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Financing Smallholder Cocoa Rehabilitation in Ghana

Submitted by Michael Cote 12th April 2021 19:49
Young Cocoa Trees, Robert O’Sullivan

Young Cocoa Trees, credit: Robert O’Sullivan.

Introduction

Statistics on climate impacts on cocoa abound: 70 percent of the world's cocoa comes from West Africa; the dry Sahara is pushing cocoa-growing areas towards the coasts; increasing temperatures are drying out water tables, stressing cocoa trees; soil health is degraded; tree diseases and fungus are on the rise; the average age of cocoa farmers is nearing 60 years old, with fewer people interested in farming; the majority of cocoa trees are old and dying, etc. Cocoa, to say the least, is under a barrage of threats. Donors, chocolate producers, development banks, and commodity traders are pouring millions of dollars into stabilizing cocoa yields in West Africa - yet, these efforts may not be enough.

It takes about 5 years for a cocoa tree to bear fruit, thus creating significant down time from productivity and income for farmers and investors. In Ghana, The private Investment for Enhanced Resilience (PIER) project and cocoa trading company ECOM Agroindustrial Corporation (ECOM) are collaborating on developing a sustainable service delivery model for cocoa farm rehabilitation services. This case study describes efforts to designing a viable investment model and finance structure, overcoming technical and financial barriers, and issues donors will need to address in designing new technical assistance projects and programs. 

The objective of this report is to provide information, lessons learnt, and recommended next steps on the farm rehabilitation service delivery model. 

*Download the full report from the right hand column. The key messages from the publication are provided below. See the full text for much more detail.

Model

Cocoa farmers would traditionally clear new forest to establish new farms as existing farms aged, or gradually cut and replace cocoa trees over time. Models of cocoa renovation and rehabilitation in Ghana and West Africa are not well documented, but governments, cocoa companies, and civil society have used different approaches to try and scale up efforts to rehabilitate old and diseased farms. 

This case-study present a new model of a commercially viable service delivery model to rehabilitate old cocoa farms through complete replanting. The new model attempts to repay the cost of rehabilitation within the first three – four years using cash crops (see figure below). The focus on cash crops also overcomes the short-term loss of cocoa income when old trees are cut, and before the replanted cocoa trees mature. This also helps diversify farmer income. The new model works as follows:

  • ECOM advertises the service and selects eligible farmers based on pre-set criteria.
  • Three acres of old cocoa trees are cleared.
  • Existing shade trees are retained where possible, but some may need to be cleared if not suitable for the farm.
  • Two of the three acres are replanted with cocoa, new shade trees as needed, plantain, and other cash crops, and the third acre is planted with cash crops only. The 2:1 ratio is important because the cost of cocoa farm rehabilitation on the extra plot is delayed at the same time income from this plot is boosted by focusing on cash crops. This shift in cost and income on the extra plot helps make the rehabilitation model financially viable. 
  • Depending on the crop, cash crops can be intercropped with cocoa for up to three years, after which point there is typically too much shade in a farm for food crops.
  • ECOM carries out the cocoa rehabilitation and manages all farm activities and crop sales over four years. This includes investing in farm activities throughout the year (planting, transportation, labor, inputs, supporting logistics) using its own staff or hired labor, though the farmer may also be hired to save costs.
  • The farmer works alongside ECOM staff and gains hands-on experience on farm rehabilitation techniques and farm management. 

 Diagram of farm rehabilitation model showing 2:1 ratio and plot progression, from p.20 of the report.

 

Methods

The updated model and this report include data collected from a selection of pilot crops grown during the 2019 – 2020 growing season. 

In  2019 ECOM enrolled 29 cocoa farmers with 87 acres (35.2 ha) in its farm rehabilitation services. All 87 acres were cleared in 2019 and planted with plantain suckers. These take more than 14 months to produce plantains but need to be planted first to establish shade before the cocoa seedlings can be planted.

To collect data and experience with diverse food crops and inform the service delivery model ECOM planted a diverse range of cash crops. In 2019 a combination of chili pepper, garden eggs, okra and turmeric were planted on the extra plots to help generate data for the financial model. The soil of each farm was also tested in three separate locations using new soil scanning technology. The scanners rapidly identify deficiencies in soil pH, organic carbon content, nitrogen, phosphorus, potassium, and cation exchange capacity. To correct the soil deficiencies ECOM applied compost and agricultural lime to the farms.

To further inform the model PIER collected local and regional market price data on a selection of crops. ECOM also worked to identify and establish value chains to allow bulk sales of cash crops in Accra and international markets to avoid any risk of their sales effecting local market prices. The model also uses 2019 – 2020 farm gate cocoa price of 515 Cedi per cocoa bag, which is less than the recently announced 625 Cedi per bag for the 2020 – 2021 season.

In the 2020 – 2021 growing season ECOM is piloting additional cash crop combinations and will plant 16 acres with cabbage, chili, turmeric, and watermelon. These crops are planted on farms after the soil has been amended, and the results will help create additional scenarios and further refine the model. 

The study assesses the expected Net Present Value (NPV) under six scenarios and results are shown for the first 4 years and long-term returns (25 years).

Financing Resilient Cocoa

The farm rehabilitation scenarios in this case study show positive rates of return for a service delivery model are possible. The analysis shows two cash crop scenarios that generate a positive net present value after 4 years. Additional testing of additional crops at larger scale, and with improved soil and agricultural practices will help to further refine the model over the 2020 – 2021 growing season. The long-term benefit increases substantially if a portion of the farm is kept for annual cash crops.

The analyses performed to understand the viability of the farm rehabilitation service delivery model provides insights to understand investment needs at scale. If the costs of ECOM’s service delivery model are applied across Ghana, the cost – and investment opportunity - for systematic replanting of all farms that need it is estimated at between $4.8 and $10.4 billion depending on the number of hectares rehabilitated and the cost per hectare. This demonstrates that there is a large-scale business case for climate smart farm rehabilitation services that delivers multiple environmental and social benefits to investors and farmers. 

The total investment needs are too large for any single cocoa company, and several key risks make it challenging for ECOM to scale up the services. Blended finance solutions that combine donor finance with private finance are therefore recommended to address three key challenges in the rehabilitation model: cash crop production risk, challenges establishing new value chains at scale, and land and tree tenure. Several options to structure blended finance to address these risks are possible. Three blended finance structures are provided in the report for donors and project designers to consider. These include development of a blended finance facility, and SME loan fund, and/or a resilience bond. Each of these three models require benchmarks for graduation away from donor dependence and towards market supported resilient cocoa farming. 

Further Resources