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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 • • • • 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 • • Arabica Robusta Coffee Markets • Movements • • • 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 • • 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 • • Coffee spot prices are a function of world supply World pricing sensitive to supply/demand fluctuations in Brazil Fair Trade Movement • Organizations working to ensure fair wages, cooperative workplaces, consumer education, environmental sustainability, cultural identity and public accountability Specialty Coffee Market • • Organic, shade grown, etc. Fastest growing sector of overall market World Bank Strategy • Promoting development in SE Asia through coffee production Coffee Market in Nicaragua Fragmented market • 80% of farmers have less that 5 manzanas each (1 Manzana = .7 hectares) Land titling • • • Disincentive to invest Barrier to extension of credit Lack of collateral Farmer organizations Banks • • High transaction costs Agricultural sector unable to benefit from formal banking mechanisms Coffee Market in Nicaragua: Key Stakeholders Social and Economic impact • • • Government/Banks Affects other economic sectors Wages and unemployment Rural economy Stakeholders • • • • • • 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 • • • • 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 • • • 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