Tuesday, April 29, 2008

Cashew Market Price Hikes and Defaults – Must They Go Hand in Hand?

By David Rosenthal

As if a staggering rise in cashew prices were not enough, reliable sources estimate that Vietnamese shippers have defaulted on over 2000 containers of cashews scheduled to arrive between November 2007 and February 2008. This presents a market differential in excess of 40 million dollars. The Vietnamese have protested that the discrepancies between current market prices and the lower prices contracted before the market overheated is so great that honoring the contracts would effectively put them out of business. Indian shippers (who so far have not defaulted) maintain that fulfilling the contracts would not result in substantial losses, because the Vietnamese raw seed, both domestic and imported, was bought at reasonable price levels and was sufficient to meet Vietnamese contractual obligations.

The problem is that much higher profits can be had by delaying shipments and causing supply disruptions. Historically, the default tolerance level is $0.20 lb. Once the market goes beyond this price differential, the temptation to default and sell to buyers willing to pay a higher price (and there appear to be plenty of these high bidders in China and Malaysia) is too much for some suppliers. And there is every possibility that even this traditional default tolerance threshold could decrease.

There is no question that these defaults are fueling the severe rise in cashew prices. It is by no means an isolated problem, but widespread – continuing from last year’s crop into the current one. The number of defaulted containers that need to be covered has triggered a wave of buying that is permeated with fear – both of shortages and of further price increases. The combination of fear and uncertainty is always a grim mix, and Indian shippers who know the extent of the defaults are not likely to allow prices to soften. There is a slim hope for price relief as the peak arrival period of raw seed in India and West Africa approaches, but the fear factor, delays and defaults seem to have created an environment in which the market firms almost as soon as it eases.

The problem is not unique to the United States. Our counterparts at CENTA have banded together and are working through their governments to resolve the situation through treaties and trade agreements with Vietnam. Although the United States does not have the same types of treaties, the AFI is also trying to safeguard the interests of American importers, who are caught in the vise of having to fulfill contracts to their customers while having to pay more for cashews purchased on an emergency basis in order to cover the defaults. Unfortunately American importers have the added handicap of the weakening dollar, making their bargaining position more problematic.

In order to recoup their losses and stabilize the situation, the importers need for these older, less expensive contracts to be shipped in full. There can be no question of “Force Majeure” from Vietnam, because they continue to offer containers of cashews for 5 – 6 months out (at high prices) which we must assume to be the very containers that they are not shipping for their contracts! By whatever means – arbitration, diplomacy, etc. the defaults need to be addressed, and resolved, because it is not only the short term that is at stake. The commodity trading and speculative market approach that has been the mainstay of the industry could be at risk if commodity traders (importers) are perceived to have no power to effectively enforce contracts.

The cashew industry has experienced these “perfect storms” in the past, and will weather this one also. It is worth mentioning that not all of the Vietnamese shippers have defaulted on their contracts – many are honoring their obligations. These tend to be the ‘best of the best’ – shippers who view long term relationships as more important than quick profits. These difficult situations are always learning opportunities – if nothing else, hopefully, the importing community will remember who the reliable suppliers are when the good times come around again.

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