A Conversation with Nicko Debenham
Good morning, Nicko, and welcome to Commodity Conversations. Please tell me a little about yourself.
I come from a horse racing family, and all the children went into racing. In those days, the best place to go was the US; it was good money and easier than in the UK or Ireland.
I broke my collarbone in the US, came back to the UK to repair it, and met my wife in London. I took her back to the US, and we got engaged there, much to the horror of both her parents and mine. My future father-in-law decided to take me under his wing. He told me I should own horses, not be paid to ride them.
He had worked as an expat in Nigeria for 35 years, and my wife was brought up in Lagos until she was twelve. He sent me to Nigeria in 1986. That’s how I moved from horses to cocoa.
I went to work for his best friend, Chief Bakare, in Ondo State at the heart of Nigeria’s cocoa production. It was a chaotic period because the government had privatised the cocoa board under an IMF structural adjustment program.
The Bakare family began trading, buying cocoa and selling it to Europe. They built a processing factory. I worked for them for about six years and learned an enormous amount. I then moved to an old-fashioned London trade house, trading everything from tallow, gum Arabic, and sesame seed. I brought cocoa to them and set up a business in Nigeria and Cameroon. The company owner wanted to sell the cocoa business to Anthony Ward, who was setting up Amajaro. I was unhappy because I said it was my cocoa business and I should have a share in the new enterprise.
I left and set up my own business, originating cocoa from Nigeria, Cameroon, Ghana, and the Ivory Coast. It worked well for five years, but it was the era of bank consolidation, and my bank facilities dried up. My capital base was too small. I went to work for Armajaro, staying there for twelve years.
My role at Amajaro was to set up traceable supply chains across Africa, Asia, and Latin America, mainly Ecuador and Peru. We ended up with an excellent trading book. By the time I left to join Barry Callebaut in 2014, 85 per cent of our cocoa was sustainable – and we were the largest trade house in cocoa.
I worked for Barry Callebaut for eight and a half years as head of sustainability, with a mandate to turn the company from a laggard to a leader in sustainability. We created a strategy called Forever Chocolate. We committed to getting 500,000 cocoa farmers out of poverty, being carbon and forest-positive, 100 per cent sustainable, and eradicating child labour in our supply chain by 2025. So, they have one year left.
I stayed with Barry Callebaut till December 2021, when I set up my own company, Sustainability Solutions.
What does Sustainability Solutions do?
I work for government entities to help Ghanaians and Ivorians raise the cocoa price to a level that generates meaningful value for farmers. To solve child labour and deforestation, you must first solve smallholder poverty.
I also work for commercial companies on sustainability, helping them comply with all the new regulations and build a social value strategy.
Could you tell me about these new regulations?
There is a saying that Americans invent, Chinese copy, and Europeans regulate. Europe is a printing machine of new regulations.
We have recently had CSRD, the Corporate Sustainability Reporting Directive. We now have EURD, the European Union Deforestation Regulation. The next one is the biggie, the CSDDD, or the Corporate Sustainability Due Diligence Directive.
What is the difference between the EUDR and the CSDDD?
The EUDR regulation covers seven commodities: soy, cattle, palm oil, timber, cocoa, coffee, and rubber. It targets deforestation, but other forms of illegality have been sneaked into the regulation.
CSDDD means that companies must perform due diligence on everything in their supply chains and prove they have done so. We expect the CSDDD to be passed as a directive in 2024 and transposed into national law by the Member States by 2027.
When does the EUDR come into force?
It’s already in force. It entered into force on 29 July 2023, with an 18-month preparation period before its application on 30 December 2024. It relates to deforestation generated since 31 December 2020.
The EUDR uses the FAO’s definition of forest, which is half a hectare with a 10 percent cover of five metres of trees or higher. If a forest existed before December 2020 and no longer exists, then that’s deforestation.
A recent news article on Reuters suggested that EUDR will lock Ethiopian coffee out of the EU market. Do you agree?
I disagree.
Among the seven commodities, cocoa and coffee present the most significant challenges as they rely most on the EU market. More than 60 per cent of global cocoa production enters the EU, much of which is processed and reexported. The figure for coffee is between 25 and 30 per cent. The statistics for palm and soy are less than 10 per cent. Europeans can choose where they buy their palm or soy, making it easier to conform to the regulations.
If traders want to ensure that their coffee and cocoa are not devalued—if they want to bring them into the EU—they must comply with the regulation.
Can the cocoa sector comply?
Cocoa is a product consumed by children in rich countries and grown by children in poor countries, often in abject poverty. It is an incredible product that everyone loves, but it is emotive because of poverty and child labour. In addition, Ivory Coast and Ghana have seen massive deforestation over the last 20 to 30 years.
NGOs and the media have targeted chocolate brands on these issues for 25 years. The brands and the supply chain companies have had to stand and defend themselves. They have developed sustainable supply chains, collected data, and done the due diligence.
Consequently, the cocoa companies look at EUDR and say, “Yeah, it’s a bit of a pain, but we can do this.”
What about coffee?
The coffee industry has thrown up its arms in horror. “It’s impossible,” they say. “It can’t be done. Our supply chain is unique.”
I’m sorry, but how is coffee different from cocoa? Okay, coffee has washing stations. You have collection stations in cocoa, and you must still clean and dry the cocoa. It’s the same.
The EU is simply asking for the sector to collect data. To do that, you download an application on your smartphone and survey the farm. While there, you ask the farmer about other forms of possible illegality. You make sure you understand the risk of that farmer not having the right to farm that land, illegally using his children on the farm, not paying labour, using forced labour, or having other issues with labour rights. It’s not that difficult. You then follow the coffee up the supply chain. It’s perfectly possible.
I started digital traceability at Amajaro in 2007. When I left in 2014, we had 80,000 farmers on a database supplying Lindt and Sprungli with 45,000 tonnes a year with barcoding on every batch.
Ethiopia says they can’t do it. It’s not that they can’t do it. They can do it. It isn’t easy and requires investment and resources. That’s the issue.
Starbucks, Nespresso and Nestlé do it already, don’t they?
Correct. If some companies can do it, why can’t everyone? It’s perfectly possible.
Does EUDR favour big companies? Will small or medium companies say, “Oh, this will be way too expensive for us. We don’t have the footprint to do it.”
Every company has a mix of direct and third-party supply. A direct supply is where you are closely engaged with your co-op or aggregator and have access to farmer data. You support the farms and have impact programs around certification, productivity, deforestation, etc.
Indirect supply is buying from a third-party shipper, often because you cannot operate inside the origin country, as in Ethiopia for coffee or Cameroun for cocoa. These guys need to be supported with logistics, software, and training.
If I’m correct and there’s a two-tier market, traders will be incentivised to take the necessary steps to achieve that higher end of the two-tier market. That’s the motivation. Most people view it as an opportunity, but some are digging their heels in. They haven’t yet seen the light.
But they need to see the light. EUDR is a stalking horse for CSDDD. If people dig their heels in on EUDR, CSDDD will be an anchor around their ankles.
How much does traceability and due diligence increase cost – and who pays for it?
We put the cost for collecting and managing the data at between $10 and $15 per tonne of cocoa bean equivalent product. It’s similar in coffee.
There is the additional potential cost of the remedial activities required to mitigate any risk of deforestation or other illegality. You may need to invest in raising awareness around child labour and deforestation.
Another potential cost is preserving your product’s traceability. If you deal in both compliant and non-compliant products, you will need to segregate the two in the warehouse, which means a less efficient use of your warehousing space. Remember, EUDR doesn’t allow for mass balance—you must maintain the product’s identity all along the chain.
But it is worth it. A conforming product should trade at a premium exceeding the cost of establishing its conformity.
How can you ensure that the cocoa you buy from a compliant farm comes from that farm?
When you perform due diligence, you must do a reasonable calculation on the volume that is coming from the farm. If it’s a four-hectare farm and the average productivity in that region is 500 kilos a hectare, you’ll start getting anxious if that farmer supplies four tonnes.
The challenge is that you don’t necessarily learn that until a significant portion of the season has passed. Farmers never deliver their entire production in one go. They generally deliver 6 to 12 times a year. You need a digital system totting up the total as the farmer delivers.
You can rely on your aggregator to keep everything honest, but it’s often the aggregator causing the problem. A farmer rarely takes cocoa from another farmer to sell as their own, but the aggregator might add illegal cocoa to a batch of legal cocoa.
The EUDR will stop that from happening because traders will have to prove that they have established that there’s no – or a negligible – risk of deforestation or other forms of illegality. If you don’t even know where it’s coming from, how can you say you’ve done your due diligence?
I understand that in the Ivory Coast, children older than twelve sometimes can’t attend school because their parents don’t have the required registration document. And if they can’t go to school, they work for their parents on the farm.
Sadly, national child labour monitoring and remediation systems are not solving the problems. The solution would be for governments to establish rural infrastructure development with schools, electricity, water, and registration of every rural resident, including their children.
In the absence of government action, companies undertake remediation activities. A company may pay for birth certificates for unregistered children so that they can attend school.
Other companies may supply school kits; a child can’t go to school without a school uniform or rucksack. I mean, who the hell decided that? You’re telling me I can’t bring my child to school just because they don’t have the right coloured shirt or pair of shorts. It’s ridiculous, but that’s what you’re up against.
Farmers need a living income that allows them to pay their workers, send their children to school and attain grades that give them a choice in the future.
The only way you’ll get there is for farmers to have a decent income and for communities to have electricity, water, and communications with schools, health centres, etc. The first thing you’ve got to solve is income, but the second is rural infrastructure.
There is progress, but it might slow if people focus only on due diligence. The danger with EUDR is that money goes into due diligence rather than dealing with the root causes.
Derek Chambers – the famous cocoa trader – told me cocoa farmers were just as poor or even poorer when he retired than when he started his career 40 years earlier.
I would agree with him.
The cocoa price is at a historic high, but it doesn’t help Ghana or the Ivory Coast because they sell their crop a year in advance. The farms still have low prices from the previous selling that they did. They will get better prices next crop.
The challenge we all face is that if you optimise the outcome from a farm – and achieve the capacity and capability of trees on that farm – you should be able to double or triple its production. If farmers did that, the world cocoa price would be not even half what it is today; it would be a quarter.
NGOs and governments want to help farmers increase productivity and yield, which drives the price down. Every complex problem has a simple solution that doesn’t work.
That’s precisely where I’m coming from. It’s about transforming the agricultural policy in a country to obtain a more balanced mix of crops. It’s as much about teaching farmers not to grow cocoa as it is about teaching farmers to grow cocoa. But it needs to be backed by government policy.
Neither Ghana nor the Ivory Coast are self-sufficient in food. Maybe their governments should use the tax from cocoa exports to subsidise the production of vegetables, chicken, pork, etc.
You mentioned that Ghana and Ivory Coast have already been severely deforested. Is the EUDR too little, too late?
No, I don’t think it is. It is essential to protect whatever is left. Countries like Cameroon have a lot of forests to preserve.
What worries me about the regulation is how the EU will implement it.
Why?
There’s lots of noise now, but there could be a mystic silence once the regulation is applied. We’re all blindfolded, standing up against the wall, wondering which one of us is going to get shot. But what if no gun goes off, no one is shot, and everyone carries on as usual?
It is what happened with the US Tariff Act. In 2017, Congress amended Section 307 to prohibit the imports of any product mined, produced, or manufactured wholly or in part by forced or child labour. In the seven years since then, no “withhold and release order” has been issued for cocoa.
What is a hold and release order?
If US Customs suspect your cocoa comes from farms that use forced or child labour, they can withhold it until you prove it didn’t. The burden of proof reverses; you are guilty until you can prove you’re innocent.
In the beginning, everyone made sure that the cocoa going into the US was certified as sustainable and that they could ensure traceability. But then time passes. And it’s like, is that certified? No, never mind, give it a go. Nothing’s happened to anyone yet, so it probably won’t happen now.
Why hasn’t it been enforced?
The US Customs Board of Protection, CBP, is tasked with implementation. However, I don’t believe CBP has the capacity, funding, or resources to do so.
Will the EU do any better?
Each Member State must appoint a National Competent Authority, an NCA, to implement the EUDR. I don’t believe they will have the capacity or the capability to do it.
There is a historical precedent. The EUTR, European Union Timber Regulation, was adopted in December 2010 and came into force in March 2013. It prohibits imports of illegally harvested timber or timber products and requires operators to exercise due diligence to ensure that their timber and timber products comply. The EU appointed NCAs to implement the regulation.
When I asked one NCA about their resources, they told me they have three full-time and two part-time employees to cover all seven commodities. They’re supposed to inspect nine per cent of all relevant products entering their border from high-risk countries, three per cent from standard-risk countries, and one per cent from low-risk countries. There is not a chance in hell that will happen if you’ve only got five people in a country’s NCA.
Some countries may be stricter about implementation than others. Won’t cocoa and other commodities enter the EU via less strict countries?
We are already hearing about different interpretations of the regulation. To clarify matters, the EU has published FAQs. There are 90 or so of them, subdivided into different sections.
One NCA told me they would use EUDR as a window against human rights infringements. Remember, the regulation doesn’t just cover deforestation; it also includes other forms of illegality according to the national laws in the country of production. But then another NCA said they would only focus on deforestation.
If the EU rules that a trade house hasn’t respected national laws at origin, does the trade house have a right of appeal, and to whom do they appeal?
It’s unclear whether you have the right to appeal, but it would be to the National Competent Authority if you do.
Deforestation will have different interpretations depending on which mapping technology you use and how accurate it is. It will cause arguments where the software shows an area as deforested, but a trader will say it’s not deforested and that they have checked it on the ground – it’s just a bit of tree pruning.
Is it a problem that coffee and cocoa both grow under forest canopy?
It is a huge problem. It’s easier in coffee because it’s less under canopy. I don’t think anyone has succeeded in distinguishing between cocoa and shade trees using satellite imagery. We tried it at Armajaro, but the satellite couldn’t differentiate between the two, and the software couldn’t learn what was a cocoa tree and what wasn’t.
There will also be problems with corrupted data – data that has been wrongly inputted.
You must have checks on the ground.
One trader I talked with believes the EU will delay the legislation.
EUDR is a European Parliamentary regulation agreed upon under a trialogue of the Council, the Commission, and the Parliament. They agree on the wording and the timelines, which are then published, translated, and entered into force. A parliamentary vote would be required to delay it, but it won’t happen.
However, the EU is delaying the risk categorisation of the origin countries/regions. As I mentioned, the EUDR calls for origin countries/regions to be categorised as high, low, or standard risk. The NCAs must inspect one per cent of regulated commodity imports from low-risk countries, three per cent from standard-risk countries and nine per cent from high-risk countries.
The EU recently announced that it will temporarily categorise each country/region as standard. This means that NCAs will be obliged to inspect three per cent of all regulated commodity imports regardless of origin. This does not change what companies need to do; it only changes the likelihood of being inspected by an NCA.
Do you have any final messages for traders and food companies?
First, if you’re a brand company and cocoa is your core raw material, you must be stupid if you haven’t learned that you’re handling a hand grenade with the pin out. Cocoa has everything there is that can go wrong. Child and enslaved labour, deforestation, abject poverty, and even potential corruption are all wrapped up in a parcel of cocoa. And that’s why I say, for God’s sake, don’t let go of that pin. Run your business correctly, do your due diligence and do what you should do.
Use digital technology to understand and engage with your supply chains and capacity. Work with your supply chain partners. There is a massive opportunity if you do that.
We are moving to a world where people need to pay a fair price for a product which provides a livelihood for the people who produce it. Is it a human right to be paid a fair price or get a fair income for doing a job? It’s going to be a debate, and it’s going to happen. Historically, with all these issues, the companies that lent into it and tackled it first came out of it best.
Lean into it, identify how you can make a difference and tell the great stories around it. It’s what I call proud marketing.
Thank you, Nicko, for your time and input.
For more information on EUDR, please click here.
© Commodity Conversations ® 2024
This is part of a series I will include in my next book, Commodity Professionals – The People Behind The Trade.