WHAT DRIVES COMPETITIVENESS IN THE MOZAMBIQUE CASHEW VALUE CHAIN?

JAKE WALTERJAKE.WALTER@TVCABO.CO.MZ OCTOBER 19, 2006

THIS PRESENTATION IS BASED ON THE TECHNOSERVE’S USAID-FUNDED WORK IN NORTHERN MOZAMBIQUE

Processing plants in 8 different districts- south of Tanzania and east of

Malawi - began operations over the past

5 years with TechnoServe assistance. Revenues are

now in excess of $10 million

X

XXX

XXX

X

• Approximately 200,000 families, each with 5 members, live in this area and more than 90% of the families produce and sell cashew nuts

• Per capita annual income is approximately $80

• Opportunities for employment are minimal

• The 8 factories now employ over 6,000 workers and source raw materials from more than 120,000 families

Global Enabling Environment

National Enabling Environment

Financial (cross cutting)

Financial (cross cutting)

Sector-specific providers

Sector-specific providers

Cross-cutting providers

Cross-cutting providers

ProducersProducers

Input SuppliersInput Suppliers

GLOBAL VALUE CHAINGLOBAL VALUE CHAIN

WholesalersWholesalers

National Retailers

National Retailers

ExportersExporters

Global RetailersGlobal Retailers

BuyersBuyers

TO COMPETE WITH INDIA AND VIETNAM, MOZAMBIQUE MUST REDUCE COSTS ALONG THE VALUE CHAIN

Tree Productivity

Quality Sampling and Pricing

Links to Markets and

Scale Industry Coordination and

Policy

Skill Levels, Interest Rates and Real Cost

of Labor

INTERVENTIONS SHOULD BE CHOSEN BASED ON THEIR ABILITY TO DRIVE COST COMPETITIVENESS

•Intensive technical assistance and training (firm-level upgrading)•Government-backed loan guarantees and industry-specific wage agreement (enabling environment)

•Strong relationship with broker (end market)

•Joint marketing under single brand (inter-firm cooperation)

•Training in quality testing of farmers, farmer groups, traders, factories and other stakeholders (relationships)

•Development and diffusion of optimal production model through farmer groups and other stakeholders (firm-level upgrading)

•Implementation of brand strategy (Zambique) encompassing smallholder suppliers, workers, customers and other stakeholders (end market, enabling environment, inter-firm cooperation, etc.)

RAW CASHEWS MUST BE PRODUCED COMPETITIVELY

Tree Productivity

QUALITY OF RAW CASHEWS IS MEASURED BY “OUTTURN” OF RAW NUTS

Select a random sample of 1 kg of

raw nuts

Open the nuts and identify

•Good kernels•Spotted kernels

•Humidified kernels•Premature kernels

•Bad kernels

Pounds of sellable kernels per 80 kg bag of raw nuts

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

MORE QUALITY OF RAW NUTS WILL LEAD TO HIGHER INCOME FOR THE FARMER

Base case: smallholder farmer with 25 trees*

Eff

ect

of in

crea

sing

yie

lds

per

tre

eEffect of increasing quality

44 lbs 48 lbs 52 lbs4

kg/t

ree

6 kg

/tre

e8

kg/t

ree

$36.4

$72.8

$54.6

$39.7

$79.4

$43.0

$64.6

$86.0

Annual income from cashews, USD

$59.6

HIGHER QUALITY NUTS ALSO ENABLE WORKERS TO EARN HIGHER SALARIES

Monthly salary in MT, example of cashew nut cutterWorker cuts 40 kg/day

Worker cuts 50 kg/day

Worker cuts 55 kg/day44 lbs quality

52 lbs quality

48 lbs quality

Minimum wage: 1,443,176 MT

0 500,000 1,000,000 1,500,000 2,000,000

AND BETTER QUALITY RAW NUTS SIGNIFICANTLY INCREASES THE PROFITABILITY OF PROCESSING

100

48

23

19

7

3

Total revenues

Profits

Sales commission

Fixed costs*

Variable salaries

Cost of raw nuts

+9%

+34%

+9%

-

+9%

+9%

+18%

+68%

+18%

-

+18%

+18%

44 LB 48 LB 52 LB

PRODUCERS, PROCESSORS, RESEARCHERS AND EXTENSIONISTS MUST UNDERSTAND OUTTURN

Tree Productivity

Quality Sampling and

Pricing

TECHNOSERVE DEVELOPED A DATABASE OF 1,234 SAMPLES TO INFORM PRODUCTION AND PURCHASING

Step 1Training

290 people in Mozambique received training over 12 sessions

Step 2Kit distri-bution

77 kits distributed to participants from the five cashew-producing regionsParticipants also received cash to buy cashew samples

Step 3Sampling

Participants who received kits went out and bought samplesSamples were analyzed

Step 4Reporting

Detailed results were recorded on forms received during training

Step 5Follow-up

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

Step 6Data collection

Training team collected forms and samples of nuts

Step 7Quality control

Training team controlled information on forms against content of samples

Step 8Data entry

Results were entered into excel database

AND FROM THIS DATA THE GOVERNMENT AND PARTNERS CAN ORIENT RESEARCH AND EXTENSION

Share of potential outturn achieved

Po

ten

tia

l o

utt

urn

80% 100%

45

55

Nampula

Zambezia

Gaza

Inhambane1

2

High potential achieved for all cashew-trees in

Mozambique

1 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

2 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)

PROCESSING EFFICIENCY, INTEREST RATES AND COSTS OF LABOR ARE ALSO KEY TO COMPETITIVENESS

Tree Productivity

Quality Sampling and Pricing

Skill Levels, Interest

Rates and Real Cost of

Labor

REVENUES ARE VERY SENSITIVE TO WHOLE NUT YIELD RATES

More nuts are broken during processing in Africa….

20

45

8075

55

25

India Africa

hand

Whole nuts

Broken nuts

Africa

mechanical

775

688

758

…resulting in lower revenues

US $ per metric ton of raw nut

RETURNS ARE ALSO IMPACTED BY WORKING CAPITAL INTEREST RATES AND REAL WAGES

IRR sensitivity to changes in working capital rates and wages

Working Capital Interest

Rates

46% 38%

39% 30%

30% 12%

19% 3%

23%

9% -1%

4% na

na na

Base case 6% 10% 20%

6%

9%

15%

20%

Increase in real wage rates

Unattractive returns

Potentially viable returns

14%

Base Case

STRONG LINKS TO THE MARKET AND ECONOMIES OF SCALE INCREASE COMPETITIVENESS

Links to Markets and

Scale

Tree Productivity

Quality Sampling and Pricing

Interest Rates and Real Cost

of Labor

CASH FLOW AND PRODUCT PRICE ARE SENSITIVE TO VOLUMES

A 1000-ton capacity factory takes more than two months to fill a container, increasing working capital requirements

Cashew kernels come in 26 different grades and most buyers are interested in only a few grades and will pay more for containers with fewer grades

Therefore, cash flow and margins can be enhanced by strong market linkages and joint marketing

INDUSTRY COORDINATION AND POLICY SUPPORT INCREASES COMPETITIVENESS

PRESIDENT GUEBUZA LAUNCHES ZAMBIQUE BRAND

SUMMARY OF TECHNOSERVE INTERVENTIONS TO DRIVE COMPETITIVENESS IN THE VALUE CHAIN

•Intensive technical assistance and training (firm-level upgrading)•Government-backed loan guarantees (enabling environment)•Industry-specific wage agreement (enabling environment)

•Strong relationship with broker (end market)

•Joint marketing under single brand (inter-firm cooperation)

•Training in quality testing of farmers, farmer groups, traders, factories and other stakeholders (relationships)

•Development and diffusion of optimal production model through farmer groups and other stakeholders (firm-level upgrading)

•Implementation of brand strategy (Zambique) encompassing smallholder suppliers, workers, customers and other stakeholders (end market, enabling environment, inter-firm cooperation, etc.)

THANK YOU! Please visit www.microlinks.org/breakfast for

seminar presentations and papers

Jake Walterjake.walter@tvcabo.co.mz October 19, 2006