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ManagingRiskinCtedIvoires CocoaSector

March3,2009

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SummaryofCtedIvoireCocoaSector
AddressingCtedIvoirecocoasustainabilityissuesisanindustryandnational imperative
BothindustryandcountryhavesignificantstakesinthehealthofthecocoasectorinCtedIvoire

CocoagrowingconditionsinCtedIvoirearebleak butcanbeimproved
Economic,social,environmentalconditionsarepoorandinadownwardspiralofdecline Conditionsarealreadycreatingvolumeandqualityrisk TurnaroundofthecocoasectorinCtedIvoireisbothpossibleandneededalongwith improvementsinotherorigins

ClearstrategiesexisttotakecorrectiveactionStakeholdersmustmobilize urgently
Priorityshouldbeplacedonimprovingeconomicstothefarmer Solutionstoimprovefarmerincomeareknownbuthavenotbeensuccessfullybroughttoscale Improvingfarmerincomewilldriveconcurrentenvironmentalandsocialimprovements,in combinationwithotherefforts Addressingchallengesinthecocoasectorcanbeintegratedwithbroaderagriculturaldevelopment efforts

Achievingsuccesswillrequireanewlevelofcollaboration
Developing/workingwithinacommonagenda:government,NGOs,donors,supplychainandthena publicprivategovernancestructureforcocoasectoractivitiesinCtedIvoire Integratingcommercialinterestsinsustainabilitywithpublicgoodsinvestments
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

CtedIvoireCocoaCaseStudy

I. II.

SituationAssessment VisionandStrategies

III. TakingAction&Partnerships

CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

CtedIvoireIstheLeadingCocoaProducingCountryintheWorld, SupplyingMorethanTwiceasMuchastheSecondLargestCountry
AnnualCocoaProductionbyRegion,2007
2,257,000tons
100% Cameroon Nigeria 80 Ghana Mexico PNG DR

602,000tons

582,000tons

CtedIvoireis40%of worldcocoasupply Cocoais15%ofGDP, 20%oftaxrevenueand 35%ofexportsforCte dIvoire Cocoaemploys700,000 householdsandsupports sixmillionpeople

%of 60 Regional Supply


40 Coted'Ivoire 20

Ecuador Indonesia

ROW

Brazil

Africa

Asia

1 L. ROW America

RegionasPercentageofGlobalSupply

CtedIvoirecanbecomenotjustavolumeleader,butaleaderinsustainable, competitive,intensifiedanddiversifiedcocoafarmingsystems
Source:Industrydata1Cocoafromtherestoftheworldrepresentslessthan10%oftotalproductionandisfromsmallerorigincountries(e.g.,PapuaNewGuinea)
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

CtedIvoireIsRankedAmongtheLowHumanDevelopmentCountries accordingtotheUnitedNationsHumanDevelopmentIndicators

Cted'IvoireCountryLevel DevelopmentChallenges
PoliticalUncertainty Electionshavebeenpostponedseveral timesandmaynotbeheldin2009 WeakEconomicGrowthandOutlook Reducedforeigninvestmentandslow economicgrowthhaveresultedfrom uncertainfuture Percapitaincomedown15%since1999 DiminishedPublicServicesandInvestment 72%ofcocoafarmingvillagesdonot haveahealthcenter 9%havenoprimaryschoolwithin3km

UNHuman Development Indicator

Cte d'Ivoire Value

Cte d'Ivoire Rank AmongAll Nations

Cted'Ivoire RankAmong Selected Cocoa Producing 1 Countries 5/5

Life Expectancyat Birth AdultLiteracy Combined School Enrollment GDPPer Capita

55years

164/177

48.7%

125/139

5/5

39.6%

160/172

5/5

$1648

147/174 166/177

5/5 5/5

UNHumanDevelopment IndexTotalRanking

CtedIvoireleadsincocoaproduction,butnotindevelopmentagainstother cocoaproducingcountries
Source:UNDPHumanDevelopmentReport,CIAFactbook,InitialDiagnosticReportonChildLabor 1SelectedcocoaproducingcountriesincludeIndonesia,Ghana,Cameroon,andNigeria 2DataonlifeexpectancyisfromCIAFactbookrankingsarefromUNDPHumanDevelopmentReport
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

TheVastMajorityofCocoaFarmersinCtedIvoireAreatSubsistence Level,WithLimitedAbilitytoInvestSufficientlyinTheirFarms

Cted'IvoireAverageFarmandFamilyLevelEconomics
KeyFarm Indicators
CurrentAvg.Yield CocoaVolume CocoaPrice

CocoaFarmingInefficient,under priced,subsistence
450Kg/Ha Averagefarmsize3Ha 1.35tons Recentfarmgatepriceof$11.40/Kg ~$1600(GrossIncome) Grossincometoolowtoinvestinoptimal farminputs Costofoptimalfarminputs($300/Ha or$900totalona3Hafarm) 49yearsold CtedIvoire:52kgofcocoa Indonesia:8kgofcocoa

Income

1 AverageFarmerAge

#ofKgofCocoa NeededtoBuyOne BagofFertilizer

1IncountryexpertinterviewsFranoisRuf,CIRAD
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

ChallengingEconomic,Environmental,SocialandPoliticalConditions inCtedIvoirePlaceConsiderablePressureontheCocoaSupplyChain
Economic LowCocoaYields450Kg/Ha TaxBurden34%versus~15%inGhanaandzerotoverysmallinothercocoaorigins ResultingLowShareofPricestoFarmers Environmental Deforestationnonewland 1 FullSunCocoaSystems 35%noshade DecliningSoilFertility~14% accesstofertilizers Social LackofSocialServicesOnly ~28%ofcocoafarmingvillages haveahealthcenter ChildLabor89%ofchildren, 43%injuries,9%forcedlabor Migration

Pressureon theCte dIvoire CocoaSupply Chain

PoliticalandRegulatory EvolvingPoliticalEnvironment LaunchofNewCocoaSectorGoverningBody LandTenureRights

Notes:1Thisdoesnotincludefarmsthathave18shadetrees,theacceptableshadelevelforseveralcertificationprograms. Source:IndustryDocuments,UnitedNations,WorldBank
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

CocoaSectorSustainabilityConditionsAreCurrentlyinaMutually ReinforcingDownwardSpiral
EconomicIssues
Nonewplant Inabilityto materials investinfarms/ coops Unsustainable farmerincome Declining cocoayields &quality

Limiteduseof pesticides Limiteduseof fertilizer Noquality incentives

Environmental Issues
Fullsunsystems Lossofbiodiversity exposuretopestsand disease

CocoaSector CycleofDecline

1 Deforestation

Decliningsoilfertility Agingtrees

Farmerslackaccessto healthcaremanycant affordschoolfees Declininginterest incocoafarming Lowavailabilityof increasedmigration socialservices tocities Declining cocoayields &quality Lossofhuman capacityfor farming

Social Issues

Declining cocoayields &quality

Intheabsenceofcorrectiveaction,thesenegativetrendswillaccelerate andthreatenoverallcocoaproductionlevelsandquality
1~90,000Ha/yearattributabletococoafarming3millionhaoftotalrainforestremaininCtedIvoire
CocoaSustainabilityinCtedIvoireAVisionforChange

FSGSocialImpactAdvisors

SituationAssessment

QualityDeclinesAreTangible,ProductionDeclinesAreLikely

CtedIvoireCocoaBeanQuality
12% 20042005 10% 8% 6% 4% 2% 0% 20052006 20062007

Decliningbeanqualityhassignificantcommercial implicationsforIndustry Raisescostsofbeanprocessing(andprocessed goodprices) Increasesquantityofrejectedbeans Createsfoodsafetyconcerns Qualityissuesarearecentphenomenaand onceaddressed,thesituationcanbereversed


Driversofdecreased productioninclude: Agingtrees Soilfertilityloss Increasedlosses (pests/diseases) Deteriorating conditionsincrease CtedIvoires vulnerabilityto devastatingdeclines

Moulds

FFAs

SlatyBeans

TotalCocoaProductioninCtedIvoire 20052020(MetricTons)
2500 2000

PotentialScenarios Scenario1:Productionisflat, asinthelast5years

ForecastScenarios

1500

1 2 3

1000

Scenario2:Productionflat until2012,thenbeginsto declinegradually(5%/yr) Scenario3:Production declinesrapidlyduetoan uncontrollabledisease outbreak(modeledonBrazil)

500

Source:Industrydata
CocoaSustainabilityinCtedIvoireAVisionforChange

20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20

FSGSocialImpactAdvisors

CtedIvoireCocoaCaseStudy

I. II.

SituationAssessment VisionandStrategies

III. TakingAction&Partnerships

CocoaSustainabilityinCtedIvoireAVisionforChange

10

FSGSocialImpactAdvisors

VisionandStrategies

ANewComprehensiveVisionofCocoaSustainability,SharedbyAll Stakeholders,IsUrgentlyNeededinCtedIvoire
Vision

ARevitalizedCocoaSectorinCtedIvoire

Buildingareliablesupplyofcocoaandimprovingfarmerlivelihoods

Economic PriorityGoal: ImproveFarmerIncome


Increasefarmproductivity Promotetax/sectorreform Improvequality Promotecertification Improveaccesstomarket information Promotecropdiversification

Environmental ImproveEnvironmental ManagementofCocoaGrowing Areas


Developandpromoteenvironmentally friendlyintensificationmethods Monitorenvironmentalimpactsof intensificationanddiversification Validateoptimalagroforestrysystems Reclaimfallowcocoagrowingareas Conserveremainingforests

Social InvigorateRural Communities


Expandavailabilityofrural services Ensureresponsiblechild laborpractices Improveruralinfrastructure Researchruralmigration issues

Goals

Strategies

Actionshouldprioritizeeconomicissuesastheyunlocktheabilitytomake concurrentimprovementsinenvironmentalandsocialdimensions
CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

VisionandStrategies

OpportunitiesExistToIncreasetheFarmersShareofFOBCocoaPrices byApproximately40%ThroughTaxReformandQualityInitiatives
PotentialImpactofPriceBasedGains
$3,500

(GainsinUSD)

PriceBasedGains Cocoafarmerscanrealizeupto40% morevaluefortheircocoathrough: QualityPremiumAchieveupto USD$200(premiumreceivedin Ghana),allocatedproportionallyto farmersandsupplychainpartners forqualityandtraceability TaxReformReductionoftotal taxesfrom35%to17.5%with benefitsaccruingproportionally acrossthesupplychain MarketInformationSystemCocoa farmerscanalsoincreasefarmgate pricethroughimprovedmarketpricing information(notyetestimated)

FOBPrice($)/MetricTon

$3,000

487
$2,500

974 974 $96 $96 $521 $278 $467 $249

$96 $653 $348

$2,000 $1,500 $1,000 $500 $0

+40%
$1,416

$1,013

$1,131

Current
Farmerprice
1 TotalTaxes

PayforQuality
Tradingmargins& incountrytransport

TaxReform
Exportercosts& localprocessing

OceanFreight

Note:FOBisfreightonboard(exportprice) 1Totaltaxesincludebothexporttaxandparapublictax Source:2006industrydataadaptedtoSeptember2008prices,Incountryresearch,expertinterviews


CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

VisionandStrategies

VolumeBasedGainsinCombinationwithPricedBasedGainsCan GenerateSignificantNetIncomeImprovements
1 Pricebasedgains produceamodestbutdirectincrease infarmersbottomline(i.e.,requirenoinvestment) 2 Volumebasedgains incombinationwithpricebased gainsgeneratesignificantlymoreincome,butrequireup frontinvestmentbyfarmersinfarminputs

CropYield (kg/ha)
Incomewith qualitypremium

Incomew/o pricebasedgains Incomeaftertaxreform (includesqualitypremium)

PriceBasedGains (PotentialFamilyNetIncomeImpact)
2000 $7,000 $6,000 1600

VolumeandPriceBasedGains (PotentialFamilyNetIncomeImpact)
2000 1800 1600 1400 $5,000 $7,000 $6,000

CocoaYield (kg)/ha

CocoaYield (kg)/ha

$5,000 1200 $4,000 $3,000 $2,000 400 $1,000 0 $

1200 1000 800 600 400 200 0

FamilyIncome (USD)

FamilyIncome (USD)

$4,000 $3,000 $2,000 $1,000 $

800

1,2:Incomeimpactisshownasnetofinput/plantmaterialcostsforgraphonright(2).Bothgraphsassume12%increaseinfarmerincomeduetoqualitypremiuminyear2additional25% increaseinincomeduetotaxreforminyear3.Graphonright(2)assumes30%productivityincreaseinyear2frompestmanagementtechniquesadditional50%increaseinyear3from improvedpestmanagementandplantmaterialadditional33%increaseinyear4fromimprovedpestmanagementandplantmaterialadditional30%inyear5fromuseoffertilizerand additional10%eachyearthereafteruntiloptimalyieldof1500kg/haisachieved.Source:ExpertinterviewsandFSGanalysis


CocoaSustainabilityinCtedIvoireAVisionforChange

Y ea r1 Y ea r Y 3 ea r5 Y ea r7 Y ea r9 Y ea r1 0

13

Y ea r Y 1 ea r 3 Y ea r Y 5 ea r 7 Y ea r9 Y ea r1 0

FSGSocialImpactAdvisors

VisionandStrategies

FourLeveragePointsWillBeCriticaltoRealizingthe GoalsoftheSustainabilityVision
1

DevelopmentofaCommonAgendathatdefinestheproblemandsetsfortha visionforchange,strategiesforachievingthevision,andresource requirementsisessentialforsectorlevelimpact

PolicyReformwillhelpunderpintheefforttoachievesectorlevelimprovements ineconomic,environmental,andsocialconditions

FurtherResearch&Developmentisnecessaryinseveralkeyimpactareas(e.g., optimalplantmaterial,agroforestrysystems)

LastMileExtensionreferstothedevelopmentofefficientnewmechanismsto efficientlydistributefarminputsandtransferknowledgeatscale

CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

VisionandStrategies

TheCompletionofSeveralActivitiesWithinEachLeveragePointWill LeadtotheRevitalizationoftheCocoaSectorinCtedIvoire
LeveragePoints

Common Agenda

Policy

3 Research&
Development

4 LastMile
Extension

Economic Strategies

Setfortha visionfor change Garnerearly buyinfrom government, industry,and donors Gainconsensus onalignmentof agriculturaland environmental goals

Increasefarmer Develop shareofFOB improvedplant prices material/genome mapping Increase government Determine fundingforthe economicimpact cocoasector ofcertification& diversification Encourage Determine enforcementof optimal forestprotection agroforestry policies system Demonstrate modelsofsocial serviceprovision Determine impactofrural migration Newknowledge& toolsimproved plantmaterial

Distributeinputs andeducate farmersincrop husbandryand postharvest techniquesat scale Improvefarmer knowledgeon environmentally friendly production Increasefarmer knowledgeof appropriatelabor practices

KeyMeasures ofSuccess
Farmerquality, yieldsand income

Environmental Strategies

Hectaresunder improved environmental management

Social Strategies

Gainconsensus Advocatefor increased onprioritysocial fundingfor issues socialservices &rural development Collective agendafunding Government engagement

Improvedsocial conditionsin cocoagrowing areas

Newextension capacity

IntermediaryMilestones
CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

CtedIvoireCocoaCaseStudy

I. II.

SituationAssessment VisionandStrategies

III. TakingAction

CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

TakingAction

Today,aMultitudeofDisconnectedInvestmentsFailtoTransformthe CocoaSectorFromExtensivetoIntensiveandDiversifiedFarming
EconomicInitiatives FarmerProductivity Quality Taxation MarketInformation EnvironmentalInvestments Deforestation FarmingPractices ClimateChange ImprovingLiving Conditions SocialInvestments ResponsibleLabor Practices

SampleofActorsCurrentlyWorkinginCtedIvoiresCocoaSector
Govtof CtedIvoire

CurrenteffortsareinsufficientRevitalizingthecocoasectorwillrequire deeperintegrationofrespectiveeffortsandcompetencies
Note:Organizationwebsites,FSGresearch
CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

TakingAction

BuildingaCommonAgendaShouldFocusonDefiningLocationSpecific IntegrationofDedicatedEffortswithSectorLevelSupport
ScopeofActionon CertifiedSupplyChains FarmLevelWork Farmerfieldschools Capacitybuildingofpartner coopsandtraitants Certificationandtraceability ofproduced/purchased cocoa Inputprovisionlinkedto trainingandcertification Germplasm,fertilizer, creditasexamples Improvedcommunity supportservices
Exporters and Manufacturers BuildingSupport/DemonstratingSuccessatSectorLevel

Agreementoninterventiontargetsamongkey partners GeographicareaoffocusRoles,responsibilities, reporting,governanceAgreementonkeypartners FormationofSteeringCommittee(multistakeholder) Scaleupcertificationschemesanddeterminebest organizationalapproach(farmercoopsortrading groups)andstrengthenselectedfarmerorganizations (condition:verifiedstandards) TransformationandscaleupofLastMileextension models R&Dinvestmentstoimproveextensionprovision Communityresearch,empowerment&enhancements Supportivepolicyreform&Infrastructural enhancements

Industry +Donors +Government

CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors

TakingAction

ThereAreManyReasonsToBelieveaCocoaSector TransformationIsPossible
ConditionssupportingCtedIvoireCocoaSectorTransformation Willingandinterestedbeneficiaries

Commonunderstandingofbothsectorchallengesandsolutions

Commitmentandmotivationamongstakeholders

Sectorlevelapproachtakesintoaccountcommercialselfinterest

Realisticacknowledgementofgovernmentandsectorpolicy conditions

Otheragriculturalsectortransformationexamplesexisttodrawfrom
CocoaSustainabilityinCtedIvoireAVisionforChange

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FSGSocialImpactAdvisors