The Policy is Wrong!

Jim, in response to Rodrik et. al's paper on the cashew industry in Mozambique

Mozambique's cashew policy must be considered a national failure, while Guinea-Bissau's policy (really the lack of a government policy until recently has been the reason for the success) has been a success.

Production has gone down from over 200 thousand tons in 1972 in Mozambique to about 50 thousand tons in the last ten years. Over the same time period Guinea-Bissau has gone from almost nothing to over 110 thousand tons at present.

The Rodrik paper misses what is happening in the present cashew industry in Mozambique and why. There is at present a 18% export tax on raw cashew nut in order to subsidies the processing industry and increase government revenue. The authors defend this tax. They and the government of Mozambique are wrong.

The first idea behind the export tax on the producers (some of the lowest income families in Mozambique) is to support a processing industry. If all of the added value from processing went to the labor for processing it still would be much less than the income that is being taken from the labor for production . The number of labors in the processing factories (estimated at between 4,500 and 6,000) is less that 1% of the number of families producing cashew.

The second idea for the tax is that the government revenue will produce more value for the producers that the cost of the tax. There is a missing study (not published) that was done by the Ministry of Agricultural and Rural Development that shows the opposite.

Another issue made by some defenders (Rodrik & others) of the export tax is that it is not an important cost to the producers. For these defenders it represents a small part of producer income. They compared the total cost of the tax per producer to the minimum wage (Approximately 2% of the rural work force is formally employed and would be illegible for the minimum wage).

The average per capital earnings for a small holder family in either cashew or cotton was $44 in 1996 or less than $4 per month. The average value added per agricultural worker was $117 in 1989-91 and $136 in 2001-3; this is equal to $11.33 per month (World Development Reports 2003 and 2006, World Bank). With average family production of less than 100 kilos per year and with producer prices approximately 32 US cents per kilo family incomes are less than $32 a year. These are averages and the numbers vary year to year based on corps size and world prices but they are in the general range of reality. A tax that takes between 25% and 30% of the family's annual main cash income can be considered to be important at these levels of income for these families.

Mozambique in 1972, its best year for cashew, produced 216 thousand tons of raw nuts. It had 46 million trees with an average productivity of 4.7 kilos per tree. In 1998 its production was 51 thousand tons and the average for the last ten years has been 57 thousand tons. This is a drop of 74%. There were an estimated 26 million trees with a productivity of 2.2 kilos per tree in 1998 a drop of 43% in the stock of trees and a drop of 53% in productivity. From anecdotal observation there is little new planting of trees. While there can be a good crop because of the weather conditions or higher prices cause the farmers to gather more nuts there seems to be little increase in the total stock of tress or increase in productivity.

The present low producer price has contributed to the cashew industry going from a cultivated crop to an extractive activity. The present prices are not enough of an incentive for producers to care for their trees or invest in new trees in order to expand production.

One widely held belief about the cashew tax is that if it was lowered or eliminated the producers would not benefit from the lower cost of exporting. This allegation holds that the traders can collude between themselves to control the price they pay to the producers. This allegation has no empirical bases nor does it conform to the market structure of the trade.

There are hundreds of thousands of producers selling into a large number of buyers. Mostly they sell to the hundreds of local buying stations and buyers in trucks that come through periodically. These in turn sell to more centralized traders. And finally at the other end of the market chain there are the exporters (over 10 in 1999) and the 15 processing factories. Some of these have their own direct buying operations with agents, trucks and warehouses.

The data on prices clearly show that as the FOB prices change so too do the producer prices. A simple observation of the FOB prices changes and the producer price changes show a high degree of positive correlation (84.0%).

If the buyers controlled the prices they would not pass on the higher export prices to the producer. The producer price would be based on a minimal price that the buyers would offer. This is not the case the producer price changes during the season and from season to season as the export prices change.

Also as the export tax has changed over time (from 30% to 20% than to 14% and finally back to 18%) so too has the producer price as a percent of the FOB price but the in the opposite direction with a one year lag. There is a negative correlation of 97.6%.

While there are seasonal price variations these are a function of available supply of nuts and the demand from India over the season and mostly the price processed cashew kernels.

India many private sector importers and not India the country or the government are the buyers of raw cashew nuts. And there is real competition between them. This can be seen when the world price changes there is a high positive relationship to the producer price changes in Mozambique.

The best extension agent does not work for the Ministry of Agricultural. The world best extension agent for Mozambican farmers of cashew is good farmer prices.

The present Mozambican cashew policy of taxing small holder cashew farmers is one of the causes of low producer prices and therefore low family income. It is also one of the reasons that the farmers do not invest and again the national cashew industry is not growing.

The policy is wrong.