Nigeria Cassava Chip Export

NigeriaCassavaChipExport

2012ChinaTermSheet&TransactionOpportunityBrief

Jointly prepared by:

Federal Ministry of Agriculture & Rural Development

The Nigeria Incentive Based Risk Sharing System for Agricultural Lending (NIRSAL) Market Access Desk

© Central Bank of Nigeria, NIRSAL, and Federal Ministry of Agriculture & Rural Development, 2012

For Limited Distribution

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Contents

0. Executive Summary ............................................................................................................................... 3

1. Transaction Term Sheet & Framework ................................................................................................. 4

II. Introduction .......................................................................................................................................... 7

III. New Market Impetus and Opportunity ............................................................................................ 7

IV. Cassava Supply & Processing ............................................................................................................ 8

V. Cassava Chip Market Context: The China Play ...................................................................................... 8

VI. Solving the Customer Standard Requirement: Initial Capability ...................................................... 9

VII. Solving the Customer Standard Requirement: Technical Performance ........................................... 9

VIII. Supply Requirements: Processor Capacity........................................................................................ 9

IX. Pro Forma Assumptions and Economics ......................................................................................... 10

X. Working Capital Financing: Chip Processors Access to Raw Cassava ................................................. 11

XI. Working Capital Financing: Farmer Access to Chip Processors ...................................................... 11

XII. Transaction Risks and Select Management Options ....................................................................... 11

XIII. Conclusion ....................................................................................................................................... 12


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0. ExecutiveSummary

The purpose of this briefing document is to summarize an opportunity to export 800,000 metric tons of

food grade cassava chips to a pre‐specified buyer in mainland China. Nothing in this document including

forward looking statements should be construed as legal, tax, accounting, financial or investment

advice. All parties are advised to perform their own due diligence as appropriate in addition to seeking

out professional advice on the suitable of the investment opportunity given their risk tolerances.

For further information, please contact the following:

Federal Ministry of Agriculture & Rural Development NIRSAL Market Access Desk

Dr. Martin Fregene Senior Technical Adviser to the Honorable Minister and Team Leader, Cassava Federal Ministry of Agriculture E: [email protected]

Mr. James Awoniyi Member, Cassava Value Chain Team and Head, Fuel Ethanol Working Group Federal Ministry of Agriculture E: [email protected]

Jude Uzonwanne Head, NIRSAL PIO E: [email protected] M: 0703‐372‐0591


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1. TransactionTermSheet&Framework

Category Key Parameters

Transaction Overview Total Volume of Cassava

800,000 tons at 50,000 tons/month; first month volumes will be pilot volumes of 15,000 – 20,000 tons

Exporter/processors should participate in the program based on their balance sheet strength i.e. some exporters will ship 1,000 tons while others may export 5,000 tons; the objective is to take a level of risk commensurate with the financial flexibility afforded individual exporter balance sheets

Monthly Maximum Financing Required

₦1.75 billion (for 50,000 tons per month) based on per ton average fully loaded chip production cost structure of ₦37,288

Current Number of Borrowers

15 companies and volumes exported by individual companies will vary

Number expected to grow as long as firms trained and have processing equipment

Number of Lenders Open Interest Rate Range 16% ‐ 22% based on individual financial institution borrowing costs

Full disclosure of all applicable fees and transaction costs via itemization Duration Minimum of 120 days but is flexible depending on borrower requirements Cassava Source 27 states in the Southwest, North Central, Northeast, Southeast and South‐

South Technical Requirement

Moisture Content: <12%

Freshness Testing Processor tests random samples of cassava roots before harvesting using specific gravity equipment to confirm starch content

Quality Control FMA&RD sponsored training sessions of dried chip producers from Thai Tapioca Development Institute (TTDI), Huay Bong, Thailand

Checks from Sheda S&TC, FIS, SON and NAFDAC

Financial & Delivery TermsFinance of Fresh Cassava Purchase

Subject to local market conditions and cassava access, flexible models include o Use of local purchase orders and/or bank letter of comfort specifying

payment on delivery of specified quantity and quality of fresh cassava o In other situations, direct cash transfer to borrower to pay farmer

acceptable Chip Purchase Price US$236/ton on initial contract

Price will be adjusted midstream of contract as supply‐demand shifts in China in 2nd half 2012

Shipping Basis Ocean freight (containerized) to China on CIF basis Payment Terms Covered by Letter of Credit

70% paid upfront upon loading of vessel at Nigerian export port; 30% upon


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acceptance in China Financing Terms Loan provided by Nigerian financial institution NIRSAL Credit Risk Guarantee (CRG)

In principle, 75% cover on outstanding and declining principal and interest balance

Duration of CRG based on the duration of the underlying loan i.e. flexible based on the terms of individual credit transactions

Bank Risk Sharing Range of 0% ‐ 25% percent based on individual institutional risk appetite Borrower Equity Flexible level but at a minimum should cover various fees and transaction costs

as well as signal commitment e.g. 5% to 10% Borrower Collateral 15% to 25% of loan value; varied forms of collateral acceptable including

specialized machinery and warehouses related to chip business

Expectation that as chip market expands, resale and secondary market values for equipment will become more common

Other Requirement All exporters who seek access to FMA&RD projects must participate in FMA&RD Thai Tapioca Development Institute training session, and sign an MoU with FMA&RD agreeing to comply with quality and process controls

Transaction Risk Considerations (Sequential) Risk Category Definition Potential Mitigation

Cassava Supply Sufficiency of cassava supply at cost effective price

Appropriate level of freshness and starch content

Supplied from 27 states ensuring sufficiency of feedstock with moderate price appreciation risk

Use starch testing equipment to confirm satisfactory starch content pre‐purchase

Process within 48 hours of harvest

Processing and Performance Quality

Meeting technical specifications set by customer

Training by Thai Tapioca Institute

Inspection by Sheda Institute

Inspection by NAFDAC and FIS

Internal Inspection and Certification

Minimizing delays associated with regulatory dispersion and/or inefficiency

Creation of one stop shop to be located at FMA&RD in Abuja and regional offices

One stop will issue all required certification

Internal Transport and Multiple Taxes

Minimizing costs and taxes imposed between load point and port

Political management by Hon. Min. of Agriculture e.g. briefing of NEC/FEC

Media campaign and outreach to ALGON

Ocean Transport

Loss of cargo at sea due to normal maritime risks

Insurance cover purchased on cargo

Customer Acceptance

Rejection of cargo for failing technical or Chinese inspections

Use of customer’s agent e.g. SGS or Bureau Veritas

FX Risk Naira strengths against USD, reducing Naira denominated profits

Lock in forward purchase contract on US$‐Naira values


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High Level Project Activities, Parties and Timeline

Activity Deadline Status Responsible Party Term Sheet and brief circulated

April 9 Ongoing NIRSAL Market Access

Assemble documentation and refine business planning

April 11 Ongoing Exporters

Exporters approach banks and commence credit applications

April 12 ‐ 16 Ongoing Exporters

Banks review and provide decision on application

April 30 Not started Banks

Submit credit risk application to NIRSAL

Once credit approved Not started Banks / Financial Institutions

Exporters submit details of equipment and key personnel to FMA&RD

April 11 ‐ 16 Not started Exporters

Publish schedule and location of Thai Tapioca Development Institute Cassava Training

April 17 Under discussion FMA&RD

Conclude training and commence cassava buying


Finalize commercial terms including pilot with off‐taker


Open LC for exporters April 17 Under discussion FMA&RD Authorization of 1‐stop shop (discussion and review)

April 17 HMA briefed FMA&RD

Political and EEG engagement of ALGON, State Governors, NEC and FEC

April 1 Under discussion HMA FMA&RD

Process, transport and prepare for export

April 30 ‐ Open In preparation Exporters

1‐Stop Shop In Operation including briefing session for required agencies

April 30 In preparation FMA&RD

Conduct off‐taker / customer inspections

May 1 onwards Not started Customer agent

Conduct all Federal inspections

May 1 onwards Not started 1‐Stop Shop Team of SON, Sheda, FIS and NAFDAC


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II. Introduction

Nigeria is the world’s largest producer of cassava. In 2011, Nigeria produced approximately 36 ‐

40 million tons of cassava. It is estimated that due to post‐harvest losses of ~20%, about 6

million tons of cassava is lost at harvest; the estimates may be understated as loss also occurs

from leaving cassava in the ground for more than 12 ‐ 15 months. Of the volume which reaches

market, the majority is used for food and industrial processing. As a result, Nigeria supplies less

than 5% of the world’s cassava chip volumes. The intent of the export initiative is to raise

Nigeria’s chip exports materially.

III. NewMarketImpetusandOpportunity

The Agricultural Transformation Programme’s (ATA) cassava support is focused on doubling the

production of cassava by using higher yielding varieties, intensifying the use of fertilizer,

appropriate crop protection compounds, and extension workers. Therefore, we anticipate

additional volumes of cassava will be available above and beyond normal food and industrial

requirements. Due to shifting patterns of demand for cassava and the existence of a strong

2011‐2012 harvest, approximately 22 million tons of cassava is available for use today (across

1.6 hectares).

Normally, the volumes noted above would be harvested or allowed to decay in the ground. If

harvested in a year suffering semi‐glut conditions, it would typically attract less than

competitive pricing, discouraging farmers and leading to a scale back in volumes planted in the

next year. With a scaled back supply in Year 2, a moderate price rise occurs and in Year 3, a

further price increase occurs, leading typically to overconfidence and oversupply in year 4.

Such a dynamic is starting to emerge in 2012 triggering the need to identify alternate markets

for cassava at attractive price points.

Thus, following a January 2012 meeting with cassava chip buyers in China, the Federal Ministry

of Agriculture & Rural Development (FMA&RD) reached agreement on a commercial export

opportunity. The order calls for the export of 800,000 metric tons of cassava chips (3.0 – 3.2

million tons of raw cassava based on a 3.75x – 4.0x conversion ratio) over a 12 month period

starting in May or June 2012.


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IV. CassavaSupply&Processing

The required cassava will be supplied from 27 states of the federation in the North Central,

Northeast, South South, Southwest and Southeast. The specific sources will be a function of

supply‐demand balances and the relative sourcing requirements of existing industrial users

around the Ogun axis for example. From a pro forma view, the majority of volumes will be

sourced from Kogi, Taraba, Nasarawa, Benue, Kaduna and related high volume producers.

Individual non‐North Central states such as Oyo, Edo and Delta are also expected to make

significant contributions. In the final analysis, the chip processors are expected to reach terms

with farmers, cooperatives and related entities at commercial terms.

Given the diversity of sourcing, processing therefore must be as equally diverse but adhere to

central standards and grades in order to meet customer specifications. The shortlisted

participants in the current contract are required to have processing facilities proximate to

cassava production regions, a fundamental principle for all future agribusiness transactions

under NIRSAL in order to minimize the transport of non‐productive freight.

V. CassavaChipMarketContext:TheChinaPlay

The global market for cassava chips and pellets is estimated at ~US$1.5 – US$2.0 billion in 2011.

China is the world’s largest buyer of cassava chips. In 2011, China utilized an estimated 6

million tons, of which 4 million tons or 66% was imported. A key demand driver is the growth

in use for the animal feed market, ethanol and bio‐fuels market. South Korea is also a large

buyer. Southeast Asia particularly Thailand (54%), Vietnam (38%) and Indonesia (4%) are the

leading exporters.

While these 3 leading exporters have strong market positions, their ability to grow is

constrained by structural considerations such as yield per hectare boundaries based on current

technology and availability of cost effective land. In Thailand’s case, the 2011 floods wiped out

significant volumes of cassava, damaged access to farmland, and reduced usefulness of support

infrastructure.

Therefore an opening exists for Nigeria which does not face the aforementioned structural

constraints to step in and capture the incremental growth in the market. Capturing opportunity

is however a function of 2 important gating requirements: (1) meeting the standards set by the

customer; and (2) achieving a competitive delivered price for cassava.


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VI. SolvingtheCustomerStandardRequirement:InitialCapability

Given the importance of the chip export contract to Nigeria’s forward looking supply

reputation, the FMA&RD and select partners constituted a committee to identify Nigerian

companies capable of performing to the technical specifications of the contract. Rather than

advertise in general media, the Ministry advertised with the 2 leading cassava chip and farming

associations, and one industrial group. Using a set of filters – prior export experience and cash

flow, as well as ownership of chip making equipment – the pool of possible companies was

narrowed to 15 companies. Final due diligence and reviews of the 15 may result in additional

pruning if necessary, otherwise the 15 would be formally invited to fulfill the terms of the

Chinese contract.

VII. SolvingtheCustomerStandardRequirement:TechnicalPerformance

The FMA&RD is finalizing discussions with the Bangkok based Thai Tapioca Development

Institute (TTDI) to provide specific training on the guidelines and process controls required to

meet the standards of the Chinese buyer. Also before shipment of the chip cargo, a number of

additional federal laboratory analysis and inspections will be performed by the following

entities:

Sheda Science & Technology Complex (FCT Abuja): Reviews the quality of the final

product and if satisfied, issues a certificate of compliance

Other MDAs including SON, NAFDAC and the Federal Inspection Service will perform

regulatory required audits

Discussions are underway with all relevant parties and it is anticipated that a series of 1 week

courses on quality and process controls will be launched in April 2012. The courses will be

delivered in multiple locations.

VIII. SupplyRequirements:ProcessorCapacity

As noted above, the overall initial contract is for 800,000 tons. Based on current installed

capacity of the shortlisted firms, the supplier network of each firm can produce on average 100

tons of chips per days, or a total of 1,500 tons/day. Assuming 26 days of production per month,

total output would be 39,000 tons. However, we estimate that as learning costs decline and


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overall running efficiencies improve (e.g. hours of operation, number of days per month

operated, etc), production levels can improved rapidly to 52,650 (13 hours per day for 27 days

across 15 firms). Based on these sensitivities, the commercial terms presume a monthly supply

level of 50,000 tons to the counterparty.

IX. ProFormaAssumptionsandEconomics

The economics of producing cassava chips at a high level follow the following structure:

Selling Price: denominated in US$/ton at $236 ‐ $250/ton or ₦37,288/ton – ₦39,500/ton

(CIF basis) depending on what grade chips required for i.e. ethanol, animal feed, food

grade, etc

Chip processing and logistics cost: denominated in Naira/ton includes labor for peeling

the cassava, transport to processing site, and transport of chips to port; also includes

cost of international container freight

Purchase price for raw cassava: denominated in Naira/ton range from ₦5,000 – ₦10,000

depending on which part of country the cassava is sourced from i.e. lowest cost in the

North Central and Northeast

FX rate: ₦158 to US$1

Based on the above, the pro‐forma and high level economics of producing cassava chips on a

per ton basis is outlined below. We have also prepared basic sensitivity analysis and noted key

considerations that could shift estimates.


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X. WorkingCapitalFinancing:ChipProcessorsAccesstoRawCassava

Based on the detailed per ton cost of production of cassava chips, a preliminary estimate of the

working capital requirement on a monthly basis is v1.8 billion per month or ₦21.6 billion for the

entire 800,000 contract. Given the scope of financing required, a number of creative

structuring alternatives exist ranging from individual bank loans to syndicated loans and

revolving medium term notes to farmer cooperatives. Credit provided to chip processors is in

principle qualified to apply for NIRSAL credit risk guarantees (CRG). Approval of such CRG

contracts is at the sole discretion of NIRSAL’s Credit Desk which is independent from the

Market Access & Development Team. Therefore, nothing in this memo should imply a

commitment, oral or written by NIRSAL’s Credit Desk to issue such guarantees.

XI. WorkingCapitalFinancing:FarmerAccesstoChipProcessors

In order to further reduce the cost of transportation and improve farmer cooperative

participation in the value chain, the FMA&RD recognizes that additional efficiencies can be

obtained by market financing of additional chip making capacity. Logically, such equipment

should be in close proximity to the farm / harvest. A logical investment partner in such a

context is a farmer cooperative – serving a cluster of farmers perhaps in a 10 mile radius, or

large farmer (owning a greater than 50 Ha farm). Such equipment is estimated to cost $2,000

per unit (₦316,000). Based on the economics of planting cassava and chipping, a commercial

profit margin appears a reasonable conclusion.

XII. TransactionRisksandSelectManagementOptions

A number of risk considerations have been identified. In no way should the discussion which

follows be viewed as exhaustive. The intent is to provide a high level snapshot of

considerations for credit providers:

FX Risk: Chip exporters are exposed to the FX conversion risk in that their costs including

loans will be Naira denominated while revenues are in US dollars. Should the Naira

appreciate against the US dollar, Naira denominated profitability margins will shrink.

The converse naturally is true, subject to domestic price inflation expectations

remaining muted.


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Quality Risk: Matching customer specifications is absolutely critical in order to avoid the

buyer rejecting the cargo. Therefore the FMA&RD as both an interested party and

regulator needs to ensure compliance with customer specifications; in the absence of

such measures the ability to finance the transaction will unwind for all credit exposed

parties.

Cassava Supply: The mop up of cassava by chip processors could shift regional supply‐

demand imbalances, pushing up average prices for cassava and raising costs for chip

providers as well as general food users. That could also damage profitability for chip

exporters.

We anticipate that market participants can manage the aforementioned risks using a number of

tools e.g. using FX swaps, 3rd party auditors e.g. Bureau Veritas, and forward supply contracts

with guaranteed prices.

XIII. Conclusion

The cassava chip opportunity outlined above is expected to be the first in a series of similar

transactions targeted at multiple North Asian markets. In addition, the FMA&RD and key

private sector end users are actively working to create new domestic markets for the

incremental volumes of cassava entering the market in second half 2012 (2H 2012) and beyond

e.g. animal feed.

Documents

Nigeria Cassava Chip Export