Transcript Cecocafen

CECOCAFEN
To Buy or Not to Buy? And, How?
February 23, 2006
Daniel Grundman, Richard Hooper,
Amber Kuchar, Kristopher Nordstrom
Overview
Background
Nicaragua
Coffee Industry
Coffee Market
CECOCAFEN
Solcafe
Financing
Decision
Background
January 1999, a dry coffee processing mill
comes up for sale (Solcafe)
Cecocafen wants to become vertically
integrated
Previously no other coffee cooperative had
ever owned and operated a mill
Volatile market and limited access to credit
Only two years old
Nicaragua
History
1937 – 1979: Samoza dictatorship
Sandanistas seize control in armed revolt
9-years of civil conflict
1990 begins democratic era
Aleman elected in 1996
1998: Hurricane Mitch
Economy
Poorest country in Central America
Legacy of civil war
Inadequate infrastructure
Corruption and red tape
Coffee is major contributor to GDP
Healthy forecast
Coffee Industry Overview
Overview
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World coffee production in 1999/2000 is forecast at 107.2 million
bags
World coffee consumption in 1998/99 is estimated at 106.0 million
bags, up 2 percent from the preliminary 1997/98 level
Largest Exporters: Brazil (23,135,000) Colombia (9,300,000)
Indonesia (5,084,000)
Largest importers: Europe, United States, Japan
Coffee Types
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Arabica
Robusta
Coffee Markets
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Movements
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Organic – Promotes organic farming and processing practices
Fair Trade – Ensures equitable trading arrangements for disadvantaged
farmers organized into cooperatives
Specialty Coffee - (Starbucks)
Coffee Producing Nations
World Coffee Production Statistics
Exportation in 60Kg bags from major producing countries between 1995-1999
('000s)
Country
Angola
Bolivia
Brazil
Cameroon
Colombia
Costa Rica
Dominican Republic
Ethiopia
Mexico
Nicaragua
Venezuela
Arabica/Robusta
Robusta
Arabica
Arabica/Robusta
Robusta/Arabica
Arabica
Arabica
Arabica
Arabica
Arabica
Robusta
Arabica
Source: International Coffee Organization
1995
62
151
15,784
663
12,878
2,684
886
2,860
5,527
985
1,364
1996
71
133
27,664
1,432
10,876
2,126
519
3,270
5,324
793
1,200
1997
64
153
22,756
889
12,211
2,500
941
2,916
5,045
1,084
986
1998
85
150
34,547
1,334
11,088
2,350
422
2,745
5,051
1,073
991
1999
55
184
32,353
1,218
9,336
2,465
694
3,505
6,442
1,384
717
Coffee Pricing
Long run coffee prices
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Short term periods of high volatility and/or high prices
Gradual decline in recent history
Coffee Industry: Processing &
Supply Chain
Producers
Farm workers
Credit institutions
that lend to producers
Suppliers to
producers
Processors
Exporters
Prevailing Trends in the Coffee
Market
Prices
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Coffee spot prices are a function of world supply
World pricing sensitive to supply/demand fluctuations in
Brazil
Fair Trade Movement
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Organizations working to ensure fair wages, cooperative
workplaces, consumer education, environmental
sustainability, cultural identity and public accountability
Specialty Coffee Market
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Organic, shade grown, etc.
Fastest growing sector of overall market
World Bank Strategy
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Promoting development in SE Asia through coffee production
Coffee Market in Nicaragua
Fragmented market
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80% of farmers have less that 5 manzanas each
(1 Manzana = .7 hectares)
Land titling
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Disincentive to invest
Barrier to extension of credit
Lack of collateral
Farmer organizations
Banks
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High transaction costs
Agricultural sector unable to benefit from formal
banking mechanisms
Coffee Market in Nicaragua:
Key Stakeholders
Social and Economic impact
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Government/Banks  Affects other economic sectors
Wages and unemployment
Rural economy
Stakeholders
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Government of Nicaragua
Farmers
Labor
Global Trading Partners
NGOs
Development Agencies
CECOCAFEN
Established 1997 to export Nicaraguan coffee to
Europe’s specialty markets.
Represents 1200 producers
Promotes sustainable development and social
programs
Cuts out traditional middleman and increases
the money going back to the producer
Focus on increasing quality of coffee
CECOCAFEN
CECOCAFEN
Sales and Production
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
Cecocafen/Nicaragua Options
1. Leverage comparative advantage of
coffee industry and focus on enhancing
coffee quality and reducing costs in order
to ensure sustainability
2. Pursue a diversification strategy into
other long term products in order to
minimize risk to the economy
SOLCAFE
Solcafe is a wet processing mill
Coffee is prepared and shipped
Would act as an information center
accessing quality and sales availability
Has excess capacity and can easily
expand
Critical to achieving the vision of
Cecocafen
Financing
Options
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National: Most of the larger banks have some
coffee lending in their portfolio
Export Sector: They finance about 88% of the
short-term debt for coffee producers in Nicaragua
International Banks: Rabobank, Oikocredit and
Triodos are anthroposophical banks with strong
social missions
Micro-Credit/NGO/Other: Primarily finance
ancillary projects
Financing
Oikocredit
Operates like a development "bank", providing
financing to disadvantaged people, people who would
normally not get a loan from a commercial bank.
Loan duration: 2-10 years
Flexible interest rates: based on market rate, country
and project risks, development relevance
Dividend: Modest, usually 2%
Decision
RESULTS
May 1999, Cecocafen bought Solcafe with a
loan from Oikocredit
Coffee prices crash in December 2001 at 41.5
cents per pound
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Coffee prices at record lows
Global over-production leads to accumulation of inventories
Increasing competition on global scale
Due to Fair Trade and flexible interest rates
Ceocafen and Solcafe survived the crash