This case explores the viability of an inexperienced coffee cooperative buying a dry processing mill in Nicaragua. The Center of Northern Coffee Cooperatives (Cecocafen) is only two years old and believes that it is vital to their social mission and business strategy that they control the entire production chain to improve quality and ensure consistency of its product. The cooperative faces substantial challenges in completing the transaction, including executing a successful business model in the face of extremely volatile market conditions and uncertain political and economic stability. Furthermore, there is no precedent to follow, as no cooperative has ever attempted to purchase a mill. Only a thorough examination of the numerous risks and uncertainties facing Cecocafen will determine whether or not the transaction is feasible.
Objectives of the Case
By working through this case, students should develop an understanding of the political, economic, and social context around a strategic investment decision in an emerging market. Specifically, the case requires an analytical look at the various financing options available for enterprises that promote social welfare, the impact of nonfinancial returns in determining whether or not to accept or reject an investment, and the importance of evaluating real options in building a longer-term view of a particular scenario. In addition, the case asks students to evaluate both the explicit and implicit risks associated with a project or investment, explore alternative investment/project valuation methodologies in light of ambiguous or incomplete information, and understand the role of the cost of capital and cost of debt in analyzing financial returns. To a lesser extent, the student should also consider the strategic implications of vertical integration.
Primary objectives of this case include:
• Risk assessment of the coffee industry
• Risk assessment of the political, economic, and social environment in Nicaragua • Analysis of Cecocafen’s investment decision
• Analysis of a foreign bank’s investment decision with respect to both financial and economic rate of return
• Identification and evaluation of real options
• Evaluation of supply chain control in an industry which provides the economic foundation of an emerging market
• Qualitative analysis of the social impact of the cooperative system and specialty coffee
Cecocafen: Providing Hope in an Unstable Market
Coffee is the second largest commodity traded on the world market, second only to oil, and has a huge impact on the lives of millions of small farmers across the world. Coffee is also interesting because of the complicated relationship between the various stakeholders, geopolitical relationships, and price volatility. The principal consumers of coffee are in the developed markets while coffee production only occurs in emerging markets, and a very small percentage of the final price is derived from the cost of the beans. This presents a formidable challenge for those attempting to improve the livelihood of coffee producers by helping them to capture more of the value of their product and to be less vulnerable to the instability of the world coffee markets.
Why Fair Trade and Cooperatives?
Fair trade coffee bypasses the traditional export middlemen and provided additional support to the farmers, which give the producer higher profits and protects them from market risk. Fair Trade products are marketed as a socially responsible product that provides a living wage to the farmers. Western businesses and other organizations partner with small businesses, cooperatives, and associations in emerging markets to improve the livelihood of small farmers by increase their access to credit and establish higher prices for their products. The profits from the Fair Trade are often reinvested in community projects such as...