86045 SOLOMON ISLANDS COCONUT VALUE CHAIN ANALYSIS JANUARY 2014 (Revised February 2014) David Young and Moses Pelomo World Bank, Australian Department of Foreign Affairs and Trade, International Fund for Agricultural Development TABLE OF CONTENTS EXECUTIVE SUMMARY 1. INTRODUCTION 1.1 Background 1.2 Rationale 1.3 Approach and Methodology 2. POLICIES AND STRATEGIES 2.1 Economic and National Development 2.2 Agriculture Sector and Coconut Industry Development 2.3 Infrastructure and Transport 2.4 Institutional and Regulatory Framework 2.5 Development Partners 3. DOMESTIC AND GLOBAL MARKETS 3.1 Global Trends 3.2 Domestic Trends 4. VALUE CHAIN ANALYSIS 4.1 Geographic Distribution 4.2 Product Range 4.3 Value Chain Overview 4.4 Methodology 4.5 Results 5. CHALLENGES 6. CONCLUSIONS AND RECOMMENDATIONS ANNEXES Annex I Value Chain Analysis for Copra Annex II Coconut Industry Stakeholder Profiles 1 LIST OF ABBREVIATIONS ACIAR Australian Centre for International Agricultural Research AusAID Australian Agency for International Development CEMA Commodities Export Marketing Authority CIF Cost, Insurance, Freight CNO Coconut Oil CSS Coconut Sector Strategy DFAT Australian Department of Foreign Affairs and Trade EU European Union FACT Facilitating Agricultural Commodity Trade FOB Free on Board GDP Gross Domestic Product IACT Increasing Agricultural Commodity Trade IFAD International Fund for Agricultural Development ITC International Trade Centre IWG Industry Working Group KOA Key Outcome Areas MAL Ministry of Agriculture and Livestock MAWG Market Access Working Group MCILI Ministry of Commerce, Industry, Labour and Immigration MDPAC Ministry of Development Planning and Aid Coordination NCIDP National Coconut Industry Development Plan NDS Solomon Islands National Development Strategy PARDI Pacific Agriculture Research and Development Initiative PHAMA Pacific Horticulture and Agriculture Market Access Program PIC Pacific Island Country PNG Papua New Guinea R&D Research and Development SBD Solomon Islands Dollar SEF Supplemental Equity Facility SIAQS Solomon Islands Agriculture Quarantine Services SIG Solomon Islands Government SIPA Solomon Islands Ports Authority SIRDP Solomon Islands Rural Development Program VCO Virgin Coconut Oil 2 EXECUTIVE SUMMARY Background: Coconuts are the most widely distributed crop in the Solomon Islands and form a key part of almost all farming systems in all provinces. Some 40,000 rural households produce coconuts for their own consumption, to produce fuel and building materials, and to generate cash income. Copra is the most important coconut product and is a vital source of cash income for rural households, especially those in the more remote areas. The Coconut Sector Strategy estimates that total production in the Solomon Islands is about 370 million nuts of which around 70 million worth about SBD 140 million are consumed. Copra exports account for 150-200 million nuts worth some SBD 110-150 million depending on prices. Coconut oil (crude and virgin) exports generate a further SBD 40-50 million. Byproducts such as copra meal, charcoal, coir, coconut wood etc. may contribute a further SBD 20-40 million in the value of coconut products, giving a total gross value of some SBD 300-400 million (USD 40-50 million). Despite their importance, there has been little investment in coconut production in recent decades. Coconuts are overwhelmingly a smallholder crop and former plantation production has declined to negligible amounts. Smallholder households use their income from coconuts to finance their basic needs and very little is re-invested in the crop, or in value adding through byproduct utilisation, or diversification into higher value products. Global Trends: Global trade in coconut products is dominated by copra and coconut oil. The prices of copra, coconut oil and other vegetable oils are highly correlated and tend to fluctuate over a wide range. However coconut oil consistently receives a premium over most other vegetable oils. Over the last decade internationally traded copra prices have ranged between US$ 500 and US$ 1,500/ton whilst crude coconut oil prices have fluctuated between US$ 600 and over US $2,000/ton. Solomon Islands copra prices closely track the international benchmark prices. FOB Honiara prices average about 64% of CIF Europe prices. The volume of global copra trade has declined from 200,000- 300,000 tonnes in the 1990s to 100,000-150,000 tonnes during the 2000s. During the last decade the Solomon Islands’ share of global trade has increased to almost 20% and is exceeded only by Indonesia. Solomon Island Production: Since 1997 annual copra production has mostly been in the range of 25,000-35,000 tons but fell to almost zero in 2001-2002 due to the combined effect of civil unrest, the end of CEMA’s monopoly and insolvency of CEMA’s oil milling businesses. Production of copra in the Solomon Islands is price inelastic. A 10% increase in prices is generally associated with increased monthly deliveries of around 5%. The combination of fluctuating prices and production leads to extreme volatility in the value of copra exports. Since 2005 the value of exports has been as low as SBD 33 million and as high as SBD 232 million, and is currently near the lower end of this range. These wide fluctuations have major implications for rural communities, which are heavily dependent on copra sales for cash income generation. Value Chain Analysis: The coconut value chain is extremely complex due to the many products that can be derived from the coconut palm. From its roots, trunk, leaves, and the different components of its fruits (husk, shell and kernel, water and “apple”) to its apical bud (King’s salad) are used for medicinal purposes, housing, wood energy, furniture, handicrafts, other functional utilities and food. Many of the value chain actors undertake more than one function spanning more than one sub-sector. The main sub-sectors in the coconut value chain include:  Coconut growers, mostly smallholder households, some of whom also produce copra for sale, sell coconuts into the domestic market and consume them for food and drinking.  Market intermediaries including coconut and copra traders, copra millers, producers of virgin coconut oil (VCO), and copra exporters.  The domestic market sub-sector, which utilises a broad range of coconut products for food, fuel and construction materials. 1  The international market sub-sector, which includes traders and brokers (mostly in Asia and Northern Europe), copra millers (mostly in the Philippines), buyers of coconut oils and meals, VCO buyers and buyers of dry and drinking nuts. The value chain analysis for copra shows that at the low prices prevailing in December 2013 copra is a low-margin business for all of the value chain participants. Growers are only receiving around SBD 1.60/kg delivered to the village buyer, which is not sufficient to generate much interest in producing copra. This explains why copra production and exports are currently running at a very low level, and why some traders have suspended their operations due to lack of supply and slender margins. The total margin accruing to all value chain participants is currently around SBD 0.19 per coconut processed, which is far less than revenue from other uses such as sale of nuts in local markets or for use in VCO extraction. At the upper end of the price range the margin increases to around SBD 0.42 per nut, still less than the domestic market price or prices offered by VCO units (generally around SBD 0.50 per nut). However most growers, especially in remote areas, do not have alternative market outlets for their coconuts, and copra remains the only available option. The analysis also shows that margins at all stages are very sensitive to changes in the FOB price of copra: an increase from the current FOB price of around US$500/tonne to US$ 700/tonne (a 40% increase) would more than double margins all along the value chain. This is because the costs incurred, apart from financing costs for working capital, are all independent of copra prices. Estimates of the total gross margins generated at each level in the value chain, based on 30,000 tonnes of copra exports, suggest that the industry generates between SBD 30 million and SBD 70 million of net value addition, with about a third of this accruing to growers. However the grower’s share is spread amongst tens of thousands of households whereas there are far fewer traders and only three or four companies engaged as exporters. Overall the value chain analysis for copra confirms the importance of the sector as a generator of cash income in rural and remote areas, and generating revenues for traders and exporters. It explains the resilience of the sector in the face of adverse circumstances and its ability to survive natural disasters, social unrest and periods of very low prices. However it also demonstrates that the overall returns per coconut processed into copra are low, and confirms the validity of the two-pronged approach adopted in the Coconut Sector Strategy of improving the profitability of the copra value chain in combination with product and market diversification. The Sector Strategy Identifies challenges and constraints among the different value chain actors: growers, traders and processors. There are also sector-wide issues related to the institutional and regulatory framework; the need for product and market diversification; access to finance; infrastructure and transport; improved value chain integration; and the long-term decline in coconut production. Conclusions and Recommendations: Coconuts and copra are the Solomon Islands’ longest standing commercial smallholder income generating activity and are also very important in food and nutrition security. The sector will no doubt survive with or without special development interventions. However, there is a risk that production and exports will decline unless there are definite steps to revive the sector. SIG has made a strong commitment to the coconut sector through general and sector-specific strategies, and the Development Partners increasingly recognise the importance of coconuts in rural incomes and poverty reduction. Against this background, the design of the follow-up phase of SIRDP should consider a number of possible measures, which target the coconut sector. The recommended approach therefore has seven key elements: 1. Improve the profitability of the copra value chain mainly through improvement of copra quality using a combination of regulatory measures, the strengthening of linkages between the commercial actors and the regulatory and technical support agencies. 2 2. Strengthen the institutional framework of the coconut sector. 3. Continue SIRDP-supported improvements in agricultural services to coconut growers. 4. Improve the availability of financial services to value chain actors. 5. Establish a matching grant and technical support facility to support the development of commercial partnerships between growers and value chain actors with a focus on product diversification and value addition. 6. Target key marketing infrastructure constraints including logistics as part of SIRDP’s efforts to develop local infrastructure. 7. Initiate a long-term coconut replanting program. The above recommendations will be considered in the design of agriculture sector interventions within the follow-on phase of SIRDP scheduled to be launched in 2015. 3 1. INTRODUCTION 1.1 Background The Solomon Islands Rural Development Project (SIRDP) is a US$37 million initiative supported by the World Bank, the Australian Government, the European Union and the International Fund for Agricultural Development (IFAD). The Solomon Islands Ministry of Development Planning and Aid Coordination (MDPAC) is implementing the Project. Launched in 2008, the program is now implemented in the eight provinces of Choiseul, Western, Isabel, Central, Guadalcanal, Malaita, Makira and Temotu. The development objective of SIRDP is to increase access of rural households to high priority, small-scale economic and social infrastructure, agriculture and financial services. The Program comprises four components: local infrastructure and service delivery; improved agriculture services; rural business development; and program management. SIRDP is scheduled to end in January 2015 and preparations are being made for the design of a follow-on phase. It is proposed to focus agriculture sector interventions, in the follow-on phase, on high value products in domestic and export markets, specifically on cocoa and coconut products in the case of the latter. This focus is broadly in line with and supported by key Solomon Island Government (SIG) strategies and policies including: the Solomon Islands National Development Strategy (NDS) 2011-2020 which stresses the need to create an enabling environment for private sector led growth in general and promoting commercial export crops including cocoa in particular; the Ministry of Agriculture and Livestock (MAL) through the Corporate Plan 2011-2014 strives to be premier provider of information, research, extension, education, regulatory and other services to improve the agriculture sector; and the Solomon Islands Coconut Sector Strategy (SICSS) sets out a roadmap for development of the sector over the next decade. 1.2 Rationale The coconut industry is a significant contributor to smallholder livelihoods and national economy earnings. Coconuts are the most widely distributed crop in the country and form a key part of almost all farming systems in all provinces. Coconuts are both a food crop and a cash crop and are used to produce a large number of end products. Some 40,000 rural households in the Solomon Islands produce coconuts for their own consumption, to produce fuel and building materials, and to generate cash income - coconuts are often referred to as “the tree of life”. Copra is the most important coconut product and is a vital source of cash income for rural households, especially those in the more remote areas. Coconuts are also an important source of earnings for the national economy. The Coconut Sector Strategy (CSS) estimates that total production is about 370 million nuts of which around 70 million worth about SBD 140 million are consumed. Copra exports account for 150-200 million nuts worth some SBD 110-150 million depending on prices. Coconut oil (crude and virgin) exports generate a further SBD 40-50 million. Byproducts such as copra meal, charcoal, coir, coconut wood etc. may contribute a further SBD 20-40 million in the value of coconut products, giving a total gross value of some SBD 300-400 million (USD 40-50 million). In total coconut products comprise about 20% of agriculture and fishery exports. Despite their importance to the national economy and to rural households, there has been little investment in coconut production in recent decades. Coconuts are overwhelmingly a smallholder crop and former plantation production has declined to negligible amounts. Smallholder households 1 use their income from coconuts to finance their basic needs including food, clothing and education and very little is re-invested in the crop, or in value adding through byproduct utilisation, or shifting to higher value products. The recent establishment of a number of virgin coconut oil (VCO) production units is an exception to this general observation, but so far accounts for less than 1% of coconut production. 1.2 Approach and Methodology The objective of this value chain analysis is to identify the most promising opportunities for increasing the contribution of coconuts and coconut products to rural livelihoods and to the national economy. The analysis aims to map coconut value chains, focused on elaborating practical pathways to improving production and marketing and where feasible developing partnerships between domestic, international and other stakeholders. The results of the analysis reported here will inform the design of agriculture sector interventions within the follow-on phase of SIRDP. The report comprises 5 sections: Section 2 describes Solomon Islands Government’s (SIG) national and sector policies and strategies, the state of infrastructure and transport, relevant institution and regulatory frameworks activities of development partners involved in the coconut industry; Section 3 provides and overview of global and domestic trends in prices, production and productivity of coconut products; Section 4 provides an overview of the copra value chain and a snapshot of costs, revenues and gross margins accruing to smallholders, traders and exporters at each stage of the value chain; Section 5 provides an overview of key challenges in development of the Solomon Islands coconut value chain; and Section 6 concludes the main findings of the value chain analysis and makes recommendations around improving agriculture services and enhancing value chains. 2. POLICIES AND STRATEGIES This section describes SIG’s national and sector policies and strategies, the state of infrastructure and transport, relevant institution and regulatory frameworks activities of development partners involved in the coconut industry 2.1 Economic and National Development The Solomon Islands economy is continuing to recover from a prolonged period of sharp contraction following civil tensions during the late 1990s and early 2000s. The average GDP growth rate for the period 2003-2013 was 2.9%; expected to be around 2.5% in 2013; and forecast to be over 4% in 2014. National development policies and strategies aimed at promoting development are elaborated in several key documents including the National Development Strategy (NDS) 2011-2020. The NDS comprises 8 objectives of which Objective 5 is especially relevant to developments of the coconut sector: “Increase economic growth and equitably distribute income and employment benefits” which includes creating an enabling environment for private sector led growth and promoting commercial export crops. 2.2 Agriculture Sector and Coconut Industry Development Agriculture plays an important role in the Solomon Islands: 75% of the population are engaged in agriculture compared with 20% in services and 5% in industry (fishing, mining and timber); and 52% of GDP is derived from agriculture compared with 39% from services and 9% from industry. As shown in Figure 2.1 over the five years 2008-12 copra and coconut oil exports averaged SBD 132 million per annum, less than palm oil but more than cocoa, and only comprising 6% of total 2 merchandise exports, which are dominated by logs. However if the extractive industries (logs, minerals and timber) are excluded, copra and coconut oil is the third most important export contributing 16% of the total and about 20% of the agriculture and fisheries sector exports. Figure 2.1: Solomon Islands Merchandise Exports, Average 2008-2012 (SBD millions) All Merchandise Exports Excluding Logs, Timber and Minerals Logs 1,128 Fish 254 Minerals 290 Palm Oil 232 Fish 254 Copra & Coconut Oil 138 Palm Oil 232 Cocoa 98 Copra & Coconut Oil 138 Re-exports 72 Cocoa 98 Other 38 Re-exports 72 Sawn Timber 64 Other 38 Source: National Statistics Office and Customs and Excise Division of Ministry of Finance Sector development policies and strategies aimed at promoting agriculture development in the Solomon Islands is elaborated in the Ministry of Agriculture and Livestock (MAL) Corporate Plan 2011-2014. The MAL Corporate Plan has as its vision “to promote, improve and lead agriculture development in the Solomon Islands to a profitable and environmentally sustainable future by being the premier provider of information, research, extension, education, regulatory and other services to improve the agriculture sector.” The MAL Corporate Plan comprises 10 key outcome areas (KOA) of which the following 6 are especially relevant to developments in the coconut sector: KOA 1 poverty alleviation, enhanced food security and rural livelihood; KOA 2 sustainable growth and economic development; KOA 5 investment in agriculture research and development; KOA 7 increase agriculture investments; KOA 8 enabling environment for growth and development; KOA 9 strategic strengthening of alliances for national, regional and international cooperation. Aligned with the NDS and the MAL Corporate Plan is the Coconut Sector Strategy (CSS) 2010-2020. The purpose of the Strategy is to guide and support the development of the coconut industry by providing a plan and a management framework that articulates value chain actors, the private sector, existing resources, development activities and donor support. The Strategy presents a situation analysis including the following key points:  Copra continues to dominate trade in coconut products mainly due to high freight costs, the lack of bulking capacity and weak sector coordination;  Although direct consumption of fresh nuts is very important nutritionally, coconuts are of commercial value primarily as copra;  Copra exports are heavily dependent on a single market – the Philippines;  Since plantations in the Russel Islands stopped crushing copra in the late 1990s there has been limited downstream process of copra and a number of un-successful attempts to rehabilitate defunct mills;  Land tenure issues are critical in planning effectively for changed production regimes; 3  Coconut is a low maintenance, low technology crop with favourable growing conditions in the Solomon Islands; and  Lack of other income-generating opportunities has meant that copra production has remained relatively attractive for smallholders. The Coconut Sector Strategy details a number of anticipated impacts of sector improvement including the following:  85% of the population will directly benefit and volatile dependency on copra exports will be reduced;  Increasing income earnings of rural communities and providing more employment opportunities for men and women;  Value addition: Empowerment of rural economic centres and promotion of investments;  Import substitution particularly for fuel (US$ 700 million per year), food, animal feed and soap;  Electrification of rural areas (oil as fuel for generators);  Promotion of other sectors such as livestock (development of animal feed); and  Diversification away from timber and reduction of forest depletion. The CCS also includes an analysis of strategic options and identifies two main priorities: (i) increasing the value received from copra by improving copra quality and shipping/commercialisation practices; and (ii) increasing local markets for coconut products by strengthening the local processing sector. It is envisaged that both import substitution and export development will play a part and that there should be investment in a portfolio of coconut products rather than just one or two. The identified priority products include: crude coconut oil for export sales, cooking oil and biodiesel; VCO and coconut flour; husk utilisation for coir and pith; shell utilisation for energy, charcoal and activated carbon; and higher value coconut milk for export. These priorities will be pursued through the following six strategic objectives: 1. Create a Coconut Strategy implementation and coordination body that is self-sustaining. 2. Consistently improve the quality of market, production and business feasibility Information to enable stakeholders to effectively plan for sector diversification and development. 3. Increase collection and supply of coconuts by 30%. 4. Develop finance mechanisms to enable Strategy implementation and investment by all stakeholders by 2015. 5. Develop a coconut processing industry for value added and diversification of coconut products by 2015. 6. Improve support services to respond to sector needs by 2015. The National Coconut Industry Development Programme (NCIDP) was prepared by MAL and approved by MDPAC in May 2013 - it consists of a programme to implement the CSS. The rationale for the Programme is based on the essential role of coconuts in food and nutrition as well as cash income generation, especially for the poorer sections of the population. It is noted that copra is the dominant coconut product and that production is moderately price responsive, so any measures to improve prices (or reduce costs) will stimulate production. Production of VCO rather than copra is 4 seen as a priority to increase value addition in the sector, but is at an early stage of development. The priorities of NCIDP are: (i) to increase the collection and supply of coconuts by 30%; (ii) in collaboration with the Ministry of Commerce, Industry, Labour and Immigration to develop a coconut processing industry for value added and diversification of coconut products by 2015; and (iii) to create a coconut strategy implementation and coordination body that is self-sustaining. At impact level the NCIDP addresses NDS Objective 5 regarding economic growth, income distribution and employment. The expected outcome is a strengthened coconut industry through rehabilitation and value adding activities. The program is costed at SBD 70 million over four years (2014-18) and includes five outputs: (i) rehabilitation of seed gardens in the provinces; (ii) rehabilitation and establishment of coconut-based farming system; (iii) establishment of processing and value adding activities; (iv) improved surveillance for possible introduction of Bogia disease; and (v) a fully resourced and operational Coconut Secretariat within MAL 2.3 Infrastructure and Transport In general public infrastructure (roads, bridges, electricity, telecommunications; wharves) are poorly developed in the Solomon Islands with much of that which was destroyed during the tensions having not been repaired or replaced. There are some 1,500 kilometres of roads of which only round 50 kilometres are paved. Roads are sparse reaching less than a quarter of communities with the rest reliant on sea transport. Many bridges are in need of repair and some are impassable. Less than 20% of the total population has access to electricity and supply extends only a few kilometres outside of the capital Honiara. Telecommunications, especially mobile communications, are developing rapidly but remain expensive. There are two operational exports ports in the Solomon Islands at Honiara on Guadalcanal and Noro on Western Province, both of which have basic container handling facilities. A third export port used to operate at Yandina in the Russell Islands (Central Province) but has fallen into disuse following the closure of the RIPEL plantation. There are regular inter-island shipping services that transport agricultural and other commodities to and from the main ports and other destinations within the Solomon Islands. There are no dedicated coconut industry infrastructure or transport services. At the two main ports sacks of copra are unloaded by hand and those buying and selling copra – processors, traders and exporters – rely almost exclusively on the regular inter-island shipping services and, locally, on other sea and road transport services. A few copra traders operate their own small vessels to collect copra from the remote outer islands. Outside of the two main ports copra is transported by road or sea to collection points in the main provincial centres or to pick-up points along the coasts often off beaches, stored in private facilities, before being transported by regular or in some instances private shipping services to the ports of Honiara and Noro. Domestic shipping services also tend to price according to the value of the commodity so that higher value commodities regardless of size and weight pay a higher transport price. For instance the average price of an 80 kg bag shipped to Honiara is SBD 60-80 for cocoa compared with between SBD 35-60 for copra depending on its origin. 2.4 Institutional and Regulatory Framework Copra marketing in the Solomon Islands has evolved from a highly regulated parastatal-managed system to one where there is minimal institutional and regulatory intervention. From 1953 until 1984 the Solomon Island Copra Board controlled copra marketing. CEMA took over the functions of the 5 Board between 1984 and 2002, with monopoly rights to export copra, whilst domestic trading was open to private traders. At this time the industry consisted of several large plantations as well as many smallholder growers. Traders were paid an incentive to source copra from remote areas under a freight equalisation scheme. In the 1980s CEMA operated five copra buying centres at Choiseul Bay (Choiseul Province), Buala (Isabel), Auki (Malaita), Kaonasughu (Makira) and Lata (Temotu). These buying centres and the three export ports (Honiara, Gizo and Yandina) were staffed by CEMA with managers, inspectors and labourers. In the early 1990s some 30 buying points were established, covering the entire country. These were used for both copra and cocoa and included storage facilities connected to private shipping services, for copra and coconut oil. CEMA engaged Buying Point Agents to purchase copra at these buying points as well as selling driers, drier parts and sacks. CEMA paid the Agents a commission per tonne of copra delivered and chartered three vessels to collect copra from the buying points on a monthly basis. However, these buying points fell into disuse following CEMA’s withdrawal from trading activities, and the tensions, and are currently not functional. In 1995-96 CEMA took over Levers Plantations Ltd and incorporated its subsidiary Russel Island Plantation Estates Ltd (RIPEL). CEMA also established six provincial copra crushing mills which supplied coconut oil to RIPEL for export. By the late 1990s only about a 20% of copra was exported and the remainder processed into oil. However due to a prolonged slump in coconut oil prices (1999 to 2003) coupled with the adverse effect of the tensions RIPEL and the provincial mills went bankrupt and remain inoperative. In 2002 the Government decided to remove CEMA’s monopoly and deregulate the marketing of copra. CEMA ceased involvement in all commercial activities and retained only a regulatory function. The buying centres and buying points were sold and are no longer operating. CEMA has the authority to issue, renew and revoke licences to exporters and in cooperation with MAL and the relevant Provincial Government to register copra traders. However copra driers are not licensed or registered as for cocoa. MAL extension officers through the Chief Field Officers in their respective provinces are responsible for enforcing the design and operational standards of copra processing and storage facilities. However, these requirements were only enacted in August 2013 and little if any progress has been made in terms of their practical implementation. CEMA is ultimately responsible for controlling the quality of coconut products exported from the Solomon Islands. The Chief Inspector of CEMA has the authority to inspect copra storage premises and inspect copra prior to export. However the copra grading system previously in use is no longer applied and CEMA simply approves copra for export or occasionally refuses to approve export if quality is very poor. Preparation of the Coconut Sector Strategy and establishment of the Coconut Secretariat aimed to develop a new institutional and regulatory framework the coconut sector following the withdrawal of CEMA from all commercial activities. This has only been partially successful so far. The Sector Strategy has not yet been endorsed by the proposed national stakeholder consultation due to lack of funding, and the Coconut Secretariat has no resources to perform its functions of coordinating and leading sector development. During the next three years the Secretariat will receive some administrative, financial and technical support from the Pacific Horticultural and Agricultural Market Access Program1 (PHAMA). PHAMA also supports a Coconut Industry Working Group, which has similar functions. 1 Financed by the Australian Aid Program 6 MAL is attempting to address some of the key problem areas in the regulatory and institutional framework through the NCIDP. However the NCIDP remains un-funded and there are competing uses for MAL’s limited resources, so its capacity to exert strong leadership in coconut industry development is limited. The follow-on phase of SIRDP will continue to support capacity building of MAL. Despite the regulatory and institutional weaknesses and disruptions the coconut industry has shown considerable resilience compared with other Pacific Island Countries (PICs), particularly those of Polynesia were copra production has almost disappeared. This has been attributed2 to six main factors: (i) a fundamental comparative advantage in copra production; (ii) the desperation of many rural households for a source of cash income; (iii) the ability of coconuts to survive several years of complete neglect; (iv) several periods of relatively favourable copra prices; (v) the existence of a network of collection centres previously established by CEMA which could be used by private traders; and (vi) the availability and willingness of the private sector to become involved in copra trading. 2.5 Development Partners Whilst there has been significant support for cocoa industry development the Development Partners have tended to avoid involvement in the coconut sector. Lack of donor support may be attributable to the parastatal monopoly situation that existed until 2002 and the involvement of commercial entities thereafter, and or a commonly held view that the sector is strong enough to look after itself. There was some support to the sector through a copra drier distribution programme funded under the Australian-financed Community Peace and Restoration Fund (CPRF). SIRDP provides general support for MAL extension officers to assist coconut growers and copra traders under the improved agriculture services component, and the Supplemental Equity Facility (SEF) under the rural business development component provided equity to match borrower equity and commercial bank loans. It is estimated that copra traders and processors received around SBD 854,000 representing 36% of the value and six of the 20 SEF grants that went to the agriculture sector. The SEF ended in 2012 following full disbursement of available funds and SIRDP is scheduled to close in 2015. PHAMA has been supporting the sector through the Coconut Industry Working Group (IWG) and the Coconut Secretariat. Both the IWG and the Secretariat have similar composition and it is possible that they will be merged in the future. 3. DOMESTIC AND INTERNATIONAL MARKETS This section provides an overview of global and domestic trends in prices, production and productivity of coconuts and coconut products. 3.1 Global Trends Coconut oil belongs to the category of “lauric oils” because of their high lauric acid content which has particular advantages for food and industrial uses. Lauric oils (which also include palm kernel oil) receive a price premium of 15-20% above other edible oils. The market for lauric oils is highly competitive, characterised by little product differentiation and limited opportunities for niche marketing. However VCO is becoming an increasingly important exception to this general rule as 2 Solomon Islands Smallholder Agriculture Study, Volume 2: Markets and Marketing Issues 7 there are niche markets for certified organic and fair trade VCO used in high value toiletries and skin care products. The demand for copra is derived from the demand for coconut oil and more generally to other edible oils. As shown in figure 3.1 the prices of copra, coconut oil and palm oil are highly correlated and tend to fluctuate over a wide range. However coconut oil consistently receives a premium over palm oil. Over the last decade internationally traded copra prices have ranged between US$ 500 and US$ 1,500/ton whilst crude coconut oil prices have fluctuated between US$ 600 and over US $2,000/ton. On average the world price of copra is around 66% of the price of coconut oil (range 58-74%) reflecting the high oil content of copra – average 70% oil, range 65-72% and the value of the residue (copra meal) as a livestock feed. Figure 3.1: World Prices 1993-2013 (US$/ton) 2,500 Copra Coconut Oil 2,000 Palm Oil 1,500 1,000 500 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Solomon Islands copra prices closely track the international benchmark prices as shown in Figure 3.2. FOB Honiara prices average about 64% of the “cost, insurance, freight” (CIF) Europe prices with a correlation coefficient of 92%. The margin between FOB and CIF prices tends to expand during price spikes and contract during price slumps. Figure 3.2: Monthly Copra Prices (US$/ton) FOB Honiara and CIF Europe, 2005-2013 8 $1,600 USD FOB $1,400 CIF Europe $1,200 $1,000 $800 $600 $400 $200 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 3.2 Domestic Trends Global trade in copra has been in long term downtrend over the last 20 years as seen in Figure 3.3. During the 1990s global exports varied between 200,000 tons and 300,000. Since 2000 global trade has mostly been between 100,000 tonnes and 15,000 tonnes. This downtrend reflects in increasing dominance of palm oil in world edible oil trade. However the Solomon Islands’ share of global copra exports has been increasing sharply in recent years to almost 20% compared to less than 10% in the 1990s. Figure 3.3: Global and Solomon Islands Copra Exports (Thousand Tons) 350 World 300 Solomon Islands 250 Linear (World) 200 150 100 50 0 1993 2006 1990 1991 1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 Source: FAOSTAT 9 The growing importance of the Solomon Islands in global copra trade is shown in Figure 3.4 where in 2010 the Solomons was second only to Indonesia. The Philippines is by far the largest copra importer and is the destination of most Solomon Islands copra. Figure 3.4: Five Leading Copra Exporters Figure 3.5: Five Leading Copra Importers in in 2010 (Thousand Tons) 2011 (Thousand Tons) 90 80 70 60 50 40 30 20 10 0 Philippines Malaysia Bangladesh Pakistan Australia Source: FAOSTAT There are a number domestic price, production and productivity features that characterize the Solomon Islands copra market. Figure 3.6 shows that since 1997 annual copra production has mostly been in the range of 25,000-35,000 tons but fell to almost zero in 2001-2002 due to the combined effect of civil unrest, the end of CEMA’s monopoly and insolvency of CEMA’s oil milling businesses. Figure 3.6: Solomon Islands Copra Production (tons), 1997-2012 Figure 3.7 shows that production of copra in the Solomon Islands is price inelastic. Although the price/quantity relationship is not strong, a 10% increase in prices is generally associated with increased monthly deliveries of around 5%. Figure 3.7: Price/Volume Relationship, Monthly Prices and Deliveries 2005-2013 10 5,000 4,500 4,000 R² = 0.316 3,500 Tonnes/month 3,000 2,500 2,000 1,500 1,000 500 0 1 2 3 4 5 6 7 8 SBD/kg FOB The combination of fluctuating prices and production leads to extreme volatility in the value of copra exports. As shown in Figure 3.8, since 2005 the value of exports has been as low as SBD 33 million and as high as SBD 232 million. This has major implications for rural communities, which are heavily dependent on copra sales for cash income generation. Figure 3.8: Value of Copra Exports (SBD million) 2005 48 2006 33 2007 47 2008 156 2009 57 2010 92 2011 232 2012 119 Y TD 2013 33 4. VALUE CHAIN ANALYSIS This section provides an overview of the value chain for coconut products and a snapshot of costs, revenues and gross margins accruing to smallholders, processors, traders and exporters at each stage of the copra value chain. This analysis is intended to inform the design of agriculture interventions within the follow-on phase of SIRDP. The tentative focus of SIRDP will be on: (i) improvements to agriculture services including coconut (and cocoa) sector coordination, regulation and monitoring, research and development and knowledge management, and partnership support services; and (ii) value chain enhancements including SEF, agriculture value chain grants, technical services, and community-driven agricultural infrastructure. Discussions around design of the SIRDP agriculture 11 interventions commenced in December 2013 (see Annex 3) - full design of the SIRDP will commence in early 2014 and the Program is scheduled to start in early 2015. 4.1 Geographic Distribution As shown in Table 4.1 below, over 60% of the copra comes from three provinces: Guadalcanal, Western and Central. Table 4.1: Annual Average Copra Production 2004-12 Province Tons % of Total Guadalcanal 7,546 27.2 Western 5,304 19.1 Central 4,657 16.8 Malaita 4,188 15.1 Makira 2,296 8.3 Choiseul 1,885 6.8 Isabel 1,283 4.6 Temotu 542 2.0 Total 27,701 100.0 Source: Commodities Export Marketing Authority 4.2 Product Range The coconut value chain is extremely complex due to the many products that can be derived from the coconut palm. From its roots, trunk, leaves, and the different components of its fruits (husk, shell and kernel, water and “apple”) to its apical bud (King’s salad) are used for medicinal purposes, housing, wood energy, furniture, handicrafts, other functional utilities and food. Table 4.2 lists the income- generating products in the domestic market and with special focus on exportable coconut products currently being traded. Table 4.2: Domestic and Internationally Traded Coconut Products in the Solomon Islands Item Domestic Market International Markets Roots and  House posts or stockades from senile palm  Coco-wood – potential for high class trunk trees furniture and veneer or interior decoration (stem) and artefacts Leaves and  Leaves- handicrafts (baskets, hats, mats,  Leaves- handicrafts exported to importers fronds fans etc) for sale to locals and visiting in the Pacific Region tourists  Leaf ribs- sold as brooms Fruit –  Immature drinking nuts market and street  Drinking nuts to NZ and Australia Whole nut stalls supermarkets  Mature dry- urban and village markets  De-husked dry nuts to NZ and Australia  Mature dry- sold to VCO DME operators  Mature dry- exchanged with trade-store consumer goods 12 Kernel  Dried for copra and sold to copra buyers for  Copra imported by overseas copra millers export for coconut oil and copra cake  Dried copra sold to local copra millers for  Local millers export Coconut Oil (CNO) coconut oil and copra cake for export or and copra cake (CNC) local livestock feed  VCO exported as organic product  VCO-DME operators used grated and dried  Packaged VCO exported as health food kernel from mature nuts to produce VCO to and cosmetic lotions export and meal as livestock feed.  VCO sold locally as health food and cosmetic lotions and soaps  CNO used locally as biofuel  CNO used to manufacture soaps and detergents  Kitchen produced coconut oil mixed with imported perfume or diffused with local natural scents and sold locally as hair or massage lotions Husks/Coir  Rotting husks sold as potting medium for nurseries of flower, forestry and oil palm  Fibre used to make ropes for traditional Polynesian and Micronesian houses Shell  Charcoal fuel-wood for local use in handicrafts 4.3 Value Chain Overview An overview of the Solomon Islands coconut value chain, depicting functions, export market channels and support services to the main stakeholders, is presented in Figure 4.1. Figure 4.1: Solomon Island Coconut Value Chain 13 International Overs eas dry a nd Overs eas copra Overs eas CNO Certi fi ed VCO dri nking nut mea l buyers buyers buyers buyers Overs eas copra mi l lers International Utilisation International copra , CNO & CNC buyers /brokers Domestic Market La rge l ocal copra Loca l VCO buyer- Copra exporters mi l lers exporter Sub-Sector Domestic ma rket/use of Sma ll l ocal copra VCO-DME byproducts: mi l lers opera tors Soa p Bi ofuel Body l otion Proces sors of Ma s sage oils Rura l copra buyers VCO hea lth food purcha sed dry nuts Cooki ng oil Li ghting Li ves tock feed Domestic Market Dry nuts Dry a nd dri nking Dri nking nuts Intermediaries nut buyers Grower-Processors (ma y a lso buy wet Coconut Growing Sub-Sector copra or nuts) Coconut Growers The various sub-sectors of the value chain are shown in different parts of Figure 4.1. Coconut Growers The growers who produce nuts process coconuts into copra in the lower part of Figure 4.1. Coconut and copra production uses few purchased inputs other than hand tools and sacks, so input suppliers are not shown as part of the system. The majority of growers are household units with 5-6 family members growing coconuts on customary land. There are also some communal or cooperative plantations, church-owned plantations and rural training centre farms. Large commercial plantations such as those owned by RIPEL are mostly inactive. Some smallholder households do not grow commercial quantities of coconuts but have 10-20 palms for their own food consumption and to feed their pigs. Others sell immature nuts for drinking, dry nuts to copra processors or trade stores, or may dry their own nuts into copra to sell to rural copra traders, copra mills or copra exporters. Increasing amounts of nuts are being sold to VCO operators but this still represents less than 1% of coconut production. 14 Market Intermediaries The middle parts of Figure 4.1 are the market intermediaries between the growers and the domestic and export markets. The most important are the rural copra traders who purchase copra from growers and forward it to the exporters, who are all based in Honiara. Transport of copra from the grower to the rural trader is generally by boat, but some is by road on some islands. The rural traders accumulate shipments for forwarding to the exporters in Noro and Honiara. There are three main copra exporters (SICEPL, Agribiz Ltd and SINSA/ALCOM) plus a few smaller operators who export irregularly. There are also dry and drinking nut buyers who supply the domestic and export markets and trade store owners who buy nuts and produce copra. Some of these also sell nuts to VCO producers who in turn sell VCO to exporters. Whilst the majority of the copra is exported, small amounts are processed into coconut oil and meal in small local mills or larger mills in Honiara. Most oil and meal produced in the local mills is used locally for soap making, fuel, livestock feed and cooking. These are general communal or family owned operations producing around 200 litres of oil per day. Oil produced in the larger mills in Honiara is exported or used for soap making and fuel. Oil mills are licensed by CEMA. There are two main Honiara-based copra millers, Solfish and Solomon Tropical Products, plus two smaller operators. VCO is a small but growing part of this sector. There are around 40 communal or family owned VCO units using the “direct micro expeller” (DME) technology. They are almost all linked to a nucleus operator (Kokonut Pacific) which provides the equipment and technical support and purchases the oil, most of which is certified organic. Most of the VCO is exported for use in cosmetics and skin-care products, massage oils etc. or as a cooking oil. The VCO units buy nuts from villagers, sort the nuts to identify those suitable for VCO and process the remainder into copra. Each VCO unit employs a team of 5-6 operators. Revenues per nut are much higher from VCO than copra and crude coconut oil manufacture. Domestic Utilisation The right hand part of Figure 4.1 shows the domestic utilisation of coconut products which includes mature nuts for cooking, green nuts for drinking, soap-making, biofuels, body lotions and massage oils, cooking, lighting, livestock feeds, and many other products. International Utilisation The upper part of Figure 4.1 shows the international parts of the value chain which includes international traders and brokers (mostly in Asia and Northern Europe), copra millers (mostly in the Philippines), buyers of coconut oils and meals, VCO buyers (mostly in the skin-care/cosmetics business) and buyers of dry and drinking nuts. It is common, throughout the coconut value chain, for actors to undertake multiple functions. Many growers dry their own copra, some are also village traders and some produce value added products such as VCO. The trade stores which buy copra also sell inputs such as bags, copra drying equipment and hand tools. Exporters and oil millers have their own networks of buyers and agents in the provinces, and may also provide land and sea transport services to move coconuts and copra. Number of Value Chain Actors The complexity of the coconut product value chain is also reflected in the number of actors at different levels, estimated as follows: 15 Coconut growers 40,000 rural households Rural copra traders Around 200 SME scale businesses Small copra millers 11 SMEs Large copra millers/exporters of oil and/or copra meal 4 medium sized businesses Copra exporters 5 medium/large businesses VCO operators 1 exporter and 40 DME units Coconut product manufacturers (soap etc) 3 medium sized businesses Coconut exporters (mature and drinking nuts) 1 medium sized businesses Many of the above enterprises operate as informal (not registered legal business entity) family enterprises. This includes virtually all of the growers and most of the rural traders. The traders fall into two categories:  agents that are strongly linked to the higher level actors (exporters, millers) and very dependent on the latter for commission and support, especially working capital; and  independent traders who sell competitively and opportunistically. Often they have their own working capital although limited. Most also operate other rural businesses (trade stores, fuel depots etc.). 4.4 Methodology The value chain analysis estimates of gross margins are based on costs and revenues accruing to smallholders, processors, traders and exporters of copra, based on the Solomon Islands coconut value chain depicted in Figure 4.1; and the gross margins are presented under three scenarios including a low price, medium price and high price scenario. Current (December 2013) prices are at the lower end of this range. The gross margin estimates are shown in Annex I and include the following costs and revenues from the harvesting, processing, trading and exporting of copra: Smallholder grower sale of copra to village copra buyers. Costs include labour for collecting nuts, cutting and drying copra and transporting it, usually by canoe, to the first point of sale. Unpaid family labour is valued at SBD 30 per day. The only cash costs are for purchase of second-hand jute sacks. About 5,000 to 6,000 nuts are required to produce one tonne of copra, and average yields are 200 – 300 kg of copra per hectare. Village copra buyers purchase copra from growers and sell it to inter-island traders. The costs incurred include transporting copra from the canoe to a storages shed, and later from the shed to a ship, plus the costs of holding stock for about a month while accumulating a shipping consignment. Inter-island copra traders buy copra from the village traders and transport it to Honiara, or in some cases Noro, for sale to exporters and/or millers. The main costs incurred are shipping and handling charges. In some cases the village buyers and also inter-island traders, and some exporters also engage in inter-island trade. Copra exporters purchase copra from the inter-island traders under contractual arrangements, or at informal auctions on the wharf at Honiara. They transport the copra by truck to their shed where it is sorted to remove defective material and transferred from sacks to bulk bins, and then back to the port for shipping, mostly to the Philippines or Europe. 16 At all stages in the value chain, up to the point of shipping copra is transported in jute sacks containing 70-100 kg of copra. According to CEMA and international standards, copra is supposed to be no more than 6.5% moisture at first point of sale, but in reality much is delivered at higher moisture content. As a result there is about 10% shrinkage between initial delivery and export due to moisture loss, spillage, pilferage and mould damage. 4.5 Results The revenues, costs and gross margins, under the today’s (low) price, medium price and high price scenario, are summarised in Table 4.2 and Figure 4.2 below: 17 Table 4.2: Prices, Revenues, Costs and Margins Price Scenario Low b/ Medium High FOB price (US$/t) 500 600 700 FOB price (SBD/t) 3,700 4,400 5,100 Sale Prices (SBD/kg) Grower 1.60 1.80 2.00 Village Trader 2.00 2.40 2.75 Inter-Island Trader 2.75 3.25 3.80 Exporter 3.70 4.40 5.10 Revenues, Costs and Margins per tonne copra produced Grower Revenue 1,600 1,800 2,000 Costs 1,260 1,260 1,260 Margin 340 540 740 Village Trader Revenue 1,900 2,280 2,613 Costs 1,658 1,963 2,068 Margin 242 317 544 Inter-Island Trader Revenue 2,613 3,088 3,610 Costs 2,373 2,753 3,085 Margin 240 335 525 Exporter Revenue 3,300 3,960 4,590 Costs 3,089 3,564 4,087 Margin 241 396 503 Total Margin 1,063 1,588 2,312 Total Margin/coconut 0.19 0.29 0.42 a/ Per ton of copra produced by grower b/ Current (December 2013) prices 18 Figure 4.2: Costs, Revenues and Gross Margins (SBD/ton of Copra) A. Low (December 2013) Price Scenario B. Medium Price Scenario US$ 500/t FOB US$600/t FOB 5,000 5,000 4,500 4,500 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 Grower Village Trader Inter-Island Trader Exporter Grower Village Trader Inter-Island Trader Exporter Revenue Costs Margin Revenue Costs Margin C. High Price Scenario US$700/t FOB 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Grower Village Trader Inter-Island Trader Exporter Revenue Costs Margin The value chain analysis for copra shows that at the low prices prevailing in December 2013 copra is a low-margin business for all of the value chain participants. Growers are only receiving around SBD 1.60/kg delivered to the village buyer, which is not sufficient to generate much interest in producing copra. This explains why copra production and exports are currently running at a very low level, and why some traders have suspended their operations due to lack of supply and slender margins. The total margin accruing to all value chain participants is currently around SBD 0.19 per coconut processed, which is far less than revenue from other uses such as sale of nuts in local markets or for use in VCO extraction. At the upper end of the price range the margin increases to around SBD 0.42 per nut, still less than the domestic market price or prices offered by VCO units (generally around SBD 0.50 per nut). However most growers, especially in remote areas, do not have alternative market outlets for their coconuts and copra remains the only available option. The analysis also shows that margins at all stages are very sensitive to changes in the FOB price of copra: an increase from the current FOB price of around US$500/tonne to US$ 700/tonne (a 40% increase) would more than double margins all along the value chain. This is because the costs incurred, apart from financing costs for working capital, are all independent of copra prices. The sensitivity to FOB price levels also explains the supply response pattern shown in Figure 3.7. Returns to labour are an important consideration. Whilst the returns are not as attractive as for cocoa production, copra production generates returns of SBD 40-50 per day depending on prices which compares reasonably well with the usual estimate of SBD 30 per day for the shadow price of rural labour. 19 Table 4.3 presents estimates of the total gross margins generated at each level in the value chain, based on 30,000 tonnes of copra exports. This suggests that the industry generates between SBD 30 million and SBD 70 million of net value addition, with about a third of this accruing to growers. However the grower’s share is spread amongst tens of thousands of households whereas there are far fewer traders and only three or four companies engaged as exporters. Table 4.3: Total Gross Margins in SBD million/Stakeholders a/ Low Medium High Growers 10.2 16.2 22.2 Village Traders 7.3 9.5 16.3 Inter-Island Traders 7.2 10.1 15.8 Exporters 7.2 11.9 15.1 Total 31.9 47.6 69.4 Based on exports of 30,000 tons of copra Overall the value chain analysis for copra confirms the importance of the sector as a generator of cash income in rural and remote areas, and generating revenues for traders and exporters. It explains the resilience of the sector in the face of adverse circumstances and its ability to survive natural disasters, social unrest and periods of very low prices. However it also demonstrates that the overall returns per coconut processed into copra are low, and confirms the validity of the two-pronged approach adopted in the CSS of improving the profitability of the copra value chain in combination with product and market diversification. 5. CHALLENGES This section provides an overview of key challenges in development of the Solomon Islands coconut sector. The coconut sector strategy identifies challenges and constraints among the different value chain actors: growers, traders and processors. There are also sector-wide issues related to the institutional and regulatory framework; the need for product and market diversification; access to finance; infrastructure and transport; improved value chain integration; and the long-term decline in coconut production. Grower Level Constraints The focus of growers is limited to copra production and they have very little understanding of alternative coconut products. There is a low level of awareness about improving copra quality and product diversification. Farmers also complain about lack of access to inputs such as drying nets, fuel drums and other equipment in remote areas, irregular shipping schedule, lack of cash advances from copra buyers, lack of information on prices and poor coordination of collection times. Low and variable copra prices, and lack of price incentives for quality, are also a major concern of growers and there is a good deal of distrust between growers and traders. The lack of price bonuses/discounts for high/low quality copra and the limited capacity of CEMA to monitor quality except at the point of export are major concerns which need to be addressed under any initiative to revitalize the sector. Trader Constraints The CSS identifies several main constraints facing the copra traders: transport infrastructure (roads, bridges, wharfs etc), irregular and expensive shipping services; and access to finance for investment and working capital. Traders complain about lack of affordable credit to source advance funds for purchasing copra or accumulating stocks. 20 Processor Constraints The main problems raised by the copra millers concern the quality of copra and the difficulty in competing with the copra exporters for supplies to process. The quality issue seems to be of less concern to the exporters. However the millers complain about the lack of grading and regulation of quality standards by CEMA which is aggravated by the lower quality standard accepted by exporters and overseas millers. The high cost of electricity is also a major concern to the copra millers and further impairs their ability to compete with the exporters for procurement of copra. Institutional and Regulatory Framework At all levels in the coconut value chain the institutional and regulatory framework governing the industry are weak – the Coconut Secretariat is not fully functional, and regulations governing quality control in the coconut value chain have been gazetted but are not being implemented. CEMA and MAL both suffer from serious capacity limitations in their ability to support development of the sector. PHAMA has supported the establishment of a Coconut Industry Working Group and is also supporting the Coconut Secretariat. However the nature of this support is confined to market access issues (in line with PHAMA’s mandate) and in any case will only last for the lifetime of PHAMA. In terms of the regulatory framework SIRDP has supported MAL wide capacity building although the practicalities of extension officers enforcing coconut and cocoa industry regulations specifically have not been elaborated in corporate plans. Shift to Higher Value Coconut Products Copra is a product with many positive characteristics and is highly suited to the Solomon Islands as a scattered archipelago, as shown by its long history and great resilience, including its ability to tolerate global warming and increasing frequency of climatic extremes. Copra will continue to be a vital foundation of the coconut sector under almost any future scenario, but its capacity to contribute to rural poverty reduction is limited. In many ways copra can be seen as a “poverty trap” rather than means of escaping poverty. Fortunately there are a number of alternative coconut products capable of generating additional value from the nation’s supply of coconuts, although most of them are not as well suited as copra to remote areas with poor transport and communications infrastructure. VCO is perhaps the best example of the several opportunities to diversify into higher value coconut products. The copra value chain analysis indicates that the coconut growers generate a margin of SBD 0.07-0.15 per nut processed into copra (assuming 5,000 nuts/ton of copra). As shown in the stakeholder profiles in Annex 2, coconut growers currently sell husked nuts to VCO processor for around SBD 0.50 per nut. In addition the VCO processor generates further value addition of around SBD 0.65 per nut. If a VCO processor uses his own nuts the total margin would be over SBD 1.00 per nut. Of course this requires and investment of around SBD 130,000 in a DME expeller unit, which many cannot afford, but the much higher margins earned are sufficient to pay this off in less than two years, and at the same time give the growers who supply the unit a much better return than they could get from copra. Access to finance is limited – there are no dedicated facilities to assist lending to the coconut industry especially to address the mainly operating cost constraints to exporters (i.e. for cash flow) and the mainly capital cost constraints to traders (e.g. for re/construction and maintenance of storage facilities) and processors (e.g. for re/construction and maintenance of copra mills or establishment of DME units for VCO). This has been addressed in the past albeit more incidentally than intentionally by SIRDP providing financial support through the SEF under the rural business development component which provided equity to match borrower equity and commercial bank loans; and 21 exporters are providing various amounts of financial support to traders and processors and in some instances even to smallholders. Infrastructure and transport is inadequate and expensive. Copra traders and exporters mostly have their own copra sheds, although some are storing copra in shipping containers that adversely affects quality. On arrival at Honiara port copra has to be moved to the exporters’ she ds in the industrial area, and then back to the port at the time of shipping. Value Chain Integration: There are few, if any, formal relationships between the various value chain actors, and public-private partnerships (PPPs) have not been developed. Concerns about copra quality can potentially be addressed by building stronger partnerships between exporters/millers and traders and between traders and growers. MAL and some exporters are providing independent ad hoc services to traders, processors and smallholders. SIG through the NDS provides general support to private sector led growth and specifically through the MAL Corporate Plan, which stresses the importance of engaging the private sector to deliver services to smallholders as well as traders and processors. Taking an example from the cocoa industry, the role of the private sector has been raised in the past especially by the Cocoa Livelihoods Improvement Programme (CLIP), which recommended that future interventions should include for instance facilitating exporters to provide more embedded services to traders and growers. Coconut Supply: Currently there are more coconuts produced than are used, and an estimated 100-150 million nuts are fed to pigs or not used at all. This is sufficient to produce some 20-30,000 tonnes of copra. Whilst there has not been an age census of coconuts since the mid-1980s it is known that there has not been very much re-planting since then, and since the tall varieties grown in the Solomon Islands reach peak production between about 15 and 30 years of age, it is generally agreed that production is declining, and at the same time, domestic consumption is increasing in line with growing population and incomes3. Depletion of fertility (principally potassium) and soil salinization due to sea level rise may also be contributing to declining productivity. Assuming a 2.0% per annum decline in production and 2.5% per annum population growth rate, the apparent surplus of coconuts could disappear within 10-15 years. Given the long gestation period of this crop this emphasises the importance of initiating a major coconut-replanting programme in the coming years. Within the coconut industry there is a preference for the use of local tall (as opposed to hybrid coconuts) as they tend to have higher oil content and are better suited to integrated multi-cropping systems instead of mono-cropping. This will ensure higher financial and social returns for the same piece of land farmed. 6. CONCLUSIONS AND RECOMMENDATIONS Coconuts and copra are the Solomon Islands’ longest standing commercial smallholder income generating activity and are also very important in food and nutrition security. The sector will no doubt survive with or without special development interventions. However, there is a risk that production and exports will decline unless there are definite steps to revive the sector. The sector also has the potential to make a significant contribution to the enhancement of rural livelihoods and rural poverty alleviation. SIG has made a strong commitment to the coconut sector through strategies and policies elaborated in the NDS and the MAL Corporate Plan as well as the CSS and the NCIDP. In addition the Development Partners increasingly recognise the importance of coconuts in improving rural incomes and reducing poverty levels. 3 This is a problem encountered in all the major coconut producing and consuming countries of the Asia-Pacific region. 22 Against this background, the design of the follow-up phase of SIRDP should consider a number of possible measures, which target the coconut sector, in parallel with interventions to stimulate development of the cocoa sector. The recommended approach therefore has seven key elements:  Improve the profitability of the copra value chain mainly through improvement of copra quality using a combination of regulatory measures, the strengthening of linkages between the commercial actors and the regulatory (CEMA) and technical support (MAL) agencies as well as measures to improve financial literacy and business management skills of value chain actors. Measures to improve quality must be accompanied by pricing protocols which reward/penalize growers and traders for good/bad quality and that these pricing signals are transmitted along the value chain. Any improvement in profitability will also stimulate production and increase export volumes.  Strengthen the institutional framework of the coconut sector, in particular to establish the Coconut Secretariat as an effective and sustainable sectoral agency which is able to coordinate efforts of all stakeholders to, including marshalling the financial and other resources needed to revitalize the sector.  Continuation of SIRDP-supported improvements in agricultural services to coconut (and cocoa) growers including supporting MAL and CEMA to implement the regulatory framework governing processing, trading and exporting of cocoa and coconut products and supporting MAL to implement an institutional shift towards leveraging industry-led agriculture services.  Improving the availability of financial services to value chain actors, especially the traders, processors and exporters, through continuation of the SEF and designing SEF guidelines that specifically target coconut (and cocoa) sector participants.  Establishment of a matching grant and technical support facility to support the development of stronger commercial partnerships between coconut growers and downstream value chain actors, modelled on the PNG Productive Partnerships in Agriculture Project (PPAP). Such partnerships would focus on supporting efforts in product diversification with a specific focus on higher value coconut products – VCO, biodiesel, coconut cream, export of fresh nuts etc.  Targeting key marketing infrastructure constraints including logistics as part of SIRDP’s efforts to develop local infrastructure that will facilitate efficiency.  Initiating a long-term coconut replanting programme, beginning with the selection of mother palms, and establishment or rehabilitation of coconut seed gardens. The best way(s) to stimulate re-planting, and the role of MAL and commercial partners in developing seed gardens and distributing seedlings will be assessed during the design of the SIRDP follow-on phase. The above recommendations will be considered in the design of agriculture sector interventions within the follow-on SIRDP scheduled to be launched in 2015. Some activities could commence in 2014 especially as these are within the scope of the SIG policies and strategies and do not require significant additional resources other than those already committed. Examples include the regulatory measures to improve copra quality, strengthening of the intuitional framework (with support from PHAMA), and continuing support for improvement of MAL services to growers. The other elements recommended above will be built into the design of agriculture sector interventions within the follow- on phase of SIRDP and commence in early 2015. 23 24 ANNEX I: VALUE CHAIN ANALYSIS FOR COPRA December 2013 (low) Price Scenario Table 1: Copra Production: Revenue, Costs and Gross Margins Unit: One tonne of Copra produced SBD/ Notes Unit Unit No Units SBD Revenue Sale of copra to village trader a kg 1.60 1,000 1,600 Total 1,600 Labour costs b Nut collection Person days 30 10 300 Cutting Person days 30 8 240 Drying Person days 30 3 90 Sorting Person days 30 1 30 Ramming Person days 30 1 30 Firewood cutting Person days 30 1 30 Transport of firewood Person days 30 5 150 Person days 30 6 180 Drier maintenance Person days 30 1 30 Transport to village buyer Person days 30 1 30 Total labour costs 37 1,110 Other costs Jute sacks c Sack 10 15 150 Total other costs 150 Total costs 1,260 Gross margin 340 Gross margin per labour day 39.19 a. Yield 200-300 kg/ha of copra, moisture content approx 6% b. Surce: DBSI crop budgets 1995 c Second-hand sacks, 15 per ton, SBD 10 per sack 1 Table 2: Village Copra Buyer: Revenue, Costs and Gross Margins Unit: One tonne of Copra produced SBD/ Notes Unit Unit No Units SBD Revenue Sale of copra to inter-island trader a kg 2.00 950 1,900 Total 1,900 Labour costs Transfer copra from canoe to shed Per bag 1.00 15 15 Loading from shed to ship Per bag 1.00 15 15 Total labour costs 30 Other costs Working capital b kg 0.0292 950 28 Purchase of copra kg 1.60 1,000 1,600 Total other costs 1,628 Total costs 1,658 Gross margin per tonne 242 a Allowance for 5% shrinkage due to loss of moisture, mould damage etc b Cost of stock-holding: one month @ 17.5% Table 3: Inter-Island Copra Trader: Revenue, Costs and Gross Margins Unit: One tonne of Copra produced SBD/ Notes Unit Unit No Units SBD Revenue Sale of copra to Honiara exporter a kg 2.75 950 2,613 Total 2,613 Labour costs Unloading bags at Honiara wharf Per bag 1.50 15 23 Total labour costs 15 23 Other costs Shipping cost b bag 30 15 450 Purchase of copra kg 2.00 950 1,900 Total other costs 2,350 Total costs 2,373 Gross margin per tonne 240 a Sale on wharf at Honiara Port b Cost of shipping to Honiara SBD 20-50 per bag 2 Table 4: Copra Exporter: Revenue, Costs and Gross Margins Unit: One tonne of Copra produced SBD/ Notes Unit Unit No Units SBD Revenue Sale of copra FOB Honiara a kg 3.70 900 3,330 Total 3,330 Labour costs Load bags onto truck at wharf Per bag 1.50 15 23 Unload and empty bags at shed Per bag 2.00 15 30 Total labour costs 53 Other costs Truck hire, wharf to shed b bag 8.89 15 133 Truck hier, shed to wharf tonne 160.00 0.90 144 Port Authority charges c bin 275.00 0.36 99 CEMA inspection d tonne 50.00 0.90 45 Phytosanitary certificate e tonne 3 0.90 3 - Purchase of copra kg 2.75 950 2,613 Total other costs 3,037 Total costs 3,089 Gross margin per tonne 241 a After further 5% shrinkage due to spillage, pilferage, mould damage and moisture loss b Truck costs SBD 400 to transport 3 tonnes (45 bags) c SIPA charges for hire of bulk (2.5 tonne) bins, port charges and loading costs e Costs SBD 150/consignment: assumes 50 tonnes per consignment 3 ANNEX 2: COCONUT INDUSTRY STAKEHOLDERS PROFILES Overview The coconut industry in Solomon Islands involves many players at the production, trading (domestic and international), value-adding players as well as manufacturers of coconut products for domestic and export markets. The key stakeholders may be categorised into the following groups although in practice individual players may be involved more than one part of the value chain.  Coconut growers  Rural and urban traders of mature nuts and drinking nuts  Mature nuts and drinking nuts traders and exporters  Traders and exporters of copra  Millers of copra and exporters of coconut oil (CNO) and copra cake  Manufacturers of secondary and tertiary coconut products for domestic and international markets  Producers and marketers of virgin coconut oil (VCO) and by-products There are five licensed coconut exporters, four medium-sized copra crushers and ten smaller sized mills as well as one organic VCO marketer with at least 30 VCO producers using Direct Micro Expeller (DME) technology. There are many more coconut trading enterprises involved in processing and drying copra linking with the exporters. Selected players are profiled below to show their diversity and the different approaches and innovations that they use. Copra Exporter 1 This company was the first to enter the copra exporting market in 2003 after CEMA relinquished its monopoly over marketing of copra in 2002. It is a subsidiary of an international commodities broker. It took over the CEMA export facilities at Honiara and Noro as well and more recently, the buying centre at Choiseul Bay, Choiseul Province. It operates in a similar way to CEMA – posting staff to Noro and Choiseul Bay, advancing pre-finance to its agents throughout the country; and operates a 500 ton ship that collects copra from its agents, branches and even purchased from nearby Bougainville, PNG. The copra is exported to its parent company’s mill at Vanuatu or to the Asian markets. From its initial 4,782 tons in 2003, the company has grown - averaging 10,924 tons annually or 39% share of the market for the last nine years. This had brought an annual average more than SBD 36.5 million cash to rural coconut growers. Using its ship, it was able to provide services to many of the islands and regions not served by other exporters. However, it also had to revised its mode of operations the last couple of years when its contracted shipping operation proved fraudulent, agents defaulting on their advances, more competition from other exporters, and growers reluctant produce copra because of the lower prices. Apart from establishing an extensive trading network in the high copra growing regions, the company is spending time and resources in cementing the loyalty of grower-clients as well as its own agents by offering competitive prices and ensuring secure markets. The company provides the following services to its clients and agents: (i) advances of working capital; (ii) drier-part materials such as drums, nettings and chimneys; (iii) copra sacks; (iv) subsidised freight – charging SBD 30.00 per bag for copra at point of purchase anywhere in the country; and (v) higher prices for larger consignments. Copra Exporter 2 1 This company is a family company licensed as a cocoa trader in 2002 and copra exporter in 2004. The company was the first fully locally-owned company that ventured into copra exporting after CEMA discontinued its commercial operations. The company established a financing arrangement with a Singaporean commodities trader to provide advances for copra buying. The company is based in Honiara but also had a branch at Gizo. Later the Gizo branch was closed and moved to Noro export port. Management includes the owner who has qualifications and experience in exporting from his previous employment with the Quarantine Services of MAL and several years with CEMA. Most of its trade for copra is in Western and Choiseul Provinces but the company is also very active in Russell Islands (Central Province) and at the Honiara wharf – offering competitive prices to traders from other provinces. The company usually charters ships on a monthly basis to collect copra from its agents and bring to Honiara or Noro. These charters are also used to collect sawn timber for the company’s sawn-timber exporting business. Its first copra export was 3,661 tons in 2004. Since then it had exported on an average 7,591 tons (annually for the nine years to 2012) and became the second largest exporter. In 2011, it was the top copra exporter. During 2004-2012 it brought in over SBD 234 million (27%) of the cash flowing into the rural economy from copra. In fact as a relatively small family company, it had provided many services to the rural people, not only copra but also purchase and export of 3,025 tons of cocoa as well as sawn timber. Like other copra exporters, the company offers incentives to its agents and key grower clients to ensure loyalty, including; (i) subsidised freight; (ii) copra sack replacement; (iii) copra drier parts; (iv) working capital; (v) other personal assistance where ever appropriate; and (vi) providing “breakfast of tea and biscuits” to early morning sellers to its Honiara office. Copra Exporter 3 This company is a partnership of an expatriate and two nationals. It started as an agricultural management company but obtained a copra export licence in 2004. It is managed by the expatriate partner and based in Honiara. This is basically a one-man operation with the manager and labourers. It buys copra from all provinces and depends on reliability of payment of competitive prices as way to hold its suppliers. Advances are restricted to proven loyal agents. It also provides incentives to sellers by offering subsidised freight, sack replacement and competitive prices for high volume batches. It sells its copra to at least two commodities brokers. It exported 6,611 tons in 2004. Since then it had exported 57,510 tons averaging 6,390 tons (annually to 2012 valuing SBD 19.6 million. For the last nine years to 2012, it had maintained its share of the market as the third highest copra exporter (23% of volume). Its main strength is being consistent in providing reliable services including prompt cash payment of copra supplied by growers and traders. However, as more millers are entering the market, the company is facing more challenges but plans to continue being innovative and efficient in order to survive. Copra Miller 1 This company is a foreign investor that began operating in the coconut industry about a decade ago. It started by using the Tinytech technology from India that was able to mill at least 200 litres of CNO on a daily basis. In the beginning this technology was used as cold-press to extract higher quality coconut oil for special markets or to manufacture higher quality products. It also operated a shipping service around Guadalcanal, Savo Island and Russell Islands to ensure its supply of copra. It also tried to enter the organic market for its coconut oil. Unfortunately, this venture did not take off as the cost for certification was expensive. Later it took-over a medium sized mill with a capacity of 200 tons of CNO per year. It continued to export its oil while investing further into using coconut oil as blended diesel fuel. 2 The company continues to venture into other coconut related enterprises including soap and cosmetic products. While the cosmetic products are meeting a lot of competition from cheap imported products from Asia, the company is targeting special and loyal clients for its cosmetic products. The company is continuing to export small amounts of CNO and coconut meal. It has received assistance through the PHAMA program and get certification for its copra meal to access markets in Australia. More recently, the company is providing technical and marketing support to small rural coconut oil millers (using the Tinytech technology) that are promoted by the EU RAMP Project. It orders the machines, assembles them, and provides training for the operators. The partnership also includes buying the oil and copra cake from these rural millers. The company is also promoting and testing special generators to be fuelled by filtered coconut oil, suitable for villages to produce electricity. Like other copra millers in the country, the company has to manage the many challenges that affect the viability of its business including: (i) price volatility for copra, CNO and fossil fuels; (ii) low consistency and reliability of high quality copra; (iii) low quality copra produced that targeted the copra milling markets in Asia; (iv) strong competition from cheaper cosmetic products; (v) high cost of utilities; and (vi) high international and domestic freight costs. Copra Miller 2 This company is a subsidiary of a one of the main hardware importing and construction companies. Its interest in agriculture sector started about a decade ago with the coconut industry. It also has interest in exporting cocoa. For the coconut industry, it invested in a fleet of three ships and a large- scale copra mill. It also has plans to grow a 100 hectares of its own coconut and produce VCO as well as exporting drinking nuts and dry nuts. It had been licensed to export copra by CEMA. With its three ships, the company operates as a “beach trader” to the far-west (Vella, Shortlands and even Bougainville), Makira and Russell Islands - buying copra, cocoa and other commodities while selling consumer goods and hardware including copra driers. The copra mill started production in 2012, operating four days a week mainly because of low throughput. It exported 172 tons of coconut oil in 2012 and 6 tons in 2013, all going to Taiwan. The company is still at its early stage of developing the coconut industry and the agriculture sector at all levels of the value chain. It is robust and has invested much in production, processing, manufacturing of products for local and export markets. Future plans include bio-energy production using coconut oil. While it has not yet produced or exported any bio-fuel, it has undertaken research for bio-diesel using coconut oil and developing other edible coconut products such as desiccated coconut, coconut cream, yogurt, VCO and cooking oil. Its core activities are producing oil to manufacture soap and other cosmetic products for the local market. The other activity is to facilitate the procurement of Tinytech machines for rural small millers under the EU funded RAMP Program. In association with this programme, it also provides instalment of the machines, training for the operators and purchase of the oil. This project started in 2013 and many of the machines have just arrived. The company does not plan to venture into large-scale industrial coconut oil production because it does not have the capacity to be competitive with the Asian producers. Its sees the developing of higher-value products for domestic and even regional markets as the priority. VCO Marketer 1 There is one company engaged in coordinating the production and marketing of VCO. It has supplied about 40 DME units to widely scattered individuals and community groups, of which about 30 are operating satisfactorily. The ten which are not operating or partially operating are mostly affected by 3 other income generating opportunities in the areas (e.g. logging) or ill health, family disputes etc. The company partly finances the new DME units, provides all the technical support and training for the operators, and buys the oil for a fixed price of SBD 24 per litre for first grade oil regardless of location. Lower quality oil is purchased at a discounted price and sold in the local market. All of the first grade oil, about 100 tons per annum, is marketed internationally as certified organic VCO and is mainly used for cosmetics and skin-care products such as moisturizers, lotions, massage oils and soaps. Some is also used as edible oil. Global demand for VCO is strong and growing. The current world market is around 10,000 tonnes per annum, with the Pacific Islands supplying less than 3% of this. VCO is a product that is well suited to the Solomon Islands on the following basis:  It utilises a raw material (mature coconuts), which is in abundant supply and would otherwise go to waste.  It produces a high value and non-perishable product, which can be easily stored and transported.  It is well suited to small-scale decentralized production in clusters of small-scale units.  It is well suited to Solomon Islands lifestyle and culture whereby production can be scheduled around social and family obligations.  Significant price premiums are available for certified fair trade and organic product.  There are no significant phytosanitary trade barriers.  VCO can be used locally as an edible oil as a substitute for imported vegetable oils.  It produces a byproduct (meal) which is a valuable pig and poultry feed There are a number of technologies available for production of VCO. The preferred technology in the Solomon Islands is the direct micro-expeller (DME) method which involves the following steps: (i) collection of mature coconuts from the field; (ii) husking the nuts; (iii) sorting into those suitable for DME processing and those suitable for copra; (iv) grating to remove the flesh; (v) roasting to reduce moisture content; and (vi) pressing to extract the oil. Each DME unit costs about SBD 130,000 to establish and is capable of producing around 40 kg of VCO per day. There are estimated to be around 100-150 million un-used coconuts in the Solomon Islands, which at the rate of 15 nuts per kg of VCO, represents potential production of over 7,000-10,000 tonnes. This suggests that this business has the potential to scale-up over time, provided there is a means of financing the establishment of additional DME units. The investment required for a single small-scale DME unit is around SBD 130,000 (US$ 18,000) covering the cost of processing equipment, a generator, shed, installation and working capital. One individual DME operators has also scaled up to five DME units operated on a contract basis by paying teams per liter of oil produced with premiums and discounts for quality. As shown in Table 1 below, the margins earned by a DME operator are attractive, and sufficient to return the SBD 130,000 investment in less than two years. The returns per coconut processed and per labour day are much higher than can be earned from copra production. Also the DME units buy coconuts from growers at prices well above the amount they could earn from producing copra. 4 Table 1: Gross Margin for Virgin Coconut Oil Unit: One DME unit for one year Gross Income Unit SBD/Unit No Units ST VCO - first grade a/ kg 24.00 6,000 144,000 VCO - second grade a/ kg 18.00 2,000 36,000 Coconut cake (for livestock feed) kg 2.50 8,400 21,000 Total Gross Income per DME Unit 201,000 Variable Costs Purchase coconuts (16 nuts/kg oil) nuts 128,000 0.50 64,000 Labour (SBD 5.00/kg of oil produced) b/ per kg 5.00 8,000 40,000 Repairs and maintenance c/ Lumpsum 6,500 Fuel for generator (60 L/tonne VCO) L 14.00 480.0 6,720 Total Variable Costs per DME Unit 117,220 Total Gross Margin per DME Unit 83,780 Gross Margin per Coconut Processed 0.65 Gross Margin per Labour Day 124 a/ 200 days/year x 40kg/day = 8 tonnes per annum b/ Team of five paid SBD 5.00/kg of oil produced c/ 5% of buildings and equipment cost per annum The business model is a “hub and spoke” system with a central collection, processing and ex porting unit supporting some 40 village-based DME units operated by individuals or family businesses. The central unit supplies the equipment, trains the operators and collects the oil for final processing (filtering) and exporting in 200 liter drums. VCO is a relatively low risk investment opportunity. Production technologies are well developed and quite simple, the supply or raw material is assured, and the market is large relative to the Solomon Islands capacity to supply, and is expanding. It is possible however, that VCO prices may converge with crude coconut oil prices over time due to increasing production of VCO in the large coconut producing countries such as the Philippines, Indonesia and Sri Lanka. Coconut Exporter 1 There is currently one business exporting mature fresh coconuts (also known as “dry nuts” and “brown nuts”) from the Solomon Islands to Australia and New Zealand and several other companies interested in doing so. The nuts are purchased from growers, transported to Honiara, graded and packed into sacks and shipped in refrigerated containers. A study by PHAMA4 in February 2013 noted that:  Coconuts are approved for export from all PICs to Australia provided the husk is removed and the shipment is fumigated.  Demand for dry nuts in Australia is modest but has increased significantly in recent years.  There is almost no competition from domestic suppliers in Australia.  Other countries exporting coconuts to Australia include Thailand, Samoa and Tonga  The Australian market for fresh drinking nuts is small but developing rapidly. 4 PHAMA (2013) Feasibility Study on Developing Exports of Selected Commodities from Solomon Islands to Australia 5  Retail prices are high – around AUD 2.50 per dry nut and AUD 2.80 for drinking nuts (SBD 16.50 and 18.50 respectively).  Wholesale prices are around AUD 24 – 29 per bag of 20-22 nuts (equivalent to SBD 8 – 9 per nut).  Supermarkets are keen to increase turnover of coconuts but require full traceability and HACCP certification. The PHAMA study noted that Australian imports of coconuts increased from 1,700 tonnes in 2001 to almost 4,300 tonnes in 2010, a compound annual growth rate of 11%. Between 2007 and 2010 the volume imported increased by 85%. Most of these imports were fresh mature nuts. On the basis of wholesale market turnover it was estimated that the total Australian market for coconuts is currently around 5,000 to 5,500 tonnes and continuing to grow. Prices have also increased significantly – from around USD 290/tonne in 2001 to USD 516/tonne CIF in 2010. Thailand is the largest supplier with Samoa and Tonga being the main sources within the PICs. The PHAMA study concluded that: (i) there is potential for expansion of coconut exports and diversification into fresh drinking nuts; (ii) the logistics of collecting coconuts on the outer islands and transporting them to Honiara to assemble export shipments impose significant costs; (iii) however the marketing margins are adequate to cover these costs; and (iv) coconuts are an established export with high priority for expansion and diversification. 6