Cocoa Sector Overview Risks and Opportunities

Cocoa Sector Overview Risks and Opportunities as an introduction to: Managing Risk in Côte d Ivoire s Cocoa Sector 1 ARD Week 2009 Peter van Grinsven, Mars Incorporated

Contents of Presentation General Mars Incorporated Chocolate Market and Market Outlook, Cocoa Price History Price Risk Management by Industry Cocoa Production and Shifts of Production The Importance of Cocoa to various producing countries Cocoa Sustainability: Awareness of Risk of Availability (Supply) in addition to Price Risk Identify Supply Challenges and Solutions through use of appropriate Science, capacity building and Pilot Programs conducted in farmers fields Develop Key Partnerships 2

Introduction of Mars Incorporated Mars Incorporated is a family owned business that was founded in the USA in 1911 and we are a world leader in branded Snack foods, Main meal and Pet care products Today, Mars Incorporated is a US$25 billion business operating in over 70 countries with 60,000 associates and 120 factories Throughout our history the business has been guided by the Five Principles of Mars: Quality Responsibility Mutuality Efficiency Freedom Mars Incorporated and Cocoa Sustainability: for Mars, cocoa beans are a key raw material and supply of affordable, good quality cocoa beans is important Mars commits itself to help bring about necessary changes to transform the cocoa sector into a sustainable industry, focusing on economic, social and environmental wellbeing of all stakeholders 3

Cocoa = Chocolate The Market and Market Outlook There is significant growth New Consumers in China, India, even Europe New Products (health aspects, dark chocolates) 4

Cocoa Prices: History 1979 2008 London Market Prices fluctuate Long term price trend is rather flat 5

Historical Industry Focus : Price Risk Management Monthly Average NY Cocoa 2nd Futures Price $5,000 $4,500 $4,000 1970 s Risk Management Importance 1980 s Risk Mgt complex: Beans & Products, currency, politics etc. $3,500 Dollars/MT $3,000 $2,500 $2,000 $1,500 1960 s: Crop Forecasts, Weather $1,000 $500 $0 195301 195408 195603 195710 195905 196012 196207 196402 196509 196704 196811 197006 197201 197308 197503 197610 197805 197912 198107 198302 198409 198604 198711 198906 199101 199208 199403 199510 199705 199812 200007 200202 200309 Innovative Change & Cost Advantage Late 90 s Geo Political Risk, awareness of non Sustainability New: Health issues? Flavor? Reputation? 6

Global Cocoa Production: Last 100 years Production mondiale de cacao par continent 3500 3000 tonnes 2500 2000 1500 Consumption 1000 500 0 30 60 90 années Afrique Amérique Asie + océanie source 7

M etric Ton per Year 1400 1200 1000 800 600 400 200 0 1950 1954 8 Ghana: policy, farm income, capsids Issues with Cocoa Production in country: Last 60 years 1958 1962 1966 1970 Nigeria: policy (oil), farm income, capsid & black pod 1974 Brazil: Witches Broom, low prices, currency Year 1950 to 2005 Malaysia: Major economic growth, cocoa price, alternatives 1978 1982 1986 1990 1994 1998 2003 Indonesia: Pest (cocoa pod borer), Brazil Ghana Nigeria IC Malaysia Indonesia

Importance of Cocoa for African Countries Country Data and Cocoa Cameroon Nigeria Ghana Cote d'ivoire Ranking of cocoa as Agriculture income earner 1 n/a 1 1 and as source of employment 1 1 1 1 Production (2005) 180,000 190,000 630,000 1,400,000 People 'living' of cocoa 1,400,000 1,400,000 6,300,000 7,000,000 Percentage of people 'living' of cocoa 12% 1% 29% 44% Foreign exchange earnings in millions US$ 270 285 945 2,100 % of foreign exchange earnings derived from cocoa 15% 0.40% 30% 35% 9

Awareness of Risk of Availability (Supply) in addition to Price Risk Industry knows how to manage price risk But managing price risk is not enough if there will not be sufficient supply of affordable, good quality beans Mars Commitment to Cocoa Sustainability Understand situation (Risk analysis) Identify Supply Challenges and Solutions; use, linking and Sharing of Science Capacity building in producing countries and Pilot Programs conducted in farmers fields Develop Partnerships 10

Challenges in the Current Cocoa Supply Chain Economic issues Low Yields Poor agronomic practices, pest and disease problems, ageing farms, inadequate planting materials, poor soil management and use of farm inputs Economic issues Other Land Tenure rights, Inadequate infrastructure and land use planning, poor market information systems and quality signals, absence of crop diversification, no credit systems Environmental issues Weather anomalies and trends, soil erosion, deforestation, water stress, global warming, monoculture issues Social Issues Poverty, lack of education, diseases, vulnerable rural livelihoods, labor conditions i.e. WFCL 11 The long term supply of cocoa is at risk

Missed production potential due to Pest and Disease and Soil Fertility 1,800,000,000 1,600,000,000 Lost potential in US$ by Issue Loss US$ value 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 0 Fertility Black Pod Mirids Rodents CPB WB FPR Cote d'ivoire Ghana Nigeria Cameroun Indonesia Latin America 12 Low income due to avoidable losses

13 When productivity and income decline due to avoidable soil nutrient depletion, land is abandoned.

Rainforest in Cote d Ivoire change from 1955 to 1999 14 Land Availability is an Issue

Challenges of a sustainable cocoa supply chain Down stream Inadequate Marketing systems No or inadequate price information systems and low farm gate price compared to FOB and World Market price, poor price/quality signals to farmers, boom/bust cycles etc. Cocoa and Chocolate Market far away from Farmer Not enough direct contact and feedback to farmers, market forces at farmers end very different than those at consumers end Consumer Needs and Demands Good Quality but affordable product, pressure to improve human and environmental conditions for all stakeholders in chain Corporate Social Responsibility The image of a business, a product 15

How many How many kg of How many kg of kg of rice can be cocoa are needed cocoa are needed bought by one kg to buy one 100 cc to buy one fertilzer of cocoa? motorcycle? bag Indonesia 4,2 800 8 Ghana 1,5 2900 14 Côte d'ivoire 1,1 5500 52 Sources: survey Ruf (CIRAD) Competitiveness & Cost of Doing Business Value of Cocoa Production and Purchasing Power: Indonesian Cocoa Farmers have twice the yield and 500% more buying power from I kg of cocoa beans than Ivorian Cocoa Farmers Competitiveness and Policy: Whilst Ivorian Farmers could compete on productivity (yield) with Indonesian Farmers they are still at a disadvantage policy issues? 16

Bulk Cocoa Origins Côte d Ivoire Ghana Avg. Yield (Kg/Ha) 450 (200 1000) 400 (200 1000) Situation Assessment of Cocoa Growing Countries: Competitiveness Country Level Bulk Cocoa Origin Trends and Conditions Farm Gate Price as % FOB 40 45% 65% Annual Pest / Disease Loss 24% 29% Annual Soil Fertility Loss 28% 25% Other Challenges Lack of sector support High tax rates Limited land for further expansion High % of aging cocoa trees Limited land for further expansion High % of aging cocoa trees The climate in Côte d Ivoire, Ghana and Indonesia is most suitable for cocoa cultivation Whilst Ghana & Côte d Ivoire yields are lower than Indonesia, they have the lowest crop losses Indonesia Cameroon Nigeria Brazil 17 800 (300 1500) 425 (200 1000) 350 (200 800) 175 (200 1500) 84% 79% 79% 90% 49% 50% 50% 65% 15% 23% 23% 20% Poorly flavored beans Low rates of post harvest fermentation Major losses from Cocoa Pod Borer Sector neglect in favor of oil and gas industry High % of aging cocoa trees Major losses from Black Pod Unsolved Witch s Broom infestation Declining interest in cocoa farming Sources: Mars internal data, Indonesia Cocoa Producers Association (Askindo), Bill and Melinda Gates Foundation Presentation, COPAL, WCF Soil fertility in W. Africa is low but can be improved by use of compost and additional fertilizer Farm Gate prices in Cote d Ivoire are do not provide incentives for Cocoa Farming Cocoa could be a viable industry in West African Countries

Summary of Issues The Solution to current problems in the Cocoa Producing countries lies in Competitiveness (price, productivity, infrastructure) Intensification (germplasm, rehabilitation, P&D control, fertility) + Crop Diversification (farmers cultivating several crops) Whilst Mars and other Cocoa Industry stakeholders understand cocoa issues such as competitiveness and intensification, more expertise is needed for crop diversification 18

Coconut and Cocoa Farm Cocoa under Fruit Cocoa under Coconut Cocoa in Mixed Farm Luzon 19 Farm Diversification: Mixing of Crops or Several Single Crops

Partnerships: Mutual and Complementary Goals Mutually Achieving Goals through Development of Sustainable Cocoa Goals Mars, Inc. (and others World Bank, Producer Organizations in the cocoa and Governments of and Small Farmers chocolate industry) Producer Countries, NGO s Long Term A socially, environmentally Poverty reduction and economic Predictable yield, allowing and economically sustainable growth through a market and trade investment in land and equipment; cocoa industry with motivated oriented agriculture agroforestry systems that will farmers and assured supplies expand the economy Medium Term Better quality and more reliable Sustainability and high quality Increased yield and income; supply of cocoa from Asia by technical support implemented reduced labor cost/acre combating CPB at little incremental cost Short Term Opportunities in trading; Global access to world class Improved understanding of infrastructure, training knowledge and advanced farming techniques; improved technical innovations planting materials 20

Cocoa Sustainability Mars Incorporated Initiatives Mars Inc. works in Partnerships and Collaboration with: Research Institutes Government, Public and Civil Society Institutes Private industry Mars Inc. focuses on our Expertise, i.e. Analysis: both in house and external Science: e.g. Cocoa Genome Implementation: Mars Cocoa Development Centres, impact Supply Chain: Certification through Rainforest Alliance, Utz Certified 21

Example of Mars leading Science: Molecular genetics at USDA 5 6 7 8 1 2 3 4 9 10 0 HistoneB 0 AFLP1/6 0 AFLP7/7 0 mtccir1 0 ct ccir253 2,8 ct ccir83 3,2 gt ccir104 3,6 gt ccir115 4,2 C168 12 ct ccir238 14,7 ct ccir1 17,7 mtccir15 17,8 ct ccir79 23 ct ccir77 23,6 gt ccir127 27,4 C75 28,7 C66 31,1 ct ccir46 31,5 ADH 33,6 ct ccir230 33,9 cot448 35,7 AFLP17/5 35,9 ropm7/1.4 36,3 AFLP14/5 36,3 AFLP3/1 39,1 ct ccir78 40,7 mtccir54 42,5 AFLP18/9 43,9 mtccir29 46,1 AFLP18/6 46,6 AFLP17/1 47,4 AFLP1/12 48,3 AFLP9/8 50,9 AFLP14/9 51,2 C55 51,6 AFLP5/9 52,1 AFLP15/3 52,3 AFLP5/11 52,6 ropp 14/.9 52,7 AFLP17/3 52,7 AFLP6/2 53,1 AFLP8/10 54,6 ropk 15/,6 54,6 AFLP11/1 55,7 ct ccir19 56,6 AFLP12/4 59,4 AFLP5/19 60,8 ct ccir48 61,3 AFLP6/6 61,9 AFLP6/10 62,8 gt ccir144 63,2 ropd14/1 64,8 ct ccir218 66,7 ct ccir215 68,4 AFLP1/2 73,9 ct ccir3 74,6 C138 78,3 rtcc IR132 79,4 AFLP6/16 80 C157 83,8 AFLP10/15 86,2 ropr19/.4 89,8 ct ccir72 96,1 gt ccir120 0 AFLP4/3 1,8 gt ccir147 2,5 cot3932 8,6 gt ccir141 9 gt ccir135 10 mtccir19 11,4 AFLP20/3 11,5 gt ccir110 12,3 mtccir44 14,5 ct ccir235 14,6 AFLP10/8 19,3 mtccir3 20,9 N1072 22 AFLP8/3 23,4 gt ccir161 24,8 gt ccir140 25,5 ct ccir252 25,6 AFLP19/4 30,7 ct ccir53 42,1 ropr16/.9 46,6 ct ccir246 48 ct ccir43 50,1 ct ccir249 56,3 mtccir60 56,9 AFLP1/13 58,5 ropm3/0.8 60,3 AFLP16/10 60,4 AFLP9/5 60,5 AFLP1/15 63,4 rtccir133 64,4 ct ccir74 64,5 AFLP12/5 65,4 C119 65,5 ct ccir86 66 AFLP3/4 68,9 gt ccir149 69,6 ct ccir23 70,3 AFLP6/9 71,6 CA 18 72 mtccir48 72,7 C37 74,8 PGM/H 77,4 gt ccir156 81,1 ct ccir76 82,5 AFLP1/7 84,6 ct ccir211 85,6 ct ccir250 87,5 ct ccir213 87,5 AFLP8/13 92,8 mtccir11 96 ropr8/.5 0 1,4 ct ccir90 ct ccir99 5 AFLP8/9 5,2 mtccir 49 5,9 ct ccir69 8,5 ct ccir80 9,8 gt ccir108 11,2 mtccir 21 12,1 ct ccir61 12,6 CA 39 13,4 gt ccir121a 13,7 AFLP6/11 15,1 cot3089 15,4 mtccir 40 15,6 ropq4/.75 15,7 ct ccir47 16,2 mtccir 62 16,6 AFLP3/2 18,2 AFLP17/6 19,9 AFLP6/15 20,2 AFLP14/8 21,8 AFLP5/17 22,5 AFLP8/15 24 AFLP10/5 24,7 ropl10/.8 25,3 ct ccir62 25,5 C6 5 27,3 AFLP8/12 28 AFLP9/9 30,7 AFLP16/7 38,1 AFLP10/9 42,2 ct ccir51 44,6 gt ccir107 48 gt ccir143 48,1 ct ccir32 49,4 AFLP6/5 49,5 C4 2 52,5 AFLP7/1 53 rtccir131 54,5 AFLP3/3 64,1 AFLP10/1 66 AFLP5/7 72 AFLP10/11 73,9 gt ccir118 74,1 ct ccir66 78,3 gt ccir122 78,5 C4 1 79,5 ct ccir49 82,7 AFLP2/1 95,6 ct ccir237 0 ropf3/2,5 10,1 IDH 12,3 TEL139/HIND 12,5 AFLP17/8 13,4 C104 14,7 gt ccir146 17,3 gt ccir112 24 AFLP8/2 25,2 AFLP6/14 26 AFLP6/1 26,2 AFLP6/13 26,5 N1102 27,4 AFLP5/5 28,4 AFLP10/2 28,5 mtccir39 29,3 AFLP9/1 30 mtccir18 31,7 AFLP7/10 32,6 AFLP8/14 33 AFLP17/2 33,7 AFLP5/14 34,5 mtccir17 35,3 AFLP1/17 36,2 AFLP5/15 36,3 gt ccir128 36,8 ct ccir232 38,2 AFLP5/18 38,4 AFLP20/2 38,7 AFLP1/16 39,3 AFLP5/16 39,5 AFLP1/11 40,9 ct ccir224 41,4 ropf12/1 41,4 AFLP16/11 43,4 gt ccir119 45,6 N1388 46,4 mtccir12 47,2 mtccir43 49,1 AFLP4/5 53,1 ct ccir243 54,9 mtccir32 55,1 gt ccir136 57,3 AFLP15/6 57,5 AFLP19/1 59,8 AFLP13/2 60 ropo16/.7 60,4 ct ccir212 61,2 mtccir33 64,1 MDH/A 68,9 mtccir57 69,8 AFLP1/3 74 ct ccir214 74,4 gt ccir129 77,3 C3 78,7 ct ccir251 79,9 AFLP1/8 80 gt ccir154 85 ct ccir205 2 5,9 6,7 7,8 9 9,6 12,4 14,8 16,2 17,6 20,8 21,2 21,6 23 23,5 24 24,5 25,3 25,6 25,8 25,9 26,2 27,2 27,5 27,5 28,5 29,4 30,6 33,4 35,3 40 40,5 41,1 44,2 46,1 47,8 49,2 51 51,2 54,5 56,2 58,4 60,7 61,9 62,8 63,5 64,2 66,4 66,6 gt ccir106 ct ccir202 gt ccir148 AFLP18/5 HistoneA ropd 14/.6 ct ccir73 ct ccir85 AFLP5/10 ct ccir88 gt ccir139 a AFLP8/4 AFLP9/6 AFLP8/5 AFLP16/4 mtccir10 gt ccir101 ropo15 AFLP7/5 CA 24 AFLP11/8 ct ccir55 mtccir2 mtccir51 mtccir47 mtccir42 5S AFLP4/1 AFLP16/5 ct ccir56 ct ccir58b AFLP7/2 ropm17/1.4 5 ct ccir68 AFLP10/14 ct ccir229 AFLP10/13 AFLP10/12 N1333 gt ccir145 C164 ct ccir81 ct ccir2 ct ccir216 mtccir36 rops 8/.55 ct ccir231 ct ccir89 ct ccir234 10,5 mtccir6 11,9 AFLP5/3 12,1 AFLP17/10 13,6 ct ccir247 15,5 mtccir16 20,9 AFLP7/6 21,4 AFLP5/1 22,9 mtccir53 23,2 AFLP6/8 23,2 gt ccir160 23,8 AFLP12/3 24,1 AFLP15/5 24,3 AFLP10/6 25,2 AFLP2/5 25,9 mtccir50 26,5 AFLP9/3 26,7 AFLP9/2 26,8 ct ccir245 27,8 AFLP5/13 28,2 ropr3/.75 28,3 AFLP9/4 29,6 AFLP11/4 30,3 AFLP2/6 32,8 ct ccir223 36,8 gt ccir130 42,5 ct ccir12 45 ct ccir54 45,2 mtccir25 46,5 ct ccir241 48,9 AFLP7/3 56,5 ct ccir225 61,3 gt ccir116 61,4 AFLP5/4 65,4 ct ccir222 68,2 mtccir52 73,3 mtccir9 75 ct ccir93 75,9 ct ccir240 76,2 gt ccir139b 76,4 AFLP1/5 1,2 C173 3,2 AFLP1/14 7,3 AFLP16/13 10,2 AFLP10/7 12 gt ccir138 15,2 gt ccir152 16,3 gt ccir155 16,9 N1081 18,2 gt ccir125 18,4 ropp 14/.7 19 N1077 21,8 AFLP4/4 24,1 ct ccir71 26,2 mtccir46 28,3 AFLP11/5 28,4 mtccir7 32,7 AFLP10/4 33,1 AFLP10/3 34,5 mtccir56 36,7 mtccir55 38,3 AFLP6/17 41,6 AFLP14/10 43,1 ct ccir59 43,2 AFLP14/11 44,1 AFLP14/4 44,9 ropm20 44,9 AFLP18/8 45,7 AFLP5/12 47,8 AFLP8/11 48,3 ct ccir94 48,7 AFLP16/3 48,9 AFLP19/2 50,5 rdna PT A71 51,4 AFLP18/3 51,7 AFLP18/2 52,2 ct ccir204 56,2 ct ccir244 56,4 AFLP18/4 59,6 ropm4/.7 63,2 AFLP15/7 65,8 ropm5/.75 76,5 ct ccir96 2,6 AFLP12/6 4,4 AFLP12/7 12,4 PGI 15,7 AFLP6/12 17,1 AFLP16/14 26 ct ccir21 30,5 gt ccir124 30,9 gt ccir114 32,5 gt ccir111 35 AFLP15/1 39,2 mtccir26 43,9 ropp 14/.4 47,1 ropf15/,4 48,7 AFLP2/4 50,9 AFLP15/2 50,9 ct ccir63 51,1 ct ccir92 51,6 AFLP1/10 51,6 N1111 51,6 ct ccir98 52,4 AFLP17/7 53,4 AFLP11/7 53,5 ct ccir201 58,2 AFLP17/9 60,8 mtccir45 62,6 ct ccir203 65,6 AFLP19/3 67,5 TEL139/BGL 78,9 TE L139/HI 0 gt ccir117 0 ct ccir206 5 gt ccir109 14,6 ct ccir45 22,8 mtccir30 24,4 gt ccir157 25,2 AFLP5/2 26,4 ct ccir11 28,3 AFLP12/1 28,7 AFLP12/2 29 ct ccir39 29,9 AFLP4/2 31,6 ct ccir58a 31,7 mtccir24 32,1 ct ccir95 32,1 AFLP1/4 32,2 gt ccir134 33,5 ct ccir207 36,7 AFLP6/7 37,6 AFLP8/8 38 ACP 38,3 AFLP8/7 38,3 mtccir35 39 AFLP8/6 42,4 ropf15/18 46 AFLP3/5 48,5 AFLP2/8 49,4 AFLP3/6 49,6 AFLP4/6 49,9 AFLP1/9 50,3 gt ccir150 50,4 AFLP11/3 50,4 mtccir63 50,5 AFLP16/1 50,7 AFLP11/9 50,8 ropr19/.5 51,3 AFLP16/6 51,5 ropf3/1,6 52,1 mtccir8 52,4 AFLP13/1 52,8 AFLP5/20 53,4 ropq10/2.1 54,1 ct ccir208 54,6 AFLP5/6 54,8 ct ccir228 55,3 AFLP2/3 57,9 AFLP3/7 59,7 gt ccir102 60,9 mtccir58 65,1 ct ccir87 71,8 AFLP5/22 73,4 AFLP14/7 78,2 AFLP18/1 85,3 AFLP11/2 91,1 ct ccir236 94 C106 94,4 AFLP11/6 95,4 AFLP14/2 0 AFLP9/7 0,7 gt ccir105 6,1 gt ccir126 8,2 ropp 9/.35 9,7 ct ccir239 11,3 ct ccir254 11,6 ct ccir50 12,8 ct ccir219 29,7 AFLP6/3 30,5 mtccir31 32,6 ct ccir217 34,7 HistoneC 41,8 gt ccir113 43,4 ct ccir233 45 AFLP14/3 46,5 mtccir41 46,8 mtccir38 46,9 mtccir61 47,6 AFLP16/8 48,5 ct ccir252/2 50,6 gt ccir137 51,8 ct ccir75 54,3 gt ccir103 60,9 AFLP2/7 63,6 AFLP5/21 65,5 ct ccir209 66,2 AFLP14/1 67,3 AFLP14/6 68,8 mtccir59 68,9 mtccir37 69,9 mtccir34 75,2 AFLP2/2 84,8 AFLP10/10 88,6 AFLP11/10 100,2 mtccir22 105 ropq4/1.8 103,9 AFLP7/8 109,1 gt ccir151 108 gt ccir159 110,4 AFLP1/1 22 Mars waives IP rights on this research

Side grafting Example of application of Science in a Mars Cocoa Development Centre top grafting Results from grafting rehabilitation 23

24 Thank You