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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.
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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
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 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 Sales and Production
Cecocafen/Nicaragua Options • Leverage comparative advantage of coffee industry and focus on enhancing coffee quality and reducing costs in order to ensure sustainability • 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%
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