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 40 35 30 25
$400 million Potential processing revenues

20 15 10 5 0
1995 2000 2005 2010 Processing revenues assuming no further expansion

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 6

13 40

18

Manual labor wages

Admin, sales & overhead

Other*

Export levy

Income Tax

After-tax profit

Total

Source:Industry Sources, Team estimates

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

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

Production Production costs costs

Working Working capital rates capital rates

Quality and Quality and reputation reputation

Outturn of Outturn of raw material raw material

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

25*

India

Africa hand

Africa mechanical

Revenue with 20% broken nuts

Revenue with 25% broken nuts

Revenue with 45% broken nuts 4

Source: Industry Data

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

450

Base Case IRR 39% Payback 35 months

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

350 250 150 50 -50 -150 -250 1 2 3 4 5

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

Years

Source: Team Estimates

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

Processing Cost

250

Indias processing cost advantage is offset by the shipping cost of the raw nuts

India

Africa hand

Africa mechanized

Source: Industry Sources, Team Estimates

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 6% 10% 20% Potentially viable returns Unattractive returns

Base Case

6%

46%

38%

30%

12%

9% Working Capital Interest Rates

39%

30%

19%

3%

15%

23%

14%

4%

na

20%

9%

-1%

na

na

Source: Team Estimates

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

Training Training

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

PROCESSORS MUST HAVE ACCESS TO QUALITY NUTS TO ASSURE LONG TERM INDUSTRY VIABILITY
Cashew yields (and nut outturn!) decline after trees reach 20 years of age
cashew yield per tree (kg/tree)
50

and 60% East Africas trees are over 20 years old

16 14 12 10 8 6 4 2 0
0

20

20

10

15

20

25

30

35

40

0-10

11-20

21-30

31-40

> 40

Tree Age (years)

Source: Naliendeli Research Institute, Farmer interviews

Tree Distribution by Age (years)

percent 9

OUTTURN IS THE MEASURE OF QUALITY OF RAW NUTS

Definition of outturn:

Pounds of sellable kernels per 80 kg bag of raw nuts

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

Step 2: Open the nuts, and identify

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

Average outturn for major producing countries: India Vietnam Brazil Guinea Bissau Ivory Coast Indonesia Benin Tanzania Ghana Mozambique Nigeria Kenya Madagascar 50-56 50-56 50-55 48-56 48-52 48-52 46-50 45-52 44-48 42-46 40-46 40-46 40-46
10

Good kernels Spotted kernels Humidified kernels Premature kernels Bad kernels

11

THE PROJECT RIGOROUSLY DEVELOPED A DATABASE OF CASHEW QUALITY IN MOZAMBIQUE

Step 1 Training

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

Step 4 Reporting

Step 5 Follow-up

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

Step 7 Quality control Training team controlled information on forms against content of samples

Step 8 Data entry

290 people in Mozambique received training over 12 sessions

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

Detailed results were recorded on forms received during training

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

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 Inhambane Nampula 48.5 45.9 Cabo-Delgado*

Gaza

53.4

47.4

Potential outturn

Zambezia Inhambane 53.1 44.6 45 Zambezia 48.6 46.6 80% Share of potential outturn achieved 100% Nampula

* 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 Gaza Inhambane High potential achieved for all cashew-trees in Mozambique

1 1

Potential outturn

2
Zambezia Nampula

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)

45 80% Share of potential outturn achieved 100%

* 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
Effect of increasing quality

44 lbs 8 kg/tree 6 kg/tree 4 kg/tree

Effect of increasing yields per tree

48 lbs

52 lbs $43.0

Base case: smallholder farmer with 25 trees*

$36.4

$39.7

$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 48 lbs quality

crucial in order to bring workers salaries in line with minimum wages

Increased salaries may

bring higher motivation and thus improve productivity further

52 lbs quality

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 48 lbs quality 52 lbs quality

Impact of improved quality

Total revenues

100

+9%

+18%

Profits

+34%

+68%

Sales commission

+9%

+18%

Fixed costs*

19

Variable salaries

23

+9%

+18%

Cost of raw nuts

48

+9%

+18%

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

18

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

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

Production Production costs costs

Working Working capital rates capital rates

Quality and Quality and reputation reputation

Outturn of Outturn of raw material raw material

OBRIGADO!