Securing our future Coffee Supply Chain A Global View. Sintercafe November 2015

Transcription

1 Securing our future Coffee Supply Chain A Global View Sintercafe November 2015

2 Presentation Structure 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

3 Olam Coffee- A historic snapshot Supply Chain Supply Chain Upstream Supply Chain Midstream 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 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 16% Volume CAGR

4 Olam Coffee Now Upstream Supply Chain Midstream Olam coffee plantations with focus on high 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 12 million bags of green coffee Direct presence in 21 coffee growing origins Olam Specialty Coffee as an independent subsidiary to focus on Specialty segment primarily in US while expanding in EU and Asia 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

5 Presentation Structure 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

6 Agriculture- Key global challenges 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

7 Key structural trends point to growing imbalance between supply & demand for agri commodities over the long term 1 DEMAND FACTORS Population growth pressures 1 SUPPLY FACTORS Growing scarcity of arable land due to urbanization, soil erosion and related factors 2 Increased per capita food consumption driven by rising incomes and urbanization 2 Slowing rate of agricultural productivity improvement 3 Dietary shift towards organic/ sustainable while increase in demand for protein/fats in developing countries 3 Water scarcity due to climate change, and other environmental degradation 4 4 Biofuels increasing competition for resources Logistical inefficiencies and storage bottlenecks

8 Demand: Growing global population to increase overall consumption, particularly in developing markets 2.3x 1.2x Asia & Africa will be the key regions to supply 8

9 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 0.4% 0.6% 1.1% E 2030E x CAGR 9

10 Demand: Consumer preference shifts will increasingly shape global food consumption patterns Health & wellbeing 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 Safety & traceability 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 Globalization Emergence of Chinese players driving down prices in agriculture and food production sector Increasing international integration and ease of outsourcing lowering cost of production 10

11 Supply: Arable land per capita has declined over time POPULATION GROWTH HAS OUTPACED ARABLE LAND INCREASE AVAILABILITY OF ARABLE LAND IS EXPECTED TO PLATEAU 0.5x 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 11

12 Supply: Agricultural productivity improvement has slowed 2.0% 1.5% 0.7% x CAGR 12

13 Supply: Water Scarcity will become a huge challenge Water for irrigation also challenged by water demand for urbanization By 2025, 36 countries, home to 1.4B people will be affected by water scarcity (KM 3 ) 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 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

14 Presentation Structure 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

15 Coffee- Key global challenges Yield growth/ productivity Weather volatility Land Suitability Water Stress Labor Availability

16 Coffee Global Challenges - Yield Growth Average global yields of coffee have been going up quiet steeply over the last decade. 25 Coffee Yields by Major Producing Regions 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 60 kg bags per hectre Takeaway: Yield Improvement in coffee is contributing positively in increasing coffee supply however it is critical to improve yields in Africa Central America South America Asia Africa and CAA.

17 Coffee Global Challenges - Weather Volatility 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

18 Coffee Global Challenges - Land Suitability 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 source CIAT 2014 Takeaway: Serious challenge for high grown Arabicas

19 Coffee Global Challenges - Water Stress Generally, coffee is not anticipated to face t h e w a t e r s t r e s s s e e n i n o t h e 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

20 Coffee Global Challenges - Labour Availability 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. Percent of Population over Brazil Viet Nam Colombia Peru India Indonesia Ethiopia 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

21 Presentation Structure 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

22 Coffee Key Trends Increasing demand of differentiated coffees Specialty, certified etc Increasing Concentration of Producing countries Increasing Participation of financial participants Increasing volatility Long term demand growth

23 Increasing demand of differentiated coffees Specialty, Certified, Sustainable coffees Growth of Coffee Shop Culture - Coffee becoming a trendy drink With rising incomes and affordability 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 Specialty Coffee Demand ( mn 60kb bags) 12.5 % CAGR in 5 years The 3 rd wave of specialty coffee further helping to create a focus on quality and sustainability amongst consumers E 2024 E

24 Increasing Concentration of Producing countries 02/03 13/14 Others 60% Brazil 29% Last Decade Others 46% Brazil 36% Vietnam 11% Vietnam 18% 13/14 24/25 Others 46% Brazil 36% Next Decade Others 35% Brazil 44% Vietnam 18% Vietnam 21% Over dependence on Brazil and Vietnam for supplies will continue

25 Increasing Participation of financial participants 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 % CAGR in 10 years 10% 8% 6% Increasing correlation amongst commodities as well as between commodities and other % 2% asset classes 0.0 0% Massive growth in Hedge funds over the last 10 years AUM under CTA/managed money funds growing to over 220 b usd CTA funds(usd bn) % of Hedge funds(rhs)

26 Increasing volatility 340 NY Coffee Price (c/lb) With increasing concentration of producing countries 290 And increasing numbers of extreme weather events And the large growth in CTA funds many 190 of which depend heavily on trend following strategies, 140 Volatility is here to stay

27 World Consumption (Total Coffee) 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 TOTAL WORLD (mil. Bags) CAGR-10y CAGR-5y f.cagr-5y f.cagr-10y R&G % 1.4 % 1.4 % 1.4 % Soluble % 4.2 % 4.0 % 3.8 % Pods % 16.6 % 10.0 % 6.0 % Total % 2.7 % 2.7 % 2.7 % Specialty (Total) % 9.5 % 6.5 % Emerging Markets % 5.0 % 4.4 % 4.0% 27

28 Presentation Structure 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

29 Price vs. Spec length vs. S/D 15,000 10,000 S&D: 4.6 mn bgs surplus Spec sold mn Bgs Price dropped by +183 cts S&D:0.7 mn bgs deficit Spec bought mn Bgs Price rallied by +107 cts S&D:3.8 mn bgs deficit Spec sold mn Bgs Price dropped by +80 cts , Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep ,000 S&D: 1 mn bgs deficit Spec bought mn Bgs -10,000 Price rallied by +172 cts ,000 Spec Length in '000 Bags (LHS) NY Price (RHS)

30 Depreciation of Coffee currencies crude shock! Brazil Real : -71% Col Peso : -48% Mex Peso : -26% Coffee Price : -38% 30

31 Coffee Supply & Demand 13/14 14/15 15/16 Arabica Production Consumption Surplus/ Deficit (0.7) (3.8) (3.7) Robusta Production Consumption Surplus/ Deficit 3.7 (1.2) (1.1) Total Production Consumption Surplus/ Deficit 3.0 (5.0) (4.8) All figures in mn 60kg bags 31

32 Presentation Structure 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

33 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

34 Corporate Responsibility & Sustainability (CR&S) Plantations, Concessions & Farming Code Sustainable stewardship of land and communities through carrying out Environmental & Social Impact Assessments Olam Livelihood Charter (OLC) Plantations & farms Supplier Code Using our purchasing to achieve better outcomes through implementing Supplier Code Small-scale FarmersImproving farmer well being Through the OIC Large-scale FarmersWater, carbon and biodiversity management through Good Agricultural Practices Championing sustainability in the workplace through behavior change Farmers/ suppliers Sourcing & Trading Olam Sustainability Standard Carbon Footprint & Safety Environment, people and food safety through recognized processes and policies Offices Improved efficiencies and reduced emissions through intelligent systems Processing Logistics 34

35 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; HCV: High Conservation value; FPIC: Free and Prior Informed Consent; OFIS: Olam Farmer Information System

36 Olam Livelihood Charter 2014: One million tonnes of product 30 qualifying initiatives 350,000 farmers enrolled 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

37 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 37

38 Coffee CR&S: Key Facts 2014 Participating Countries: Côte d'ivoire, Cameroon, Colombia, Honduras, Vietnam, Indonesia, Laos 14,258 33,650 71,526 6 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 38 38

39 Laos Plantation CR&S project 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

40 Laos Plantation CR&S Project Meeting with Group Heads Discussing 4 C Principles Washed Robusta Group Nongtuang Village Arabica Planning for season Discussing with Group Heads from 4 Villages Robusta Improving Robusta Quality Checking Processing Quality of Groups 40

41 Presentation Structure 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

42 Wrap Up 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. 42

43 Wrap Up 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. 43

44 Thank You