Export Strategy of Cocoa Products from India to EU - Term Paper Example

MANAGING INTERNATIONAL TRADE: BOARD PAPER

Reference Paper

Date of Paper: Export Strategy of Cocoa products from India to EU (UK and Switzerland)

For End of Module Assessment

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“Brief Synopsis of the Issue”

UK has imported £ 162 mn cocoa products in the year 2015. (www.tradingeconomics.com 2016). Cocoa and Cocoa butter are mainly used in the preparation of chocolates, soft drinks, alcohols, Jam and in food products.

Figure 1- UKs Import figures for Cocoa products.

British consumers have a long and distinguished history with the chocolates. Chocolate products in the UK should have at least 20% cocoa solids as against just 10% in the USA, and this is a mandatory requirement. For instance, Cadbury Dairy Milk in the UK has 23% cocoa solids. However, some EU based manufacturers make chocolates with about 40% cocoa solids (BBC.Com 2009).

In Europe, UK is the 7th largest importer of cocoa products and about 99% of cocoa products to the UK is being supplied by two African nations namely Ghana and Ivory Coast. Famous chocolate manufacturing companies in the UK such as Nestle, Cadbury and Mars relies more on imported cocoa products. Nonetheless, in the UK, there is also a comparatively quick and large market especially for Fairtrade and organic certified cocoa products and fine flower products. Direct trade is the most convenient trade route with small traders, particularly coffee houses, chocolate stores, bakeries and chocolatiers (www.cbi.eu.com 2015).

The following table shows that India exported about 23725 metric tonnes of cocoa products in 2015-2016 to various countries except EU nations. Hence, it is recommended that India should give more focus to export cocoa products to Europe especially to UK and Switzerland as there is a large demand for cocoa products.

Figure 2- Total Quantity of Cocoa Products Exported from India during 2015-2016

S.No

Country

Qty- In Metric Tonnes

1

U S A

6,185.51

2

Singapore

5,889.14

3

U Arab Emts

1,736.46

4

Korea Rp

1,757.34

5

China P Rp

1,559.52

6

Saudi Arab

1,641.90

7

Netherland

1,785.85

8

Hong Kong

723.94

9

Nepal

1,857.66

10

Taiwan

Top of Form

587.73

Bottom of Form

Total MT

23,725.05

Source:http://agriexchange.apeda.gov.in/product_profile/exp_f_india.aspx?categorycode=0504

The following graph shows the country wise export of cocoa products by India in 2015-2016. It is heartening note that in that list, EU is not appearing. As the UK is importing its 99% of the cocoa products from just two African nations, India should penetrate into UK market by offering quality cocoa products at a competitive price. Hence, it is strongly recommended that Hindustan Cocoa Exports Limited should export their cocoa products to UK and Switzerland by employing the direct strategy.

Figure 3- Exports from India to Top 10 Countries in Cocoa Products

Source:http://agriexchange.apeda.gov.in/product_profile/exp_f_india.aspx?categorycode=0504

Recommendation(s)

It is strongly recommended that Hindustan Cocoa Exports Limited to export their cocoa products from India to the UK directly. Cocoa beans are directly sourced from Indian cocoa farmers by multination processors/grinders. For instance, Cargill and Callebaut have established their branch office in cocoa producing nations to source directly from farmers or wholesalers. It is to be noted that Hindustan Cocoa Exports Limited by exporting directly its cocoa products will offer the company to take control of all processes. All documentation works for the export can be handed over to a freight forwarding company who will take care of all the export documentation works.

Background

Ricardo’s comparative advantage theory can be applied as the fundamental foundation for exporting cocoa beans from India. This theory deals with that India is one of the most aggressive producers of cocoa beans competing with the major cocoa producers such as Ghana and Ivory Coast. This is supported by the establishment of the largest cocoa processing centre in India by Cadbury’s Mondelez in April 2016. The farmers from South Indian states such as Tamilnadu, Andhra Pradesh, Kerala and Karnataka are now cultivating cocoa as a substitute crop with oil palm, areca and coconut palm. Further, the surging cocoa bean’s price in the international market is further encouraging cocoa production in India (Manorama online.com 2016).

In Market Access and Border Administration, in the Enabling Trade Index of 2014 of World Economic Forum, India has a rank of 136 thereby scoring 2.4 out of seven scores, 3.8 scores in infrastructure and 4.1 scores in operating environment index (www3.weforum.org 2015).

India and EU are attempting to enter into free trade agreement (FTA) since 2007. Nonetheless, even after 13 rounds of talks, FTA is yet to be signed, and it is essential to sign FTA at the earliest as it would remove trade barriers and eliminate customs and VATs. Some critics are of the view that it is in the interest of India to sign the FTA with the EU as it would mitigate some of the export losses that may be witnessed due to trade diversion by EU to other nations. To increase the export of cocoa products to EU, the Indian government should encourage Indian farmers to cultivate cocoa on a large scale and should provide all fiscal assistance in this regard. Since India is already a member of WTO and also an active member of ASEAN, FTA with the EU will open up their market in EU and will minimise trade obstacles.

In EU, UK is the 7th largest importer of cocoa beans with a market share of 3.5%. In 2014, UK imported in excess of 60,000 tonnes at a value in excess of €134 mn. Further, UK has imported highest quantity of chocolates among all the five cocoa product groups, which has soared to the quantity of in excess of 390,000 tonnes in 2014.

The aggregate quantum of imports of cocoa beans to the UK declined on mean by eighteen percent per annum between 2010 and 2014. However, the cocoa powder import soared by nineteen percent over the same period and imports of chocolates by the UK soared by 6.9%. Further, cocoa is being exported by the UK to other nations in the EU as demonstrated by the following figures.

Figure 4- Volume of Imported Cocoa Beans to the United Kingdom 2010-2014 (thousands tonnes)

(Cbi.eu 2016:5)

The saddest part is that even though India has exported about 23,725 metric tonnes of cocoa products in 2015-2016 to various countries and an even single tonne of cocoa bean never has been exported to EU or UK by India as on date.

EU is dedicated to multilateralism and has assured to open its markets around the globe by lessening tariff rates offering EUs market access initiative that was introduced in 1996. Further, there is double taxation avoidance agreement (DTAA) between UK and India, and there is no levy of excise duties or VAT inflicted on Cocoa beans in the UK.

About 99% of UK’s imports of cocoa beans are being supplied by Ghana (42%) and Ivory Coast (57%). Belgium and Peru are the next biggest suppliers as they take care of remaining 1% of imports of UK. (“ITC Trademap 2015”).

The cocoa farming was first introduced in India as early as 1965 by Cadbury, which is now part of the Mondelez International Group, which buys the majority of the cocoa beans produced by the Indian farmers. As per Mondelez India, about 33% of its cocoa needs are sourced from India.

Swiss chocolate manufacturer Stella Bernrain is much interested in Indian cocoa beans, and it is investing greatly in the cocoa processing know-how in India. Even though Swiss chocolate manufacturer Stella Bernrain has opened their doors for Indian cocoa farmers, fluctuation in domestic prices and volatile weather conditions make the cocoa a risky crop for small farmers in India (Chandrasekhar 2014).

Figure 5- Stella Bernrains “India Noir 72 %”(

Chandrasekhar 2014).

Single-origin chocolate is one the Stella Bernrains most exclusive products and these chocolates are manufactured from cocoa beans farmed from a particular country. The latest nation to join the Swiss Chocolate manufacturer is India with a completely Indian dark chocolate bar named “India Noir 72 %”( Chandrasekhar 2014).

“Research on the Assessment”

In the cocoa supply chain, UK chocolate producers and chocolate consumers increasingly need transparency. UK consumers want to be aware where the chocolate originates from, the real stories behind the cocoa beans (whether there is any child labour abuse during the cultivation), who earns especially in the long supply chain. With the improved traceability, transparency originates which is more flexible to manage in direct trade relations and which is more flexible to manage in certified supply chains (“Cbi.eu 2016:7”).

In the UK, in 2013, the quantum of cocoa products with socially sustainable labels soared by 120%. In 2013, the Fairtrade sales of cocoa soared by fifty-two percent to attain a value of € 1,162,000. Even though the UK has not fixed any deadline for 100% sustainable cocoa products, this trend is anticipated to keep soaring fastly in the coming years. It is to be noted that the Netherlands has set a deadline by 2025 to procure only certified sustainable cocoa by 2025. Hindustan Cocoa Exports Limited should take into account that there is a good scope for cocoa exports to the UK and other nations in EU, should indulge in making more farmers to cultivate sustainable cocoa beans in the near future. For that, they may assist the farmers by supplying quality seeds, subsidised fertilisers and assist them in raising the cocoa beans in a sustainable manner in India.

Hindustan Cocoa Exports Limited can manage its own nurseries to supply cocoa saplings to the farmers and also can impart training to farmers about cocoa cultivation. It should also enter tie-up with the agricultural universities to do research in cocoa cultivation. Internationally, about 30% to 40% of cocoa production is lost due to pesticides and blight. About, 35% of the cocoa trees are more than 33 years old thereby further impacting the yield (Manoramaonline.com 2016).

It is to be noted that Hindustan Cocoa Exports Limited should adhere to the legal needs as demanded by the EU as regards to food contaminants, food safety and labelling and there are no other further legal needs applicable for exports of cocoa products to the UK.

The Exporting documents are needed for the Export of Cocoa to EU and UK

• “Pro Forma Invoice “
• Commercial Invoice
• Letter of Credit issued by the Importer banker
• Export Declaration by Shippers (PEB)
• Packing List
• “Bill of Lading”
• Certificate of Origin (Westwood 2012:104).

For importing of cocoa by EU, the CAL (Cocoa Association of London Ltd) contract is employed with the exporter. The exporter has to use CN (Combined Nomenclature) which is used by EU for cocoa powder with 0% to 5% sucrose, and it has to be mentioned as 18061015. The exporter of cocoa beans either broken or whole, roasted or raw has to mention the HS code in the invoices and other documents as 1801 (Westwood 2012:104).

By employing direct strategy, the exporter can directly supply to the importer in EU. By making a Pro Forma invoice, an importer from India can demonstrate that a negotiation of terms and conditions have been already completed with the importer in EU. The invoice for the products exported is detailed in the commercial invoice. Exporter’s Export Declaration will be signed by the exporter, the banker and the customs officials.

The Letter of Credit issued by the importer through his banker in EU will act as a guarantee that money will be paid to the exporter once the cocoa consignment is received and acknowledged by the importer in EU (Westwood 2012:105).

“Arguments against the Recommendation(s)”

Exporting of cocoa is not without risks, and there are risks such as price volatility, physical loss during transport, quality deterioration and not fulfilling the export contract obligations. Other risks include infested or contaminated, spoilage and loss due to accident or fire. An exporter can avoid such risks by taking insurance policies and offering products on CIF basis (cost, insurance and freight) Westwood 2012:108).

There is a risk of loss due to foreign exchange rate fluctuations. This can be avoided by taking forward and future contract.

Arguments in support of the Recommendation(s)

For exporting cocoa to EU, an Indian exporter does not need any license as the product falls under open general license. (OGL). All that he is a need to do is that he has to obtain an importer -exporter code (IEC Code) from the government of India, and he can start exporting.

Hindustan Cocoa Exports Limited should concentrate more on exporting to EU as it is the biggest importer of cocoa beans in the world and it is supported by the Netherlands, which is having larger processing industry that could fulfil the higher level of demand of EU for cocoa powder and cocoa butter.

“Implementation of Recommendations”

• The exporter, Hindustan Cocoa Exports Limited (HCEL) has to make an agreement with the importer in EU.
• HCEL has to issue both Pro Forma Invoice and Commercial Invoice to the importer in EU.
• The importer from EU will issue a letter of credit to the HCEL through its banker
• After the receipt of LC from the importer, HCEL will forward the cocoa beans consignments to the importer through its nearest Indian ports.
• HCEL will draft the Shipper’s Export Declaration (PEB) and forward it to the custom house through its freight forwarders together with the packing list.
• The consignment will be quarantined so to get the Phytosanitary Certificate.
• Then, cocoa bean consignment will be forwarded through the containers to the importer in EU.
• Bill of Lading will be issued by the shipping company
• Bill of lading, packing list, PEB will be sent to importer’s bank in EU through the exporter’s bank in India and the payment will be claimed by the Indian banker on behalf of the exporter from the importer’s bank in EU once the product is received and approved by the importer in EU.

“Signature and Date;”