Discussion
Enterprise Risk Management ITS 835
Dr. Ronald Menold ronald.menold@ucumberlands.edu
Chapter 18 Blue Wood Chocolates
ITS 835
Introduction
▪ Background
▪ Market overview
▪ Blue Wood financial performance
▪ Conclusion
Background
▪ U.S. Manufacturer of chocolate products – Privately owned (family)
▪ New CFO – Outsider – Brought in to stabilize financial performance
▪ Blue Wood risk management practice in doubt – Banks wondering if RM gaps are causing unstable finances – Bank was considering taking action against Blue Wood due to high risk
▪ Internal politics and conflict
Softs Market Overview
▪ Growing market – Increasing popularity of chocolate
in BRIC countries ▪ putting strain on raw materials
supply which increases price
▪ Major competitive factors – Large producers (Kraft, Hershey,
Mars, & Nestle) – Brand recognition / reputation
▪ Example of two cocoa purchasers – Who used
▪ Delivery contracts ▪ Futures ▪ Options on Futures
– Actively hated each other ▪ No coordinated effort ▪ Sometimes had offsetting errors
– One would lose money when other made money making work useless
Softs Market Overview
▪ Cacao trees only grow 20 degrees north and south of the equator
▪ 70% of world production in West Africa
▪ Ivory Coast – 40% ▪ Ghana – 20%
▪ 14% in Indonesia
▪ Shelf life of several years
▪ Cacao beans are – Harvested by hands – “Sweated” (seed-pod pulp
extraction) – Fermented/Dried – Trodden with bare feet – Shipped – Roasted by buyer – Shells are removed leaving nibs – Akalized – Processed into chocolate by
manufacturer
Cocoa Price
▪ Low of $714 per metric ton in November 2001 due to good weather in Ivory Coast (largest producer with 40% of worldwide production)
▪ High of $3775 per metric ton in March 2011 due to disruptive Ivory Coast presidential election
Cocoa Futures Contract Specifications
Cocoa Futures
Sugar Futures
▪ US was 5th largest producer, now 10th largest at 2% – US Price is subsidized and is higher
than worldwide price
▪ Largest producers – Brazil – 47% – India – 22% – China – 8% – Thailand – 6% – Pakistan – 4% – Mexico – 4% – Columbia – 2% – Indonesia – 2% – Philippines – 2%
Sugar Futures Contract Specifications
Sugar Futures
Milk Futures
▪ Peak US consumption in World War II (1940-1945)
▪ 30% decline from 1945 to 1975 – Somewhat offset by increase in yogurt and cheese consumption
▪ Regulated industry in US with federal and state subsidies
Milk Futures Contract Specifications
Milk Futures
Currency Market Overview
▪ Canada – 8% of sales
▪ Mexico – 3% of sales
▪ United Kingdom – 4% of sales
▪ Eurozone – 10% of sales
▪ All sales in foreign countries are transacted in local currencies
▪ A 10% drop in currency exchange rate would lead to a 10% drop in gross income for Blue Wood chocolate with no decrease in sales – This is most definitely a risk factor which has to be accounted for
Canadian Dollar Futures Contract Specifications
Canadian Dollar Futures
Mexican Peso Futures Contract Specifications
Mexican Peso Futures
British Pound Futures Contract Specifications
British Pound Futures
Euro Contract Specifications
Euro Futures
Blue Wood Financial Performance
▪ Profitability measures worse than competitors – Lots of internal finger pointing – European market sales at a loss
▪ Deteriorated cash position – Currently borrowing against
revolving line
▪ Long-term debt matures in two years
▪ Retained earnings falling – High dividend payouts
▪ Substantial investments – In case cash flow couldn't cover
dividend payments – Not tracked by mangement
▪ Potential $10 million lawsuit – CEO unaware of lawsuit
▪ Risky entrance into currency hedges and futures – Highest volatility of profits and
losses was the futures market
Conclusion
▪ Business underperforming
▪ Immediate action is necessary to respond to banks
▪ CFO requires – Overall view of corporate objectives – Major risks facing the company
▪ Must have support from the top – CEO and Charmain of the Board seemed disinterested
▪ After initial pass – Implement ERM
Chapter 18 Blue Wood Chocolates
ITS 835