WHAT DRIVES COMPETITIVENESS IN THE MOZAMBIQUE CASHEW VALUE CHAIN?
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WHAT DRIVES COMPETITIVENESS IN THE MOZAMBIQUE CASHEW VALUE CHAIN?
JAKE [email protected] OCTOBER 19, 2006
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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
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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
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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
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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.)
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RAW CASHEWS MUST BE PRODUCED COMPETITIVELY
Tree Productivity
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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
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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
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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
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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
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PRODUCERS, PROCESSORS, RESEARCHERS AND EXTENSIONISTS MUST UNDERSTAND OUTTURN
Tree Productivity
Quality Sampling and
Pricing
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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
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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)
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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
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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
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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
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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
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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
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INDUSTRY COORDINATION AND POLICY SUPPORT INCREASES COMPETITIVENESS
PRESIDENT GUEBUZA LAUNCHES ZAMBIQUE BRAND
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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.)
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THANK YOU! Please visit www.microlinks.org/breakfast for
seminar presentations and papers
Jake [email protected] October 19, 2006