Challenges and Opportunities in Asia s Bean Supply

Challenges and Opportunities in Asia s Bean Supply

The Macro Picture

Asia already is the 2 nd cocoa consuming region 14/15 24/25 Source: Olam Research from IMF, trade sources, official statistics, ICCO data Today, Asia has the 2 nd lowest level of consumption (industrial use) per capita, but it also is the 2 nd biggest consuming region (behind Western Europe) and the 2 nd fastest growing region (behind Africa) Assuming past growth rates will persist, Asia will consume nearly as much cocoa as Americas and Africa combined in 24/25

A cocoa tale of two Asias Source: Olam Research from IMF, trade sources, official statistics, ICCO data The +7.7% growth in Asia is dissimulating very contrasted situations within the region. While Australasia and Japan + Korea grow less than 2%, Turkey, China, India, Indonesia and other Asian markets are growing between 10-14% annually

Asia: Growth in Population, GDP and Cocoa Use Source: OlamResearch from IMF data, trade sources, official statistics While Asia s population is growing a mere 1% annually, cocoa consumption growth is mostly driven by increasing incomes, that result in a booming upper middle and middle classes across key geographies in Asia

Growing middle class segments expected to drive ~7% p.a. growth in consumption expenditure in Asia Pacific (2014-20) Note: US$ Per Capita figures based on Current Prices and Fixed 2014 Exchange Rates Source: Euromonitor, Bain analysis

Growing cocoa deficit in Asia between Production and Grind and between Production and Industrial Consumption Source: Olam Research from trade sources, official statistics, ICCO data Contrary to the bean production deficit vs grind, the bean production deficit vs industrial use is relatively recent (appeared for the first time in 10/11) In 14/15, Asia will grind 400tmt more beans than it will produce. It will consume 380tmt more cocoa (in bean-equivalent) than it will produce Assuming past 10-year growth rates for Production (-0.8% p.a.), Grindings (+4.6%) and Consumption (+7.7%) will persist going forward, these deficits will deteriorate to 900tmt and 1,300tmt respectively in 24/25

Asian Cocoa Opportunities & Challenges OPPORTUNITIES CHALLENGES Chocolate confectionery and powder-based products are growing in popularity Middle class is increasing, as well as urbanization. Consumption habits are changing Consumption is also benefiting from the rapid expansion of the distribution channels (e.g. convenience stores in Indonesiaand India) and the premiumisation trend Bean production is declining Regional cocoa deficit will keep increasing. If growth in production cannot be restored, more beans and/or more products will have to be imported from ROW Consumption growth may be capped by increasing health concerns among Asian consumers, as well as the region s largely hot climate. Slowing macroeconomic growth may also be a headwind to regional cocoa consumption growth

Bean Consumption Trends

Asia witnessed a boom & bust of cocoa production in Malaysia throughout the 1980s & 1990s. Indonesia is today at risk of following a similar path, having lost a third of its output within a few years.

Combined with a growing local processing activity, this has transformed Asia from being a small net provider to a significant net consumer of cocoa beans over the past 10 years in effect putting an end to the outflow of Indonesian beans to the US and Brazil. But this has also triggered many changes of the beans mix within Asia itself

Singapore, in spite of stable overall beans imports, is seeing a progressive erosion of its Indo usage, mostly replaced by Ghana (and, more recently, Cameroun)

Malaysia has mirrored the Singapore evolution, but to a much greater extend. The vast majority of the beans mix in Malaysian factories is made up nowadays of fermented West Africans -when Indos, PNGs and domestic beans used to be the staple of local factories barely a few years ago. Ghana and Ivory Coast have become the main imported origins.

The trend in Indonesia itself is less clear cut. 2013/14 has seen a staggering increase of beans imports, especially Ivory Coast mid crop, on the back of a declining local production and accelerating local grindings. But the nature of Indonesia as a net supplier or importer of beans on the market will much depend of the fate of Indonesian domestic crop overt the coming years

Hence the growing supply shortfall of beans in Asia has been mostly filled by West African in recent years, rather than competing Latin American grades. This nascent flows is providing opportunities for Trade Houses, albeit with notable caveats

Advantagesand limitations of the new Asian beans trading route A new opportunity for beans traders: but a more complex market to handle as well: Local demandbooming, in spite of short term hiccups Growing need for financing ManyAsian grindersnot involvedat origin Productsalsoa risingtrade opportunity ex Asia to Europe/NAFTA Buyers very price sensitive 5 cocoa terminal markets, but none having Asia as a delivery point Competitionwithmetalsfor warehousing More complexqualitymanagement (wet damage, FFA, infestations) Asian demand pushing up forward IVY/GHA differentials

The Grinders Perspective

Indonesian Grinder s Bean Value Perspective Cheaper diffs compensate for yields to make Indo FAQ bean of choice for factories in Indonesia. Indo FAQ Indo Fermented Ivory Coast Main Crop Ghana Main Crop Differential (CIF) GBP -120 GBP +10 GBP +60 GBP +100 Export Tax Taxes - - $160 $160 Product Yield 0.78 0.80 0.81 0.82 Relative Value Baseline -$10 - $155 -$155 Assumptions: LIFFE N5 @ GBP 2,000 FX GBP/USD @ 1.55

Malaysian Grinder s Bean Value Perspective Indo export tax and yield benefits make West Africans the bean of choice. Indo FAQ Indo Fermented Ivory Coast Main Ghana Main Differential (CIF) GBP -120 GBP +10 GBP +60 GBP +100 Taxes US $285 US $285 - - Product Yield 0.78 0.80 0.81 0.82 Relative Value Baseline -$10 +$290 + $290

Consumer trends require quality ingredients. Rising incomes and penchant for indulgent foods In Asian countries such as India and China, a growing middle class, steadily rising incomes, and a growing penchant for more indulgent and Western-style snack foods bodes well for Biscuits, Cookies & Crackers. Willing to pay more for good quality treats. 76% of Chinese internet users aged 20-49 think biscuits are a nice treat to have; and 67% agree that biscuits with unique fillings/coatings (hazelnut fillings, blueberry coatings) are worth paying more for. Premium NPD comes in many forms There are many routes companies are taking in order to advertise the gourmet nature of their new biscuits and in turn appeal to consumers, from marketing the use of natural and local ingredients, to detailing foreign provenance and advocating sharing/gifting attributes. Source: Mintel report, Biscuits, Cookies and Crackers - China - March 2014 20

China and India expected to drive regional growth in coming years. China chocolate market seen growing to $4.3 billion by 2019 Hershey / Reuters (18 February 2015) 60% increase from $2.7 billion in 2014 Chocolate consumption growth closely tracks GDP growth Mars to invest $100 mlnin Pune (India) manufacturing unit (12 February 2015) Packaged food category averaging 20% annual growth over past 5 years March 2015 CMAA presentation Page 21

Regional Free Trade Agreements (FTA) in certain markets require significant Asean bean content. Lack of fermented cocoa in Asiamakes it difficult to meet quality demands and satisfy Aseancontent limits. Japan China India RVC requirements 50.0% 40.0% 35.0% Butter Powder Liquor Butter Powder Liquor Butter Powder Liquor Normaltariff rates 0.0% 12.9% 5.0% 22.0% 15.0% 10.0% 30.0% 30.0% 30.0% FTA tariff rates 0.0% 0-2.9% 0.0% 0.0% 0.0% 0.0% 15.0% 15.0% 0-8.0% Savings on tariff (permtin USD) - $250 $225 $1,320 $375 $450 $900 $375 $1,350 Product price referencing (approximates): Butter@ $6,000 Powder @$2,500 Liquor @$4,500/mt

Asian cocoa farmers a healthy balance of opportunities and challenges. Indonesian farmers are Rural population 85% -95% literate; children have access and go to schools. Tax burden on cocoa farmers is moderate; share of FOB value very high. Politically, cocoa is a mid-level cash crop in terms of importance. 80% of Indonesian cocoa farmers have diversified income streams. Distribution of clonal planting material is allowed and common practice. Diverse opportunities for off-farm income. Indonesian farmer has financial options and plays an active role in planting decisions. With the right focus and incentives from the industry, we should expect the Asian farmers will choose to farm cocoa over competing crops.

Grinders perspective Summary of Challenges and Opportunities. Consumers are asking for new and better products and are starting to have the financial means to pay for premium indulgences. Lack of good fermented cocoa in the region (and cocoa in general) is driving an increased usage of West African beans. Difficult to satisfy Asean content in premium products for discerning (Japan) and growing (China, India) markets. Funding the longer supply chain flow from West Africa is putting more stress on working capital requirements. The Asian farmers are fairly sophisticated businessmen; the industry must therefore find the right financial incentives to reverse the negative S&D trends.

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