SENEN M. PERLADADirector, Bureau of Export Trade Promotion (BETP)

KAKAO KONEKNovember 21, 2012

Apo View Hotel, Davao City

PRICE RISK MANAGEMENT FOR PRODUCERS AND EXPORTERS

Outline of Presentation I. Risk Management

– World Price movement– Cacao Production – World Exports and Imports of Cocoa products– PH Exports and Imports of Cocoa products – Managing Export Price and Other Risks

II. Branding: What Now “Davao Cacao”? - Comments and Observations - Personal thoughts on way forward

COCOA PRICE MOVEMENT FOR THE MONTH OF SEPTEMBER 2012

WORLD EXPORTS & IMPORTS

Cacao production Cacao production has been, and still is, concentrated in developing countries, more specifically in West Africa.

2011 World Importers for Cocoa and Cocoa Preparation

Importers 2007 2008 2009 2010 2011 % ShareAve.

Annual Growth

Rate

Total

29,160,329

34,658,503

34,333,289

39,572,592

44,005,210 100.00 11.09

TOP 10

17,741,902

21,139,697

21,195,398

23,970,322

27,056,605 61.49 11.35

Rest of the World

11,418,427

13,518,806

13,137,891

15,602,270

16,948,605 38.51 10.74

1United States of America

2,786,092

3,433,912

3,592,364

4,415,104

4,807,051 10.92 14.91

2Netherlands 2,573,455

3,305,293

3,599,911

3,863,087

4,616,382 10.49 16.04

3Germany 2,844,769

3,277,378

3,558,919

4,145,858

4,581,950 10.41 12.70

4France 2,516,337

2,906,035

2,781,388

2,911,125

3,319,193 7.54 7.47

5United Kingdom 2,006,729

2,124,143

2,152,264

2,178,110

2,303,054 5.23 3.53

6Belgium 1,540,567

1,697,680

1,628,839

1,735,502

2,040,341 4.64 7.56

7Russian Federation

846,707 1,081,578

984,023

1,282,428

1,445,384 3.28 15.44

8Canada

904,923 1,087,834

1,060,836

1,200,166

1,390,002 3.16 11.67

9Malaysia

873,435 1,287,110

874,963

1,145,680

1,298,435 2.95 14.90

10Italy

848,888

938,734

961,891 1,093,262

1,254,813 2.85 10.37

World Importers of Cocoa and Cocoa Preparation(Value in USD Thousand)

Source: TradeMap, International Trade Centre

Consumption of chocolate in the EUin kg per capita (2008)

Source: Caobisco (2010)Not including Czech Republic, Cyprus, Luxembourg, Malta, Slovenia, Slovakia and Sweden

2011 World Exporters for Cocoa and Cocoa Preparation

Source: TradeMap, International Trade Centre

World Exporters of Cocoa and Cocoa Preparation(Value in USD Thousand)

Exporters 2007 2008 2009 2010 2011 % Share Ave. Annual Growth Rate

  World 28,218,564 33,224,466 34,453,233 38,623,213 44,179,966 100.00 11.98

  top 10 18,288,386 21,420,424 22,080,922 24,453,963 28,914,160 65.45 12.30

  Rest of the World 9,930,178 11,804,042 12,372,311 14,169,250 15,265,806 34.55 11.49

1Netherlands 3,615,627 4,327,889 4,210,231 5,021,441 5,188,407 11.74 9.89

2Germany 3,154,696 3,699,873 3,694,643 4,249,756 4,875,621 11.04 11.72

3Côte d'Ivoire 2,204,547 2,807,307 3,724,395 3,826,923 4,158,530 9.41 17.86

4Ghana 1,053,370 1,042,124 1,158,219 975,927 3,468,350 7.85 62.43

5Belgium 2,566,617 2,739,788 2,614,314 2,674,439 2,994,116 6.78 4.11

6France 1,776,832 2,021,234 1,940,537 2,029,604 2,353,762 5.33 7.58

7United States of America 1,013,378 1,183,395 1,161,575 1,386,631 1,591,796 3.60 12.28

8Italy 1,221,924 1,327,154 1,245,947 1,343,072 1,560,549 3.53 6.62

9Malaysia 757,236 1,002,713 917,620 1,302,521 1,377,751 3.12 17.91

10Indonesia 924,159 1,268,947 1,413,441 1,643,649 1,345,278 3.04 11.71

Source: TradeMap, International Trade Centre

PHILIPPINE EXPORTS AND IMPORTS OF COCOA

PRODUCT COVERAGE

• Cocoa Paste• Cocoa Butter, Fat and Oil• Coca Powder w/o added sugar• Chocolate & Other Food

Preparations containing Cocoa• Cocoa Beans

Philippine Merchandise Exports of CocoaValue in US$ Million

2007 2008 2009 2010 2011 Jan-Aug 2012

0

1000000

2000000

3000000

4000000

5000000

6000000

3.54 3.573.24

5.24 5.40

2.53

Source: NSO; Processed by BETP

Top 5 PH Export Markets of CocoaJanuary to August 2012

USA27%

Spain23%

UK20%

Malaysia10%

Thailand8%

Rest of the World11%

Source: NSO; Processed by BETP

Philippine Merchandise Imports of CocoaValue in US$Million

2007 2008 2009 2010 2011 Jan-Aug 2012

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

39.8446.03

55.49

88.37

102.67

49.56

Source: NSO; Processed by BETP

In-donesia

24%

Malaysia

19%

Singapore15%

China15%

USA7%

Rest of the

World20%

Top 5 PH Import Sources of CocoaJanuary to August 2012

Source: NSO; Processed by BETP

MANAGING EXPORT PRICE RISKS

Risk Management

• Like all other commodities trading, cacao trading has an inherent set of risks

• It is good policy to identify risks and set up a formal and realistic and set up a formal and realistic program on how to manage them, preferably in writing and communicated to all participants in their respective trading activities.

• Risk management may be seen as series of actions that modifies the risks from less acceptable to more acceptable

Physical Risks

• These are traditional dangers to which all goods are exposed, e.g. a warehouse may burn down, a ship may sink, the shipment may be contaminated or infested; a truck mightr be hijacked.

Non-performance risks • Perhaps the most common- examples are:• The risks of partners in a transaction not fully living up

to their obligations, e.g. a farmer may not deliver the crop after having signed a contract to do so, or may deliver only part of it;

• A shipper may not ship at all (default) or may not ship within the terms of the contract

• A carrier may deliver to a contract point other than that required by the B/L.

• A buyer may refuse a delivery, for some reason, or fail to make payment

Non-performance risks

• Financial instruments– Following fundamental principle of all risk

management: the greater the protection, the more costly it is • Performance bonds (c/o insurance cos.) • Delivery obligation secured by L/C• Marketing boards/bodies

Non-performance risks

• Superintendence arrangements– Importer may retain a company whose function is

primarily to safeguard the interests of the principal, for a fee

• Deliveries may be structured so as to give such company custody of the goods prior to export

• Other arrangements

Market risks

• Functional trading• Hedging • Unhedged position• Futures hedge

Price Structure

The price structure of a chocolate bar (ex-factory) may be broken down roughly, as follows:• Cocoa producer: ~4-6%• Traders: ~30%• Transport: ~20%• Confectionery industry: ~40%• Retail channels can make up to 50% profit on

the final product.

Certifications

• Fair Trade • Organic• UTZ-Certified• Rainforest Alliance

SENEN M. PERLADADirector, Bureau of Export Trade Promotion (BETP)

KAKAO KONEKNovember 21, 2012

Apo View Hotel, Davao City

Branding: What now “Davao Cacao”??

Tell your story: From “plot to gut”• There is an increasing interest in the origin and context of the cocoa bean

production. • Chocolate companies want to connect the end-consumer to the very

beginning of the production process; that is, from “bean to bar”. But I challenge you to go further by making it from “plot to gut”

• To gain loyal consumers, large marketing campaigns of chocolate brands engage in new promotional tools.

• Marketing expenses of major chocolate manufacturers estimated to amount to more than 19% of their total budget.

• There is Increasing focus on the origin of cocoa to highlight quality; Origin/region and processing methods also play a central role in brand image

• Marketing noise: Consumers are confronted with a large amount of information when they purchase chocolate bars, ranging from how a company is active in the conservation of natural resources to how they engage in the improvement of livelihood opportunities for the cocoa-producing farmers, etc. etc.

Certification-enabled Marketing?

• Fair Trade • Organic• UTZ-Certified• Rainforest Alliance

Certification schemes focus areas and volume produced

Source: 2010 and 2011 numbers are based on information provided by Fairtrade, Rainforest Alliance, UTZ Certified through their annual reports and interviews. 2010 Organic figure is derived from the TCC (2010) Cocoa Barometer 2010.

Roles and processes related to certification of sustainable cocoa

Source: KPMG Team Analysis

Areas for further research • Study the value chain perspective, from farmer to coop,

trader, processor, retailer and consumer.• Validate information on costs and benefits on the ground

(farm level)• Costs and benefits between coops and individual farmers• Costs of group churn, agrochemicals usage, product handling, rejuvenating trees, farm wages, etc.• Deeper insights in certification schemes impact assessments• Farm size/productivity potential• Pros and Cons of multi-certifications • Actual social impact of certification, e.g. gender equality and

elimination of child labor

Package Brand name

Accessories

After-salesservice

Warranty

Instructionsfor use

Company’simage

Physicalproduct

So, what now, Davao Cacao??Anything but a Forrest Gump experience, please!!!

“Life is like a box of chocolates. You never know what you’re gonna get” Forrest Gump

Package Brand name

Accessories

After-salesservice

Warranty

Instructionsfor use

Company’simage

Physicalproduct

Life is Davao Cacao. You always know what you’re gonna get!!!

Thank you very much!Daghang Salamat!!