Mozambique s Natural Resource Boom. What potential impacts on the competitiveness of Mozambique s Agriculture industry?

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1 Mozambique s Natural Resource Boom What potential impacts on the competitiveness of Mozambique s Agriculture industry? October 2014

2 Agriculture is an important contributor to Mozambique s economy Top food crops Cassava 000 tons 10,051 Maize 1,177 Sweet potatoes Paddy rice Source: Food & Agriculture Organization, FAOSTAT, accessed August 20, Over the period: 25% Agriculture s share of GDP 8% per year Average agriculture growth Agriculture accounted for 17% of Mozambican exports in 2013 More than 95 % of Mozambique s production takes place on smallholder farms Limited access to finance and markets 75% of smallholders occupy an average area ranging from 0.5 to 3 hectares Low yields: cereal yields 1/4 to 1/3 of Zambia and Malawi s Low use of inputs by smallholder farmers: 3% use inorganic fertilizers 6% use pesticides 9% use improved seeds Low use of animal traction and mechanization Source: Banco de Mocambique. Balanca de Pagamentos 2013

3 Five key value-chains analyzed in-depth Banana Cotton Soybean Rice Tomato

4 Mozambique enjoys very good conditions to grow bananas on a commercial basis Manica Nampula 85% of domestic production consumed locally and 15% exported 85,000 tons exported to Eastern Europe, Middle East, South Africa, Zimbabwe and Zambia Distribution of Banana Production (% tons) Agriza Matanuska 36,452 tons exported to SADC countries Maputo Banana yield (tons/ha) 15 medium to large commercial plantations across the country World class Banana yields! 52 t/ha 56 t/ha Farm-level segment 73% of costs Inputs Southern Mozambique (Bananalandia, Conglomerate) Production & Harvesting Processing Smallholders Source: TechnoServe 2013 Post-plantation segment Banana value-chain (large-scale) 27% of costs Transport & Marketing Mozambique Philippines (top producer)

5 Cotton is one of Mozambique s Top 10 exports Cotton is Mozambique s 3 rd most important agricultural source of foreign exchange earnings (nearly US$100 million in 2013) Burkina Faso World Cotton Lint Exports 2011 (tons) Cotton is a source of livelihood for around 250,000 farmers (mostly smallholders) Nampula, Cabo Delgado, Tete, Niassa and Zambezia account for 84% of total production 15 ginning companies in Mozambique with installed capacity of 260,000 metric tons and ginning ratio (% lint extracted/unit of seed cotton) of 38% (Burkina Faso 42%) Mali Zambia Mozambique Chad Africa accounts for 11% of world lint exports and Mozambique only accounts for 2% of Africa s share USD/ton Cotton Lint Average FOB prices World Price Mozambique Price Average ratio of Mozambique s price to World price over the period is 95% Mozambique Cotton Institute (IAM: Instituto do Algodão de Moçambique) Established in 1991 to support and supervise production, marketing, processing and export of cotton Works closely with ginning companies to promote efficiency and competitiveness in the industry Acts as buyer of last resort if farmers are unable to sell to the ginning concessionaire in their district

6 Mozambique depends on imports for two-thirds of total rice consumption Rice plays an important role in the diet of Mozambicans: currently a quarter of all cereal calories consumed Only a third of Mozambique s 900,000ha of rice production area potential is currently cultivated Considerable initiatives are underway to raise rice production in Zambezia, Nampula, Sofala, Gaza and Maputo 2012 Mozambique rice production (milled) tons Imported mainly from Thailand, Pakistan, Vietnam and India Domestic production shortfall Mozambique rice consumption Farm-level segment 73% of costs Intergovernmental cooperation with China has led to new developments in the Chokwe and Xai-Xai irrigation perimeter Rice value-chain Post-plantation segment 27% of costs Milling Ratio (% of processed rice obtained from paddy) 72% 67% Inputs Production & Harvesting Processing Transport & Marketing Mozambique Asia (best practice)

7 Approximately 271,000 households (smallholder farmers) cultivate tomatoes in Mozambique Tete Nampula Zambezia Manica Sofala Tomatoes are a key part of the Mozambican diet (urban and rural) Tomato is a high-value crop produced predominantly by smallholders 80% of tomato production takes place in: Nampula, Zambezia, Tete, Manica and Sofala 195,000 tons Tomato production in Mozambique 25,000 tons Tomato consumption rising sharply Maputo Mozambique is the largest export market for SADC countries: 72% of South Africa s tomato exports come to Mozambique Farm-level segment 63% of costs Tomato value-chain (smallholder) Downstream segment 37% of costs Inputs Production & Harvesting Packaging Transport & Marketing 20% to 60% of domestic demand supplied locally

8 Soybean has huge growth potential in Mozambique Demand in Center-North is met by domestic production in the same region) CENTER-NORTH High transport/logistics costs: 50 MZN/ton-kilometer Targeted provinces for soybean production Tete Zambezia Manica Cultivation of soybeans in Mozambique has experienced rapid growth since it s introduction in the 1980s Since 2008/9 TechnoServe and Clusa have promoted the scale up of soybean production Top producers include MOCOTEX, Africa Century, Rei do Agro, Hoyo-Hoyo, AgroMoz and Alif Quimica Demand in the South (Maputo) is fully met by imports from South Africa, Argentina, India and Malawi Farm-level segment 83% of costs Inputs Production & Harvesting SOUTH Maputo Soybean value-chain (smallholder) Processing Post-plantation segment 17% of costs The domestic poultry industry is key to soybean production Transport & Marketing $ Development of soy-driven industries: soy oil, soy milk, +soy tofu 132,782 tons 65,657 tons Feed production for poultry industry Cost of a broiler (chicken) is 34% soy-cake

9 Mozambican agriculture: use of inputs varies across different crops Use of: Improved seed, planting materials Mechanization Fertilizers Other agrochemicals Irrigation Banana Cotton * * when cultivating > 2 ha Rice Soybean Tomato

10 4 out of 5 of the selected value-chains are currently competitive Sample profitability analysis based on 30MZN/$ Banana Cotton Rice Soybean CIF Europe; 40 tons/ha Ex-ginnery FOB; 0.7 tons/ha Maputo wholesale price; 4 tons/ha Entry soy mill; 1.2 tons/ha Tomato Maputo price; 40 tons/ha Gross Revenue (Metical/ton) 28,500 57,305 14,219 18,568 16,624 Costs (Metical/ton) 11,356 38,453 20,047 13,140 7,123 Profit (Metical/ton) 17,144 18,852 (5,828) 5,428 9,501 Cost-benefit ratio Competitive?

11 Dutch Disease: a threat to Mozambique s competitiveness 1 One of the potential effects of Mozambique s impending resource boom is an appreciation of the Metical (one consequence of the phenomenon known as Dutch Disease ) 2 This means buyers would need more units of their currency (for example dollars) to buy the same amount of Mozambican products 3 This would result in a loss of competiveness relative to other exporters whose currencies have not undergone a similar appreciation USD exchange rate goes from 30MZN/$ to 20MZN/$ Costs of imported goods go down Costs of exported goods go up Costs of imported inputs go down Competitiveness goes down Profitability goes down

12 Certain value-chains show resilience to Dutch Disease Strong value-chains Metical appreciation 30MZN/$ Cost-benefit ratio 20MZN/$ Cost-benefit ratio Impact of Dutch Disease Banana Strong resilience to Dutch Disease Soybean Mild resilience to Dutch Disease Tomato Strong resilience to Dutch Disease

13 Some value-chains would be severely impacted by Dutch Disease Weak value-chains Metical appreciation 30MZN/$ Cost-benefit ratio 20MZN/$ Cost-benefit ratio Impact of Dutch Disease Cotton Vulnerable to Dutch Disease Rice Highly vulnerable to Dutch Disease

14 Increased agricultural yields can boost competitiveness Banana Cotton Rice Soybean 20MZN/$ Cost-benefit ratio Base case yields 40 tons/ha Yield increase 0.7 tons/ha Yield increase 4 tons/ha Yield increase 1.2 tons/ha Yield increase Improved yields 52 tons/ha 1 tons/ha 9 tons/ha 1.5 tons/ha 20MZN/$ Cost-benefit ratio w/ yield increase

15 A multi-layered approach to Mozambique s agriculture competitiveness Reduce bureaucracy and streamline processes Ensure minimum wage increases reflect productivity Improve road quality and storage infrastructure (silos, cold storage) Increase management efficiency Business environment Eliminate illegal taxes Transport & Logistics Increase port efficiency Simplify legal framework for land rights Improve access to electricity Remove/Reduce non-tariff barriers (TEEN, PSI, scanners) Expand production areas Farm-level Promote use of inputs (improved seeds, fertilizers, pesticides, seedlings) Increase access to irrigation systems and mechanization services Improve production and harvesting techniques Increase domestic R&D and local production of seedlings to reduce phytosanitary risk Processing Upgrade processing machinery and increase asset utilization Improve management efficiency and quality control

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