JAMAICAN COCOA INDUSTRY: REFORM NEEDED, BUT OPPORTUNITY

UNCLAS SECTION 01 OF 02 KINGSTON 000772 SENSITIVE SIPDIS STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO) WHA/EPSC (MROONEY) SANTO DOMINGO FOR FCS AND FAS E.O. 12958: N/A TAGS: EAGR ECON SENV EINV AID ETRD JM XL SUBJECT: JAMAICAN COCOA INDUSTRY: REFORM NEEDED, BUT OPPORTUNITY EXISTS SUMMARY -------------- ¶1. (SBU) On August 20, 2008 USAID in association with the Ministry of Agriculture held a workshop to present findings from a 2008 USAID-funded assessment of the Jamaican cocoa industry. The assessment found that Jamaica's cocoa beans are some of the finest in the world and are in high demand as a flavor in premium cocoa products. Although there are significant economic opportunities to be derived from cocoa production, Jamaica's cocoa industry continues to languish under the stranglehold of its rent-seeking national cocoa board, with production on a downward trajectory. Given the underlying political imperatives, there appears to be reluctance to change the board arrangement; appointments to these boards are often extended as a reward for years of commitment to party politics. However, for the industry to be resuscitated there is immediate need for restructuring of the entire industry, to include devolution of the pricing mechanism from the board. In closing comments, Minister of Agriculture Christopher Tufton indicated he was willing to do whatever is needed turn the sector around; hopefully this will include doing away with the board -- a precondition for any future USG, and probably private sector, investment. End summary. USAID Assessment of Cocoa Industry -------------- ¶2. (SBU) The USAID funded assessment indicates that even though there are attractive international prices, local production continues on a downward trajectory. Output of cocoa beans plunged from a one-time peak of 2,500 metric tons in 1993 to 800 metric tons in 2007. At this level, Jamaica is producing far below its capacity and missing opportunities in the international market for its high quality beans. It is also a little known fact that Jamaica's cocoa beans have a premium quality status similar to that of world famous Blue Mountain coffee. Jamaican cocoa is some of the finest in the world and commands a high price for use in premium products. Like coffee, the quality is attributed to sound genetic selection, ideal climatic conditions, and meticulous fermentation, drying, and polishing. With almost 15,000 farmers involved in the industry, output per person is negligible, suggesting production has been relegated to subsistence level. It is little surprise that current yields are just about one quarter of the economically feasible level of 400 kilograms per acre per year. The low yields are attributable to: 1) very low prices; 2) recurrent hurricane damage; 3) farm neglect; 4) pest and diseases; and, 5) generally poor agronomic practices influenced by high input cost and inadequate extension services. Cocoa Board, A Major Bottleneck -------------- ¶3. (SBU) Jamaica's cocoa industry fails to realize the economic opportunities that exist in the export market because the sector continues to languish under the stranglehold of its rent seeking cocoa board. With the exception of primary production, the board, a relic of Jamaica's 1970s failed socialist experiment, continues to control every other aspect of the industry --- from collection and transportation to processing and international marketing. This heavy involvement in the non-regulatory aspects of the industry is largely driven by the board's desire to control the pricing mechanism and by extension extract economic rent. This control is even more paramount in the current environment, given that international prices, on which Jamaica fetches a premium, are at an all time high. But this windfall has not trickled down to the farmers who shoulder the weight of production. In fact, farmers complained during the workshop that they felt "shafted" by the board, which now allocates only 40 percent of the total revenues to them. Remarkably, this is actually a dramatic increase of 50 percent on the previous pay out. ¶4. (SBU) One farmer told emboffs that his return on his last cocoa crop was a mere USD 40. At such modest profit levels, it is virtually impossible for coca fields to be resuscitated and production levels to increase. The price signal to farmers acts as a disincentive to new investment, further suppressing production and productivity levels. There are also indications that the board falls short on managerial and technical competencies as evidenced by comments made by senior board representatives during the workshop. The board spent a significant amount of time trying to defend their role and value to the industry even in the face of strong evidence to the contrary. In particular, with the exception of the board, it was generally accepted that there was a clear conflict between the regulatory and commercial aspects of board functions, a potential avenue for corruption. Ministry of Agriculture Unwilling to Curb the Board -------------- -------------- ¶5. (SBU) Although the Ministry of Agriculture (MOA) is a partner in the assessment, the top echelon of the ministry was visibly absent for the technical discussions and the technocrats in attendance remained silent on the continuing value of the cocoa board. MOA officials voiced criticism of the board to emboffs and USAID staff, but are reticent to make their concerns public. The reluctance of the MOA to address the issues of the cocoa board is understandable, given the underlying political imperatives, with appointments to these boards often serving as a reward for years of commitment to party politics. And this scenario is not unique to the cocoa industry, but is consistent with all commodity boards, including citrus, banana, coffee and sugar. This systemic approach to commodity board appointments is a means of institutionalizing patronage and firming up political support. Farmers Lose in the End -------------- ¶6. (SBU) While political actors extract rewards from the industry, the cocoa farmers remain on the economic fringe and future investment in the sector is hindered. The declining benefits to primary producers also have precipitated an exodus of farmers from the industry. The few that remain must supplement their income with other economic activities. When asked about the payout required to achieve financial viability, farmers told emboffs that 60 percent of current market price would be a good starting point. And while this might appear to be a major premium on the existing price, it is still well below the 80 percent paid to Caribbean neighbors and recommended in the cocoa assessment. A common concern expressed by farmers was the desire to end the cocoa board's stranglehold on marketing and processing and act solely as a regulator. Farmers told emboffs that this move not only would strengthen cash flows, but also would lead to an influx of new investors along the value chain. Good Regional Alternatives Exist -------------- ¶7. (SBU) The recommendation to revise the role of the board appears to be in sync with the picture painted by a leading Caribbean industry expert Ken Mortin Whiteman of JHB International Trade and Finance, who attended the work shop. He explained that across the Caribbean and Latin America the cocoa industry largely has been deregulated, with the board assuming a purely regulatory function. He dismissed the position of the Jamaican board, when they argued that farmers had to produce at least 300 metric tons for direct export to be viable. In fact, there are farmers in Trinidad and Tobago who produce and export as little as 30 metric tons allowing them to realize the entire gains from the export trade. However, he did agree that independent quality control was pivotal to the integrity of the industry and in particular to export trade. Comment -------------- ¶8. (SBU) Although challenges loom, they are largely board- created, and the potential economic benefits to be gained from a de-regulated cocoa industry are significant. International cocoa prices are projected to remain high, and Jamaica already benefits from positive branding for premium coffee that could be used to market premium cocoa. It is an imperative that the GOJ moves swiftly to create an enabling structure, shifting the balance of power from the board to producers. But this is easier said than done, and any move in this direction will require a willingness to challenge those with political strength on the board. Given the GOJ's history of appeasement, it is not likely that any radical departure from the existing structure will take place, although Minister Tufton has indicated he is willing to take the issue head-on. Embassy/USAID agree that privatization of the sector by eliminating the control of the board is a precondition to USG, and probably, private sector investment. At best, the GOJ might agree to decrease the board's influence on the pricing mechanism, but this may not be enough to reinvigorate the sector and attract new investment. End Comment. HEG