmers and the financial reserves of your company will enable you to respond more effectively to unexpected situations.

If coronaviruses continue to be present in the years to come, you will have to stay alert at the production level. Social distancing towards clients, including limited or no trade fairs, will require you to have excellent marketing. For this, you need quality staff. You will need to have your finances in order, to make these investments or cope with economic losses.

8. Innovate – diversify your offer

Improving your quality will set you apart from the competition. This is particularly the case if you can supply your new products with consistent quality. If you only supply fine flavour cacao and you wish to increase volume, look into developing more mainstream cacao as an extra product. This can be a lower quality at a more reasonable price. This could be a wise move, as a continued recession worldwide could lead to more consumers moving to lower-end products.

9. Invest in taking control of more of the supply chain

The further you are involved in the supply chain as a group, and the more knowledge you have of your product and the market you want to sell it in, the greater the value you control and retain. By increasing the quantities on offer, you increase the possible competition on price.

10. Understand international market prices better

Understanding international market prices and how these prices are behaving can help you decide how to price at what moment. Smaller producer groups and exporters, in particular, are not very familiar with price mechanisms, such as how contracts are drafted. Contracts should reference the world market price at a future date plus a differential or premium. Understanding international pricing and hedging mechanisms will allow you to protect yourself and trade more volume than if you were to just trade cacao at outright prices.

11. Diversify the income of your company and farmers

The World Bank warns that COVID-19 will push Sub-Saharan Africa into recession, “increasing pressure on government budgets, and their spending on essential services and social protection. At a household level, farmer illness, higher food prices, lack of access to school feeding for children, and possible disruptions to the supply of fertilisers and pesticides will all place increasing pressure on farmer incomes.”

Diversification of your farm to create multiple streams of income or food sources reduces these risks. Diversification into cash crops, as well as subsistence crops, is recommended.

12. Improve your country’s or region’s marketing

Your country or region will be more likely to hold on to its buyers if it establishes online and trade fair visibility, works on common standard-setting and thus differentiates itself from its competitors.

This study was carried out on behalf of CBI by Jeroen Kruft of Amigos International Consultancy.

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