AfricasheW450 - February 2023 Market Analysis

Cashew Market Outlook

By: Jim Fitzpatrick

(Please note that all views expressed in the “Cashew Market Outlook” section are those of Mr Fitzpatrick and do not necessarily reflect the view of the African Cashew Alliance)

Mixed messages, some intended most not intended, are making the reading of the puzzle we call the cashew market more difficult than ever. Do not be surprised if you are finding market decision-making difficult right now. Many of the most experienced people in the business from all parts of the World are in the same position judging from their comments at the World Cashew Conference at the end of February. The African cashew sector was well represented at the Conference by ACA, of course, and by a range of regulatory bodies, development projects, traders and processors. Their contribution was notable, balanced and welcomed. In particular, we salute the contribution of African women to the debates.

The difficulty for many people in understanding the market in the early days of 2023 stems from a series of apparent contradictions and misleading reports. We will not get to the bottom of these in this short article but let's try to look at some facts and dispel some myths.

Let’s start with the apparent contradictions. Firstly, RCN prices in the international market range from US$ 1200 - 1350/t Cfr depending on quality and destination. These prices are sustained despite a sharp fall in freight rates back toward pre-pandemic levels. Cashew kernel prices for export trade WW320, range from US$ 2.65 – 2.75 / lb FOB for reliable, certified processors. These do not match in terms of a calculation to buy RCN and profitably transform it. Unlike earlier years, existing forward sales will not be at higher prices as the cashew kernel market has been around the current levels for months. That means that processors cannot make a profit, especially in the leading exporter, Vietnam. It is true that good prices for by-products and higher-priced sales in the Chinese market make this look a little better. But by how much? And for how long?

Secondly, cashew kernel prices have been at low levels – in fact, ten-year lows – for almost a year now but demand from key price-sensitive markets has not been stimulated. That is unusual. In the USA retail prices have actually increased. Surely lower prices should mean higher demand, promotions and more buying from processors. Isn’t that the basic economic Law of Demand? It is, but there is a time lag that could range from 12 to 18 months. It might be toward the longer end of that range when other costs such as energy, delivery and labour are rising for roasters and retailers. It is also impacted by the timing of retailers’ tenders, the high levels of inventory coming into the lower price period and the undermining of confidence caused by price volatility in the sector since 2017. This malaise is repeated across the nut sector causing inventories of almonds, walnuts and pistachio to build up not to mention incredible volatility in the hazelnut sector.  It will change in time. Many people think that the second quarter of 2023 will see the beginning of the turn. They argue that the underlying demand for cashew kernels remains strong and that trends in healthy foods and snacking will support the upward trajectory in demand that we have seen for the past 30 years.  

Third, farm gate prices in some countries have been trending higher than either the international RCN trade or the international kernels market. This has been noted in Cambodia where undried RCN is trading at the equivalent of US$ 1,300/t at the farm gate, in Ghana where farm gate prices have flown past what appeared to be an ambitious minimum price and in Cote d’Ivoire where prices are up to CFA 350/kg (US$560/t) look way beyond a level that the market can sustain.  It is important to bear in mind that early-season prices do not necessarily reflect what is to come. For example, the late entry of Benin into the export market this year has caused buyers from India to look to Ghana for high-quality early supplies. Stocks of RCN left over from 2023 are lower than many expected. Only Guinea Bissau reports a significant carry-over. Ghana, Guinea, Nigeria, Benin and Burkina Faso report no carryover. Cote d’Ivoire has some carry-over of the old crops but the range of estimates is from 2 – 8% of the 2022 crop – not a major concern by any measure. The reasons for the good demand for early-season material are fairly clear. It seems unlikely that the current level of prices can be maintained unless kernels move up and that is likely to come too late for the 2023 crop.

Staying with the contradictions, why are Indian RCN buyers so interested to buy when demand for kernels elsewhere is slow? India 2022 moved directly opposite markets such as the USA and the EU. Demand in those markets fell back after a pandemic boom. India powered to new demand levels. RCN imports smashed previous records. RCN imports increased by an incredible 58% from 2021 to 2022 according to India’s Ministry of Commerce figures. Kernel demand remains strong in India. Growth in 2022 is almost certain although not at the same rate of increase as last year. Although CRISIL, the Indian analytical company, is forecasting 15% growth in 2023 – that would be an additional 190,000 tonnes of RCN needed.  Stocks of 2022 crop RCN are selling out. The Indian crop is estimated at 750,000 tonnes similar to last year. India probably needs circa 1 m tonnes of RCN so Indian buyers are active early.

Vietnamese RCN buyers may be a little slower to the market. They have access to a minimum of 800,000 tonnes of Cambodian RCN and some carry-in stock. Estimates of both are difficult to make. Both are often exaggerated by interested parties mainly RCN import traders and processors. It should not be forgotten that in 2022, a year portrayed, wrongly, as a poor year, Vietnam's exports of cashew kernels were the second highest in history and 47% higher than in 2018 just five years ago. What has changed? Cambodia has changed with a remarkable surge in production. Cashew kernel imports to Vietnam have changed with the counterproductive “borma” kernels trade that damages processors and workers in African countries.

Production all around the Northern Hemisphere looks good. Most West African countries are forecasting a better crop in 2023 than in 2022. Optimistic forecasts are typical early in the year so we need to keep a close eye on the weather as the season progresses. The news from SE Asia is less encouraging. Vietnam was forecasting a better crop than in 2022 but late rains may have dented production back toward last year's levels. As mentioned above, Cambodia has become the driver of world production growth taking over from West Africa in 2020. Initial forecasts for Cambodia are optimistic with the country forecast to be the second largest producer after Cote d’Ivoire again in 2023. It is unlikely that the record production of 2021 will be reached. Last year has shown that the new varieties in Cambodia are vulnerable to poor weather and pests. Some trees have been removed probably from areas that were not suitable in the first place. Production costs have risen as fertilizer and pest control inputs are among the most affected products in the 2022 price rises. Production may stabilise in the region of 750 – 800,000 tonnes in the coming years. In total, the 2022/23 season World production looks 3-7% up on last year with the main variable being the Cambodian figure.

There are many other mixed messages in the marketplace at the moment. RCN buyers are talking about how production is up and prices are unsustainable. It is difficult for this to have an impact when buyers continue to buy. Vietnamese processors are reluctant to pay the prices that Indian buyers can well afford. We may see a wider differential between origins favoured by India and those favoured by Vietnamese processors. There has never been a better time to improve quality and invest in improved post-harvest handling. Vietnamese processors may be frustrated by this but so too may African processors that have to compete for early-season supplies. Without any clear signal that kernel prices are ready to move up, it could be a mistake to follow high early-season prices at the farm gate or with local traders. It is a time when good relationships and linkages with farmers could pay off.

Mixed messages on demand too, are common at the moment. Let's, first of all, say that the underlying long-term trends in demand in India, Europe, North America and China are positive. Health-conscious consumers, younger consumers and more conscience-driven consumers are all interested in nuts. This oldest of foods is very much a 21st-century food. Unfortunately, marketing is very much in the 20th century. More on that another time.

In 2022 demand stalled in North America as retailers’ orders slowed down based on expectations due to inflation and recession. Inflation is now falling again. The recession has been largely avoided. It is reasonable to assume that the major slowdown in imports from June 2022 onwards has accounted for much of the inventory that was too high coming into 2022.  European demand was less impacted. We are still waiting for final figures but our estimates were that imports were down around 3% taking into account that imports of roasted and consumer packs were strongly up albeit from low volume levels.

China’s import figures show mixed messages too. Official figures report 42,321 tonnes imported significantly down from 2021. However, Vietnam reports exports to China of 75,000 tonnes. Perhaps different tariff headings were used on either side. Perhaps the goods got lost en route. Whatever the case it appears that Chinese demand was resilient in a time of trade restrictions and a slow exit from the pandemic.

Perhaps the greatest mixed message of all for African cashew processors is coming from importers and especially retailers in the EU and the US. On the one hand, the importance of traceability, environmental sustainability, social responsibility and other “ilities” are stressed by buyers as reasons to buy origin-processed cashew kernels. These factors are increasingly part of the law in importing countries. They are important to consumers. As we have written here before if consumers knew about the carbon footprint of most of the cashews, they buy they might demand origin-processed kernels. It all seemed to be moving in the direction of an integrated, cost and carbon-efficient supply chain. But in the second half of 2022 and now at the beginning of the new season, the same buyers that encouraged African processors and farmers are just interested in beating prices as low as they can. Sustainability both environmental and economic is not just a label for the small farmers that grow this product it is a way of life. Surely it is time that kernel buyers practice what they preach.