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Colombian cocoa “High quality and distinctive aroma”

2012

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Introduction This document contains information about the advantages of investing in Colombian cocoa, the benefits that will enhance your investment and the support that Proexport can provide in order to make your investment in Colombia a reality.

The following are some of the reasons for investing in this sector:

• Colombian cocoa has the best flavor and aroma, a distinction given by the International Cocoa Organization (ICCO) to only 5% of worldwide beans.

• Cocoa Market Review 2012 has forecast an international deficit of 100,000 tons. Investing in Colombian cocoa represents a business opportunity to meet world demand.

• Colombian geographical characteristics benefit cocoa plantations. Colombia has a strategic geographic position. As an equatorial tropical country, Colombia has sunlight throughout the year. In addition, Colombia boasts a variety of climates and abundant water resources.

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• Colombia has a potential 2 million hectares for cocoa crops, an area that would place the country among the world's top cocoa growers.

• Colombia has the necessary genetic material (regional and universal varieties, always of fine or flavor cocoa) for each of its agro-ecological areas.

• The chocolate and confectionery sectors are part of the Ministry of Commerce, Industry and Tourism's Productive Transformation Program (PTP). The program strives to enhance industry competitiveness through public-private alliances and business plans.

• Colombia offers an income tax exemption on late harvest crops and productive alliances for new plantings established 2003-2014. The new cocoa crops are exempt from net income tax for a 10-year period starting when production begins1.

1 Law 939 of 2004

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The following document provides information on cocoa in Colombia, as well as the reasons to invest in this sector. This study was prepared using information from the FAO, the Ministry of Agriculture and Rural Development (MADR), the International Cocoa Organization (ICCO), the National Cocoa Growers' Council, and FEDECACAO.

• "Colombian cocoa: the best flavor and aroma, a distinction given to only 5% of beans

worldwide "(ICCO). Colombian cocoa has been named fine or flavor cocoa by the ICCO2. Only 5% of the world's commercial cocoa beans earn this title. The quality of cocoa is based on its physical3, chemical4, and organoleptic5 features. This combination of factors means that Colombian cocoa produces unique sensations with aromatic properties and chemical traits that make it superior to bulk or ordinary cocoa. Fine or flavor cocoa is cultivated from the cross cultivation of Criollo and Trinitario varieties of cocoa trees. In the past ten years, Colombia has planted regional varieties and Trinitario varieties to guarantee that 100% of production is fine or flavor grade. Colombian cocoa, in fact, was recognized at the second edition of the "Salon du Chocolat" international cocoa awards in Paris for its sweet flavor.

• Cocoa Market Review 2012 has forecast an international deficit of 100,000 tons. Investing in Colombian cocoa represents a business opportunity to meet world demand for fine or flavor cocoa.

Cocoa supply has fallen short of demand in recent years. The shortage amounted to 82,000 tons in 2009-2010. The Cocoa Market Review projects a shortage of 100,000 tons in 2011-2012.

The United States is one of the largest importers of cocoa and cocoa products in the world. US demand for cocoa grew 73% between 2007 and 2011. In 2010, the US imported 4.4 billion dollars worth of cacao. Entire or split cocoa beans, either raw or roasted made up 1.3 billion and 587 million was spent on cocoa butter, fat or oil. Europe is also a large importer of cocoa and cocoa products. Germany recorded imports in 2010 of USD $4.1 billion, followed by the Netherlands (USD $3.2 billion), France (USD $2.9 billion), the UK (USD $2.1 billion) and Belgium (USD $1.7 billion). There is, therefore, a huge opportunity to meet

2 Decree ICC/71/7, Characteristics of fine or flavor cocoa. 2001. Ordinary meeting of the International Cocoa Council held March 8-11, 2005. 3 Physical qualities refer to: seed index, percentage of shell, pod index 4 Chemical qualities refer to percentage of fat, fiber and protein 5 Organoleptic qualities refer to feel, flavor and aroma

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the demand for fine or flavor cocoa, as Colombia is one of the few countries in the world that produces this type of bean, representing the top 5% of world production.

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1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

United States Germany Netherlands France United Kingdom Belgium

Main importers of cacao and its products2007-2011

Thousands of USD

2007

2008

2009

2010

2011*

Source: Trademap, Proexport calculations

• Colombia has a strategic geographic position. As an equatorial tropical country, Colombia

enjoys strong sunlight year round. In addition, Colombia boasts a variety of climates and abundant water resources.

Cocoa is native to the Amazon region. Today, it is grown in tropical countries between 18° north and 20° south of the Equator6. It is currently cultivated in regions of Colombia that have the adequate edaphic, physiographic and climatic conditions for cacao cultivation. (Between 0 - 1,100 m.a.s.l, 24 - 28°C, 1,800 - 2,600 mm of annual rainfall) According to the FAO, the Ivory Coast is the world's largest cocoa producer, with 2,150,000 hectares in 2010, followed by Ghana (1,625,000 ha) and Nigeria (1,344,500 ha). Ecuador, Colombia, Peru and Venezuela produce 70% of the world's fine or flavor cocoa: Ecuador with 360,025 ha, Colombia with 143,645 ha, Peru with 77,192 ha, and Venezuela with 48,400 ha.

6 Valle 2007

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Cocoa Growing Regions

Source: Fedecacao, MADR and CORPOICA

• Colombia has a potential 2 million hectares for growing cocoa crops. Corpoica, Fedecacao, and the Ministry of Agriculture and Rural Development (MADR) conducted a study of the zones suited for growing cocoa (scale: 1,100,000) based on edaphic and climate criteria. The study estimated that Colombia has 2 million hectares that could be used for cocoa crops (2003), of which 662,669 ha have either no or minor restrictions (A1)7. These lands do not require any soil treatment to grow cocoa crops. The other 1.3 million ha have moderate restrictions (A2)8.

7 A1 (No or minor restrictions): These lands have no limitations on their sustainable use for growing cocoa, or they have minor limitations that would not have a significant impact on production and would not require more supplies or technology than usual. (Corpoica-Minagricultura Agreement No. 034 of 2003) 8 A2 (Moderate restrictions): These lands may have moderate limitations on the sustainable production of cocoa that would result in reduced yield potential or would require supplies or management practices beyond those which are normally used (Corpoica-Minagricultura Agreement No. 034/2003).

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Table 1. Regions by Cocoa Cultivation Potential

Hectares Department A1 A2daa A2dab A2tea TOTAL Santander 105,911 351,571 15,857 5,461 478,800 Casanare 134,855 200,842 - - 401,684

Meta 66,159 241,310 - - 307,469 Bolivar 21,458 73,166 5,986 89,050 189,660

Norte de Santander 108,750 68,647 6,128 32 183,557 Antioquia 55,293 50,238 8,547 - 114,078

Arauca 11,705 58,101 973 - 70,779 Cesar 27,263 - 10,889 29,067 67,219

Cundinamarca 46,304 7,311 11,577 - 65,192 Boyaca 31,923 8,421 110 460 40,914 Caldas 34,769 2,190 191 21 37,171 Tolima 20,109 477 9,815 - 30,401 Cauca 5,350 - 18,805 - 24,155 Huila 4,435 - 15,551 - 19,986

Valle del Cauca 4,053 655 14,225 - 18,933 Sucre 5,207 - 9,718 1,073 15,998

Risaralda 4,932 - 2,122 - 7,054 Magdalena 4,193 79 1,568 516 6,356

Quindio - - 145 - 145 Atlantico - - 115 - 115

TOTAL 692,669 1,063,008 132,322 125,680 2,079,666 Source: CORPOICA, FEDECACAO, MADR; “Caracterizacion y zonificacion de areas potenciales para el cultivo de cacao en Colombia."

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Potential Regions for Growing Cocoa

Source: FEDECACAO, CORPOICA, MADR.

Current Growing Areas Cocoa has traditionally been produced by approximately 25,000 rural families. Ninety percent (90%) is grown by small farms. Santander is the largest cocoa-producing department, contributing approximately 38% of Colombia's production.

Table 2. Cocoa Producing Areas

Source: MADR- CDP, National Cocoa Growers Council (Consejo Nacional Cacaotero) *Estimated

Cacao is grown between an altitude of 0 and 1,100 meters. It can adapt to all of Colombia's agro-ecological environments. With 45,402 cubic meters of water per capita per year, the country sits

Department 2008 2009 2010 2011* Santander 47,646 48,044 49,429 53,929 Nariño 9,855 10,458 10,940 12,440 Huila 12,305 11,045 11,200 12,180 Norte de Santander 9,541 9,978 10,190 11,390 Antioquia 7,608 8,045 8,290 10,870 Tolima 9,869 10,006 10,140 10,215 Arauca 8,064 8,304 8,460 8,510 Others 19,141 22,108 22,991 24,111 Total 124,029 127,988 131,640 143,645

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above the South American average, and way above other regions such as North America, Europe and Asia.

Main Cocoa Growing Regions in Colombia

Source: MADR- CDP, National Cocoa Growers Council (Consejo Nacional Cacaotero)

Santander is the largest established growing area in Colombia with 53,929 hectares of cocoa in 2011, approximately 37% of the national production. The departments of Huila, Tolima, Nariño, Norte de Santander, Arauca and Antioquia make up approximately 46% of national production. They have the highest expectations in terms of expanded cocoa cultivation thanks to their soil and climate. At the moment, Colombia has 147,000 hectares planted with common, hybrid, and cloned cocoa. The 2012-2021 National Cocoa Development Plan will address the need to modernize 130,000 hectares and transition all crops to clones in order to guarantee world-class cocoa and increase current production.

Table 3. Current Production

Evolution of Crops by Material Hectares Planted Hectares in Production Kg/ha 2010 Production

(Tons) Common (50s-60s) 40,000 40,000 160 6,400 Hybrids (70s-90s) 40,000 40,000 398 15,920

Clones (2002-2011) 6,7000 21,000 950 19,934 Total 147,000 101,000 419 42,254

Source: National Cocoa Growers Council

• Colombia has the necessary genetic material (regional and universal varieties, always of fine or flavor cocoa) for each of its agro-ecological areas.

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Colombia has the necessary technology for growing cocoa based on propagation via universal genetic cloning, planting nearly 1,300 trees per hectare, and using management practices and organic supplies as part of its agro-forestry system. Fedecacao, the Ministry of Agriculture, Corpoica, and technical departments from the industry have identified materials (clones) for planting that are renowned for their production, physical, and organoleptic (sensory) qualities and thus used in modern crops. Since 2009, studies have been carried out on descriptive statistics to identify the morpho-agronomic and molecular characteristics of Criollo, regional, and introduced species so that each one can be classified according to yield, quality, and resistance to disease. Regional and universal clones have been defined in Colombia. These have been selected for their productivity and the results of a physical, morphological, and molecular investigation of the different varieties of fine and flavor cocoas. The cocoa that is planted in Colombia is cloned from the Trinitario variety (ICS-TSH), as well as regional varieties selected in Colombia according to the same standards of quality and productivity. Introduced Material Genetic material introduced to Colombia is primarily from Trinidad, Ecuador and Costa Rica. This material has served as the base for creating hybrid seeds since the 1980s. Field studies have been conducted on experimental farms run by the ICA, Nacional de Chocolates, and Casa Luker.

Table 4. Clone Nomenclature

Nomenclature Name Origin ICS 1, 6, 39, 40, 60, 95 Imperial College Selection Trinidad

TSH 565, 792, 812 Trinidad Selection Hybrid Trinidad EET 8 Estacion Experimental Tropical Ecuador

UF 613 United Fruit Co. Costa Rica Source: Corpoica and Fedecacao

Yield of Introduced Material

Mass propagation of cocoa clones has taken place in Colombia since 2002 through grafting and the establishment of large-scale plant bio-factories. The varieties with the greatest productivity in Colombia were: ICS 39, ICS 1, EET 8, TSH 565, ICS 60, ICS 95, and CCN 51 (introduced to Colombia in 1998 and planted in independent batches).

Table 5. Yield of Introduced Material Clone Pods/Tree Monilia % Pod Index * Seed Index** ICS 39 22 14 14 2 CCN 51 23 8 15 1.5 ICS 1 23 14 17 1.7 EET 8 18 18 15 2 TSH 565 24 16 19 1.3 ICS 60 17 13 15 1.9 ICS 95 22 7 21 1.3

Source: Corpoica and Fedecacao *Pod Index: Pods necessary for a kilo of cacao

**Seed Index: Number of seeds per pod

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Regional Cocoas To select the preferred regional species, the following physical, organoleptic, and sensory variables were considered. A molecular analysis will be performed in the near future.

Table 6.

Selection Guidelines for Regional Cocoas

Descriptor - Variable Indexes and Limits

1 2 3 No. of pods per tree per year <70 70-100 >101

Pod index >21 16-20 <15 Seed index <1.3 1.4-1.5 >1.6

No. of seeds per pod <35 36-45 >46 Percentage of pods with monilia >16 5-15 <5

Visual indicator (sample of dried seed) Poor-average Good Excellent Source: Fedecacao, Annual Report, 2005

The best regional material is categorized by agronomic character and quality for detailed identification purposes. According to Table 7, the average weight of a dried bean from the sample was 1.8 grams (min. 1.4 g, max. 2.8 g). The number of pods needed to make one kilogram of chocolate was 14.8 (min. 10, max. 19). The average reported production was 157.9 pods per year (max. 409, min. 78). Regional material selected for its quality exhibited satisfactory results for the following varieties:

Table 7. Clone Dried Cocoa kg/ha Pods/Tree Monilia % FLE 3 2,102 36 6 FLE 2 1,838 27 16

FSA 13 1,673 29 3 FEAR 12 1,462 38 7 FEAR 5 1,430 27 7 SCC 59 1,374 28 6 FSA 11 1,342 26 6 SCC 61 1,299 19 5 FSA 12 1,227 26 3 FTA 1 1,080 19 11 FTA 2 1,128 19 6

Source: Corpoica and Fedecacao

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Table 8. Chemical and Compatibility Characteristics of Cocoa Species in Colombia Species Origin Compatibility Shell % Fat % Fiber % Ph

Universal - Introduced ICS-1 Trinidad AC 11.9 52.7 5.6 5.1

ICS-39 Trinidad AI 10.5 54.3 4.8 4.9 ICS-60 Trinidad AI 12.7 54.7 4.7 4.8 ICS-95 Trinidad AC 15.7 53.8 4.3 4.9 EET-8 Ecuador AI 10.9 54.7 6.1 4.9

EET-96 Trinidad AC 12.2 - - - TSH-565 Trinidad AI 12.2 56.2 6.8 5 IMC-67 Peru AI 15.2 56.8 5.5 4.9 CCN-51 Ecuador AC 13.5 54.6 3.3 4.9

ICS-6 Trinidad AC TSH-812 Trinidad AI UF-613 Costa Rica AI

Regional Species FLE-2 Lebrija AI 12.1 58.4 7.9 5.2 FLE-3 Lebrija AI 14.2 54.9 2.9 5.4

FSA-11 Saravena AI 17.8 54.1 3.1 4.8 FSA-12 Saravena AI 14 55.1 2.9 5.5 FSA-13 Saravena AI 13.7 53.3 3.1 4.8 FTA-1 Tame AI 14.7 56.4 3.1 5 FTA-2 Tame AC 15.4 49.5 2.8 5

FEAR-5 Arauquita AC 10.5 53.9 3.7 5.9 SCC-61 San Vicente AI 10.9 56.5 2.5 5.1 Hybrid 12.7 58.4 2.4 5.2

Source: Corpoica and Fedecacao

The CCN-51 variety, although not fine or flavor cacao due to its quality, is appealing because of its high fat content, used to make cocoa butter. Regulations exist in Colombia dictating that this bean be cultivated independently to avoid mixing it with other varieties. • The chocolate and confectionery sectors are part of the Ministry of Commerce, Industry and

Tourism's Productive Transformation Program (PTP). The program strives to enhance industry competitiveness through public-private partnerships and industry-specific business plans.

Historically, the agriculture and livestock sector has been one of the primary engines driving Colombian economic development. It constitutes 9% of the GDP, 21% of exports, 19% of all jobs, and enormous potential based on competitive and comparative advantages. Colombia's agricultural sector is extremely attractive for foreign direct investment. Through the Productive Transformation Program based on a public-private partnership, the Colombian government is driving development by transforming eight industrial sectors and four agribusiness sectors (beef; chocolates, confectionery, and related raw materials; fats and oils of palm; and shrimp farming) into world-class players.

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The goal of the program is to improve productivity, efficiency, quality, research and innovation in the cacao-growing sector. The 2012-2021 Ten-Year National Cocoa Development Plan strives to position Colombia as a top producer on the international market for fine or flavor cacao. More specifically, the plan's objectives are to:

• Increase average productivity from 400 kg/ha/year to 1200 kg/ha/year • Obtain productivity of 1,800 kg/ha/year from modern crops • Involve 30,000 families in cacao farming on 120,000 Ha • Involve 500 business owners in cacao growing on 30,000 Ha • Modernize 80,000 ha, revitalize 40,000 ha, and rehabilitate 40,000 ha • Improve the quality of life of 50,000 cacao-farming families

The graph below depicts the projected production after implementing the Plan.

Source: National Cocoa Growers Council

The Cacao Processing Industry in Colombia Cacao is used primarily as a raw material for producing chocolate and confectionery products. Colombia boasts a thriving chocolate industry led by companies such as Nacional de Chocolates and Casa Luker. There are an additional 20 chocolate processing and confectionery companies located near the country's major cities and consumption centers, Medellin, Cali and Bogota.

Escenarios de producción 2011-2020

-10.00020.00030.00040.00050.00060.00070.00080.00090.000

100.000110.000120.000130.000140.000150.000160.000170.000180.000190.000200.000210.000220.000230.000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Toneladas

Sin Plan

CONPlan

DmdaInterna

Levels of Production 2011-2020

Without a plan

With a plan

Domestic demand

Tons

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Table 9. Chocolate and Confectionery Companies Name City Website

Compañia Nacional de Chocolates S.A.S. Medellin, Antioquia www.chocolates.com.co Casa Luker S.A Manizales, Caldas www.casaluker.com Colombina S.A. Cali, Valle del Cauca www.colombina.com Cadbury Adams Colombia S.A. Cali, Valle del Cauca www.cadburyschweppes.com C.I. Super de Alimentos S.A. Manizales, Caldas www.superdealimentos.com.co Comestibles Italo S.A. Bogota D.C., Cundinamarca www.comestibles.com.co C.I Dulces la Americana S.A. Bogota D.C., Cundinamarca www.dulceslaamericana.com.co Golosinas Trululu S.A. Cartagena, Bolivar Industrias Alimenticias Valenpa LTDA Soacha, Cundinamarca Fabrica de Chocolates Triunfo S.A. Bogota D.C., Cundinamarca www.chocotriunfo.com Industrial Cacaotera del Huila S.A. Neiva, Huila Fabrica de Chocolates Andino LTDA Bogota D.C., Cundinamarca JJ. Marbes Carrillo LTDA Bogota D.C., Cundinamarca Comercializa LTDA Bogota D.C., Cundinamarca Industria de Alimentos la Fragancia LTDA Bucaramanga, Santander

Dulces Emilita LTDA Bogota D.C., Cundinamarca Ficas LTDA Bucaramanga, Santander Comestibles Azucar Limitada Bogota D.C., Cundinamarca Productos Johnny's de Colombia LTDA Bogota D.C., Cundinamarca Monteolivar LTDA. Bogota D.C., Cundinamarca

Dulces la Colmena Limitada Bogota D.C., Cundinamarca Source: BPR Benchmark.

• Incentives for Growing Cacao in Colombia Income tax exemption Colombia offers an attractive incentive for investments in late harvest crops, including cacao: a ten-year income tax exemption, explained below: Investments in new plantings of late harvest crops, including cacao, are exempt from income tax9. This benefit applies to plantings established between January 1, 2003 and December 31, 2014, and it will be in effect for 10 years from the start of production10.

9 Other late harvest crops are: palm oil and fruits (including citrus fruits), as defined by the Ministry of Agriculture (Law 939 of 2004, article 1). 10 Tax Code, article 207-2 and Law 939 of 2004, article 2.

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To receive this tax benefit, the following must be submitted to the DIAN: 1. A copy of the crop record from the Ministry of Agriculture11. 2. A certificate issued by the Ministry of Agriculture stating that the crop is a new planting. 3. A property certificate for the field where the crop is planted or the specific deed or contract

under which the field is being used. 4. A certificate issued by the Statutory Auditor and/or Certified Accountant of the project, stating

the value of the income obtained from the new plantings. 5. A certificate issued by the company's Statutory Auditor and/or Certified Accountant stating

that the accounting for the income generated from the new plantings is kept separate from income obtained from any other company activities.

Finally, beneficiaries of the program must submit an annual technical report to the Ministry of Agriculture before March 31 of each year about the condition of the crop, its productivity, the number of jobs created, the financial statements and, when applicable, the environmental impact of the crop.12 Productive Partnerships This program works to engage small producers who own industrial equipment (processors and packagers) in collective medium- and long-term projects through supply commitments. Up to 30% of the agricultural value of the project is subsidized. Support and Benefits For producers: • Comprehensive assistance for structuring profitable, sustainable initiatives. • Inclusion in value chains as providers (business alliances). • Improved income (by at least two minimum monthly salaries of net income). • Financial sustainability through a revolving fund. • Job creation (2.6 jobs for each beneficiary). For the private and business sectors: • Guaranteed production (quality, opportunity, planning, loyalty, and stability).

For public and private institutions: • Proven platform of profitable and sustainable initiatives. • Less dependence on social assistance programs.

11 Decree 2755 of 2005, article 2. 12 Decree 1970 of 2005, articles 5 and 6.

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The information contained herein is for general informational purposes. Neither PROEXPORT nor any of its employees shall be liable to you or any other party for decisions or actions taken based on the information

presented herein. This document reflects current Colombian legislation at the date it was published. It seeks to provide general,

basic information about Colombian law. This message does not constitute or replace legal counsel. To find specialized legal services, please contact the law firms listed in the Legal Services Directory on PROEXPORT's

website www.proexport.com.co.