Good morning, Alex, and welcome to Commodity Conversations. You have extensive experience in commodities and the agricultural supply chain, procurement, traceability, certification, and price risk management. I want today to concentrate on cocoa and your role as a cocoa arbitrator. Where did you learn about cocoa?
Good morning, Jonathan. I began my commodity career in sugar. I learned about cocoa when I joined Barry Callebaut after completing an executive MBA at Université Paris Dauphine. I was a senior cocoa trader with Barry Callebaut for about ten years in Zurich.
Barry Callebaut was – and still is – the world’s number one chocolate producer and transformer. It was a fantastic learning experience. I went through the whole value chain, from cocoa bean production to the different steps of transformation all the way to the chocolate bar and liquid industrial chocolate. Except for chocolate, I touched on every cocoa product. By trading all the products, I developed a deep understanding of the problems linked to the supply chain. My time with Barry was an immensely fulfilling one.
Was it a procurement or a trading role?
It was more of a procurement role. Eight people were on our desk, handling a little more than 10 per cent of the world crop and a substantial quantity of cocoa products. We were all backups to each other. Not only did we have responsibility for hedging our own portfolio, but we were also, at times, required to participate in the pricing and structure of the market management.
Did you have a specific geographical area that you looked after?
Initially, I was trading organic and certified cocoa beans, omnibus, from origin niche markets. From there, I moved to cocoa products, liquor, and butter, mainly in Europe but also from Asia. Because of Barry Callebaut’s large footprint, I was also involved in the Americas flows. I then moved to bulk beans from West Africa. I oversaw Ivory Coast and Ghana. That last role is the one I kept with my subsequent employers.
You began your commodity career in sugar before moving to cocoa. How does the sugar market compare to the coca market? Are there any specific differences between the two markets?
First, the sheer size of the market. World sugar production is more than 180 million mt compared to 5 million mt for cocoa beans. It’s on a different scale.
Second, cocoa is grown in a relatively narrow band between 15 degrees north and 15 degrees south of the equator. It limits the number of countries which can produce cocoa. Sugar is grown pretty much everywhere due to beet and cane production.
Third, cocoa has two main crops. The first is from October to March, and the second is a smaller crop from May to September. Both crops are significant and have implications for the market and its prices.
Fourth, the weather can have more of an impact on cocoa than sugar. For instance, if you have too much rain in West Africa, the area will develop different types of fungus that can wipe out the whole crop.
Fifth, cocoa is a tree crop, so you have a lag between planting and production of three to five years.
Six, sugar is harvested on an industrial scale – very little is now done manually. Cocoa farmers manually harvest the pods, open them, and often ferment the beans around the trees. The average plot size is small, usually slightly more than one acre. The farmers sell the beans to the middleman, who goes around different farmers or groups to gather their beans, bring them to the port and prepare them for shipment.
Lastly, sugar is still shipped in large bulk or breakbulk vessels. In cocoa, most of the trade is done in containers.
It seems that disease is a significant factor in cocoa. As you say, disease can wipe out the crop if you get terrible weather.
Absolutely. Cocoa traders pay specific attention to meteorological events. La Nino and El Nino are examples of patterns that can affect crops significantly and specifically around the equator. Some market actors take protection or insurance on the market with over-the-counter (OTC) instruments on weather patterns. Meteorology is indeed an essential part of cocoa trading.
Sustainability, farmer welfare, and human rights, particularly child labour, are significant issues in cocoa. What are the specific challenges you faced as a trader and procurement manager?
These issues changed the whole supply chain, flow and pricing of cocoa beans and their derived products.
When I started in cocoa in 2006, consumer demand began to drive profound structural change within the supply chain. There was a significant shift in the profile of chocolate consumers. The population was getting older and wealthier. Consumers were looking for a healthier product, but also for a product that demonstrated it cared about our environment and the welfare of growers.
There was a particular focus on child labour in the fields, notably in West Africa among immigrants from neighbouring non-cocoa-producing countries working in cocoa fields.
What about deforestation?
The first problem in West Africa is that people often don’t know who owns the land. Farmers often don’t have official title to their land. I understand that several initiatives are currently being rolled out to address this issue.
The second is that protected rainforests are not protected enough. Farmers go into natural forests, cut down indigenous trees, and plant cocoa trees. It is attractive because the soil in these areas is more fertile, and you have a better canopy. Farmers have discovered that the trees grow better, and they can turn around their crops quicker, reducing costs.
Deforestation is a huge issue, especially with the new EU legislation on deforestation. It will be challenging for the supply chain to demonstrate that the cocoa they are importing hasn’t caused deforestation.
Yes, it is.
The FCC was established to serve the trade in physical cocoa. Its aim is to develop a single robust commercial framework for the cocoa market – to harmonize the rules.
It also provides support services and education programmes, not only for traders. FCC members come from various stakeholders in the cocoa supply chain: exporters, processors, chocolate manufacturers, traders, brokers, warehouse keepers, and all other ancillary services. The FCC has about 200 members spread across 38 countries.
The different bodies, FCC, GAFTA, RSAL and SAL, enforce their contract terms under English Law and the provisions of the Arbitration Act 1996. There is a constant watch on what is happening with these different trade associations to see if we should consider their findings in our rules or guidelines. The FCC follows what happens at GAFTA as well as other trade associations.
Cocoa destined for Europe normally trades under FCC rules, but cocoa for other destination trades under different rules and associations, such as the Cocoa’s Merchant Association of America in the USA.
When did you first become an arbitrator, and how many cases a year do you arbitrate?
I became an arbitrator in 2011. I went through the FCC training with some of my Barry Callebaut colleagues.
The number of arbitrations varies yearly, usually depending on weather, market conditions, shipping issues, etc. Poor weather can lead to quality issues with the beans. It can also lead to defaults if the production is below expectations. An oversold crop can lead to disputes between sellers and buyers on the beans and the products. Depending on the years, I have anywhere from two to ten cases. In some years, I have none. Beyond arbitrations, we also have appeals to arbitration decisions.
How many cases a year does the FCC arbitrate?
I believe that is protected information from the FCC. All FCC contracts are copyright protected.
Okay, no problem. How many arbitrators are there?
You must understand that there’s a significant percentage of traders in my age group, and retirement is looming. We’re trying to get younger people in the industry involved as arbitrators.
What’s the role of an arbitrator?
That’s a big question. The point of arbitration is to have respected members of the trade, not only in terms of people but also of organizations, to find a fair, timely, and economical form of dispute resolution as a service to parties who use our contract terms.
Okay, that’s the number one point. Arbitration provides a fair, timely, and economical form of dispute resolution. What else?
Cocoa coming to Europe and contracted under FCC rules follows English law in accordance with the procedures of the FCC and the arbitration and appeal rules of the Arbitration Act of 1996. All disputes are arbitrated by arbitrators recognized by their peers. To become an arbitrator, your peers must support and identify you as a respected individual who knows the business. To become an arbitrator, you must follow serious training with your peers, older traders, and lawyers. There’s a whole language, behaviour and way of thinking that develops in this training.
And then, once you are in the FCC or arbitration and appeal panel, the Council will periodically review you and your decisions. They might ask you to go for further training or review your standing.
I understand that there are two types of cases. One is quality, and the other is contract non-performance.
Yes, you have two types of arbitration. Technical arbitration pertains to contractual rules, such as default, late shipments, or companies that have gone bankrupt and, in general terms, contract non-performance. It can also involve two entities that have a complex contractual agreement. They may ask the board of arbitration for their interpretation of the contract.
The second type of arbitration is about the quality of the cocoa beans. Arbitrators will do a cut test to ascertain the quality of the beans. They may then ascribe a discount to the cocoa or reject it as unfit. While the FCC is not a grader of cocoa, it is essential beyond resolving a dispute, as it may determine specific problems at a given time from a particular origin. For products, the process of ascertaining quality is a little more complex.
Do you arbitrate any cases on the New York or London futures exchanges?
No. We restrict ourselves to the physical movement of cocoa rather than trading on the futures markets.
Are the FCC rulings confidential, or are they published?
They are confidential. And arbitrators are not allowed to talk to each other about the cases they’re doing.
You mentioned that many of the arbitrators work for the big companies. Can’t that lead to a conflict of interest? If an arbitrator from a big company arbitrates a case, they could look at their interest rather than for fair results. How do you get around that?
There is a spirit of the rules and the spirit of the law. You should not be an arbitrator if you’re not fair or looking for a good resolution. However, human nature is what it is, and yes, it has happened.
But if you feel that you’ve been unfairly treated, you can go to appeal, which will bring in a new tribunal with a new panel of arbitrators, sometimes with totally different views. I’ve been on appeal panels that have overturned decisions. Finally, if you feel the whole process has been unfair, you can go directly to the High Court of London.
So, if you’re not happy with the first arbitration ruling, you can go to appeal with a different set of arbitrators. You can go to the High Court of London if you’re still unsatisfied. That last step sounds like a big one.
Yes, it becomes serious because everybody involved throughout the whole history of the case, including the FCC, becomes liable and is under the scrutiny of the law.
Very interesting. When you’re arbitrating on the panel, Alex, do you look at precedent?
Parties to arbitration may take on a law firm to represent them. A law firm will often try to use legal precedent to defend or claim innocence for their parties. But I’ll be frank with you; arbitrators prefer it when lawyers are not involved. It’s quicker and cheaper. I have been in some arbitration cases where the legal costs were so high that they threatened a company’s economic survival.
It’s the role of arbitrators to tell the parties when to stop. There are rules. The claimant states his case, the defendant states his case, and there is room for rebuttals. The arbitrators then decide when to cease submissions from the parties unless they need more clarification.
With modern technology, it is now unusual to hold face-to-face hearings. Each party presents their arguments electronically.
If a counterparty is found in default on a contract, it must pay compensation to the other party. How do you ensure that they pay the compensation?
We publish a list of companies that fail to honour an arbitration ruling. Reputable trading houses will not trade with anyone on that list. Companies will be taken off the list once they fulfil their obligations.
What advice would you give to cocoa traders and buyers to avoid finding themselves in arbitration?
Cocoa has the benefit of being a small market. Most participants in the market know each other or know someone who knows somebody. People understand the contractual terms they’re trading. The rules of contracts are available in French and English. The contract terms spell out the obligations of each party at each stage. As with everything in life, people should not enter contracts without knowing the rules.
And they should be careful not to overtrade and find themselves in an unfavourable financial position where they cannot honour the contract.
So read the contract and don’t overtrade.
What’s the most challenging thing about being an arbitrator?
Time. Being an arbitrator takes commitment and tempo in your work with the other arbitrators.
What qualities do you need as an arbitrator?
Humility, an open mind, and the curiosity to listen to all the arguments from both sides. You also need to have listening, writing and analytical skills.
To continuously test any biases you think you may have.
The ability to work in a team with your colleagues on the arbitration panel.
Stubbornness. If something is not clear, you must go back and dig. Sometimes, one point can take a long time. You must make the effort necessary to clarify any unclear issues.
A sense of fairness – and the will to find the fairest solution.
And once you have made a ruling, you must be able to write it clearly and coherently.
How do you become an Arbitrator?
Voting and Associate Members of the Federation can nominate employees as applicants for the role of Arbitrator for the Council’s consideration for appointment as arbitrators within the FCC Arbitration & Appeal Committee.
The Arbitration and Appeal Committee will then talk to different parties and see if you have the industry support and market knowledge to be recommended for the role, subject to following the compulsory FCC Arbitrator training. You must have at least five years of experience in the cocoa trade and FCC rules.
The recognition of your professionalism and competencies by your peers is essential. Being an arbitrator is not just a title. You must demonstrate the will to better the industry.
Do arbitrators get paid?
Yes, they do. We are paid an hourly amount clearly stated in the arbitration and appeal fees and the arbitration rules of the FCC.
I guess that you don’t become an arbitrator for the pay.
You guess right!
What else are you doing now, Alex, to keep food on the table?
I’m still doing consulting, not only on cocoa. I’m busy even if I’m not making as much money as I used to. I miss trading, but it is challenging to remain in the market when you are 58. It’s a young man’s, women’s game, and you must accept that.
Is there anything else you’d like to add that we haven’t covered?
Only to stress that I love being an arbitrator. It is challenging as many of the cases are complex, but I enjoy the challenge. A bonus is that you meet people from all over the supply chain.
Thank you, Alex, for your time and input.
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This is part of the series Commodity Professionals – The People Behind the Trade.