July 29, 2019
A portion of the 2018 Tanzanian cashew crop was being processed locally, but a very large portion, which should have been processed in India and Vietnam between November 2018 and March 2019 is still lying in Tanzania. These were the findings of a new report on cashew inventories and Tanzania prospects for 2019. It was released by cashew expert Pankaj Sampat.
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This stock of approximately 2,25,000 metric tonne (MT) is like a Damocles sword on the cashew market. Until it falls, everyone in the supply chain – be it RCN (raw cashew nut) traders, processors or kernel handlers – is scared to take any large positions.
Inventories in the cashew chain
Monthly processing in India and Vietnam is approximately 1,25,000MT each. Processors keep four to six weeks’ inventory on an average (some keep more). Transit time from West Africa to Asia is approximately six weeks. So, inventory plus pipeline is minimum 3,50,000MT each (i.e., a total of 7,00,000MT).
Indonesia, Africa and Brazil have to buy 12 months’ requirement in 2-3 months, and then gradually drawn down inventory during the year. Rough estimate of processing in these areas is 5,00,000MT. Average inventory can be assumed to be 1,00,000MT.
World kernel trade (excluding consumption in processing countries) is approximately 5,50,000MT (approximately 45,000MT per month). Assuming minimum four weeks inventory plus four weeks on waters, kernel inventory plus pipeline is 90,000MT (approximately 3,50,000MT of RCN).
Adding all this, normal operating inventory for the industry is 700 + 100 + 350 = 1.35MT. Here, we are not considering inventory held by traders.
Does this mean that over one-third of world production is always held as normal operating inventory?
If so, what impact would 225-250K - less than seven per cent of the world production have, keeping in mind that it is just one month requirement of India and Vietnam?
If this percentage is completely out of the equation (short crop), it would certainly have an impact. If it is out of circulation for a few weeks (shipment delays), it would not matter.
But if it remains out of the system for a long time – as it now has – it can distort the market and create significant ripple when it finally comes into the market. Although the wave will be temporary, it can cause minimal or serious damage depending on when this happens.
Some thoughts on what could happen in Tanzania
If the 2018 Tanzania crop moves in August-September-October (i.e., before the 2019 crop comes to market), there will be a smooth transition to the new crop. Of course, sales will have to be at prices in line with the current kernel market, because nobody would bet on prices moving up significantly given that overall supply situation is comfortable.
This is evident from the fact that prices have been low during FH 2019, despite 225-250K of RCN not being available for processing when it should have. With this stock out of the way, trading for the 2019 crop would proceed smoothly because processors will need RCN to process till the northern crops start in March 2020.
If this does not happen, processors (and even RCN traders) would be reluctant to buy the 2019 crop even if the 2 crops are sold simultaneously in separate auctions or systems. This will mean continued uncertainty with unintended negative consequences.
Another effect of 2018 crop not moving now would be a squeeze on RCN supplies to India and Vietnam in the last quarter of 2019. This could lead to a unnecessary and unjustified spurt in prices which would prove to be short-lived. It would be followed by a sharp fall when the 2018 and 2019 crops come to the market. Any price advantage on the first few thousand tonne would be more than lost by lower prices on the rest of the quantity.
Our take is that Scenario 1 is the one with least pain and most gain for everyone in the chain.
In the last few days, there are some indications – unconfirmed so far – that things could be moving in this direction.
If they do, there willl be a steady market with a gradual and healthy growth in business for everyone, supported by adequate supplies and reasonable prices. As mentioned by several others, there are already signs of renewed interest and growth in most markets.
If not, we will see sharp moves – up and down – before the 2020 crops, causing damage to all links in the chain, which will take a long time to repair.
Reporters
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