Developing a Fairtrade Cocoa Sector in Nicaragua (Slides)

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Barcelona GSE Master Project by Giuliano J. Bandeen, Armen Khederlarian,
Edmund Moshammer, Tommaso Operto, and Christoph Sponsel

Master Program: International Trade, Finance and Development

About Barcelona GSE master programs: http://j.mp/MastersBarcelonaGSE

Published in: Economy & Finance
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Developing a Fairtrade Cocoa Sector in Nicaragua (Slides)

  1. 1. 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!
  2. 2. 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!
  3. 3. Cocoa World Market! 3   §  Weather and disease sensitivity, long-term investment! §  Proportionally stronger demand increase for certified cocoa! 0   1   2   3   4   5   6   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 Productionin mio. tons 04/06/2014   Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  4. 4. 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   Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  5. 5. 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   Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  6. 6. 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! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  7. 7. Motivation for Policy! 7   Would Nicaraguan FT production be profitable?!  2.36      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   Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  8. 8. Content! 8! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Introduction & Motivation! Perfect Market Cost-Benefit Analysis! Coordination Problem! Policy Recommendations! Conclusion! I! II! III! IV! V! VI! 04/06/2014! Cost-Benefit Analysis incl. Policies! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  9. 9. Cocoa Prices! 9  04/06/2014   Source:  FAO,  FLO,   RiSer,  ZoSer,  field   research   Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! !"!# !"$# %"!# %"$# &"!# &"$# '"!# '"$# ("!# ("$# %))(# %))*# %))+# &!!!# &!!&# &!!(# &!!*# &!!+# &!%!# &!%&# &!%(# !"#$%$&'$ ,-.# /0102#34516# ,7-#34516# 80964#,:# ;5461<#=2>6# ?5964#:42@A5B0@# ?5964#,:# :42C6>5@D#=2>6AE6@# Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  10. 10. Perfect Market Cost-Benefit Analysis! 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:! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Costs:! Benefits:! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  11. 11. 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?! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  12. 12. Content! 12! Introduction! CBA I! !! Coordination! Policies! CBA II! Conclusion! Introduction & Motivation! Coordination Problem! Policy Recommendations! Conclusion! I! II! III! IV! V! VI! 04/06/2014! Perfect Market Cost-Benefit Analysis! Cost-Benefit Analysis incl. Policies! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  13. 13. 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! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! DELIVERY! PAYMENT! PAYMENT! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  14. 14. Coordination Problem! 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! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  15. 15. Content! 15! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Introduction & Motivation! Coordination Problem! Policy Recommendations! Conclusion! I! II! III! IV! V! VI! 04/06/2014! Perfect Market Cost-Benefit Analysis! Cost-Benefit Analysis incl. Policies! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  16. 16. Policy I: Storage Improvement ! 16  04/06/2014   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! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Solution: Construction of local and regional warehouses! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  17. 17. Policy I: Storage Improvement ! ! 17  04/06/2014   100 Local Warehouses! ! 14 Regional Warehouses! ! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  18. 18. Policy I: Upfront Payment! 18  04/06/2014   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! Developing a Fairtrade ! Cocoa Sector in Nicaragua! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Solution: Upfront payment scheme!
  19. 19. Content! 19! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Introduction & Motivation! Coordination Problem! Policy Recommendations! Cost-Benefit Analysis incl. Policies! Conclusion! I! II! III! IV! V! VI! 04/06/2014! Perfect Market Cost-Benefit Analysis! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  20. 20. CBA incl. Policies - Methodology! 20  04/06/2014   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! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  21. 21. CBA incl. Policies – Results! 21  04/06/2014   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%! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  22. 22. Content! 22! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Introduction & Motivation! Coordination Problem! Policy Recommendations! Conclusion! I! II! III! IV! V! VI! 04/06/2014! Perfect Market Cost-Benefit Analysis! Cost-Benefit Analysis incl. Policies! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  23. 23. 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! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Solution: Policy proposal! Developing a Fairtrade ! Cocoa Sector in Nicaragua!
  24. 24. Externalities & Scope! 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! Developing a Fairtrade ! Cocoa Sector in Nicaragua! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion!
  25. 25. 
 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  
  26. 26. 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! Developing a Fairtrade ! Cocoa Sector in Nicaragua! Introduction! CBA I! Coordination! Policies! CBA II! Conclusion! Solution: Educational Campaign!
  27. 27. 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  
  28. 28. 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 Rate! Pricing! Welfare Gain ! Individual farmerʼs profit! NPVF vs. NPVTS! 6%! Zotter! USD 8ʼ010 ! USD 440 ! + 10.75 %! IRR ! Zotter! 7.42%! Real Interest Rate! Pricing! Welfare Gain ! Individual farmerʼs profit! NPVF vs. NPVTS! 6%! Intl. FLO! USD - 95ʼ750! USD - 1ʼ050 ! - 25.80 %! IRR ! Intl. FLO! Negative Return!

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