Joao is a farmer from Guinea-Bissau who owns an average sized cashew nuts plantation of 4 hectares in the Eastern region of Guinea-Bissau called Bafatá. Between January and February, the trees bloom and he and his family of six manage to harvest the cashew fruit during April and June.
This year harvest will be quite good. Temperatures were mild after all, and warm winds from the Sahara did not bring too many dust particles. These particles have the ability to damage blossoms. Luckily not many trees were affected this year. The government has set a farm-gate price to ensure that farmers can sell at a minimum guaranteed price to traders, who later ship the raw, unprocessed cashew kernels to other countries for further processing.
However, Joao is just one, out of thousands of other farmers, who will need to bargain to ensure that these farm-gate prices are actually respected and upheld. This will not be an easy task.
Traders and exporters are a small, powerful and knowledgeable group of foreign nationals who will attempt to maximize profit by transferring to farmers the 11% levy that Guinea-Bissau government sets on export products.
Joao and his family, among many others, are considering to smuggle part of their harvest to neighboring countries such as The Gambia or Senegal where those taxes are non-existent.
This would allow them to sell the raw, unprocessed cashew nuts kernels at a higher price and avoid the so-called FUNPI tax.
Cashew nuts exports make up around 35% of Joao’s household annual income. For other families, such as the one from Fatima, who is a single mother, cashew nuts bring around 26% of her yearly income. “It’s very challenging”, she says, “when we have a good harvest, prices decrease. Guinea-Bissau is a price taker, and supply has been increasing the past ten years between 2000 to 2011, leading to lower and lower prices. We produce more but we are paid less for each kilo that we sell. This is not sustainable for us.”
Commodity processing is made in other countries such as Vietnam and India. Guinea-Bissau, on the other hand, exports most of their production and has little cashew nut processing done locally. This keeps prices low and a high dependency on international cashew nut market prices.
Once cashew nut kernels are processed in countries such as India, these are sold at a +250% margin to developed economies, especially in Europe.
Smuggling cashew kernels helps farmers get a better price by dodging the traders and exporters, in addition to skipping the 11% government surcharge that falls on them.
Farmers know that having a good harvest does not mean getting more income. Revenues and crop rents have been stable and growing at a minimal rates, only between 0.7% to 0.9% per annum, which is lower than the country’s inflation.
For Joao and Fatima, rice is the most important staple food. They use the cashew nut receipts to pay for rice. If rice prices keep rising at a faster pace than cashew nut kernel exports, this will lead to severe financial difficulties to feed their families. Joao and Fatima, as the heads from their own families, will need to stop having 2 meals per day for just 1.
Climate conditions have also worsened local rice production. “Uneven rainfall patterns and heat waves have decreased our rice yields and we are fully dependent from outside production to feed our families. Our families live day on day and we no longer know whether we will be able to serve a rice dish to our kids next week.”
Guinea-Bissau has had current account deficits and it is heavily dependent on external financial aid to finance domestic investment, as internal savings are insufficient to pay for infrastructure and import key commodities. Rice and fuel for energy production are the two most important imports for the country.
“Foreign and donor money has been on and off. We have had at least ten coup d’état since our independence in 1974. During political crises, we stop receiving donor funds which aggravate the situation further.” Remittances has been another valuable source of income, despite being cyclical and tied to economic downturns.
If there are no structural political and economical shifts, labor productivity will remain one of the lowest in the world. “Our demographic dividend will not be used to create more prosperity if there are no jobs and no access to financing to set up businesses. We will need to share the same land and despite growing in production, prices will eventually keep going down.”
Solutions and partnerships to process cashew nuts locally should be welcomed and we urgently need public-private investment to improve our economic outlook.
Sources:
- Guinea-Bissau and the Cashew Economy (2016). Macroeconomics and Fiscal Management MFM Practice Notes.
- Names and quotes are made up by the author, based on real data and economic analysis, written by Matteo Arellano, CFA.
