HONDURAS PRODUCTION GROWTH AND OUTLOOK. Presented by Chris.an LeSage, Bon Café SA / ADECAFEH SINTERCAFE November 13, 2015

HONDURAS PRODUCTION GROWTH AND OUTLOOK Presented by Chris.an LeSage, Email: cl@boncafehn.com Bon Café SA / ADECAFEH SINTERCAFE November 13, 2015

Introduction - Macros coffee in Honduras GDP: 19.5 billion USD Ag GDP 2.5 billion USD Coffee as a Percentage of Ag GDP: 26% Per capita GDP: $2236 USD Number of producers: 100,000 Coffee exports: 5 million bags 60kg Country Bags per capita Honduras 0.62 Brasil 0.27 Vietnam 0.30 Colombia 0.26 Indonesia 0.03 Honduras has the highest produc8on per capita in the world

Honduras Export Volume (15 YEARS) 7.0 6.0 5.6 5.8 Millions of 60KG BAGS 5.0 4.0 3.0 2.0 3.0 2.5 3.0 2.1 3.0 2.4 3.0 3.2 3.4 3.2 3.2 4.0 4.4 4.2 5.0 1.0-15 Year Growth : 2.5 myn bags 6.3% growth rate 5 Year growth: 1.8 myn bags 9.3% growth rate

Farm Size Distribution 100% 5 million 60kg bags 100000 5% 5,000 7+ HA 80% 30% 1.5 million 25% 25,000 2-7 HA 60% 40% 20% 0% 36% 1.8 million 34% 1.7 million VOLUME 70% 70,000 PRODUCERS 0-2HA 1/3 produc.on in hands of 70% producers, another 1/3 in hands of 25% and 1/3 In hands of 5%. 95% percent of producers pick coffee with their own family.

Age and Gender distribution of Producers 61+ 16% Age 18-30 9% 51-60 20% 41-50 27% 31-40 28% female 13% Gender male 87% AVERAGE AGE IS 46 HAS GONE DOWN FROM 56 IN LAST 10 YEARS HONDURAS HAS EXECUTED A GENERATIONAL CHANGE 13% FEMALE

Other farm issues Limited credit has kept producers from outspending earning but also limits investment projects. Producer views coffee produc8on as a an investment. When he has some cash les over he plants. Producer gets no subsidies and contributes $4.25 / 46kg to Ihcafe, $9/46kg to a returnable coffee fund and is subject to Income Tax above $5000 per year. Farms produce some of their own food but in a very inefficient way. Transfering agricultural prac.ces is very difficult. Can do Aftude genera.onal change.

A new generation of producers

A new generation of producers

Human development Producer lives in very small communi.es. Usually no purified water, some.mes no electricity. Nutri.on above average for producer families but s.ll well below city and interna.onal standards specially in protein consump.on. Schools are limited beyond 6th grade with high student/teacher ra.os. Access to healthcare is very limited. Limited transporta.on.

HONDURAS GROWTH AND OUTLOOK WHY DOES HONDURAS KEEP GROWING? BUSINESS DRIVERS

Business drivers - Cost of production 2015 140 120 130 28 111 100 28 93 USD/46KG 80 28 FARM TO FOB 60 40 102 82 65 FARM GATE+ 20 0 HIGHEST COST PRODUCER AVG SMALL LOWEST COST PRODUCER Average cost of produc8on is $111 FOB Highest cost producer is $130 but is only 5% of produc.on

Business drivers - cost components 120 100 80 $24 FARM TO FOB $4 LOGISTICS $18 Other $111 TOTAL $82 FARMGATE 60 40 $41 Labor 20 $23 INPUTS 0 INPUTS LABOR PICKING WET MILLING / DRYING ADMIN INTEREST LOGISTICS FARM TO FOB $69 per 46kg out of pocket cost. Family farm cost includes $41 as living expenses. Converts to $2665 per year per producer.

Business drivers - Cost and selling price 250.0 Graph of cost and Sell Price (10 YEARS) USD / 46KG 200.0 150.0 100.0 50.0 COST PRICE 0.0 Average composite selling price is $150.00 FOB

Business drivers - ProPitability 160.0 140.0 120.0 AVERAGE PROFITS USD PER 46KG 100.0 80.0 60.0 40.0 20.0 0.0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 The weighted average profitability has been $47 per 46kg for the last 10 years.

Business drivers - ProPitability 160.0 140.0 120.0 AVERAGE PROFITS USD PER 46KG 100.0 80.0 60.0 40.0 20.0 0.0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 The weighted average profitability has been $47 per 46kg for the last 10 years. That comes to $3300 per producer per year

Producer Income Summary Over the past 10 years the average producer has made $2665 per year in farm labor $3300 per year in profits $5965 per year total Income

Producer Income Summary Over the past 10 years the average producer has made $2665 per year in farm labor $3300 per year in profits $5965 per year total Income Minimum salary in Honduras is $4350 per year.

Producer Income Summary Over the past 10 years the average producer has made $2665 per year in farm labor $3300 per year in profits $5965 per year total Income Minimum salary in Honduras is $4350 per year. Cost of basic food in Honduras is $3000 per year

Producer Income Summary Over the past 10 years the average producer has made $2665 per year in farm labor $3300 per year in profits $5965 per year total Income Minimum salary in Honduras is $4350 per year. Cost of basic food in Honduras is $3000 per year The producer is s.ll living in poverty

Business drivers - Price / growth correlations 6.0 $300 5.0 $250 4.0 $200 3.0 $150 2.0 $100 1.0 $50 0.0 94/95 95/96 96/97 97/98 98/99 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 $0 Growth 1.2 (15%) -0.5 (-3%) 0.8 (7%) 1.8 (11%) WA Price 120 65 115 177

Business drivers - Price / growth correlations Adjustment for InPlation Growth (bags) Yearly Growth 1.2 (15%) 95-99 00-04 05-09 10-14 -0.5 (-3%) 0.8 (7%) 1.8 (11%) WA Price 120 65 115 177 WA Price (Adj for Inf 2%) 170 83 133 186 In infla8on adjusted dollars Honduras has shown growth above $130

Business drivers - Productivity PRODUCTION AND YIELD 2000-2015 6.0 25.0 5.0 20.0 18.8 20.0 4.0 3.0 2.0 1.0 10.0 2.5 12.0 3.0 10.2 2.1 12.2 3.0 11.0 2.4 11.8 3.0 12.9 13.7 3.2 3.4 13.1 12.6 3.2 3.2 14.9 4.0 5.6 16.5 16.5 4.4 4.2 5.0 15.0 10.0 5.0 60kg/HA - 0.0 PRODUCCIÓN PRODUCTIVIDAD Over the same perios yield have increased from 10 bags/ha to 18.8 bags/ha Accounts for big percentage of growth.

Business drivers - Reasons for improved Productivity MORE INPUTS PLUS BETTER FARMING $250 million USD invested over the last 10 years Exporter and other Private sector implementa.ons. Sustainability programs premiums and one.me payments Aid from coopera.ng organisms Producer funded asistance, IHCAFE and Suppliers Genera.onal change has made producer open to change

Business drivers - planted area 350 ROYA 300 250 200 HA ( 000) 150 100 50 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Planted area is 274,000 Hectares 36,000 HA lost to Roya.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop. Over the past 15 years on average producer has been able to make a living from coffee produc.on.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop. Over the past 15 years on average producer has been able to make a living from coffee produc.on. A low cost of produc.on has allowed the producer to survive cri.cal crisis years.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop. Over the past 15 years on average producer has been able to make a living from coffee produc.on. A low cost of produc.on has allowed the producer to survive cri.cal crisis years. A new genera.on of producers has brought new energy into produc.on.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop. Over the past 15 years on average producer has been able to make a living from coffee produc.on. A low cost of produc.on has allowed the producer to survive cri.cal crisis years. A new genera.on of producers has brought energy into produc.on. The producer has reinvested some of his money into his farms as shown by improved produc.vi.es.

Why does Honduras keep growing? Business drivers Farms are in the hands of very small holders who pick their own crop. Over the past 15 years on average producer has been able to make a living from coffee produc.on. A low cost of produc.on has allowed the producer to survive cri.cal crisis years. A new genera.on of producers has brought energy into produc.on. The producer has reinvested some of his money into his farms as shown by improved produc.vi.es. The exporter, private sector and NGO implementa.ons have contributed to this development.

HONDURAS GROWTH AND OUTLOOK WHY WAS THE ROYA RECOVERY SO FAST?

Current trend vs No Roya theoretical Trend 7.0 6.0 5.0 25% 18% No Roya Theore.cal Trend Line 13% NEW CROP 4.0 3.0 2.0 3.2 4.0 5.6 4.4 4.2 5.0 5.8 1.0-2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 No Roya theore.cal trend line 15% growth rate. 1.4 myn bags 60kg lost in 2013-14 vs trend = to 25% of projected volume 18% permament loss of produc.on capacity in past crop.

Distribution of Resistant versus non resistant varieties 100% Chart 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 45 55 Pre- Roya 32 68 Post - Roya 29% non resistant and 13% overall loss. Currently almost 70% of plants are Roya Resistant

The story of the Roya recovery. Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market.

The story of the Roya recovery. Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red.

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth Long term complacency on Roya preven.on by producer

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth Long term complacency on Roya preven.on by producer Roya resistant plants limit loss to 13%

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth Long term complacency on Roya preven.on by producer Roya resistant plants limit loss to 13% Dispersion of farms some farms and areas not affected.

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth Long term complacency on Roya preven.on by producer Roya resistant plants limit loss to 13% Dispersion of farms some farms and areas not affected. Most farms con.nued producing to some degree.

The story of the Roya recovery Volume was growing very fast (15%) before Roya. Significant amount of new plan.ngs triggered by the market. The perfect storm hits: Record 2011-12 crop ler plants.red, Lower prices caused lower inputs by producers Hot and humid weather created perfect condi.ons for Roya growth Long term complacency on Roya preven.on by producer Roya resistant plants limit loss to 13% Dispersion of farms some farms and areas not affected. Most farms con.nued producing to some degree. Producer aftude Market rally Feb 2014 gives hopes to producers Surprising aftude - producers plant more than they lost.

HONDURAS GROWTH AND OUTLOOK HOW MUCH CAN HONDURAS GROW? A RESOURCE ANALYSIS

Resource analysis - Age of Plantations in 2015 1 YR 1-2 YRS 3-5 YRS 6-9 YRS 9-15 YRS 16-25 YRS 65% of planta.ons are less than 9 years old. Planta.ons have been renewed and will not present a problem for the next 10 years

Resource Analysis - Land All of Honduras 112,000 km2 Land above 1000m Suitable for coffee 55,000 km2 57 55 52 3 Coffee planta8ons 3,000 km2 No major conflicts with popula.on centers Honduras does not have a land limita.on for coffee plan.ng.

Resource Analysis - Rains (A composite of 5 regions) 3000 2500 2602 2224 Rains have been low this year 10 months 2000 1767 1827 Mm / year 1500 1000 500 0 1159 Y2011 Y2012 Y2013 Y2014 Y2015 Rains have been lower than expected this year and will impact crop. Timing of rains not op.mal

Coffee labor demand Pickers needed 700 600 500 400 300 200 100 0 1 2 3 4 5 6 7 8 9 10 Volume (million bags 60kg) 300,000 pickers currently employed of which some are producers families. 2 million people theore.cally available. Produc.vity of farms s.mulates pickers

Other Labor Issues Popula8on growth rate 2.5% popula.on growth rate adds 200,000 people per year. Distribu8on: 50% urban 50% rural Salaries: Minimum salary is $4350 per year Emmigra8on URBAN: Significant growth in urban centers, San Pedro Sula and Tegucigalpa, but popula.on is dispersed in various other urban centers, Comayagua, La Ceiba, Santa Rosa and Choloma. FOREIGN: Hiring restric.ons in the US have slowed emmigra.on. Around 40,000 per year but not increasing significantly. Compe88on TEXTILES: Was a big compe.tor in the 2000s but now growth has slowed significantly. 242,000 total employees. AGRICULTURAL: 350000 non coffee farm jobs.

Processing capacity estimates Honduras has enough processing capacity to reach 6.5 million bags. Significant capacity investments were made arer 2011-12 crop which remain unused. There is a botle neck in wet milling which will require a lot of investment and.me. 25 million dollars in capacity would be required for each addi.onal million bags.

Threats to sustained growth Climate change: Produc.vity belt was 500m-1200m eleva.on 20 years ago, Today it is 900-2000 meters. Deforesta.on High amount of deforesta.on used for farming decreases bio diversity, and increases erosion and other biological risks. Water availability: Rivers, rains, other agricultural uses. Forest and Water conserva8on seems like a key element for the long term future.

How much can Honduras grow? Does not have resource constraints to con.nue growing. Capacity investments will be required for growth specially in wet milling. Climate and water represent an important threat. A produc.on of 8 mllion bags in the next 5 years seems feasible.

HONDURAS GROWTH AND OUTLOOK WHAT ARE THE CHALLENGES FOR THE FUTURE?

Some thoughts about the future Where is your coffee going to come from 10 years from now?

Some thoughts about the future Where is your coffee going to come from 10 years from now? As the worldwide consump8on grows are most coffees going to come from two origins? Or Should we support origin diversity?

Some thoughts about the future Where is your coffee going to come from 10 years from now? As the worldwide consump8on grows are most coffees going to come from two origins? or Should we support origin diversity? Honduran coffee produc8on growth has been self sustaining so let us support (not subsidize) the producer.

Some thoughts about the future Where is your coffee going to come from 10 years from now? As the worldwide consump8on grows are most coffees going to come from two origins? or Should we support origin diversity? Honduran coffee produc8on growth has been self sustaining so let us support (not subsidize) the producer. We need to find a way for the Honduran producer to improve his income and con8nue this growth trend.

Some thoughts about the future Where is your coffee going to come from 10 years from now? As the worldwide consump8on grows are most coffees going to come from two origins? or Should we support origin diversity? Honduran coffee produc8on growth has been self sustaining so let us support (not subsidize) the producer. We need to find a way for the Honduran producer to improve his income and con8nue this growth trend. What challenges must we meet?

Challenges - Productivity Improving produc8vity is key to remaining compe88ve.

Quality - Pulping stations Eliminate pulping sta8ons and quality separa8on key to quality improvement.

Quality - Wet mills

Challenges Water conservation and environment

Producer-Productivity-quality-water-forrest We need to bring sustainable economic and human development to Honduras through coffee produc8on.

HONDURAS GROWTH AND OUTLOOK NEW CROP PROJECTION

NEW CROP PROJECTION ( 000s) 60kg bags EXPORTABLE 2014-15 2015-16 + CARRY-IN 186 267 + PRODUCTION 5101 5700 = AVAILABLE 5287 5967 - SHIPMENTS 5020 = CARRY OUT 267 TOTAL PRODUCTION EXPORTABLE 5101 5700 LOCAL CONSUMPTION 241 400 SMUGGLING 300 300 TOTAL 5642 6400 Commited 20% Farmer sold Below 10%

Factors affecting crop 2014-15 Large amounts of unpriced coffee delivered to beneficios took selling pressure of the market. Producer sold well but intermediary remained long and many.mes lost. Quality was beter than two previous crops. Yields were just ok. Smuggling was an important factor specially at the end of the crop. Big demand for inferiors from many parts of the world. Venezuela buyers came in at key purchasing.mes to pick up demand slack in Feburary and April.

Factors expected to affect 2015-16 Flowerings well distributed should contribute to distributed crop. Rains not enough during the summer, limit fer.liza.on and bean development in specially in lower eleva.ons, es.mate 5% loss on crop poten.al. Farmer unable to make new plan.ngs, limited growth in 2018. Strong rains in September and October compensate some rain loss, slow crop advance. Market perceived to be very low by producers will be reluctant sellers and will deposit coffee again. Yields expected to be lower specially at the beginning. New tax laws create new costs. Strong inferior demand in Central America and Caribbean con.nues as demand outpaces supply.