WHAT DRIVES COMPETITIVENESS IN THE MOZAMBIQUE CASHEW VALUE CHAIN?

1. WHAT DRIVES COMPETITIVENESS IN THE MOZAMBIQUE CASHEW VALUE CHAIN? JAKE WALTER JAKE.WALTER@TVCABO.CO.MZ OCTOBER 19, 2006

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

3. National Enabling Environment GLOBAL VALUE CHAIN Global Retailers Global Enabling Environment National Retailers Sector-specific providers Exporters Wholesalers Buyers Cross-cutting providers Producers Financial (cross cutting) Input Suppliers

4. Tree Productivity Quality Sampling and Pricing Skill Levels, Interest Rates and Real Cost of Labor Links to Markets and Scale Industry Coordination and Policy TO COMPETE WITH INDIA AND VIETNAM, MOZAMBIQUE MUST REDUCE COSTS ALONG THE VALUE CHAIN

5. Development and diffusion of optimal production model through farmer groups and other stakeholders (firm-level upgrading) • Training in quality testing of farmers, farmer groups, traders, factories and other stakeholders (relationships) • 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) • Implementation of brand strategy (Zambique) encompassing smallholder suppliers, workers, customers and other stakeholders (end market, enabling environment, inter-firm cooperation, etc.) INTERVENTIONS SHOULD BE CHOSEN BASED ON THEIR ABILITY TO DRIVE COST COMPETITIVENESS

6. RAW CASHEWS MUST BE PRODUCED COMPETITIVELY Tree Productivity

7. Pounds of sellable kernels per 80 kg bag of raw nuts Weigh the useable share of nuts and calculate: • Select a random sample of 1 kg of raw nuts • Grams of • useful kernels • x 80 • 454 • = • Outturn QUALITY OF RAW CASHEWS IS MEASURED BY “OUTTURN” OF RAW NUTS 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 • Open the nuts • and identify • Good kernels • Spotted kernels • Humidified kernels • Premature kernels • Bad kernels

8. Base case: smallholder farmer with 25 trees* • Annual income from cashews, USD • Effect of increasing quality • 48 lbs • 52 lbs • 44 lbs • $36.4 • $43.0 • $39.7 • 4 kg/tree • Effect of increasing yields per tree • $59.6 • 6 kg/tree • $54.6 • $64.6 • 8 kg/tree • $79.4 • $86.0 • $72.8 MORE QUALITY OF RAW NUTS WILL LEAD TO HIGHER INCOME FOR THE FARMER

9. Minimum wage: 1,443,176 MT Monthly salary in MT, example of cashew nut cutter • Worker cuts 40 kg/day • Worker cuts 50 kg/day • 44 lbs quality • Worker cuts 55 kg/day • 48 lbs quality • 52 lbs quality 0 500,000 1,000,000 1,500,000 2,000,000 HIGHER QUALITY NUTS ALSO ENABLE WORKERS TO EARN HIGHER SALARIES

10. 44 LB 48 LB 52 LB • Total revenues • Profits • Sales commission • Fixed costs* • Variable salaries • Cost of raw nuts • +9% • +34% • +9% • - • +9% • +9% • +18% • +68% • +18% • - • +18% • +18% AND BETTER QUALITY RAW NUTS SIGNIFICANTLY INCREASES THE PROFITABILITY OF PROCESSING

11. Tree Productivity PRODUCERS, PROCESSORS, RESEARCHERS AND EXTENSIONISTS MUST UNDERSTAND OUTTURN Quality Sampling and Pricing

12. Step 1 Training Step 2 Kit distri-bution Step 3 Sampling Step 4 Reporting Step 5 Follow-up Step 6 Data collection Step 7 Quality control Step 8 Data entry 290 people in Mozambique received training over 12 sessions 77 kits distributed to participants from the five cashew-producing regions Participants also received cash to buy cashew samples Participants who received kits went out and bought samples Samples were analyzed Detailed results were recorded on forms received during training Training team visited each person 3-4 times to follow up on procedure and check that results were being recorded properly Training team collected forms and samples of nuts Training team controlled information on forms against content of samples Results were entered into excel database TECHNOSERVE DEVELOPED A DATABASE OF 1,234 SAMPLES TO INFORM PRODUCTION AND PURCHASING

13. 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 55 High potential achieved for all cashew-trees in Mozambique 1 Gaza Inhambane Potential outturn 2 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) Zambezia Nampula 45 80% 100% Share of potential outturn achieved AND FROM THIS DATA THE GOVERNMENT AND PARTNERS CAN ORIENT RESEARCH AND EXTENSION

14. Tree Productivity Quality Sampling and Pricing PROCESSING EFFICIENCY, INTEREST RATES AND COSTS OF LABOR ARE ALSO KEY TO COMPETITIVENESS Skill Levels, Interest Rates and Real Cost of Labor

15. More nuts are broken during processing in Africa…. • …resulting in lower revenues • US $ per metric ton of raw nut • Whole nuts • Broken nuts • Africa • mechanical • India • Africa • hand REVENUES ARE VERY SENSITIVE TO WHOLE NUT YIELD RATES

16. IRR sensitivity to changes in working capital rates and wages Increase in real wage rates Base case 6% 10% 20% Potentially viable returns Base Case 46% 38% 30% 12% 6% Unattractive returns 39% 30% 19% 3% Working Capital Interest Rates 9% 14% 23% 4% na 15% 9% -1% na na 20% RETURNS ARE ALSO IMPACTED BY WORKING CAPITAL INTEREST RATES AND REAL WAGES

17. Tree Productivity Quality Sampling and Pricing Interest Rates and Real Cost of Labor Links to Markets and Scale STRONG LINKS TO THE MARKET AND ECONOMIES OF SCALE INCREASE COMPETITIVENESS

18. 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 CASH FLOW AND PRODUCT PRICE ARE SENSITIVE TO VOLUMES

19. INDUSTRY COORDINATION AND POLICY SUPPORT INCREASES COMPETITIVENESS PRESIDENT GUEBUZA LAUNCHES ZAMBIQUE BRAND

20. SUMMARY OF TECHNOSERVE INTERVENTIONS TO DRIVE COMPETITIVENESS IN THE VALUE CHAIN • Development and diffusion of optimal production model through farmer groups and other stakeholders (firm-level upgrading) • Training in quality testing of farmers, farmer groups, traders, factories and other stakeholders (relationships) • 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) • Implementation of brand strategy (Zambique) encompassing smallholder suppliers, workers, customers and other stakeholders (end market, enabling environment, inter-firm cooperation, etc.)

21. THANK YOU!Please visit www.microlinks.org/breakfast for seminar presentations and papers Jake Walter jake.walter@tvcabo.co.mz October 19, 2006