Monday, June 23, 2008

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?

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