Chapter 8. Cocoa and cotton commodity chains in West Africa 269
institutions such as better market information and legal reforms such as warehouse receipts - also offer
opportunities to lower transaction costs.
Our research has revealed that there may be significant fixed costs and therefore scale economies for both
marketing and processing of cocoa and cotton. A successful innovation by Cargill, discussed later, has exploited
these scale economies by utilizing larger trucks for transporting cocoa to the port and using industrial-scale
gas dryers for which unit costs are lower. Moreover, problems with cocoa cooperatives were often due to lack
of transportation capital. Small all-terrain vehicles may be effective for collecting cocoa from remote farmers
but as one gets closer to the port larger trucks are more cost-effective. Rental markets for transportation
were limited and imperfect. In general, the successful traders were quite large and could cover fixed costs
of doing business against larger volumes. Similarly, fixed costs and scale economies appear to be factors in
primary-processing activities. Fixed costs have an impact on cotton gin operations and on “usinage” (drying
and sorting cocoa beans) as well as on primary processing of cocoa. Marketing agents, including producer
organizations, need to be organized in order to exploit these scale economies.
STCP and ICCO have also pursued marketing interventions to establish traceability of cocoa exports back
to the village of origin, along the lines of the French system of appellation controlée. STCP’s original goal
was to utilize “village of origin” as a basis for gaining premiums in cocoa marketing. But participants
of STCP in the chocolate industry argued that demand for quality cocoa is weak and these identity
preservation-based premiums would not be realized. The continued emphasis on traceability by an ICCO
project probably reflects European food safety concerns rather than cost or premium considerations along
the cocoa value chain. The safety concern is of considerably less importance along the cotton value chain
given that cotton is not food. Traceability will add, not reduce, transaction costs along the value chain.
The niche market solutions (e.g. Fair Trade, organic) are also aimed at gaining premiums along the
marketing chain and also require traceability. Costs for these marketing options are very likely to be
higher than trade in bulk cocoa or cotton. The goal of these options is to gain premiums, not to reduce
transaction costs. Once again, limited demand for high quality products prevents premiums from being
realized by a large numbers of farmers.
3.2 Tax incidence
Consumers, intermediaries, processors, manufacturers and farmers share in any reductions of taxes,
rents or transaction costs along the value chain. Tax incidence across these agents depends on market
responses, as measured by elasticities. Tax incidence is greatest on the most inelastic agents – which may
well be the intermediaries, processors or manufacturers. While supply of cocoa and cotton by farmers is
not likely to be extremely elastic, consumer demand for these products is also likely to be inelastic, as is
the derived demand of intermediaries. Transaction costs near the farmgate are also a much smaller share
of consumer costs than they are of farmgate prices, affecting the relative shares of change in tax and
transaction costs. Abbott, Wilcox and Muir (2005) simulated various interventions along the cocoa value
chain and found small shares of tax reductions or cost savings accrued to farmers. While assumptions were
necessary to establish elasticities, and although the magnitudes of elasticities – particularly of consumer
demand – are disputed, it is clearly the case that price changes at the farmgate will only be a fraction of
changes along the value chain, even if the shares are not precisely known.
Sharing of tax and transaction cost reductions is complicated by two additional factors. Several studies
argue that exporting agents, processors and chocolate manufacturers are oligopolistic firms, so market
power is relevant. Sexton et al. (2007) argue that market power exacerbates the rents captured by