CECOCAFENCECOCAFENTo Buy or Not to Buy? And, How?To Buy or Not to Buy? And, How?

February 23, 2006February 23, 2006Daniel Grundman, Richard Hooper,Daniel Grundman, Richard Hooper,

Amber Kuchar, Kristopher NordstromAmber Kuchar, Kristopher Nordstrom

OverviewOverview

BackgroundBackgroundNicaraguaNicaraguaCoffee IndustryCoffee IndustryCoffee MarketCoffee MarketCECOCAFENCECOCAFENSolcafeSolcafeFinancingFinancingDecisionDecision

BackgroundBackground

January 1999, a dry coffee processing mill January 1999, a dry coffee processing mill comes up for sale (Solcafe)comes up for sale (Solcafe) Cecocafen wants to become vertically Cecocafen wants to become vertically

integrated integrated Previously no other coffee cooperative Previously no other coffee cooperative

had ever owned and operated a millhad ever owned and operated a millVolatile market and limited access to Volatile market and limited access to

creditcreditOnly two years old Only two years old

NicaraguaNicaragua

HistoryHistory

1937 – 1979: Samoza dictatorship1937 – 1979: Samoza dictatorshipSandanistas seize control in armed Sandanistas seize control in armed

revoltrevolt9-years of civil conflict9-years of civil conflict1990 begins democratic era1990 begins democratic eraAleman elected in 1996Aleman elected in 19961998: Hurricane Mitch1998: Hurricane Mitch

EconomyEconomy

Poorest country in Central AmericaPoorest country in Central AmericaLegacy of civil warLegacy of civil warInadequate infrastructureInadequate infrastructureCorruption and red tapeCorruption and red tapeCoffee is major contributor to GDPCoffee is major contributor to GDPHealthy forecastHealthy forecast

Coffee Industry OverviewCoffee Industry OverviewOverviewOverview

• World coffee production in 1999/2000 is forecast at 107.2 million bagsWorld coffee production in 1999/2000 is forecast at 107.2 million bags • World coffee consumption in 1998/99 is estimated at 106.0 million World coffee consumption in 1998/99 is estimated at 106.0 million

bags, up 2 percent from the preliminary 1997/98 levelbags, up 2 percent from the preliminary 1997/98 level • Largest Exporters: Brazil (23,135,000) Colombia (9,300,000) Indonesia Largest Exporters: Brazil (23,135,000) Colombia (9,300,000) Indonesia

(5,084,000)(5,084,000)• Largest importers: Largest importers: Europe, United States, JapanEurope, United States, Japan

Coffee TypesCoffee Types• ArabicaArabica• RobustaRobusta

Coffee MarketsCoffee Markets• MovementsMovements

• Organic – Promotes organic farming and processing practicesOrganic – Promotes organic farming and processing practices• Fair Trade – Ensures equitable trading arrangements for disadvantaged Fair Trade – Ensures equitable trading arrangements for disadvantaged

farmers organized into cooperativesfarmers organized into cooperatives• Specialty Coffee - (Starbucks)Specialty Coffee - (Starbucks)

Coffee Producing NationsCoffee Producing Nations

('000s)

Country Arabica/Robusta 1995 1996 1997 1998 1999Angola Robusta 62 71 64 85 55Bolivia Arabica 151 133 153 150 184Brazil Arabica/Robusta 15,784 27,664 22,756 34,547 32,353Cameroon Robusta/Arabica 663 1,432 889 1,334 1,218Colombia Arabica 12,878 10,876 12,211 11,088 9,336Costa Rica Arabica 2,684 2,126 2,500 2,350 2,465Dominican Republic Arabica 886 519 941 422 694Ethiopia Arabica 2,860 3,270 2,916 2,745 3,505Mexico Arabica 5,527 5,324 5,045 5,051 6,442Nicaragua Robusta 985 793 1,084 1,073 1,384Venezuela Arabica 1,364 1,200 986 991 717

Source: International Coffee Organization

World Coffee Production Statistics

Exportation in 60Kg bags from major producing countries between 1995-1999

Coffee PricingCoffee Pricing

Long run coffee pricesLong run coffee prices• Short term periods of high volatility and/or high pricesShort term periods of high volatility and/or high prices• Gradual decline in recent historyGradual decline in recent history

World Coffee Prices - (1/94 - 2/99)

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350.00

CLOSE

Coffee Industry: Processing Coffee Industry: Processing & Supply Chain& Supply Chain

ProducersProducersFarm workersFarm workersCredit institutions Credit institutions

that lend to that lend to producersproducersSuppliers to Suppliers to

producersproducersProcessorsProcessorsExportersExporters

Prevailing Trends in the Prevailing Trends in the Coffee MarketCoffee Market

PricesPrices• Coffee spot prices are a function of world supplyCoffee spot prices are a function of world supply• World pricing sensitive to supply/demand fluctuations in World pricing sensitive to supply/demand fluctuations in

BrazilBrazilFair Trade MovementFair Trade Movement

• Organizations working to ensure fair wages, cooperative Organizations working to ensure fair wages, cooperative workplaces, consumer education, environmental workplaces, consumer education, environmental sustainability, cultural identity and public accountabilitysustainability, cultural identity and public accountability

Specialty Coffee MarketSpecialty Coffee Market• Organic, shade grown, etc.Organic, shade grown, etc.• Fastest growing sector of overall marketFastest growing sector of overall market

World Bank StrategyWorld Bank Strategy• Promoting development in SE Asia through coffee Promoting development in SE Asia through coffee

productionproduction

Coffee Market in Coffee Market in NicaraguaNicaragua

Fragmented marketFragmented market• 80% of farmers have less that 5 manzanas each (1 80% of farmers have less that 5 manzanas each (1

Manzana = .7 hectares)Manzana = .7 hectares)Land titlingLand titling

• Disincentive to investDisincentive to invest• Barrier to extension of creditBarrier to extension of credit• Lack of collateral Lack of collateral

Farmer organizationsFarmer organizationsBanksBanks

• High transaction costsHigh transaction costs• Agricultural sector unable to benefit from formal banking Agricultural sector unable to benefit from formal banking

mechanismsmechanisms

Coffee Market in Nicaragua: Coffee Market in Nicaragua: Key StakeholdersKey Stakeholders

Social and Economic impactSocial and Economic impact• Government/Banks Government/Banks Affects other economic sectors Affects other economic sectors• Wages and unemploymentWages and unemployment• Rural economyRural economy

StakeholdersStakeholders• Government of NicaraguaGovernment of Nicaragua• FarmersFarmers• LaborLabor• Global Trading PartnersGlobal Trading Partners• NGOsNGOs• Development AgenciesDevelopment Agencies

CECOCAFENCECOCAFEN

Established 1997 to export Nicaraguan coffee Established 1997 to export Nicaraguan coffee to Europe’s specialty markets. to Europe’s specialty markets. Represents 1200 producersRepresents 1200 producersPromotes sustainable development and Promotes sustainable development and

social programssocial programsCuts out traditional middleman and increases Cuts out traditional middleman and increases

the money going back to the producerthe money going back to the producer Focus on increasing quality of coffee Focus on increasing quality of coffee

CECOCAFENCECOCAFEN

CECOCAFENCECOCAFEN

Quantity in qq Sold Prices Harvest Total Organic Conventional Cecocafen Average for Nicaragua

1997-1998 6,776.50 26.50 6,750.00 $165.64 $151.22 1998-1999 12,698.12 413.06 12,285.06 $129.02 $107.98

Sales and ProductionSales and Production

Cecocafen/Nicaragua Cecocafen/Nicaragua OptionsOptions

1.1.Leverage comparative advantage of Leverage comparative advantage of coffee industry and focus on enhancing coffee industry and focus on enhancing coffee quality and reducing costs in coffee quality and reducing costs in order to ensure sustainabilityorder to ensure sustainability

2.2.Pursue a diversification strategy into Pursue a diversification strategy into other long term products in order to other long term products in order to minimize risk to the economyminimize risk to the economy

SOLCAFESOLCAFE

Solcafe is a wet processing millCoffee is prepared and shippedWould act as an information center

accessing quality and sales availabilityHas excess capacity and can easily

expand Critical to achieving the vision of

Cecocafen

FinancingFinancing

Options Options • National: National: Most of the larger banks have some

coffee lending in their portfolio• Export Sector: Export Sector: They finance about 88% of the

short-term debt for coffee producers in Nicaragua• International Banks: International Banks: Rabobank, Oikocredit

and Triodos are anthroposophical banks with strong social missions

• Micro-Credit/NGO/Other:Micro-Credit/NGO/Other: Primarily finance ancillary projects

FinancingFinancing

OikocreditOikocreditOperates like a development "bank", Operates like a development "bank",

providing financing to disadvantaged people, providing financing to disadvantaged people, people who would normally not get a loan from people who would normally not get a loan from a commercial bank.a commercial bank.Loan duration: 2-10 years Loan duration: 2-10 years Flexible interest rates: based on market rate, Flexible interest rates: based on market rate,

country and project risks, development country and project risks, development relevancerelevanceDividend: Modest, usually 2%Dividend: Modest, usually 2%

DecisionDecision

RESULTSRESULTS

May 1999, Cecocafen bought Solcafe with a May 1999, Cecocafen bought Solcafe with a loan from Oikocreditloan from OikocreditCoffee prices crash in December 2001 at 41.5 Coffee prices crash in December 2001 at 41.5

cents per poundcents per pound• Coffee prices at record lowsCoffee prices at record lows• Global over-production leads to accumulation of Global over-production leads to accumulation of

inventoriesinventories• Increasing competition on global scaleIncreasing competition on global scale

Due to Fair Trade and flexible interest rates Due to Fair Trade and flexible interest rates Ceocafen and Solcafe survived the crashCeocafen and Solcafe survived the crash