Businessafrica.net Newsletter ISSN 1563-4108
Dr. QUENUM & ASSOCIATES
INVESTMENT AND BUSINESS PLANNERS
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WE TAKE CARE OF
BUSINESS IN AFRICA™
ECONOMIC ANALYSIS

TRUE CAUSES BEHIND THE COLLAPSE
OF MOZAMBIQUE'S CASHEW NUT IN
DUSTRY
(Part 1)
CASHEW NUT WORLDWIDE MARKET
PRODUCTION LEVEL AND PRICING STRUCTURE


This delivery is a continuation to these preliminaries
It is also a continuation to:
"The Strategy for an African Country"

© Copyright Dr. B.M. QUENUM All rights reserved
SYNOPSIS


End of April 2001, Mozambique's authorities slapped an embargo on the export of raw cashew nuts to India. This put an end to the controversial relationship with the IMF and the World Bank, which strongly advocated and imposed to Mozambique - in 1994-1995 - the export of raw nut instead of processed finished products.

Following said export policy, 14 Mozambique's raw cashew nut processing units progressively closed shops - for lack of raw materials. The last factory closed down beginning of April 2001.

The Embargo was a dramatic decision taken by the authorities to salvage the cashew nut industry, which is the second provider of hard currency to the national budget.

Many economic reports and publications put the blame on the IMF and the World Bank
for the collapse of the cashew nut industry in Mozambique

To contribute to the debate, it is necessary to dig out the true causes behind the disaster. To do so, an analysis of the cashew nut's worldwide market is exposed in this delivery to have a good knowledge of the market' specifics.

Some of the figures exposed are outdated. Nevertheless, they give indications about prices' evolution and the marketplace's big players; and therefore they help to investigate and determine which entities are responsible for the collapse of Mozambique's cashew nut as per May 2001.
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General Considerations / Economics and Specifics / Pricing Evolution / Price Comparison / Investment Considerations /

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CONTINUATION PART - 2
CONTINUATION PART - 3
FREQUENTLY ASKED QUESTIONS

1- GENERAL CONSIDERATIONS

For a global market of 395,000 metric tons / year for all kinds of nuts (cashew nut, Brazil nut, hazel nut, walnut, almond) cashew nut' share is - for a normal harvest" - in the average range of 70,000 -75,000 metric tons a year. That is to say 17.4 % to 19 % of the total. The market is highly concentrated:

- Two countries, India and Brazil provide 64 % of the total production.

- Five countries, India, Brazil,Tanzania, MozambiqueandKenyaaccount for 95 % of the production.

The market is also characterized, year in year out, by unexpected sharp highs and lows of the global production. Some year, production may suddenly decline to halving past year's production level. Variations of production occurring in Africa when Mozambique and or Tanzania production's levels are less or more abundant than expected.
2- ECONOMIC SPECIFICS OF THE CASHEW NUT MARKET

Prior to the IMF and the World Bank's dictums to Mozambique in 1994-1995, only 5% of raw cashew nuts were sold on the global marketplace. After 1995 till this May 2001 that proportion substantially increased due to by Mozambique's export of raw nut to India. Click here for more

Principal importing countries of processed cashew nut (90% of total of world's imports) are: The United States of America, European Union countries, Japan and the former USSR countries.

- 1 - The United States' market is fundamental in cashew nut's trading. It stands for 50% of the total of imports of processed cashew nuts, and therefore, it dictates international selling prices. Brazil has an export monopoly to that market.

- 2- Former USSR used to account for 25 % of the global imports' market of processed cashew nut. Something in the range of 20,000 metric tons per year before the collapse and disappearance of USSR. These 20,000 metric tons of processed cashew nuts representing 83,000 metric tons of raw nuts. That market was India exports' monopoly.

The market of former USSR, however, had always played a disturbing role on the cashew nut's global marketplace. International selling price of cashew nut used to rise sharply when USSR countries' imports are steady and important. Same prices nose dive abruptly when these countries demands are inconsistent and low. That behavior of former USSR market results in highlighting the importance and predominance of USA's imports, which then represent something in the range of 60% of the global world market of cashew nut; instead of the normal level of 50% when demands are steady in former USSR's market.

- 3° - Cashew nut' share on the global market of nuts and almonds in European Union countries is marginal. It accounts for 10,000 metric tons per year of processed cashew nut or something in range of 3% of the total of imports of all kinds of nuts and almonds. These 10,000 metric tons are provided by following countries: India: 20%; Brazil: 20%; Africa: 60% and spread between importing European countries as follows: Germany 30%; United Kingdom: 25%; France: 10%; Netherlands: 25% and 10% for other European countries.

- 4° - In Asia, only the Japanese market is important. It accounts only for 4% to 5 % of the total of the global international export market of cashew nut. That is to say 4,000 metric tons per year.
3- PRICING AND PRICE EVOLUTION

- 1° - GENERAL CONSIDERATIONS ABOUT THE PRICING STRUCTURE

Selling price of cashew nut depend on the origin of the product. Pricing is not uniformly setup.

The selling price of raw nut and processed nut depend on several factors:

- The resumption of production in countries like Mozambique and Tanzania.
- The increase of plantation's acreage in India and Brazil.

The combined effect of both factors may initiate an "explosion" of the production level. Production output of a certain year can thus double in comparison to previous year. The amount of all kinds of raw nut can explode from the normal 395,000 metric tons per year to 790,000 metric tons. The resulting quantities of cashew nuts swelling from 75,000 metric tons to 150,000 metric tons.

It is obvious that when that occurs, the market being flooded, selling prices drop sharply. This is an important fact to keep in mind when one is establishing a processing line to transform raw nut into finished cashew almonds.


In addition, as briefly explained above, former USSR countries' import-market plays a disturbing role on the cashew nut marketplace. The pricing fluctuation, which can result from the steady high level demand or low level and irregular demand from these countries can average + / - 20%.

Furthermore, in addition to above outlined factors, which more or less dictate the pricing evolution, one should bear in mind that cashew nut is a delicacy, a luxury product in the category of dried fruits. Its selling price is almost double of the selling price of other similar nuts and almonds against which it competes on dried fruits' marketplace.

- 2- PRICING

Prevailing prices depend on the origin of the product. During 1980-1990's period prices were good for India cashew nut, which selling price was between US $ 1.188 and 1.012 per metric ton / FOB. During the same period cashew nut from Mozambique was selling between US $ 330 and 315 / metric ton / FOB. And product from Guinea Bissau was enjoying a premium pricing of US $ 700 in average.

When raw cashew nut is processed on industrial scale, the following products are obtained and selling (1980-1990) at the prices listed in column 4 of Table N°1 below:

TABLE N° 1
Processed Products
Yield Nut/ Product-Ton
Yield Product/ Raw Nut-Ton
Price FOB - US $/ Metric Ton
1- Cashew Almond
-
0,21
a- Whole White
0,30
0,063
4.540
b- Notched White
0,20
0,042
4.320
c- Notched Small White
0,18
0,0378
4.130
d- Notched Broken Small White
0,12
0,0252
3.380
e- White Morsel
0,12
0,0252
3.190
f- White Broken Morsel
0,08
0,0168
2.810
2- CNSL -OIL
-
0,070
300

- REMARK The technical yield of the process is 0,21. That is to say: one metric ton of raw nut gives 210 kg of processed cashew almond and other products listed in column number 1 as a - b - c - d - e - f plus 7% of Cashew Nut Shell Liquid (CNSL).
4- PRICES COMPARISON BETWEEN RAW AND PROCESSED NUT

Above inputs - from the General Considerations' chapter to the processed products listed in Table N°1 - stand as preliminaries to deciding upon which products a company, trading in the cashew nut business, should sell on the cashew nut international marketplace to ripe substantial profits and increase Return On Investment's ratio.

Let's us consider and discuss now about the category of products the company should sell: processed cashew almond or raw cashew nut or a combination of both.


As the technical yield of the transformation process of raw nut to various almond and products is only 0,21 one could wonder if it is a profit making operation to implement the transformation of raw nut to finished almond plus cashew nut oil. (See Table N°1 above)

Taking into account data listed in Table N° 1 we obtain Table N° 2 - shown below - which gives the proceeds in US $ generated by products a - b - c - d - e - f plus CNSL for the transformation of one metric ton of raw nut to finished almonds.:

TABLE N° 2
One metric ton of raw nut
210 kg of almond
Proceeds US$
a- Whole White
63 kg
286
b- Notched White
42 kg
181
c- Notched Small White
37,8 kg
156
d- Notched Broken Small White
25,2 kg
85
e- White Morsel
25,2 kg
80
f- White Broken Morsel
16,8 kg
47
CNSL - OIL
70 kg
21
TOTAL
280 kg
856

- One sees that the transformation process of raw nut to processed almonds plus CNSL-OIL is a profit making operation when one compares the global price obtained to pricing discussed in Chapter 3- above: "Princing and Price Evolution"

By-products have not even been taken into account (the shell and fine particles of raw nuts and processed almond - 700 to 720 kg per one ton of raw nuts), which can be used as animal feed and therefore provide additional revenues to the company. And also the processing of Cashew Apple to candies, jam, chutney,syrup, sun-dried cashew-apple, carbonated soft-drinks and wine can improve the bottom line.(One ton of raw nut for 15 tons of fresh cashew-apple)

Courtesy of India's Cashew  Marketing BoardCourtesy of chawa.com Courtesy of Chawa.com
Yellow and Red Cashew-AppleWhole Cashew NutBroken Cashew NutCashew Nut in pieces
5- INVESTMENT DECISIONS

Data and information listed in Tables N° 1 and N° 2 are not sufficient to assist the company in making sound and safe investment decisions; particularly for the initial investment and installation of production lines. The company's decision making body should get precise and accurate answers to following questions:

- Is the knowledge of the various selling prices of processed products as listed in Table N°2 enough to decide for the exact amount of investment necessary to establishing processing plant? To decide for the number of production lines to establish?

- Is that knowledge sufficient to determine the duration of the investment thrust? The rhythm and modulation of ordering equipment?

- Is that knowledge enough for the production manager to allocate production shifts necessary to achieve the maximum output of the processing lines?

Obviously not. Taking investment decisions based only on the pricing listed in tables 1 and 2 and Chapter 3 will be suicidal. It is a sure recipe to financial disaster - sooner or later.

The commercial manager or production manager are not in the position to provide additional information and answers to questions raised above and others to be considered soon in part 2 and 3 of this report.

These answers are within the realm of the financial manager and Accountancy department. They represent an opportunity for the financial manager to step in and shows his financial analysis acumen. His input will kill or boost the company as it will determine:

- The productivity and output of the processing plant
- The ROI - Return On Investment - and thus the bottom line the company may achieve
- And consequently the longevity of the company on the global marketplace.

In next delivery are considered data and recommendations of a feasibility study drafted for the transition of Guinea Bissau's cashew nut industry from raw nut selling to processed products' marketing. The critical analysis of the findings and recommendations of said feasibility study will help us move a step further to determining which entities are responsible for the collapse of Mozambique's cashew nut's industry. Click here for more.

© Dr. Bienvenu-Magloire QUENUM
Investment and Business Planner
Click here for Part -2
2001 Dr. Bienvenu-Magloire Quenum. All rights reserved
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