Some portion of the 2018 Tanzania crop is being processed locally but a very large portion which should have been processed in India & Vietnam between Nov 2018 & Mar 2019 is still lying in Tanzania.
This stock of approx. 225,000MT is like a Damocles sword on the cashew market. Until it falls, everyone in the supply chain – RCN traders, processors, kernel handlers – is scared to take any large positions.
Thinking about this, we put together some notes on inventories in the Cashew chain:
1) Monthly processing in India & Vietnam is approx. 125,000MT each. Processors keep 4-6 weeks inventory (average – some keep more). Transit time from West Africa to Asia is approx 6 weeks. So, inventory + pipeline is min 350,000MT each – total 700,000MT.
2) Indonesia, Africa, 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 500,000MT. Average inventory can be assumed to be 100,000MT
3) World kernel trade (excluding consumption in processing countries) is approx. 550,000MT = approx. 45,000MT per month. Assuming minimum 4 weeks inventory plus 4 weeks on waters, kernel inventory + pipeline is 90,000MT = approx. 350,000MT of RCN.
4) Adding all this, normal operating inventory for the industry is 700 + 100 + 350 = 1.35 million tons. Here, we are not considering inventory held by traders.
Does this mean that over 1/3 of World Production is always held as normal operating inventory ?
If so, what impact would 225-250K = less than 7% of World production have – keeping in mind that it is just 1 month requirement of India & 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 can happen in Tanzania :
1) If the 2018 Tanzania crop moves in Aug Sep Oct i.e. before 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 2019 crop would proceed smoothly because processors will need RCN to process till the Northern crops start in March 2020.
2) 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.
3) Another effect of 2018 crop not moving now would be a squeeze on RCN supplies to India & Vietnam in last quarter 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 & 2019 crops come to the market (which they finally have to, at some stage). Any price advantage on the first few thousand tons 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, we will see a steady market with a gradual and healthy growth in business for everyone, supported by adequate supplies & reasonable prices. As mentioned by several others, there are already signs of renewed interest & 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.
We would appreciate your comments on this situation and your thoughts on how things will pan out in the coming weeks.
Pankaj N. Sampat
San Francisco & Mumbai
+91 98200 79015 / +1 415 881 0633