Financing and Slavery in Chocolate
Hello and good day!
Most hardcore chocolate lovers know that slavery in the chocolate supply chain is a major concern.
More and more people are looking for slave free chocolate, which is a great thing.
However, the are structural problems in the industrial chocolate supply chain that make it extremely difficult to eradicate the slavery problem.
The big problem is that there are so many middle men between cacao farmers and end buyers of chocolate.
I've outlined this many times before, but it is worth laying out again.
- First, a person with a pick up truck goes out to farms and buys cacao.
- Second, the pick up truck buyers mark up what they paid for the cacao, and sell the cacao to somebody with a big warehouse in the closest big city.
- Third, the owner of the big warehouse sends all the cacao they've accumulated in freight trucks to the capital where there are companies with even bigger warehouses. Of course, there is a mark up on the price paid here as well.
- Fourth, the company with the big warehouses in the capital sells to a big international commodities broker, with a mark up added.
- Fifth, the big commodities broker takes a mark up and sells the cacao to a huge chocolate company, like Callebaut or Mars.
- Sixth, the chocolate companies make products and sell the products, at a profit, to international distributors who take the products from the factory to the countries where the products will be sold.
- Seventh, the international distributors mark up the products and sell the products to a national distributor.
- Eighth, the national distributor marks up the products and sells them to a retailer.
- Ninth, the retailer puts the products on the selves with a mark up and customers come and price comparison shop.
Whatever price the customers are willing to pay works its way all the way back down through the supply chain and after everybody else has taken a mark up, whatever is left over goes to cacao farmers.
In business, there are only two ways to increase revenue, sell more units or raise the price per unit.
For cacao farmers, the price per unit is more or less dictated to them by the supply chain. They really have no control over the world commodity price and if they don't sell when the fruit is ripe, they get nothing.
Therefor, the only option open for earning more money is to increase the number of units sold.
Most of the world's cacao farmers live at the subsistence level, which means that they earn just enough to stay alive. They are always looking for ways to make more money.
The only way to increase units sold in cacao farming is to plant more trees.
But planting more trees is not exactly a scalable business. Cacao farming is labor intensive. More trees means more labor.
However, if cacao farming is a subsistence level type of work because the dictated prices are so low, it isn't really possible to make a profit on hiring labor.
The labor will eat up all the revenue generated by the new trees.
This causes a survival of the fittest scenario and abductions start happening. The only way for one family to get ahead is by exploiting members of other families.
It is a tragic and ugly situation.
When you get all the way down to the core fundamentals of the issue, it is a question of financing.
That is my belief anyhow.
The guy with the pick up truck needs to buy and sell cacao quickly, because he has to get cash to buy groceries and support his family.
He can't afford to wait for the cacao to be made into chocolate before he gets paid.
He wants money right now.
Each leg of the supply chain is under similar pressure.
They all want to buy and sell quickly so they don't have all their cash tied up in inventory. You can't pay medical bills with a big bag of cacao.
This goes on all the way through to the grocery store level.
And this is why there are so many links in this chain.
Everybody is playing hot potato with the cacao and chocolate, trying to get rid of it and turn it into cash as soon as possible.
The alternative is to follow our model, which admittedly can be gut wrenching at times.
One party buys the cacao, holds it throughout the entire production process, and sells the final chocolate directly to customers.
This frees up the possibility of allowing farmers to generate more revenue by charging higher prices per unit.
In this case, more trees can be planted profitably as well, even if additional labor needs to be hired, because there is a spread between labor costs and selling prices.
You don't need to kidnap people to make it work.
But this can only be pulled off if some or all of the middle man mark ups are eliminated.
That is where the money comes from to pay the farmers more, while still being price competitive with the final product.
We are a very small company compared to Mars. We are less than miniscule comparatively.
We spend our money buying cacao and don't recoup our funds with a profit until 8 or 9 months later. A lot can happen in 8 or 9 months while you are waiting. This takes a steely resolve.
The guy with the pickup truck recoups the same day.
Mars doesn't want tens of billions of dollars tied up in inventory for 8 months.
They want to turn over their inventory quickly. They buy from the commodities broker and sell to their distributors as quickly as possible.
That makes sense.
But the long supply chain with too many markups is what causes slavery at the farm level.
The core issue is financing. Who is willing to hold inventory from the farm until a final product can be made?
Who has the stomach to see their cash tied up for long periods of time?
This is what is required to do it right across the board.
It is the key to squaring the circle of a high quality product at a fair price for customers, while paying much higher prices to cacao farmers.
If there were a big cacao financing bank, that could do a lot of good. But they'd have to finance hundreds of billions of dollars worth of cacao purchases per year. It is a lot.
Anyhow, I don't exactly what the solution is. But I do know what the problem is, so that is a good start.
Thank you so much for your time today!
I hope that you have a truly blessed day!
Adam
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