Indonesia is the third largest producer of cocoa in the world after Ghana and the Ivory Coast, and the most significant cocoa bean supplier in East Asia. Indonesia’s biggest competitive advantages include its low cost, high production capacity (availability of supply), efficient infrastructure and open trading/marketing system (business environment). Although the cocoa value chain in Indonesia has experienced phenomenal growth over the past few decades, its continued competitiveness is threatened by inconsistent and poor quality production. Widespread pest infestation, especially from the cocoa pod borer (CPB), is a primary cause of poor cocoa bean quality. In order to address the problems of CPB infestation, various public and private sector initiatives have been undertaken to conduct research, train and improve the traditional practices of smallholder cocoa farmers in Indonesia. Despite these efforts, adoption of improved production and post-harvest skills by cocoa farmers has been limited. This fact raises two questions: 1) What are the incentives and risks that various market actors in the Indonesian cocoa bean value chain have for investing in improved consistency of cocoa bean quality? and 2) How are the actors responding to these incentives? With multiple levels of local and international cocoa bean buyers fiercely competing on price, a smallholder cocoa farmer in Indonesia has many selling options and market channels for his/her production. Within such a market-based environment that differentiates little for quality, Indonesian smallholder cocoa bean farmers have little incentive to upgrade or adopt more labor-intensive (and costly) production and post-harvest practices. Similarly, cocoa bean collectors and traders have few incentives to invest in upgrading their supply channels. In contrast, processors and/or manufacturers have clear incentives to establish closer, more directed supplier relationships in order to improve the quality and consistency of their raw materials. However, these incentives are not yet strong enough for them to transform their procurement operations, especially when faced with opposition from local traders. Lead firms must be convinced that moving procurement closer to their suppliers is worthwhile from a cost-benefit perspective. In addition, cocoa bean price alone may not provide sufficient incentive to promote process upgrading. Smallholder farmers must also have the capacity (skills and knowledge) to access and adopt improved practices and be able to respond to opportunities to increase their returns.
INDONESIA COCOA BEAN VALUE CHAIN CASE STUDY
The cocoa bean value chain in Indonesia has experienced phenomenal growth over the past few decades, but its continued competitiveness is threatened by inconsistent and poor quality production. Why have efforts to improve the production and post-harvest skills of smallholder cocoa farmers been limited? This case study explores this question and examines how value chain governance 1 and incentives at all levels can influence industry-wide upgrading and the adoption of improved practices by smallholder farmers. An overview and description of the cocoa bean value chain in Indonesia is first presented, followed by analysis of the key drivers and threats to its competitiveness. This is followed by analysis of the risks and incentives for actors throughout the value chain to invest in improving cocoa bean quality and maintain competitiveness. The central theme of this case is that market signals and the governance of relationships drive incentives for various market actors in Indonesia to change behavior and invest in upgrading. The final section describes some of the lessons derived from this case for development practitioners. These include: • the need for development practitioners to understand the risks and incentives of market actors (at all levels in the value chain) in order to effectively promote...