V. MULTILATERAL TRADE AND ENVIRONMENT AGREEMENTS
E. International Commodity-Related Environmental Agreement
4. International Commodity-Related Environmental Agreement for cocoa: a case study
Although an ICREA does not yet exist, the appropriateness and possibility of such an agreement has been studied for cotton, copper and cocoa. A summary of the cocoa study is presented as a case study below (Khalid and others, 1995).4.1 Externalities in cocoa production
Externalities in cocoa production are, in general, similar to many cocoa producers. Of the externalities identified, only the use of agrochemicals such as fertilizers, insecticides, pesticides and fungicides could pose problems to the environment and are of major concern among the producers and environmentalists alike. However, they are applied at minimum levels. Farmers in Ghana, for example, do not apply fertilizers except for demonstration and research purposes. Leaf litter provides enough nutrients to cocoa trees planted under thinned forests. Farmers are taught how to control pests and diseases through biological control, the minimum use of insecticides, and shade and canopy manipulation. The sweatings (fruit juice) and wastes from cocoa pod husks have already found uses, and studies are being undertaken to determine its viability as a commercial product. The technical externalities in each stage of cocoa production, from planting to primary processing, are found in Khalid and others, 1995. A summary of the activities involving environmental externalities in cocoa production is presented in tables 11 and 12 for the estate and smallholder sectors respectively.4.2 Options and constraints in sustainable cocoa production systems
Cocoa production could move either towards plantations or smallholdings. The future depends on price structures, which respond to market forces, the availability of new technology for the management of the crop, the results of scientific research and, finally, innovation.
Under traditional smallholder systems the ecology is diverse, plots tend to be randomly arranged, and are smaller and influenced to a greater extent by the biological diversity adjacent to, and within, them. High levels of sanitation are rarely practised to any great extent and agricultural chemicals are seldom used. The environmentally friendly smallholder sector seems much more promising, provided that prices show some improvement from the levels in the early 1990s. Technology for smallholders must also advance in the areas of adequate yield potential under farmer management systems, particularly for low input systems which rely on integrated pest management that involves a high degree of biological control of the major pests and diseases. Better planting material would be most helpful in achieving that objective.
Some 90 per cent of world cocoa production is grown on family holdings of two hectares or less. Establishment of cocoa trees has been traditionally under thinned forest shade, following logging and a few years of food crop production. Added value may be generated by the use of multipurpose shade trees, improved establishment systems using cash crops, the use of legumes to enhance nitrogen nutrition during and after establishment, and the integration of cocoa with non-cocoa crop enterprises. The added value of other products from the cocoa trees, such as animal feed potash and soap from cocoa pods, and human food, and alcoholic and non-alcoholic beverages from sweatings during fermentation, could be an important economic incentive to production. Farmer inputs have been minimal. The main cost to the farmer is his own labour in harvesting, fermenting and sun-drying the crop in the absence of major pest and disease outbreaks. Weeding is only required during the establishment period or when canopies are thinned by heavy pruning. Nutrients are recycled through the development of leaf litter under the cocoa canopy and a healthy biological degradation into organic matter. Thus, mature cocoa trees require less chemical fertilizer application. The opportunity cost of keeping the land under cocoa could be high, especially when prices are low and the price of food crops in the markets are high. In Ghana in the 1980s such a situation resulted in many cocoa trees being abandoned, or even uprooted, and being replaced by food crops (Smith, 1994).
Plantation cocoa sector seems to be an uncertain industry Many commercial cocoa plantations have been established in Brazil, Indonesia, Malaysia and parts of the Pacific island countries, but all have their problems and it has proved difficult to produce cocoa beans of the quality routinely produced by West African smallholders. Cocoa plantations have seldom proved to be a consistently good investment for the plantation companies or their shareholders. In Tawau (which is Malaysia’s largest cocoa area) some 1,753 ha of cocoa were replaced with oil palm in 1993. One hectare of cocoa provided a return of M$ 800 per year compared with M$ 3,300 per year from a hectare of oil palm at the Bal Plantation in Sabah. In plantation operation, all inputs including capital, infrastructure, administration, labour and its welfare aspects, and materials are fully costed and charged against revenue from sales. Since high capital expenditure is not required for traditional primary processing of cocoa beans, processing on a commercial scale does not add any material value to cocoa produced on a small scale by peasant farmers, in contrast to other major perennial plantation crops such as oil palms, rubber and coffee, all of which require a capital intensive processing facility. Thus, the need for large-scale fermentation and drying facilities by large plantations necessitates additional costs.4.3 The cost of internalization
To produce cocoa in a manner consistent with eco-friendly objectives requires: investments in soil erosion prevention programmes; development of cost-effective biological control and an integrated pest management system; research and development on clonal materials; specific cultural practices and rehabilitation; farmers’ education; and extension services. Such requirements involve huge sum of investment by the government in addition to the strengthening of the environmental protection agencies. To compensate adequate soil management, disease prevention and maintenance of production infrastructure, cocoa growers in Brazil require international prices of at least US$ 1,700, or at least 13.33 per cent above the minimum price of US$ 1,500 that just covers variable costs in average productivity. In Malaysia, a 10 per cent reduction in the use of agrochemicals by smallholders would require an additional cost of 15.6 per cent above the cost of production under the conventional production method. Thus, with the cost of production estimates of US$ 1,200-1,700 (Duncan, 1991), it can be expected that the price of cocoa beans would need to be at least US$ 1,367 to US$ 1,936 per ton in international markets to just cover the variable costs.
Studies in Brazil, Cote d'Ivoire, Malaysia and Nigeria reveal that the greatest potential source of environmental pollution in cocoa production and processing is the use of pesticides followed by the use of fertilizers. However, the use of pesticides in all those countries is still within acceptable limits. Only pesticide misuse in the form of a lack of either proper training for workers engaged in spraying or the provision of protective clothing, and the inadequate labelling and disposal of containers is serious. No effort has been made to quantify the adverse effects on the environment and the health of farmers in the pricing of cocoa beans. Despite a considerable decline in the application of pesticides during the 1980s in Brazil, a commensurate decline in yields is not evident. In Malaysia, the use of pesticides, insecticides and fungicides is not a significant factor affecting the production of cocoa. The use of fertilizers in cocoa production in the major cocoa-producing countries is minimal. Cocoa farming systems are, in a sense, sustainable because of their high relative ground cover and the recycling of organic matter as a means of maintaining soil fertility. There are, in fact, environmental benefits in the cabruca system in Brazil, chiefly in the form of retention of a range of species representative of the threatened Atlantic forests. In Malaysia, cocoa plantations are established on logged-over forests or intercropped with coconut and fruit trees by smallholders, thus providing recycled nutrients that are shared between the crops.
It is evident that the cost of internalization of externalities in cocoa production is small, falling within the range of 10 to 16 per cent of the private costs of production. While the production of cocoa responds to the variations in cocoa prices through changes in the use of agricultural inputs, internalization costs associated with its production externalities are relatively small. The estimation on the internalization of externalities through input substitution for Malaysian producers results in an increased cost of production of about 15.6 per cent; when introduced into the market model, the production level declines marginally by about 2 per cent. This is the result of the inelastic response of production to the cost of production. The inelastic response is not uncommon for perennial crops, since investment in perennial crops like cocoa involves a long gestation period.
Each producer has a different cost structure such that internalization of production externalities may result in higher production costs for some countries but reduced costs for others. For example, an integrated pest management when initially implemented would require additional labour, and despite a reduction in expenses for chemicals, might increase the cost of production as a result of the labour charges. In some countries with low wages, however, integrated pest management practices would instead lower the cost of production. That is evidenced by a 77 per cent reduction in the cost of production in Indonesia. In Malaysia, one-third of the cost of production is accounted for by labour involved in combating the cocoa pod borer on estates in Sabah.4.4 Trade effects of sustainable production
Many primary commodities have the potential of being produced in a sustainable manner but developing countries are concerned that such methods may increase their cost of production and subsequently erode their competitive position in the international arena if internalization measures are taken unilaterally. Policy innovations with incentive package appear imperative to the challenges to sustainable production.
Evaluating the trade effects of alternative production techniques for cocoa involves two major steps. In the first step, a production function is estimated and the costs of an alternative technology are quantified. Efforts to internalize environmental externalities increase the cost of production through the production function, by an estimated 15.6 per cent. In the second step, a market model is developed and estimated. The impact of the increased cost of production is simulated through its introduction into the market model. A conservative 14 per cent increase in the cost of production is chosen for simulation (although the difference is marginal) after taking into account expert opinions that a reduction of only less than 10 per cent in agrochemicals is plausible, given their already low level of usage and the Brazilian estimate of a 13.3 per cent increase in price to compensate for sustainable production. The effects on production, exports, domestic consumption and imports are marginal at 2.08, 0.07, 0.58 and 1.14 per cent, respectively (Khalid and others, 1995).4.5 Lessons from the study
Cocoa is one of the commodities that are produced by developing countries but mostly consumed by developed countries. The appropriateness of an ICREA for cocoa as an instrument to encourage internalization of externalities in the production and consumption of cocoa is assessed. Essential to the study of ICREA as a possible arrangement for full cost pricing of commodities is the analysis of the market structure. Cocoa is characterized as an oligopsonistic market structure both at local farm and at international levels. That gives some power to the buyers in determining prices at both levels. The world cocoa market structure is oligopolistic-oligopsonistic in nature. There are few traders and manufacturers. The main cocoa traders are E. D. & F. Man, Rayner, ACLI and Hutton. The main cocoa manufacturers that control about 60-80 per cent of the market are Cadbury-Schweppes, Nestle, E. D. & F. Man and Rowntree.
On the supply side, process and production methods differ with local conditions, although most producers believe their practices are the most sustainable compared to many other agricultural crops. Few producers would admit that there is any urgency to change their production methods to a more sustainable manner. However, they are responsive to the adoption of new technology. In that area extension agents play an important role in promoting innovations in the cocoa industry. While production of cocoa responds to the variations in cocoa prices through changes in the use of agricultural inputs, internalization costs associated with the production externalities are relatively small.
An ICREA for cocoa seems to be a potentially appropriate instrument through which cocoa producers could cooperate and negotiate full cost pricing, given the nature of the world market. An ICREA of Type A seems to be appropriate as the existing few producers could get together and collectively pass on the cost of internalization to the consumers in terms of higher prices. Seven major producers, i.e., Brazil, Cameroon, Cote d'Ivoire, Ghana, Indonesia, Malaysia and Nigeria, account for about 85 per cent of the world production of cocoa beans. Four countries, i.e., Germany, the Netherlands, the United Kingdom and the United States, account for about 45 per cent of world consumption. Agreement among producers is difficult to attain since developing producer countries lack experience in cartel and market power manipulation.
A Type B ICREA is preferred by developing producer countries as it involves financial transfers which could be used for research and development as well as the transfer of knowledge and technologies to farmers. Flexibility in terms of implementation that takes into account national conditions is another benefit of Type B ICREA to the developing countries. Farmers are heavily dependent on extension agents in terms of advice and the adoption of new technologies. As 90 per cent of world producers are smallholders, institutions such as cocoa marketing boards, agricultural departments and cocoa research institutions could play major roles in formulating policies and enforcing them for sustainable production, as well as the undertaking of research and extension and the promotion of consumption, for the benefit of farmers. Thus, the benefits to the farmers can be channelled through institutional strengthening via financial transfers. Outlay for research and development is one of the major constraints in developing producer countries. Individual producers or countries without strong financial backgrounds and economic power may lose their competitive position and market share. More benefits of ICREA can be envisaged through research and development of the harmonization of cleaner production technologies and standards by signatory countries. The experiences of the International Cocoa Agreement could provide the foundation for an ICREA for cocoa, although trade and environmental concerns related to the industry could be dealt within the International Cocoa Agreement.
Internalization of production externalities may generate tangible benefits to the producers, as described above. Perhaps resources that once were wasted could be processed into useful by-products and, when commercialized, provide additional revenue to the cocoa farm operator. Khalid and Wan Mustafa (1992) showed that the benefits of resource recovery and recycling are quantifiable and that those efforts could be rewarded tangibly. Cocoa has to be managed on a total farm basis. Recycling of resources within the farm will not only eliminate externalities but also generate additional revenue.