FINANCING CASHEW PROCESSING AND EXPORT
By
ALHAJI BABA YUSUF AHMED MANAGING DIRECTOR/CHIEF EXECUTIVE NIGERIAN EXPORT-IMPORT BANK (NEXIM)
Text of Paper presented at a Seminar on “CASHEW”
Organized By
CENTRAL BANK OF NIGERIA AND AFRICAN CASHEW ALLIANCE At The CONFLUENCE BEACH HOTEL, LOKOJA
On 10TH – 11TH JULY, 2007
1.0
INTRODUCTION
May I commence by expressing my profound gratitude to the organizers of this seminar, Central Bank of Nigeria and African Cashew Alliance, for inviting me to present a paper on the topic “Financing Cashew Processing and Export”. The timing of this seminar is most apt, considering the Federal Government’s on-going efforts to promote exports to gain foreign exchange earnings for the Nation.
1.1
CASHEW PROCESSING
Cashew Tree It is a short, stocky, low-spreading, evergreen tropical tree. It flowers once a year, between the months of November and January. The fruit ripens fully within 2 months. Cashew Production Cashew is grown mostly in semi-arid, sub-tropical regions of Africa, Latin America and South- and South-east Asia . The world's largest producers are India , Vietnam , Brazil , Tanzania , and Guinea Bissau respectively. As shown below, Senegal is currently the world's tenth most important producer of cashew nuts, and Africa 's seventh largest. In the early 1970s, the majority of global cashew production (68 percent of total) took place in African countries, in particular, Mozambique and Tanzania. Over the following thirty years, production trends shifted, with Asian countries emerging as the world leaders in cashew production. Today, India commands about 40 percent of the international market in cashew production. Other Asian countries, particularly Vietnam and Indonesia, are beginning to expand their production capacities. Currently, the four main cashew producing regions are India, Brazil, Nigeria and Tanzania. During the past decade, the production of cashew nuts in Nigeria has increased almost six-fold from 30,000 tonnes in 1990 to 176 000 tonnes in 2000. Prior to this, production was relatively static at 25 000 tonnes over a 25 year period from 1965. As in the case of other developing countries, Nigeria has recognised the potential economic value of cashew and has made a concerted effort to improve production of the crop.
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World Raw Cashew Nut Production - (Estimate) Country Quantity (in MT ) 1. India 350,000 2. Vietnam 200,000 3. Tanzania 120,000 4. Brazil 100,000 5. Guinea Bissau 91,000 5. Mozambique 50,000 7. Ivory Coast 30,000 8. Nigeria 15,000 9. Benin 15,000 10. Senegal 12,000 11.Other Countries 40,000 WORLD TOTAL 1,018,000 Source: Multiple Sources, FAO Statistical Database, The Cadju, Vol. 1, No. 1 Processing of Cashew Cashew processing methods have improved considerably over the years. Difficulties in shelling cashew nuts are due to the irregular shape of the nut, the tough leathery outer shell and the CNSL within the shell that must not be allowed to contaminate the kernel during its removal from the shell. An early method used to remove the CNSL in cashew producing countries was to burn the raw nuts for a short period in order to burn the shells and the CNSL without affecting the taste or appearance of the kernel. This was a delicate operation requiring an experienced processor to gauge the length of time required for burning. The process consists of five main steps: • • • • •
Shelling: removal of the outer shell and CNSL Peeling: removal of the testa Grading: into different sizes and colours in accordance with standard grading Drying or humidifying: to a final moisture content of 5 percent Packing: into airtight bags or cans, depending upon the scale of operation
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The Market for Processed Kernels Globally, the market for cashew kernels is growing at nearly 10 % per year. The most important market for kernels is the U.S. , followed by the European Union, which is currently the fastest growing market along with China. As with most African producer countries, Cashew nuts are exported raw to Kerala State in India, where they are mostly processed into kernels for consumption in domestic and global markets. The table below is a list of the value of cashew kernel exports from the most important processing countries, traditionally led by India but aggressively trailed by Vietnam : Table 2: Cashew Nuts Shelled - Val Year (1000$) Exports - Val (1000$) 1995 1997 1999 2001 World 637,274 704,752 946,825 720,675 Brazil 147,236 156,917 142,125 112,251 C么te d'Ivoire 0 131 2,020 1,725 India 383,068 325,879 570,595 366,789 Indonesia 0 3,766 12,733 4,983 Mozambique 7,000 12,000 15,000 0 Tanzania , United Rep of 0 112 3,165 746 Vietnam 34,000 133,331 109,748 151,707 Source: FAO Statistical Database World Cashew Consumption (estimate) Per capita consumption of cashew is highest in the Netherlands estimated at 230 grams, followed by USA at 215 grams, the United Kingdom at 75 grams and Germany at 50 grams. Cashew products are equally prepared on the Japanese as well as the Arab markets. World prices tend to fluctuate for kernels, but much less severely so than for African raw nuts. In the 1990s burgeoning demand from Indian processors helped push up farmgate prices for raw nuts in Senegal from an initial 50 CFA tenfold to 500 CFA in 2000, but this price collapsed to less than half that value the following year. Subsequently, farmgate prices for raw nuts prices in the Casamance and indeed most of the rest of West Africa have fluctuated between 150 and 300 CFA. COUNTRY USA EU India
Metric Tonnes 55,000 40,000 35,000 4
China 18,000 Australia/N.Z 5,000 Brazil 5,000 Europe (Non 5,000 EU) Japan 5,000 South East 4,000 Asia Other 4,000 Total 176,000 Source: The Cadju, Vol. 1 In comparison, international wholesale prices, while dipping slightly since 2002, remain comparatively more stable: by mid-July 2003, the international kernel price at the wholesale level has sunk by nearly 20% from its 2000 price to just under $2.00 (about 1100 CFA at current exchange rates). This is primarily due to the slumping U.S. dollar, which is the currency of choice for the cashew trade. This decrease is probably only temporary given that world consumption is increasing on a yearly basis, and many forecasts predict a stabilisation if not a long-term increase in kernel prices. Chart 1 shows the price trends for kernels over three years and illustrates that kernel prices have fluctuated by nearly 20%. In comparison, raw nut prices over the same period have fluctuated between 50 - 100% . Chart 1:
Even more value added is made after kernels are exported wholesale to northern markets. Final or secondary processing involves roasting, salting and packaging for retail, where the final price in these markets typically hovers around 20 USD or more. PlantersT, a subsidiary of RJR NabiscoT, is the world's largest single distributor of final-processed and branded cashew. The quality demands such distributors place on cashew processors makes the market very competitive for large-scale distribution. Thus, the relationship between processors in India or Brazil and final markets can be described as a more buyer-driven chain (Gibbon, 2001). In contrast, the chain down from Indian processors to African producers and suppliers is 5
trader driven, with intricate, multi-tiered networks of buyers. This will be thoroughly examined in the next chapter. Non-oil Export With non-oil export earnings traditionally accounting for between 2 – 3 percent (or US$250 – US$300 million) of total export earnings, there is a clear need to move beyond ‘talk shops’ and evolve coherent strategies to mobilize the business community in rising to the challenges of achieving the set target. It has been suggested at various fora that the foremost area in which the country could achieve quick wins are in the export business later followed by investments in appropriate technologies to tap into existing markets. The awareness and interest in the export of Cashew can be jumpstarted through enlightenment seminars of this nature, formation of producer/processor groups and streamlining supply networks thereby reducing production costs. It is in this respect that we situate and commend the efforts of organizations such as yours. Distinguished Ladies and Gentlemen, the recognition of exports as a basis for promoting rapid economic transformation has led many countries to abandon the import-substitution industrialization strategy of the 70s and 80s for an export-led growth strategy. Apart from the economic efficiency derivable from re-allocation of productive resources to efficient sectors of the economy, a strong export sector also provides the stimulus for healthy international competition in goods and services. At the micro level, individual companies see exporting not only as a means of expanding their production but also as an avenue for smoothening out cyclical business fluctuations in the domestic market. The development role of export as identified here has been seriously hampered in Nigeria due largely to the absence of long-term, low-cost financing support. In the attempt to harness the benefits of a strong export sector, many countries have established specialized institutions, such as Export-Import Banks or Export Credit Agencies (ECAs) as they are generically called, to provide financing support to export. NEXIM is well positioned to intervene in this regard through its complement of finance and risk bearing facilities. 2.0 AN OVERVIEW OF THE NIGERIAN EXPORT ECONOMY As you are very much aware, the structure of Nigerian economy is based almost entirely on a single product – oil, which has continued to contribute over 90% of export earnings and about 80% of Nigeria’s total revenue. This has in turn reduced the contribution of the non-oil sector to an insignificant level. For example, Nigeria’s total export trade in mainly agricultural produce, chemicals and some light manufactured products grew significantly in the 1960s and early 1970s. The situation was however replaced by massive export of crude oil and the attendant neglect of the agricultural sector. From 97.4% of total export value in 1960, non-oil exports continued 6
to decline to 42% in 1970, 2.8% in 1980, 2.37% in 1990, 1.2% in 2000 and about 2.0% in 2002. The decline in non-oil export has been worsened by the high preference by Nigerians for imported goods. In 2003, Nigeria’s total import bill stood at $ 15.1 billion (N1, 956 billion) with consumer goods accounting for about $5.77 billion (N744.7 billion) or 38 per cent. In the consumer goods category, food items, accounted for over N274.5 billion or 37 percent. The irony of this national trade tragedy is that these imported items have better local substitutes. The ban currently placed by the Federal Government on some imported goods such as textiles, biscuits, fruit juice, etc, signals a great sigh of relief to local enterprises and therefore, a major boost to nonoil export. The current Cashew initiative will no doubt unlock the economic potential of the Cashew crop into a cash crop for both domestic and export markets, if fully utilized, will also significantly improve the outlook of Nigeria’s non-oil export. 3.0 NATURE AND SOURCES OF EXPORT FINANCING Export finance is the totality of funds available to an exporter. include equity, debt and Grants/Subsidies.
These
Such funds take various forms and their categorization may be done by purpose, stage of export operation or tenor. Although, an exporter may need one or a combination of the different financing options (depending on the nature of his contract), he is usually mindful of the cost of such assistance as it affects his competitive ability in the international market. The purveyance of funds to him, therefore, requires skills and expertise in financial operations, as well as a thorough knowledge of the export process and of the conditions prevailing in the international market. The competition to sell abroad has resulted in an increasing shift of bargaining power from the seller to the buyer who in international trade dictates terms with regards to price, quality, packaging, specifications and delivery schedules. These requirements have made correct availability of export finance an important tool for export promotion. An adequate supply of funds to the exporter at a reasonable cost not only facilitates the task of the exporter, but greatly augments his export efforts. The inability of many exporters to finance large scale export transactions from their own resources has made it imperative for them to turn to their governments and/or financial institutions in this regard. Commercial banks play an important role in the provision of export finance. However, other specialized financial institutions such as development banks and Export-Import Banks (EXIM BANKS) also assist with the provision of supplementary financial facilities to meet the diverse needs of exporters.
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Credits granted to exporters by these institutions may be broadly classified into two namely: Classification by export trade cycle (pre-shipment credit and postshipment credit) Classification by tenure (short, medium- and long-term).
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Pre-shipment credit refers to any loan/advance granted or any other credit purveyed to an exporter for the financing of purchases, processing and packaging of goods up to the point at which they are placed on board a ship or other means of transportation. Post-shipment credit on the other hand relates to the funds provided to an exporter from when the goods have been shipped to the date of realization of export proceeds. While preshipment credit is a form of working capital with the important condition that it be specifically linked to an export order, post-shipment finance permits the exporter to offer good credit payment terms to his buyer. On the other spectrum, short-term credit generally refers to accommodation of up to 360 days while medium and long-terms relates to periods between one to five years and above five years respectively. These categorizations may however vary from one country to another and most of the funds provided to exporters usually take any or a combination of the various forms. Short term export finance are usually for trade and somewhat selfliquidating. Medium and long-term funds may however be for production purposes, such as raw material acquisition, provision of infrastructure and procurement of equipment. 4.0 THE NIGERIAN EXPORT–IMPORT BANK AND ITS MANDATES NEXIM was established by Act 38 of 1991 to provide finance, risk mitigating facilities and trade information as well as advisory services in support of exports to the Nigerian export community. The main statutory functions of the Bank are – (i) (ii) (iii) (iv) (v)
Provision of export credit guarantee and export credit insurance facilities to its clients; Provision of credit in local and foreign currency to its clients in support of exports; Establishment and management of funds connected with exports; Provision of trade information and export advisory service in support of export business; Provision of investment guarantees and investment insurance facilities.
These broad functions can be further categorized into three main services and these are discussed in detail hereafter to enable participants have clearer insights on how to benefit from them. The three are: 8
(i) (ii) (iii)
Provision of export finance Provision of risk bearing facilities Provision of trade information and advisory services.
4.1 PRODUCT/SERVICE OFFERINGS Other primary products of the Bank include the following: 4.1.1 Export Credit Rediscounting and Refinancing Facility (RRF) The RRF is a facility designed to assist banks to provide pre and postshipment finance in local currency to their export clients. To qualify for the RRF, there must be an undertaking in the form of loan, overdraft, discount of inland bills drawn on export letter(s) of credit, or negotiation of foreign bills or promissory notes. The RRF is made available in two ways, namely: Rediscounting Facility and Refinancing Facility. Under the Rediscounting Facility, short-term pre- and post-shipment finance is provided for a maximum of 180 days. For a pure pre-shipment transaction, the maximum tenor allowed is 120 days while a maximum of 60 days is allowed for a pure post-shipment transaction. The Refinancing component of RRF is aimed at providing longer-term credit than is available under the Rediscounting Facility for export items whose production takes longer time to conclude. The facility has duration of 12 months and covers installments of longer-term financing such as export debentures, term loans, etc. maturing within one year of the date of application. 4.1.2 Foreign Input Facility (FIF) The FIF provides the manufacturing exporter through its bank with foreign exchange for the importation of raw materials, packaging materials and capital equipment needed for production of goods specially designed for export. It is a facility made available to exporters in foreign currency and is therefore repayable in foreign currency. Any company/business registered in Nigeria can benefit from the facility provided that:
It is registered as a limited liability company, an association or a cooperative; It produces goods for direct export It provides services that support export and tourism; and It uses at least 40 percent (by value) of local raw materials or intermediate goods produced in Nigeria for its products, OR the local value added of its products exceeds 35 percent, so that the product may be given preferential treatment within the ECOWAS region.
4.1.3 Stocking Facility (SF) This facility, given in local currency also through a bank, is to enable manufacturers of exportable goods procure adequate quantities of local raw materials (which may be seasonal in nature) needed to keep production at
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optimal levels during periods of scarcity. The duration of this facility is 12 months. 4.1.4 Local Input Facility (LIF) Under this facility, NEXIM extends medium and long-term loans in local currency to banks for on lending to their clients. This facility is aimed among others, at providing medium and long-term local currency resources for the following purposes:
Establishment of new export projects; Modernization/revitalization/expansion of existing production lines for export; Acquisition/rehabilitation/expansion of plantations/farms for the production of exportable commodities and Acquisition of spare parts and packaging materials for manufacture of export products.
The facility complements the RRF and SF which are short term trade finance facilities in local currency and the FIF which is a medium /long term facility in foreign currency. 4.1.5 Direct Lending Facility (DLF) The Direct Lending scheme, which aimed at complimenting the existing onlending arrangement through participating banks, was introduced into the market towards the end of 2002. Under the DLF NEXIM funds are disbursed directly to exporters. The facility is designed among others to diversify the channels for accessing NEXIM facilities; reduce cost of funds to exporters through the deduction of the margins/spread charged by participating banks under the inter-bank system and minimize, if not eliminate the incidence of funds diversion and round tripping through closer monitoring of loan utilization. All normal credit lending processes and documentation as applicable under the inter-bank lending shall also apply under the DLF. Disbursements under this window amounted to N1.81 billion in 2004 down from N2.17 billion in 2003. Although the scheme was suspended in towards the last quarter of 2004 as a result of abuses, it has just been restructured and re-introduced. 4.1.6
Export Credit Guarantee Facility (ECGF)
Under the Export Credit Guarantee, three (3) products are available, namely: Short-term Export Credit Guarantee, Medium-term Export Credit Guarantee and Advance Payment Guarantee. The Short-term Export Credit Guarantee is operated as a guarantee provided by NEXIM to banks in respect of credit provided by them (the banks) to exporters in support of the export of goods and services from Nigeria. The facility is the usual guarantee, which a lender receives from a 10
suitable party as security to protect it against a borrower's default. It is hoped that this facility will encourage the banks to provide credit to exporters since the ECGF will reduce the risks associated with such transactions. It has a tenor of not more than 180 days. The Medium-term Export Credit Guarantee was introduced to provide project promoters greater latitude through access to financing, either locally or from foreign sources with the aim of establishing export-oriented factories, retooling/modernizing others, resuscitating and expanding those already in production through the provision of machinery, infrastructure and other inputs, and through the provision of services. It is also intended to de-emphasis the export of primary commodities and shift to that of valueadded products that can compete internationally and earn additional foreign exchange for the economy. The Guarantee may be in the form of a promissory note, a deferred LC (that is not cash-backed) or any other acceptable undertaking by NEXIM. It is issued in favour of a local or overseas lending institution or supplier, directly or in the form of a counterguarantee. It covers loans with maturities between two and five years. Advance Payment Guarantee on the other hand is issued by the Bank on behalf of a Nigerian exporter receiving advance funds from overseas buyers for export production purposes. 4.1.7 Export Credit Insurance Facility (ECIF) The ECIF is designed to cushion the Nigerian exporter against payment risks arising from: -
insolvency of the buyer, protracted default of the buyer due to his refusal to pay for goods shipped to him, Rejection of goods shipped in accordance with contract terms, and political events that would prevent the receipt of payment
Thus, the facility insures exporters operating in Nigeria against risk of nonpayment by overseas buyers, where such default is ascribable to commercial causes. Payment defaults due to political reasons are however covered separately by the Bank for the account of the Federal Government of Nigeria. The objective of the Export Credit Insurance Facility is therefore to encourage exporters to diversify markets and ultimately expand export volumes. 4.1.8 ECOWAS Inter-State Road Transit Scheme (ISRT) In line with the ECOWAS Protocol on free movement of persons, goods and services, NEXIM was appointed the National Guarantor under the ECOWAS Inter-state Road Transit Scheme to guarantee goods transiting Nigeria to other ECOWAS countries. The scheme, which is designed to promote free flow of goods among member states, seeks to eliminate the time wasting 11
escort system and diversion of goods consigned to specific destinations in the ECOWAS sub-region. The Scheme was launched on August 7, 2000 and has since been operational. 4.1.9 Business Development & Advisory Services As part of the Bank’s strategic measures, the Business Development & Advisory Services Department was created to among others source for lines of credit from multilateral institutions (such as AFREXIM Bank, the World Bank, International Finance Corporation, ECAs and other EXIM Banks and similar agencies) for qualified projects in Nigeria. The department is also saddled with the responsibility of identifying, evaluating and recommending alliance opportunities with external ECAs. Other functions include arrangement of loan and/or guarantee syndications with other financial institutions for specific projects as well as to identify and harness other fee earning potentials of the Bank.
5.0 CONCLUSION We have also shown that NEXIM is currently active in the provision of finance, trade information and advisory services, as well as risk bearing facilities. It is the Bank’s intention to further use its facilities to reinforce other incentives targeted at the export sector for the establishment of a culture of self-inspired export, correction of the structural weakness in Nigeria's export (especially those of product and market concentration), and the attainment of a high level of export growth and development. It is important to note however, that export promotion could be ineffective if not reinforced by other measures such as political stability, consistent and stable macro-economic policy environment and effective tariff protection. In conclusion, let me reiterate to this august gathering that the export potentials of this country (particularly in Cashew) are far from being even barely tapped. Distinguished Ladies and Gentlemen, while thanking you for your attention, we encourage you to seize the available opportunity in the Bank’s export financing for your success as well as for the growth of the Nigerian economy in general.
Nigerian Export-Import Bank July 2007
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