PRODUCER ORGANIZATION: COOPERATIVE UNION HUISTA

PRODUCT: COFFEE BEANS

PROPOSAL OF INTERVENTION FOR THE IMPROVEMENT OF THE "PRODUCTION AND COMMERCIALIZATION OF PARCHMENT COFFEE OF COOPERATIVE UNION

HUISTA"

LOCATION: El Rodeo, Escuintla

PRESENTED

BY

FUNDASISTEMAS

TO

ROTARY FOUNDATION

Guatemala SEPTEMBER 5th, 2012

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY 3

II. SOCIAL ASPECTS 4

1. Description of the Organization 4

2. Organizational chart 6

3. Location of the organization. 6

III. MARKET RESEARCH 7

1. Product description: Guatemalan coffee 7

2. International Market 8

3. National and Regional Markets 8

4. Clients 8

5. Quality 9

6. Providers 9

IV. TECHNICAL STUDY 10

1. Production Process 10

2. Project Objectives 12

Component 1: Management development and competitiveness. 13

Component 2: Productivity, quality control and assurance 13

Component 3: Negotiation and Marketing 17

Component 4: Financial process for the milling operation for parchment coffee: 17

V. BUDGET 19

APPENDIX A: Timeline 20

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I. EXECUTIVE SUMMARY

The Cooperative UNION HUISTA is dedicated to the production and commercialization of parchment coffee beans. The 130 partners, 80 actives from Cooperative UNION HUISTA currently grow some 128 acres of semi-hard coffee.

Their partners produce approximately 125 MT/year of coffee cherries, which are processed to 25 MT/year of coffee beans. In addition, the Cooperative UNION HUISTA purchases and stores 300 MT/year of cherry coffee of small producers in the area, which are processed to 60 MT/year of parchment coffee and sold in the local market to Fedecocagua.

COOPERATIVE UNION HUISTA and its associates have 1 coffee mill and warehouses for storage with an approximate value of Q1.200,000.00. The chain of production and marketing processes seeks to produce and market 60 MT/year of semi-hard parchment coffee beans.

To achieve these results, FUNDASISTEMAS intends to develop an intervention plan, which includes three components, one per result. The components are:

Development of management capacities and competitiveness Increase marketing of parchment coffee beans Development of capacities for negotiation and marketing, including Fund for productive

credit

Project Objectives:

Improve COOPERATIVE UNION HUISTA’S and its Associates ability to implement administrative, productive innovations, and plans to develop the Cooperative to its fullest potential. At the same time, to achieve a market of at least 80TM / semi hard parchment coffee in the international and/or national market.

PRODUCTIVE CHAIN GOAL: To strengthen the capacities of management development and productivity of the Cooperative UNION HUISTA-producing partners in order to improve the revenue from higher sales and increased productivity.

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Expected results:

Result 1: The organization improves its business, administrative and strategic capacity and contributes to the well-being of their associated families.

Result 2: Improved and increased productivity to 25% of the mill by a proper administration.

Result 3: The organization and its associates and non-associates achieve conditions for its coffee production increased to at least 2 times more.

Result 4: The organization manages to sell at least 70 MT of semi hard parchment coffee in the market of the national coffee industry.

II. SOCIAL ASPECTS

1. Description of the Organization

COOPERATIVA AGRICOLA INTEGRAL UNION HUISTA, RESPONSABILIAD LIMITADA is a legal entity registered in the National Institute of Cooperatives (INACOP) in the book NUMBER 4, SHEET 473, 474, 475, 476 and item No. 9-2003 legal civil registry of Escuintla.

COOPERATIVE UNION HUISTA is located and registered in the village El Rodeo, in the Department of Escuintla and has 130 cherry coffee-producing families; almost 100% of those belong to the Department of Huehuetenango. The economy of these associates revolves around producing and commercializing of coffee as the main source of income for families.

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GENERAL ORGANIZATION INFORMATION

Name of the group: Cooperativa Unión Huista

Department: Escuintla

Type of legal organization; Cooperativa Municipality: Escuintla

Name of the Representative: Carlos Montejo Village / Settlement / EL Rodeo

Phone Number (s): 48247154 e-mail address: clle6a@hotmail.com

Number of associates/ partners. Active producers

80% of Mayan partners producers: N/A

Mayan Etnicity: N/ANumber of indirectly beneficiaries 600

Number of permanent jobs: 8

Number of temporary jobs Up to 25

Table 1. General information of the Group

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2. Organizational chartCooperative UNION HUISTA - is structured in the following way:

Graphic 1. Organizational Chart of Cooperative UNION HUISTA

3. Location of the organization.

Graphic 2: Cooperative Union Huista Northern part of Escuintla

III. MARKET RESEARCHPágina 6 de 20

General Assembly

Board Members

Committee of Caution (overseeing)

Operations form.

1. Product description: Guatemalan coffee

Coffee is obtained from the seeds roasted and crushed fruit of the coffee plant. Coffee cultivation is widespread in tropical and subtropical countries, Guatemala being one of the best places in the world to produce coffee. There are 7 registered regions by ANACAFE, Caturra represents 25% of the coffee plantations; Catuai occupies 25% of the total national coffee plantations; and Bourbon represents 30% of the coffee plantations in the production area and are the most cultivated country-wise. One of the main reasons is that they show better organoleptic qualities for consumption and sale on the national and international level. (ANACAFE 2005).

In Guatemala, more than 800 million coffee trees grow, scattered in 262,500 hectares of the land. These coffee plants receive shade provided by about 38 million species of trees such as the caspirol, el cuje, el chuchín. (López 2006)

Chart 2. Guatemalan coffee per Department and per year production.

The number of farms registered by ANACAFE is 61,521 productive farms. The cultivated area coffee-wise is 273,000 hectares. According to the National Statistics Institute-INE, in the fourth national agricultural census 2003, cultivation is distributed in the 22 departments of Guatemala.

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The Department of Alta Verapaz has the greatest number of coffee-producing farms—large, medium, small and micro—exceeding 35,000 producing farms.

The second largest is the Department of Huehuetenango, with over 30,000 producing farms including large medium, small and micro farms. In third place is the Department of San Marcos, with over 15,000 farms including large, medium, small and micro farms. The Department that has the smallest number of productive farms is Peten, with less than 5,000 farms. (Lopez, 2006)

2. International Market

World coffee production is estimated at 7,259,000 MT. The main producing countries are: Brazil with 25%, Vietnam 9%, Colombia 8%, and Indonesia with 6%; Peru participates with 2%.

Focusing in the international trade market in coffee:

5 international buyers purchase nearly half of the world’s production of green coffee (Newman, Volcafé, Esteve, Carguil, Arom).

10 roasting companies control 63% of the roasted coffee sold (Nestlé, Phillip Morris, Sara Lee, Procter & Gamble).

Three companies control the market of ground roasted coffee (Kraft Food, Sara Lee and Nestlé).

Two companies control instant soluble coffee (Nestlé and Kraft Food). In Europe, 10 main supermarket chains control 23% of retail food sales; in the U.S., 4

chains of supermarkets control 28 percent.

3. National and Regional Markets

Most of the coffee produced in Guatemala is exported, since the international price is better in the worldwide market; a low percentage stays in-country to supply the local market. Today, Guatemalan coffee production is one of the major lines of export in the Guatemalan economy. Despite the decline in prices and volumes of current exports, the quality of Guatemalan coffee is on a par with the international level. The growing demand for a quality type of gourmet coffee requires the cultivation of varieties that produce quality beans. Therefore, the intention behind the standards is to have the characteristics and comparative evaluation of remarkable aspects of a plant whose product is of good quality. (Lopez, 2006)

4. ClientsThe Cooperative UNION HUISTA parchment coffee is sold entirely to Fedecocagua. This entity is responsible for exporting in industrial quantities. With greater capital, it would be easier to commercialize coffee to other customers, trying to increase the value and the price.

5. Quality

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The quality standards–for exporting coffee, and for the purchasing of parchment coffee—are a set of specifications that the coffees must meet, that lay down clear criteria for their appropriate internal and external marketing.

To set the quality of Parchment Coffee, you must evaluate the following quality features: Humidity Aroma Color (appearance) Size of the bean (only Excelsos) Defects Peeling beans, Guayaba y Media Cara, Strange Matter (only parchment) Flavor in the cup

Control Standards for Parchment Coffee:

For the Parchment Coffee called Federation, the bounds of control for each of the characteristics to evaluate are:

Humidity: 10% to 12% Bare bean: Supports up to 2% by weight - based parchment. Guayaba y Media Cara: Supports up to 3% by weight - based parchment. (no bold) Pasilla: Supports up to 5% by weight - almond base. Smell: The coffee must be free of strange odors; it must have a fresh scent. Color: Characteristic of a properly green coffee. Strange matter and/or impurities: Supports up to 0.5% by weight. Cup test: The coffee must have characteristic flavor and aroma, free from defective flavors

like fermentation, mildew, chemicals, etc..

Cafés Excelsos control standards:

Humidity: 10% to 12% Smell: Must be free of strange odors. Appearance (Color): Typical appearance associated with a fresh and well-benefited coffee.

6. Providers

Providers include the participation of the 80 associates which are involved in training processes that increase volumes of coffee produced. Members provide only 20-25% of all the products sold by the cooperative. The remaining percentage is provided by 4 communities in the area—more than 400 small producers and providers. The Cooperative UNION HUISTA purchases from the small producers and associates 10,000 qq of cherry coffee, which is then processed to yield 2,200 qq (?) parchment coffee, which is then sold to Fedecocagua. The price paid by Cooperative UNION HUISTA is 5-15% higher than the price of the intermediaries of the area.

IV. TECHNICAL STUDYPágina 9 de 20

The project in its current state emphasizes three of the critical points in the production process of the coffee chain: the continuous supply of cherry coffee, the proper management of funds (administration) and nutrition/prevention in the coffee plantations. In this sense, the cooperative has inadequate resources for the purchase of coffee, and for loan production (nutrition/prevention in coffee plantations). As well, it has few skills and management characteristics for the proper development of a coffee commercializing entity.

Cherry Coffee Purchases: The cooperative buys coffee, paying by cash and credit in the area. The cooperative lacks the resources to buy the coffee at 100% cash; this is the reason there is a low-flow income of coffee to the coffee mill. This gives space to intermediaries, and thereby reduces the amount of product that can be processed and marketed.

Management Skills: The marketing of coffee requires continuous and dynamic work, focused on the proficient management of funds, pricing and sales decisions. The cooperative lacks the necessary skills to develop and generate large profits.

Nutrition and Prevention: Producers need technical assistance and enough funds to be able to properly feed and protect their coffee plantations. Guatemalan coffee is being severely attacked by rust, a fungus which has spread throughout the national territory. Need inputs and adequate technical help are needed to avoid the partial or total loss of coffee plantations. Addressing these two needs would greatly increase the production of coffee that is currently only reaching 30% of its potential.

1. Production Process

Conventional

Technically speaking, the Conventional Process is the series of steps or stages of processing that coffee is subjected to in order to remove or eliminate all layers or covers—in the most efficient way—without affecting its quality and/or performance. It is the first processing step of the beans.

Ecological

The Ecological Process is the set of operations performed to transform cherry coffee in dry parchment, preserving the quality of the coffee, fulfilling the marketing standards, avoiding loss of coffee and eliminating unnecessary processes. This process takes advantage of the sub-products of the bean, earning more income for the coffee grower and minimizing pollution of the environment.

It is a resourceful method that combines the processing of high quality coffee with the protection of the environment and the use of the sub-products of grain.

The parts are integrated and compacted in high-capacity. Using water currents to move the product saves on electricity and maintenance. The transportation of cherry coffee and pulping is

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also performed with water currents. The pulp and mucilage are brought back together at the end of the process and are transported by a similar system as the cherry coffee.

Demucilaging involves the use of a machine to wash the coffee components. An upstream process, it uses very little water in the washing procedure. Washing is a very efficient process that allows for the retrieval of a large amount of green and dry coffee.

The pulp mixed with mucilage is transported to storage trenches. After several days, the Californian Red Worm is used to break down the material. Earthworms decompose the pulp with the mucilage to form compost that can be used as organic fertilizer.

Coffee techniques:

Humid way

Collection Floating Pulping Fermentation Demucilaging Washing Drying Bagging Storage

Meshing system

Collection Separation Flotation Washing Drying Bagging Storage

Wet Mill Processing

(So named because water is used in the processing of the beans.)

Siphon Tank (a hydraulic coffee cherry classifier) Transportation of coffee Pulping Transportation of the pulp Transportation of non-pulped coffee in fermentation tanks Washing Classification of the parchment coffee Transportation of parchment coffee to mechanical dryers Drying

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Water consumption:

Gallons of water per qq of Green Coffee

12.5% - Pulping 37.5% - Washing and transporting beans 50.0% - Transporting the pulp

Cost of the tank construction

Necessary to prevent the loss of the quality of the coffee during the milling

Percentage of the components of the coffee fruit:

Shell or pulp – 40 - 50% Mucilage or “baba” – 18 - 20% Parchment – 20% Seed – 18%

2. Project Objectives

The General Objective is for COOPERATIVA UNION HUISTA and its partners to improve administrative skills, abilities, techniques and plans in order to develop the cooperative to its fullest potential.

Specific Objectives:

Organization focuses on improving its business, administrative and strategic capacity, and to contribute to the well-being of its associated families.

Market at least 70 MT/year parchment coffee To buy more coffee from 300 + small producers in the area. To increase production of cherry coffee 2 times more per cultivated area of small associates

and non associates. The organization constitutes a fund, with contributions from the beneficiaries, for the

continuity of the communal credit fund for the improvement of the production, processing and marketing of coffee.

Component 1: Management development and competitiveness.

This component has as a specific objective: to increase business and strategic operations of the Organization to raise the quality of the services that it provides to customers and its partners.

Current membership of the partners and producers of coffee: The Business Plan proposes to maintain the number of partners of the Cooperative UNION HUISTA, while increasing production and marketing volumes.

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A diagnosis of the productive and business needs of the organization: As a first step, the Organization must carry out assessment needs that identify the social, economic and environmental development needs of the Organization and the partners; those which it considers as benefits from the commercialization of coffee will contribute to the development of the Organization and the partners.

Develop a Business Plan and a strategic planning for access to differentiated parchment coffee markets.

Improve executives’ and/or partners’ capacities on issues of management development and competitiveness through the following topics (but not limited to): 1) administrative process of the micro and small business, 2) internal accounting and financial controls, 3) production and investment, 4) calculation and use of costs, and 5) marketing and commercialization.

Reporting of the progress of the project: It will be presented to the Cooperative UNION HUISTA and the financial agency of the project by monthly progress report, consolidated progress report every six months, and by final report.

Component 2: Productivity, quality control and assuranceThis component has as specific objectives:

Improve the productivity/area of the coffee plants. Improve the quality of the coffee bean through proper pre/post harvest handling. Increase productivity/area of the coffee plantations. Increase the capacity of the coffee mill process and the transformation from coffee cherry to

green coffee. Improve capacities of executives and/or partners on issues of quality assurance and quality

control through the following topics: quality assurance in pre/post harvest handling, and tools for the control of the quality of the coffee beans.

Create an environmental plan. The Cooperative UNION HUISTA must ensure that the partners protect the environment, making the protection of the environment part of the management of farms and the processing (coffee mills) units. Develop a training program that includes the themes listed below:

Nutrition:

Application of fertilizers and basic elements for the proper development of the plant. Direct influence on the productivity of the plant. Increase the life and health of the plant.

Prevention/Cure:

Application of chemicals and/or organic substances for the prevention or treatment of diseases caused by insects, bacteria, fungi and viruses.

Prevents the total or partial death of planting. Allows a high productivity. Increases the life of the plant. Allows having a grain of coffee of quality and weight.

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Maintenance:

Activities that improve the health and development of the plant, as well as preventing diseases.

Include activities such as handling of shade, pruning, cleaning and weed control.

Recollection:

Time of harvest. Maturity. Wise and skillful selection of fruits. Degree of maturity green (new), green ("fact") and yellow, red, purple, brown and black.

Pulping:

First physical transformation of the coffee pulp; separates and removes the shell and part of the mucilage

Maintenance and cleaning of the machine, hopper and channels. Paint with anti-rust after the harvest.

Types of distributors:

Roll or horizontal cylinder Roll or vertical cylinder Disks

Mucilage removal:

Ways of removing mucilage: natural fermentation, addition of enzymes in fermentation (pectinasa), addition of chemicals (hydroxide or sodium carbonate is used), hot water, manual or mechanical friction (by rubbing or wear).

Composition of the mucilage:

Total of sugars – 50% Total pectic materials – 33% Cellulose, ash, etc. – 17%

Fermentation:

Occurs through the action of enzymes and micro-organisms on the mucilage The time and normal situation for this to happen. Sequence of fermentation Formation and loss of volatile sub-products (CO2, steam of water, ammonia, etc.) Lixiviadiation of soluble solids Requires a lot of care and attentions to not detract from the quality of the coffee.

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Wash:

Its purpose is to eliminate the digested mucilage. It is the only process where the use of water is required and its performed when the coffee has reached the appropriate point of fermentation.

Wash test: (take a sample in a container), using a stick (2") in the mass (stops hollow and does not fall if it is well washed), pH test (low from 6 to 4)

Can be made in: wash tanks (rake or palettes), dedicated channels, machines, centrifugal pumps, washer/demucilaging.

Important for drying and storage of the coffee beans.

Demucilaging process:

Quick mucilage removal Does not affect the physical quality of the grain Does not affect the organoleptic quality of the drink The operation starts drying immediately Reduces losses due to weight of the dried coffee (1.5 - 2.0%) Recovers a high percentage of the beans that keeps the pulp, which contributes to

improved performance of the process. Reduces water consumption Decreases the area needed for the construction of structures Enables the industrialization of the mucilage Reduces 90% of pollution Better drying process. There are no differences in quality (fermentation vs. demucilaging). Less impurities

Drying:

The type of bean is more difficult to dry The objective is to eliminate the water content in the grain up to 10-12% Parchment coffee washed and drained enters with 50-55% moisture content at the drying

process. Cherry coffee processing "collor" enters the drying with 65-70% humidity

Ways to dry the coffee:

Solar (solar energy) Glacis, terraces or patios Runners, drawers, (still or moving)

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Toldas (jute or plastic bags) Mechanical Dryers (Fixed or dynamic litter) (Guardiola) - Rotary, horizontal Silos (columns) Pre dryers

Elements influencing the drying:

Temperature Flow of air Static pressure Relative humidity Time of drying: 10-24 hours Temperature: Should not exceed 120-140 degrees Fahrenheit in the mass of coffee

High

Causing hardening of the surface of the bean, making it more difficult to dry the inside of the bean.

Harm the appearance of the bean (discoloration, crystallization) and its quality. Weight loss and problems in the stacking. It causes the expulsion of the embryo of the bean

Low

Slow drying, making it more expensive. If the bean retains humidity it will cause problems in storage, fungi attack, loss of taste, etc. Risks the quality of the product.

Heating systems:

Direct fire Indirect fire

Component 3: Negotiation and Marketing

This component has a specific objective: to enhance capacities to negotiate and sell parchment coffee with industrial consumers, coffee processors in dry mills, and to produce green coffee for export, which will provide better prices, terms of purchase and sustainability.

The strategy of this component is based on three specific actions:

Training to achieve collective learning for the managers, partners and supporters of the process.

Prompt technical support in topics of financial accounting, financial management, tax legislation, GOVERNANCE, market connections, and collateral services (technical assistance).

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Negotiation with buyers Prepare and send samples of parchment coffee to national buyers Get contracts and letters of intent to buy parchment coffee. Market at least 70 MT of parchment coffee to the national and/or international market. Increase the aptitude of executives and/or partners on topics of national marketing of

parchment coffee.

Component 4: Financial process for the milling operation for parchment coffee:

Description of Seed Capital:

With this project, the COOPERATIVA UNION HUISTA tries to guarantee the adequate and constant milling of cherry coffee, and ensure the delivery of parchment coffee from members and non-members to customers (Fedecocagua and others).

Also try to achieve the production levels and reach the volumes of parchment coffee for national marketing.

To achieve this objective, it is necessary to provide and improve the financial capacities of the associate and non-associate producers for the purchase of cherry coffee, so they can sell it at a fair price, in accordance with the crop production and milling costs to reach the selling price.

The Cooperativa Unión Huista needs a capital seed to buy/produce process and market coffee. This lack of capital opens doors to intermediaries that not only affects the cooperative—paying prices much lower in cash, thereby achieving the capture of the entire purchasing process—but also leaves small producers with little income after the low-price purchase.

For the future of the Rural Fund, it’s necessary to have capital seed for the agricultural production for the members of the producer organizations formed as network producers. FUNDASISTEMAS acquires sharess 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.

ROTARIOS capital that FUNDASISTEMAS is placing as share should be leveraged by the members in a ratio of 4 to 1, meaning that for each quetzal of acquired share by the members, FUNDASISTEMAS get 4 quetzals in shares. That means that at the end of 2 years, they will have capital as shares in the fund of productive loans and credits.

For the collective decisions financial knowledge is needed, they need to have the resources to finance their productive activities, reduce the necessity to get loans are humongous interest rates. Through this joint of effort, it develops a better participation in the market to get better prices, creating a scale of economy and loyalty to your organization.

The contribution of the beneficiaries will be counted as contributions for the Association, who will register that income in a specific account that will not be used during this project. The same will be used as capital for buying and selling in the coffee operation, as an hereditary fund that will be used

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as leverage with the contribution of the capital seed of Rotary, for the sustainability of COOPERATIVA UNION HUISTA.

For one year FUNDASISTEMAS executes the strengthening business plan for the beneficiary organization (OB), through the application of a methodology of learning/sharing, with the strategy of learning by doing, and with the participation of more than 50% of the members of the organization, well affiliated and active within it.

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V. BUDGET

Based on a contribution of $ 30,000.00 by ROTARIOS, in the form of donation, and through the support of $2,564.00 by the benefiting organization (through the organization’s fund), totaling a sum of $32,564.00 equivalent to Q. 254,000.00

No. Budgetary Area Total Q’s

RotarySupportQ’s

Benefiting Organization Support. 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

RotarySupport$ 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

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APPENDIX A: Timeline

Execution Time ChartPROJECT FOR THE IMPROVEMENT OF THE PRODUCTION AND COMMERCIALIZATION OF PARCHMENT COFFEE OF COOPERATIVE

UNION HUISTAItem 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

2Business 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

3Quality and Productivity of PARSHMENT COFFEE 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

5Financial 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