Improving Agricultural Market Performance:
Creation and Development of Market Institutions
51
The strength of the model lies in its ability to align incentives among different actors in a way
that has typically not occurred in more top-down programs. “In a broader social landscape
where cocoa production is declining, and where farmers are exposed to various other
livelihood options, cocoa buyers are increasingly conscious of the need to intervene to
encourage cocoa farming as part of an attractive livelihood strategy. As a result, important
actors along the cocoa and chocolate market system are motivated to invest in the
establishment of CDC training centres as a means to ensure long-term supply sustainability.”101
Sulawesi cocoa has historically been traded on the global market as unfermented, bulk beans,
mainly for their butter content. Processors and manufacturers use Sulawesi beans mainly as a
filler and blend them with other, more flavourful fermented beans. There has historically been
insufficient price differentiation to encourage farmers to invest in producing higher-quality
cocoa beans (e.g. through fermentation). Nevertheless, intense competition among buyers
meant that, even in the 1990s, Indonesian cocoa farmers were receiving a much higher share
of the international price (89%) than farmers in Côte d’Ivoire (50%) and Ghana (63%).102
In 2010, Indonesia introduced an export levy on cocoa, ranging from 5% to 15% of export
value, to encourage a shift from raw cocoa exports to domestic grinding and processing. In
2009, 77% of the crop was exported, but by 2012 an estimated two-thirds of the crop was
processed domestically. Though this caused a number of traders and exporters to go out of
business, but domestic employment in the processing industry has more than made up for
these losses. The increase in domestic grinding capacity has led to a shortage of domestic
supply, despite the export levy, and an increase in imports. In 2016 Indonesia imported 61,000
MT of unprocessed cocoa beans, representing an annual increase of 27% by weight and 34%
by value. This, despite a 5% import tariff applied to all imports except those from other ASEAN
countries, principally Malaysia, which is the second-largest supplier after Ecuador.103
Research in the Polewali district of Sulawesi found that the share of the world price received
by farmers increased from 67% in 2008 to 79% in 2012, primarily as a result of increased
competition among domestic processors since the introduction of the 2010 export tax.104
Several multinationals, including Barry Callebaut, Cargill, and Olam, have made substantial
investments in processing facilities in Indonesia. This is partly because of the export levy, but
that is not these companies’ principal concern. The principal motivation of these companies is
to improve product quality and guarantee supply, but their investments are also motivated by
international efforts to promote better labor practices and more environmentally sustainable
production, which they can better guarantee through greater integration of the market
systems and closer relationships with farmers and farmer organizations. Several of these
companies have promoted sustainability initiatives in Indonesia as well as in other countries:
Cargill’s Cocoa Promise program, Barry Callebaut’s Cocoa Horizons Foundation, and Olam
International’s Grow Cocoa Program (in collaboration with the Blommer Chocolate Company).
101 Ibid
102 Ibid
103 (2017), Trademap, available at
[Accessed July 2017].
104 Neilson, J. & McKenzie, F. (2016), “Business-oriented outreach programs for sustainable cocoa production in Indonesia:
an institutional innovation,” in FAO/INRA (eds.), Innovative markets for sustainable agriculture – How innovations in market
institutions encourage sustainable agriculture in developing countries, pp. 17-32, Rome: Food and Agriculture Organization of
the United Nations and Institut National de la Recherche Agronomique.