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

2. Overview BackgroundNicaragua Coffee Industry Coffee Market CECOCAFENSolcafeFinancingDecision

3. Background January 1999, a dry coffee processing mill comes up for sale (Solcafe) Cecocafen wants to become vertically integrated 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

4. Nicaragua

5. 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

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

7. Coffee Industry Overview Overview World coffee production in 1999/2000 is forecast at 107.2 million bags 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 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 Exporters: Brazil (23,135,000) Colombia (9,300,000) Indonesia (5,084,000) Largest importers: Europe, United States, Japan Largest importers: Europe, United States, Japan Coffee Types Arabica Arabica Robusta Robusta Coffee Markets Movements Movements Organic – Promotes organic farming and processing practices Organic – Promotes organic farming and processing practices Fair Trade – Ensures equitable trading arrangements for disadvantaged farmers organized into cooperatives Fair Trade – Ensures equitable trading arrangements for disadvantaged farmers organized into cooperatives Specialty Coffee - (Starbucks) Specialty Coffee - (Starbucks)

8. Coffee Producing Nations

9. Coffee Pricing Long run coffee prices Short term periods of high volatility and/or high prices Short term periods of high volatility and/or high prices Gradual decline in recent history Gradual decline in recent history

10. Coffee Industry: Processing & Supply Chain Producers Farm workers Credit institutions that lend to producers Suppliers to producers ProcessorsExporters

11. Prevailing Trends in the Coffee Market Prices Coffee spot prices are a function of world supply Coffee spot prices are a function of world supply World pricing sensitive to supply/demand fluctuations in Brazil 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 Organizations working to ensure fair wages, cooperative workplaces, consumer education, environmental sustainability, cultural identity and public accountability Specialty Coffee Market Organic, shade grown, etc. Organic, shade grown, etc. Fastest growing sector of overall market Fastest growing sector of overall market World Bank Strategy Promoting development in SE Asia through coffee production Promoting development in SE Asia through coffee production

12. Coffee Market in Nicaragua Fragmented market 80% of farmers have less that 5 manzanas each (1 Manzana =.7 hectares) 80% of farmers have less that 5 manzanas each (1 Manzana =.7 hectares) Land titling Disincentive to invest Disincentive to invest Barrier to extension of credit Barrier to extension of credit Lack of collateral Lack of collateral Farmer organizations Banks High transaction costs High transaction costs Agricultural sector unable to benefit from formal banking mechanisms Agricultural sector unable to benefit from formal banking mechanisms

13. Coffee Market in Nicaragua: Key Stakeholders Social and Economic impact Government/Banks  Affects other economic sectors Government/Banks  Affects other economic sectors Wages and unemployment Wages and unemployment Rural economy Rural economyStakeholders Government of Nicaragua Government of Nicaragua Farmers Farmers Labor Labor Global Trading Partners Global Trading Partners NGOs NGOs Development Agencies Development Agencies

14. 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

15. CECOCAFEN

16. CECOCAFEN Sales and Production

17. 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

18. 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

19. Financing Options National: National: Most of the larger banks have some coffee lending in their portfolio Export Sector: Export Sector: They finance about 88% of the short-term debt for coffee producers in Nicaragua International Banks: International Banks: Rabobank, Oikocredit and Triodos are anthroposophical banks with strong social missions Micro-Credit/NGO/Other: Micro-Credit/NGO/Other: Primarily finance ancillary projects

20. 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%

21. Decision

22. 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 Coffee prices at record lows Global over-production leads to accumulation of inventories Global over-production leads to accumulation of inventories Increasing competition on global scale Increasing competition on global scale Due to Fair Trade and flexible interest rates Ceocafen and Solcafe survived the crash