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 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

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
Pursue a diversification strategy into
other long term products in order to
minimize risk to the economy

2.

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, usually2%

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