January 12, 2009
During the latter half of 2008, we published articles on two problems that had severely impacted the world cashew scenario: The increasing defaults by Vietnamese shippers that occurred during the spring and summer, and the disturbing reports of chlorophenol contamination that began surfacing around the same time. The cashew world has been on a virtual roller coaster ride since then, buffeted by the world recession and by industry practices that in some cases have backfired. Both of these articles can be accessed in the Newsroom section of the Cashew Concern website: www.cashewconcern.com .
Crisis in Vietnamese Cashew Industry
On June 20th, 2008, we published an article entitled "Unbridled Cashew Speculation - History Lesson 102" warning of the potential fallout from an overheated cashew market fueled by speculation and low price feeding frenzy. A recent article which appeared in VietnamNet Bridge describes the devastating effect that this "perfect storm" has had on the Vietnamese cashew industry. The complete article can be accessed at the following link: http://english.vietnamnet.vn/biz/2008/11/815737/
Over the last decade, Vietnam quickly became the largest exporter of cashew kernels in the world, surpassing even India. Unfortunately, instead of healthy, managed growth, many Vietnamese cashew producers opted for the quick money to be had by offering cheaper prices than their global counterparts. Offers were made without a realistic assessment of production capacity. In 2008, as cashew prices soared, they did not deliver under the signed contracts, but sold to others as the price went up, with the intention of fulfilling the contracts later. However, material prices rose sharply, making it impossible to honor the contracts without devastating losses. To make matters worse, demand dropped and cashew prices fell dramatically.
The Vietnamese cashew industry is now in crisis and is scrambling to survive. Reports have begun to surface of Vietnamese cashew splits that have been adhered together with 502 glue in an attempt to disguise them as wholes, a practice that certainly cannot be tolerated.
Vietnamese cashew producers are now seeking help from the Vietnamese government in the form of loans and tax reductions, but it remains to be seen if the industry will be able to recover. Alarmingly, farmers in Vietnam are increasingly giving up on growing cashews in favor of more profitable crops, such as rubber and cocoa.
The speculation that has become rampant in the cashew industry has in the end benefited no one. Vietnam's cashew industry is struggling to survive, American cashew importers hit by the massive wave of defaults sustained significant losses at a time when the economy makes it difficult to absorb such a blow, and American roasters faced historically high prices during a brutal retail season.
Chlorophenol Update
On September 9th, we published an article about the detection of chlorophenol, mostly in cashews exported from India. In order to prevent contamination, guidelines have been established by the Cashew Export Promotion Council of India. The guidelines have been published by the African Cashew Alliance and can be accessed from their website. Alarmingly, however, there have been reports as recently as December 27th of containers being rejected because of chlorophenol contamination, and it is not at all clear that the source of the problem has been identified. An article published in the Indian Express states that the rejected cashews had been tested in India before shipment.
Every Link in the Global Food Chain is Important
Clearly more vigilance is needed. As we move further into the 21st century, better monitoring systems must be put into place, not only to ensure that suppliers follow good manufacturing practices, but also to understand the calibre of suppliers that we work with. Each link in the global food chain is important. We need to build strategic working partnerships between supplier, importer, roaster, retailer and consumer in order to ensure a better overall food product and foster the development of reliable working relationships that have a positive effect on food quality and on our business as a whole.
"An Ounce of Prevention or a Metric Ton of Cure" Peanut and Tree Nut Processors Association Conference - January 17 - 20
David Rosenthal will give a presentation entitled "An Ounce of Prevention or a Metric Ton of Cure - It's Your Choice" at the General Session of the PTNPA Conference, held at Our Lucaya Resort in the Bahamas, on January 18th. The co-host of this session will be Merle Jacobs, president of the American Council for Food Safety and Quality.
Showing posts with label default. Show all posts
Showing posts with label default. Show all posts
Thursday, January 22, 2009
June 20, 2008, Unbridled Cashew Speculation - History Lesson 102
"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 LessonsThe 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
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 LessonsThe 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
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