Securing our future Coﬀee Supply Chain A Global Vie...Olam Coffee Now Upstream • Olam coffee...

Sintercafe November 2015

SecuringourfutureCoffeeSupplyChainAGlobalView

  A Snapshot of Olam Coffee

  Food Security – Key global challenges in Agriculture

  Challenges facing the Coffee supply chain

  Long term trends and demand in Coffee

  Near term Supply and Demand situation

  Corporate Responsibility & Sustainability (CR&S) in Olam Coffee

  Wrap up

Presentation Structure

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

Robusta Arabica

•  Africa & Asia •  8 Origins •  Robusta 95% + Arabica 5%

•  South America •  12 Origins •  Robusta 53% + Arabica 47%

•  4 Plantations •  Specialty Division •  21 Origins •  Robusta 51% + Arabica 49% •  2 Soluble Plants

Supply Chain Supply Chain Upstream Supply Chain

Midstream

Olam Coffee- A historic snapshot

16% Volume CAGR

Olam Coffee Now

Upstream

•  Olam coffee plantations w i th focus on h igh quality Arabica

•  Existing operations in Laos, Brazil, Zambia & Tanzania with current planted area of 5,000 ha

•  Target to have 15,000 hectares of estate coffee i n 6 - 7 l o c a t i o n s worldwide

Supply Chain

•  12 million bags of green coffee

•  Direct presence in 21 coffee growing origins

•  Olam Specialty Coffee as an i ndependen t subsidiary to focus on S p e c i a l t y s e g m e n t primarily in US while expanding in EU and Asia

Midstream

•  Soluble coffee with focus on Bulk and private label manufacturing

•  Located in Vietnam and Spain with 22,000 tons capacity

•  Spain for private label & Vietnam for bulk

Presence across the entire coffee value chain







  Wrap up


I believe that there are six key developmental challenges that confront all of us this century:

  Food security

  Water security

  Energy security

  Impact of climate change

  Sustainable growth

  Inclusive growth

Agriculture- Key global challenges

Key structural trends point to growing imbalance between supply & demand for agri commodities over the long term

DEMAND FACTORS SUPPLY FACTORS

Population growth pressures Growing scarcity of arable land due to urbanization, soil erosion and related factors

Dietary shift towards organic/ sustainable while increase in demand for protein/fats in developing countries

Water scarcity due to climate change, and other environmental degradation

Increased per capita food consumption driven by rising incomes and urbanization

Slowing rate of agricultural productivity improvement

Biofuels increasing competition for resources

Logistical inefficiencies and storage bottlenecks

1

2

3

4

1

2

3

4

8

2.3x

1.2x

Asia & Africa will be the key regions to supply

Demand: Growing global population to increase overall consumption, particularly in developing markets

9

0.6% 1.1%

0.4%

1979-81 1997-99

2015E 2030E x 1997-

2030 CAGR

Demand: Rising income levels will result in increased food consumption and shift in dietary habits

HIGHER GDP/CAPITA CORRELATED WITH INCREASED CONSUMPTION

GROWTH IN MEAT CONSUMPTION MAINLY FROM DEVELOPING COUNTRIES

10

Globalization

Health & wellbeing

Safety & traceability

•  Emergence of Chinese players driving down prices in agriculture and food production sector •  Increasing international integration and ease of

outsourcing lowering cost of production

•  Growing middle class and availability of information leading to a rise in health conscious consumers •  Rising affluence translates to willingness to pay for

healthier, organic options

•  Series of high profile food safety scares has heightened public awareness and concerns over food safety •  Increasing prevalence of processing and additives use

driving need for government to regulate sector

Demand: Consumer preference shifts will increasingly shape global food consumption patterns

11

“Indian, Chinese, and US companies are among many inking land investment deals in Africa, including Ethiopia, Tanzania, South Sudan, Mali and Mozambique. [...] foreign investors bought or leased a land area in sub-Saharan Africa about the size of France in 2009 alone.”

Press article

Supply: Arable land per capita has declined over time

POPULATION GROWTH HAS OUTPACED ARABLE LAND INCREASE

AVAILABILITY OF ARABLE LAND IS EXPECTED TO PLATEAU

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 98

Availability of arable land is also expected to plateau

GLOBALLY, ARABLE LAND AVAILABILITY IS REDUCING DUE TO URBANIZATION, ECONOMIC GROWTH

Source: Literature Search; Paper on ‘Global agriculture towards 2050’

“Indian, Chinese and U.S. companies are among many inking land-investment deals in Africa, including Ethiopia, Tanzania, South Sudan, Mali, and Mozambique. […] foreign investors bought or leased a land area in sub-Saharan Africa about the size of France in 2009 alone.”

Press article

0.5x

12

Supply: Agricultural productivity improvement has slowed

0.7%

2.0% 1.5%

x CAGR

(KM3)

Water for irrigation also challenged by water demand

for urbanization

Supply: Water Scarcity will become a huge challenge

Economic water scarcity: Water resources are abundant relative to water use, with less than 25% of water from rivers withdrawn for human purposes, but malnutrition exists. Little or no water scarcity: Abundant water resources relative to use. Less than 25% of water from rivers is withdrawn for human purposes. Not estimated

Physical water scarcity: More than 75% of river flows are allocated to agriculture, industries, or domestic purposes.

Approaching physical water scarcity: More than 60% of river flows are allocated

By 2025, 36 countries, home to 1.4B people will be affected by water scarcity







  Wrap up


  Yield growth/ productivity

  Weather volatility

  Land Suitability

  Water Stress

  Labor Availability

Coffee- Key global challenges

  Average global yields of coffee have been

going up quiet steeply over the last decade.

  Yield growth has been substantial in Asia and

South America, while Africa & Central America

remains flat

  Bulk of the increases in yield are a reflection of

the increases in acreage in Vietnam and

efficiency lead production increases in Brasil

  Takeaway: Yield Improvement in coffee is

contributing positively in increasing coffee

supply however it is critical to improve yields in

Africa and CAA .

Coffee Global Challenges - Yield Growth

0

5

10

15

20

25

196

1

196

4

196

7

197

0

197

3

197

6

197

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9

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2

60 k

g ba

gs p

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ectr

e

Coffee Yields by Major Producing Regions

Africa Central America South America Asia

  The number of extreme and unpredictable

weather events have increased over the

last few decades. Ex: Brazil Dry weather

in early 2015

  Takeaway: Coffee may see sudden

unforeseen weather shocks in growing

countries leading to price and supply

volatility

Coffee Global Challenges - Weather Volatility

  While overall availability of land does not

seem to be a problem for future growth in

coffee production climate change will

influence the suitability of land for coffee

  Average global temperatures expected to

climb 1.7º C pushing the proper altitude for

coffee production higher

  “Models predict that, in Central America as

a whole, the optimal coffee-growing

elevation will shift from 1,200 m.a.s.l

currently to 1,600 by 2050” - source CIAT

2014

  Takeaway: Serious challenge for high

grown Arabicas

Coffee Global Challenges - Land Suitability

Coffee Global Challenges - Water Stress

  Generally, coffee is not anticipated to face

t he wa te r s t r ess seen i n o the r

commodities

  Asia, especially Indonesia, and Central

America are possible areas of concern

  However the increasing dependence of

coffee on Brazil and Vietnam with the

increasing dependence on irrigation in

these countries does pose a doubt on the

ability of these coffee giants to continue to

increase production going forward.

  Takeaway: While not an immediate

concern, water conservation should be a

focus area

  Populations are rapidly aging across the globe.

  Coupled with the global trend of urbanization and the

clear preference of younger generations to city life

finding labor for coffee farming is one of the biggest

challenges.

  While this is a challenge for all of agriculture it is

especially acute for coffee as a large number of

farms are small holder farms and not amenable to

corporatization and mechanization.

  Takeaway: The entire industry and the govt’s have to

work together to ensure that workers are enticed to

stay back and work on the farms

2015 2030 2050Brazil 11.7 18.8 29.3Viet Nam 10.3 17.5 27.9Colombia 10.8 18.3 27.6Peru 10.0 14.7 23.2India 8.9 12.5 19.4Indonesia 8.2 13.2 19.2Ethiopia 5.2 6.1 10.4

Percent of Population over 60

Coffee Global Challenges - Labour Availability







  Wrap up


  Increasing demand of differentiated coffees – Specialty, certified etc

  Increasing Concentration of Producing countries

  Increasing Participation of financial participants

  Increasing volatility

  Long term demand growth

Coffee – Key Trends

Specialty, Certified, Sustainable coffees

  Growth of Coffee Shop Culture - Coffee

becoming a trendy drink

  With rising incomes and affordabil i ty

consumers developed a discerning taste for

quality coffee and were willing to pay a bit

more

  With Customers looking for similar coffees at

home and Innovation by the industry seeking

to meet the convenience need of consumers

lead to phenomenal growth in Single serve

Consumption

  The 3rd wave of specialty coffee further

helping to create a focus on quality and

sustainability amongst consumers.

Increasing demand of differentiated coffees

0.0

5.0

10.0

15.0

20.0

25.0

2010 2011 2012 2013 2014 2019 E 2024 E

Specialty Coffee Demand (‘mn 60kb bags)

12.5 % CAGR

in 5 years

Increasing Concentration of Producing countries

Brazil 29%

Vietnam 11%

Others 60%

02/03

Brazil 36%

Vietnam 18%

Others 46%

13/14

Last Decade

Brazil 44%

Vietnam 21%

Others 35%

24/25

Brazil 36%

Vietnam 18%

Others 46%

13/14

Next Decade

Over dependence on Brazil and Vietnam for supplies will continue

Increasing Participation of financial participants

0%

2%

4%

6%

8%

10%

12%

14%

0.0

50.0

100.0

150.0

200.0

250.0

CTA funds(USD bn) % of Hedge funds(RHS)

7 % CAGR

in 10 years

  Commodities being looked upon as separate asset

class with increasing participation of funds

  Resulting in pricing being driven as much by

macro events as by fundamental supply and

demand

  Increasing correlation amongst commodities

as well as between commodities and other

asset classes

  Massive growth in Hedge funds over the last 10

years AUM under CTA/managed money funds

growing to over 220 b usd

  With increasing concentrat ion of

producing countries

  And increasing numbers of extreme

weather events

  And the large growth in CTA funds many

of which depend heavily on trend

following strategies,

  Volatility is here to stay

Increasing volatility

107.2

308.9

101

225.5

119.95 90

140

190

240

290

340 NY Coffee Price (c/lb)

World Consumption (Total Coffee)

27

TOTAL WORLD (mil. Bags) 2010 2011 2012 2013 2014 2019 2024 CAGR-10y CAGR-5y f.CAGR-5y f.CAGR-10y

R&G 90.5 91.0 92.6 94.0 95.3 102.1 109.5 1.5 % 1.4 % 1.4 % 1.4 %

Soluble 41.2 42.9 44.5 46.2 47.8 58.2 69.4 5.1 % 4.2 % 4.0 % 3.8 %

Pods 3.2 3.7 4.3 5.1 5.7 9.2 10.3 20.5 % 16.6 % 10.0 % 6.0 %

Total 134.9 137.6 141.4 145.3 148.8 169.6 189.2 2.9 % 2.7 % 2.7 % 2.7 %

Specialty (Total) 6.3 7.2 8.1 9.1 10.2 16.0 19.1 - 12.5 % 9.5 % 6.5 %

Emerging Markets 58.5 61.5 64.3 67.1 70.0 86.6 103.8 5.3 % 5.0 % 4.4 % 4.0%

  For many decades Overall Coffee growth rates were fairly sedate at about 2.25% per annum. However over the last 10

years demand has been growing at between 2.5 to 3.0 %

  However segments of the business have been growing at much higher growth rates

  Consumption in origin countries growing at above 5% and growing rapidly in countries like Brazil, Indonesia etc

  Soluble coffee growing at over 4% per annum

  Specialty Coffee growing at over 10% growth rates on an ever increasing base.

  Extrapolating existing trends we expect the world to need an additional 40 m bags of coffee over the next ten years







  Wrap up


S&D: 4.6 mn bgs surplus Spec sold + 13.9 mn Bgs Price dropped by +183 cts

Price vs. Spec length vs. S/D

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0.00

50.00

100.00

150.00

200.00

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300.00

350.00

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

Jul-0

9 S

ep-0

9 N

ov-0

9 Ja

n-10

M

ar-1

0 M

ay-1

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l-10

Sep

-10

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-11

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-11

Jul-1

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ep-1

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ov-1

1 Ja

n-12

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ar-1

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ay-1

2 Ju

l-12

Sep

-12

Nov

-12

Jan-

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-13

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-13

Jul-1

3 S

ep-1

3 N

ov-1

3 Ja

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M

ar-1

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ay-1

4 Ju

l-14

Sep

-14

Nov

-14

Jan-

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Mar

-15

May

-15

Jul-1

5 S

ep-1

5

Spec Length in '000 Bags (LHS) NY Price (RHS)

S&D: 1 mn bgs deficit Spec bought + 7.3 mn Bgs Price rallied by +172 cts

S&D:0.7 mn bgs deficit Spec bought + 15.0 mn Bgs Price rallied by +107 cts

S&D:3.8 mn bgs deficit Spec sold + 19.5 mn Bgs Price dropped by +80 cts

Depreciation of Coffee currencies – crude shock!

30

Brazil Real : -71% Col Peso : -48% Mex Peso : -26%

Coffee Price : -38%

Coffee Supply & Demand

31

13/14 14/15 15/16

Arabica Production 82.3 80.1 81.8 Consumption 83.0 83.9 85.5 Surplus/ Deficit (0.7) (3.8) (3.7)

Robusta Production 66.8 62.4 64.1 Consumption 63 63.6 65.1 Surplus/ Deficit 3.7 (1.2) (1.1)

Total Production 149.1 142.5 145.9 Consumption 146.0 147.5 150.6 Surplus/ Deficit 3.0 (5.0) (4.8)

All figures in mn 60kg bags







  Wrap up


Corporate Responsibility & Sustainability (CR&S)

“CR&S is a key pillar to support the delivery of the BU vision, helping to achieve our goals as a responsible

corporate citizen and in the most sustainable manner. Therefore, we need to ensure CR&S is embedded in our business models across all platforms, be it in the

Core Supply Chain or our Upstream and Mid/Downstream businesses”

As per Olam’s Common Purpose

“Growing Responsibly”

This is the way we do business

34

Olam Sustainability

Standard

Olam Livelihood Charter (OLC)

Plantations, Concessions & Farming Code

Supplier Code

Carbon Footprint & Safety

Improved efficiencies and reduced emissions through intelligent systems

Championing sustainability in the workplace through behavior change

Small-scale Farmers- Improving farmer well being Through the OIC Large-scale Farmers- Water, carbon and biodiversity management through Good Agricultural Practices

Environment, people and food safety through

recognized processes and policies

Using our purchasing to achieve better outcomes

through implementing Supplier Code

Sustainable stewardship of land and communities through carrying out Environmental & Social Impact

Assessments

Corporate Responsibility & Sustainability (CR&S)

Farmers/ suppliers

Plantations & farms

Sourcing & Trading

Processing

Logistics

Offices

Olam Coffee- CR&S

Upstream (Plantation)

• Adherence to ESIA, FPIC and HCV standards for land suitability

•  Implementing measurable steps for environment

• Habitat Preservation • Water Discharge & Emission

•  Implementing measurable steps for communities

• Labor Welfare • Medical facilities • Livelihood Improvement

Supply Chain (Green Coffee)

•  Implementation of Supplier code in all origins

•  Project implementations under Olam Livelihood Charter

• 6 active projects • 14,000 farmers under the projects

•  Focus areas: • Market Access and Information flow • Improve Quality & Yield • Usage of OFIS

Midstream (Soluble)

•  Energy/ CO2 reduction • Use of high efficiency lights • Use of heat recovery technology

• Water usage reduction • Reuse evaporate condensate • Recycle vacuum pump water

• Waste reduction • Best in class waste treatment plant • Strict emission standards

ESIA: Environment and Social Impact Assessment; FPIC: Free and Prior Informed Consent; HCV: High Conservation value; OFIS: Olam Farmer Information System

[email protected]

8 Qualifying Principles 1.  Finance 2.  Improved Yield 3.  Labour Practices 4.  Market Access 5.  Quality 6.  Traceability 7.  Social Investment 8.  Environmental Impact Updated June 2014

2014: §  One million tonnes of product §  30 qualifying initiatives §  350,000 farmers enrolled

Olam Livelihood Charter

37

Green Coffee Olam Farmer Information System (OFIS)

  Inputs :   GPS data – farm and infrastructure

  Farmer survey – baseline and annual, focus modules possible (e.g. gender, etc.)

  Productivity and input updates

  Deliverables :   Risk mapping - infrastructure risks (distances to

schools, etc.), risk maps

  Analysis

  Farm management plans

  Tracking impact changes over time

UNDERSTANDING FARM DATABASE AND TARGETING INTERVENTIONS

ACCORDINGLY

Coffee CR&S: Key Facts 2014

38

Participating Countries: Côte d'Ivoire, Cameroon, Colombia, Honduras, Vietnam, Indonesia, Laos

FARMERS HECTARES TONNES INITIATIVES

Partners : DE Foundation, Nestle / Nespresso, Sustainable Trade Initiative (IDH), etc. Certifications : 4C, Rainforest Alliance, Starbucks C.A.F.E. Practices, UTZ, FT / FLO, Organic

14,258 33,650 71,526 6

38

Laos Plantation CR&S project

39

  Objectives   Ensure long-term social, commercial and agronomical viability of small holder Arabica and Robusta farming

  Professionalize existing cooperatives and farmer groups – reaching 2,000 farmers

  Consolidate internal service supply of cooperatives and farmer groups to members (mutual collateral, saving schemes, processing, training, supply of inputs)

  Partners and roles   DE-Foundation

  IDH

  RABOBANK

  OLAM (lead and technical support)

  Scope   No. of farmers: 2,000 / Volume: 2,000 MT / year (1,500 MT Arabica, 500 MT Robusta)

  Duration: Oct 2015 – Dec 2020

Laos Plantation CR&S Project

40

Meeting with Group Heads Discussing 4 C Principles

Planning for season

Washed Robusta Group Nongtuang Village

Discussing with Group Heads from 4 Villages

Checking Processing Quality of Groups

Improving Robusta Quality

Ara

bica

Robusta







  Wrap up


Wrap Up

42

  Food security is one of the major developmental challenges facing the world and agriculture globally faces several supply side constraints to meet the ever growing demand.

  The Coffee industry faces its own challenges of increasing yields, water stresses and land suitability amidst changing climactic conditions and especially labor availability.

  On the supply side Coffee is increasingly dependent on just 2 origins for the bulk of the world’s demand

  Volatility in the coffee market is here to stay and we expect markets moves to be even more unpredictable, extreme and frequent.

  On the demand side the picture looks rosy with improving quality and innovation by the industry attracting newer customers and the soluble segment as well as consumption in origin countries growing at very healthy rates

  However some of the highest quality coffees where demand is growing very rapidly also face the biggest challenges in terms of land, water and labor.

  I believe one of the things that makes coffee “special” is the sheer spread and diversity of qualities and growing regions. We as the coffee industry have to strive to retain this special appeal of coffee

  Sustainable and inclusive growth of coffee farmers will help in ensuring them seeing a long term future in the business leading to better security of supply as well preserving the current diversity of coffee.

Wrap Up

43

  It is a pity that coffee a product category that leads in sustainability initiatives does not have a common industry wide platform. It is imperative that while we continue to work individually on our own initiatives, we have a common agenda and voice for the industry as a whole.

  Need for CSR to be less talk, less Jargon, less marketing and investor relation pitches and more action, more data and more hard targets.

  I believe that Volatility, which I believe is a given, is a major headwind for a sustainable supply chain. I would urge Govts to step in and protect the small holder farmers from feeling the impact of steep price drops – I feel that this could be achieved in a manner that is neutral to Govt budgets in the long run.

  Finally a word of caution – Unfortunately as many of us here would be aware there are loopholes and malpractices in many coffee origins in the sourcing of certified coffee. I feel that each of us has to strongly guard against these. A PR disaster with any one player will hurt the entire industry and will take a long time to recover from.

Thank You

Securing our future Coﬀee Supply Chain A Global Vie...Olam Coffee Now Upstream • Olam coffee...

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