CECOCAFEN

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CECOCAFEN

• To Buy or Not to Buy? And, How?
• February 23, 2006
• Daniel Grundman, Richard Hooper,
• Amber Kuchar, Kristopher Nordstrom

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Overview

• Background
• Nicaragua
• Coffee Industry
• Coffee Market
• CECOCAFEN
• Solcafe
• Financing
• Decision

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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

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Nicaragua
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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

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Economy

• Poorest country in Central America
• Legacy of civil war
• Inadequate infrastructure
• Corruption and red tape
• Coffee is major contributor to GDP
• Healthy forecast

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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)

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Coffee Producing Nations
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Coffee Pricing

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

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Coffee Industry Processing Supply Chain

• Producers
• Farm workers
• Credit institutions that lend to producers
• Suppliers to producers
• Processors
• Exporters

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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

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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

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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

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CECOCAFEN

• Established 1997 to export Nicaraguan coffee to
  Europes 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

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CECOCAFEN
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CECOCAFEN
Sales and Production
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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

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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

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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

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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

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Decision
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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