CECOCAFEN To Buy or Not to Buy And

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 • • 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

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

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