ASSOCIATIONFOR COCOAAGRICULTURALDEVELOPMENT –ADAC-

PROPOSEDINTERVENTIONTO IMPROVETHE
"PRODUCTIONAND COMMERCIALIZATION OF FERMENTED AND /OR CONVENTIONALORGANIC COCOABY THE ASSOCIATIONOFCOCOAAGRICULTURAL DEVELOPMENT”

Location:Cahabón, Alta Verapaz

PRESENTED BY:

FUNDASISTEMAS

TO: ROTARY

Guatemala, June 4th, 2012

TABLE OF CONTENTS

I.EXECUTIVE SUMMARY

II.SOCIAL ASPECTS

1.Description of the organization

2.Organizational Chart

3.Location of the Organization

III.MARKET STUDY

1.Product Description: Cocoa in Guatemala

1.International market

2.National and Regional Markets

3.Customers

4.Quality

5.Suppliers

IV.TECHNICAL STUDY

1.Project Objectives

Component 1: Management Development and Competitiveness

Component 2: Quality Assurance and Control

Component 3: Negotiation and Commercialization

Component 4: Financial Processes for Cocoa Processing Operations

V.BUDGET

APPENDIX A: Timeline

I.EXECUTIVESUMMARY

The ASSOCIATIONFORCOCOA AGRICULTURALDEVELOPMENT(ADAC)is dedicated tothe productionand commercialization offermented andunfermentedcocoa.All 145ADAC active associatescurrently grow about 145ha ofhybridcacaoin agroforestry systemswithoutthe useof agrochemicals.

Its associatesproduce about30 tons/year ofconventional regularcocoa(without fermentation) and sell itatthe local market or tofarmintermediaries.

ADACand its associateshave 3 cocoa processing buildings, with an approximate valueofQ600,000.00forpost harvesthandling. The chain ofPRODUCTION ANDCOMMERCIALIZATION OFORGANICFERMENTED AND / OR CONVENTIONALCOCOA,seeks to produce and market43.500kgoffermented and /or conventional organic cocoa.

To achieve this, FUNDASISTEMAS proposes to develop anintervention plan thatincludes fourcomponents, one per eachresult. The components are:

  • Managementdevelopment andcompetitiveness.
  • Createconditionsfor theassuranceandquality control.
  • Creating conditionsforproduct certification.
  • Building skills fortrading and marketing, including productive creditFund.

General Objective:

To improve ADACand its associate’sability to implementtechnological innovations, policies, and plansto increasetheir competitivenessindifferentiatedcocoa markets, and to marketat least 5MT ofCFCand /orCFOinthe local and/or international market.

Objectiveof thechain:
Strengthen themanagement development andproductivity skillsof the ADACassociatesto improve theirincome through sales andgreater access to differentiatedmarkets.

Expected results:
Theproductive chainaims to achievethe following results:
1. The organizationimproves itsbusiness,administrativeand strategic skills,and contributeto the welfare ofthe familiesassociated.
2. To improve thequalityof at least5 MT(about 110 bushels) ofcocoathroughproper pre/post harvesthandling(fermented and dried, mainly).
3. The organizationand its associatesachievethe conditionsfor organic certificationof at least 50haof cocoa.

4. The organizationmanages tosell at least5 TM of ConventionalDryFermentedCocoa–CFCS- inthe chocolate national market industry.

II.SOCIAL ASPECTS

1.Description of the organization

The ASSOCIATIONFORCOCOA AGRICULTURALDEVELOPMENT-ADAC-is a legal entityregistered in the Registry of Legal Entities, under actnumber30369, page30 369, of Book 1, in theLegal Entities Electronic Registrationuniquesystem, Guatemala, 28/09/ 2010.

ADAC is located in the Saquihá village, Cahabón municipality of the department of Alta Verapaz. Its 100 cocoa producing families belong 100% to the Q'eqchi´ ethnic group andlive in the communities of: Tzalamtun, San Francisco Canihor, Tamax, San Marcos Chimaw, Saquihá, San Juan Chivite, and Chipoc, which are located on the Cahabon river banks, called “the nature trail”. The economy of the associatescomes from the cocoa production and commercialization, as the main source of income for their families.

Organization’s General Information
Group Name: / Associationforcocoa agriculturaldevelopment–ADAC- / Department: / Alta Verapaz
Type of Legal Status: / Association / Municipality: / Cahabón
Name of Legal Representative: / Ricardo Caal Pop / Hamlet/County: / Saquihá
Telephone: / 5919-8781 / E-mail: /
Number of Active Associtates: / 100 / % of Indigenous Associates / 100%
EthnicGroup: / Q’eqchi’ / Number of Indirect Beneficiaries: / 500
Number of Permanent Employees: / 6 / Number of Seasonal Employees: / 100 per year

2.Organizational Chart

ADAC is structured as follows:


3.Location of the Organization

Figure 1.Cocoafarms in Guatemalauntil 2003[1].

III.MARKET STUDY

1.Product Description: Cocoa inGuatemala

Cocoa farmingbegan inMexico and spreadall the way to theAmazon River basin. Cocoa treeneeds moistureandheat. It is evergreenandalwaysblooming. Itgrowsbetween 6and 10meters​​high.Requiresshade (grow in the shade oflarger treeslikecoconutand banana), wind protection and arich, porous soil;butit doesn´tdevelop wellinlowlandwarmvapors. Itsideal height above sea level is, approximately, 400meters.

Chocolate andthe Mayan civilizationgo hand in hand. More than 2,500 yearsago, the Mayans from thelowlands prepared a chocolate drinkfromthe cocoa seeds (TheobromacacaoL., "food of thegods"). Among the MayasandAztecs, chocolate was anelite andprestigious drink, reserved for royalty, nobility and high-rankingwarriors. Cocoa was alsoused as currency inancient Mesoamerica.

Table 1.Guatemalan productionof cocoa beans.Number offarms, acreage,scatteredplants and productionobtained fromcocoa beans, by department. Crop year 2002/03.(Area inacresand productionin quintals).

Department / Number of farms / Acreage / Number of spread plants / Production
obtained
Total / Productiveagefarms / Unproductiveagefarms / %
Department / %
Region
Alta Verapaz / 5,294 / 1,547 / 1,362 / 185 / 40.15 / 32,729 / 44,909
Baja Verapaz / 42 / 6 / 6 / 0 / 0.16 / 40.31 / 344 / 344
Country´s total / 9,172 / 3,853 / 3,195 / 659 / 83,398 / 145,591

92.77% of the farms havean area smaller than22.54ha; of these,74.34% arefarmswithan areaof 7.04ha[2]or less,producingabout 1,000tons ofdry cocoaannually, contributing 0.02%toworld production. Theaveragenet incomeperfamilytococoaproducer organizationsin Central Americais approximately$ 108per month[3].

All together, thenationalcocoa sectorgeneratesannually anaverageday´s wages of 216.757,equivalentto 803 fullemployments, of which46.04% belong toagricultural activitiesand53.96% toindustrial and craftactivities. The annual income generatedbyemployment,approaches to9.34 millionquetzals, of whichabout4.24 millionquetzals(45.36%) aredistributedin rural areasthroughagricultural activity (Table 2).

1.International market

In recent years,the cocoa industryhasbegun to differentiatebetween twotypes ofcocoa:"regular" cocoaand"fine” cocoa. Regular cocoa beanscome from theForasterotree(cocoa with less than 30% ofbrown beans), andfine cocoabeanscome from CriolloandTrinitariotrees. GuatemalahasCriollo andTrinitariocacaothathashigh expectationsofquality-differentiated demand[4].

Global productionis projected toincrease fromabout 3.7million tons in2007/2008to 4.5 millionMT in2012/2013, at anestimatedgrowth rateof3.7%per year. Cocoaworld grinding(consumption) is estimated to growbyat least 3.7million tons in2007/2008to 4.3 millionMT in2012/2013, agrowth rateestimatedat2.8%per year[5]. Price expectations are good, theycurrentlyrangefrom U.S. $3,200 perMT[6]-CFC-and U.S. $ 3,800per MT-CFO-

2.National and Regional Markets

Guatemala City chocolate industry consumes 85% ofdomesticcocoa beans, as well as more than 200craft factoriesinMixco municipality,in the department ofGuatemala,and Suchitepéquez, SanMarcosandQuetzaltenangodepartments. The restis for theregionaland /or international market,mainlyto El Salvador andto a lesser extentthe UnitedStates of America[7]. It is nota common practiceinGuatemalato establish contractsbetween producersand buyers,which regulate specific aspects ofquantity, quality, price, deliverytimesand payment methods[8].

ADACwill offertwo types ofproducts:Conventionalfermented cocoa-CFC-andOrganicFermentedCocoa-CFO. The productwill be packedin100 poundsnet weight polypropylene bags.

Several processorsin two markets have been identified: 1) International market: -ICAM-Italy, -RitterSport-Germany, and –RainRepublic-United Statesof America; and 2)National market: Granada FactoryandLa Grecia.

Sellingproductsdirectly to the buyerallowsintermediaries eliminationand increases ADAC´s profit. The organization, withdirect and regular contactwith the importer/buyer,may obtaininformation onthe acceptance of itsproduct,suggestions, andcustomer´s needs. Thesefactors help to enhance themarketing mix. Theorganizationwill chargeitsownproduction behalfof the importer/buyer.

3.Customers

Since 2009,ADAChastriedanotherdifferentiated market andhas successfully placedits product innationalprivatecompanies, where pricesobtainedvary from Q.13.00to 15.00per poundof dry cocoa. Thecurrentcustomer´s prospectsfor the businessremains in the localmarket.

4.Quality

Good quality cocoais the one thatmakesgoodchocolate. Cocoa must bewell fermented, dry, and moldand odor free.Not onlycooperativesand associationsshould receive goodcocoa, butour familiesmust be feedfrom healthy grains. In order tosell cocoa right, it isimportant to knowthe requirements(Standard)ofthe company that buys toour cooperative or association, eitherdryorslime (baba).

Why isfermentationimportant? To producea series of changesin thecocoa bean that will allow the cocoa bean become edible.The fermentationcausesthe colorchange, andthe beansflavorand aromadevelopment.When done well, taste and smellare nice.

Welldriedgrains:
Theymake dry soundslikegravelwhen you rub ahandful ofbeansbetween the hands,and the color isbrown(completely lostpurplish).

5.Suppliers

Among thesuppliers are the beneficiarieswhoparticipateincocoaproducingtraining processesthatallow them to increase thevolumesand achievebetter qualityin the cocoacherry toparchmenttransformationprocess. The ADACassociationpurchases cocoacherryto its associatesas themain raw materialof the final product(dry cocoa) at a price of Q.1000.00to1,200.00 per100 poundsorcurrentmarket price,with a differentialprofit because theirassociates are their own suppliers.

  1. TECHNICAL STUDY

The projectin itscurrent situationemphasizes thatone ofthe critical pointsin thechainingproduction processis thecocoabean fermentation, in order to processhigh quality cocoa. Inthis regard,the ADACassociationhas theminimumtools and infrastructureto fermentcocoato produce and marketquality drycocoa.

Production process
Production. Cocoa plantations are grownin multi-layeragroforestry systemswithoutagrochemicalapplication, mostly4x4m(625trees/ha). They were produced withhybridseeds, which are characterizedby 60% of plantationproducing few, and remaining 40% of the treesproviding most part of the harvest.

Post-harvest Handling.Cocoa qualityis lowdue to poorfermentation and dryingpracticesandbecause selectedgenetic materialhas not been usedfor itsgrainquality characteristics, chemical composition and sensory profile.

Productivity/ Diseases.Cocoagrows inproximity and interactionwithother plants, especially trees(timber, fruit, forestremnantsandnature regeneration), anda long list ofannual crops9. Farmersretain orplant treesor other usefulplantsin thecacao plantation, mainly for shadow regulation,growth optimization and cocoaproduction, timber production, fruit or other incomefor family useor sale.

Cocoarequires,to effectively combatdiseases, adequate and periodicbleakregulation.Fromphytopathologicalpointof view, this practiceseeks to promote air circulationwithin plantationsandeliminatemoistureexcess, creating environmental conditionsthat disadvantagepathogens and benefitsthe plant.

Inthe case ofthrush, severalauthors have emphasized the use ofagriculturalpractices,standing outtheshade regulationandcocoapruning, essential toeffectively combatingthe disease.

1.Project Objectives

The General Objective is that ADAC and its association members improve their capacity to implement technological innovations, policies, and development plans to increase their competitiveness in differentiated cocoa markets.

Specific Objectives:

  • The organization improves its business, administration and strategic capacity, and contributes to the welfare of the association’s members families.
  • Increase of at least 5 MT cocoa through a correct pre & post harvest management (fermentation and drying, mainly).
  • The organization trades at least 25 mT of CFC and/or CFO in the national and/or international market.
  • The Organization constitutes a fund, with contributions from the beneficiaries, for the continuity of the Credit Community Fund for the improvement of cocoa production, transformation and trade.

Component 1: Management Development and Competitiveness

This component has as a specific objective, to increase the business and strategic operation of the organization to increase the quality of the services that it provides to its associates and customers.

To achieve this, this network component proposes:

Updated membership of the cocoa producer associates. Conduct an organization productive and business needs diagnostic. As a first step, the organization must carry out a needs evaluation en which the organization and its associates social, economic and environmental development needs might be identified; and that it might be considered how will the benefits of CFC and/or CFO trade will contribute to the organization and its associates development.

Elaborate a Business Plan and a Strategic Plan to access differentiated cocoa markets.

Improve the directors and associates capacities in managerial development and competitiveness topics through the following subjects (though it’s not limited by this): 1) Micro and Small Business Administrative Process, 2) Internal Accounting and Financial Controls, 3) Production and Investment, 4) Calculation and usage of costs, and 5) Marketing and Trade.

Present Project status reports. A status report will be presented to ADAC and to the Project’s financial organism every month, and a consolidated report every six months, and then a final report.

Component 2: Quality Assurance and Control

This component has as a specific objective, to improve cocoa grain quality through a proper pre & post harvest management.

To achieve it, this network component proposes:

  • To take technical advantage of one cocoa post harvest management processing plant, with a storage warehouse, drying patio, static dryer and a solar dryer each. FundaSistemas will provide Technical Assistance service with the cooperation funds requested to ROTARY, for the processing plant management and dry fermented and/or conventional cocoa quality insurance.
  • To train upon the use of a Quality Control and Insurance of cocoa pre & post harvest management manual, which we already have, as a result of current accompaniment. ADAC and its associates must assure cocoa grain quality according to the specifications of their clients through the implementation of a quality insurance protocol, as well as to know the tools for its control. This manual will be applied during the whole pre/post harvest process to minimize product rejection probability, and to increase clients trust in the organization.
  • To improve directors and associates skills in quality control and insurance subjects through the following topics: 1) Quality Insurance in pre/post harvest management, and 2) CFC and/or CFO Quality Control Tools.

Component 3: Negotiation and Commercialization

This component has as a specific objective to negotiate and trade CFC and/or CFO with differentiated processors that will grant better prices, purchase conditions and sustainability.

To achieve this, this network component proposes:

  • Prepare and send cocoa samples to national and international buyers.
  • Obtain purchase contracts for CFC and/or CFO.
  • Trade at least 25 mT of CFC and/or CFO in the national and/or international market.
  • Increase directors and/or associates skills in CFC and/or CFO international trade.

Component 4: Financial Processes for Cocoa Processing Operations

Description of Seed Capital:

Through this project, ADACexpects to guarantee the proper process of drying slime cocoa, and assure the delivery of slime cocoa from the associates as a benefit for FUNDALACHUA and be able to process larger volumes for commercialization of dry cocoa.

To achieve this objective, it is necessary to provide financial assistance and better the organization’s financial capacity for making purchases at a just price in accordance with costs of production and sale prices.

Currently, associates of ADAC sell their cocoa to intermediaries. The money obtained through sales of their product is used to buy fertilizers for maize, cardamom, coffee, and pepper. The necessity to reinvest their profits does not allow them to offer a high quality cocoa to the market, forces them to accelerate the processing, and causes them to constantly require more capital to maintain their other crops.

For the future of the Rural Fund, it’s necessary to have seed capital for the agricultural production for the members of the producer organizations formed as a network of producers. FUNDASISTEMAS acquires shares in the organization, on behalf of the producers that are active participants in the production process and delivery of the product, for the processing and marketing, for a period of two years. At the end of that period combined, the organization decides to whom they will give the shares, with the commitment to keep them within the company that manages the fund.

The capital of ROTARIOS that FUNDASISTEMAS places in the form of shares, should be leveraged for the associates in a ratio of 4 to 1; in other words, for each Quetzal of shares acquired by associates, FUNDASISTEMAS will purchase 4 Quetzals of shares, in such a way that at the end of 2 years there will be capital in shares available inside the credit fund. There will also be trainings to make group financial decisions, resources to finance their productive activities, and reduce the need to approach lenders. Through this union of forces the association will develop a better participation in the market, achieve a better price, and improve economies of scale and loyalty to their organization.

The contribution of the beneficiaries will be placed in the books as shares or contributions made by the association. These incomes will be registered in a specific account that will not be utilized while this project is still valid. Afterward they will serve as working capital in the buying and selling of cacao and as an equity fund that will serve as leverage with the support of seed capital from ROTARIOS, for the sustainability of the entrepreneurship of ADAC.

Within one year, FUNDASISTEMAS will execute a Business Strengthening plan for the benefiting organization, through the application of a shared learning methodology, with the learning strategy involving the participation of more than 50% of the associates who are properly affiliated and active within the association.

V.BUDGET

Based on a $30,000.00 contribution on behalf of ROTARY, as a donation, and a $2,564.00 contribution as a balancing entry on behalf of the beneficiary organization (for the organization patrimonial fund), adds up to a total of $32,564.00 equivalent to Q. 254,000.00.

No. / Budgetary Area / TotalQ’s / Rotary
Contribution
Q’s / Benefiting Organization Contribution Q’s / Method of support from the organization
1 / Fund for seed capital. / 120,000.00 / 100,000.00 / 20,000.00 / Cash.
2 / Productive and administrative Training and Technical Assistance / 95,613.00 / 95,613.00
3 / Training materials and technical assistance. / 27,130.00 / 27,130.00
4 / Monitoring of FUNDASISTEMAS / 11,257.00 / 11,257.00
TOTAL / 254,000.00 / 234,000.00 / 20,000.00
No. / Budgetary Area / Total
$ USA / Rotary
Support
$ USA / Benefiting Organization Support. $USA / Method of support from the organization.
1 / Fund for seed capital. / 15,385.00 / 12,821.00 / 2,564.00 / Cash
2 / Productive and administrative Training and Technical Assistance / 12,258.00 / 12,258.00
3 / Training materials and technical assistance. / 3,478.00 / 3,478.00
4 / Monitoring of FUNDASISTEMAS / 1,443.00 / 1,443.00
TOTAL / 32,564.00 / 30,000.00 / 2,564.00

APPENDIX A: Timeline

/ Execution Time Chart
Project for the Strengthening of Fermented Organic and/or Conventional Cocoa Commercial Trade
Item / Result / Month 1 / Month 2 / Month 3 / Month 4 / Month 5 / Month 6 / Month 7 / Month 8 / Month 9 / Month 10 / Month 11 / Month 12
1 / Previous conditions
Agreement Sign and Management
Intervention Plan
First Outlay
Hiring of executing team
2 / Business and Strategic Operation of Beneficiary Org. Effective
Updated membership
Productive and business need diagnosis
Reinforcement to the business plan
Business Skills improvement
Creation of accounting and managerial controls and records
3 / Quality and Productivity of COCOA according to the market
Productive capacity improvement
Production increase
Post-harvest management improvement
4 / Market share increase
Sending product samples
Creation of contract negotiation skills
5 / Financial capacity has been strengthened for trading process
Creation of a seed capital fund
Financial tools design and training
Creation of a local trading company
Joint administration with Fundasistemas, ROTARY, and Beneficiary Organization from seed capital

[1]INE.(Statistics National Institute) 2004.Number offarmcensus, acreage andproduction ofpermanent andsemi-permanent crops.FourthNational Agricultural Census Guatemala 3:18-2