Pricing Agribusiness Risk

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Coconut Craze

Every so often a new dietary fashion, a ‘craze’ even, captures the popular imagination.  Whether it is blueberries, kale, goji berries, or high cocoa content dark chocolate, health and dietary commentators have a history of ‘bigging-up’ the qualities of one fruit or vegetable to elevate its desirability in the minds of consumers. The latest such ‘craze’, a phenomenon of the second decade of this century, has been coconut water:

  • “Rich in nutrients. Unlike any other beverage on the market, coconut water contains five essential electrolytes that are present in the human body. These include: calcium, magnesium, phosphorous, potassium and sodium”.
  • “Naturally refreshing, coconut water has a sweet, nutty taste. It contains easily digested carbohydrate in the form of sugar and electrolytes. Not to be confused with high-fat coconut milk or oil, coconut water is a clear liquid in the fruit’s center that is tapped from young, green coconuts…”.

The ‘craze’ for coconut water has generated a $1bn pa drinks segment – and outside the source countries, this has been an almost entirely new development. The growth in demand, which is still expanding, has prompted the entry into the market of the largest beverage brand owners in the world: Coca Cola and Pepsi. These global brands have acquired two of the leading names in the coconut water sector:

  • Zico (No. 2 brand in USA; owned by Coca Cola)
  • N.E (No. 3 brand in USA; controlled by Pepsi).

The growing appetite of populations around the developed and developing worlds for coconut water has transformed the status of this ‘tree’ crop. Consumers’ engagement with coconuts has traditionally taken one of four principal forms:

  1. Fresh coconuts as a fruit, predominantly in source countries
  2. Desiccated coconut for use in baking and food preparation – a global product
  3. Coconut oil as a dietary product (and not without some controversy as detailed in the paragraph below)
  4. Coconut oil as the principal oil in body care products and cosmetics.

Coconut oil is about 90% saturated fat, which is a higher percentage than butter (about 64% saturated fat), beef fat (40%), or even lard (also 40%). Coconut oil is considered to be very effective at boosting levels of “good” HDL cholesterol. But dietary advisors in the late 20th Century and into this century have argued for the sparing use of coconut oil in the diet citing concerns about its possible contribution to heart disease and promoting as more ‘healthful’ vegetable oils such as olive oil and soybean oil, which are mainly unsaturated fat and which lower the LDL and increase the HDL forms of cholesterol. “Coconut oil’s special HDL-boosting effect may make it “less bad” than the high saturated fat content would indicate, but it’s still probably not the best choice among the many available oils to reduce the risk of heart disease” (http://www.health.harvard.edu/staying-healthy/coconut-oil).

From an economic perspective, the production of coconut oil from copra, and its co-product, coconut meal, has been described by Vinay Chand of Vinay Chand Associates (VCA), as “a pursuit to keep farmers in poverty”. Now after decades of disinterest, consumers, brand owners, government agencies (across the tropics), and investors, are all reviewing the crop as a wealth of new coconut derived consumer products, led by Coconut Water, are gaining in popularity.

  1. Green Coconut Water – the ‘Miracle Drink’
    • derived from 6-7months old coconuts which must be drunk within 10 days of harvesting or packaged in Tetrapak containers
    • VCA estimates that the green water segment has an annual value of circa $600m at retail:

The majority of these coconuts are consumed in the source countries as part of the ordinary diet. The market is mostly relatively informal and these nuts (sold for drinking) are typically significantly cheaper than packaged mature coconut water products, notwithstanding that green coconut water is considered to be very much superior to water from mature nuts. VCA estimates that if this segment was to be priced at global retail market levels, the combined segment of mature packaged water products and green water / fresh immature nuts for drinking, would be equivalent to circa $5bn.

  1. Packaged Coconut Water
    • derived from mature coconuts of 10 months or older
    • typically a by-product of desiccated coconut production
    • this product represents the bulk of the current coconut water market and is considered by experts in the field to be much inferior as a consumer experience to green coconut water
    • $1.2bn market at retail value
  2. Coconut Milk
    • The processing of mature coconuts for the production of coconut milk is dominated by consumption within the source countries where it has traditionally been used for culinary purposes and as a drink (packaged whole coconut milk and skimmed milk)
    • Coconut milk is also highly suitable for the production of coconut ice cream and coconut yoghurt. After conducting extensive market research, VCA believes that these product segments have good growth prospects.
    • The international market for packaged coconut milk products is relatively mature with an estimated (VCA) retail value of $400m pa
    • The market for fresh coconut milk products (in the source countries) may be 10x larger than the packaged segment according to Vinay Chand. This is a relatively informal sector and accessing reliable data is not possible
  3. Virgin Coconut Oil
    • This is a relatively new product segment and VCA reports that it is growing at some 35% pa.
    • A small new segment made from fresh coconuts and not dried coconut flesh/copra
    • Current value FOB (Philippines and Indonesia) $150m annually
  4. Rubberised Coir
    • Derived from the husks of mature coconuts, coir can be rubberized for use in mattresses for which there is strong demand in Asia
    • A factory gate value of circa $1bn annually and a retail value of perhaps $2bn
    • Only 17% of the annual crop of coconuts is currently having the husks used in the manufacture of coir
      1. VCA estimates that in the period 2012-2015 demand for coir has been expanding at circa 50%
      2. VCA estimates that over 60% of usable husks are not being commercially exploited.

Bad Economics – An Opportunity

According to the lifetime student of coconut sector economics, Vinay Chand, the coconut sector’s most traditional product segment, copra, should be reviewed and its production downscaled. VCA asserts that copra is a product that will keep producers poor:

The value chain results in an average farm gate price of 2-3 US cents per coconut and, while it may just cover costs of production, it depresses farmer livelihoods and results in a low rate of return on land use. VCA estimates that the production of copra generates revenues (on average) of less than $200 per ha”.

The dried flesh of the coconut is used for the production of coconut oil and coconut meal, but the profile and economics of both commodities render them less competitive than palm oil and soyabean meal.

Under Investment in Processing

Vinay Chand notes that the coconut sector has been under investing in processing facilities for much of the past 25 years and now that there appears to be a sustainable upsurge in demand for coconut related products (in particular coconut water, coconut milk derived products and rubberized coir), Vinay argues that there is an opportunity to invest in processing plant to supply these markets, aggregating supply from producers supplying traditional low value at source markets and the copra industry.

The major high value coconut products enjoying robust market growth and yet supply constrained by a lack of processing capacity include:

  • green coconut water
  • mature coconut water
  • virgin coconut oil (VCO)
  • rubberised coir
  • coconut sugar is a new niche market that is attracting interest from food brands and investors.

Supply of all the products bulleted above tends to be from South-East and South Asia. In the case of green and mature water and VCO, the products are most attractive in the more affluent developed regions and countries including:

  • Europe
  • The Americas
  • Japan
  • Australasia.

The liquid range of coconut products has good stowage factors and thus freight rates. What matters is abundant coconut supply, affordable labour, and effective cost competitive logistics.

Rubberised coir, in contrast to the liquid products, is bulky and needs to be positioned to supply specific markets or produced in those markets using imported coir and latex. It is mainly used for mattresses and vehicle upholstery (Daimler Benz and Volkswagen are major users). Any coconut producing country with significant domestic demand potential may be a suitable investment destination, including:

  • Indonesia
  • Philippines
  • Vietnam
  • Nigeria
  • Mexico

Supplying Japan and Australia could be undertaken from South-East Asia or the Pacific. USA and Europe are best supplied with the materials for processing.

Origins & History

The history of mankind in the tropics and the history of the coconut (Cocos nucifera L) are deeply entwined. The origin of the plant is the subject of debate: based on its current-day worldwide distribution it has been hypothesized that the coconut originated in the Americas, however there is evidence providing support for an Indo-Pacific origin either around Melanesia and Malesia or the Indian Ocean. Current thinking is that the coconut originated in the coral atoll ecosystem — without human intervention — and required a thick husk and slow germination to survive and disperse. However the palms could not reach inland locations without human intervention. Human cultivation of the coconut selected, not for larger size, but for thinner husks and increased volume of endosperm, the solid “meat” or liquid “water” that provides the fruit its food value. Although these modifications for domestication would reduce the fruit’s ability to float and to disperse naturally, this ability became irrelevant to a cultivated population.

Among modern C. nucifera, two major types or variants: a thick-husked, angular fruit and a thin-husked, spherical fruit with a higher proportion of endosperm reflect a trend of cultivation in C. nucifera: the first coconuts were of the ‘niu kafa’ type, (a classification introduced by the botanical scientist Hugh Harries), with thick husks to protect the seed, an angular, highly ridged shape to promote buoyancy during ocean dispersal, and a pointed base that allowed fruits to dig into the sand, preventing them from being washed away during germination on a new island. As early human communities began to harvest coconuts for eating and planting, they are presumed to have selected for a larger endosperm to husk ratio and a broader, spherical base, which rendered the fruit useful as a cup or bowl, thus creating what is known as the ‘niu vai’ type (a classification introduced by the botanical scientist Hugh Harries). The decreased buoyancy and increased fragility of this spherical, thin-husked fruit would not matter for a species that had started to be dispersed by humans and grown in plantations. Harries’ adoption of the Polynesian terms niu kafa and niu vai has now passed into general scientific discourse, and his hypothesis is generally accepted.