Developing a Fairtrade Cocoa Sector in Nicaragua (Slides)

Developing a Fairtrade Cocoa Sector in Nicaragua!

04/06/2014 Developing a Fairtrade Cocoa Sector in Nicaragua 1

Independent Study Project Presentation – 04/06/2014!!

Group 4: Giuliano Bandeen, Armen Khederlarian,!Edmund Moshammer, Tommaso Operto, Christoph Sponsel!

Content!

2!

Introduction! CBA I! Coordination! Policies! CBA II! Conclusion!

Introduction & Motivation!

Perfect Market Cost-Benefit Analysis!

Coordination Problem!

Policy Recommendations!

Cost-Benefit Analysis incl. Policies!

Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014! Developing a Fairtrade !Cocoa Sector in Nicaragua!

Cocoa World Market!

3

§  Weather and disease sensitivity, long-term investment!§  Proportionally stronger demand increase for certified cocoa!

0

1

2

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1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Cocoa Beans World Production in mio. tons

04/06/2014


Developing a Fairtrade !Cocoa Sector in Nicaragua!

Nicaraguan Cocoa Market!

4

§  2001 coffee price crisis !

→ shift to cocoa production!

§  Positive growth outlook!

§  Production dominated by

low-scale subsistence farmers!

§  Weak infrastructure, lack of

input finance!

04/06/2014



Potential Gains from Certification

5

§  Guaranteed minimum price!

§  Ban of child labor!

§  Improved contract terms, more equitable trading practices!

§  Environmentally sustainable production standards!

Certification empowers producers in developing countries and reduces poverty and environmental destruction!!

04/06/2014



Cocoa Supply Chain!

6 04/06/2014

COCOA PRODUCERS! INTERMEDIARIES! BUYERS!

COOPERATIVE! BUYERS OF !FT COCOA!

FAIR LABELLING ORGANIZATION !

TRAVELING SALESMEN (TS)!

OTHER BUYERS!CONVENTIONAL FARMERS!

FT FARMERS!

SUPERVISION PAYMENT!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

SUPERVISION!



Motivation for Policy!

7

Would Nicaraguan FT production be profitable?!

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2.82

3.18 2.89

1.57

RaBo Net Exports Value / QuanBty in 2011

Costa Rica Côte d'Ivoire Ghana Indonesia Nicaragua

Export in 2011!

Quantity (tons)!

Value (USD

1ʼ000 )!

Price per kilo in USD!

FT! 363! 1383! 3.81!

Non FT! 1372! 1340! 0.98!

04/06/2014



Content!

8!






Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014!



Cocoa Prices!

9 04/06/2014

Source: FAO, FLO, RiSer, ZoSer, field research


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10 04/06/2014

§  Certification cost!§  Yield loss without fertilizer!§  Transition phase!

§  Equal technology and labor cost (except fertilizer)!§  No information asymmetry!

§  Constant gap between prices of TS and FT!

§  No environmental damages!

§  Higher price!§  Lower price fluctuations!§  No spendings on fertilizer!

Assumptions:!


Costs:! Benefits:!


Static Cost Benefit Analysis!

11 04/06/2014

Description! FT! Non FT!

Price! USD 3500 / t (Ritter Sport)!

USD 1445 / t (avg. TS)!

Transportation! USD 64 / t! 0!

Certification! paid by Ritter Sport! 0!

Quantity per cooperative! 36 t / year! 51 t / year!

Quantity per farmer! 0.51 t / year! 0.73 t / year!

Fertilizer cost! 0! USD 23 / t!

Profit / cooperative! USD 123ʼ696 / year! USD 73ʼ153 / year!

Profit / farmer! USD 1ʼ767 / year! USD 1ʼ045 / year!

Why do Nicaraguan Farmers not switch to FT?!



Content!

12!

Introduction! CBA I! !! Coordination! Policies! CBA II! Conclusion!




Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014!




Cocoa Supply Chain!

13 04/06/2014

COCOA PRODUCERS! INTERMEDIARIES! BUYERS!

COOPERATIVE! BUYERS OF !FT COCOA!

FAIR LABELLING ORGANIZATION !

TRAVELING SALESMEN (TS)!

OTHER BUYERS!CONVENTIONAL FARMERS!

FT FARMERS!

SUPERVISION!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

DELIVERY!!

PAYMENT!

SUPERVISION!


DELIVERY! PAYMENT!

PAYMENT!



FT requires coordination and the !current incentive structure imposes hurdles.!

14 04/06/2014

Minimum quantities requirement!§  MQR to fill container!§  Warehousing facilities scarcity!§  Underdeveloped transport infrastructure!

!

Price information asymmetry!§  Lack of knowledge of market prices!§  Distance to market and availability of local

intermediates buying at lower prices!

Negotiation power in supply chain!§  Small scale subsistence farmers!§  Lack of collaboration between farmer!

Financial and technological constraints!§  Lack of access to credit (upfront-payment,

certification costs)!§  Limited capacity to apply FT techniques!

Introduction! CBA I! !! Coordination! Policies! CBA II! Conclusion!


Content!

15!





Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014!




Policy I: Storage Improvement !

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Problem: Selling FT cocoa requires minimum quantities to fill container !

§  Group forming and joint liability!

§  Construction costs covered by government but farmers pay rent for amortization (spread over 10 years)!

§  Maintenance organized by trusted farmers at negligible costs!

§  Government needed due to difficult landownership situation and weak

law enforcement!


Solution: Construction of local and regional warehouses!


Policy I: Storage Improvement !!

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100 Local Warehouses!!

14 Regional Warehouses!!



Policy I: Upfront Payment!

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Problem: Farmers face acute financial distress à Fire Sales!

§  Farmers receive upfront payment at first delivery to local warehouse!

§  Maturity of credit line dependent on chocolate manufacturer !

§  Credit line issued by private bank to cooperatives!

§  Guaranteed credit line by government with reduced interest rate!

§  High risk premium of farmers (~ 20%) à Gov. intervention needed!



Solution: Upfront payment scheme!

Content!

19!






Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014!



CBA incl. Policies - Methodology!

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Initial Y0! Transition Y1-3! FT Y4-10! NPV Total!

Farmer!

Revenue (price * Q)! USD 117ʼ000! USD 126ʼ000! !Cost (Maintenance, Certification, Transport, Interest = 6%)! USD -5ʼ000! USD -5ʼ000! !

Total! ! USD 112ʼ000! USD 121ʼ000! !

NPV (discounted at 26%)! ! USD 215ʼ400! USD 186ʼ500! USD 401ʼ800!

Government!Cost (Warehouse Construction)! USD -17ʼ500! !

NPV (discounted at 6%)! USD -17ʼ500! ! ! USD -17ʼ500!

Traveling Salesmen!

Revenue (price * Q * fertilizer productivity increase)! USD 74ʼ300! USD 74ʼ300! !

Cost (Fertilizer)! USD -1ʼ200! USD -1ʼ200! !

Total! ! USD 73ʼ200! USD 73ʼ200! !

NPV (discounted at 26%)! ! USD 157ʼ600! USD 126ʼ300! USD 284ʼ000!

Total welfare gain = NPVF + NPVG – NPVTS! USD 100ʼ400!

Total individual farmerʼs profit = (NPVF – NPVTS) / 70! USD 1ʼ700!



CBA incl. Policies – Results!

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ü  3 alternative policy choices!ü  3 pricing schemes!ü  4 real interest rate scenarios!ü  2 time horizons!

ROBUSTNESS!CHECKS!

Real Interest

Rate!Pricing! Welfare Gain ! Individual

farmerʼs profit! NPVF vs. NPVTS!

6%! Ritter! USD 100ʼ370 ! USD 1ʼ680 ! + 41.51%!

IRR ! Ritter! 50.78%!



Content!

22!





Conclusion!

I!

II!

III!

IV!

V!

VI!

04/06/2014!




Main Findings!

23 04/06/2014

Problem: Coordination problem!

§  Storage infrastructure improvement!§  Upfront payment financing!

§  Group forming and joint liability!

§  Main findings of Cost-Benefit Analysis:!

§  High IRR in comparison to opportunity costs!

§  Individual farmerʼs profit +41% of yearly income!


Solution: Policy proposal!


Externalities & Scope!

24

Developing a Fair Trade Cocoa Sector in Nicaragua

04/06/2014

§  Upscale propsal given low current FT production!§  Reasonably easy scalability of proposed policy to new “uptakers”!

§  Prospects of high world market growth!

Scalable scope of our proposal!

Positive Externalities!

24

§  Lower volatility of farmersʼ income!§  Reduction in child labor!§  Higher environmental sustainability!§  Stronger empowerment of farmers!



Thank you for your attention.!

Independent Study Project Presentation – 04/06/2014!!

Group 4: Giuliano Bandeen, Armen Khederlarian,!Edmund Moshammer, Tommaso Operto, Christoph Sponsel!

04/06/2014 Developing a Fairtrade Cocoa Sector in Nicaragua 25

Appendix: Educational Campaign!

26 04/06/2014

Problem: Farmersʼ unawareness of FT productionʼs benefits !

§  2 workshops per region with appropriate curriculum!

§  Experienced and acquainted farmers as teachers!

§  Farmers gain specific expertise!

§  Vehicles and salaries provided by government!



Solution: Educational Campaign!

Appendix II: CBA – Policy Choices!

27 Developing a Fair Trade Cocoa Sector in Nicaragua 04/06/2014

IntroducBon Cost-‐Benefits CoordinaBon Policies Cost-‐Benefits Conclusion

Costs Policy choice 1: No iterven3on

Policy choice 2: Proposed interven3on

Policy choice 3: Full interven3on

Warehouse construc3on

Warehouse maintenance

Credit Line Guarantee

Interests on credit line

Cer3fica3on costs

Transport Costs

Appendix III: CBA – Results!

28 Developing a Fair Trade Cocoa Sector in Nicaragua 04/06/2014

IntroducBon Cost-‐Benefits CoordinaBon Policies Cost-‐Benefits Conclusion

Real Interest



6%! Zotter! USD 8ʼ010 ! USD 440 ! + 10.75 %!

IRR ! Zotter! 7.42%!

Real Interest



6%! Intl. FLO! USD - 95ʼ750! USD - 1ʼ050 ! - 25.80 %!

IRR ! Intl. FLO! Negative Return!

Economy & Finance

Developing a Fairtrade Cocoa Sector in Nicaragua (Slides)