TechnoServe+Cashew+Competitiveness+ACA+English

7/31/2019 TechnoServe+Cashew+Competitiveness+ACA+English

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1

INTERNATIONALLY COMPETITIVE PROCESSING COULD GENERATE ANADDITIONAL $400 MILLION REVENUES FOR AFRICA BY 2020

Africa cashew value added processing revenues, 1995-2010USD, tens of millions

0

5

10

15

20

25

30

35

40

45

Potential processingrevenues

201020051995

$400 million

2000

Processing revenues assumingno further expansion


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2

13

6

40

21 1

18

Manual laborwages

Export levy After-taxprofit

Total

OVER 40 PERCENT OF THE $400 MILLION REVENUES WOULD GO TOMANUAL LABOR WAGES

US $ tens of millions

Source:Industry Sources, Team estimates

IncomeTax

Other*

Breakout of value created by processing cashews in Africa

Admin, sales& overhead


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AFRICAN PROCESSORS WILL NEED TO BE INTERNATIONALLYCOMPETITIVE ON FIVE DIMENSIONS IF THEY ARE TO BE PROFITABLE

Revenues are sensitive to the percentage of nuts broken during processin India achieves yield rates of around 80% whole nuts

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

Raw nuts are an expensive input requiring large capital outlays to secureinventory

African competitiveness will be impacted by the availability of working capiat internationally competitive rates

New entrepreneurs will need to achieve internationally competitive qualitystandards to remain viable

Prices received by local processors may initially be discounted until areputation for reliability and quality is established

Outturn of raw cashews impacts the competitiveness of processing, theincomes of producers and the productivity of factory labor

Research, extension and marketing chains of raw cashew must value the

outturn of raw cashew nuts

Broken nutyields

Broken nutyields

ProductioncostsProductioncosts

Working

capital rates

Working

capital rates

Quality andreputation


Outturn ofraw material



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AS RECEITAS DEPENDEM MUITO DA PERCENTAGEM DE AMENDOASINTEIRAS

Source: Industry Data

Mais amendoas sao partidas noprocessamento na Africa.Percent

20

45

80

75

55

25*

India Africahand

Whole nuts

Broken nuts

que resulta em receitas mais baixasUS $ per metric ton of raw nut

Revenuewith 20%

broken nuts

Revenuewith 25%

broken nuts

775

688

758

Africamechanical

Revenuewith 45%

broken nuts


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5

LOW MARGINS MAKE PROFITABILITY OF CASHEW PROCESSINGHIGHLY SENSITIVE TO YIELDS AND PRODUCTION COSTS

Source: Team Estimates

-250

-150

-50

50

150

250

350

450

1 2 3 4 5

Cumulative cash flow$ thousands

Base Assumptions

Whole Nut Yields70% year 175% year 280% year 3 andafter

Working capital rate 9%

Broken nut prices 59% ofwhole nut prices

Base Case IRR 39%

Payback 35 months

Whole yields plateauat 75% IRR 27% Payback 42 months

Years


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PRODUCTION COSTS ARE DRIVEN BY LABOR RATES ANDTRANSPORTATION COSTS

Source: Industry Sources, Team Estimates

Processing CostsUS $ per ton of raw nut

250

285

620

Processing Cost

Raw nut shipping 65

315

India Africamechanized

Africahand

India has a small advantage inprocessing cost due to the efficiency ofits workforce

Indias processing cost advantage isoffset by the shipping cost of the rawnuts

GBK6


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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


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IRR sensitivity to changes in working capital rates and wages

WorkingCapitalInterestRates

46% 38%

39% 30%

30% 12%

19% 3%

23%

9% -1%

4% na

na na

Base case 6% 10% 20%

6%

9%

15%

20%

Increases in real wage rates

Unattractivereturns

Potentially viablereturns

RETURNS WILL ALSO BE IMPACTED BY CHANGES IN WORKING CAPITALRATES AND WAGES

14%

Base Case

Source: Team Estimates


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NEW ENTREPRENEURS WILL NEED BUSINESS AND TECHNICALSUPPORT TO OVERCOME KEY CHALLENGES

Working capital for raw nut inventory is the most significant capital requirement for aprocessor 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

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 theworking capital burden on processors

Processors with strong market relationships may have flexibility to deliver mixed gradecontainers

FinancingFinancing

TrainingTraining

Market

Linkages

Market

Linkages

Issue


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9

PROCESSORS MUST HAVE ACCESS TO QUALITY NUTS TO ASSURELONG TERM INDUSTRY VIABILITY

Tree Age (years)

Cashew yields (and nut outturn!) declineafter trees reach 20 years of age

cashew yield per

tree (kg/tree)

Source: Naliendeli Research Institute, Farmer interviews

0-10 11-20 21-30 31-40 > 40

and 60% East Africas trees are over 20years old

Tree Distribution by Age (years)

percent

20 20

5 5

50

0

2

4

6

8

10

12

14

16

0 5 10 15 20 25 30 35 40


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OUTTURN IS THE MEASURE OF QUALITY OF RAW NUTS

Definition of outturn: Pounds of sellable kernelsper 80 kg bag of raw nuts

Step 1: Step 2: Step 3:

Select a randomsampleof 1 kg ofraw nuts

Open the nuts, andidentify

Good kernels Spotted kernels Humidified kernels Premature kernels Bad kernels

Weigh the useableshare of nuts, andcalculate:

Grams ofuseful kernels x 80

454

=

Outturn

India 50-56

Vietnam 50-56

Brazil 50-55Guinea 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

Average outturn for majorproducing countries:


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THE PROJECT RIGOROUSLY DEVELOPED A DATABASE OF

CASHEW QUALITY IN MOZAMBIQUE

Step 1

Training

Step 2

Kit distri-bution

Step 3

Sampling

Step 4

Reporting

Step 5

Follow-up

Step 6

Datacollection

Step 7

Qualitycontrol

Step 8

Data entry

290 people inMozambiquereceivedtraining over12 sessions

77 kitsdistributed toparticipantsfrom the fivecashew-producingregionsParticipantsalso receivedcash to buycashew

samples

Participantswho receivedkits went outand boughtsamplesSampleswereanalyzed

Detailedresults wererecorded onformsreceivedduringtraining

Trainingteam visitedeach person3-4 times tofollow up onprocedureand checkthat resultswere beingrecordedproperly

Trainingteamcollectedforms andsamples ofnuts

Trainingteamcontrolledinformationon formsagainstcontent ofsamples

Results wereentered intoexceldatabase


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PROBLEMS WITH OUTTURN VARY FROM ONE PROVINCE TO

ANOTHER

48.6

53.1

53.4

48.5

52.0

46.6

44.6

47.4

45.9

50.6

ActualPotential

Cabo-Delgado

Nampula

Gaza

Inhambane

Zambezia

Share of potential outturn achieved

Potential

outturn

80% 100%

45

55

Cabo-Delgado*

* Only 3 samples were tested from the Cabo-Delgado province, may not be representative.

Source: TechnoServe

Nampula

Zambezia

Gaza

Inhambane


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TWO DIFFERENT STRATEGIES NEED TO BE PURSUED

Share of potential outturn achieved

Potential

outturn

80% 100%

45

55

* Only 3 samples were tested from the Cabo-Delgado province, may not be representative.

Source: TechnoServe

Nampula

Zambezia

Gaza

Inhambane

1

2

1

2

Gaza/Inhambane: improve

production methods to achievefull potential:

Educate farmers about properharvesting and post-harvestingmethods

Impose the use of jute sacks instead

of woven plastic Establish link between quality and

price

Zambezia/Nampula: increase potentialthrough replanting schemes andeducation:

Plant new cashew trees Make sure high-quality grafted seedlings

are used Ensure trees are properly taken care of

(chemicals and tree maintenance)

High potentialachieved for allcashew-trees in

Mozambique


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FOCUSING ON QUALITY WILL INCREASE QUANTITY

PRODUCED AND LEAD TO HIGHER INCOME FOR THE FARMER

Base case:smallholder

farmer with25 trees*

Effe

ctofincreasing

yieldspertree

Effect of increasing quality

44 lbs 48 lbs 52 lbs

4

kg/tree

6

kg/tree

8

kg/tr

ee

* Income effect calculated based on a price of 10,000 per kg of raw nuts for 44 lbs quality, and an exchange rateof 1 USD = 27,500 Mt

Source: TechnoServe

$36.4

$72.8

$54.6

$39.7

$79.4

$43.0

$64.6

$86.0

Annual income from cashews, USD

$59.6


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HIGHER QUALITY NUTS ENABLES WORKERS TO GAIN HIGHER

SALARIESMonthly salary in MT, example of cashew nut cutter Worker cuts 40 kg/dayWorker cuts 50 kg/day

Worker cuts 55 kg/day

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

44 lbsquality

52 lbsquality

48 lbsquality

Minimum wage:1,443,176 MT

Improved quality iscrucial in order to bringworkers salaries in linewith minimum wages

Increased salaries maybring higher motivationand thus improveproductivity further


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BETTER QUALITY OF RAW NUTS SIGNIFICANTLY INCREASES

THE COMPETITIVENESS OF THE PROCESSING INDUSTRY

100

48

23

19

7

3

Total revenues

Profits

Sales commission

Fixed costs*

Variable salaries

Cost of raw nuts

44 lbs quality 52 lbs quality48 lbs quality

44 lbs quality = 100Impact ofimproved quality

* Includes fixed labor, overhead, amortizations, taxes and interest

Source: TechnoServe

+9%

+34%

+9%

-

+9%

+9%

+18%

+68%

+18%

-

+18%

+18%


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AFRICAN PROCESSORS WILL NEED TO BE INTERNATIONALLYCOMPETITIVE ON FIVE DIMENSIONS IF THEY ARE TO BE PROFITABLE

Revenues are sensitive to the percentage of nuts broken during processin India achieves yield rates of around 80% whole nuts

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

Raw nuts are an expensive input requiring large capital outlays to secureinventory

African competitiveness will be impacted by the availability of working capiat internationally competitive rates

New entrepreneurs will need to achieve internationally competitive qualitystandards to remain viable

Prices received by local processors may initially be discounted until a

reputation for reliability and quality is established

Outturn of raw cashews impacts the competitiveness of processing, theincomes of producers and the productivity of factory labor

Research, extension and marketing chains of raw cashew must value theoutturn of raw cashew nuts

Broken nutyields

Broken nutyields

ProductioncostsProductioncosts

Working

capital rates

Working

capital rates






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OBRIGADO!

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TechnoServe+Cashew+Competitiveness+ACA+English