I also wish to thank the management of African Plantations Company Ltd, Zambia Coffee Growers Association (ZCGA) and I&M Smith (Pty) Ltd for allowing me access to their coffee industry information banks. Indeed, the coffee crisis has been "simmering" for some time, but has recently percolated as the reality of far-reaching structural changes in global coffee production and marketing is recognized. While there are strategies the coffee industry could adopt to improve the current situation, they are unlikely to lead to a rapid recovery in global prices or farm profitability.
The paper concludes that the debt within the financial structures of industry actors is the result of the crisis and the solution of the coffee crisis strategies focused on increasing and stabilizing the income of coffee producers is the ultimate goal and not the increase of production statistics.
INTRODUCTION
It is also quite clear that specializing in a highly profitable activity might make economic sense, while diversifying into low-profitable activities (such as corn, wheat, etc.) is not such a good choice. This research deals with the analysis of the coffee crisis in Zambia with a particular focus on the African Plantations Company Ltd which is currently the largest player in the industry. In the first chapter of the study, the statement of the problem and also the limitations of the study were given.
BACKGROUND OF THE STUDY
At the same time, there are growing consumer markets for gourmet and other specialty coffees (gourmet, fair trade, organic, environmentally friendly, etc.), which demand a significant price premium. v) The impact of the coffee crisis on the macro economy. On average, over a quarter of the rural workforce is employed in the coffee sector. In contrast, larger farmers, although a small percentage of total farmers, account for the majority of production. viii) The impact of the coffee crisis on the environment.
The rest is owned by large-scale farmers who are currently the mainstay of the industry.
MOTIVATION FOR THE RESEARCH
Private property was being expropriated in Zimbabwe, and the shockwaves spread to Zambia, where history could become reality and repeat itself. They could not have increased their return to cover the perceived risk because the operation, in addition to being new, was facing two evils, the low price of coffee and the very scary debt in an unprofitable business. If it is the price of coffee, then the company has not had adequate strategies for the downside of industry cycles.
The IFC blocked any new loans that violated debt-to-equity conditions, and the company could not raise new loans.
VALUE OF THE PROJECT
This is a case of corporate failure and my research is motivated by finding out exactly what caused this problem at APC.
PROBLEM STATEMENT
The aim of this research is to discover the impact of commodity prices on African plantations and measure the financial risk in the Zambian coffee industry. What caused financial problems for African Plantations Company in 2001 was due to high debt burden or coffee prices.
OBJECTIVES OF THE STUDY
RESEARCH METHODOLOGY (i) Sampling design
I supplemented my knowledge of the company by interviewing industry experts, CEG, the company's property managers and the Zambian Coffee Growers Association (CEO) and the largest client (I & M Smith Pty Ltd). The official authorization to use the company's records for study purposes was given by the president of the board. From the ICO publications, we extracted a list of coffee prices on the world market since 1996 and analyzed its impact on the company's performance.
The company's financial statements and other information will be used to determine the debt-to-equity ratio and the ultimate financial distress risk can be determined.
LIMITATIONS
In order to obtain a deeper understanding of the financial risks associated with the coffee industry, additional data will be collected through unstructured interviews of the industry. The New York Board of Trade website was used to provide additional industry statistics. The effects of debt level and coffee price changes on the company will be measured and compared with the company's financial performance.
The tax shelter provided by debt reduces the cost of capital, but APe has not been profitable and therefore the effects of taxes in this case are limited.
THEORIES ON FINANCIAL RISK
Since debt was introduced into APC's financial policy in 2000, according to MM theory, shareholders should increase their required return to compensate for the risk premium, but this could not be applied to APC because shareholders did not receive any return. Stewart Myers' other contributions were not tested due to the lack of market-to-book value relationships.
2. 1 Modigliani and Miller
The benefits of debt in controlling overinvestment
Because both of these strategies tend to reduce value, companies aiming to maximize enterprise value must distribute their free cash flow to investors. For example, in their 1984 study, Michael Bradley, Greg Jarrell, and Han Kim found that the ratio of debt to (book) assets was negatively related to both the volatility of annual operating earnings and to advertising and R&0 expenditures. Several studies have also reported that individual firms' debt ratios appear to be moving back toward optimal targets.
Moreover, the same study also found that the debt issued by growth firms was significantly more concentrated among high-priority classes.
Information cost Theory
For this reason, adding more debt to a company's capital structure can serve as a credible signal of higher future cash flows. Signaling theory states that firms are more likely to issue debt securities than equity securities when they are undervalued due to the large information costs (in the form of dilution) associated with the equity offering. According to pecking order theory, a firm should issue as many securities as possible with the lowest information costs.
To explain these more detailed aspects of capital structure, proponents of the pecking order theory must step outside their theory and argue that costs and other benefits determine these choices.
The evidence on taxes
But once you allow these other costs and benefits to have a material impact on firms' financing choices, you are back in the more traditional realm of optimal capital structure theories. And according to the limiting order theory, debt is the next source of less resistance, which is why management decided to take on debt. Assuming the growth levels that APC planned, the limiting order theory is reaffirmed.
However, before concluding that taxes are unimportant in the capital structure decision, it is crucial to recognize that the results of these studies are difficult to interpret because tax variables are crude proxies for a firm's effective marginal tax rate. Indeed, these proxies are often correlated with other variables that influence capital structure choice. For example, businesses with investment tax credits, high levels of depreciation, and other non-debt tax shields also tend to have mostly fixed assets.
Thus, again, it is not clear whether net operating losses represent low tax benefits for debt or for financial distress. For example, a 1990 study by Jeffrey Mackie-Mason examined registered securities of public US companies and found that companies were more likely to issue debt if they had a high marginal tax rate and to issue equity if they had a low tax rate . In another attempt to avoid the difficulties of crude proxy variables, a 1996 study by John Graham used a sophisticated simulation method to provide a more precise measure of corporate marginal tax rates.
Using such tax rates, Graham also found a positive relationship between changes in debt ratios and the firm's marginal tax rate. Overall, the evidence seems to suggest that taxes play at least a modest role in corporate financing and capital structure decisions.
CASE STUDY REVIEW
- SWOT ANALVSIS .1 Strengths
- Opportunities
- OPERATIONAL POLICY
- Factories
- FINANCIAL POLICY
- Financial Distress Risks
- Commodity Price
- MARKETING APPROACH
- Does the financial policy create competitive advantage?
- FRICT Analysis
- DIVERSIFICATION
- INCREASED COMPETITIVENESS
- GROWING ORGANIC COFFEE
- BRAND RECOGNITION
- PROMOTION OF COFFEE
- Producer oriented promotion
- HEDGING
- Tailored solutions
- Swap agreements
- Alternative solutions
This will reduce transportation costs by 20% (compared to parchment) and provide some of the fuel required by dryers in the form of parchment husks. The location of processing facilities played a vital role in reducing transport volume and distance. With financial difficulties, all the above goals were not achieved and this affects the future of the company.
They looked at the security of future supplies of the commodity and made alternative arrangements. Further arguments can be made about the viability of the project itself in light of the commodity price crisis. 4 yrs Where value exists • The life of debt is not of growth the same as the life of opportunities lack of the assets.
But the company's financial policy could not offer any flexibility to support this ideal model. A good financial policy is concerned with (a) maintaining the company's financial flexibility, (b) the sustainability of the company's financial policies, and (c) the feasibility of the company's strategic goals. Such labels are taking a rapidly increasing share of food sales, even in the high-end market.
Judges evaluate every detail of the coffee from aroma, acidity, to body and balance. One of the opportunities that emerges from a low-cost global market is the development of local markets. In the early 1990s, some of the lower quality coffees commonly sold across the country began to be replaced by milder, more flavorful coffees.
They allow a cooperative to pay a higher initial share of the coffee's market value to a producer. As always, the provider will still need reassurance as to how the cost of the option will ultimately be recouped. The work is being carried out by the World Bank's Commodity Risk Management Group.
SUMMARY AND CONCLUSIONS
- Bibliography
It was observed that at debt levels of 40% the company has the lowest cost of capital and also that the financial distress risk was the least, therefore it can be concluded that there is an optimal financial structure for each industry. The impact of commodity price was reflected in the profitability of APC year after year (table 3), with continued losses the capital structure was further weakened creating further financial distress risk. Companies carried with net losses like APC are often in financial distress, and since equity values typically decline in such circumstances, financial distress itself causes leverage ratios to increase.
Therefore, net operating losses caused by commodity prices are an indicator of low tax benefits of debt and also financial distress. It is also very important to look at price risk management tools, however if prices remain low for a period of years, commodity price risk management tools will be of limited use.
Appendices
Debt Equity Ratio
