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PHILIPPINE RURAL DEVELOPMENT PROGRAM (PRDP) I-PLAN Component Mindanao Cluster

DEPARTMENT OF AGRICULTURE

Region XI

March 2014

VALUE CHAIN ANALYSIS AND COMPETITIVENESS STRATEGY:

DAVAO DEL NORTE COCOA BEAN

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MB/II:Updated VCA format

CONTENTS

Page

EXECUTIVE SUMMARY 4

Section 1: INTRODUCTION 11

A. Background Information Rationale 11

B. VCA Objectives 12

C. Methodology and Approach 13

Section 2: OVERVIEW OF THE CACAO INDUSTRY 14

A. Production Description 14

B Production Trends 17

Section 3: NATURE AND STRUCTURE OF THE INDUSTRY 22

A. Value Chain Mapping 22

B. Key Players and Functions 24

C. Nature of Interfirm Relationships 34

D. Price and Cost Structure 40

Section 4: MARKETS AND MARKET OPPORTUNITIES 44

A. Markets and Market Trends 44

B. Price Trends 50

Section 5: SUPPORT SERVICES 52

A. Financial Services 52

B. Non-Financial Services 54

Section 6: BUSINESS ENABLING ENVIRONMENT 56

A. Formal Rules, Regulations and Policies 58

B. Informal Rules and Socio-cultural Norms 59

Section 7: CONSTRAINS AND OPPORTUNITIES 62

Section 8: COMPETITIVENESS DIRECTIONS 67

A. Competitiveness Vision 67

B. Priority Constrain/Opportunities and Interventions 68

Section 9: CONCLUSION AND RECOMMENDATIONS 84

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LIST OF TABLES

List of Tables Page

1 Priority Constraints and Proposed Solution and Approach 6

2 Top 5 Cacao Bean Producing Country 17

3 Cacao Production Volume: 2008-2012 18

4 Yield per Hectare (in Metric Ton) Davao Region 19

5 Number of Bearing Trees: 2008-2012 Davao Region 19

6 Area Planted:2008-2012 Davao Region 20

7 Expansion Areas 21

8 Breakdown of Nurseries by Province Davao Region CY 2012 24

9 Distribution of Farmers by Province 25

10 Description of Typical Farm by Province 25

11 Farmers Assessment of the Effect of Current 27

12 Proposed Solution and Intervention Approach on Priority problem Areas 28

13 Distribution of Postharvest Facilities (PHF) by Province Davao Region 29

14 Breakdown of Cocoa Processors Davao Region 30

15 Top 3 Chocolate Producers in the Philippines 35

16 Relative Financial Position Of the VC Players 35

17 Summary of Sustainable Purchasing Practices 39

18 Cost and Returns 40

19 Performance Comparison: Grafted and Ungrafted Planting Materials 42

20 Relative Financial Position of VC Players Mars/Kennemer Led Value Chain 43

21 Philippine Export of Cocoa and Cocoa Preparation (in US$) 45

22 World Cocoa Bean Production: Grindlings and Stock 46

23 Grindligs of Cocoa Beans (in Thousand MT) 46

24 2009 Imports: Cocoa Products (in US$) 47

25 Competitiveness characteristics of the Cocoa Bean in the Global Market 48

26 Philippine Imports of Cocoa and Cocoa Production (in US$) 49

27 Provider of Financial Services 52

28 Services Provided by the Government Agencies and NGO’s 55

29 Constrain and Opportunities 61

30 Summary of Priority Concern 67

31 Priority Constrain/Opportunities and Intervention 74

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ACRONYMS

DA Department of Agriculture

PRDP Philippine Rural Development Project

MRDP Mindanao Rural Development Project DA Department of Agriculture

PRDP Philippine Rural Development Project

PDP Philippine Development Plan

NCCAP National Climate Change Action Plan

KII Key Informant Interview

FGD Focus Group Discussion

MLGU Municipal Local Government Unit

FAO Food and Agriculture Organization

GAP Good Agriculture Practices

BAS Bureau of Agriculture Statistics

CDA Cooperative Development Authority

DAR Department of Agrarian Reform

ICCO International Cocoa Organization

FEDCO Federation of Cooperatives in Mindanao

CBAED Cacao-Banana Agri-Enterprise Development

ACDI/VOCA

Agricultural Cooperative Development International/Volunteers in Overseas Cooperative Assistance

CSI Chokolate de San Isidro

BPI Bureau of Plant Industry

BAFPS Bureau of Agriculture and Fisheries Products Standards

PhilMec Philippine Center Post-Harvest and Mechanization

NAFCI National Agriculture and Fishery Council

ATI Agricultural Training Institute

CIDAMI Cacao Industry Development Association of Mindanao

AMCFP Agro-Industry Modernization Credit Finance Program

MRL Maximum Residue Level

RCEP Regional Comprehensive Economic Partnership

ASEAN Association of Southeast Asian Nation

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EXECUTIVE SUMMARY

The Philippine Rural Development Program (PRDP), a flagship program of the Department of Agriculture (DA), is designed to establish the government platform for a modern, climate-smart and market-oriented agri-fishery sector. The design of PRDP and its implementation aspects draw heavily on the experiences of the Mindanao Rural Development Projects (MRDP 1 and2), a program that has been successfully implemented over the past decade. The program adopts a value chain development approach as a platform for promoting inclusive, climate resilient, and sustainable growth in key agricultural subsectors and value chains. Entry point for the implementation of value chain interventions is at the provincial level with an aim to gradually scale these up to other viable areas within the region. In Region XI, Davao del Norte has been identified as the priority and pilot area. . The cocoa bean value chain is one of the selected priority products on which the PRDP will concentrate during Year 1 of PRDP implementation. This report provides an overview and analysis of the cocoa bean value chain, linking the global context to the national, regional, and provincial contexts, with the aim of identifying main leverage points and key strategies to improve Davao del Norte’s competitiveness and promote development in a pro-poor and sustainable manner. It will provide the basis for the formulation of the Provincial Commodity Investment Plan and will lay the foundation for PRDP’s cooperation with the private sector and other government agencies active in the cocoa industry. 'The food of the gods', as cacao was called 500 years ago by the Spaniards who saw the plant the first time in South America, remains a precious commodity in the world. As news of chocolate’s health benefits has spread and gourmet interest has increased, demand for cacao has, likewise, expanded. Cocoa producing countries are unable to fulfil the growing demand for cocoa products worldwide, especially chocolate (Cocoa Barometer 2010). The Philippines itself is a net importer of cocoa products and trade deficit is increasing at about 15% per annum. By 2020, the Philippines chocolate industry’s projected demand is expected to reach an estimated 100,000 metric tons of dried cocoa beans which would translate to 50-70 million trees and 120-150 thousand hectares of land. In the world market, cocoa bean supply deficit in 2012/13 was about 160,000 metric tons. This trend is of particular interest to Davao del Norte, which is responsible for approximately 7% of the country’s cacao production. The cocoa and chocolate supply chain is dominated by the three grinders (ADM, Cargill, and Barry Callebaut) and five chocolate and confectionery companies (Mars Incorporated, Nestlé, Hershey, Kraft Foods/Mondelez, and Ferrero). Barry Callebaut and Mars Incorporated are already sourcing in the Davao Region via cocoa bean integrators or consolidators. Mars Incorporated and one of its major integrators, Kennemer Foods, are active players in Davao del Norte. The entry of these large volume buyers provides the platform for a market-driven upgrading of the cocoa subsector in Davao del Norte. The global cocoa chain is increasingly moving towards procurement of beans certified to be sustainable. Companies have set goals to mainstream certified cocoa into their product base by 2020. Mars Incorporated, for example, has committed that by 2020 the company would only be using certified beans. This provides both a threat and opportunity for Davao del Norte. The Davao del Norte cocoa “industry leaders” recognize that adoption of sustainable production practices with the ultimate objective of achieving certification for the whole chain can play a positive role in: a) facilitating market development; b) providing the catalyst and incentives for the integration of the cocoa value chain; c) facilitating the chainwide upgrading of the cocoa industry; d) linking the

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smallholders in a positive way with the process of economic globalization; and e) building a climate change resilient cocoa industry. On one hand, they are also cognizant that failure to achieve the certification status can translate to market inclusion and non-adooption of sustainable production practices can lead to further decline in productivity and higher vulnerability to climate change. Davao del Norte and the region as a whole is still a small player in the cocoa international trade but its potential to become a key supplier is increasingly being recognized by the leading players in the global cocoa market. Owing to the presence of agents of foreign cocoa companies in the province, the orientation and focus of the Davao del Norte cocoa bean industry is now geared more towards the export market rather than the domestic market. About 75% of Davao de Norte’s production goes to the export market. The biggest competitive advantage of Davao del Norte is the availability of land resources and the favourable agronomic conditions for cacao farming. Davao del Norte’s and the region’s biggest competitive gap is the lack of supply of cocoa beans and the inconsistency of quality. Industry stakeholders in the region aim to reach 100,000 MT cocoa bean production by 2020. Parallel to the sustainable scaling up of its cacao plantations/farms, a focus on quality and differentiation anchored on sustainability claims can strengthen Davao’s position in the cocoa market in the short term. Market assessment indicates that only about 25% to 30% of cocoa beans produced in the Asia Pacific Region are fermented beans. Indonesia, the largest producer in Asia, produces mainly unfermented bulk cocoa beans. There is a supply deficit of well fermented beans in the Asia Pacific region. Barry Callebaut now operates 5 cocoa bean processing factories, 4 chocolate factories, 4 R&D centers and three Chocolate Academy™ centers across the Asia-Pacific region. This provides vast opportunities for Davao del Norte and the region as whole. Guided by the above market trends and the analysis of the current status of the cocoa industry, the main areas of convergence of interest among the cocoa value chain players and focal objectives to be achieved to foster competitiveness and sustainability are on the following: a) Increase of supply through improved productivity and expansion of areas planted b) Improvement and consistency of quality of cocoa beans c) Less price volatility and increase of share of farmers to value accrued in the chain d) Lower costs of transactions through economies of scale, volume, and increased efficiency e) Traceability/ Sustainable Production Practices/Eco-friendly and socially responsible business

practices and processes In line with the above focal points of action, Table 1 presents the priority constraints that need to be addressed and the proposed intervention strategies and approaches defined during the Stakeholders Workshop. The intervention approach is characterized primarily by a combination of technical assistance/capacity building support and smart subsidies or investments to: a) Develop the capacity of providers to offer improved products, facilities, and services to the

cocoa industry in a sustainable manner b) Promote awareness and uptake of these products, facilities, and services among the VC players c) Contribute to an improved enabling environment

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d) Build the capacity of market players to form win-win relationships to foster improved

competitiveness

Table 1. Priority Constraints and Proposed Intervention Strategy and Approach

Constraint Intervention Strategy and Approach

IMPROVED ACCESS TO AND AVAILABILITY OF AFFORDABLE AND GOOD QUALITY PLANTING MATERIALS

Lack of providers of good quality planting materials of high yielding varieties with high fat content s is limited.

Development of nursery operators in key cacao producing municipalities

− Cost contribution in setting-up of nurseries in strategic locations

− Technical assistance in the development of business model, business plan, operation manual, and its implementation

− Documentation and dissemination of emerging good practices

including viability of business model to attract private and public investors

− Fostering of linkages with financial services providers

− Support R and D on appropriate planting materials and inputs

Low acquisition and use of good planting materials among farmers/ Low willingness to pay for planting materials

Improvement of appreciation and understanding of smallholders of the cost benefit of using good quality planting materials

− Implementation of voucher program or similar tool to stimulate farmers to acquire and use planting materials

− Support to operators in the development of payment schemes

aligned to cash flow of smallholders

− Support to MFIs/banks in development of financial products for purchase of planting materials among farmers

− Set up of demo farm to showcase benefits and as venue for

learning

− Develop capacity of nursery operators to provide technical advice to farmer clients

− Dissemination of success stories

IMPROVED ACCESS TO AND AVAILABILITY OF FERTILIZER AND INPUTS APPROPRIATE FOR CACAO SMALLHOLDERS

High cost of chemical inputs both to farmers and environment Limited availability and commercial

Alignment of supply of fertilizer and inputs to the needs and purchasing capacity of farmers and to sustainable production practices

− Technical and financial assistance to existing and potential organic fertilizer producers to:

Develop inputs appropriate for cacao smallholders

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distribution of organic fertilizer and inputs specific for cacao

Scale up and align operations to sustainable production practices

− Documentation and dissemination of emerging good practices

− Foster linkages with financial services providers

Lack of understanding among farmers on cost benefits of proper and efficient use of fertilizer Low level of purchasing power of smallholders/ Lack of financial resources to purchase inputs

Promote benefits and the efficient use of organic fertilizer/inputs

− Implementation of voucher program or similar tool to stimulate purchase and use of organic fertilizer/inputs and reduce risk averseness among farmers

− Support set-up of demo farms to showcase benefits and venue for

learning

− Support the development of distribution network/ retail network to ensure proximity of supply to farmers

− Develop capacity of organic inputs providers and retailers to

deliver technical advice to farmer clients

− Support providers in the development of payment scheme aligned to cash flow of farmers

− Support to MFIs/banks in the development of appropriate

financial product (e.g., value chain financing) for input procurement

IMPROVED FLOW AND QUALITY OF EXTENSION SERVICES FOR CACAO FARMING AND ADOPTION OF GOOD PRACTICES

Limited outreach of existing extension services and providers

Strengthening of capacity of existing providers and development of alternative/embedded and complementary models to transfer the needed skills, know-how, and information to enable farmers to adopt sustainable production practices and improve productivity

− Support scaling up of Farmer Field Schools and Cacao doctors/masters

− Technical assistance to FFS in the development of commercially

viable services other than training for financial sustainability and avoid volunteerism fatigue

− Capacity building support to traders/intermediaries especially

coops and progressive farmer leaders to further develop capacity to deliver training and extension services to farmers

− Documentation and dissemination of emerging good practices via

media and social networks

Low uptake and Alignment of content and delivery of extension services to learning

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adoption of good agricultural practices

aptitude of farmers − Support the participatory development (with farmers,

multinational/ agents, traders) of modules on sustainable cacao farming practices to ensure buy-in and ownership of stakeholders and conformance to market requirements

− Technical assistance in the development of training approaches

that allow quick wins to motivate and sustain adoption

− Conduct of competitions to motivate adoption, stimulate innovation, and facilitate identification of emerging good practices as basis for regular updating of modules

Lack of skilled laborers/caretakers

Establishment of a pool of skilled caretakers and laborers which may be a stand-alone enterprise (manpower services) or among the services to be provided by a FFS - Support to development of in-house capacity (FFS, cooperatives, etc. )

to train laborers and caretakers - Technical assistance support to enterprise units in the development of

business models and its implementation - Support to promotion of services especially among absentee landlords

INCREASED CAPACITY AND IMPROVED ABILITY TO PRODUCE COCOA BEANS OF CONSISTENT QUALITY AND AS PER MARKET STANDARDS

Lack of access to facilities that would enable farmers to consistently produce high quality fermented dry beans.

Establishment of GMP compliant common service facilities for fermentation, drying, packing, and storage

− Cost contribution in set-up of facilities

− Technical assistance in the development of business model, business plan, operations manual, and its implementation

Limited know-how and skills on Good Manufacturing Practices (GMP) and Sustainable Production Practices among farmers

Build-up of local capacity to deliver training and mentoring services on GMP and Sustainable Production Practices

− Technical assistance in customization of existing GMP modules on fermentation, drying, and storage in collaboration with key VC Players

− Development of a core group of local experts to provide hands-on

training and mentoring to users of postharvest facilities as embedded service of CSF

IMPROVED COOPERATION AND ORGANIZATIONAL CAPACITY OF FARMERS

Weak capacity to organize themselves into structured groups

Development of capacity of farmers to incrementally associate, collaborate, and coordinate to achieve economies of scale in their transactions and to become attractive partners to large buyers

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Lack of trust between and among farmers Lack of entrepreneurial skills Lack of experiences in formal organizational setting

− Organizational development support to farmers complemented with behaviour change interventions and entrepreneurial skills development

− Support to groups to start low risk collective activities that

provide quick wins and tangible benefits (self and group)

IMPROVED COMMUNICATION, COORDINATION, AND COLLABORATION BETWEEN AND AMONG VC PLAYERS

Lack of market-based /price incentives for farmers to produce quality beans

Harmonization of interpretation of standards and corresponding price differentials including development of enforcement mechanism

− Technical assistance in the harmonization of interpretation of standards and the development of pricing structure based on standards and enforcement mechanism

− Strengthen capacity of existing formal and informal information

systems to disseminate accurate price information

Volatility of price and (mis)trust issues Pole vaulting/ Adversarial attitudes Weak supply chain coordination

Promotion of ethical and responsible trading relationship and development of traceability system

− Technical assistance in the development of business models on ethical and responsible trading relationship and traceability system and its piloting.

− Behaviour change interventions and capacity building in chain governance

− Support the development of social infrastructure (festivals,

dialogues, Kapihan sa barangay, etc.) that would give players the opportunities to interact and discuss issues in a non-adversarial manner

IMPROVED PHYSICAL LINKAGES TO INPUT AND SUPPORT MARKETS

Poor farm to market roads

Upgrading of farm to market roads

− Cost contribution to road construction

Limited and inefficient transport services

Development of providers of transport services that are cost and eco-efficient and compliant to Good Manufacturing Services

− Technical and financial assistance in the development and piloting of a cost and eco-efficient and GMP compliant transport services for cacao and similar products

− Promotion of cargo pooling to ensure viability and promote cost

effectiveness

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Promotion of business model to public and private sector investors to facilitate scaling up

INCREASED AREAS PLANTED TO CACAO

Lack of interest and awareness among banana and farmers engaged in cacao farming

Promotion of intercropping of cacao (coconut and banana farms) in identified expansion areas parallel to securing markets for additional volume - Dissemination of information on cacao farming opportunities including

success stories in a variety of ways—print materials, in-person events,

videos, and main-stream media—to ensure that as many farmers as

possible can hear and understand the messages

- Organization of tours to existing banana-cocoa/ coconut – cocoa farms

- Assistance to interested farmers/farmer groups to access credit for

cacao farm establishment (e.g., value chain financing)

- Implementation of a targeted input voucher program or similar

mechanism with embedded extension services

Promotion of forward contract agreements to ensure markets/prices and facilitate access to financial resources. Work with MFIs/banks in development of value chain financing.

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Section 1: INTRODUCTION

A. BACKGROUND INFORMATION AND RATIONALE1

The agricultural sector strategy (Agri-Pinoy) embodied in the Philippine Development Plan (PDP) for 2011-2016 advances the principles of inclusive growth, food staple sufficiency, natural resource management and area-based development. Agri-Pinoy also includes the following new strategies: (i) institutionalizing regionally-based, spatial planning (ii) developing a systems approach for both planning and resource allocation; (iii) providing the critical infrastructure needed by priority value chains; and (iv) building a more resilient production base to accommodate fluctuations in global markets and effects of climate change. Complementing the Agri-Pinoy strategy is the National Climate Change Action Plan (NCCAP) which highlights the priority to be given to the rural sector in pursuing climate adaptation measures. The Philippine Rural Development Program (PRDP), a flagship program of the Department of Agriculture (DA), is aligned with the Agri-Pinoy strategy. It is a six-year program (2013-2019) designed to establish the government platform for a modern, climate-smart and market-oriented agri-fishery sector. Externally, it will focus on expanding market access and improving competitiveness. Internally, it will introduce reforms in operating the DA bureaucracy. Specifically, it aims to achieve the following development objectives:

At least, 5% increase in annual real household incomes of farmer beneficiaries; 30% increase in income for targeted beneficiaries of enterprise development

7% increase in value of annual marketed output

20% increase in number of farmers & fishers with improved access to DA services To facilitate the achievement of above objectives, the program has four main components, namely:

I-PLAN: Investment for AFMP Planning at the Local and National levels

I-BUILD: Intensified Building-Up of Infrastructure and Logistics for Development

I-REAP: Investments for Rural Enterprises and Agricultural and Fisheries Productivity

I-SUPPORT: Implementation Support to PRDP

The design of PRDP and its implementation aspects draw heavily on the experiences of the Mindanao Rural Development Projects (MRDP 1 and 2), a program that has been successfully implemented over the past decade. The program adopts a value chain development approach as a platform for promoting inclusive, climate resilient, and sustainable growth in key agricultural subsectors and value chains. Entry point for the implementation of value chain interventions is at the provincial level with an aim to gradually scale these up to other viable areas within the region. In Region XI, Davao del Norte has been identified as the priority and pilot area. The cocoa bean value chain is one of the selected priority products on which the PRDP will concentrate during Year 1 of PRDP implementation. 'The food of the gods', as cacao was called 500 years ago by the Spaniards who saw the plant the first time in South America, remains a precious commodity in the world. As news of chocolate’s

1 Overview of PRDP was taken from the Program Information Document – World Bank website.

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health benefits has spread and gourmet interest has increased, demand for cacao has, likewise, expanded. Cocoa producing countries are unable to fulfil the growing demand for cocoa products worldwide, especially chocolate (Cocoa Barometer 2010). The Philippines itself is a net importer of cocoa products and trade deficit is increasing at about 15% per annum. By 2020, the Philippines chocolate industry’s projected demand is expected to reach an estimated 100,000 metric tons of dried cocoa beans which would translate to 50-70 million trees and 120-150 thousand hectares of land. In the world market, cocoa bean supply deficit in 2012/13 was about 160,000 metric tons. This trend is of particular interest to Davao del Norte, which is responsible for approximately 7% of the country’s cacao production. Cacao plays a crucial role in Davao del Norte’s economy, contributing to foreign exchange earnings as well as the livelihood of approximately 3,904 cacao farmers, most of whom are small and resource poor. Returns from cocoa are higher than copra, coffee or other cash crops. Cocoa trees are capable of producing acceptable yields for several decades. Depending on the variety, it can take between 3 and 5 years for yields to peak, with the newer hybrids reaching their peak more quickly. (Please fill up based on Davao del Norte typical situation). The pace of decline thereafter is determined mainly by cultivation practices. Processing of cacao in Davao del Norte augments income of smallholders and the households within the proximity of cacao farms/plantation. Davao del Norte offers appropriate environmental conditions and a high potential for extended cocoa cultivation. The potential expansion area for cocoa in Davao del Norte is estimated at 3,723 hectares as it is highly suited to intercropping and mixed farming systems. In many areas, cacao is being intercropped with coconut or banana.

B. OBJECTIVES OF THE VCA This report provides an overview and analysis of the cocoa bean value chain, linking the global context to the national, regional, and provincial contexts, with the aim of identifying main leverage points and key strategies to improve Davao del Norte’s competitiveness and promote development in a pro-poor and sustainable manner. It will provide the basis for the formulation of the Provincial Commodity Investment Plan and will lay the foundation for PRDP’s cooperation with the private sector and other government agencies active in the cocoa industry. Specifically, the value chain analysis aims to:

a) Provide an in-depth understanding of the range of factors and relationships that affect the performance of the cocoa industry in Davao del Norte and the region in general, including end markets, enabling environment and coordination/cooperation among firms.

b) Identify in a participatory process the systemic chain level issues that hinder or promote the

gainful participation of rural households, sustainability of the chain, and its competitiveness in general.

c) Under a participatory process, identify and prioritize interventions needed to overcome

bottlenecks throughout the chain that would foster value chain competitiveness and climate change resiliency.

d) Identify and explore how to catalyze private and public sector stakeholders in the cocoa industry

to collaborate for improved industry performance

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C. METHODOLOGY AND APPROACH

An initial desk study was conducted to collect and summarize information from currently available reports and studies. It provided guidance to issues that needed to be the focus of field research. The field work component of the study was conducted using qualitative research techniques particularly key informant interviews (KII) and focus group discussions (FGDs). Key informants and participants to the FGDs consisted of farmers, traders, processors, exporters, and representatives from relevant government agencies. Key informant

interviews were used for collecting data on individuals’ perspectives, experiences, and quantitative data. FGDs were effective in generating broad overviews of issues of concerns to the groups or subgroups represented and in the triangulation/vetting of information obtained from the KII. Constraints and interventions were identified and further elaborated based on iterative and inductive analysis of responses during the KII and FGD/Stakeholders Workshop primarily from the following perspectives:

Context of key informants and FGD participants

Third party observations (e.g., government agencies, providers, VC facilitators with experience in cocoa VC development projects, etc.) were important for suggesting important issues to explore and for substantiating the results of the company interviews

Experiences of other cocoa producing countries such as Indonesia, Nigeria, Ghana, Ecuador, and Cote d’ Ivorie.

Past assessment studies of the Philippine cocoa industry

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Section 2: OVERVIEW OF THE CACAO INDUSTRY

A. PRODUCT DESCRIPTION Cacao ((Theobroma cacao spp.) is a rainforest, understudy tree that requires shade and wind protection. It is being grown in all humid tropical lowland regions around the equator, most notably Central and South America, West Africa and Sri Lanka, Indonesia and the Philippines. It thrives best in areas where rainfall is between 1,150 to 2,500 mm per year and temperatures between 210C and 320C. Upon reaching maturity, the cacao pods sprout from its trunk and branches. Embedded inside the pods are layers of 20-60 cacao beans. The world cocoa market distinguishes between two broad categories of cocoa beans: "fine or flavour" cocoa beans, and "bulk" or "ordinary" cocoa beans. Fine or flavour cocoa beans are produced from Criollo or Trinitario cocoa-tree varieties, while bulk cocoa beans come from Forastero trees. There are, however, known exceptions to this generalisation. Nacional trees in Ecuador, considered to be Forastero-type trees, produce fine or flavour cocoa. On the other hand, Cameroon cocoa beans, produced by Trinitario-type trees and whose cocoa powder has a distinct and sought-after red colour, are classified as bulk cocoa beans. The share of fine or flavour cocoa in the total world production of cocoa beans is just under 5% per annum. Virtually all major activity over the past five decades has involved bulk cocoa (ICCO website). The various products that can be extracted and/or processed from cacao beans are used mainly in the food, cosmetics, and pharmaceutical sectors. Key products from cacao beans are the following: a) Cocoa butter - Cocoa butter is used in the manufacture of chocolate. It is also used in cosmetic

products such as moisturising creams, lotions, petroleum jelly, and soaps. Cocoa butter is also used as a suppository and ointment base as well as an emollient. The pharmaceutical and cosmetics usually obtain their requirements from sources using solvent extraction or methods other than pressing cocoa butter from cocoa shell. Some use cocoa beans that are not suitable as a food item.

a) Cocoa powder - Cocoa powder can be used as an ingredient in almost any foodstuff. For example, it is used in chocolate flavoured drinks, chocolate flavoured desserts such as ice cream and mousse, chocolate spreads and sauces, and cakes and biscuits.

b) Cocoa liquor - Cocoa liquor is used, with other ingredients, to produce chocolate. Chocolate is

used as a product on its own or combined with other ingredients to form confectionery products After processing, one third of production generally remains as cocoa liquor and the rest is pressed to obtain cocoa butter and cocoa powder. The majority of cocoa butter is used in chocolate production along with the cocoa liquor, with a small quantity used in cosmetics. In total, around two-third of bean production is used to make chocolates.

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Figure 1: Kermentarian Perdagangan Website

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The industry differentiates between cocoa processing and chocolate manufacturing. Cocoa processing normally covers the activity of converting the beans into nib, liquor, butter, cake and powder. Chocolate manufacturing covers the blending and refining of cocoa liquor, cocoa butter and various optional ingredients, such as milk and sugar (ITC, 2001). Overall, it is possible to identify four major product categories based on different stages of processing, namely:

Cocoa beans (raw, or minimally processed);

Semi-finished cocoa products (cocoa paste/liquor, cocoa butter, cocoa powder);

Couverture, or industrial chocolate;

Finished chocolate products

Cocoa products traded by the Philippines in the international market include the following:

Cocoa beans, whole/broken, raw/roast

Cocoa Powder not containing added sugar / other sweetening matter

Cocoa Paste, not defatted (licor)

Cocoa Butter, fat/oil

Chocolate Confectionery

Chocolate or Cocoa Powder, chocolate blocks

Cocoa Paste, wholly / partly defatted (Cocoa Cake)

Sweetened Cocoa Paste

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Recent studies have shown that a number of other products could be derived from the Cacao tree without infringing on seed yields. (Antonio Figueira, Jules Janick, and James N. BeMiller, 1993-cacaoweb.net). The husks of cocoa pods and the pulp, or sweatings, surrounding the beans and the cocoa bean shells can also be used. Some examples of these uses are: a) Animal feed from cocoa husk - As pelletised dry 100% cocoa pod husk, it can be used as an

animal feed. The animal feed is produced by first slicing the fresh cocoa husks into small flakes and then partially drying the flakes, followed by mincing and pelleting and drying of the pellets.

b) Production of soft drinks and alcohol - In the preparation of soft drinks, fresh cocoa pulp juice

(sweatings) is collected, sterilised and bottled. For the production of alcoholic drinks, such as brandy, the fresh juice is boiled, cooled and fermented with yeast. After 4 days of fermentation the alcohol is distilled.

c) Potash from cocoa pod husk - Cocoa pod husk ash is used mainly for soft soap manufacture. It

may also be used as fertiliser for cocoa, vegetables, and food crops. To prepare the ash, fresh husks are spread out in the open to dry for one to two weeks. The dried husks are then incinerated in an ashing kiln.

d) Jam and marmalade - Pectin for jam and marmalade is extracted from the sweatings by

precipitation with alcohol, followed by distillation and recycling of the alcohol in further extractions.

e) Mulch - Cocoa bean shells can be used an organic mulch and soil conditioner for the garden.

B. PRODUCTION TRENDS

1. Global Production

World cocoa/cacao bean production in 2010/11 reached about 4.6 million metric tons. Global output was dominated by Cote d’Ivoire which accounted for 33.8%. Indonesia and Ghana comprised 15.4% and 15.2% of global production, respectively. Indonesia has still vast land for possible expansion and, thus, can still potentially increase production. However, persistent problems with pest and diseases have led to increasing number of farmers shifting to other crops. Sustained investment in Ghana has led to increased production. Among other leading producers of cocoa, Nigeria and Cameroon experienced slight increases in production. Ecuador also increased its production with its high yielding CCN 51 variety.

Table 2. Top 5 Cacao Bean Producing Countries

Country Production Volume (in MT) 2010/11

% to World Production

% Change 2011/2010

Cote d Ivoire 1,559,441 33.8% 19.8%

Indonesia 712,200 15.4% 15.7%

Ghana 700,020 15.2% 10.7%

Nigeria 400,000 8.7% 0.2%

Cameroon 272,000 5.9% 3.0%

Source: FAOSTATS 2013

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According to ICCO’s November 2013 monthly review, cacao bean supply deficit in 2012/13 was at around 160,000 metric tons. The December 2013 monthly review indicated that in Côte d’Ivoire, 932,000 tonnes of cocoa beans are estimated to have reached ports as at 5 January 2014, a level almost 30% above the preceding season. As at 12 December 2013, cocoa purchases declared to the Ghana Cocoa Board were 486,094 tonnes as compared to 347,401 tonnes declared in the corresponding period. Despite the robust production from the top cocoa producing countries, ICCO projects that supply deficit for the 2013/2014 crop year is imminent due to increased demand from developed countries and the rising consumption in emerging markets particularly Asia. Percentage share of Philippines to global cacao production is less than 1%. Major cocoa bean buyers though are optimistic that Philippines can become a significant supplier based on its natural resource base which is favourable for cacao growing.

2. Domestic Production In 2012, Philippine cacao bean production was at 4,831 MT with Davao Region accounting for 78%. The 5 provinces in Davao Region are the top cacao producing provinces in the country. In 2012, Davao del Norte ranks fourth in terms of production volume.

Table 3. Cacao Production Volume: 2008 – 2012 Davao Region In Metric Tons

2008 2009 2010 2011 2012 % Change 2012/08

Davao del Sur 1669.25 1682.17 1,664.72 1,680.79 1,709.97 2.44%

Davao City 832.22 850.05 836.39 883.52 1,014.79 21.94%

Davao Oriental 481.49 486.52 491.22 506.16 485.25 0.78%

Davao del Norte 319.07 313.87 332.83 342.03 346.57 8.62%

Compostela Valley 167.64 177.28 181.17 204.61 206.31 23.07%

Davao Region 3469.67 3509.89 3506.33 3617.11 3762.89 8.45%

Philippines 5148.88 5133.76 5019.43 4856.48 4831.14 -6.17%

% Share of Davao del Norte to R11 Production

9.20% 8.94% 9.49% 9.46% 9.21%

% Share of Davao del Norte to RP Production

6.20% 6.11% 6.63% 7.04% 7.17%

Annual Growth Rate: Davao del Norte

-1.63% 6.04% 2.76% 1.33%

Source: BAS Statistics

Based on data from the Bureau of Agricultural Statistics (BAS), Davao del Norte production volume in 2012 reached about 346.57 metric tons, which comprised 9.21% of the total cacao production in Davao Region. The province accounted for 7.17% of the national cacao production. Between 2008 and 2012, the region’s volume of production increased by 8.45%. From 319.07 MT in 2008, output from Davao del Norte increased to 346.57 MT in 2012 or an 8.62% increase. Davao City registered the highest percentage increase at 21.33% during the five year period. The cocoa program of ACDIVOCA, which was launched in 2006, has been in some ways instrumental in revitalizing the cacao industry in the region.

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Table 7. Yield per Hectare (in Metric Tons) Davao Region

2008 2009 2010 2011 2012 % Change 2012/08

Davao del Sur 1.21 1.21 1.20 1.21 1.26 5%

Davao City 0.65 0.66 0.65 0.66 0.76 17%

Davao Oriental 0.71 0.71 0.72 0.60 0.58 -18%

Davao del Norte 0.35 0.34 0.36 0.37 0.37 7%

Compostela Valley 0.25 0.26 0.27 0.28 0.31 22%

Davao Region 0.70 0.71 0.71 0.69 0.73 4%

Philippines 0.53 0.54 0.53 0.51 0.52 -2%

Source: Calculated from BAS data

Among the provinces in Region 11, Davao del Norte has the 2nd lowest average yield per hectare in 2012. The province average yield of 370 kilograms per hectare is lower than the national average. Field tests conducted by various research institutes in cacao producing countries suggest that it is possible for farm yields to be over 1.5 metric tons/hectare with the combination of improved pest control management, use of planting materials of high yielding varieties, and appropriate fertilizer application.

Table 5. Number of Bearing Trees: 2008 – 2012 Davao Region

2008 2009 2010 2011 2012 % Change 2012/08

Davao del Sur 1,298,311 1,298,311 1,298,311 1,298,311 1,270,137 -2.17%

Davao City 523,384 523,384 522,928 540,792 545,258 4.18%

Davao Oriental 338,425 338,425 338,425 338,425 338,425 0.00%

Davao del Norte 201,842 201,868 202,456 202,976 203,864 1.00%

Compostela Valley 98,228 98,228 98,228 98,961 98,961 0.75%

Davao Region 2,460,190 2,460,216 2,460,348 2,479,465 2,456,645 -0.14%

Philippines 3,942,957 3,926,033 3,908,456 3,863,221 3,826,621


8.20% 8.21% 8.23% 8.19% 8.30% -2.95%


5.12% 5.14% 5.18% 5.25% 5.33%


0.01% 0.29% 0.26% 0.44%

Source: BAS Statistics

In 2012, number of bearing trees in Davao del Norte was at 203,864. Between the period 2008 and 2012, percentage increase in number of bearing trees was at 1%. Based on anecdotal stories, farmers were more open to plant cacao when it was promoted as an intercrop in their banana farms. Aside from the fact that it takes three to 5 years before a cacao tree grows to its full maturity, many farmers in Davao del Norte became wary when price significantly went down in 2002. A number of banana farmers also diversified into cacao growing when the banana market weakened in 2010. Demonstration farms on banana – cacao intercropping system, however, are necessary to convince farmers of its viability.

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Table 6. Area Planted: 2008 – 2012 Davao Region

2008 2009 2010 2011 2012 % Change 2012/08

Davao del Sur 1,385 1,385 1,385 1,385 1,355 -2.17%

Davao City 1,288 1,288 1,288 1,332 1,343 4.27%

Davao Oriental 682 682 682 842 842 23.46%

Davao del Norte 920 920 928 932 936 1.74%

Compostela Valley 670 670 675 735 675 0.75%

Davao Region 4,945 4,945 4,958 5,226 5,151 4.17%

Philippines 9,751 9,538 9,462 9,582 9,338 -4.24%


18.60% 18.60% 18.72% 17.83% 18.17%


9.44% 9.65% 9.81% 9.73% 10.02%


0.00% 0.87% 0.43% 0.43%

Data from BAS indicates that increase in area planted to cacao in Davao del Norte between the period 2008 – 2012 was less than 1%. In the region, Davao Oriental registered the highest percentage increase in area planted to cacao. The cacao industry in Davao del Norte is still in the process of making a comeback as described by farmers during the National Convergence initiative (NCI) – DA Region XI - GIZ Value Chain Stakeholders Workshop. Many of the farmers are on a “wait and see” attitude. The industry started to stagnate sometime in 1998. This was attributed to the implementation of the Comprehensive Agrarian Reform program. Likewise, the outbreak of cocoa pod borer pest caused some plantations to be devastated and, subsequently, abandoned. This was further aggravated by the slump of cocoa prices in 2000 due to oversupply of beans. The Davao del Norte cacao industry is concentrated in 5 municipalities covering 21 barangays.

About 3,273 hectares in Davao del Norte have been identified as potential expansion areas. 46% of the targeted expansion areas will be in the municipality of San Isidro.

Table 7. Expansion Areas Davao del Norte

Municipality Number of Hectares

San Isidro 1,500

Asuncion 500

Kapalong 500

New Corella 300

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Table 7. Expansion Areas Davao del Norte

Municipality Number of Hectares

Santo Tomas 200

Panabo City 100

IGACOS 66

Talaingod 50

Tagum 30

Carmen 27

Source: PLGU

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Section 3: NATURE AND STRUCTURE OF THE INDUSTRY

A. VALUE CHAIN MAPPING It takes a whole year’s crop from one tree to make half a kilo of cocoa and as pods do not ripen at the same time, the trees need to be monitored continuously. Cocoa is also a very delicate crop, easily affected by changes in weather and susceptible to diseases and pests. After ripe pods are harvested, they need to be cut open with machetes and the beans are taken out. The cocoa beans then need to be fermented, dried, cleaned and packed. Farmers generally sell wet beans. In export oriented value chain, integrators/consolidators do the drying and fermentation to ensure consistency. After beans reach grinding companies in Malaysia, Indonesia, Japan, and the Global North, cocoa still needs to be processed. Beans are crushed and the shells removed, roasted, and finally ground. The result – cocoa liquor – is used to manufacture chocolate, or is further processed for cocoa butter and cocoa powder.

Oftentimes, cacao beans pass as many as three different levels of traders to get from farmers to processors or manufacturers. There is no clear delineation between regional or local or provincial traders as all of them can buy beans that farmers bring to them. There is also a wide range of manufacturers and processors of cacao products in the region and in the Philippines in general --- from multinationals who are located in Manila to household tableya makers.

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The five key cocoa market channels are the following: a) Export of cocoa beans to multinational manufacturers (e.g., Mars and Barry Callebaut) and

premium chocolate manufacturers (single source, organic chocolate via Filipino exporters and integrators like Kennemer Food.

b) Small volume sales of unfermented beans to home based tableya makers who sell within their

locality or for their own consumption. c) Fermented and unfermented beans to commercial tableya makers in Region X, Cebu, and

Manila who sell to institutional buyers, specialty stores, supermarkets, and other retail outlets. d) Good quality beans from traders and cocoa powder from grinders to artisanal chocolate

manufacturers in Region XI, Cebu, and Manila who sell to specialty stores and high end supermarkets.

e) Sale of cocoa powder from domestic and international grinders to domestic chocolate

manufacturers who sell nationwide. Domestic chocolate manufacturers use mainly imported cocoa powder from Malaysia.

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B. FUNCTIONS AND OPERATORS 1. Input Provision Farmers acquire planting materials via the following ways: a) Purchase of planting materials from nurseries, mainly prevalent among commercial farmers and

recently established cocoa farms b) Seeds from larger fruits in own farm to plant seedlings, which is a common practice among

smallholders c) Free/subsidized planting materials from development programs implemented by NGOs,

national and local government agencies.

Within a period of five years (2008-2012), the number of players engaged in the production of planting materials in the Davao Region has increased from 10 nurseries in 2008 to 110 in 2012. Nursery operators consist of farmers cooperatives/associations, local government units, individual smallholders, commercial farms, and consolidators who have diversified into nursery business. Cacao growers from other regions in Mindanao as well as those from Luzon and Visayas are increasingly sourcing their planting materials from the nurseries in the region.

Table 8. Breakdown of Nurseries by Province Davao Region, CY 2012

Province No. of Nurseries

Davao del Sur 12

Davao City 70

Davao Oriental 6

Davao del Norte 7

Compostela Valley 16

Source: KII/FGD

Of the 111 nurseries in the Region, only 6 are accredited with the Bureau of Plant and Industry. The aggregate production capacity of the 111 nurseries is at 2,788,650 seedlings per year. The 7 nurseries in Davao del Norte have a combined capacity of 100,000 seedlings. The nurseries in Davao del Norte are concentrated mainly in the municipality of Santo Tomas and are operated by cooperatives. The nursery operated by FEDCO in Santo Tomas is among the 6 BPI accredited nurseries. In Kapulong, the two nurseries (capacity of 20,000 seedlings each) are operated by the municipal government and were established with the support of the Department of Agriculture. Chokolate de San Isidro (CSI), a company engaged in cocoa processing and trading with about 30% of shares owned by 400 farmers, has recently initiated the establishment of a nursery. Existing nurseries cater primarily to their members or, in the case of the Kapulong nurseries, to cacao farmers within the municipalities. Of the 5 cacao producing municipalities, only 2 have nurseries. There are still many farmers in Davao del Norte who produce their own seedlings by picking seeds from the relatively “healthy” trees in their farms. In an interview with a farmer from Asuncion whose family has been in cacao farming for more than 40 years, the notion of buying seedlings from a nursery is something a bit strange. According to him, his father established their cacao farm incrementally by producing his own seedlings. To date, their 4 hectare farm (shared by 9 siblings) is full of cacao trees. The farmer does not remember the variety as the trees were already there when he was born but he did notice that yield has been declining and, as such, they may cut down some

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trees and prepare a new batch of seedlings. The family is also not aware that there are now some varieties that can potentially provide higher yield. There are several farmers like him that have limited awareness on the latest developments in planting materials. Aside from cost consideration, farmers generally lack information on planting materials that will help them to make informed decision. In Davao del Norte, there is a need to develop both the demand and supply of good quality planting materials of high yielding varieties parallel to strengthening the business and technical skills of existing and potential operators to ensure sustainability. Many of the existing nursery operators got their initial stocks under the ACDIVOCA CocoPal Program. Regular access to new high yielding varieties suitable to Davao del Norte is important both for business sustainability and for sustaining the competitiveness of the cacao industry. There are also varying interpretations among farmers of what is a good quality planting material. Chemical Fertilizer, fungicide, herbicide, and pesticide are bought from agrivet stores, which are usually located in the town proper. With the high and increasing cost of fertilizer and other agrochemicals, typical farmers minimize their use of agrochemicals. High transport costs have exacerbated the problem. During the FGD last August 2013, some groups have indicated that they use vermicast, mulching, and botanical pesticides (e.g., pepper) which they prepare themselves. The same groups said that they use the cacao pods as substrate for the vermiculture. Shredding of cacao pods, however, can be laborious especially for those who have no access to shredders. According to the groups, their “home/farm made’ inputs are combination of what they have learned from the government provided training and from the practices of elders in their household and community. Recently, there has been an increasing use of plastic bags for pod sleeving. These bags are readily available within the locality. A problem with these bags though is its disposal. The plastic bags are almost always non-biodegradable and improper disposal can cause clogs in drainage and canals. For packaging, recycled sacks are used. These are sourced locally.

2. Farming

Table 9. Distribution of Farmers by Province

Province Number of Farmers

Davao del Sur 863

Davao City 2,125

Davao Oriental 568

Davao del Norte 3.904

Compostela Valley 1,672

Davao Region 9,132

Source: MLGUs

In Davao del Norte, there are two categories of farmers: a. Smallholders: They possess less than 3 hectares of cacao farm. The “old-timers” tend to be

dependent on cacao but there is generally low level of investment.

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b. Commercial Farms: Farms are 3 hectares and above with cacao planted between banana, coconut, and other shade trees.

Of the 3,904 cacao farmers in Davao del Norte, majority are smallholders. The province, which has the highest number of farmers in Davao Region, accounts for 43% of the total farmers in the region. The new entrants to cacao farming in Davao del Norte consist primarily of banana and coconut growers, with majority of them coming from Santo Tomas and San Isidro. Majority of the farmers are using the hybrid varieties distributed by the CocoPal Program. These varieties do not only produce more fruit per pod but also bear fruit earlier (in three instead of five years) in comparison to the older varieties These hybrid varieties though need more care and have the highest output in the presence of optimal weather conditions, in addition to the application of additional farming practices such as fertilizer application, pruning and spraying of pesticides. Many of the farms in Asuncion have been in existence for more than 30 years and are now being managed by sons and daughters. Majority of these farms use the old varieties. Likewise, many of the trees are old and need to be rehabilitated. Generally, farmers use minimal agrochemical inputs and rely more on organic inputs and traditional technology that have been passed on for generations. The lack of entrepreneurship among majority of the farmers is a perceived problem. Their passive attitude is considered a main reason for the missed opportunities and partly for the current situation. Most farmers refer to a lack of money to buy inputs when discussing the problems to increase the productivity of their farms. Cacao is a tree crop that is highly suitable or compatible under different production systems (intercropping or multistory farming, agroforestry, etc). In Davao del Norte, cocoa is grown both in reforested areas and farms. Banana, coconut, and mango form the bulk of temporary shade crop used for cocoa establishment. The banana-cacao intercrop farming system or the Cacao-Banana Agri-Enterprise Development (CBAED) project was introduced by the Federation of Cooperatives in Mindanao (FEDCO) in partnership with ACDI/VOCA sometime in 2011. When it was first introduced, many of the farmers believed that cacao cannot be intercropped with Cavendish banana. A pilot area was set up in Barangay New Katipunan in Santo Tomas – Davao del Norte. As of last quarter 2013, the 1,800 cacao trees intercropped with 1,500 cavendish bananas were on the average producing 12 pods per tree, which is within the ideal productivity index based on the CacaoCheck (ACDI/VOCA Cacao Growing Manual). Reports indicate that about 2,000 farmers are enrolled in the CBAED project covering about 200 hectares in Sto. Tomas and Asuncion in Davao del Norte. FEDCO provided 100 free cacao seedlings per hectare to the farmers. Each of the four Cacao Banana Extension Centers (CBECS) in the municipalities of Santo Tomas and Asuncion has a nursery (about 5,000 seedlings/nursery). A CBEC is comprised of five components: training, demo farms, post harvest processing, organic fertilizer and cacao seedling production and distribution. Farms that have recently been established are generally better managed than those that have been in existence for three to four decades. The old cacao farms and those located in areas where extension services are sporadic or almost none can generally be characterized as follows:

Table 10. Description of Typical Farms in the more remote areas

Tree Stock Old; many of the trees have surpassed the peak of their potential productivity

Low yielding varieties; use of planting materials of poor genetic quality

Beans are very small

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Table 10. Description of Typical Farms in the more remote areas

Farm Management Limited and irrational use of fertilizer Generally, farmers use fertilizer when prices are good Poor farm management; general thinking that even with good maintenance, farm productivity would still be low because they do not have money to buy fertilizer Others use natural fertilizer that they make themselves --- usually technology has been handed down to them by elders

Apply pesticides when level of infestation is already severe Others rely on natural remedies that they have learned from parents or elders

Below is the farmers’ assessment of the effect of their current practices on income and on the environment. Table 10 shows the solutions proposed by the farmers. These cacao farmers are relatively the more progressive ones in the community.

Table 11. Farmers’ Assessment of the Effect of Current Practices on Income and Environment Workshop Output (Unedited)

Common Practices Impact on Environment (IE) Impact on Business (IB)

Use of pesticides (Fungicide/ Herbicide) Decis, Dithane, Malathione, Alliete, Ader Round-up, Power Teeweed, Clear-up

Death of pollinator: tag-nok, bees, bat, butterfly Air contamination Health hazardous

Low production High cost of production

Fertilizer/ synthetic Urea, complete, ammonium sulphate, potash, viking

high phosphate/ nitrate acidic soil water contamination

High cost of production, low profit not sustainable

Use of organic fertilizer Increase soil nutrients Less cost Good quality

Disposal of cacao pods - use as substrate of vermi-

culture - non0utilization of cacao pods

scattered in the area

Recycling - organic fertilizer Spread of fungus infestation in the area; more mosquitoes - dengue

Low production cost Loss of income

Use of plastic in: − bagging and packaging during

harvesting − vacuum/ fermentation

Non-biodegradable -cause of clogging/drainage -acidic soil because of extract, air pollution

Additional cost Maintain quality High income, high quality

Transportation to procure inputs Use of energy Carbon emission

Additional Cost

Source: NCI-GIZ-DA Region XI Greening of Agribusinesses Workshop, August 2013

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Table 12. Proposed Solutions and Intervention Approach on Priority Problem Areas Workshop Output (Unedited)

Critical Issues Solution Intervention Approach

Use of pesticide/ fungicide/ herbicide Use of synthetic fertilizer

Practice integrated pest management Transition to organic farming practices

Encourage farmers group to supply organic pesticide & organic fertilizer Conduct training on organic farming Regular monitoring of organic farming practices

Improper disposal of cacao pods

Conversion of cacao pods to compost

Acquisition of pod shredder Training on equipment maintenance

Transport Procurement of seedlings and inputs

On-site nursery establishment

Capacity building

Source: NCI-GIZ-DA XI Greening of Agribusinesses Workshop , August 2013

3. Fermentation and Drying Genotype, soil, climate and harvest conditions, as well as processes, such as fermentation, drying, and roasting, have important effects on the characteristics of cocoa. Proper fermentation and drying remove all unpleasant flavours and start the chemical changes necessary to produce the true cocoa and chocolate flavours that emerge after roasting. The following factors influence the quality of the final beans in the fermenting step (Mikkelsen 2010): a) Degree of ripeness of the pods: Unripe pods do not contain enough sugar to ferment properly. b) Type of cocoa: Some types, for example Criollo, need shorter fermentation period than other

sorts like Trinitarios and Forasteros. c) Climate and season: Dry weather shrinks the pulp, which restrains the fermentation. Too much

pulp is also a disadvantage, as it reduces gaseous exchange and may result in high acid levels. Cold weather will also inhibit the cocoa bean fermentation.

d) Quantity of cocoa beans in one batch. e) Duration of fermentation. Under fermented beans have not developed the brown chocolate

color, and they have at bitter and astringent taste. Over fermented beans will rot Drying forms a very important part of post-harvest processing in the cocoa production chain. The water content of the bean must be reduced from about 60% at the end of fermentation to less than 8% to obtain beans in good condition for storage and transport (Mossu, 1992). Drying also facilitates a reduction in the bitterness and astringency of the beans, and it encourages the development of the chocolate brown colour characteristic of well-fermented beans. Proper drying also ensures that off-flavours do not develop within the beans. During the recent years, an increasing number of postharvest facilities have been established in Davao Region by both the public and private sectors. The postharvest facilities are generally for exclusive use of members or suppliers of the owners/operators of the facilities or are operated as common service facilities. In the Cacao Agribusiness Zone Center in barangay Talandang in Tugbok District – Davao City, for example, growers can have their beans fermented, dried, and sorted for a

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fee of PhP 15 per kilo which farmers consider to be too expensive. The facility has a 24-ton capacity fermentation boxes and sets of solar dryers and hybrid (artificial and solar) dryers. The whole process of fermenting, drying, and sorting entails about 10 days.

Table 13. Distribution of Postharvest Facilities (PHF) by Province Davao Region

Postharvest Facility Davao City

Davao del Sur

Davao Oriental

Davao del Norte

ComVal Region/ Total

Bean Grading Kit 4 2 1 1 0 8

Fermentary Facility 11 7 5 2 2 27

Solar Dryer with UV Cover 18 2 2 2 1 25

Mechanical Dryer 1 10 1 39 1 52

Multipurpose Dryer Pavement 36 11 3 111 28 189

Warehouse 8 9 0 0 2 19

Source: Mindanao Cocoa Industry Profile

In Davao del Norte, there is a wide variance in the facilities and systems used in drying and fermentation. This difference is reflected back in the quality of the beans. There are only two fermentary facilities in the province. These facilities, which are located in San Isidro, are owned by Chokolate de San Isidro (CSI) and Kennemer Foods International, Inc. The fermentary facilities are for their own use. These companies buy wet beans and do the fermentation and drying themselves to ensure compliance to quality standards.

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On the other hand, farmers in Davao del Norte still do the fermentation and drying at their farms or homes using makeshift equipment. Cacao beans are dried on the ground or makeshift platforms. Surface contamination is a major source of fungi in fermented and dried cocoa beans. Infestation of cocoa beans starts from the drying mats and continues in storage. During rainy days, drying of cocoa beans is done on prolonged periods and on an intermittent basis. If drying is done too slowly, moulds may develop. This can cause serious problems for the industry because of the off-flavours created if the moulds penetrate the testa. If the drying is too rapid however, the oxidation of acetic acid can be prevented and this leads to excess acid trapped within the beans. This acid content will ultimately adversely affect the flavour of the nib. This traditional method yielded dried cocoa beans of inferior quality, compared to those processed using the appropriate fermentary facilities. As such, agents or buyers of global cocoa traders generally do not buy fermented beans from farmers. Farmers sell their beans “all-in” which not only affects income generation potentials but also constitute disincentives for upgrading.

4. Cocoa Processing a. Domestic Processors

Table 14. Breakdown of Cocoa Processors Davao Region

Province Number of Processors

Davao del Norte 4

Davao del Sur 4

Davao Oriental 0

Compostela Valley Province 1

Davao City 5

Davao Region 14

Source: MLGU

There are 14 processors in Davao Region. In Davao del Norte, there are 4 processors. One of the processors is CSI, a social enterprise with farmers owning 30% of the total shares. Aside from the dried fermented cacao beans, the company produces tableya, cocoa bars, and blocks. About 90% of the dried cocoa beans are exported to Europe while 10% are sold within the Davao Region and Manila. The tableya, cocoa bars, and blocks are sold in key urban centers iin the Philippines. On the average, the company buys 800 kilograms of wet and dry beans per week. There are quite a number of home-based informal enterprises engaged in tableya production. These are usually farming households. According to one tableya maker in Asuncion, she processes the cocoa beans into tableya to optimize the produce from her farm. It also mitigates price fluctuation of cocoa beans as price of tableya is relatively stable. She makes the tableya with the assistance of her children. The tableyas are sold to a trader within the locality. At the national scene, chocolate manufacturing is a billion peso industry. Chocolate manufacturers generally import most of their cocoa requirements. The top 3 largest chocolate producers in the country are: Universal Robina Corporation, Commonwealth Foods Inc., and Delfi Foods Inc. Other chocolate manufacturers are: Multirich Foods Corp. (Choco Mucho), Columbia International Food Products Inc. (Klicx Cruncher and Chocquick bars), Monde Nissin (Snitch Choco Bar), Twin Oaks Foods Corp. (Mayfair), Stateline Snack Food Corp. (Stateline Nimble Chocolates), New Unity Sweets

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Mfg. Corp. (Choc-Nut), Annie Candy Manufacturing (Hany Milk Chocolate), and Gracepoint Enterprises (Lala).

Table 15. Top 3 Chocolate Producers in the Philippines

Company Description

Universal Robina Corporation.

Market leader in chocolates and the leading branded convenience food and beverage company in the country. Manufactures enrobed chocolates and panned chocolates. Its popular enrobed chocolate brands are Cloud 9, Big Bang, Chooey, and Monster Munch while its panned chocolate, Nips, is the most popular in its category. Also exports chocolates to Thailand, Malaysia, Singapore, Indonesia, and Hong Kong.

Commonwealth Foods, Inc. Manufacturer of chocolates as well as other products like coffee, cookies, biscuits, milk products, coffee beans, flour, and sugar. Its chocolate brands are Flat Tops, Curly Tops, Choco Mallows, and Chocolate Crunchies.

Delfi Foods, Inc. Delfi Foods Inc bought the manufacturing plant and sales and distribution assets of Nestle Philippines together with Goya for an aggregate deal of US$5 million in March 2006. Delfi Foods Inc is a wholly owned subsidiary of Petra Foods Inc., a Singapore-based manufacturer of branded consumer confectionery. Popular Goya products are chocolate coins and eggs

Source: The Sweet World of Chocolates in the Philippines, Agriculture and Agrifood in Canada

There are also a few artisan chocolate manufacturers such as Theo and Pilo, The Gift Farm which is based in Davao City, Risa Chocolates, and Choclery Artisan Chocolates. These companies source a greater percentage of their cocoa beans from the Philippines. The large chocolate manufacturers use imported cocoa powder primarily from Malaysia. Quality constraints and reliability of supply prevent some of the big domestic manufacturers and processors from sourcing from the Philippines. These concerns include coarse grinding because of low quality grinding equipment, inconsistent supply, inadequate drying, lack of fermentation or low quality fermentation and overly bitter beans.2 b. International Processors In the international market, the Netherlands is the world’s leading cocoa grinder. There are three companies – Cargill, Archer Daniels Midland (ADM), and Barry Callebaut – grinding 40% of the world’s cocoa. Singapore-based company, Olam/Petra Foods and Blommer complete the Top 5 cocoa grinders. In essence there are three main categories of companies operating in the grinding segment (UNCTAD): a) Companies with backgrounds in commodity trading and a widely diversified range of trading

interests (such as ADM and Cargill);

2 ACDIVOCA Cocoa VCA Report

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b) Companies whose primary interest has traditionally been in producing semi-finished cocoa products and couverture, mainly for sale to third parties (for example, Barry Callebaut, Petra Foods and Bloomer);

c) Large chocolate companies that are primarily active in the branded consumer market, yet retain

some grinding capacities to meet their specialty requirements (for example, Nestlé, Cadbury, Ferrero and Cemoi).

US based companies ADM and Cargill are active in both producing countries (cocoa sourcing and logistics and, in some countries, cocoa processing) and consumer countries (manufacture and supply of semi-finished cocoa products and, a further step down the chain, couverture production and supply). The Swiss-based Barry Callebaut group was created out of the 1996 merger of Callebaut, a leading industrial chocolate group, and Barry, with complementary sourcing activities and cocoa-processing operations. In cocoa bean producing countries, the company is active in primary processing stages. In consumer countries, it is increasingly moving from semi-finished cocoa products and couverture (the latter being its traditional core business) into the manufacture of consumer chocolate. Producers of industrial chocolate fall into two broad categories (UNCTAD): a) Vertically integrated groups which produce their industrial chocolate and mainly use it in-house

to make consumer products (integrated chain).

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Companies under this category are Nestlé, Mars, Hershey, Cadbury, Kraft Jacobs Suchard, Ferrero and Cemoi. For the most part, they still manufacture couverture for their own use, though there is a trend towards outsourcing even couverture production (and even production of the finished product, one step further along the production chain) to specialized contractors.

b) Industrial processors that supply most of their output of couverture to third parties (market

suppliers).

Companies under this category include leading cocoa-processing companies as Barry Callebaut, Cargill, ADM and Bloomer. In many cases, these companies are also active at the the sourcing/trading level (within origin countries and internationally).

The top five chocolate and confectionery companies in the world are Mars Incorporated, Nestlé, Hershey, Kraft Foods, and Ferrero. These companies control more than half of the European market for consumer chocolate.

5. Trading Before the cocoa bean reaches the exporter/processor, it passes through at least two to three intermediaries (barangay/village level trader – municipal trader – lead trader). Some of the traders and consolidators buy directly from the lower levels of the supply chain. Some cooperatives are engaged in cacao bean trading. Transactions are generally spot and on cash basis. Other functions performed by these traders include bulking, transport, quality assurance and financial services function. In many cases, the lead trader provides its network of intermediaries with money for cash advances. Farmers generally prefer to sell to village traders due to lower cost of transaction (e.g., products are picked up from the farm or delivered to a village store within the locality) and the cash advances. Some of these traders have small sari – sari stores where cacao farmer can get their household needs on credit. Long – time suppliers may also avail of financing from these traders. These advances are deducted from the proceeds of cocoa beans delivered to the trader. There are about 79 traders and consolidators in Davao region. Interviews with traders indicate that Davao City traders are able to accumulate at least 21 MT of cocoa beans or about 248 MT/year. Davao del Sur traders handle at least 29 MT of wet and dry beans/month. Davao del Norte traders are able to collect at least 37 MT of wet and dry beans/month. Davao Oriental traders handle at least 8 MT/month. Compostela Valley traders reported that they buy at least 7 MT/month. Over all, the traders accommodate at least 102 MT/month dry beans. In the international scene, major trading companies on the international market such as ADM and Cargill have taken over cocoa-exporting operations within origin countries, thus achieving a significant degree of vertical integration in the industry. Their reach extends all the way to the farm level, either directly (cocoa-buying stations) or through agency relationships.

6. Export Marketing There are about 12 processors and/or exporters in the region. These exporters buy beans from collectors and traders who deliver to their warehouses, and then sell primarily to regional buyers for processing. Both small and medium/large scale exporters have found it increasingly difficult to compete with the multinational affiliate exporters. As a result, many have begun selling their cocoa beans to the larger multinational exporters rather than continue to export directly themselves.

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There are two exporter-integrators in Davao Region namely, the Chokolate de San Isidro Trade Venture and Kennemer Food International Inc. These exporters purchase wet beans from collectors and traders, sort and grade them for quality, and then sell them to buyers in European countries and Indonesia.. Both have direct markets that continue to support them and buy their beans. In Davao Region, the CSI has been the main exporter to Traden, Poland and the only company with the Rainforest Alliance Certification. On the other hand, KFI Inc. main buyer is MARS Chocolate in Indonesia.

C. NATURE OF INTERFIRM RELATIONSHIPS

1. Horizontal Relationships

While there are cooperatives like FEDCO that are relatively strong and appear to be entrepreneurial, majority of the farmer groups lack the internal and external infrastructure and organizational elements needed to achieve the economic and social objectives that underlie the viability of collective enterprises. Among the main difficulties faced by farmer groups are: a) Lack of capital to grow in scale and for investment in physical assets for value addition and for

product quality improvement b) Lack of management capacity and good organizational governance c) Lack of entrepreneurial skills and capacity to interact effectively and to undertake collective

action, which is necessary to induce lead firms to accept a high level of interdependence. d) Weak business/market orientation

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It was observed that among farmers who are members of the cooperatives, involvement in collective initiatives is very limited. Majority of the farmer groups have not fully made use of their organizations as platforms to collectively address constraints, promote economies of scale, and improve bargaining position. The development of effective horizontal relationships among cocoa farmers has become increasingly important in the light of structural changes in the cocoa bean export supply chain. Exporting companies are generally hesitant to deal with many small farmers due to the high transaction costs involved. The block/cluster farming being promoted by Kennemer provides an indication of the possible directions that buyers will be increasingly taking in the years to come. With demand exceeding supply, traders compete on price and on services offered (transportation, credit, etc.). In addition to competing on price, traders compete on different services offered including leniency in quality control. This type of competition is unhealthy and hinders innovation and upgrading.

2. Vertical Relationships and Supply Chain Governance

Table 16. Snapshot Relationship Assessment

Parameters Description

Farmer - Trader

Buyer and Supplier Selection/ Procurement Process

Spot selling/Cash and carry Traders secure supply by providing advances in cash or in kind (e.g., rice and canned goods from sari-sari store owned by trader). With the cash advances, farmer and trader develop a semblance of long term relationship.

Information Sharing/ Transparency

Directive. One-way. Limited. Just focused on current transaction.

Quality Control and Inspection

All-in procurement at a lower price Visual inspection and sorting of beans done by trader and price discounts applied accordingly. A handful of cocoa beans are squeezed to hear if they made a cracking sound. Farmer just accept trader’s assessment.

Value added service/ Collaboration and cooperation

Pick-up of beans at farm or at a place near the farm Traders provide cash advances – informal source of credit

Basis of Competition/ Offer

Volume

Farmer/Trader –Exporter

Buyer and Supplier Selection/ Procurement Process

Some semblance of long term relationships. Informal guarantee of business beyond today.

Information Sharing/ Transparency

Purchasing and pricing decision almost always based on agreed standards. Discussions on prices, markets, and quality conducted on adhoc basis.

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Table 16. Snapshot Relationship Assessment

Parameters Description

Quality Control and Inspection

Processor/exporter exercise more stringent quality control. Exporters usually have the bean grading kit.

Value added service/ Collaboration and collaboration

Access to postharvest facilities and seedlings Some learning and skills transfer Adhoc discussions on how both parties can mutually exploit cost, quality, technical, or marketing advantages via their collaboration.

Basis of offer Volume and quality

Source: KII

Cocoa farmers sell their beans to traders and processors/exporters. There is almost no competition among farmers as buyers are readily available. The competition is among traders and processors/exporters who have to reach a threshold volume to be profitable and meet their commitments. CSI, for instance, indicated that they are operating below capacity due to lack of supply of cacao beans. In general, farmers can choose whom to sell and, as such, they tend to choose buyers that offer credit facilities and other value added services.

Transactions between farmers and traders generally consist of spot market sales. Marketing relationships between traders and farmers are informal and characterized by the concept of the “suki” system or personalized economic relations. The “suki” system, which is similar to the preferred supplier-buyer relations, proliferated in efforts to find ways to minimize risks and

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vulnerabilities to opportunistic behaviour and cheating (both trader and farmer). The depth of the suki relationship differs with each relation but over time, repetitive transactions with the same person develops trust. On both sides, there is reduced search, negotiation, and monitoring costs because the suki lives up to the norms and values of reciprocity and comes close to becoming part of the family mindset. The bonds between people engaged in exchange are determined by informal rules or social institutions and serve to enforce the terms of the exchange. Suki relationships often are strengthened by the provision of credit by buyer to farmer or by lead trader to village buyer. Local traders are the main sources of loans/’cash advances”. Farmers who sell their beans on a regular basis to one particular buyer are able to call on that buyer not only for loans for inputs but also for family emergencies, a “in-kind” (basic food commodities from store owned by traders). The extension of loans is a way for buyers to ensure loyalty of suppliers and, consequently, their supply. Traders also pick-up the beans or set-up their buying stations near the farms which make it convenient for farmers to deliver. Farmers can have the option of selling their bean “all-in” but at a lower price or to sell these based on quality standards that normally have varying interpretations from one buyer to another. The “all-in” procurement provides little incentive to invest in upgrading. On the other hand, sorting and grading based on locally adopted norms which tend to be subjective result to trust issues. Likewise, many farmers are not aware on how the cocoa bean price is set and, as such, any fluctuation in the price is attributed to the traders. Some traders, on the other hand, tend to manipulate price especially when dealing with farmers in remote areas. In chains where the farmers and traders sell directly to exporters cum processors, the product specifications required by end markets dictate the governance and nature of supplier relationships. In these chains, buyers generally offer a price differential on quality. Buyers tend to establish a closer and more directed supplier relationships in order to improve the quality and consistency of cacao beans. Kennemer Foods International, for example, is assisting agrarian reform beneficiaries in the development and scaling of cacao production. It is also helping farmers to consolidate their produce through block farming and improve product quality through access to postharvest facilities. The block farms comprise initially of about 10,000 hectares of agricultural lands that farmers acquired under the Comprehensive Agrarian Reform Program (CARP). The agreement ensures the rights of farmer-beneficiaries to retain control and possession of their awarded lands. CSI, on the other hand, facilitated the gainful participation of cocoa farmers by allowing them to acquire 30% share in the company. In addition to facilitating supplier’s access to postharvest facilities, CSI has

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established a nursery to ensure that farmer – suppliers and shareholders have access to good quality planting materials.

With demand outstripping supply and market standards becoming more stringent, there is an increasing tendency for foreign trading and processing companies to integrate backwards into origin countries. In Davao Region, such tendency is being jumpstarted by Mars through Kennemer Foods and CSI who is also working closely with an international trading company. These developments provide the platform for a market driven upgrading. It has been observed though that exporters are having difficulties in competing with exporter-integrators. Many have shifted to supplying these companies rather than exporting on their own. This is in many ways a reflection of the shifts in international markets which is marked by growing levels of concentration and directed supply chain relationships. The grinding segment is now controlled by three firms (ADM, Cargill, and Barry Callebaut). The concentration in the grinding sector arises as a consequence of three developments (Losch, 2002). The first was the development of new processing technologies (involving considerable research and development and investment) to enable the processing of different qualities of cocoa bean. Secondly, the ability to buy in large volumes and to source from different countries provided an important impetus to the scale of purchasing. And, thirdly, developments in transport (bulk shipping) and just-in- time provision to chocolate manufacturers undermined the position of smaller and less sophisticated traders and grinders except those who are buying for their own in-house grinding.

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High levels of concentration can also be observed in the international chocolate manufacturing sector. The top 6 chocolate manufacturers are estimated to control around 60% to 70% of the world market. Concentration in the chocolate manufacturing industry is attributed mainly to the very heavy costs of branding and marketing. The marked levels of concentration in the grinding and chocolate manufacturing stages of the cocoa supply chains gave rise to a “bi-polar” governance structure. The market power of grinders appears to be, to some extent, balanced by the “customer power” of downstream branded chocolate manufacturers. As can be seen in the Davao Region and in many cocoa producing countries, the cocoa bean export supply chains entail varying levels of vertical coordination at different nodes in the chains with international trading companies and/or their agents closely involve in facilitating supply chain development. The evolving governance of cocoa bean export chains provides an opportunity for producers to forge direct links with trade networks, and also an opportunity for chain gatekeepers to call for sustainable practices. The need for greater chain governance is attributed to the increasing concerns to maintain supply flow of cocoa beans and ensure traceability and quality. These structural changes have important implications for the participation of smallholders and the distribution of the benefits. While these changes can provide the catalyst and incentives for the integration and modernization of the cocoa bean supply chain, it also poses challenges on how to overcome high transaction costs and investment constraints usually associated with working with small scale farmers. A number of initiatives are ongoing aimed at shifting the balances of power in trading relations to ensure that farmers appropriate a greater share of margins from the cocoa value chain parallel to building a sustainable supply chain through the employment of longer term strategies that facilitate access to credit, market information, and guaranteed market (contract beyond one season). Table ___ presents a summary of Sustainable Purchasing Practices from various codes of practices being advocated by different bodies in the aim of promoting inclusive and sustainable supply chains. Increasingly, special attention is made on the relations between producers and buyers in order to direct the chain in a sustainable direction.

Table 17. Summary of Sustainable Purchasing Practices

Sustainable Purchasing Practices Perceived Benefit/s of Adoption

“Fair” share of export price of cocoa to return to shareholders

To cover production costs and provide a sustainable income

Longer term contractual commitments Assist production planning and reduce volatility of prices

Direct relationships Build trust and stability in the chain Reduce the number of intermediaries

Improved access to affordable credit and pre-harvest finance

Improve cash flow of farmers to purchase agricultural inputs and cover harvest expenses

Timely payments and communication with mutually agreed payment terms

Greater trust and clarity; reduce uncertainty at end of harvest

Differential pricing and community premium payments

Creation of greater local capacity through small scale investments in appropriate technology, diversification initiatives, and community development projects

Source: Philipps, et. Al 2007

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D. PRICE AND COST STRUCTURE

1. Income and Profit

Table 18. Cost and Returns – 1 Hectare Cacao Farm (800 trees) – First Five Years High Input High Yield Production System Grafted Planting Material

Item Year 1 Year 2 Year 3 Year 4 Year 5 Total

Income

Average Wet Bean Production

(in MT)

- 1.31 3.82 4.91 6.00 16.04

Price of Wet Bean per MT 29,700.00 29,700.00 29,700.00 29,700.00 29,700.00 29,700.00

Gross Income (PhP) - 38,907.00 113,454.00 145,827.00 178,200.00 476,388.00

Expenses

Materials

Tools 5,550.00 - - - - 5,550.00

Seedlings 18,040.00 18,040.00

Dolomite (for soil PH

correction)

- 192.00 192.00 192.00 192.00 768.00

Fertilizer 14:14:14 5,400.00 6,264.00 12,960.00 14,256.00 15,682.00 54,562.00

Foliar

Fertilizer/Insecticide/Fungicide

4,122.00 8,602.00 6,451.00 6,451.00 6,451.00 32,077.00

Plastic sleeves for CPB

control

- 800.00 2,400.00 3,200.00 3,800.00 10,200.00

Subtotal - Materials 33,112.00 15,858.00 22,003.00 24,099.00 26,125.00 121,197.00

Labor

Land preparation and planting 9,000.00 9,000.00

Weeding/Farm Maintenance 2,700.00 2,700.00 2,700.00 2,700.00 2,700.00 13,500.00

Fertilizer Application 600.00 600.00 600.00 600.00 600.00 3,000.00

Harvesting 900.00 2,600.00 3,000.00 4,100.00 10,600.00

Subtotal - Labor 12,300.00 4,200.00 5,900.00 6,300.00 7,400.00 36,100.00

Total Costs 45,412.00 20,058.00 27,903.00 30,399.00 33,525.00 157,297.00

Gross Profit

Gross Profit (45,412.00) 18,849.00 85,551.00 115,428.00 144,675.00 319,091.00

Gross Profit Margin 48% 75% 79% 81% 67%

Source: DFI (2014 data)

The largest cost elements at about 56% in a high input – high yield production system are the fertilizer, insecticide, and fungicide. The use of fertilizer depends on other factors such as the quality of the soil, the level of pests and diseases, and agronomic practices. In the above table, farmers are using both organic and inorganic fertilizer. In many cases, smallholders arbitrarily use fertilizer or cut down on the use of fertilizer to save on costs. Oftentimes, the savings on fertilizer result to overall low profitability in the subsequent harvests.

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Financial success in setting up a cocoa farm requires a quick return on the initial investment and increasing yields to reduce the unit costs. Productivity of grafted seedlings is higher; yield per tree is more or less uniform and are early bearers. On the other hand, ungrafted seedlings have lower productivity because yield per tree is highly variable and 10-20% of trees are shy bearers which means they will not bear fruits at all.

Table 19. Performance Comparison: Grafted and Ungrafted Planting Materials

Parameters Ungrafted Planting Materials Grafted Planting Materials

Average Yield 0.5 – 0.6 kilos 2-3 kilos Gestation Period 24 – 36 months 18-24 months Source: DFI

Profitability is most sensitive, as is usually the case in agriculture, to minor changes in market price and marketable yield. Price and yield are the primary sources of risk for the grower. While these risks cannot be eliminated entirely, good agronomic practices enable a cacao grower to avoid what might otherwise be a financially devastating event and to survive a relatively unprofitable year or two.

2. Relative Financial Position of VC Players In 2012, the global chocolate confectionery market made net sales of approximately US$ 80 billon, which is estimated to increase to US% 88 billion in 2014. Within the global value chain, most of the money is made after the beans have reached the Global North. At the same time many cocoa farmers and workers in the Global South have to get by on less than 1.25 US dollars a day, below the threshold of absolute poverty. Cocoa growers today receive about 6% of the price that consumers in rich countries pay for chocolate. In the 1980s their share was almost three times as great: 16%.3 The cost and profit analysis of the Kennemer-led value chain indicates that Davao del Norte cacao farmers get 74% of the FOB price, which is a very high percentage compared to the 65% to 70% in Ghana and West African countries. The percentage share of farmers to FOB price is in the same level as the Indonesian farmers. Similar to the Philippines, Indonesia does not have price controls nor is government involved directly in procurement and logistics services. Ghana has a controlled marketing system.

3 Make Chocolate Fair website, European Campaign for Fair Chocolate

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Private companies such as Kennemer Foods are confronted with an end-market demanding high quality cocoa. A challenge for these companies is how to secure the supply over longer periods, knowing that there is an increasing demand all over the world and a decreasing cocoa production due to declining soil fertility and neglected genetic resources. Long term relationships with producers and their organizations, and investing in farmer organisations to ensure quality, sustainability claims and sufficient supply in the future, is crucial for their own survival. The 14% gross profit of Kennemer Foods is partly spent in supporting the development of the cocoa industry in Davao del Norte. For companies like Mars and Kennemer, sustainability of the cocoa industry is part of the strategy and business practices, with focus on the viability of smallholder farmers and the needs of communities. Lead firms have clear incentives to establish closer, more directed supplier relationships in order to secure their supply of cocoa beans and improve the quality and consistency of their raw materials. Profit margins of intermediaries are narrow. It is by increasing purchased volumes that buyers are able to augment most of their profit margins. Farmers, on the other hand, have to increase their productivity especially so that areas available for cultivation are limited.

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Table 20. Relative Financial Position of VC Players Mars/Kennemer Led Value Chain In Philippine Pesos

Assumptions: 3 kilos of wet beans = 1 kilo dry beans Costs: Year 5 cost + share of establishment cost (4%)/ Intercropping/Low input farming system Yield: 672 kilos dried beans or 2016 kilos wet beans

Player Product Unit Cost

Added Unit Cost

Selling Price

Profit Share to FOB Price

Value % Value % Value %

Farmer Wet beans 29.43 29.43 73% 89.10 59.67 75% 89.10 74%

Coop/ Trader

Wet beans 91.10 2.00 5% 95.00 3.90 5% 5.90 5%

Exporter/ Kennemer

Fermented Beans

104.00 9.00 22% 120.00 16.00 20% 25.00 21%

Total 40.43 79.57 120.00

Source: KII/FGD

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Section 4: MARKETS AND MARKET OPPORTUNITIES

A.MARKETS AND MARKET TRENDS 1. Export Market While cocoa beans are produced mainly in developing countries, its by-products are consumed primarily in industrialized countries, with the main buyers being the chocolate processing and confectionary industries. Some producing countries also process part of their cocoa bean production themselves. Producing countries’ share of processing is growing steadily. In Brazil and Malaysia, the local processing industry absorbs most of their production. In West Africa, the grinding companies account for 15% to 17% of world volume.

Although Philippines is a small player in the cocoa international trade, the country’s export of cocoa products has been on an increasing trend. Similarly, export of cocoa products from the Davao Region has significantly increased during the recent years. Data gathered from the Bureau of Customs (BOC) Region XI (Southern Mindanao) reveals that the volume of cocoa products exported from 2008 to 2009 has increased dramatically. From 2008 to 2009, cocoa product exports of the region posted an impressive six fold increase from 151 MT in 2008 to 1,113 MT in 2009. In 2008, China and the United States were the main importers of cocoa products from the region. In 2009, the market expanded to Europe, with the Netherlands as the main shipping point, and to

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neighbouring countries of Thailand and Malaysia. During the same period, the 59% of cocoa exports was shipped to Malaysia, 25% went to Thailand, 9% went to the Netherlands, and 7% went to the USA. Davao del Norte exports about 75% of its annual production of cocoa beans.

Table 21. Philippine Exports of Cocoa and Cocoa Preparation (in US dollars) CY 2007 - 2011

2007 2008 2009 2010 2011 % change 2011/07

Cocoa beans 131,500 208,925 464,826 504,185 356,451 171%

Cocoa shell, husks, and other waste

1,400

Cocoa paste 372,640 41,512 107,200 992,000 166%

Cocoa butter 2,565,396 3,042,703 2,271,426 2,662,957 3,122,036 22%

Cocoa powder 235,735 102,614 225,485 1,767,695 765,600 225%

Chocolate and other preparations

3,039,536 2,007,716 1,831,385 1,921,845 1,811,723 -40%

Total 6,344,807 5,361,958 4,836,034 6,963,882 7,047,810 11%

Source: United Nations Commodity Trade Statistics Database

Cocoa is essentially produced for two different markets: the bulk market and the fine or flavor market. The former is supplied mostly by beans from the Forestero variety. Philippines is primarily dealing with the bulk market. In chocolates, Davao Region is increasingly targeting the artisan chocolate market and the single-source chocolate market. More than 90% of European cocoa consumption is bulk chocolate. Mainstream brands such as Nestle, Kit Kat, Mars, and Toblerone use bulk cocoa mainly from Ghana and Ivory coast. Mainstreaming sustainability is an upcoming trend in this segment. About 10% of the European market is specialty cocoa. This entails excellent quality, specialty products such as fine & flavour cocoa, cocoa with a special story behind it or products with as sustainability label. Often long-term contracts are made with European buyers due to the uniqueness of the flavour. Small brands, such as Valhrhona, Green & Blacks, Godiva, Vivani and Divine Chocolate purchase specialty cocoa. Sustainability is generally linked to this segment. 4

4 CBI, Market Channels and Segments, Feb 2014.

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The cocoa and chocolate supply chain is dominated by the three grinders (ADM, Cargill, and Barry Callebaut) and five chocolate and confectionery companies (Mars Incorporated, Nestlé, Hershey, Kraft Foods/Mondelez, and Ferrero). The three grinders control 40% of the global cocoa processing while the 5 companies collectively control 57.4% of the chocolate market. Barry Callebaut has acquired the Petra Foods’ Cocoa Ingredients Division sometime last quarter 2012. Petra Foods is one of the leading players in Southeast Asia that markets and distributes its own brands of chocolate and sugar confectionery products to consumers, and enjoys a market leadership position in Indonesia. Its Cocoa Ingredients Division is one of the world’s major manufacturers and suppliers of premium cocoa products such as liquor, powder, and butter. Barry Callebaut is also sourcing from Davao through Seed Core Enterprises. Based on estimates from the ICCO Secretariat, cocoa bean supply deficit in 2012/13 was about 160,000 metric tons. In 2012/13, world grindings, which is a measure of demand, increased by 2.4% over the previous season while cocoa bean production decreased from 4.080 million metric tons to 3.931 million MT. With world consumption of chocolate forecasted to increase from 7.3 million MT in 2012 to 8.2 million MT in 2017 or an 11% increase, the Cocoa Barometer 2012 report projected that the market would require 5 million MT of cocoa beans by 2020. An additional 100,000 to 120,000 MT of cocoa beans will be needed each year to meet 2020 global demand. Big grinders and chocolate manufacturers are under huge pressure to guarantee future supply.

Table 22. World Cocoa Bean Production: Grindings and Stock

Crop year

(Oct-Sep)

Gross Crop

Grindings

Surplus/ deficit

Total end-of-season

stocks

Stocks to grindings

ratio

In Thousand MT % In Thousand MT % In MT In Thousand MT %

2003/04 3 548 11.6% 3 237 5.25% +287 1 682 52.0

2004/05 4 378 -4.8% 3 382 4.55% -38 1 644 48.6

2005/06 3 808 12.7% 3 522 4.1% +242 1892 53.7

2006/07 3 430 -9.9% 3 675 4.35 -279 1 613 43.9

2007/08 3 737 9.0% 3 775 2.7% -75 1 538 40.7

2008/09 3 592 -3.9% 3 537 -6.35 +19 1 557 44.0

2009/10 3 634 1.2% 3 737 5.7% -139 1 418 37.9

2010/11 4 312 18.7% 3 938 5.4% +331 1 749 44.4

2011/12 4080 -5.4% 3 956 0.5% +83 1 832 46.3

Estimates 2012/13

3 931

-3.7%

4 052

2.4%

-160

1 672

41.3

Source: International Cocoa Organization (ICCO)

On a country/continent basis, the highest percentage of grinders is based in Europe followed by Asia and Oceania, the Americas, and then Africa. Between the period 2009/10 and 2011/12, market share of Asia and Oceania increased by 30%.

Table 23. Grindings of Cocoa Beans (In Thousand MT)

Continent/Country 2009-2010 2010-2011 2011-2012

Europe 1,492 1,595 1,554

Germany 361 439 421

Netherlands 500 525 490

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Table 23. Grindings of Cocoa Beans (In Thousand MT)

Continent/Country 2009-2010 2010-2011 2011-2012

Others 631 631 643

Share total 41.2% 41.7% 39.1%

Americas 801 839 865

Brazil 223 236 243

United States 380 390 400

Others 198 213 222

Share of Total 22.1% 22.0% 21.8%

Asia and Oceania 689 770 897

Indonesia 120 170 270

Malaysia 298 305 312

Others 271 295 315

Share of Total 19.0% 20.1% 22.6%

Africa 642 618 357

Cote d’Ivoire 390 340 380

Ghana 200 220 222

Others 52 58 55

Share Total 17.7% 16.2% 16.5%

World Total 3,624 3,822 3,973

Origin Grindings 1,423 1,472 1,621

Note: Totals may differ from sum of constituents due to rounding Source: LMC as of February 2012

2009 imports data show that the Netherlands leads in import of beans. As a major producer of cocoa food products, the United States is the top importer of cocoa powder. France, one of the biggest chocolate consumption per capita markets, is the top importer of chocolate preparations.

Table 24. 2009 Imports: Cocoa Products (in US$)

Cocoa Beans Cocoa powder and Cake Chocolate Preparation

Netherlands 2,075,860,000 United States 337,074,000 France 1,597,530,000

United States 1,228,060,000 Germany 110,855,000 Germany 1,465,840,000

Germany 976,677,000 France 100,286,000 United kingdom

1,420,300,000

Malaysia 768,199,000 Japan 75,873,000 United States 1,407,960,000

France 493,246,000 Russia 73,286,000 Netherlands 762,134,000

Belgium 462,689,000 Spain 70,486,000 Canada 683,774,000

United Kingdom

426,156,000 Netherlands 67,114,000 Spain 535,130,000

Spain 244,124,000 Italy 61,799,000 Belgium 531,020,000

Singapore 208,586,000 Australia 59,417,000 Italy 480,966,000

Italy 206,966,000 China 47,147,000 Japan 479,535,000

Source: FAOSTAT as of March 2012

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Table 24 describes the characteristics that global buyers tend to look for in suppliers. The characteristics were drawn from interviews with global buyers during a value chain assessment of the Indonesian cocoa industry conducted by AFE, a US based firm specialized in value chain development. In terms of product quality, the market considers cocoa from Ghana as the “gold standard cocoa” against which others are judged and differentials are paid.

Table 25. Competitiveness Characteristics of the Cocoa Bean in the Global Market

Competitiveness Characteristics

Description

Consistency of Quality This is based on generally accepted parameters and indicators of cocoa bean quality used in the trade, including bean count (number of beans per 100 grams; <110 beans), moisture content (<7.5 p%), and percentage of waste materials (<10 %).

Fat Content Percentage of fat content refers to the amount of fat or cocoa butter that can be extracted from the beans during processing. A high fat content is preferable.

Flavor Flavor can be accentuated with proper fermentation. Flavor also depends on the genetic trait of the cocoa bean itself. Stronger flavor beans are required for higher quality food and pharmaceutical cocoa products.

Price The price per MT of cocoa beans is a strong determinant of value chain competitiveness (though not one that can be looked at in isolation). Price often reflects other characteristics (i.e., a lower price may reflect inconsistency of quality, low fat content, etc.), and is not considered in isolation by global buyers.

Availability of Supply This pertains to the volume and reliability of cocoa bean supply

Infrastructure and Logistics

Efficiency and availability of transportation and infrastructure to move beans from producers to the global buyer This also includes the efficiency of port operations, inspection services, and other logistical export services.

Legal/Policy Environment This includes government and public sector policies and regulations (taxation, support and/or interference, standards, contracts, certification, etc). The legal and policy environment can have a positive or negative influence on competitiveness.

The demand for certified cocoa used to be limited to niche markets under minor confectionery brands. In response to pressures from consumers for cocoa processors and chocolate manufacturers to be transparent about their chain especially with regards to their environmental footprint, to provide product information (traceability), and to pay fair prices to farmers parallel to the need to increase cocoa bean production to cope with demand, there is an increasing demand for certified cocoa beans. Demand for cocoa that can be traced to a specific origin and in certified production systems that follow certain social and environmental guidelines is expected to reach 50% of total world demand by 2020 (Cocoa Barometer 2012). Early in 2010, Cadbury (which was taken over by Kraft in February the same year) announced that it would use only Fair Trade certified cocoa beans in its best-selling chocolate brand in the UK, Dairy Milk. In 2009, Mars Inc. announced that it would use only Rainforest Alliance-certified cocoa in its popular Galaxy brand, and that by 2020, all cocoa

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beans would be from sources certified as ‘sustainable’. Similarly, Nestle in partnership with cocoa processors such as Cargill and Olam are also increasingly buying only from farms and cooperatives which employ sustainable practices. In Davao del Norte, only CSI has acquired a Rainforest Alliance certification. The major standard bodies are Rainforest Alliance, FairTrade, UTZ, and Organic Cacao. in order to offer high enough volumes and to make certification - and traceability - feasible, farmers will need to ally themselves in well organized farmer groups.

2. Domestic Market Table 26. Philippine Imports of Cocoa and Cocoa Preparation (in US dollars) CY 2007 - 2011

2007 2008 2009 2010 2011 % change 2011/07

Cocoa beans 172,377 263,044 49,415 2,451,556 1,071,867 522%

Cocoa shell, husks, and other waste

228,990 199,892 257,785 331,036 278,831 22%

Cocoa paste 5,792,937 5,715,970 10,122,366 17,249,694 17,904,107 209%

Cocoa butter 325,524 614,074 522,792 865,819 1,531,074 370%

Cocoa powder 11,851,334 13,717,786 21,339,095 42,633,956 54,658,044 361%

Chocolate and other preparations

24,410,011 29,484,738 26,689,223 28,647,928 30,850,948 26%

Total 42,781,173 49,995,504 58,980,676 92,179,989 106,294,871 148%

Source: United Nations Commodity Trade Statistics Database

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Local supply of cocoa is not sufficient for the needs of industrial users. Thus, the big users of cocoa and chocolate products have to import cocoa beans and grindings. Statistics also indicate that Philippines has been importing cocoa shell, husks, skin, and other waste. The domestic market with an estimated demand of about 30,000 to 40,000 MT of cocoa beans per year presents a big opportunity for the Davao del Norte. Between the period 2007 and 2012, Philippine imports increased by 148%. During the same period, country’s exports of cocoa products increased only by 11%. Total export value in 2012 was about 5% of total imports. Philippines is a net importer cocoa products and trade deficit is increasing at about 15% per annum.

B. PRICE TRENDS

1. Export Market During the past 20 to 30 years, prices show some evidence of a long-term cyclical trend with relatively brief periods of very high prices, reaching up to US$ 4,000 per metric tons and heavy plantings, followed by prolonged periods of relatively low prices, mainly in the range of $1,000 - $1,500 per metric ton, in which many farmers lose interest. However, this cycle may be changing as analysts predict cocoa production may be flattening out, in part due to the limits of suitable production areas, and compounded by ageing trees and pest problems. Given this scenario and if trend of demand outstripping supply continues, then it is most likely for prices to increase significantly. Cocoa prices are affected by various factors including stock/grind ratios, expectations for future production/demand, global food prices, and consolidation/fragmentation in cocoa trade and processing industries. These components generally set the tone for long-term trends in cocoa prices while trading by investment funds tend to drive movement in the short-term. In the medium term, economies of cocoa consuming countries influence the price. From 2007 to 2011, there was an overall increase in cocoa price, but it has been prone to volatility from 2008 through 2011, leading to a 30-year high of $3,625/MT in January 2010 and dropping back to $2,200/MT in December 2011. In 2012, cocoa prices were less volatile with fluctuations ranging from 4% to 8% per month. In December 2013, the ICCO daily price averaged US$2,825 per MT, up by 28% over December 2011 average price.

2. Domestic Market In Davao del Norte and Davao Region as a whole, cocoa price increased by 56% between the period 2007 to 2011. The percentage price increase during the period in Davao was higher than the increase in the international market. It has been observed that oftentimes prices of wet and dry

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beans in Davao are higher than price set in the terminal market. In 2013, price of dried beans ranged between PhP 88 to 90/kilogram.

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Section 5: SUPPORT SERVICES

A. FINANCIAL SERVICES

Exporters/processors are the main parties oiling the market chain. To some extent, processor -exporters provide some pre-financing to their agents and intermediaries. These exporter-processors have their own funds and, sometimes, access credit from the banks. Farmers’ finances tend to be precarious, which makes it difficult for them to invest in inputs such as seedlings or inputs, and which makes them vulnerable to crop failure, price drops, etc. The financing needs of cocoa farmers fall into three categories: finance for inputs, consumptive credit, and finance for investment. In many cases, these are sourced from traders and informal money lenders. Cooperatives and farmer groups also need short and medium term financing for purchases of cocoa beans and investments in nursery operations, organic fertilizer production, and post harvest facilities to support their members and to promote their own sustainability. Farmers prefer to borrow from traders/intermediaries over other possible sources due to the following reasons: a) traders do not charge outright interest rates although some embed interest rate on price paid for cocoa beans; b) loans are easy available without any collateral and papers; and c) repayment of loans from collectors is easy, as do not generally have any terms and conditions except for a promise to sell the harvest to them. Traders have good knowledge about the cocoa harvest and if there are times when the output of cocoa is not sufficient, collectors do not force repayment of a loan. However, intermediaries are generally prudent in disbursing the loan amount, as they are aware of each farmer’s land area and the status of cocoa cultivation. Likewise, loans from intermediaries are also constrained by the funds that they own and are able to access.

Table 27. Providers of Financial Services (Formal)

Agency/Institution Description

Land Bank of the Philippines

Agricultural Credit Support Project (ACSP) for production loan Interest rates: Prevailing comm. rates of interest, short/long term Loan requirements: Collateral can include produce (deed of assignment) Cacao 100 Program: Last December 2013, Land Bank approved the Cacao 100 Program, a loan facility targeted for a high value and long gestating crop such as cacao. The loan has a 5 year term with 2 years grace period and lending can be done through 4 platforms; individual loans, clusters, cooperatives and rural banks. The goal of this program is to be able to provide single digit interest rates for individual farmers. Agrarian Production Credit Program (APCP): APCP is a joint program of Department of Agrarian Reform, the Department of Agriculture and Land Bank. This credit program provides financing for crop production to existing as well as newly-organized Agrarian Reform Beneficiary Organizations (ARBOs) and farmer organizations that are not qualified to avail of loans under regular windows of banks. An agreement was made September last year to extend credit terms to accommodate

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Table 27. Providers of Financial Services (Formal)

Agency/Institution Description

medium to long gestating crops such as cacao.

Development Bank of the Philippines

Seed High Value Crops Financing Programs Priority crops includes cacao Interest rates: 10-12% Loan requirements: SEC/CDA registration with land title and other business/project documents

ONB Farm loans Interest rates: 18% Loan requirements: SEC/CDA registration with land title and other business/project documents

Green Bank Credit, Production loans

While commercial banks in Davao del Norte and in the region do offer agricultural loans and rural banks and microfinance institutions have the micro agrigloans, the uptake of these instruments among cacao farmers have been low. Micro agriloans are based on character and household cash flow rather than traditional agricultural project-based lending approaches that focus on per-unit costs and projected income of agricultural outputs only. To some extent, the financial product addresses the scarcity of collateral among cocoa farmers and cooperatives. However, the microagri-loans are structured to include weekly and monthly loan payments with only a partial lump sum balloon payment (no more than 40 percent) allowed during the harvest or sale of agricultural product. The payment terms pose challenges for cocoa farmers as they can only harvest after three years. The income that they get from crops intercropped with cacao trees are barely enough to cope up with the daily needs of the households. Players in the Davao del Norte cocoa industry find it more difficult to access longer-term financing needed to make investments in plantations, organic fertilizer production facilities, warehouses, scales, cocoa dryers fermenting facilities, and other postharvest facilities. Among the different players, farmers have the least access to financial services. The Cacao 100 Program of the Land Bank of the Philippines is aimed at making long term financing accessible to farmers. It is too early though to assess uptake among farmers. Generally, microfinance institutions and banks face the following challenges in providing finance to smallholders: a) High cost of funds to provide rural credit especially as the credits are uncollateralized b) Challenges of verifying cash-flow records, credit history or financial capacity of smallholders for

banks to evaluate and mitigate lending risks c) Nil or negligible cost benefit appeal to fund fragmented, small-holder and widely dispersed

farming businesses instead of other formal, well organized and more profitable businesses. d) High level of default on loan repayment by previous rural credit beneficiaries as a result of

diversion or loss of farm produce e) Lack of formal marketing contracts to guarantee repayment

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f) Limited understanding of the cocoa sector to guide the development of financial products appropriate to the needs and cash flow of players

B. NON-FINANCIAL SERVICES

Cocoa players in Davao del Norte and the region access business development services through the following means: 1. Informal: Information, knowledge and advice available to farmers and other VC actors through

social relationships. This could include information and advice on price, market and technology trends through social networks or mediation through traditional cultural mechanisms. An example of this is the “informal“on-the-job” training provided by parents to their sons and daughters. The weakness though is that “elders” in the community are not generally aware of emerging good practices. On the other hand, they are very much knowledgeable on indigenous practices which are generally low-cost and environment friendly as well as suited to agronomic conditions in the area. Strengthening the capacity of recognized “cacao experts” in the area would enrich the informal learning system.

2. Embedded: Services are provided within a buying or selling transaction, whereby the costs of

the service provision form part of the overall cost calculation of the supplier, while the service user does not have to pay for service delivery. Embedded services are an added feature to the main business transaction. Examples Cacao Masters/Doctors: Technical advice and guidance provided to clients (e.g., buyers of planting materials, customers for grafting and pruning services). Also have demonstration farms which help clients in making informed decisions on planting materials, technology, etc.

3. Commercially sponsored mechanisms: The Kakao Eskwela, a School-on-the-Air radio program,

gives useful information about cocoa farming, crop establishment, crop maintenance andharvest and post harvest operations. Farmers and other individuals interested in cacao farming can enrol and ask questions via SMS. Sometime in June 2013, the Kakao Eskwela TV was launched. Both of these programs were initiated under the CocoPal Program.

4. Fee-based services: Services offered to farmers and enterprises as distinct services for which

they pay a fee.

Examples Cacao Masters/Doctors: grafting and pruning services CIDAMI Training: PhP 350/training module Davao City Chamber of Commerce and Industry, Incorporated (DCCCII): market linkages, trade fairs and expositions Cacao Foundation Of the Philippines Inc.: Technical Assistance, Market Linkages, Price Trend, Organized Seminars and conventions, farm demonstration, IEC (multimedia), provides post-harvest facility (combination of fee-based and subsidized services)

5. Stand alone Free Services: These are generally provided by government agencies and non-profit organizations such as CIDAMI. The services are generally provided for free.

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Table 28. Services Provided by Government Agencies and NGOs

Organization Services

DA and Attached Agencies

Department of Agriculture (DA) units/Programs & agencies:

High Value Commercial Dev’t. Program (HVCDP)

Mindanao Rural Development Program (MRDP)

Agr’l. Competitiveness Enhancement Fund (ACEF))

- Provision of funds to the RFUs and farmers groups for cacao planting materials, postharvest facilities, small scale processing equipment, research & development, planting materials certification, training, standards, and stakeholders’ forums.

- Establishment of Production Facility in Strategic Cacao Production Areas through provision of equipment such as fermentaries, drier, cacao roaster, cacao cracker and cleaner, cacao grinder and tablea maker to farmers’ groups

- Research and Development are being implemented by DA in partnership with various academe across the country

Philippine Coconut Authority (PCA)

Farm diversification program through promotion of intercropping and provision of planting materials

Bureau of Plant Industry (BPI) Certification and registration of Cacao planting materials (NSIC-Registered and Recommended Cacao Varieties)

Bureau of Agricultural Research (BAR)

- Commercialization of technologies on the processing and packaging

- Sustainable cacao production system through its projects funded under the National Technology Commercialization Program (NTCP).

- Supports projects that are in line with the National and Regional Integrated Research and Development and Extension (RDE) Agenda and Program.

- Provides funding support to studies that address current needs and problems of the agriculture and fisheries sectors.

- Organic Agriculture Program - Facilities development program - Knowledge products and services - Agriculture and Fisheries research policy and advocacy

Bureau of Agriculture and Fisheries Product Standards (BAFPS)

- Formulates and enforces quality standards - Provides assistance in establishing scientific basis for

food safety, trade standards and codes of practice, and harmonizes them with internationally-accepted standards and practices

Philippine Center for Post-Harvest and Mechanization (PhilMech)

- Support programs for research and development of Drying Systems for Philippine Cocoa Beans

- In coordination with DA's regional offices and local government units, provides financial assistance to farmers by providing 85% subsidies in acquiring farm equipment and machineries such as hand tractors, threshers, transplanters and water pumps for rice and high-value crops such as coffee, cacao, cassava and bio-ethanol.

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Table 28. Services Provided by Government Agencies and NGOs

Organization Services

National Agricultural and Fishery Council (NAFC)

- Monitoring and evaluation; IEC/Advocacy materials - Facilitates the conduct of regular consultations and

dialogues between government and private sector in agriculture and fisheries, by providing technical and administrative assistance to the members of its nationwide consultative and feedback network leading to the creation of Committee on commercial crops.

Agricultural Training Institute (ATI)

- Conducts training on production technology such as cacao production technology (training of trainers/ training of farmers)

Other Government Agencies

Department of Agrarian Reform (DAR)/ARP

ARC development support

Department of Science and Technology (DOST)-PCARRD/ SMARDEC through FITS

IEC materials, technical references, design and fabrication of equipment for the production of local cocoa products Technological Support for the Upgrading of Local Cacao and Cocoa Industry a) Improving the quality of solid cocoa liquor including

molded cocoa nibs and developing the capability of Small Scale Processors in the Manufacture of Intermediate Cocoa Products

b) Microbial Community and Biochemical Profiling for Microbial Augmentation and Development of Quality Indicators for Cacao Fermentation and Processing

c) Development and Evaluation of Improved Drying Technologies for Fermented Cacao/Cocoa Beans in the Philippines

d) Design and Fabrication of Equipment for the Production of local cocoa products

Department of Trade Industry (DTI), Export Pathways Program

- Industry cluster convener, provision of shared service facilities for cacao fermentation among MSMEs

- Served as industry cluster convener to bring together all stakeholders and enablers of the industry

- Export Pathways Program wherein business and technical assistance on product development, productivity enhancement, and domestic and international marketing assistance.

Department of Labor and Employment (DOLE)

Farmer’s organizational strengthening, postharvest facilities, processing equipment

Cooperative Development Authority (CDA)

Support to cooperative formation and organizational strengthening

TESDA Vocational skills development

Local Government Units (LGUs) Extension services, production support

University of Southern Mindanao (USM)

Research on varietal/clone improvement

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Davao del Norte was also supported by MRDP (Mindanao Rural Development Program) to improve their cacao production. About 4,000 hectares of cacao plantation in the Municipality of San Isidro have benefited in this program.. The CocoPal Program in partnership with Mars Inc. has made inroads in developing the demand and supply of business development services in the cacao industry in Davao del Norte and the region as a whole. In line with the Sustainable Cocoa Initiative program that Mars Incorporated is implementing worldwide, three Cacao Development Centers (CDCs) have been established in Mindanao. The main aim of the CDCs is to facilitate access of farmers to good quality planting materials, technology, and training to improve their yield. The CDC is being supported by a pool of Cacao Masters and Cacao Doctors. To date, the model appears to be viable although outreach is limited to areas within the proximity of the CDCs. As can be seen above, most of the government agencies are now actively supporting the cocoa industry. However, despite the increasing number of support services, it was estimated during the FGDs that about 40% to 50% of the players have very limited access to improved inputs, technology, extension services, and resources. In many instances, government agencies take a lead role in the delivery of services on the basis that there is a wider "public good" character to these (e.g., the poor in particular will be excluded if government does not provide directly). However, some caution has to be made with this rationale. Historical experiences indicate that many of the publicly-funded support services experience pronounced financial constraints and inability to increase depth and breadth of outreach. It is common for service delivery to become dependent on external aid or government funding and to collapse when funding dries up. This has increased rather than reduced the dependency of marginalized communities. Aside from the need to scale up access to extension services and resources needed to facilitate chainwide upgrading to all cacao producing municipalities, it is equally important to facilitate the greater adoption of improved production and post-harvest practices among all players in the chain. Majority of the farmers and small enterprises generally do not think they need business development services and thus demand does not exist in a form ready to be tapped. This implies the need to stimulate demand and acquisition of business development services and the subsequent application of new knowledge and skills gained in their day-to-day operations. Objectives of sustainability and increased depth and breadth of outreach of services may be achieved by facilitating the development of markets for support services. Functioning markets can offer services through a range of formal and informal sources, as separate services or embedded within other products. This shifts the focus of public intervention away from direct provision and subsidies at the level of support services transaction towards the facilitation of a sustained increase in the demand and supply of services. This will entail the following complementary strategic directions: − Development of a range of intermediary organizations and individuals that can provide services

to enterprises in transactional, business-like relationship and without the need for long-term subsidy

− Increase effective demand for business development services by enhancing enterprises’ understanding and valuation of the benefits of services ;

− Facilitate the development and delivery of a wide variety of services that are profitable to both the enterprises and the providers.

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Section 6: BUSINESS ENABLING ENVIRONMENT

A. FORMAL RULES, REGULATIONS, AND POLICIES The following are the key policy issues that affect the economic playing field for sustainability in the cocoa industry in the Davao Region and in Davao del Norte in particular: 1. For chain actors price levels are a very important incentive to produce, but also the predictability

of the price during the year is an important issue that influences business decisions. Cocoa is characterized by a volatile world market price during the year, varying between weeks and months. The various factors affecting price are quite difficult to control as these emanate from different points across the globe. Mindanao stakeholders led by the Cacao Industry Development Association of Mindanao (CIDAMI) are pushing for a “marketing board” that would control the price of cacao in both local and international markets to help local farmers and growers. According to the group, the marketing board will decide on the prices so that the farmers will not be at the mercy of buyers and consolidators. Consolidators with their own channels in the cacao industry tend to buy the beans at a price lower than prevailing local price. Likewise, significant fluctuations in price deters producers from making the necessary investments for increasing productivity and production. In many of the cocoa producing countries, institutional arrangements have been developed to translate international cocoa prices to (indicative) domestic prices for cocoa beans in the place of processing or place of shipment to international markets. Some countries have mechanisms to fix and stabilize these prices during specific periods, and some countries have developed institutional arrangements in the value chain to target specific qualities with higher than average prices on the world market. These mechanisms have, to some extent, insulated farmers from the effects of price fluctuations. However, studies have also shown that in cocoa producing countries with marketing boards (usually government managed) and price control mechanisms, farmers’ share to export prices is lower compared to those in countries with liberalized markets/ prices.

In the short term, the concern of Mindanao stakeholders may be addressed through improved implementation of price transparency measures. A careful study has to made to determine the most appropriate institutional arrangement and policy instrument that will both mitigate risks from price fluctuations and, at the same time, enable farmers and Davao chain players to have a fair share in the export price.

2. For more than a decade, most government efforts to expand access to agricultural credit have been channeled through the Agricultural Competitiveness Enhancement Fund (ACEF) and Agro-Industry Modernization Credit Finance Program (AMCFP). Outreach, to date, of the two programs have been limited. The Agri-Agra Reform Credit Act of 2009 (Republic Act 10000) signed in February 2010 has not also been effective in facilitating smallholders’ access to financial services.

There is a need for government to put in place a sound risk management framework to address the issues that are at the core of private sector reluctance to lend and farmers’ hesitation to avail of formal financial services. . Likewise, most of the policies that govern agricultural credit facilities for farmers are biased towards short-term crops. The cocoa sector needs long-term

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financial services. Parallel to this, there is a need for a tree crop insurance program and safety net arrangements given the growing vulnerability of Mindanao to natural disasters brought about by climate change.

3. The imperative of moving towards more sustainable agriculture practices that respect local ecosystems within broader landscapes is gaining momentum. Regulation may force buyers to be more accountable for social and environmental responsibilities, especially in the light of ever toughening EU regulation. For example, the ICCO predicts that the EU is likely to increasingly focus Maximum Residue Level (MRL) legislation on cocoa. More than just striving for firms and farming enterprises to be certified (Rainforest Alliance, Fairtrade, UTZ, etc), there is a need to institutionalize the conditions for sustainable production at a national level. As Mars Incorporated puts it: “If certification continues to reach only farmers working in cooperatives, it will not achieve the target of mainstream sustainability. Certification needs a critical mass to make it the new norm, to set a new benchmark. So far only cooperatives trained personnel manage ICS system; therefore it is very difficult for a trader to engage in certification. In order to reach unorganised farmers it is important to outsource ICS system management. This would allow about 30/40 per cent of traders interested in engaging in certification to hire ICS trained managers and in turn to reach a much higher number of unorganised farmers”.

Many of the compliance points in the various codes of conducts are also prescribed in standards and legislations promulgated by the Philippine government. The problem though is the lack of implementation and promotion of its widespread adoption. To ensure that certification does not exclude smallholders and micro businesses, reform in the delivery of extension services to facilitate compliance will require the adoption of a multi-provider model and market-based delivery mechanisms including partnerships with lead firms. Access to financial services and improved infrastructure are also important in achieving certification status and sustainable production as a whole.

4. There is a perception among stakeholders that government policies have not given so much attention to infrastructure needs of the cocoa sector in Davao. Infrastructure influences the cost structure as well as the quality and traceability of cocoa beans and by-products.

5. The Association of Southeast Asian Nations (ASEAN) and its six trading partners are targeting to

sign by 2015 the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement that is expected to further open up new and bigger markets for local businesses. On the other hand, this will increase competition among cocoa producing countries in the ASEAN region. This implies more than ever the need to improve competitiveness both in terms of quality and volume.

B. INFORMAL RULES AND SOCIO-CULTURAL NORMS 1. Informal rules can contribute to the effectiveness of formal rules. If the norm is to abide by

formal rules (e.g., adherence to grading standards even if the buyer does not always check), then it becomes less costly to enforce the regulations. If this is not the case (e.g., “all in” procurement as the norm in cocoa bean trading) then the standards set by government agencies become a “paper tiger” or a substantial amount of resources is needed to enforce the regulations (e.g., buyers have to send their own people to check on quality right at the point of purchase). Norms of civic cooperation reduce enforcement costs by leading individuals to internalize the value of standards and regulations even when the probability of detection for violation is negligible.

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2. The major sources of social capital among Filipino farmers are kin networks, home neighborhood, farm neighborhood, and membership in a farmer’s association. Filipinos particularly in rural areas give premium to interpersonal relations. Kinship reigns above all the social relations of Filipino farmers followed by farm neigbor relationship. It is characterized by strong ties, mutual trust, and norms, which promote coordination and cooperation for mutual benefit. Harnessing the kinship/interpersonal relations factor can reduce transaction cost in the sharing and diffusion of farming technology

3. Another value related to loyalty is utang na loob or debt of gratitude. It is expected that those who are helped in their time of need will return the favor when the opportunity comes. So, a trader or a lead farmer or buyer sharing technology with kins and peers can also be regarded a form of repayment from utang na loob or depositing a help to be withdrawn later when need arises (e.g., trader expects that farmer will give him some priority when cocoa bean supply is tight).

4. Buying in tingi or piecemeal is the norm rather than an exception in the Philippines. Long before

multinationals and large local companies began producing product sachets, sari-sari stores (neighbourhood stores) would buy household items such as sugar, vinegar, shampoo, cooking oil, cigarettes, etc. in bulk and sell these to the customers in piecemeal: by the stick, by the piece, by the tablespoon or cup. The “tingi” system has spread into various industries such as telecommunications where it became possible for users to buy phone credit or load for as low as PhP 5.00.

The tingi or piecemeal mentality influences much of what the Filipinos do. The tingi mentality is also reinforced with Filipino’s relatively low propensity to save, and preference for immediate gratification. This is manifested even in little things, such as their preference for “instant prize” promotions rather than loyalty programs which might require them to accumulate points toward a larger prize (De Veyra 2004). Spending more to purchase sachets today instead of saving up to buy in bulk would be consistent with this tendency. Likewise, the dominance of the “tingi” mentality can also be correlated to general aversion of Filipinos to risks.

As such, in the conduct of training and capacity building activities as well as introduction of new technology and innovations, the program can build the design around this “tingi” mentality to have higher chances of success and adoption.

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Section 7: CONSTRAINTS AND OPPORTUNITIES

Table 29. Constraints and Opportunities

Constraints Opportunities

Input Provision

Lack of providers of good quality planting materials of high yielding varieties with high fat content

MLGUs have expressed interest to operate a cacao nursery as a public enterprise. Farmer groups are also interested to engage in nursery operations.

Only 2 of the 5 cocoa producing municipalities have nurseries. These nurseries serve primarily members of the cooperatives or farmers within the municipality. The limited availability of better quality (high fat content/good bean size), more productive, and disease resistant varieties has contributed to the low productivity of cacao farms in the province and inferior quality of beans (e.g., small size). MLGUs and cooperatives are interested to set-up a nursery operation but they do not have adequate skills and resources to do so.

Low acquisition and use of good planting materials among farmers/ Low willingness to pay for planting materials

Cacao 100 Program can assist farmers with their finance needs for seedlings Increase in use of good planting materials will improve farm productivity and contribute to development of sustainable supply of planting materials.

There are many farms that are still using planting materials of low yielding varieties. Similarly, many of the farms have trees that have passed the age of profitable production. With low farm productivity, many farmers are not getting the full benefits from growing the crop. Low uptake of use of planting materials are attributed to: a) lack of awareness on availability of planting materials from nursery; b) lack of financial resources to invest in planting materials; and c) lack of understanding of cost benefit of using good quality planting materials. Good quality grafted seedlings are generally twice as productive and are more resistant to diseases and pests when compared with non-grafted planting materials.

High cost of chemical inputs both to farmers and environment Limited availability and commercial distribution of organic fertilizer and inputs specific for cacao

Cocoa pods and other agri-waste can be used in the production of organic fertilizer. There are also existing enterprises engaged in production of organic fertilizer but not specifically for cacao. Improving access and availability of organic fertilizer will establish a basis for sustained increases in farm productivity as well as lay the groundwork for the production of certified cocoa beans.

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During the recent years, fertilizer prices have risen faster than any other input. The high prices make it almost impossible for farmers to access fertilizers. While there are organic inputs in the market, these are not generally formulated specifically for cacao and volume is still limited.

Low level of purchasing power of smallholders/ Lack of financial resources to purchase inputs Lack of understanding among farmers on cost benefits of proper and efficient use of fertilizer

Organic fertilizer is cheaper than chemical fertilizer. Proper fertilizer management and application will decrease costs while increasing yields.

Most farmers refer to a lack of money to buy inputs when discussing the problems to increase the productivity of their farms. Risk aversion also plays an important role in the cocoa farmers’ decision to adopt fertilizer. Generally, while risk aversion increases farmers’ reluctance to adopt a new technology, it can also increase the intensity of use for farmers who have adopted the technology. In either ways, farm productivity and profitability are compromised. The continued dependence on natural soil fertility without any attempt to replenish nutrients following their uptake and export through crop harvest results in soil fertility depletion.

Farming

Limited outreach of existing extension services and providers

Integrators provide technical assistance to secure supply and improve quality of beans. There are cacao doctors/masters developed by Mars and the ACDIVOCA program Government agencies also provide services

Free extension services from the government are complemented with embedded services from VC players. Outreach has generally been limited to members of cooperatives, existing suppliers of integrators, and to cacao farmers within the proximity of areas where integrators have established sourcing operations and/or where there are cacao doctors. The farmers in remote areas rely on hand – me – down, traditional farming practices which have already become obsolete or do not really optimize farm productivity. Access to continuous education, technology and skills upgrading, and training is a critical base for growth.

Low uptake and adoption of good agricultural practices and sustainable production practices Lack of skilled laborers/caretakers

Global buyers are increasingly sourcing only from suppliers certified to be sustainable. This can potential provide incentives to adopt good practices.

Improving agricultural practices and conformance to sustainable production practices will contribute significantly to addressing issues of productivity, efficiency, and quality. Likewise, non-adoption of sustainable production practices may result to market exclusion in the near future. However, majority of the farmers including laborers/caretakers are not aware of, nor do they adopt, improved cultural practices and, thus, remain susceptible to pests and diseases. Low uptake of GAP and sustainable production practices is attributed to the following factors: a) lack of awareness and understanding of cost-benefit of improved agricultural practices; b) lack of resource to comply with GAP/sustainable production practices and to apply for certification; c) positive outcomes of agricultural improvements often take a long time to be realized and, consequently, a high level of

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abandonment; d) risk aversion; and e) lack of market-based incentives for GAP certified products.

Fermentation and Drying

Lack of access to facilities that would enable farmers to consistently produce high quality fermented dry beans.

Positioning of Davao and Mindanao as a whole as producer of quality fermented cocoa beans given that there is a supply deficit of well fermented beans in the Asia Pacific region. Only about 25% to 30% of cocoa beans produced in the Asia Pacific Region are fermented beans. Indonesia, the largest producer in Asia, produces mainly unfermented bulk cocoa beans.

Farmers usually do the fermentation and drying in their homes or farms using makeshift tools and facilities. Farmers dry the cocoa beans on the ground or makeshift platforms. This makes the beans prone to surface contamination, which is a major source of fungi in fermented and dried cocoa beans. During rainy days, drying of cocoa beans is done on prolonged periods and on an intermittent basis. If drying is done too slowly, moulds may develop. This can cause serious problems for the industry because of the off-flavours created if the moulds penetrate the testa. If the drying is too rapid however, the oxidation of acetic acid can be prevented and this leads to excess acid trapped within the beans. This acid content will ultimately adversely affect the flavour of the nib. They lack the capital to invest in improved facilities and engage in commercial scale cocoa fermentation and drying. This traditional method yielded dried cocoa beans of inferior quality, compared to those processed using the appropriate fermentary facilities. As such, agents or buyers of global cocoa traders generally do not buy fermented beans from farmers. Without access to adequate facilities and skills, farmers are left with few opportunities for value addition.

Limited know-how and skills on Good Manufacturing Practices (GMP) and Sustainable Production Practices among farmers Lack of access to training services on GMP and sustainable production practices

There are trainors on Good Manufacturing Practices within the region. Low-cost system to GMP compliance has been developed and piloted.

The fermentation is critical for the development of color and flavor of the cocoa. Farmers are not generally familiar with Good Manufacturing Practices and Sustainable Production Practices. Hygiene, sanitation, and product quality are based on local norms. Non-compliance to GMP results to production inefficiencies and inconsistent quality of beans. Fermented beans do not pass the specifications of agents of multinational buyers. Farmers thus sell their beans to traders with less discriminating quality requirements or sell wet beans to agents. Inability of farmers to meet quality standards has relegated farmers to becoming raw material suppliers without value addition.

Marketing

Volatility of prices which provides disincentives for upgrading and (mis)trust issues as well as unstable supply

A shift from arm’s length transactions to directed relationships and longer term contractual commitment can to a significant extent insulate farmers from price fluctuations in the world market.

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For chain actors, price levels are a very important incentive to produce, but also the predictability of the price during the year is an important issue that influences business decisions. Cocoa is characterized by a volatile world market price, varying between weeks and months. The various factors affecting price are quite difficult to control as these emanate from different points across the globe. International cocoa traders are able to mitigate these volatile prices by storing beans and controlling the sales volume on the market. Farmers and many of the local intermediaries especially cooperatives, however, are often forced to sell their beans immediately due to poor living conditions, the immediate need for money and a lack of storage facilities. The volatility of prices hinders chain upgrading, promotes adversarial relationships, and results to unstable supply base.

Lack of supply of cocoa beans Banana and coconut farmers not aware of opportunities and viability of cacao –coconut and cacao – banana intercropping

Demand exceeds supply Davao del Norte has the land resources that can be potentially planted to cacao.. There are also significant numbers of banana and coconut farms that can be planted with cacao (intercropping/ mixed farming system).

Philippines is a net importer of cocoa products and trade deficit is increasing at about 15% per annum. Domestic market has an estimated demand of about 30,000 to 40,000 MT of cocoa beans. It is projected to increase to 100,000 MT by 2020. In the international market, cocoa bean supply deficit in 2012/13 was about 160,000 metric tons. It is projected that an additional 100,000 to 120,000 MT of cocoa beans will be needed each year to meet 2020 global demand. Farmers, especially banana farmers, hesitant to expand into cacao growing. Many banana industry players especially those in areas without demo farms or existing banana-cacao farms still believe that cacao cannot be intercropped with banana. Many have not considered cacao intercropping as an option to make judicious use of their existing land.

Poor farm to market roads MLGUs are willing to cost share in the upgrading and maintenance of roads.

Poor infrastructure results to inefficiencies, deterioration of quality, and limited access to markets. Infrastructure influences the cost structure as well as the quality and traceability of cocoa beans and by-products.

Limited and inefficient transport services There are a number of cooperatives engage in trading. Transport services can potentially be another service that they can integrate in current operations.

Transportation services in the province is fragmented and dominated by informal, small-scale players (motorcycles, tricycles, jeepneys). This prevents efficient bulking and larger deliveries of goods to the market. Transport services are limiting in terms of their cost effectiveness but they also negatively impact on the quality, and hence end value, of produce. Quality of produce is lowered due to poor packing and protection resulting to high rates of damage.

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Interfirm Relationship/Supply Chain Governance

Lack of market-based /price incentives for farmers to produce quality beans Unhealthy competition among and between traders

The Philippines has formulated the standards which could be the basis for the development of a standard pricing scheme. Similarly, the international market has an established pricing system based on standards. Fierce competition for supply of beans provides opportunities for embedded services from traders

Traders tend to go for “all-in” procurement” to get as much supply as they can. This results in inconsistent messages and provides disincentives for upgrading. Short-term opportunism stifles innovation. Players also complain that high volume buyers offer a lower price. This provides disincentives for increasing production and improving productivity. Inconsistency in pricing often results to high incidence of polevaulting and farmers’ hesitation to enter into contractual commitments. In the medium term, the general preference for spot transactions can affect the upgrading trajectory of the industry. In addition to competing on price, traders compete on different services offered (e.g., credit and leniency on repayment terms; transportation/pick-up services, etc.). This can provide the platform for the delivery of services that can facilitate chainwide upgrading.

Weak capacity to organize themselves into structured groups Lack of trust and cooperation between and among farmers Lack of entrepreneurial skills Lack of experiences in formal organizational setting

Cooperation and collaboration among individual smallholders can position farmers better to negotiate in marketing their cocoa beans and procurement of inputs and other services Large buyers are willing to source from smallholders if they can work effectively together Farmers in the same village know each other quite well and have had experiences of working together. Such ‘natural–social constituents’ can be harnessed to get them to work together

Small volumes of output pre-dispose smallholders to weak bargaining position in the market. Incomes are eroded due to lack of economies of scale (e.g., small individual purchases of inputs, high transport cost per unit of produce, etc. ) Farmers in the same village tend to help each other in their farms but there has been little initiatives to exploit opportunities with respect to bargaining power, credit and postharvest facilities, economies of scale, etc. While there are organizations like FEDCO that seems to be well functioning, majority are still in the infancy stage.

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Inability to organize themselves into well-functioning groups results not only to diseconomies of scale and weak bargaining power but also hinders access to bigger and more lucrative markets. Big buyers generally prefer to work with organized groups as a means of lowering the costs of transaction.

Weak supply chain collaboration Global buyers are increasing integrating backwards into source countries through their consolidators

Cocoa farmers are not generally aware of the end user of their cocoa beans, signifying a lack of clear market intent at the time of production. Farmers see the market in terms of the next actor in the chain—the person who bought their produce. Minimal information about end buyers’ requirements is being communicated down the supply chain. Often, VC players are not conscious of how their actions and behavior affect the competitiveness of the whole chain and, ultimately, impact their livelihood. Many of the cocoa value chain actors see the implications of their actions only from their own perspective and that of their immediate links. The focus is on maximizing profit per transaction rather than long term planning to upgrade efficiency of chain. There is little cooperation to ensure a reliable supply of high quality beans.

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Section 8: COMPETITIVENESS DIRECTIONS

A. COMPETITIVENESS VISION

Table 30. Summary of Priority Concerns

VC Players Priority Concerns

Cocoa Farmers Higher productivity Higher farm gate price/less volatility Access to credit High quality cocoa beans Soil quality

Local Traders

Purchase as much cocoa beans as possible Competitive price Low cost of transaction

Cooperative - Traders

Purchase as much cocoa beans as possible High quality cocoa beans Access to credit Low cost of transaction Access to credit Good business relations with agents of multinationals

Agents of Multinationals

Purchase as much cocoa beans as possible High quality cocoa beans Low cost of transaction Access to credit Good business relations with multinationals Traceability and conformance to sustainable production principles

Multinational Companies

Reliable, high and stable quality supply Low processing costs Traceability and conformance to sustainable production principles

Chocolate Manufacturers

Reliable, high quality supply High margins, high profits; Reputation/traceability/conformance to sustainable production principles

Table 30 summarizes the main concerns of the different VC players in the Davao del Norte cocoa bean industry. From the above table and based on discussions during the Stakeholders Workshop, the key focal points of action to foster competitiveness and sustainability are on the following: a) Increase of supply of cocoa beans through improved productivity and expansion of areas

planted b) Consistent production of high quality fermented beans c) Less price volatility and increase of share of farmers to value accrued in the chain d) Lower costs of transactions through economies of scale, volume, and increased efficiency e) Traceability/ Sustainable Production Practices/Eco-friendly and socially responsible business

practices and processes f) Improved supply chain collaboration and cooperation

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B. PRIORITY CONSTRAINTS/OPPORTUNITIES AND INTERVENTIONS Drawing on findings from the end markets and value chain analysis and the focal points of action identified by VC actors and stakeholders, the following are the proposed intervention objectives and strategies to improve market competitiveness of the Davao del Norte cocoa bean industry while promoting broadbased growth and climate change resiliency: 1. Improvement of Access, Availability, and Use of Good Quality Planting Materials a) Development of local capacity for production and commercial production of certified planting

materials of high yielding varieties The genetic potential of planting materials largely dictates crop yields and the productivity of other agricultural inputs and cultural practices as well as the flavour and fat content of beans. Likewise, farmers demand for planting materials of improved varieties can potentially be elicited with availability of varieties that meet production challenges (high yields, affordability) and market needs (buyer preferences). This will involve the set-up of nurseries and/or strengthening of capacity of existing nurseries to provide quality planting materials at the right quantity, variety, and time needed and under sustainable conditions. To the extent possible, nurseries should be near cocoa growing areas for farmers to save on transportation and labor costs. To ensure financial viability of nurseries, it may be advisable for them to also engage in production of planting materials of crops that can be intercropped with cacao. Organizational development support to nursery operators will be vital to: i) instil a conscious application of business principles in the pursuit of social impact objectives; ii) improve competence to develop market driven, socially responsive and financially viable business strategies, and iii) stimulate standardization of processes and implement simple management systems. The nurseries may also be capacitated to deliver embedded technical assistance to their clients. Successful cacao farmer-clients will create sustainable market for nurseries. Parallel to the establishment and/or strengthening of nurseries, R and D support is needed to facilitate screening, breeding, and selection of high yielding and pest- and disease-resistant varieties. b) Improvement of appreciation and understanding of smallholders of the cost benefit of using

good quality planting materials Development of a sustainable supply of planting materials requires the creation of an effective demand. To stimulate smallholders to buy and use good quality planting materials without creating high dependency on government and project support, a voucher program, plant now – pay later scheme, and similar market-based mechanisms may be implemented during the first year. A voucher program or similar mechanism will also provide PRDP supported nurseries a captive client base which is critical during the start-up phase while respecting market development principles. Given the “to see is to believe” attitude of many farmers, establishment of a demo farm within the proximity of the nursery can serve as showcase and learning venue where clients can visually validate results to make informed decision. An information campaign on planting material selection and dissemination of success stories would help in promoting chain wide learning and in catalyzing effective demand for good quality planting materials.

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2. Improvement of access to, availability, and use of fertilizer appropriate for cacao smallholders a) Alignment of supply of fertilizer and inputs to the needs and purchasing capacity of farmers and

to sustainable production practices Soil fertility is central to crop growth. During the recent years, fertilizer prices have risen faster than any other input. On the other hand, there are serious environmental problems brought about by the huge volume of agricultural wastes which if transformed into organic fertilizer will provide farms with access to fertilizers at affordable prices. Availability of cheap and quality fertilizer will augment the purchasing power of the farmers which is tantamount to an increase in income. It will contribute to approximately 30% reduction of cost incurred by farmers in fertilization. Organic fertilizers are necessary in reconditioning the soils that are now toxic, acidic, and depleted of micronutrients after extensive use of chemical fertilizers. Apart from productivity increases and decrease in production cost, overall soil quality improvement resulting from the use of organic soil amendments may reduce the potential for nutrient contamination of ground and surface water. The set-up or strengthening of organic fertilizer enterprises has three main objectives, namely: i) To produce premium quality organic fertilizer specifically for cacao using waste materials and at a cost affordable to smallholders; ii) To reduce greenhouse gases from landfills through composting of farm wastes; and iii) To provide income generation opportunities for farming households through participation in the venture as co-owners of the business, waste collectors, workers, and retailers. c) Promotion of the benefits and efficient use of fertilizer and other inputs Fertilizer is often considered a risky investment especially among resource poor farmers who have continuously experienced low yields and declining income. To minimize risk aversion among farmers and encourage the use of organic fertilizer, the following interventions are proposed:

- Implementation of voucher program or the plant now – pay later scheme as a risk sharing mechanism for smallholder farmers to cover part of the cost for improving agricultural productivity and to provide the platform for fertilizer enterprises to launch their products to a wider market which will help them buffer upgrading investments

- Set-up of model farms to showcase benefits of organic fertilizer and as venues for training

- Assistance to fertilizer enterprises in the development of promotional tools that will support point-of-purchase knowledge transfer and reinforce organic farming advocacy of the government

- Dissemination of emerging good practices and success stories

- Harmonization of procurement and fertilizer distribution policies of government to minimize market distortion and support the development of a vibrant market for fertilizer

Farmers will have improved access to information about fertilizer use through the proposed advisory services from fertilizer enterprises, demonstration farms, and the information campaigns. The voucher program or similar schemes together with the information campaigns will encourage farmer experimentation with organic fertilizer, with the objective of bringing about successful adoption.

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3. Improvement of flow and quality of extension services for cacao farming to facilitate adoption of Good Agricultural Practices and Sustainable Farming Practices

a) Strengthening of capacity of existing providers and development of alternative/embedded and

complementary models to transfer the needed skills, know-how, and information to enable farmers to adopt sustainable production practices and improve productivity

With majority of the farms located in remote areas and in recognition of the fact that buyers/integrators are more inclined to work with groups that have already reached a certain performance level of capacity and capability to enter vertical relationships., it is recommended that PRDP pursues the build-up of an indigenous community-based capacity to deliver and provide services that would enable farms to comply with GAP and Sustainable Farming Practices. PRDP can also pursue the development of alternative or complementary extension services system built on existing trade/marketing structure to facilitate the flow of services and learning to all players in the supply chain. Under the system, a pool of trainors consisting of progressive VC players (farmers, consolidators, traders) in the communities can be tapped and trained to deliver GAP training and coaching. A first step in the promotion and development of embedded services is the identification and understanding of the following: i) who influence and control people’s access to markets (at the community level); ii) how do they influence and control people’s access to markets; and iii0 ways on how to improve capability and capacity so that their influence and control can be used to yield positive benefits for micro enterprises and the improvement of the chain in general without eroding their profit margins. The promotion of embedded services is often effective in weak markets. This approach is particularly relevant for making services accessible to smallholders. The challenges for the program are to identify these progressive individuals at the community level and how to motivate them to improve their capacities and capabilities in order to provide sufficient support to farmers as a means of improving both their incomes. b) Alignment of content and delivery of extension services to learning aptitude of farmers Compliance to GAP can play a positive role in providing the catalyst for the modernization of the cocoa bean sector in Mindanao and the adoption of safer and more sustainable farming practices. Farmers are generally not enthusiastic about upgrading or applying GAP. On the other hand, they are open to information on issues that significantly affect their income. As such, it is proposed that upgrading be carried out by promoting feasible upgrades and incremental improvements in agricultural practices that will result in the largest possible increases in yields and profits. The incremental approach to upgrading means: a) seeing issues such as sustainable farming as a continuum, rather than an either/or condition; b) promoting small, incremental improvements rather than large leaps; c) focusing on small, doable aspects of good agricultural practices, rather than on outright certification; d) collectively defining good practices by using input from all players, rather than using outside criteria; and e) identifying the motives of value chain actors to improve practices, rather than promoting GAP for its own sake. Upgrading demands a commitment of financial resources. Promoting compliance with GAP carries a risk because it involves behavioural changes and financial commitments. Furthermore, since the positive outcomes of agricultural improvements often take a long time to be realized, there is often a high level of abandonment. As such, it is important to have “quick wins”. To the extent possible, the delivery of GAP related services should follow the “Learning/ Training – Application/Mentoring – Income/Sales – Feedback/Coaching” cycle. The objective is to allow smallholders to immediately

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apply new skills and experience tangible benefits of training. Likewise, immediate feedback particularly during the early phases of implementation will aid the project team in the further development of the services. It will also be helpful if PRDP solicits the involvement of buyers and various market players during the development phase of training modules so as to ensure that these are aligned to market standards and requirements and, thus, accelerate the build-up of capacity of farmers to gainfully participate in more lucrative and bigger markets. Friendly competition can also be a major way to make learning and upgrading fun. These events can begin with easier-to-implement elements of GAP, such as “Best in Farm Layout” and incrementally move on to more complicated topics, such as “Best in Farm Sanitation. ” The competitions can provide incentives to farmers to become aligned with GAP, while simultaneously demonstrating the effects of good practices. Good practices and innovative solutions that would emerge from the competitions can be incorporated into the GAP manual and training modules, helping capture and further disseminate new learning. c) Establishment of a pool of skilled caretakers and laborers which may be a stand-alone enterprise

(manpower services) or among the services to be provided by a FFS Given that labor plays a central role in production risk management, there is a need to establish a pool of caretakers and laborers who are knowledgeable on cacao farming and GAP. Availability of skilled labor and caretakers can also entice landowners who are not fulltime farmers to invest in cacao farming. 4. Increased capacity and improved ability to produce cocoa beans of consistent quality and as

per market standards

a) Establishment of GMP compliant common service facilities (CSF) for fermentation, drying, and

storage The set-up of common service facilities will serve as the base for the delivery of postharvest and value addition services compliant to Good Manufacturing Practices. As soon as there is enough supply of cocoa beans, the common service facilities can be upgraded to include grinding and processing of various cocoa based products. b) Build-up of local capacity to deliver training and mentoring services on GMP and Sustainable

Production Practices Compliance with food safety and quality standards can play a positive role in (a) facilitating market development; (b) providing the catalyst and incentives for the integration of cocoa bean value chains; (c) facilitating the modernization of the cocoa bean industry and regulatory systems; and (d) linking the rural economy in a positive way with the process of economic globalization. Food safety and quality are functions of the whole supply chain, requiring coordination among the different players handling the produce. Rather than developing a single “one size fits all provider", the program can work with a range of providers in order to be able to match competencies and structures of different groups of players at various links in the chain. Providers of food safety related services may consist of progressive farmers, traders and leaders in communities, graduating food technology students, government technicians, and food technologists. It is important that the development of modules is done in coordination with key VC players especially buyers to ensure integration of market standards and requirements.

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5. Increased areas planted to cacao a) Promotion of intercropping of cacao (coconut and banana farms) in identified expansion areas

parallel to securing markets for additional volume Aside from yield improvement, supply base of cocoa beans can be increased through cacao-banana and cacao-coconut intercropping. To entice coconut and banana farmers to diversify into cacao farming, the program has to conduct promotional campaigns on the commercial and technical viability of intercropping as well as market opportunities for cocoa beans. Likewise, there may be a need to facilitate access to start-up capital via value chain financing or targeted input voucher program especially for smallholders. 6. Improved communication, coordination, and collaboration between and among VC players a) Harmonization of interpretation of standards and corresponding price differentials including

development of enforcement mechanism Disinformation or the lack of information has been the cause of many of the trust issues and the main barrier which distorts or blocks horizontal and vertical collaboration. Harmonization of interpretation of standards will help build a common language between and among buyers and farmers enabling the latter to gain more control over pricing. Improved flow of information is needed especially among farmers. Likewise, by being aware of what is happening in the market, rural communities have better bargaining position as well as improved understanding of the price system (which reduces feeling of being taken advantaged of). Lack of info also hinders contract agreements since everybody is wary that they miss out the opportunity to get a better price. As transparency between parties increases, willingness to invest for mutual upgrading is also most likely to increase. b) Promotion of ethical and responsible trading relationship and development of traceability

system With commodity products such as cocoa beans that have high demand from different market channels, competition can be used as a positive force to motivate lead firms to invest in collaborative relationships and in the capacity building of suppliers as a means of securing loyalty and trust as well as a strategy to lower cost of production and transaction. Business models such as forward contracting with traceability system in place can insulate farmers from price fluctuations in the world market as well as promote a more equitable relationship between and among players. Value chain upgrading requires coordinated decision-making and action among all players. As such, there is a need for a social infrastructure that would provide opportunities for players to meet and interact as a first step to building trust which is essential in formation of collaborative relationships. Rather than forming new coordination structures, PRDP may want to build on local socio-cultural events and festivals as venues for players to socialize in informal settings and on existing social networks such as informally organized supply chains (traders and his/her preferred suppliers), community associations, local development councils, etc. to make use of their existing governance structures and built-in constituency. In some cases, though, it may be necessary for the program to form a new network when existing groups are besieged with problems. and orientation is difficult to align with the value chain development approach.

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7. Improved cooperation and organizational capacity of farmers a) Development of capacity of farmers to incrementally associate, collaborate, and coordinate to

achieve economies of scale in their transactions and to become attractive to large buyers The promotion of collective action is an important strategy for increased smallholder participation in the cocoa bean value chain. In view of lower transaction costs and more effective capacities, lead firms often prefer to work with organized farmers rather than individuals, despite the increased bargaining power that groups enjoy. Thrust of PRDP’s support may be directed to assisting farmer groups to engage in communal business oriented activities that would allow them to take on additional functions in the chain such as nursery operations, communal farm/cluster or block farming, collective marketing, and CSF operations. These collective activities will also enable communities to strengthen relationships with lead firms. In areas where cooperation among and between farmers is weak, PRDP can pursue the incremental promotion of horizontal collaboration initiatives starting with relationship-building cum learning events such as organizational development sessions, festivals and competitions, and village level training to strengthen structures geared towards collective ventures with a focus on setting basic parameters/standards for participation. It is also important to facilitate the development of shared leadership in the communities. Likewise, it is best to start with low-risk low-cost collective initiatives so as not to overwhelm farmers especially if they are not used to working in formal organizational structure. 8. Improved physical linkages to input, support, and product markets a) Upgrading of farm to market roads b) Development of providers of transport services that are cost and eco-efficient and compliant to

Good Manufacturing Services Rural roads open opportunities for sourcing relatively cheaper inputs, and marketing and trading rural produce. Dependable and safe trucking service is critical in transporting agricultural commodities from farms to markets. To have an efficient supply chain that will yield benefits to supply chain participants, it is important to have the proper road network and transportation facilities and link these to production areas. The objective is to have a seamless transport service, which produces or generates value addition at each node of the supply chain for the benefit of players in the chain. Investments in good quality road infrastructure, transportation and logistic services will reduce the time and cost of doing business of VC players. Table 30 presents the priority constraints and opportunities and the proposed interventions. The intervention approach is characterized primarily by a combination of technical assistance/capacity building support and smart subsidies or investments to: a) Develop the capacity of providers to offer improved products, facilities, and services to the

cocoa industry in a sustainable manner b) Promote awareness and uptake of these products, facilities, and services among the VC players c) Contribute to an improved enabling environment d) Build the capacity of market players to form win-win relationships to foster improved

competitiveness

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Table 31. Priority Constraints/Opportunities and Interventions Davao del Norte

Constraints/Opportunities Intervention Strategy and Approach Who Can Do It?

Public Private

Input Provision

Priority #1 Lack of providers of good quality planting materials of high yielding varieties with high fat content Opportunities MLGUs have expressed interest to operate a cacao nursery as a public enterprise. Farmer groups are also interested to engage in nursery operations.

Development of local capacity for production and commercial distribution of certified planting materials of high yielding varieties. - Cost contribution in setting-up of certified/BPI accredited

nurseries or in aligning operations and facilities of existing nurseries to sustainable production standards

- Technical assistance in the development of business model,

business plan, operation manual, and its implementation - Documentation and dissemination of emerging good

practices including viability of business model to attract private sector investment

- Work with financial services providers in the development of

loan packages to facilitate establishment of certified nurseries including crop insurance products

- Support R and D on appropriate planting materials and inputs

DA/PRDP PLGU/MLGU Bureau of Plant Industry (BPI) Land Bank of the Philippines Government owned radio stations State Universities

Kennemer Foods Nursery Operators/ Cooperatives Private banks and MFIs Media

Priority #1 (related to above) Low acquisition and use of good planting materials among farmers/ Low willingness to pay for planting materials

Improvement of appreciation and understanding of smallholders of the cost benefit of using good quality planting materials - Implementation of voucher program, Plant Now, Pay Later

scheme or similar tools to stimulate farmers to acquire and use planting materials

DA/PRDP MLGU/PLGU BPI

Integrators such as Kennemer, CSI, etc. Cooperatives Banks and MFIs

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Public Private

Opportunities Cacao 100 Program can assist farmers with their finance needs for seedlings Increase in use of good planting materials will improve farm productivity and contribute to development of sustainable supply of planting materials.

- Support to operators in the development of payment schemes aligned to cash flow of smallholders

- Support to harmonization of government seed procurement and distribution program including transition to market based solutions

- Support to MFIs/banks in development of financial product

for purchase of planting materials among farmers - Set up of demo farm to showcase benefits and as venue for

learning - Develop capacity of nursery operators to provide technical

advice to farmer clients - Dissemination of success stories

Land Bank of the Philippines DAR/DENR/National Convergence Initiative Government owned radio stations

Media

Priority #2 High cost of chemical inputs both to farmers and environment Limited availability and commercial distribution of organic fertilizer and inputs specific for cacao Opportunities

Alignment of supply of fertilizer and inputs to the needs and purchasing capacity of farmers and to sustainable production practices - Technical and financial assistance to existing and potential

organic fertilizer producers to:

a) Develop inputs appropriate for cacao smallholders

b) Scale up and align operations to sustainable production

DA/PRDP PLGU/MLGU

Cooperatives/ Fertilizer Producers

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Public Private

Use of Cocoa pods and other agri-waste in the production of organic fertilizer. There are existing organic fertilizer producers but not specifically for cacao. Improving access to and availability of certified organic fertilizer will establish a basis for sustained increases in farm productivity and production of certified cocoa beans.

practices - Documentation and dissemination of emerging good

practices and viability of business model to attract public and private sector investment

- Facilitation of linkages with providers of financial services

Priority #2 (related to previous constraint) Low level of purchasing power of smallholders/ Lack of financial resources to purchase inputs Lack of understanding among farmers on cost benefits of proper and efficient use of fertilizer Opportunities Organic fertilizer is cheaper than chemical fertilizer. Proper fertilizer management and application will decrease costs while increasing yields

Promotion of the benefits and efficient use of fertilizer and other inputs - Implementation of voucher program, Fertilize Now - Pay

Later, value chain financing, or similar tools to stimulate purchase and use of fertilizer and other inputs and reduce risk averseness among farmers

- Support set-up of demo farms to showcase benefits and

venue for learning - Support in the development of distribution network/ retail

network to ensure proximity of supply to farmers - Develop capacity of organic inputs providers and retailers to

deliver technical advice to farmer clients - Support to providers in the development of payment scheme

DA/PRDP NCI PLGU/MLGU Government owned radio stations Land Bank of the Philippines

Integrators such as Kennemer, CSI, etc. Organic Fertilizer Producers and Retailers Cooperatives Banks/MFIs Media

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Public Private

aligned to cash flow of farmers - Support harmonization of fertilizer procurement and

distribution program of government agencies and facilitate shift towards market-based system.

- Dissemination of emerging good practices and success stories - Support MFIs/banks in the development of appropriate

financial product (e.g., value chain financing) for input procurement

Farming

Priority #6 Limited outreach of existing extension services and providers Opportunities Integrators provide technical assistance to secure supply and improve quality of beans. There are cacao doctors/masters developed by Mars and the ACDIVOCA program Government agencies also provide services

Strengthening of capacity of existing providers and development of alternative/embedded and complementary models to transfer the needed skills, know-how, and information to enable farmers to adopt sustainable production practices and improve productivity - Support scaling up of Farmer Field Schools (FFS) and Cacao

doctors/masters - Technical assistance to FFS in the development of

commercially viable services (e.g., nursery operations, pool of skilled laborers) other than training for financial sustainability

- Capacity building support to traders/intermediaries especially

DA/PRDP

PLGU/MLGU

Cacao Doctors/ FFS Coops/Traders Media

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Public Private

coops and progressive farmer leaders to further develop capacity to deliver training and extension services to farmers

- Documentation and dissemination of emerging good

practices via media and social networks

Priority # 6 (related to previous constraint) Low uptake and adoption of good agricultural practices and sustainable production practices Opportunity Global buyers are increasingly sourcing only from suppliers certified to be sustainable. This can potential provide incentives to adopt good practices.

Alignment of content and delivery of extension services to learning aptitude of farmers - Support the participatory development (with farmers,

multinational/ agents, traders) of modules on sustainable cacao farming practices to ensure buy-in and ownership of stakeholders and conformance to market requirements

- Technical assistance in the development of training

approaches that allow quick wins to motivate and sustain adoption

- Conduct of competitions to motivate adoption, stimulate

innovation, and facilitate identification of emerging good practices as basis for regular updating of modules

- Behavior change interventions

DA/PRDP NCI PLGU/MLGU

Cooperatives

Priority #11 Lack of skilled laborers/caretakers

Establishment of a pool of skilled caretakers and laborers which may be a stand-alone enterprise (manpower services) or among the services to be provided by a FFS - Support to development of in-house capacity (FFS,

DA/PRDP PLGU/MLGU ATI

Cooperatives FFS

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Public Private

cooperatives, etc. ) to train laborers and caretakers - Technical assistance support to enterprise units in the

development of business models and its implementation - Support to promotion of services especially among absentee

landlords

Fermentation and Drying

Priority #3 Lack of access to facilities that would enable farmers to consistently produce high quality fermented dry beans. Opportunity Supply deficit of well fermented beans in the Asia Pacific region

Establishment of GMP compliant common service facilities for fermentation, drying, and storage - Cost contribution in the setting-up of GMP compliant

common service facilities for fermentation, drying, and storage of cocoa beans

- Technical assistance in the development of business model,

business plan, operations manual, and its implementation

- Support in the promotion of use of facilities among farmers and micro processors

DA/PRDP PLGU/MLGU NCI

Cooperatives Local traders

Priority #3 (related to previous constraint) Limited know-how and skills on Good Manufacturing Practices (GMP) and Sustainable Production Practices among farmers Lack of access to training services on GMP

Build-up of local capacity to deliver training and mentoring services on GMP and Sustainable Production Practices - Technical assistance in customization of existing GMP

modules on fermentation, drying, and storage in collaboration with key VC Players

- Development of a core group of local experts to provide

DA/PRDP PLGU/MLGU BFAD

Integrators such as Kennemer, CSI Local and regional traders Cooperatives

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Public Private

and sustainable production practices Opportunities There are trainors on Good Manufacturing Practices within the region. Low-cost system to GMP compliance has been developed and piloted.

hands-on training and mentoring to users of postharvest facilities as embedded service of CSF

- Behaviour change interventions

Marketing

Priority #7 Volatility of prices which provides disincentives for upgrading and (mis)trust issues as well as unstable supply Weak supply chain collaboration Opportunity A shift from arm’s length transactions to directed relationships and longer term contractual commitment can to a significant extent insulate farmers from price fluctuations in the world market

Promotion of ethical and responsible trading relationship and development of traceability system - Technical assistance in the development of business models

on ethical and responsible, trading relationship and traceability system and its piloting

- Behaviour change interventions and capacity building in chain

governance - Support the development of social infrastructure (festivals,

dialogues, Kapihan sa barangay, etc.) that would give players the opportunities to interact and discuss issues in a non-adversarial manner

DA/PRDP MLGU/PLGU

Integrators such as Kennemer, CSI, etc. Cooperatives Traders

Priority #10 Lack of supply of cocoa beans

Promotion of intercropping of cacao (coconut and banana farms) in identified expansion areas parallel to securing markets for additional volume

DA/PRDP PLGU/MLGU

Farmers Input suppliers

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Public Private

Banana and coconut farmers not aware of opportunities and viability of cacao –coconut and cacao – banana intercropping Opportunities Demand exceeds supply Davao del Norte has the land resources that can be potentially planted to cacao.. There are also significant numbers of banana and coconut farms that can be planted with cacao.

- Dissemination of information on cacao farming opportunities including success stories in a variety of ways—print materials, in-person events, videos, and main-stream media—to ensure that as many farmers as possible can hear and understand the messages

- Organization of tours to existing banana-cocoa/ coconut –

cocoa farms - Assistance to interested farmers/farmer groups to access

credit for cacao farm establishment (e.g., value chain financing). Work with MFIs/banks in development of value chain financing.

- Implementation of a targeted input voucher program, Plant

Now Pay Later scheme or similar mechanism with embedded extension services

- Promotion of forward contract agreements to ensure

markets/prices and facilitate access to financial resources.

NCI Cooperatives Traders and Integrators

Priority #4 Poor farm to market roads Opportunity MLGUs are willing to cost share in the upgrading and maintenance of roads.

Cost contribution to road construction and/or rehabilitation DA/PRDP DPWH LGU/MLGU

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Public Private

Priority # 5 Limited and inefficient transport services Opportunity There are a number of cooperatives engage in trading. Transport services can potentially be another service that they can integrate in current operations.

Development of providers of transport services that are cost and eco-efficient and compliant to Good Manufacturing Services - Technical and financial assistance in the development and

piloting of cost and eco-efficient and GMP compliant transport services for cacao and similar products

- Promotion of cargo pooling to ensure viability - Promotion of business model to public and private sector

investors to facilitate scaling up

DA/PRDP MLGU

Cooperatives

Interfirm Relationship/Supply Chain Governance

Priority #8 Lack of market-based /price incentives for farmers to produce quality beans Unhealthy competition among and between traders Opportunities The Philippines has formulated the standards which could be the basis for the development of a standard pricing scheme. Similarly, the international market has an established pricing system based on

Harmonization of interpretation of standards and corresponding price differentials including development of enforcement mechanism - Technical assistance in the harmonization of interpretation of

standards and the development of pricing structure based on standards and enforcement mechanism

- Strengthen capacity of existing formal and informal

information systems to disseminate accurate price and market information

- Technical and financial assistance to improve existing quality

control system and lay the groundwork to improve traceability

DA/PRDP DTI PLGU/MLGU

Integrators such as Kennemer, CSI, etc. Cooperatives Traders

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Public Private

standards. Fierce competition for supply of beans provides opportunities for embedded services from traders

Priority #9 Weak capacity to organize themselves into structured groups Lack of trust and cooperation between and among farmers Lack of entrepreneurial skills Lack of experiences in formal organizational setting Opportunities Cooperation and collaboration among individual smallholders can position farmers better to negotiate in marketing their cocoa beans and procurement of inputs and other services Large buyers are willing to source from smallholders if they can work effectively

Development of capacity of farmers to incrementally associate, collaborate, and coordinate to achieve economies of scale in their transactions and to become attractive partners to large buyers - Organizational development support to farmers

complemented with behaviour change interventions and entrepreneurial skills development

- Support to groups to start low risk collective activities that

provide quick wins and tangible benefits (self and group)

DA/PRDP DAR/DENR PLGU/MLGU

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Public Private

together Farmers in the same village know each other quite well and have had experiences of working together. Such ‘natural–social constituents’ can be harnessed to get them to work together

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Section 9: CONCLUSIONS AND RECOMMENDATIONS

Davao del Norte is still a small player in the cocoa international trade but its potential to become a key supplier is increasingly being recognized by the leading players in the global cocoa market. Owing to the presence of agents of foreign cocoa companies in the province, the orientation and focus of the Davao del Norte cocoa bean industry is now increasingly geared towards the export market rather than the domestic market. The biggest competitive advantage of Davao del Norte is the availability of land resources and the favourable agronomic conditions for cacao farming. Davao del Norte’s biggest competitive gap is the lack of supply of cocoa beans, the inconsistency of quality, and the small size of the beans Price may also become a competitiveness issue given the prices of wet and dry beans in the local/domestic market are often higher than terminal prices. Parallel to the sustainable scaling up of its cacao plantations/farms, a focus on quality and differentiation anchored on sustainability claims can strengthen Davao’s position in the cocoa market in the short to medium term. The Davao del Norte cocoa industry can look at a large number of certification schemes that can help differentiate their product, improve the competitiveness of the industry, and increase incomes of smallholders. These schemes such as Organic, Fairtrade, and Rainforest Alliance are based on appealing to the socially conscious consumer. Similarly, there is a supply deficit of well fermented beans in the Asia Pacific region. Market assessment indicates that only about 25% to 30% of cocoa beans produced in the Asia Pacific Region are fermented beans. In the Philippines, there is also a big local demand for cacao beans. The domestic grinders require at least 30,000 tons of dried fermented cacao beans every year. The growing deficit for well fermented beans provides vast opportunities for Davao del Norte and the region as whole. it is recommended that programmatic focus areas be prioritized as follows: increased productivity, improved quality, scaling up of cacao production areas, adoption of sustainable practices and the corresponding traceability system, and construction or improvement of farm to market roads. To bring about systemic upgrading, there is a need to foster win-win horizontal and vertical linkages and a well-functioning supply chain governance complemented with behaviour change interventions. Win-win relationships can provide the platform to facilitate: a) upgrading to become competitive; and b) adaptation to changes in end markets, in the enabling environment or within the chain to remain competitive. The development of relationships is an iterative and evolutionary learning process. The key is to start with small, “riskable” steps and incrementally expand depth and outreach as players become more open to working collaboratively and with increasing levels of trust. Trust is a mediating variable without which it is difficult to sustain cooperative relationships. Many of the interventions needed to make the Davao del Norte cocoa bean chain competitive and to facilitate broad-based growth are rooted in catalyzing behavior and social change in communities and among value chain players.

value chain analysis: dava0 del norte …drive.daprdp.net/iplan/vca/cacao beans vca (davao del...2...

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