Latest Insights on the

Philippines Coffee Market Jakarta, Indonesia

May 7, 2014

2

Coffee Distribution

Key Features of the Coffee Market Fast increasing Demand Demand is driven by demography Fast economic growth Emergence of Middle Class Emergence of Fresh Coffee Culture Consumers better educated and exposed Coffee Bistro Chains are wide spread Specialty Coffee Shop opening Institutional accounts are main outlets Supermarkets, hotels, restaurants, resorts

3

1.1. Philippine Market Size a. Philippine has a population of 100

million consumers b. 79 provinces, 85 cities, and 41,000 Barangays (Villages) c. Population grows at 2% per year d. 50% of the population is 30 years old

or younger

4

1.2. Gross Domestic Products (GDP) a. GDP grow at more than 6% per year since 2012

b. This generate additional $2 Billion per year in the economy

5

1.3. Personal Consumption Expenditure a. Personal Consumption Expenditure constitute

79% of GDP b. 53.5% of Personal Expenditure goes to food c. 2.3% of Personal Expenditure goes to beverage d. Cold beverage consumption is higher during dry

months of December to May Hot beverage consumption is higher during rainy season from June to November e. 30 - 35% of sales are in November and

December (Christmas season) f. 13th month, bonuses

6

1.4. Consumer Profile Consumers are divided into 5 categories: A, B, C, D & E - A & B accounts for 4% of consumers 15% of spending goes to grocery - C accounts for 22% of consumers, 39% of spending goes to grocery - D & E accounts for 74% of consumers 46% of spending goes to grocery A & B households do their grocery once a week A & B goes mostly to supermarkets C, D & E households make an average of 4 trips per week to grocery C, D & E goes mostly to sari – sari stores

7

1.5. Preferred Establishments (A & B) a. 78.9% Supermarkets b. 10.8% Grocery Stores c. 4.9% Sari – Sari Stores d. 4.6% Market Stalls e. 0.1% Drug Stores

8

2.1. Coffee Distribution

a. Highly competitive market and improving quality.

b. Market is characterized by relatively frequent new product and

new variant introduction.

c. Entry of multinational brands (presaging the effects of GATT, WTO and ASEAN round table conferences on the liberalization of trade has ushered a shift in consumer needs and preferences and at the same time expanded the market.

d. Multinational’s know-how, high pricing and (possibly) high margins

may mean higher costs of competing for local brands.

e. Low priced brands proliferate but leadership still rests on quality. These products are concentrated in the low end market rather than in the traditional and major outlets as supermarkets and convenience stores.

9

2.2. Leading Brands

Local Foreign Gourmet Folgers Rocky Mountain Cafe Maxwell Culinary Exchange Bon Cafe Conlins Starbucks Blue Notes Dunkin Donut Artisan Monks’ Blend Siete Baracos Café de Lipa Bon Vivant

10

2.3 Business Opportunities for Coffee Distribution • Coffee bistros segment

• Getting saturated in Metro Manila, except specialty • Room for micro-roasting • Most opportunities in the provinces

• Coffee products segment getting saturated • Top 20 supermarket chains already saturated

• Coffee services still growing • Metro Manila is saturated, opportunities in provinces

• Coffee catering still growing

11

Coffee Production

Present Situation of the Philippines Coffee Industry No real industry, 97% backyard Farmers are all getting older New generation stay away fm farming Declining industry Declining production Fast increasing demand Fast increasing imports Huge impact on trade balance Poverty in high elevation areas Missed business opportunities

12

Coffee Industry Snapshot

13

Coffee Industry Snapshot

14

Coffee Industry Snapshot

15

Coffee Industry Snapshot

16

What Went Wrong ?

Absence of centers of excellence where technology is available Absence of cluster of farmers to produce large quantities Absence of post-harvest technologies to guarantee quality Absence of buyers for reliable markets/transparent pricing Absence of financing mechanisms adapted to coffee industry Absence of public infrastructures (FTM Roads, irrigation) No Integrated Value Chain approach Instead, “Dole outs” with little economic integration:

o Sporadic Farm-to-Mkt Roads towards low output areas o Wide spread seedlings with no clustering objectives … o Stand alone pulpers lacking supporting equipment

RESULTS Philippines went from No. 3 to 27 in world production Philippines went from Net Exporter to Net Importer

17

The Solution : PPP

To Pool resources between Private Sector and Government To Provide a viable, efficient and practical development model To Achieve Inclusive Growth objectives among IPs and Lumads To Utilize private sector efficiency, technology, market access

Our Common Goal

To empower Indigenous People residing in Ideal Arabica areas • By providing access to Property Rights • By providing access to Capital • By providing access to Technology • By providing access to Market

Match High Elevation Areas with suitable Arabica production

• insuring job creation and increase income for farmers.

Address the growing insurgency problem with Livelihood. Turn the Philippines into a Net Coffee Exporter Improve Philippines Trade Balance within ASEAN

19

How to Achieve This?

By establishing Public-Private-Partnerships between Farmer Organizations and: • A Leading Private Sector Company in Arabica Coffee for:

Modern, eco-friendly, and competitive technology Market access (local and export) Business leadership, efficiency, and sound management

• National Government Agencies for:

Funding for quality seedlings (DENR) and fertilizers (DA) Funding for post-harvest equipment (DTI) Funding for public and tourism infrastructures (DA, DPWH, DOT)

• A Private Sector Based Consulting Firm for:

Over-all Project Management, Coordination, and Monitoring Build Capacity of local cooperatives and set up and train management team Ensuring timely fund disbursements and implementation schedules Assured transparency and accountability

• Financial Institutions:

Debt financing for Farmer Organization (LBP, DBP, or rural banks) Guarantees to securitize loans (AGFP - Agriculture Guarantee Fund Pool) Crop Insurance to reduce risks (PCIC - Philippine Crop Insurance Corporation)

20

Public Private Partnership

Beneficiary (Coop or IPO)

Cluster of 100 Farmers

FINANCIAL INSTRUMENTS - Nursery Loan (2 years) - Coffee Mill Loan (5 years) - Plantation Loan (10 years) - Rotating Credit Line (1 year)

MARKET INSTRUMENTS - Purchase Agreement - Management Agreement - Production, Technology, and Marketing Agreement (PTMA)

+ + LGU

21

Our Development Objectives

1. To Increase land area covered with Arabica coffee tree by 5,200 Ha

2. To increase Arabica production by 7.8 Million kg annually;

3. To turn the Philippines from a net importer into a net exporter of Arabica coffee

4. To Increase coffee processing capacity by 10.4 million kg annually;

5. To increase Arabica seedlings production by 5.2 million seedlings annually;

6. To create 6,000 jobs for Filipino farmers nationwide;

7. To increase income of coffee farmers fm PhP 15,000 to 225,000 / Ha

8. To generate economic benefits from 26 production clusters and 78 coffee

production/processing facilities to be built in 7 regions and 20 provinces;

9. To generate P 30 billion in economic benefits over 10 years, and over P 5

Billion annually in economic activities after year 5 and thereafter;

10. To export P 4 Billion of coffee annually within 7 years

22

The Arabica Road Map

26 Arabica Nurseries 3.9 millions seedlings

26 Arabica Plantations 260 km farm-to-market roads 2,600 Ha or irrigation system

26 Coffee Mills 26 coffee brands

How to achieve our objectives?

23

COOPERATIVE OR IPO Professional Board of Directors (MBA)

- Agronomist

- Irrigation & Soil Specialist

- Plant Pathologist & Entomologist

MASTER PLANTATION

100 hectares

Arabica Coffee Trees

Typica, Bourbon, San Ramon

COFFEE MILLING & GRADING •Mechanical Pulper

•Fermentation Tank

•Mechanical Washer

•Mechanical Drier

TRAINING CENTER •Best Practices on Coffee Farming

•Best Practices on Coffee Processing

NURSERY Quality Planting Material

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

Satellite

Farm

1ha.

LABORATORY

+/- 100 satellite farms

ROCKY MOUNTAIN

INTEGRATED COFFEE COMPLEX

24

ARABICA ROAD MAP Region: CAR

25

ARABICA ROAD MAP Region: IV-A

TANAY

SILANG

CANDELARIA

26

ARABICA ROAD MAP Region: VI & VII

27

ARABICA ROAD MAP Region: X

28

ARABICA ROAD MAP Region: XI

29

ARABICA ROAD MAP Region: XII

30

ARABICA ROAD MAP Region: ARMM

31

TYPES OF PARTNERSHIP

3 Contractual Arrangements: Purchase Agreement - Seedlings Management Agreement - Plantation Production, Technology & Marketing Agreement- Market

32

WHY RMACC ?

RMACC is the Arabica coffee industry leader in the Philippines Only Coffee Company that has an integrated value chain Established track record in every sector of the coffee industry:

o Nursery development and management o Plantation development and management o Coffee mill development and management o Coffee mill equipment manufacturing in the Philippines o Coffee roasting and packaging o Coffee distribution and export

Active Member in the DA’s NAFC Coffee Committee Committed to making the Philippine a net coffee exporter Huge contact network with bankers, investors, and buyers RMACC has the Management Team to make things happen

33

RESPONSIBILITY OF RMACC

To build and operate 26 nurseries To manage the development of 26 plantations To build and operate 26 coffee mills To transfer best practices in coffee plantation management To provide technical training to Farmer Organizations To provide market access to Farmer Organizations To develop and promote regional coffee brands To assist in the preparation of Business Plans and Financial Projections to secure funding To coordinate with LGU, HVCC and DA-RED

34

RESPONSIBILITY OF DA / DENR / DOT / DTI

To coordinate Arabica Road Map with RMACC and Coop Identify Beneficiaries and Authorized Representatives (NCIP) Validate Access to Land and Property Rights (DENR)

To build Farm-to-Market Roads with LGUs (DA, DPWH, DOT) To build irrigation system for the plantations (DA,NIA) To provide funding to purchase seedlings (DENR – NGP) To provide funding to purchase farm tools & fertilizer (DA) To provide funding to purchase post-harvest equipment (DTI)

35

RESPONSIBILITIES OF THE LOCAL GOVERNMENT UNITS

To link Farmer Organizations to private sector partners To assist in the identification of suitable planting areas To assist Farmer Organizations in securing usufructs rights To assess need for infrastructures to facilitate project

Farm-to-Market Roads Bridges or Tramlines Water supply and irrigation system

To prepare Agri-Fishery Modernization Plan To secure funding for required public infrastructures To prepare Invitation to Bid for require infrastructures To facilitate issuance of business permits To coordinate with PRDP, National Government Agencies, and

Private Sector Partners

36

BUDGET REQUIREMENTS

For One (1) Cluster of 100 Ha: o Plantation Development P 19,102,832 $ 454,809 o Plantation Maintenance P 22,630,475 $ 538,809 Sub-Total P 41,733,307 $ 993,618 For 26 clusters or 2,600 Ha: X 26 o Plantation Dev +Maint. P 1,085,065,956 $ 25.8 Millions o Coffee Tourism Center 52,000,000 $ 1.3 Millions o Farm-to-Market (New gravel road (P 3.5 M / km) P 910,000,000 $ 21.6 Millions o Irrigation System (P 250K / Ha) P 650,000,000 $ 15.5 Millions Total P 2,797,065,956 $ 64.2 Millions

37

THANK YOU

Rocky Mountain Café

More Than Just Coffee … • Economic Development • Integrated Value Chain • Inclusive Business Model