Securing our future Coffee Supply Chain A Global Vie...Olam Coffee Now Upstream • Olam coffee...
Transcript of Securing our future Coffee Supply Chain A Global Vie...Olam Coffee Now Upstream • Olam coffee...
Sintercafe November 2015
SecuringourfutureCoffeeSupplyChainAGlobalView
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15
Robusta Arabica
• Africa & Asia • 8 Origins • Robusta 95% + Arabica 5%
• South America • 12 Origins • Robusta 53% + Arabica 47%
• 4 Plantations • Specialty Division • 21 Origins • Robusta 51% + Arabica 49% • 2 Soluble Plants
Supply Chain Supply Chain Upstream Supply Chain
Midstream
Olam Coffee- A historic snapshot
16% Volume CAGR
Olam Coffee Now
Upstream
• Olam coffee plantations w i th focus on h igh quality Arabica
• Existing operations in Laos, Brazil, Zambia & Tanzania with current planted area of 5,000 ha
• Target to have 15,000 hectares of estate coffee i n 6 - 7 l o c a t i o n s worldwide
Supply Chain
• 12 million bags of green coffee
• Direct presence in 21 coffee growing origins
• Olam Specialty Coffee as an i ndependen t subsidiary to focus on S p e c i a l t y s e g m e n t primarily in US while expanding in EU and Asia
Midstream
• Soluble coffee with focus on Bulk and private label manufacturing
• Located in Vietnam and Spain with 22,000 tons capacity
• Spain for private label & Vietnam for bulk
Presence across the entire coffee value chain
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
I believe that there are six key developmental challenges that confront all of us this century:
Food security
Water security
Energy security
Impact of climate change
Sustainable growth
Inclusive growth
Agriculture- Key global challenges
Key structural trends point to growing imbalance between supply & demand for agri commodities over the long term
DEMAND FACTORS SUPPLY FACTORS
Population growth pressures Growing scarcity of arable land due to urbanization, soil erosion and related factors
Dietary shift towards organic/ sustainable while increase in demand for protein/fats in developing countries
Water scarcity due to climate change, and other environmental degradation
Increased per capita food consumption driven by rising incomes and urbanization
Slowing rate of agricultural productivity improvement
Biofuels increasing competition for resources
Logistical inefficiencies and storage bottlenecks
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3
4
8
2.3x
1.2x
Asia & Africa will be the key regions to supply
Demand: Growing global population to increase overall consumption, particularly in developing markets
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0.6% 1.1%
0.4%
1979-81 1997-99
2015E 2030E x 1997-
2030 CAGR
Demand: Rising income levels will result in increased food consumption and shift in dietary habits
HIGHER GDP/CAPITA CORRELATED WITH INCREASED CONSUMPTION
GROWTH IN MEAT CONSUMPTION MAINLY FROM DEVELOPING COUNTRIES
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Globalization
Health & wellbeing
Safety & traceability
• Emergence of Chinese players driving down prices in agriculture and food production sector • Increasing international integration and ease of
outsourcing lowering cost of production
• Growing middle class and availability of information leading to a rise in health conscious consumers • Rising affluence translates to willingness to pay for
healthier, organic options
• Series of high profile food safety scares has heightened public awareness and concerns over food safety • Increasing prevalence of processing and additives use
driving need for government to regulate sector
Demand: Consumer preference shifts will increasingly shape global food consumption patterns
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“Indian, Chinese, and US companies are among many inking land investment deals in Africa, including Ethiopia, Tanzania, South Sudan, Mali and Mozambique. [...] foreign investors bought or leased a land area in sub-Saharan Africa about the size of France in 2009 alone.”
Press article
Supply: Arable land per capita has declined over time
POPULATION GROWTH HAS OUTPACED ARABLE LAND INCREASE
AVAILABILITY OF ARABLE LAND IS EXPECTED TO PLATEAU
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 98
Availability of arable land is also expected to plateau
GLOBALLY, ARABLE LAND AVAILABILITY IS REDUCING DUE TO URBANIZATION, ECONOMIC GROWTH
Source: Literature Search; Paper on ‘Global agriculture towards 2050’
“Indian, Chinese and U.S. companies are among many inking land-investment deals in Africa, including Ethiopia, Tanzania, South Sudan, Mali, and Mozambique. […] foreign investors bought or leased a land area in sub-Saharan Africa about the size of France in 2009 alone.”
Press article
0.5x
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Supply: Agricultural productivity improvement has slowed
0.7%
2.0% 1.5%
x CAGR
(KM3)
Water for irrigation also challenged by water demand
for urbanization
Supply: Water Scarcity will become a huge challenge
Economic water scarcity: Water resources are abundant relative to water use, with less than 25% of water from rivers withdrawn for human purposes, but malnutrition exists. Little or no water scarcity: Abundant water resources relative to use. Less than 25% of water from rivers is withdrawn for human purposes. Not estimated
Physical water scarcity: More than 75% of river flows are allocated to agriculture, industries, or domestic purposes.
Approaching physical water scarcity: More than 60% of river flows are allocated
By 2025, 36 countries, home to 1.4B people will be affected by water scarcity
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
Yield growth/ productivity
Weather volatility
Land Suitability
Water Stress
Labor Availability
Coffee- Key global challenges
Average global yields of coffee have been
going up quiet steeply over the last decade.
Yield growth has been substantial in Asia and
South America, while Africa & Central America
remains flat
Bulk of the increases in yield are a reflection of
the increases in acreage in Vietnam and
efficiency lead production increases in Brasil
Takeaway: Yield Improvement in coffee is
contributing positively in increasing coffee
supply however it is critical to improve yields in
Africa and CAA .
Coffee Global Challenges - Yield Growth
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Coffee Yields by Major Producing Regions
Africa Central America South America Asia
The number of extreme and unpredictable
weather events have increased over the
last few decades. Ex: Brazil Dry weather
in early 2015
Takeaway: Coffee may see sudden
unforeseen weather shocks in growing
countries leading to price and supply
volatility
Coffee Global Challenges - Weather Volatility
While overall availability of land does not
seem to be a problem for future growth in
coffee production climate change will
influence the suitability of land for coffee
Average global temperatures expected to
climb 1.7º C pushing the proper altitude for
coffee production higher
“Models predict that, in Central America as
a whole, the optimal coffee-growing
elevation will shift from 1,200 m.a.s.l
currently to 1,600 by 2050” - source CIAT
2014
Takeaway: Serious challenge for high
grown Arabicas
Coffee Global Challenges - Land Suitability
Coffee Global Challenges - Water Stress
Generally, coffee is not anticipated to face
t he wa te r s t r ess seen i n o the r
commodities
Asia, especially Indonesia, and Central
America are possible areas of concern
However the increasing dependence of
coffee on Brazil and Vietnam with the
increasing dependence on irrigation in
these countries does pose a doubt on the
ability of these coffee giants to continue to
increase production going forward.
Takeaway: While not an immediate
concern, water conservation should be a
focus area
Populations are rapidly aging across the globe.
Coupled with the global trend of urbanization and the
clear preference of younger generations to city life
finding labor for coffee farming is one of the biggest
challenges.
While this is a challenge for all of agriculture it is
especially acute for coffee as a large number of
farms are small holder farms and not amenable to
corporatization and mechanization.
Takeaway: The entire industry and the govt’s have to
work together to ensure that workers are enticed to
stay back and work on the farms
2015 2030 2050Brazil 11.7 18.8 29.3Viet Nam 10.3 17.5 27.9Colombia 10.8 18.3 27.6Peru 10.0 14.7 23.2India 8.9 12.5 19.4Indonesia 8.2 13.2 19.2Ethiopia 5.2 6.1 10.4
Percent of Population over 60
Coffee Global Challenges - Labour Availability
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
Increasing demand of differentiated coffees – Specialty, certified etc
Increasing Concentration of Producing countries
Increasing Participation of financial participants
Increasing volatility
Long term demand growth
Coffee – Key Trends
Specialty, Certified, Sustainable coffees
Growth of Coffee Shop Culture - Coffee
becoming a trendy drink
With rising incomes and affordabil i ty
consumers developed a discerning taste for
quality coffee and were willing to pay a bit
more
With Customers looking for similar coffees at
home and Innovation by the industry seeking
to meet the convenience need of consumers
lead to phenomenal growth in Single serve
Consumption
The 3rd wave of specialty coffee further
helping to create a focus on quality and
sustainability amongst consumers.
Increasing demand of differentiated coffees
0.0
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10.0
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20.0
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2010 2011 2012 2013 2014 2019 E 2024 E
Specialty Coffee Demand (‘mn 60kb bags)
12.5 % CAGR
in 5 years
Increasing Concentration of Producing countries
Brazil 29%
Vietnam 11%
Others 60%
02/03
Brazil 36%
Vietnam 18%
Others 46%
13/14
Last Decade
Brazil 44%
Vietnam 21%
Others 35%
24/25
Brazil 36%
Vietnam 18%
Others 46%
13/14
Next Decade
Over dependence on Brazil and Vietnam for supplies will continue
Increasing Participation of financial participants
0%
2%
4%
6%
8%
10%
12%
14%
0.0
50.0
100.0
150.0
200.0
250.0
CTA funds(USD bn) % of Hedge funds(RHS)
7 % CAGR
in 10 years
Commodities being looked upon as separate asset
class with increasing participation of funds
Resulting in pricing being driven as much by
macro events as by fundamental supply and
demand
Increasing correlation amongst commodities
as well as between commodities and other
asset classes
Massive growth in Hedge funds over the last 10
years AUM under CTA/managed money funds
growing to over 220 b usd
With increasing concentrat ion of
producing countries
And increasing numbers of extreme
weather events
And the large growth in CTA funds many
of which depend heavily on trend
following strategies,
Volatility is here to stay
Increasing volatility
107.2
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290
340 NY Coffee Price (c/lb)
World Consumption (Total Coffee)
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TOTAL WORLD (mil. Bags) 2010 2011 2012 2013 2014 2019 2024 CAGR-10y CAGR-5y f.CAGR-5y f.CAGR-10y
R&G 90.5 91.0 92.6 94.0 95.3 102.1 109.5 1.5 % 1.4 % 1.4 % 1.4 %
Soluble 41.2 42.9 44.5 46.2 47.8 58.2 69.4 5.1 % 4.2 % 4.0 % 3.8 %
Pods 3.2 3.7 4.3 5.1 5.7 9.2 10.3 20.5 % 16.6 % 10.0 % 6.0 %
Total 134.9 137.6 141.4 145.3 148.8 169.6 189.2 2.9 % 2.7 % 2.7 % 2.7 %
Specialty (Total) 6.3 7.2 8.1 9.1 10.2 16.0 19.1 - 12.5 % 9.5 % 6.5 %
Emerging Markets 58.5 61.5 64.3 67.1 70.0 86.6 103.8 5.3 % 5.0 % 4.4 % 4.0%
For many decades Overall Coffee growth rates were fairly sedate at about 2.25% per annum. However over the last 10
years demand has been growing at between 2.5 to 3.0 %
However segments of the business have been growing at much higher growth rates
Consumption in origin countries growing at above 5% and growing rapidly in countries like Brazil, Indonesia etc
Soluble coffee growing at over 4% per annum
Specialty Coffee growing at over 10% growth rates on an ever increasing base.
Extrapolating existing trends we expect the world to need an additional 40 m bags of coffee over the next ten years
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
S&D: 4.6 mn bgs surplus Spec sold + 13.9 mn Bgs Price dropped by +183 cts
Price vs. Spec length vs. S/D
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ep-1
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Spec Length in '000 Bags (LHS) NY Price (RHS)
S&D: 1 mn bgs deficit Spec bought + 7.3 mn Bgs Price rallied by +172 cts
S&D:0.7 mn bgs deficit Spec bought + 15.0 mn Bgs Price rallied by +107 cts
S&D:3.8 mn bgs deficit Spec sold + 19.5 mn Bgs Price dropped by +80 cts
Depreciation of Coffee currencies – crude shock!
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Brazil Real : -71% Col Peso : -48% Mex Peso : -26%
Coffee Price : -38%
Coffee Supply & Demand
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13/14 14/15 15/16
Arabica Production 82.3 80.1 81.8 Consumption 83.0 83.9 85.5 Surplus/ Deficit (0.7) (3.8) (3.7)
Robusta Production 66.8 62.4 64.1 Consumption 63 63.6 65.1 Surplus/ Deficit 3.7 (1.2) (1.1)
Total Production 149.1 142.5 145.9 Consumption 146.0 147.5 150.6 Surplus/ Deficit 3.0 (5.0) (4.8)
All figures in mn 60kg bags
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
Corporate Responsibility & Sustainability (CR&S)
“CR&S is a key pillar to support the delivery of the BU vision, helping to achieve our goals as a responsible
corporate citizen and in the most sustainable manner. Therefore, we need to ensure CR&S is embedded in our business models across all platforms, be it in the
Core Supply Chain or our Upstream and Mid/Downstream businesses”
As per Olam’s Common Purpose
“Growing Responsibly”
This is the way we do business
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Olam Sustainability
Standard
Olam Livelihood Charter (OLC)
Plantations, Concessions & Farming Code
Supplier Code
Carbon Footprint & Safety
Improved efficiencies and reduced emissions through intelligent systems
Championing sustainability in the workplace through behavior change
Small-scale Farmers- Improving farmer well being Through the OIC Large-scale Farmers- Water, carbon and biodiversity management through Good Agricultural Practices
Environment, people and food safety through
recognized processes and policies
Using our purchasing to achieve better outcomes
through implementing Supplier Code
Sustainable stewardship of land and communities through carrying out Environmental & Social Impact
Assessments
Corporate Responsibility & Sustainability (CR&S)
Farmers/ suppliers
Plantations & farms
Sourcing & Trading
Processing
Logistics
Offices
Olam Coffee- CR&S
Upstream (Plantation)
• Adherence to ESIA, FPIC and HCV standards for land suitability
• Implementing measurable steps for environment
• Habitat Preservation • Water Discharge & Emission
• Implementing measurable steps for communities
• Labor Welfare • Medical facilities • Livelihood Improvement
Supply Chain (Green Coffee)
• Implementation of Supplier code in all origins
• Project implementations under Olam Livelihood Charter
• 6 active projects • 14,000 farmers under the projects
• Focus areas: • Market Access and Information flow • Improve Quality & Yield • Usage of OFIS
Midstream (Soluble)
• Energy/ CO2 reduction • Use of high efficiency lights • Use of heat recovery technology
• Water usage reduction • Reuse evaporate condensate • Recycle vacuum pump water
• Waste reduction • Best in class waste treatment plant • Strict emission standards
ESIA: Environment and Social Impact Assessment; FPIC: Free and Prior Informed Consent; HCV: High Conservation value; OFIS: Olam Farmer Information System
8 Qualifying Principles 1. Finance 2. Improved Yield 3. Labour Practices 4. Market Access 5. Quality 6. Traceability 7. Social Investment 8. Environmental Impact Updated June 2014
2014: § One million tonnes of product § 30 qualifying initiatives § 350,000 farmers enrolled
Olam Livelihood Charter
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Green Coffee Olam Farmer Information System (OFIS)
Inputs : GPS data – farm and infrastructure
Farmer survey – baseline and annual, focus modules possible (e.g. gender, etc.)
Productivity and input updates
Deliverables : Risk mapping - infrastructure risks (distances to
schools, etc.), risk maps
Analysis
Farm management plans
Tracking impact changes over time
UNDERSTANDING FARM DATABASE AND TARGETING INTERVENTIONS
ACCORDINGLY
Coffee CR&S: Key Facts 2014
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Participating Countries: Côte d'Ivoire, Cameroon, Colombia, Honduras, Vietnam, Indonesia, Laos
FARMERS HECTARES TONNES INITIATIVES
Partners : DE Foundation, Nestle / Nespresso, Sustainable Trade Initiative (IDH), etc. Certifications : 4C, Rainforest Alliance, Starbucks C.A.F.E. Practices, UTZ, FT / FLO, Organic
14,258 33,650 71,526 6
38
Laos Plantation CR&S project
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Objectives Ensure long-term social, commercial and agronomical viability of small holder Arabica and Robusta farming
Professionalize existing cooperatives and farmer groups – reaching 2,000 farmers
Consolidate internal service supply of cooperatives and farmer groups to members (mutual collateral, saving schemes, processing, training, supply of inputs)
Partners and roles DE-Foundation
IDH
RABOBANK
OLAM (lead and technical support)
Scope No. of farmers: 2,000 / Volume: 2,000 MT / year (1,500 MT Arabica, 500 MT Robusta)
Duration: Oct 2015 – Dec 2020
Laos Plantation CR&S Project
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Meeting with Group Heads Discussing 4 C Principles
Planning for season
Washed Robusta Group Nongtuang Village
Discussing with Group Heads from 4 Villages
Checking Processing Quality of Groups
Improving Robusta Quality
Ara
bica
Robusta
A Snapshot of Olam Coffee
Food Security – Key global challenges in Agriculture
Challenges facing the Coffee supply chain
Long term trends and demand in Coffee
Near term Supply and Demand situation
Corporate Responsibility & Sustainability (CR&S) in Olam Coffee
Wrap up
Presentation Structure
Wrap Up
42
Food security is one of the major developmental challenges facing the world and agriculture globally faces several supply side constraints to meet the ever growing demand.
The Coffee industry faces its own challenges of increasing yields, water stresses and land suitability amidst changing climactic conditions and especially labor availability.
On the supply side Coffee is increasingly dependent on just 2 origins for the bulk of the world’s demand
Volatility in the coffee market is here to stay and we expect markets moves to be even more unpredictable, extreme and frequent.
On the demand side the picture looks rosy with improving quality and innovation by the industry attracting newer customers and the soluble segment as well as consumption in origin countries growing at very healthy rates
However some of the highest quality coffees where demand is growing very rapidly also face the biggest challenges in terms of land, water and labor.
I believe one of the things that makes coffee “special” is the sheer spread and diversity of qualities and growing regions. We as the coffee industry have to strive to retain this special appeal of coffee
Sustainable and inclusive growth of coffee farmers will help in ensuring them seeing a long term future in the business leading to better security of supply as well preserving the current diversity of coffee.
Wrap Up
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It is a pity that coffee a product category that leads in sustainability initiatives does not have a common industry wide platform. It is imperative that while we continue to work individually on our own initiatives, we have a common agenda and voice for the industry as a whole.
Need for CSR to be less talk, less Jargon, less marketing and investor relation pitches and more action, more data and more hard targets.
I believe that Volatility, which I believe is a given, is a major headwind for a sustainable supply chain. I would urge Govts to step in and protect the small holder farmers from feeling the impact of steep price drops – I feel that this could be achieved in a manner that is neutral to Govt budgets in the long run.
Finally a word of caution – Unfortunately as many of us here would be aware there are loopholes and malpractices in many coffee origins in the sourcing of certified coffee. I feel that each of us has to strongly guard against these. A PR disaster with any one player will hurt the entire industry and will take a long time to recover from.
Thank You