Raw cashew nut price review 2012

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Stakeholder consultation March 27 – April 27, 2012

The Cashew nut price review project

The last Cashew Nut minimum price review took place betweenJanuary 2009 and the end of 2010.The outcome of that review was the approval of new Fairtrade Minimum Prices and Premiums for different grades of cashew kernels. Prices for raw cashew nut were notdecided upon at the time, because more research was required. Fairtrade organized a round table with stakeholders in Accra at the end of November 2011. The Pricing Unit has now started a new price review for raw cashew nut prices, which aims at requesting the Standards Committee(SC) to take a final decision on this matter in the second quarter of 2012.

The purpose of this document is to start a second round of consultation about the issues which were not resolved in the past. This paper focuses on:

  1. Raw cashew nut minimum price and premium proposals
  2. Additional Standard requirements to accompany the prices for raw cashew nuts, including transparency for producers and regional processing.

Please send your answers to before April 27, 2012. Note that we have to be strict on the deadline of April 27, to be ableto meet out time schedule.

If you have any question about this project or this questionnaire, please do not hesitate to take contact with Margret Loeffen at or by phone at +49 22894923283.

We thank you in advance for your participation,

Margret Loeffen

Pricing Project Manager

Standards Unit

Fairtrade International

How to complete this document

When filling in this document, please try to provide clear responses and take time to explain your rationale. This will help us to understand why you propose something. You may also put forward alternative proposals or include any other suggestions.

Confidentiality

All of the information we receive from respondents will be treated with care and kept confidential. Results of this consultation will only be communicated in aggregated form (a synopsis of the consultation feedback will be made available to stakeholders and will be available on the Fairtrade International website). All feedback will be analysed and used to draw up the final proposal. However, when analysing the data we need to know which responses are from producers, traders, licensees, etc. which is why we kindly ask you to identify yourself below.

Questionnaire:

Please indicate the name of the person filling in the document
Please indicate the name of the certified or registered FLO partner, the FLO-ID and country
Please describe what your position in the Fairtradesupply chain is (more than 1 answer possible - please consider the options carefully)
Producer who sells raw cashew nuts (but not kernels)
Producer who sells kernels, processed at his own a processing facility
Producer who sells kernels, by subcontracting an external processor
Exporter of raw cashew nuts
Importer of raw cashew nuts
Processor or processor-exporter (not producing (but buying) Fairtrade raw cashew nuts)
Exporter of cashew kernel (not involved in processing Fairtrade cashew nuts)
Importer of cashew kernels into a consuming country
Trader of cashew kernels (in aconsuming country)
Licensee
Other, please specify:
Please describe the consultation you carried out with members of your organisation, with partners or with external sources of information in order to fill in this document

Introduction and background to the raw cashew nut price setting project

The Raw Cashew Nut (RCN) is the Cashew nut just before the processing. It is the fruit taken out of its apple and first dried to be ready to be stocked[1]. It is the step before the shelling process to get the kernel.

Below you will find a Fairtrade Minimum Price proposal and related questions, where you can provide feedback on the proposal. The proposal is for prices for RCN at EXW level, which wouldprovidetransparent Fairtrade Minimum Prices for different qualities of raw nutsfor all producers, including those who do not process their own nuts..Apart from transparency, raw cashew nut prices can help to increase sales volumes sold by Fairtrade producers and with that the amount of Fairtrade benefits flowing back to producers. To do this in a way that assures that maximum benefits are retained in the region of production, accompanying rules to go with the RCN prices are also proposed and consulted on through this document.

In the Fairtrade system, RCN prices would only apply to producers selling RCN and not to producers who process their nuts (whether in their own processing facilities or through sub-contracting processing) and sell cashew kernels. The FOB prices will continue to apply for producers who sell cashew kernels., The raw cashew nut prices will applyonly for supply chains in which producers sell RCN. Thus, for each contract, only one Fairtrade Minimum Price will apply; either the RCN price or the FOB prices for kernels, but not both.

Ex Works (EXW)means that the seller delivers hispart of the contract when the goods areplaced at the disposal of the buyer, at the SPO collection point. Goods are not cleared for export and are notloaded onto any collecting vehicle. The production costs are included as well as the transportation from the farm-gate of individual producers to the SPO and the organizational costs of the SPO.

Targeting these aims, Fairtrade International proposes:

  1. To fix a Fairtrade EXWPrice and Premiumfor RCN with worldwide validity
  2. To elaborate a quality system at RCN to stimulate quality improvement
  3. To decide on additional rules to accompany RCN prices.

Costs information:

In March 2009 cost of production data were collected and costs at RCN level were received and other costs of production were gathered from different external sources.

Because the costs were collected 3 years ago, the Pricing Unit has decided to use the exchange rate and consumer price index methodology to update the 2009 price proposal for inflation and exchange rate changes in countries with Fairtrade cashew producers since 2009. The average loss in value (due to exchange rate fluctuations and increases in consumer prices indexes) between 2009 and now was found to be 9.2%.

According to our approach, the price proposals presented in this document are based on producer’s organization costs of production plus 9.2%, to compensate for the loss of value since the collection of the production costs.

Raw cashew nut quality issues

The pricing system proposed in this document follows the recommendation to set a quality mechanism for RCN. This quality mechanism is based on the kernel outturn ratio (KOR) and nut count.

The following price proposal is valid worldwide at EXW level and based on:

  1. An average Kernel Outturn Ratio (KOR)[2] value, based on Fairtrade consultation results received in 2010 on the proposal based on the Technoserve evaluation in 13 different countries. The KOR refers to the amount of useable kernel obtained from a Kg of raw nuts.
  2. An average income gain by 2 points of Kernel Outturn Ratio (KOR)
  3. A fixed moisture content of9%,which is based on the feedback received to the 2009 consultation.
  4. An average nutcount[3](number of nuts per Kg)
  5. A bonus and discount (malus) of 1 cent per difference of 10 nuts, for nut counts below and above an average nutcount
  6. An average Fairtrade Minimum Price based on the updatedaverage cost of production[4].

Fairtrade raw cashew nutprice proposal:

In the table below you find per level of outturn, a Fairtrade Minimum Price proposal based on an assumed nut count between 181 and 190. For a lower or higher nut count, respectively a bonus or malus would apply as described in the table below.

  • The line in grey in the table belowrepresents the average situation.
  • This price proposal is valid for a 9% moisture content.
  • This price proposal is based on 2% income increase by KORpoint (4% by 2 KOR points).
  • Nut count: The proposal is based on an average nut count of 181-190nuts per Kg. A bonus and discount for different nutcounts is proposed to be applied as follows:

A:Raw cashew nut pricequestions

A-1- The average outturn

Outturn is the amount of kernel retrieved from 1 Kg of nuts in shell. It is measured in pounds of kernel per 80Kg bag of raw nuts.Outturn (KOR) is an important indicator of quality of the raw cashew nut and determines processing yields. It is as such an important determinant of the value of the nuts.

Price proposal for conventional (non-organic) Fairtrade raw cashew nuts
KOR / Nut count / Fairtrade minimum Price / Fairtrade Premium
<40 / 181 - 190 / Kg (if different bonus / discount applies) / 0.45 USD / Kg / 0.09 USD / Kg
40 / 181 - 190 / Kg (if different bonus / discount applies) / 0.47 USD / Kg / 0.09 USD / Kg
42 / 181 - 190 / Kg (if different bonus / discount applies) / 0.49 USD / Kg / 0.09 USD / Kg
44 / 181 - 190 / Kg (if different bonus / discount applies) / 0.51 USD / Kg / 0.09 USD / Kg
46 / 181 - 190 / Kg (if different bonus / discount applies) / 0.53 USD / Kg / 0.09 USD / Kg
48 / 181 - 190 / Kg (if different bonus / discount applies) / 0.55 USD / Kg / 0.09 USD / Kg
50 / 181 - 190 / Kg (if different bonus / discount applies) / 0.57 USD / Kg / 0.09 USD / Kg
52 / 181 - 190 / Kg (if different bonus / discount applies) / 0.59 USD / Kg / 0.09 USD / Kg
54 / 181 - 190 / Kg (if different bonus / discount applies) / 0.61 USD / Kg / 0.09 USD / Kg
56 / 181 - 190 / Kg (if different bonus / discount applies) / 0.63 USD / Kg / 0.09 USD / Kg
58 / 181 - 190 / Kg (if different bonus / discount applies) / 0.65 USD / Kg / 0.09 USD / Kg
>58 / 181 - 190 / Kg (if different bonus / discount applies) / 0.67 USD / Kg / 0.09 USD / Kg

Do you agree with the average value of outturn of 48 presented in the price table above?

Yes No

If No, what other value would be valid?

Why?

A-2-Average Fairtrade Minimum Price

WhichFairtrade minimum price would you recommend for the average quality outturn (0.55 USD/Kgaccording to the table above under A1)?

0.50 USD/Kg 0.55 USD/Kg 0.60 USD/Kg Other?

Why?:

A-3- Marginal price change per point of outturn

As it can be seen on the proposal above, for 2 points of outturn, the minimum price is raised or diminished by 2 cents (Note that that is 2% per 1 point of outturn and thus 4% per 2 points of outturn[5]). Do you agree with 2 cent marginal change per 2 points of outturn?

Yes No

If No, what other percentage would be valid?

Why?

A-4- Bonus and discountfor nut count

Would you agree to apply bonuses and discounts for nut counts?

Yes No

Why?

So you agree to take 181-190 as the basis for which no bonus, nor discount applies?

Yes No

Why?

Do you agree with the proposed bonus and discount of 1 cent of a USD per 10 points of nut count (which represents 2% bonus or discount per 10 points of nut count)?

Yes No

Why?

A-5- The organic differential

Raw cashew nuts are produced withlittle or no chemical input and often produced organically if not organically certified. As such, the difference in terms of cost of production for organic RCN is mainly the organic certification cost and the compliance costs. At FOB level we have therefore adopted a relatively (compared to many other products) low organic differential of 13%. At EXW level the same percentage would represent less actual value, which may justify a slightly higher percentage. We propose 2 percentage points more: a difference of 15% between prices for organic and prices for conventional cashew nuts. The same bonus and discountfor nut count as for conventional nuts is proposed to apply for organic RCN.

We propose the same Premium for conventional and for organic nuts, as is also the case with the Premiums for cashew kernels (at FOB level).

Note that we herebyconsult on the differential between conventional and organic nuts. If, based on consultation feedback to the conventional prices, the proposal for conventional nuts is modified, we plan to make the same changes to the proposal for organic nuts and retain the 15% differential between organic and conventional. The prices presented above are an example derived from the conventional price proposal. Based on the Fairtrade Price and Premium proposal presented above for conventional nuts that would imply the following price proposal for organic cashew nuts:

Price proposal for organic Fairtrade raw cashew nuts based on an organic differential of 15% to be applied to the proposal for conventional nuts
Outturn / Nut count / Fairtrade minimum Price / Fairtrade Premium
<40 / 181 - 190 / Kg (if different bonus / discount applies) / 0.52 USD / Kg / 0.09 USD / Kg
40 / 181 - 190 / Kg (if different bonus / discount applies) / 0.54 USD / Kg / 0.09 USD / Kg
42 / 181 - 190 / Kg (if different bonus / discount applies) / 0.56 USD / Kg / 0.09 USD / Kg
44 / 181 - 190 / Kg (if different bonus / discount applies) / 0.59 USD / Kg / 0.09 USD / Kg
46 / 181 - 190 / Kg (if different bonus / discount applies) / 0.61 USD / Kg / 0.09 USD / Kg
48 / 181 - 190 / Kg (if different bonus / discount applies) / 0.63 USD / Kg / 0.09 USD / Kg
50 / 181 - 190 / Kg (if different bonus / discount applies) / 0.66 USD / Kg / 0.09 USD / Kg
52 / 181 - 190 / Kg (if different bonus / discount applies) / 0.68 USD / Kg / 0.09 USD / Kg
54 / 181 - 190 / Kg (if different bonus / discount applies) / 0.70 USD / Kg / 0.09 USD / Kg
56 / 181 - 190 / Kg (if different bonus / discount applies) / 0.72 USD / Kg / 0.09 USD / Kg
58 / 181 - 190 / Kg (if different bonus / discount applies) / 0.75 USD / Kg / 0.09 USD / Kg
>58 / 181 - 190 / Kg (if different bonus / discount applies) / 0.77 USD / Kg / 0.09 USD / Kg

Would you agree to an organic differential of 15%?

Yes No

If No, what other organic differential would you proposed?

Why?

B: Fairtrade premium for RCN

B-1- Fairtrade Premium value for raw cashew nuts

It is industry practice to express kernels in pounds, while raw nuts are traded in 80 Kg bags.At FOB level we have a FP of 0.15 USD / pound.In order to be consistent, the Premium value should be the equivalent between the RCN and the kernel in proportion of the processing yield, based on the average KOR. An average KOR of 48 stands for an average processing yield of 27%.This implies that one needs 3.7 Kg of raw nuts to produce one Kg of kernels. Converted into a Premium per Kg that would be 0.09 USD/ Kg[6].

Would you agree, in order for both Premium levels to be consistent, that the Premium for RCN is the Fairtrade premium of kernels (0.15 USD / pound) divided by 3.7?Converted into a Premium per Kg that would be 0.09 USD/ Kg.

Yes No

Why ?:

C:Additional requirements to be included for cashew in the nut standard

C-1- Transparency to producers

Fairtrade aims at transparency and strengthening the position of producers. Access to information is a key element in this. Many producers of raw cashew nuts have very limited knowledge about the processing of their raw cashew nuts and about what happens after that. Having more information on this can strengthen their position in the supply chain and thereby helping to offset a risk some stakeholders see in the establishment of raw cashew nut prices, that is to more strictly limit producers to their position of suppliers of raw nuts.

Would you favour requiring (through FairtradeStandards) that processors have to share, at least annually, certain information with producers for transparency? This information is proposed to be (at least): processing yields, a breakdown of costs incurred by the processor (including packaging and transportation costs),volumes of each grade of kernel sold, destination markets and average prices obtained for each grade of kernel.

Yes No

If no, is there any information in the above proposal that you think does or does not need to be shared Whichinformation should or should not be shared in your opinion?

Why ?:

C-2- Regional processing

Some stakeholders indicated during the roundtable in Accra that they would prefer to see the value added through processing to take place in the region of production, by requiring this through the Standards. To further investigate the feasibility of this idea, the Standards Unit would like to better understand for which volumes processing (into kernels) takes place by producers and to what extent processing takes place in the region of production of the raw nuts.

What tonnage of nuts in your supply chain(s) are processed (directly or through subcontracting a processor) by the producers of the raw cashew nuts and what tonnage is processed by external processors (which implies producers sell RCN)?

MT is processed by producers of raw cashew nuts

MT is processed by external processors (producers sell raw cashew nuts)

Which percentage of the nuts you deal in are processed in the country in which the raw nuts grow?Which country or countries?

100%, both processing and production for Fairtrade takes for 100% place in .

Partly. Of the Fairtrade nuts that grow in , about % is processed within the country and the remaining percentage is processed in

(please name all countries in which the Fairtrade nuts are processed).

0%, for all the Fairtrade raw nuts grown in processing for Fairtrade takes place abroad in

(please name all countries in which the Fairtrade nuts are processed).

It is currently allowed to ship raw Fairtrade cashew nuts for processing to another continent, for example shipping raw nuts from Africa to Asia for processing.While this may not be optimal from an environmental perspective, it is the case currently. And much processing takes place in Asia in factories that benefit from economies of scale, leading to a cheaper end product which more easily finds a market. . However since most of the value adding is realized during the processing of raw nuts, it may be of interest to each production region to benefit from processing raw nuts more locally.Processing opportunities in Africa have traditional been limited, but this is changing.

Would you favour adding a requirement that raw cashew nuts, in order to be Fairtradecertified, need to be processed in the region of production or in a neighbouring country sharing a land-frontier with the region of production?

The regions would be determined according to the Fairtrade geographical scope and regions (see annex 1).

Yes No

Why ?:

C-3- Date of implementation of new Prices, Premiums and other requirements

Fairtrade would like to implement the new requirements before contracts are signed. Since for the 2012 season, contracts have been signed and the season is starting, we would like to implement new requirements and prices for the 2013 season. To do so, we propose to announce prices in July or August with validity from October 1, 2012. That implies that the new prices and requirements will be valid for contracts which will be signed after October 1, 2012.

Would you agree with the announcement of prices in July or August with a validity from October 1, 2012, that means for contracts signed from October 1 on.