Businessafrica.net Newsletter ISSN 1563-4108
Dr. QUENUM & ASSOCIATES
INVESTMENT AND BUSINESS PLANNERS
Fax: +1 202 478 0432
Click here for contact & support console
WE TAKE CARE OF
BUSINESS IN AFRICA™
ECONOMIC ANALYSIS

TRUE CAUSES BEHIND THE COLLAPSE
OF MOZAMBIQUE'S CASHEW NUT INDUSTRY

(Part 2 )
CASE STUDY
EVALUATION OF A FEASIBILITY STUDY
ON THE TRANSITION FROM RAW NUT' SELLING
TO PROCESSED PRODUCTS' MARKETING

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

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


In the first part of this report titled
"Cashew nut's worldwide market. Production level and Pricing structure" is exposed a preliminary conclusion that the knowledge of the different processed products' selling prices is far from enough to assisting a company - involve in the trading - makes the right investment decisions.

With this continuation to Part 1, we move a step further. We analyze and evaluate a feasibility study, which covers the transition of an African country's cashew nut industry from raw nut's selling to finished products' marketing.

More flesh are put on the
previous conclusion i.e. a thorough financial analysis of economic data and operation factors are the prerequisite for good and sound investment decisions.

Cashew Nut Plantations / Processing Plant / Investment Period / Critical Considerations / Investment Impact On Cost Of Production/ Conclusion /

Strategy for an African country

PART - 1
CONTINUATION PART - 3
FREQUENTLY ASKED QUESTIONS

1- GENERAL CONSIDERATIONS ABOUT CASHEW NUT PLANTATIONS

In the commodities business (coffee, cocoa, palm oil, cashew nut. Etc.) always exist two kinds of plantations:

-1- "Old plantations" characterized by low and declining productivity; or established with less genetically performing variety seeds or plants.

-2- "New or recent plantations" characterized by high productivity; or established with good genetically performing seeds or plants.

For the case study here under evaluation, all kinds of cashew nut plantations as above categorized, new or old, should provide in Year 1 of the industrialization process: 33,000 metric tons of raw cashew nuts.

Let us then, based on said production level, review and evaluate the feasibility study drafted by an engineering company for the transition of Guinea-Bissau 's cashew nut industry from raw nut' selling to finished products' marketing.
2- PROPOSED CAPACITY FOR THE PROCESSING PLANT

- The feasibility study recommended the establishment of two lines of processing equipment. Each line involving two processing units with a transformation capacity of 2,500 metric tons of raw nuts for each unit. This means that the nominal total installed capacity is 10,000 metric tons.

- The feasibility study also recommended that two operational shifts of hands be in charge of the production; working 300 days a year. Two shifts being proposed, the total effective capacity of the processing plant is therefore 20,000 metric tons of raw nuts a year.

- Above proposal is apparently correct when one takes into account the global production of both categories of cashew nut plantations in Guinea Bissau as above exposed. (33,000 metric tons for the starting Year 1)

- The processing of 20,000 metric tons of raw nut (based on two production shifts) will give an output of finished dried almonds amounting to 4,200 metric tons; plus 1,400 metric tons of CNSL - with the technical yield of 0,21,as here explained applied to 20,000 metric tons of raw nuts; plus 7% of CNSL..
3- INSTALLATION-SCHEDULING OF THE PROCESSING UNITS

We have reported above that the feasibility study advised for the installation - at the start of the industrialization phase - of four processing units (2,500 metric tons treatment capacity for each unit). And two production shifts, which extend the nominal installed capacity of 10,000 metric tons to an effective installed capacity of 20,000 metric tons of raw nuts.

The feasibility study, however, states clearly that only 5,512 metric tons of raw cashew nuts - from the "New plantations" - will be available - during Year 2 of the processing period.

Here one could raise the following question: Knowing that crops generated by New Plantations are of better quality than those coming from the Old ones; and, subsequently, that these new crops are granted a premium price on the cashew nut's marketplace, is it wise and profitable to process the new-generated raw nut together with the old-generated ones?

If one sticks to the proposal of the engineering company as above explained - the immediate ordering, acquisition and installation of four units - there is really no alternative. To justify the use of two shifts from the start of the industrialization period, the company is obliged to process New and Old raw nuts.

The undertaking of a brief economic analysis proves, however, there are at least two other alternatives to the one advised by the feasibility study. These two alternatives read as follows:

- 1- The immediate ordering and purchase of two lines (four processing units); but requesting from the equipment seller for a delivery gap of one year to one year and a half for the second line. And processing operations with only one working shift during two running operational years starting from Year 1.

- 2- A complete postponement of the ordering and purchase of the second package of two processing units.
And operate with one shift during four running operational years starting from Year 1. Installation of the second unit at Year 6 of operation.

Then order, purchase the second processing line 7 (seven) years after the installation of the first line. And install the third unit at Year 8 of operation.

And finish with the installation of the fourth unit 11 (eleven) years after the first installation.

Above outlined suggestions about the investment scheduling and the operational management of the processing plant are more visible and understandable in Table N° 3 (Alternative N°1), Table 4 and Table 4-Bis (Alternative N°2) below:

TABLE N° 3
FOR INVESTMENT SCHEDULING ALTERNATIVE N° 1
ABOVE OUTLINED IN THE YELLOW RECTANGULAR CAPTION
Year1
Year2
Year3
Year4
Year5
One Unit
One Unit
Two Units
Three Units
Four Units
2,500 metric tons of nominal capacity
2,500 metric tons of nominal capacity
5,000 metric tons of nominal capacity
7,500 metric tons of nominal capacity
10,000 metric tons of nominal capacity
One Shift
Two Shifts
Two Shifts
Two Shifts
Two Shifts
300 days /year / 2,500 metric tons effective
300 days /year / 5,000 metric tons effective
300 days /year / 10,000 metric tons effective
300 days /year / 15,000 metric tons effective
300 days /year / 20,000 metric tons effective
30,500 tons of raw nut in excess for export
28,000 tons of raw nut in excess for export
23,000 tons of raw nut in excess for export
18,000 tons of raw nut in excess for export
13,000 tons of raw nut in
excess for export
1rst Unit already installed
Install 2nd Unit
Install 3rd Unit
Install 4th Unit
All four Units operational


TABLE N° 4
FOR INVESTMENT SCHEDULING ALTERNATIVE N° 2
ABOVE OUTLINED IN YELLOW RECTANGULAR CAPTION
Year1
Year2
Year3
Year4
Year5
Year6
One
Unit
One
Unit
One
Unit
One
Unit
One
Unit
Two
Units
2,500 metric tons of nominal capacity
2,500 metric tons of nominal capacity
2,500 metric tons of nominal capacity
2,500 metric tons of nominal capacity
2,500 metric tons of nominal capacity
5,000 metric tons of nominal capacity
One
Shift
Two Shifts
Two Shifts
Two Shifts
Two Shifts
Two Shifts
300 days /year / 2,500 metric tons effective
300 days /year / 5,000 metric tons effective
300 days /year / 5,000 metric tons effective
300 days /year / 5,000 metric tons effective
300 days /year / 5,000 metric tons effective
300 days /year / 10,000 metric tons effective
30,500
tons of raw nut in
excess for export
28,000
tons of raw nut in excess for export
28,000
tons of raw nut in excess for export
28,000
tons of raw nut in excess for export
28,000
tons of raw nut in excess for export
23,000
tons of raw nut in excess for export
First Unit already installed
first Unit installed
first Unit installed
first Unit installed
Install second Unit
Second Unit installed

TABLE N° 4- Bis - CONTINUATION OF TABLE N°4 ABOVE
FOR INVESTMENT SCHEDULING ALTERNATIVE N° 2
ABOVE OUTLINED IN YELLOW RECTANGULAR CAPTION
Year7
Year8
Year9
Year10
Year11
Year12
Two
Units
Two
Units
Three
Units
Three
Units
Three
Units
Four
Units
5,000 metric tons of nominal capacity
5,000 metric tons of nominal capacity
7,500 metric tons of nominal capacity
7,500 metric tons of nominal capacity
7,500 metric tons of nominal capacity
10,000 metric
tons of nominal capacity
Two
Shifts
Two
Shifts
Two
Shifts
Two
Shifts
Two
Shifts
Two
Shifts
300 days /year / 10,000 metric tons effective
300 days /year / 10,000 metric tons effective
300 days /year / 15,000 metric tons effective
300 days /year / 15,000 metric tons effective
300 days /year / 15,000 metric tons effective
300 days /year / 20,000 metric
tons effective
23,000
tons of raw nut in excess for export
23,000
tons of raw nut in excess for export
18,000
tons of raw nut in excess for export
18,000
tons of raw nut in excess for export
18,000
tons of raw nut in excess for export
13,000
tons of raw nut in excess for export
Second Unit installed
Install third Unit
Third Unit installed
Third Unit installed
Install fourth Unit
All four
Units in
action
4- ANALYSIS OF ABOVE TABLES INFORMATION

One can see that the brief operational analysis as shown in Table N°3 and Tables N°4 reveals hidden critical economic facts and data, which lead to the following remarks and observations:

-1- Data in Table N°3 show that the investment schedule for heavy equipment purchasing is spread over an investment period of 4 (four) years if Alternative N°1 is chosen against the initial proposal made by the feasibility study (which recommended a "one-go" investment thrust and immediate purchasing of the heavy equipment (four processing units and ancillary equipment).

-
However, even if Alternative N° 1 is adopted by the processing company, the initial investment amount cannot be drastically reduced. The management of the company is obliged to consider the delivery period imposed by the equipment provider and "Force Majeure" probability and order needed second unit far in advance of end of second operational year (Year2).

-2- If Alternative N° 2 is the one the management adopts, the initial investment amount is halved. That's not bad news for the processing company's cash flow. The company only needs to build - from the start - enough space for future expansion of the plant.

-
Nevertheless, the production manager should take necessary measures (tuning up of the processing equipment, strict control of idling time in the plant and incentives granted to the hands for instance) to maintain the productivity at its highest pick.

-
Also due to the highs and lows fluctuation of the raw nut pricing on the marketplace the processing company's financial manager will have to decide about what to do with the raw nut in excess listed in line N° 6 of Tables N° 3 and 4. To sell these excesses as raw nut or install additional equipment and hire more hands to process them? Here a careful financial analysis of the operating expenses (labor cost, raw material purchasing cost. Etc.) against new equipment purchasing will certainly be necessary.

5- THE IMPACT OF THE AMOUNT OF THE INITIAL INVESTMENT
ON THE COST OF PRODUCTION

To make the winning choice the management of the processing plant needs to undertake more economic and financial analysis. It needs to implement a correct assessment of the cost of production of finished products and compare these costs to the selling price of raw cashew nut.

The calculation of the cost of production is based on the total expenses incurred to implementing the transformation of raw cashew nuts to finished dried almonds and CNSL. The following essential items are always taken into consideration for the calculation of the cost of production:

- The purchasing price of raw materials.
- The operation expenses linked to the production (administrative, hands, equipment maintenance, foreign technical assistance if any and so on).
- Interests on loan.
- Amortization charges.
- Marketing expenses.

It is obvious that the investment planning, the scheduling of the installation of equipment and the number of working shifts adopted to processing the raw nut into finished products will have an important impact on the production cost of processed dried almonds.

Let us implement a simulation of the evolution of the factors above listed in order to investigate their impact on the cost of processing one metric ton of raw nuts into finish products (Dried cashew almonds plus CNSL).

Table N° 5 below show the results of the simulation:

TABLE N° 5 EVOLUTION OF THE COST OF PRODUCTION AGAINST
THE INITIAL AMOUNT OF INVESTMENT FOR PRODUCTION-YEAR N° 1
OPTIONS Proposal From Engineering Company / Quantity of raw material used: 20.000 Metric Tons Alternative N° 1 / Quantity of raw material used: 2,500 Metric Tons Alternative N° 1 / Quantity of raw material used: 5,000 Metric Tons Alternative N° 1 / Quantity of raw material used: 7,500 Metric Tons 1
Investment Level - US $ 5,000,0002,500,0002,500,0002,500,0002
Production Shifts21233
Initial Raw Material Year 1 - Metric Tons20,000
(Point 4 of Chapter 2 -a)
2,5005,0007,5004
Year 1 Total Production Almond Plus CNSL - Metric Tons5,6007001,4002,1005
Operating Expenses - US $     6
Raw Material Cost (US$ 300 Per Metric Ton)6,000,000750,0001,500,0002,250,0007
Processing Cost750,000175,000325,000385,0008
Interest On loans -10 Year Period - 10% Per Year500,000250,000250,000250,0009
Amortization Over 10 years500,000250,000250,000250,00010
Marketing50,0005,00010,00015,00011
Total of Operating Expenses - US $7,900,0001,430,0002,335,0003,150,00012
Production cost - US $ / One metric ton of Almonds plus CNSL1,4112,0431,6681,50013

Figures listed in Table N° 5 show the cost of production linked to the initial proposal of the engineering company (based on the purchase and immediate installation of four units from starting Year N° 1) compares better to Alternatives N° 1 - options. Working with three shifts (column 5), however, for Alternative N° 1 may be also a winning strategy. The purchasing cost of raw material if the company sticks to the engineering company proposal (column N° 2) requires heavy financial means, which might dried out the processing company's cash-flow.

All this boils down to the important remark that a company involved in the cashew nut business of processing raw nut to finished almonds plus CNSL has to consider and evaluate all factors, which may have the tinniest impact on its final cost of production.


Figures listed in Table 1, Table 2, Table 3 Table 4 and Table 5 clearly demonstrate that, in order to be in the position to sell on the marketplace, prosper and perpetuate its business, a company, trading in the commodities sector, needs to have a perfect and constant control on:

-1 - The investment level at any given time.

-2 - The purchasing price of raw materials.

-3 - The operating costs to processing raw materials into value added finished products.

CONCLUSION

In Part 1 we saw that the knowledge of the selling prices of raw cashew nut and finished processed cashew almond plus CNSL is not enough to making sound, wise and profit oriented investment decisions.

Here in Part 2 we have evidences that a good Feasibility Study or Business Plan is not an absolute recipe for success. Having a good Business Plan or Feasibility Study in hand is obviously an asset. A company, which doesn't have a Feasibility Study or a Business Plan - from the start - covering all aspects of its operation is heading for financial disaster. Click here to see why any company, which is profit oriented and ready to compete and win on the marketplace should have a Business Plan.

However, once a Feasibility Study or a Business Plan drafted to setup the company, additional work remain to be done constantly during the lifetime of the company, to improve the collection of economic data to having a dynamic updated financial control board.

With a dynamic updated Business Plan the management of a company is in the position to compare, month after month, the trend of the operation costs. It can negotiate better purchasing prices for services and raw materials; adjust staff and hands salary grid; purchase new equipment to produce at less cost; make sales forecasts. Etc.

With a good Business Plan in hands, a company - whatever maybe its line of business - have more chance to survive in the cutthroat competition atmosphere prevailing in today business world; where only those prepared and equipped to tackle the tinniest detail linked to their production costs are sure to survive and thrive in prosperity. Click here for more.

If such an approach is not adopted by a company involved in the processing and trading of commodities - in agribusiness or mineral sector - that company will, soon or later, hit the wall of bankruptcy and disintegrate.

- Now the final question: Had the management of Mozambique's cashew nut industry implemented such a dynamic update of their financial analysis and Business Plan? If they had done so they should have been in the position in 1994-95 to provide to the decisions makers of Mozambique's government valuable economic data and feedback. The government would then have been at ease to making alternative propositions to the IMF and the World Bank's dictums which strongly recommended the export of raw nut instead of processed finished cashew almond.

Now that Mozambique decided upon an embargo on export of raw cashew nut to India processing units in Mozambique will get regular supplies of raw nut.

However, if the management of the processing plants does not take necessary measures to implementing regular analysis of the cashew nut's market; if they do not implement a dynamic reviewing of all economic aspects of their operations, production's objectives will not be achieved and the companies bottom line will dried out. Consequently, for lack of good management practice, the cashew nut industry crisis will develop into total collapse of the cashew nut agribusiness.

Therefore, one can conclude - taking into account arguments and observations above exposed - that the current collapse of Mozambique's cashew nut industry results from the combination of the following causes

- Wrong recommendations made by the IMF / World Bank to the Mozambican authorities.
- Bad management decisions made for the operation of Mozambique's cashew nut industrial plants..
- Bad follow-up by Mozambique's authorities who do not get proper economic feedback from the processing plants' management.

Part 3 deals with the paramount importance for a company to have a good, experienced and seasoned Financial Manager.

© Dr. B.M. QUENUM
Investment and Business Planner

TOP

This article is Copyright 1997 - 2014 Dr. Quenum & Associates. It may be reproduced for noncommercial purposes as long as attribution is given. This ezine is registered at Yahoo's Newsletters Directory as http://africabiz.org For Terms & Conditions: Click here. For Media Kit / Card Rate: Click here. Subscribe to Africabiz RSS Feed and HTML Email edition