Unbridled Cashew Speculation - History Lesson 102

June 20, 2008
By David Rosenthal
"Enhancing" contracts?
On May 28th members of the Association of Food Industries Nut and Agricultural Section met with diplomats at the Vietnamese Embassy in Washington DC to discuss the magnitude of cashew defaults from Vietnam over the past several months. It is reported that approximately 2000 container loads have been defaulted on by Vietnamese cashew shippers between November 2007 and April 2008. These actions by the Vietnamese shippers have had a major impact on cashew prices with some grades increasing by over $2.00 per pound. Importers are being forced to pay 'enhancements' in order to have their contracted product shipped. This puts the importing community in a position to lose millions of dollars, depending on the volume of contractual obligations to roasters at lower market prices. Several importers who had agreed to these enhancements have been caught off guard when shippers again refused to ship already renegotiated containers unless they agreed to further increases to the enhancements as a result of higher market prices at the time of shipment. Diplomats at the Vietnamese Embassy gave very little hope to the importers and roasters who attended the May meeting. They asked for the AFI members affected by the defaults to have sympathy for the suppliers who have suffered due to higher production costs, increases in raw material and high inflation rates. One roaster commented that he could understand the plight of the Vietnamese cashew suppliers if the enhancements were a one time event, but that asking for further enhancements to release shipments was unsustainable. Three weeks have passed since this meeting and in this short time the FOB price on 320's has moved up by almost $0.35 per pound.

Flashback to 1999
Industry wide defaults by cashew suppliers are not new to the industry. In 1999 Indian shippers defaulted in unprecedented numbers, resulting in tremendous market increases, and huge losses were absorbed by the importing and roasting community. Ironically, these actions by Indian shippers resulted in increased support of the Vietnamese cashew industry. Now that we have experienced this behavior from both major cashew producing countries we may have to reassess the way we conduct business, as taking forward positions has proven to be a very risky venture. Understandably this is a difficult proposition since retailers continue to demand long term contractual agreements to lock in pricing, in some cases for more than one year. With a market certainty time frame of approximately 3 months, the speculative nature of the business has always presented a risk for the cashew commodity trader. Traditionally, if a trader called the market wrong he stood to lose a great deal of money. In today's environment, the trader runs the risk that, even if he calls the market right, his profitable forward position may turn out to be a worthless printout of uncollectible contracts.

Speculative Trading Now Riskier
The current conditions in the cashew market clearly indicate the high price paid for aggressive speculative trading practices from unreliable sources. The desire to get the lowest price sends many importers to small, poorly funded suppliers who not only have questionable manufacturing practices, but also have proven to be unreliable when markets go against them. The ripple effects of this behavior became so far reaching this year that even major Vietnamese suppliers that have been historically reliable caved in to the temptation to demand "price enhancements" in order to fulfill contractual obligations.
Hard Lessons
The cashew industry has experienced the same devastating events twice within one decade. Price increases of over $2.00 lb. are bound to have a negative impact on business with retailers - indeed cashew consumption is already down as consumers, faced with increased fuel and food expenses, cut back on snacks and luxury items. No one in the importing or roasting sectors is benefiting from the present conditions. The great American philosopher, George Santayana once said "Those who do not learn from history are doomed to repeat it". We've had two hard lessons - do we really want to continue on this path?

www.cashewconcern.com

Cashew prices firm up on lower global output

Vietnam, Brazil, Indonesia may witness fall in crop
Ground realities
Some crop damage has been reported from the major producing regions such as Kerala and Mangalore due to incessant rains.
Firm price trends likely to persist till the end of the current year
Our Bureau
Kochi, June 16 Cashew prices have begun to firm up on projections of lower production in Brazil, Vietnam and Indonesia this year.
Raw nut production
Raw cashew nuts production for 2007-08 is expected to be lower by 20 and 10 per cent in Vietnam and Brazil respectively, while the Indian crop is expected to be normal, the Cashew Export Promotion Council of India (CEPCI) has pointed out.
Preliminary indications are that shortfalls are expected from the Indonesian crop as well.
Increased global cashew consumption and greater consumption from India are also expected to contribute to the firm price trends.
Some crop damage has been reported from the major producing regions of the country such as Kerala and Mangalore due to incessant rains. Prices, which had been reigning low for close to a decade have begun to climb back to the peaks of 1999.
Record price
F.o.b prices of cashew grade W-320 have risen to $3.04 a pound in April, closing in on the record price of $3.16 a pound attained in August 1999.
Prices had subsequently touched a low of $1.66 a pound during March 2003. The price spurt of 1999 was mainly contributed by rising domestic and global consumption, CEPCI said.
Rise in acreage
However, there has been significant growth in area and production of cashew since then. The area under cashew registered a growth of 4.2 per cent to 8.5 lakh hectares and production grew by eight per cent to 6.2 lakh tonnes in 2007-08, as against the previous year. This is far ahead of the 7.06 lakh hectares under the crop and 5.2 lakh tonnes production of 1999.
On the processing front, import of raw cashew nut this year was reported to be 6.05 lakh tonnes and the kernel exports stood at 1.14 lakh tonnes. The domestic consumption is also expected to be higher this year on account of increased disposable income of the people and better health awareness. Though raw cashew nut imports have risen this year, kernel exports have dropped due to the sharp appreciation in the value of the rupee.
Trend to persist
Going by the present trends in production, consumption and growing purchasing power in the hands of the consumers, industry sources were optimistic that the firm price trends would persist to the end of the current year and future trends would become evident with the next crop.

India: Cashew nut union leader shot dead this is really getting ugly

India: Cashew nut union leader shot dead at ChatrapurIn a stunning incident, K Srinivash Rao, a union leader of cashew nut traders has been shot dead on broad day light at Chatrapur, the district headquarter town of Ganjam on Saturday. According to the cashew nut traders of nearby areas who were gathered at the post mortem centre at MKCG Medical College, two miscreants riding on a motorbike on the highway alleged fired two rounds at him from the back when Srinivash along with U Ramesh, a businessman returning from the factory in Chatrapur.The local people in Chhatrapur says the fateful incident took place at around 7.30 am near the Ujuli maa temple, outskirts of chhatrapur. Srinivash, president of the Ganjam district union of cashew nut traders has received two bullets; one below his neck and another at back near backbone. He had been taken to the hospital at Chatrapur and then shifted to the MKCG Medical but declared dead after some time in MKCG.Ramesh who was shocked after seeing the deadly seen lost his consciousness after some time of the incident and was not in a condition to reveal all the details about the murder. Meanwhile National Congress party (NCP) leader Rabi Rath demanded a crime branch inquiry into the murder of Srinivash, adding that he was very popular among the local businessman.

Weekly Cashew Update

May 31, 2008

The Cashew market is entering uncharted waters. There has not been much activity this week but undertone is very firm. Business has been done W240 around 3.45, W320 between 3.20 and 3.25, W450 around 3.00-3.05 FOB from India. Most of the business in W320 was with USA for shipments upto Sep but there were reoorts of some business for forwards as well. Stray business being done to off markets few cents higher.

Some processors in Vietnam have been selling few cents lower than India but business being done only for nearbys. Shipments of old re-negotiated contracts is reported to be slow. Buyers say they come to know price they have to pay for each lot only when it is actually shipped !

RCN prices have also moved up. Price for some goods shipped and under shipment are being re-negotiated. Some traders are re-selling afloat parcels at higher prices to other buyers. RCN still available in IVC are with lower yields. Situation in Guinea Bissau is very messy. Over 50,000mt have arrived in port but very small quantity has been shipped. It is reported that sellers are holding buyers to ransom, playing one against the other. Already, re-negotiated prices are about 300 dollars per mt (equiv to 60 cents per lb, kernel basis) higher than original prices and it is still not certain what prices will finally have to be paid to get the goods.

For the time being, buyers (RCN and kernels) have no option but to keep buying what they need to fulfill their delivery commitments. It will be several months before things come close to normal flow of supplies.

If - and only if - demand slows down significantly in coming weeks, we can expect some stability in prices this year; otherwise the firmness will continue till end of the year. And If current firmness continues till beginning of last quarter, RCN prices will be high in Brazil + Indonesia + East Africa leading to higher prices in first quarter 2009 as well.

We will be entering the third quarter - which is traditionally a busy period - with lot of uncertainty and consequent volatility. Next few months are going to be very difficult for all stakeholders – instability distorts trends and decision making becomes difficult

Would appreciate your comments on market situtation, views & forecast of demand & market trend and any other news / info AND opinion

Regards
Pankaj N. Sampat
Mumbai - India