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!