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USAID FROM THE AMERICAN PEOPLE

Competitiveness of the Cashew Industry

Jake Walter Mozambique


INTERNATIONALLY COMPETITIVE PROCESSING COULD GENERATE AN ADDITIONAL $400 MILLION REVENUES FOR AFRICA BY 2020 Africa cashew value added processing revenues, 1995-2010 USD, tens of millions 45 Potential processing revenues

40 35 30 25

$400 million

20 15 10 5 Processing revenues assuming no further expansion

0 1995

2000

2005

2010

1


OVER 40 PERCENT OF THE $400 MILLION REVENUES WOULD GO TO MANUAL LABOR WAGES US $ tens of millions Breakout of value created by processing cashews in Africa

1

1

2

6

13 40

18

Manual labor wages

Admin, sales & overhead

Source:Industry Sources, Team estimates

Other*

Export levy

Income Tax

After-tax profit

Total

2


AFRICAN PROCESSORS WILL NEED TO BE INTERNATIONALLY COMPETITIVE ON FIVE DIMENSIONS IF THEY ARE TO BE PROFITABLE Broken Broken nut nut yields yields

 Revenues are sensitive to the percentage of nuts broken during processing  India achieves yield rates of around 80% whole nuts

Production Production costs costs

 Africa has at least a $65 per ton cost advantage relative to the cost of shipping raw nuts to India  However, wage rates and worker productivity must match Indian levels

Working Working capital capital rates rates

 Raw nuts are an expensive input requiring large capital outlays to secure inventory  African competitiveness will be impacted by the availability of working capital at internationally competitive rates

Quality Quality and and reputation reputation

 New entrepreneurs will need to achieve internationally competitive quality standards to remain viable  Prices received by local processors may initially be discounted until a reputation for reliability and quality is established

Outturn Outturn of of raw raw material material

 Outturn of raw cashews impacts the competitiveness of processing, the incomes of producers and the productivity of factory labor  Research, extension and marketing chains of raw cashew must “value� the outturn of raw cashew nuts 3


AS RECEITAS DEPENDEM MUITO DA PERCENTAGEM DE AMENDOAS INTEIRAS Mais amendoas sao partidas no processamento na Africa…. Percent

…que resulta em receitas mais baixas US $ per metric ton of raw nut

775 55 758

Whole nuts

80

75

688 45

Broken nuts

20

India

Source: Industry Data

25*

Africa hand

Africa mechanical

Revenue with 20% broken nuts

Revenue with 25% broken nuts

Revenue with 45% broken nuts 4


LOW MARGINS MAKE PROFITABILITY OF CASHEW PROCESSING HIGHLY SENSITIVE TO YIELDS AND PRODUCTION COSTS Cumulative cash flow $ thousands

Base Case • IRR 39% • Payback 35 months

450

Base Assumptions • Whole Nut Yields •70% year 1 •75% year 2 •80% year 3 and after • Working capital rate 9% • Broken nut prices 59% of whole nut prices

350 250

Whole yields plateau at 75% • IRR 27% • Payback 42 months

150 50 -50

1

2

3

4

5

-150 -250

Years

Source: Team Estimates

5


PRODUCTION COSTS ARE DRIVEN BY LABOR RATES AND TRANSPORTATION COSTS Processing Costs US $ per ton of raw nut

GBK6

620

315 285 Raw nut shipping

Processing Cost

65  India has a small advantage in processing cost due to the efficiency of its workforce

 India’s processing cost advantage is offset by the shipping cost of the raw nuts

250

India

Source: Industry Sources, Team Estimates

Africa hand

Africa mechanized

6


Dias nummer 7 GBK6

Interesting that this shows that a 50% increase in ON rice would equal the entire imported quantity. Gregory B. Kruse, 23/07/2003


RETURNS WILL ALSO BE IMPACTED BY CHANGES IN WORKING CAPITAL RATES AND WAGES

IRR sensitivity to changes in working capital rates and wages Increases in real wage rates Base case

Base Case

Working Capital Interest Rates

Source: Team Estimates

6%

10%

20%

6%

46%

38%

30%

12%

9%

39%

30%

19%

3%

15%

23%

14%

4%

na

20%

9%

-1%

na

na

Potentially viable returns Unattractive returns

7


NEW ENTREPRENEURS WILL NEED BUSINESS AND TECHNICAL SUPPORT TO OVERCOME KEY CHALLENGES Issue

Training Training

• The ability to rapidly achieve whole nut yields of close to 80% is the key to economic viability • Entrepreneurs without significant manufacturing experience will need training in labor and financial management

• Aggregation of standard 18 ton single grade containers of finished nuts increases the Market Market Linkages Linkages

working capital burden on processors

• Processors with strong market relationships may have flexibility to deliver mixed grade containers

• Working capital for raw nut inventory is the most significant capital requirement for a Financing Financing

processor at US $400-500 K per 1,000 MT of processing capacity

• Access to pools of working capital will be the critical financing need for most entrepreneurs

8


PROCESSORS MUST HAVE ACCESS TO QUALITY NUTS TO ASSURE LONG TERM INDUSTRY VIABILITY …and 60% East Africa’s trees are over 20 years old

Cashew yields (and nut outturn!) decline after trees reach 20 years of age cashew yield per tree (kg/tree)

16

50

14 12 10 8 20

6

20

4 2

5

5

0 0

5

10

15

20

25

30

Tree Age (years) Source: Naliendeli Research Institute, Farmer interviews

35

40

0-10

11-20

21-30

31-40

> 40

Tree Distribution by Age (years) percent 9


“OUTTURN” IS THE MEASURE OF QUALITY OF RAW NUTS

Definition of outturn:

Step 1: Select a random sample of 1 kg of raw nuts

Pounds of sellable kernels per 80 kg bag of raw nuts

Step 2: Open the nuts, and identify

• • • • •

Good kernels Spotted kernels Humidified kernels Premature kernels Bad kernels

Average outturn for major producing countries:

Step 3: Weigh the useable share of nuts, and calculate: Grams of useful kernels x 80 454 = Outturn

India

50-56

Vietnam

50-56

Brazil

50-55

Guinea Bissau

48-56

Ivory Coast

48-52

Indonesia

48-52

Benin

46-50

Tanzania

45-52

Ghana

44-48

Mozambique

42-46

Nigeria

40-46

Kenya

40-46

Madagascar

40-46 10


11


THE PROJECT RIGOROUSLY DEVELOPED A DATABASE OF CASHEW QUALITY IN MOZAMBIQUE

Step 1 Training

290 people in Mozambique received training over 12 sessions

Step 2 Kit distribution 77 kits distributed to participants from the five cashewproducing regions Participants also received cash to buy cashew samples

Step 3 Sampling

Participants who received kits went out and bought samples Samples were analyzed

Step 4 Reporting

Detailed results were recorded on forms received during training

Step 5 Follow-up

Training team visited each person 3-4 times to follow up on procedure and check that results were being recorded properly

Step 6 Data collection Training team collected forms and samples of nuts

Step 7 Quality control

Step 8 Data entry

Training team controlled information on forms against content of samples

Results were entered into excel database

12


PROBLEMS WITH OUTTURN VARY FROM ONE PROVINCE TO ANOTHER Potential

Actual

55 Cabo-Delgado

52.0

50.6 Gaza

Nampula

Gaza

48.5

53.4

45.9

47.4

Cabo-Delgado*

Potential outturn

Inhambane

Zambezia Inhambane

53.1

Nampula

44.6 45

Zambezia

48.6

46.6

80%

100% Share of potential outturn achieved

* Only 3 samples were tested from the Cabo-Delgado province, may not be representative. Source: TechnoServe

13


TWO DIFFERENT STRATEGIES NEED TO BE PURSUED

55

1 Gaza

Potential outturn

Inhambane

1

High potential achieved for all cashew-trees in Mozambique

2 Zambezia Nampula

45 80%

100%

2

Gaza/Inhambane: improve production methods to achieve full potential: • Educate farmers about proper harvesting and post-harvesting methods • Impose the use of jute sacks instead of woven plastic • Establish link between quality and price Zambezia/Nampula: increase potential through replanting schemes and education: • Plant new cashew trees • Make sure high-quality grafted seedlings are used • Ensure trees are properly taken care of (chemicals and tree maintenance)

Share of potential outturn achieved

* Only 3 samples were tested from the Cabo-Delgado province, may not be representative. Source: TechnoServe

14


15


FOCUSING ON QUALITY WILL INCREASE QUANTITY PRODUCED AND LEAD TO HIGHER INCOME FOR THE FARMER Annual income from cashews, USD

8 kg/tree 6 kg/tree 4 kg/tree

Base case: smallholder farmer with 25 trees*

Effect of increasing yields per tree

Effect of increasing quality

44 lbs

48 lbs

52 lbs

$36.4

$39.7

$43.0

$54.6

$59.6

$64.6

$72.8

$79.4

$86.0

* Income effect calculated based on a price of 10,000 per kg of raw nuts for 44 lbs quality, and an exchange rate of 1 USD = 27,500 Mt Source: TechnoServe

16


HIGHER QUALITY NUTS ENABLES WORKERS TO GAIN HIGHER SALARIES Monthly salary in MT, example of cashew nut cutter Minimum wage: 1,443,176 MT

Worker cuts 40 kg/day Worker cuts 50 kg/day Worker cuts 55 kg/day

44 lbs quality

• Improved quality is crucial in order to bring workers’ salaries in line with minimum wages

48 lbs quality

• Increased salaries may bring higher motivation and thus improve productivity further

52 lbs quality

0

500,000

1,000,000

1,500,000

2,000,000

17


BETTER QUALITY OF RAW NUTS SIGNIFICANTLY INCREASES THE COMPETITIVENESS OF THE PROCESSING INDUSTRY 44 lbs quality = 100 44 lbs quality

Total revenues

7

Profits

Sales commission

3

19

Fixed costs*

Variable salaries

Cost of raw nuts

52 lbs quality

48 lbs quality

100

23

48

* Includes fixed labor, overhead, amortizations, taxes and interest Source: TechnoServe

Impact of improved quality

+9%

+18%

+34%

+68%

+9%

+18%

-

-

+9%

+18%

+9%

+18%

18


AFRICAN PROCESSORS WILL NEED TO BE INTERNATIONALLY COMPETITIVE ON FIVE DIMENSIONS IF THEY ARE TO BE PROFITABLE Broken Broken nut nut yields yields

 Revenues are sensitive to the percentage of nuts broken during processing  India achieves yield rates of around 80% whole nuts

Production Production costs costs

 Africa has at least a $65 per ton cost advantage relative to the cost of shipping raw nuts to India  However, wage rates and worker productivity must match Indian levels

Working Working capital capital rates rates

 Raw nuts are an expensive input requiring large capital outlays to secure inventory  African competitiveness will be impacted by the availability of working capital at internationally competitive rates

Quality Quality and and reputation reputation

 New entrepreneurs will need to achieve internationally competitive quality standards to remain viable  Prices received by local processors may initially be discounted until a reputation for reliability and quality is established

Outturn Outturn of of raw raw material material

 Outturn of raw cashews impacts the competitiveness of processing, the incomes of producers and the productivity of factory labor  Research, extension and marketing chains of raw cashew must “value� the outturn of raw cashew nuts 19


OBRIGADO!

TechnoServe Cashew Competitiveness ACA English  

TechnoServe Cashew Competitiveness ACA English

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