I-LIFE DAP REGIONAL MARKET OVERVIEW

I-LIFE DAP REGIONAL MARKET OVERVIEW GROUNDNUTS Grant FFP-A-000400066-00 1 Market Praxis Systems of innovation for agribusiness development

. PRESENTATION In June of 2005, the I-LIFE DAP contracted the services of Market Praxis Limited to conduct a Regional Market Analysis for a set of crops selected by the program s target communities. The market analysis would constitute the basis for the development of the implementation plan for the consortium s Market-Oriented Agriculture Program. The Market Analysis, divided into three phases, is aimed at producing a robust and scientificallybased production and marketing strategy for a set of crops to be produced and marketed by beneficiary households in a sustainable and profitable fashion. This will be achieved through the introduction of systems of innovation, including interventions in the areas of collective action, production technologies and institutional arrangements in support of market access. This report of the findings from the second phase of the Market Analysis, presents an overview of the regional groundnut markets as a mechanism to identify the challenges and opportunities for Malawian smallholder farmers in preparation for the development of production and marketing strategies and the facilitation of market linkages, as part of Phase 3.

TABLE OF CONTENTS INTRODUCTION... 4 I. Global Groundnut Markets... 5 II. Regional Markets... 9 Zambia... 9 Malawi... 14 Mozambique... 17 Zimbabwe... 20 South Africa...23 III. Findings... 28 Strategic Issues Synthesis... 29 Conclusion... 30

INTRODUCTION Groundnut products are of crucial importance for millions of small farmers in Africa and Asia both as a source of protein, as well as sources of income in support of their livelihoods. Malawi is not an exception. With an annual groundnut production in the order of 160 thousand metric tons equivalent to over 1.8 percent of Africa s entire groundnut output, this subsector presents unique economic opportunities for some 800,000 smallholder Malawian farmers whose livelihoods are dependent on groundnut production and related activities. Historically, groundnut production systems in Malawi have been characterized by smallholder-based production systems, with women playing a key in both production and marketing of the crop. Smallholder farmers role in groundnut production constitutes an ideal vehicle for facilitating increased rural income via systems of innovation. Such systems may include technological, organizational and institutional interventions in the form of: 1) modern crop production and postharvest handling technologies to enable farmers increase productivity, as well as farm-gate quality, 2) strengthening of collective action schemes to increase the efficiency of marketing systems, and 3) institutional arrangements to increase the levels of certainty, and manage the risks inherent in agricultural-based activities. The degree to which Malawian groundnut producers will succeed in reaping the benefits of marketing systems will greatly depend on their level of competitiveness in terms of their ability to drastically reduce both pre and post-harvest loses, while also increasing their bargaining power and securing long-term marketing arrangements with reliable trading partners. The achievement of these goals will require developing production and marketing strategies to better position Malawian smallholders in the regional markets. Therefore it is crucial to base those strategies on reliable assumptions about the marketplace, while factoring-in the elements driving regional market dynamics. Within this context, this document attempts to answer four fundamental questions: 1. What are the forces driving the dynamics of groundnut markets in Southern Africa? 2. Which are Malawi s major competitors in the regional groundnut markets? 3. Which countries in the region constitute potential markets for Malawian groundnuts? 4. What interventions are needed in order to facilitate the improvement of the level of competitiveness of Malawian groundnut producers? Answering these questions is crucial because: 1) Recognizing the role of regional market dynamics will allow for the identification of threats and opportunities facing Malawian farmers in their quest for market access: 2) Identifying regional competitors and understanding their marketing strategies will allow Malawian producers to anticipate future changes in supply and demand for the crop: 3) Identifying potential markets in the region will inform the development of appropriate production and marketing strategies: and 4) It sets the framework for policymakers, development practitioners and donor agencies to understand the needs of smallholder farmers and what it takes to provide them with the necessary tools to achieve a level of competitiveness that enables them to gain regional market shares. Finally, only through the recognition of the multiple factors influencing regional

agricultural markets will development agencies be able to assist poor households in managing the risks inherent in to marketing endeavors. Within this context, this report presents a snapshot of the regional groundnut markets, using a format accessible to managers, policymakers and field staff. The authors have made every possible effort to reduce the use of technical language and sophisticated quantitative analysis in order to facilitate the practical use of findings. This report is composed of three sections: Section I provides a summary of major trends in the global groundnut markets, Section II presents an overview of the regional markets with a focus on Malawi, Mozambique, South Africa, Zambia, and Zimbabwe; Section III presents a summary of findings using the framework of Strengths, Weaknesses, Opportunities and Threats (SWOT). The conclusion presents a summary of Strategic Issues, which constitutes the basis for the development of the production and marketing strategies for groundnuts. I. Global Groundnut Markets World groundnut production reached 35.7 million metric tons in 2004, accounting for 8.7 percent of total oilseed production of nearly 410 million MT. China is the largest producer with over 40 percent of world s production, followed by African continent with 24.65 percent and India with 18.2 percent. The United States produced 5.4 percent of global groundnut output, while Indonesia reached 4.1 percent (Table 1). Table 1. World Groundnut Production, 2004 COUNTRY PRODUCTION (MT) SHARE OF WORLD PRODUCTION (%) China 14,385,000 40.3 India 6,500,000 18.2 Nigeria 2,937,000 8.2 United States of America 1,933,070 5.4 Indonesia 1,450,000 4.1 Sudan 1,200,000 3.4 Myanmar 715,000 2.0 Senegal 465,000 1.3 Viet Nam 451,100 1.3 Chad 450,000 1.3 Argentina 418,571 1.2 Ghana 389,649 1.1 Dem. Republic of Congo 363,850 1.0 Other 4,057,720 11.4 TOTAL 35,715,960 100.0 Source: FAOSTAT Groundnut production in Africa was dominated by Nigeria, with 33.6 percent of the continent s production and 8.2 percent of global output, followed by Sudan (13.63 percent), Senegal (5.28 percent) and Chad (5.11 percent). Malawi s share of Africa s production reached 1.83 percent, with 161 thousand metric tons.

Table 2. Africa s Groundnut Production, 2004 Country Production (MT) Percentage of African Production Nigeria 2,937,000 33.36 Sudan 1,200,000 13.63 Senegal 465,000 5.28 Chad 450,000 5.11 Ghana 389,649 4.43 Dem Republic of Congo 363,850 4.13 Burkina Faso 321,000 3.65 Guinea 300,000 3.41 Niger 209,369 2.38 Cameroon 200,000 2.27 Egypt 180,000 2.04 Malawi 161,162 1.83 Mali 156,000 1.77 Uganda 155,000 1.76 South Africa 127,975 1.45 Zimbabwe 125,000 1.42 Other 1,061,960 12.06 TOTAL 8,802,965 100.00 Source: FAOSTAT Based on historical data, over the last 20 years there has been an increase in demand for edible groundnuts, coupled with a decline in demand for groundnut oil and meal. Most of the increase in demand for edible groundnuts has taken place in the developed world. Notwithstanding this trend in global demand, a large number of producing countries especially India and countries in Sub- Saharan Africa are still devoting more than 60 percent of their groundnut production to crushing. The reduction in the demand for groundnut oil is derived from the increasing availability of cheaper, low-fat vegetable oils mainly produced from soybean, palm and canola. In the meal market, groundnut meal competes with other oilseeds and with cereal-based products. Additionally, a major factor influencing a reduction in the use of groundnut meal for animal feed is the high prevalence of aflatoxin, thereby limiting its use in the beef and dairy industries, as aflatoxin has the ability to find its way into meat and milk. As shown in Figure 1, fifty eight percent of world s demand for shelled groundnuts is concentrated in eight countries; the Netherlands has the largest share with 17 percent, equivalent to 207,000MT in 2003, followed by Indonesia (8 percent), the United Kingdom (8 percent), the Russian Federation (6 percent), Canada (6 percent), Germany (5 percent), Mexico (5 percent) and Japan (4 percent). An aspect to take into consideration is that these figures include all shelled groundnuts for oil expressing, food manufacturing and confectionery uses.

Figure 1. Major Groundnut Importing Countries Major Groundnut Importers (2003) Netherlands 17% Others 41% Indonesia 8% United Kingdom 8% Russian Federation 6% Japan 4% Mexico 5% Germany 5% Canada 6% The market for confectionery groundnuts in which Malawi has comparative advantage is much more concentrated. The European Union (EU), Canada and Japan are the major importers; the EU market accounts for 43 percent of world s groundnut imports for confectionery amounting close to US$500 million/year. Canada and Japan account for 9 and 8.2 percent of global groundnut imports, respectively. Recent developments in agriculture policy in the United States and China are heavily influencing a re-distribution of market shares, with China becoming the major beneficiary in the expansion of the global groundnut markets. Meanwhile the role of the U.S. has decreased significantly. From nearly one percent in 1976, China s market share in the world edible groundnut market increased drastically to 32 percent in 2001. During the same period, the U.S. market share dropped from 31 to 19 percent. In addition to changes in agricultural policy, China has capitalized on the market for large-seeded groundnuts, which is considered a specialty market supplying snack manufacturers. The emergence of China as a leading groundnut exporter is even more impressive in the market for confectionery groundnuts. While the international edible groundnut market has become more concentrated with 61 percent of exports controlled by China, the U.S. and Argentina in 2002, the market for processed groundnuts has become more fragmented. The concentration of the confectionery market partially reflects a decrease in the share of Sub-Saharan Africa from 17 to 5 percent. African shares have been quite volatile, as several African countries (e.g. Nigeria, Malawi and the Gambia) enter intermittently the confectionery market, depending on their crop quality, and world market demand, and are not considered dependable suppliers. The historical trend for groundnut prices in the international markets can be divided into two periods; before and after 1981. In the period preceding 1981 price series were non stationary, and did not show co-integration relationship between grain and cake. Prices were high and dominated by the U.S. and Sub-Saharan Africa with 45 and 18 percent of world exports. In the period following 1982, prices showed a stationary trend (reverting to their mean). However there have been two well-marked sub-periods; prior to 1994 prices for groundnuts showed a higher

degree of volatility, with a coefficient of variation for the period1980-1994 of 20 percent, compared with 7 percent for the period 1995-2001. This can be explained by the reliance on a limited number of exporting countries and strong variations in global supply during the first period, followed by the entrance of China in the global market with sustained production and the reduction of the markets shares of the U.S. and Argentina. Looking at the last two marketing years (Figure 2) prices in Rotterdam taken as basis for global pricing, it is possible to observe a downward trend from US$1000/MT in early 2004 to US$850/MT in August 2005, primarily derived from news of record harvests in Argentina and South Africa. However, even at those price levels, if Malawian farmers were able to meet EU aflatoxin standards, they would be able to sell their groundnuts at prices in the range of US$650-US$680/MT FOB Lilongwe. This underlines the need to address the aflatoxin issue, which by opening the door to Malawian exports would introduce the much needed incentive to increase production. Figure 2. Reference Prices for Groundnuts - CIF Rotterdam, 2003-2004 and 2004-2005 Groundnut Prices CIF Rotterdam 2003-2004 and 2004-2005 US$/MT 1050 1000 950 900 850 800 750 Oct Nov Dec Jan Feb Mar Apr May jun Jul Aug Sep oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2003/2004 2004/2005 Based on the salient developments of the world groundnut market presented above, it is possible to conclude the following: 1) Global demand for groundnut oil and cake is decreasing due to the introduction of low-cost and healthier substitutes like palm, soybean and canola oils; and to the aflatoxin residue in cake that could otherwise be used for animal feed. 2) The market for groundnuts for the processing industry is largely supplied by the U.S., Argentina, South Africa and West African countries; it is a captive market characterized by long-term contracts and highly volatile in terms of prices 3) The market for confectionery groundnuts, traditionally supplied by the U.S., Argentina and India is progressively being taken by China, due to their ability to produce and export large volumes of large-seeded groundnuts at competitive prices. 4) Notwithstanding these challenges, Malawi still has the opportunity to re-enter into the global confectionery market, capitalizing in its long-held reputation in Europe. However, it will be necessary to address three fundamental issues: a) lack of consistency in national production, b) low crop productivity, and c) high prevalence of aflatoxin contamination.

II. Regional Markets Zambia Figure 3. Zambia s Groundnut Production, 1994-2004 Groundnut Production 1994/1995-2003/2004 Thousands MT 180 160 140 120 100 80 60 40 20-1994/95 1995/96 1996/97 1997/98 Area (Ha) 1998/99 1999/2000 2000/2001 2001/2002 2002/2003 Production (MT) 2003/2004 90 80 70 60 50 40 30 20 10 - Thousands Ha Most of Zambia s groundnuts are grown in the Central, Copperbelt, Eastern, Luapula and Northwestern provinces. Figure 3, shows seasonal changes in production in metric tons and also total land area devoted to groundnut production between 1994/95 and 2004/05 production seasons. Groundnut production reached its peak of about 160,000 metric tons during the 2002/2003 season and its lowest levels of about 70,000 metric tons between 1994/1995 and 1996/1997. Total land area devoted to groundnut production was lowest during the 1999/2000 production season however total output was substantially higher compared with the previous years partly due to record high yields of over 0.8 tons/ha as shown in Figure 4. Like most groundnut producing countries in Sub-Saharan Africa, Zambia s groundnut yields vary from anywhere between 0.3 and 0.5 MT/ha with occasional highs of 0.7 and 0.8 MT/ha. Variations in groundnut yields are typically related to changes in soil fertility, farming systems/practices and seed selection. In sharp contrast to Zambia s low yields, in other major producing nations for example the United States, yields sometimes reach well over 2 ton/ha; 1.8 1.9 ton/ha in China and Argentina; about 1 ton/ha in Indonesia, Brazil, Thailand and South Africa compared with only 0.5 0.7 tons/ha in the rest of Sub- Saharan Africa including Zambia. The Zambian government and NGO s, through drought relief programs supply the bulk of groundnut seeds to farmers particularly those in marginalized areas. Between 1954 and 2003, Zambia Seed Company, the Maize Research Institute and Seed Co International Ltd, altogether released 12 improved groundnut varieties. However adoption of improved Figure 4. Zambia s Average Groundnut Yields, 1994-2004 Groundnut Yield 1994/1995-2003/2004 Mt/Ha 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004

varieties has been extremely low despite their record high yields (i.e. 80 percent more yield advantage) over local varieties. Nearly all groundnuts grown in Zambia are produced from farmerretained seed recycled over several generations, resulting in perpetual low yield records. Figure 5. Zambia s Groundnut Exports to SADC Region, 1997-2005 MT 2500 2000 1500 1000 Groundnut (grain plus oil) Exports from Zambia to SADC Countries (1997-2005) 500 0 1997 1998 1999 2000 2001 2002 2003 2004 Jul-05 Net Weight (MT) According to the FAO food balance sheet for Zambia, average per capita supply of groundnut between 1994 and 2002 was 1.4kg p.a. while the average daily per capita groundnut protein supply was 0.8g. Comparing these figures to those reported for neighboring Zimbabwe (4.1kg p.a. and 2.4g average for the same period), raises a lot of concern for Zambian food security since groundnut is a major staple. Protein imports possibly from within the Southern Africa region coupled with increased local groundnut production backed by appropriately selected varieties may help ameliorate Zambia s current situation. In terms of trade with SADC countries, Figure 5 suggests that Zambia s largest volumes of groundnut exports occurred in 1998 and 2003, contributing and aggregate of over US$1.5 million to the national economy for those particular years. By virtue of income from trade, South Africa is Zambia s single most important regional trade Value (USD) partner followed by Malawi and then Zimbabwe (Figure 6). The value of Zambian groundnut exports to South Africa alone in 1998 was well over US$1.1 million, compared to US$290,000 for Malawi. Similarly, for 2003 the value of Zambian exports to South Africa was US$$895,000 compared to US$65,515 for Zimbabwe. By July 2005, only Zimbabwe remained a significant buyer (US$36,300). Between 1997 and July, 2005, groundnut imports (raw and processed) from SADC countries increased dramatically, reaching the highest peak in 2002 with imports valued at well over US$400,000 (Figure 7). The years 2003 and 2004 however witnessed a gradual decline of groundnut imports. According to key informant accounts, most of Zambian groundnuts exported into South Africa and Zimbabwe are typically imported back into Zambia in the form of processed peanut butter. Visits to Zambia s major supermarket (Shoprite) as well Petrol/gas mini-malls (BP), confirmed that most of 2500 2000 1500 1000 500 0 Thousands US$ Figure 6. Value of Zambia s Groundnut Exports (SADC), 1997-2005 Thousands US$ 1200 1000 800 600 400 200 0 Value of Zambian Exports to Selected SADC Countries 1997-07/2005 1997 1998 1999 2000 2001 2002 2003 2004 2005 South Africa Malawi Zimbabwe

Zambia s peanut better sold in the supermarkets and the mini-malls are sold under South African and Zimbabwean brand names Black Cat and Lyons respectively. Figure 7. Zambia s Groundnut Imports (SADC), 1997-2005 MT 500 400 300 200 100 0 Groundnuts (grain and oil) Import from SADC Countries into Zambia 1997-2005 1997 1998 1999 2000 2001 2002 2003 2004 Jul-05 Net Weight (MT) Value ($USD) 500 400 300 200 100 0 Thousands US$ Figure 8 indicates that Zimbabwe and Malawi are Zambia s most important groundnut suppliers. For instance, in 2001 value of imports from Zimbabwe reached a record high of about US$200,000, while the value of supplies from South Africa and Malawi remained under US$$10,000 (Figure 7). By 2004, imports from Malawi exceeded Zimbabwean imports signaling an increasing trend of trade opportunities for Malawian groundnut exporters. Information obtained from key players in the groundnut industry suggests relatively stable prices of US$500-600/ton CIF Lusaka however potential buyers indicated they would offer slightly higher prices for top grades such as the Makulu Golden Variety (MGV4), Muyuni, Nyanda and CG7 (the most preferred groundnut varieties). The Chalimbana variety according to key informants is irregular in outlook and difficult to sort. However, Quality Specialty Foods, a local processor located in Blantyre, Kitwe in Zambia s Copperbelt processes mostly Chalimbana variety into peanut butter sold in most local supermarkets under the brand name Chalimbana in competition with Lyons and Black Cat brands. Figure 8. Zambia s Groundnut Imports from Selected SADC Countries, 1997-2005 Thousands US$ 250 200 150 100 50 0 Value of Zambian Imports from Selected SADC Countries 1997-7/2005 1997 1998 1999 2000 2001 2002 2003 2004 Jul-05 South Africa Malawi Zimbabwe For Malawian producers to maintain their share of export markets in Zambia and elsewhere, they must be cognizant of the different groundnut varieties and what they are best suited for, in terms of the manufacturing requirements of different food products. For example, the large red-skinned Virginia kernels are most suited for cocktail and salted nuts while the medium-sized Runner and the small Spanish varieties are best used for peanut butter, oil and candies. Additionally, Valencia varieties, with long shells containing three to four kernels, are best suited for roasting. The real test for Malawian producers and traders is to establish a niche market to which they will provide the preferred varieties (example CG7, and MGV4) at the competitive export parity price.

The following conclusions may be drawn based on information gathered from key informants, the Central Statistical Department and reviewed literature: 1. The Zambian groundnut industry is riddled with lack of the necessary investments in groundnut processing. Almost all groundnuts exported from Zambia are in the form of raw material thus depriving the country of the opportunity to harness the income generating potential of value adding processes. Developing a strong agro-processing industry will improve the prospects of the groundnut subsector which has the potential of creating strong backward and forward linkages in Zambia s economy. 2. Newly released improved varieties come with special characteristics adapted to specific enduses. For example some varieties by virtue of their physical (i.e. kernel shape and size), biological (i.e. high yields, early maturity, disease and pest resistance etc.) and chemical (i.e. high oil content) characteristics may be suited for specific end uses. Therefore for Malawians to remain competitive, farmers must be given access to groundnut varieties which meet the demands of potential export markets 3. Information provided by key players in Zambia s groundnut industry suggests that with the right selection of seeds and proper agronomic practices enforced, there is very high potential for about 6,000-10,000 tons of Malawian groundnuts exported to Zambia at export parity prices ranging from $500-600. In order to better understand the conditions under which Malawian exports to Zambia would be profitable will require a brief analysis of export parity price (EPP) calculations for groundnuts CIF Lusaka. Table 3. EPP Calculation for Malawian Groundnut destined for Zambia, 2005 EPP at prices offered by Zambian importers of ZK 2,175,000/MT CIF Lusaka CIF Lusaka (ZK/MT) 2,175,000.0 CIF Lusaka (US$/MT) 500.0 Insurance (US$/MT) 1.2 Freight (US$/MT) 62.0 FOB Lilongwe (US$/MT) 436.8 FOB Lilongwe (MK/MT) 54,163.2 Loading (MK/MT) 150.0 Fumigation (MK/MT) 500.0 Documents (MK/MT) 125.0 Internal transportation and storage (MK/MT) 3,720.0 Farmers' price per MT (MK)* 49,668.2 Price per Kg (MK) 49.7 * Delivered at community collection centers

Figure 9. Structure of Zambia s Groundnut Value Chain Input Suppliers Imports Small-scale Processors Producers Traders/first stage processors Importers Wholesalers Exporters Peanut Butter Manufacturers Oil Manufacturers Confectionery Processors Retailers Exports Consumers

Malawi Malawi has traditionally been a major groundnut producer; the crop fulfills a dual purpose; as a major source of protein in the diet of rural households, as well as a source of income through the sale of surpluses. In the rural settings, groundnuts are usually consumed as porridge, while smaller quantities are processed into edible oil. National output has varied substantially in the last 20 years, with volumes ranging from 25,000 to 190,000 MT. Exports have also fluctuated; in the late 1970s and 1980s exports reached 70,000 MT, at a time when Malawian groundnuts, especially Chalimbana, were particularly appreciated in the international markets Figure 10. Groundnut production and price trends MT 200 180 160 140 120 100 80 60 40 20 0 1985 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 groundnuts gnutprice Geographic Distribution of Groundnut Production Malawi, 2004 '99 2000 '01 '02 '03 '04 especially in the United Kingdom and were used by the confectionary industry. Quality deteriorated in the years preceding market liberalization due to the introduction of differential pricing by ADMARC the government parastatal in charge of trade in agricultural commodities, which introduced an incentive for farmers to sell the larger kernels, while keeping the smaller ones for seed. The reduction of quality output for export prevented the government parastatal from complying with contracts abroad, resulting in the demise of the industry. The industry has re-emerged in the post-liberalization period, but on a much lesser scale, influenced both by supply and demand constraints, especially the introduction of stricter aflatoxin standards by the European Union, consistent with the reduction of maximum allowable levels of aflatoxin in groundnuts to 4 parts per billion (ppb) for groundnuts intended for human consumption and 20ppb for those destined for animal consumption. Figure 10 depicts the production and domestic price trends for the last 19 years, which is consistent with the issues outlined above. Figure 11. Geographic Distribution of Groundnut Production, Malawi, 2004 70 60 50 40 30 20 10 0 thousand kwacha/ton Blantyre 11% Shire Valley 2% Karonga 2% Mzuzu 8% Machinga 16% Kasungu 26% Lilongwe 28% Salima 7%

As shown in Figure 11, eighty eight percent of domestic groundnut production comes from five of the eight Agricultural Development Divisions (ADDs), with Lilongwe and Kasungu ADDs representing 54 percent of national groundnut production. This is consistent with recent studies that depict these areas as having optimal agro-ecological conditions for groundnut production. The post-liberalization period has been characterized by slow growth in the agricultural trading sector, which opened the door to a monopsony characterized by a large number of producers dealing with a much reduced number of traders, giving rise to unethical trading practices and the substantial reduction of farm revenue, thereby discouraging production. This partially explains the slow growth of production during the period 1994-1997. Following 1997 farm gate prices observed a progressive increase, going from MK14/Kg in 1997 to MK40/Kg in 2004, which again encouraged an increase in production (Figure 10). Despite the decline in total production, Malawi still exports groundnuts to neighboring countries. Export market for Chalimbana, probably the most widely grown variety in Malawi, has suffered also due to genetic degeneration, resulting in lower yields (e.g. 0.8MT/Ha.). However, there is still demand for Chalimbana groundnuts and increasing production for the crop would put Malawi as a reliable supplier of this specialty product There are two other varieties with market potential; CG7 a red-skinned groundnut developed by ICRISAT and highly adopted by Malawian farmers, which yields 1.2MT/Ha under smallholder farmer conditions and up to 2.0MT at higher technology levels; and ICG90704, another variety developed by ICRISAT, similar to Chalimbana and with yields in the order of 1.2MT/Ha. Groundnuts are typically traded in rural markets as a mechanism to cope with food shortages, while they are also used as payment for causal labor (ganyu). Demand in the commercial market gained thrust in 2000, when the gap in domestic supply in the South African Market widened, allowing the entrance of over 12,000 MT from the Southern African region. Since then, there have been regular exports to South Africa in the order of 3,000-8,000MT per annum. A phenomenon that encouraged stronger competition in the Malawian groundnut market was the sudden increase in demand from South Africa in 2003, which resulted in a substantial increase in prices to levels above MK40/Kg at farm gate. This reinforces the notion that the Malawian groundnut market is directly linked to the market dynamics of the region, led by South Africa, the major consumer in the Southern Africa Region. According to traders and processors in South Africa, in 2005 South African groundnut production increased as compared with 2003 and 2004, leaving little room for imports. Therefore all else being equal it is expected that during the current season prices will be in the range of US$ 480- US$490/MT CIF Johannesburg, which will pressure farm gate prices downwards to abut MK38/Kg. However there are indications that the area grown to groundnuts in South Africa will decrease in the coming season, due to expansion of maize production, which will likely bring prices to about US$525-US$550 in 2005. This is relevant considering that most local traders export to South Africa, and regional prices are heavily influenced by changes in production in that country. There are a number of traders that operate in Malawi, with most of them dealing with groundnuts in occasional basis. The number of formal traders is limited being Rab Processors, Farmers World, Export Trading, Transglobe and NASFAM, all of which are considered the most reliable; evidence of that is their heavy investment in the country, including some cases of contract farming and large warehousing and processing facilities. These are in contrast to the mushroom companies which appear and disappear with the harvest.

While most traders export to South Africa, NASFAM has started to export directly to the United Kingdom, capitalizing on the Fair Trade Certification of their Association in Mchinji, thereby constituting an alternative worthy of being explored, especially for the districts of Lilongwe and Mchinji. Similarly, Farmers World and Rab Processors have indicated their disposition to enter into an agreement for the purchase of groundnuts from the I-LIFE beneficiaries. An issue to be taken into consideration is the groundnuts low level of product specificity, which can be marketed through a variety of channels, thereby increasing the risk of non-compliance with pre-agreed deliveries. This is a factor influencing traders decision not to enter into contractual agreements and which should be further explored in order to identify institutional innovations that could lower the risk of non-compliance. The salient characteristics of the Malawian groundnut industry can be summarized in the following lines: 1) Large reliance in smallholder production, which while providing an ideal vehicle for increasing incomes through improved marketing, poses a challenge in coordination of production and marketing activities. 2) Poorly functioning collective action schemes have a negative impact on the achievement of economies of scale, reduction of transaction costs and bargaining power before rural traders. 3) Relatively high incidence of aflatoxin contamination is a major constraint to market expansion, in most cases limiting exports beyond South Africa, where processors add value by reducing the levels of aflatoxin. 4) High market potential for production and marketing of large-seeded groundnut varieties, capitalizing on existing landraces and the international reputation of Chalimbana groundnuts. The supply chain for groundnuts in Malawi follows a rather simple structure (Figure 12), with input suppliers providing seed, although according to recent studies carried out by the International Fertilizer Development Center (IFDC) less than 6 percent of farmers buy certified seeds in any given year. Individual farmers grow groundnuts for domestic consumption and as a potential source of supplementary income; sales typically take place in informal markets and in small quantities, while commercial sales take place at farm-gate, where rural traders collect the produce in small lots and deliver to larger traders in urban centers. Groundnuts reach large traders in Lilongwe and Blantyre, who in turn export to South Africa. As mentioned before, NASFAM and especially Mchinji Smallholder Farmers Association (MASFA) play a key role trading some 600MT per annum, a third of which are sold in the United Kingdom, while the rest are exported to South Africa.

Figure 12. Structure of Malawi s Groundnut Value Chain Input Suppliers Producers Payments in kind Informal traders Rural markets Larger traders in urban centers NASFAM Traders/processors in the UK Traders and processors Domestic market Traders/processors in South Africa Mozambique Despite substantial changes in the oilseed complex of the country in the last 25 years, groundnut is still an important commodity for producers and consumers throughout Mozambique. Current groundnut production is in the order of 130,000 MT per annum, a bulk of which is produced in the provinces of Nampula, Inhambane, Zambezia and Cabo Delgado, which concentrate over 78 percent of national production. The area grown to groundnuts is estimated in 300,000 hectares, with an average yield of 0.44 MT/ha. Figure 13. Geographic Distribution of Mozambique s Groundnut Production 93/94-03/04 Thousands MT 160 140 120 100 80 60 40 20 0 Groundnut Production at Provincial Level 93-94--03-04 94-95 93-94 "03-04 "02-03 "01-02 00-01 99-00 98-99 97-98 96-97 95-96 CABO DELGADO NAMPULA ZAMBEZIA INHAMB. OTHERS As shown in Figures 14 and 15, the introduction of soybean oil in the Mozambican market has reduced the market share of groundnut oil from 75 to 36 percent in the period 1975-2004. Nonetheless, groundnuts are still a major component of the diet of rural Mozambicans, especially for the preparation of porridges.

Figure 14. Mozambique s Oilseed Complex, 1975 Groundnut 75% MOZAMBIQUE OILSEED COMPLEX 1975 Sunflower seed 9% Cotton 16% Annual Groundnut imports are in the order of 3,000 MT, most of which is seed, while formal exports average 3000MT, mainly to South Africa. However, there are indications that informal trade to Malawi would account for some 2,000 MT which are sold in small quantities, given the relative proximity of producing areas to urban centers in Southern Malawi. The Government of Mozambique, private sector companies and NGOs are promoting groundnut production for export purposes. Within this context, CARE through its office in Nampula has embarked on the production of seed of one Spanish and two Virginia varieties to supply the growing demand of the industry. CARE has also made arrangements with Twin Trading, a fair trade company in the United Kingdom, in order to facilitate market linkages with small farmer associations. Similarly, the Cooperative League of the United States (CLUSA) through a grant from the Global Development Alliance is channeling its efforts towards the establishment of market linkages between its cooperatives in northern Mozambique and importers in Europe. These initiatives started in just 2004 and the impact in terms of trade expansion will not be visible until 2-3 years from now. V&M and Export Marketing are two trading companies located in Nampula and Zambezia; the bulk of their business is maize for export to the region. However, they are also seeking to establish linkages with farmer organizations in order to establish a contractual arrangement for production of groundnuts and other legumes. These two companies demonstrated interest in procuring Malawian groundnuts, if they can be delivered in Maputo at US$400/MT, presumably with the intention of exporting them to South Africa. Universal Leaf, a regional tobacco company associated to Phillip Morris is aggressively promoting groundnut production among its contract farmers, as an alternative for crop rotation. The effort which began in 2003 produced over 600 MT of groundnut which was used as seed. Some of the seed was channeled through Sementes de Figure 15. Mozambique s Oilseed Complex, 2004 Groundnut 36% Soybean 26% MOZAMBIQUE OILSEED COMPLEX, 2004 Sunflower seed 28% Mozambique (SEMOC), regional seed companies and a portion was bought by Universal Leaf to be re-injected in their farmer network in Tete and Angonia. At the time of this study, Universal Leaf and a local trading company were buying groundnuts from farmers with preliminary estimates of 900MT which will be marketed in Mozambique and South Africa as seed and grain, respectively. Cotton 10%

Prices paid to farmers in northern Mozambique are in the region of US$300/MT. Although this price is substantially lower than that currently paid to Malawian farmers, it must be taken into account that collection and distribution costs are in the order of US$70/MT, which puts Mozambican producers at a disadvantage. Prospects to supply the domestic market in Mozambique are limited, especially due to low-price levels, which partially explain the informal exports of Mozambican groundnuts to Malawi. However, in the absence of better options, Malawian farmers could explore the possibility of selling groundnuts to trading companies CIF Maputo. Mozambican traders are not highly stringent regarding grades and standards and would require 7-8 percent moisture, and less than 0.2 percent of foreign matter (in weight). The varieties that would be of interest to traders are Chalimbana and CG7, although there is also interest in Spanish-type varieties. Traders buy commodities year-round, and do not generally offer a premium for deliveries in the low season. However, it is likely that price seasonality will play a major role once they have established commercial relationships with South African traders and processors. Regarding potential competition between Malawian and Mozambican producers in the regional markets, it is estimated that the Malawian groundnut industry is not only better organized, but has several other strengths (e.g. regional reputation and trading networks) that puts it at an advantage. Additionally, based on field evidence, it is estimated that it will take Mozambican producers and traders at least five years to develop the industry to a level at which it could compete with Malawi in the international markets. This timeframe could be eventually reduced to three years if the tobacco companies manage to increase the area grown to groundnuts and are able to market the output effectively by exporting directly to Europe out of their shipping facility in Beira. The latter will greatly depend on their ability to establish linkages with reputable trading companies. From the statistical data available, as well as from the discussions with government, private sector and international development organizations in Mozambique, it is possible to conclude that: 1) Until now, the Mozambican groundnut industry has focused on supplying the domestic market with nuts of acceptable quality, at low prices, and a portion of supply is still being traded through arms-length operations in the rural areas. 2) The Mozambican government is committed to develop the groundnut industry. However, dispersion of production and poor access to growing areas are still major challenges. Coordination and transport costs result in low farm-gate prices, seriously affecting the incentive structure for small farmers. 3) There are no clear advantages for groundnut exports to Mozambique. Prices are lower than in other alternative markets, transport costs are high and there is some degree of uncertainty that would result in over-exposure to risks. 4) Mozambique is not yet an influential player in the regional groundnut market, and it is likely that significant exports to South Africa and/or Europe will not occur in the following three years, giving Malawi first-mover advantage in the region. Notwithstanding the current absence of advantages for Malawian groundnut producers in the Mozambican market, it is appropriate to look objectively at the prices that Malawian farmers could receive should they decide to sell groundnuts CIF Maputo. The export parity price (EEP) calculation below is based on the price of US$400/MT CIF Maputo suggested by Mozambican traders for the current season. It is relevant to take into consideration that current farm-gate prices for groundnuts in Malawi are in the range of MK35 to MK40/Kg.

Table 4. EPP Calculation for Malawian Groundnuts Destined for Mozambique EPP at prices offered by Mozambican importers of MMT 9,400,000/MT CIF Maputo CIF Maputo (MMT/MT) 9,400,000.0 CIF Maputo (US$/MT) 400.0 Insurance (US$/MT) 1.2 Freight (US$/MT) 72.0 FOB Lilongwe (US$/MT) 326.8 FOB Lilongwe (MK/MT) 40,523.2 Loading (MK/MT) 150.0 Fumigation (MK/MT) 500.0 Documents (MK/MT) 125.0 Internal transportation and storage (MK/MT) 3,720.0 Farmers' price per MT (MK)* 36,028.2 Price per Kg (MK) 36.0 * Delivered at community collection centers Zimbabwe Traditionally, the bulk of Zimbabwe s groundnuts has been produced by smallholder farmers mainly as a source of vegetable protein. However the high demand for groundnuts by the oil expressing industry as well as by confectioners makes it an even more important source of cash revenue that contributes significantly to both the rural and national economy. Key informants estimate of smallholder groundnut production put the figure in the neighborhood of 60 percent to 65 percent of national output. Table 5 and Figure 16 present a ten year trend (1994-2003) of total land area devoted to groundnut production, total harvest in tons and yields in kg/ha. Total area, production and yield figures shown in figure 16 depict a rather Table 5. Zimbabwe s Groundnut Production Profile Area (ha) Production (tons) Yield (kg/ha) Year 1994 130 015 91 050 700 1995 150 446 45 675 304 1996 128 341 67 562 526 1997 167 591 123 633 738 1998 178 555 46 148 258 1999 132 117 80 240 607 2000 175 773 124 117 706 2001 275 036 168 749 614 2002 258 610 56 378 218 2003 105 052 86 494 823 irregular trend in the ten year period under review. For example in 1994, a total of 130,000 ha devoted to groundnut production resulted in 91,000 tons of groundnuts produced with average yields of 700 kg/ha. In 1995, even though total area planted increased by more than 20,000 ha from 130,000 ha to 150,500 ha total production and yields decreased by nearly half from 91,000 tons produced in 1995 to 46,000 tons in 1995. Similarly average yields dropped from 700 kg/ha in 1994 to a mere 304 kg/ha in 1995. Similarly, unpredictable trends occurred in 1997/1998, and 2001/2002 production seasons respectively. This sporadic turn of events may be explained partly by 1) the drought of the 1990s, 2) poor choice of varieties and 3) the cobweb theory of decision making at time of production.

Michigan State University Food Security II researchers Rusike, Howard and Maredia (2004), assert that Zimbabwe's National Agricultural Research System (NARS) since 1950 has released over 11 groundnut varieties. However adoption rates for these improved varieties have been extremely low Figure 16. Zimbabwe s Groundnut Production 1994-2003 Ha/Tons/Kg/Ha 300 000 250 000 200 000 150 000 100 000 50 000 Groundnut Production (1994-2003) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Yr Groundnuts area (ha) Groundnuts production (tons) Groundnuts yield (kg/ha) despite the availability of improved materials with yield up to 80% above than local varieties. The researchers also found that nearly all groundnut crops in currently produced in Zimbabwe are produced from farmer-retained seeds that have been recycled over several generations with obvious implications regarding yields and overall production. Acid soil infertility is also another factor cited by other researchers as major limitation to sustainable crop production in Zimbabwe s light textured soil regions, particularly in the smallholder sector where majority of the country s groundnut is grown. The average per capita supply of groundnuts between 1994 and 2002 was 4.1kg p.a. while the average daily per capita groundnut protein supply for the same ten year period was 2.4g. During the critical years of drought i.e., between 1996 and 1999 the average per capita supply of groundnuts Figure 17. Zimbabwe s Groundnut Trade, 2001-2004 2000000 1800000 1600000 1400000 1200000 Tons 1000000 800000 600000 400000 200000 0 Groundnut Trade (2001-2004) Import Export Import Export Import Export Import Export 2001 2002 2003 2004 Yr Regional Trade World Trade was 3.7kg p.a. while the average daily per capita groundnut protein supply was 2.2g. Between 2000 and 2002, average per capita supply increased drastically to 5.4kg per annum and 3.2g daily protein supply. Increased trends observed between 2000 and 2002 may be attributed in part to groundnut imports from the region as well as increased local production as depicted in Figures 16 and 17. As shown in Figure 17, regional imports dropped from 18,000 tons in 2002 to 12,600 tons in 2003 and increased to 17,100 tons by the end of 2004. Approximately 98% of all groundnut imports are from within the Southern African region. Figure 18 lists Zimbabwe s major trade partners, with South Africa being the most important in terms of total groundnuts shipped to Zimbabwe. Imports of Malawian groundnuts into Zimbabwe were particularly important in 2003, with a record high figure of 2,600 MT. However this figure dropped by nearly 50 percent to 1,350 MT by the end of 2004.

Information obtained from key players in the groundnut industry suggests relatively stable prices of US$450-500 CIF Harare. Also key informants believe that some of South African exports to Zimbabwe are actually Malawian grain hence the possibility of cutting cost through direct imports from Malawi. The most preferred groundnut variety is the CG7. Figure 18. Zimbabwe s Major Trading Partners, 2001-2004 Thousands MT 20 18 16 14 12 10 8 6 4 2 0 Zimbabwe's Major Groundnut Trade Partners Import Export Import Export Import Export Import Export 2,001 2,002 2,003 2,004 Zambia According to key informants, the Chalimbana variety has an irregular outlook. The real test for Malawian s is to provide the preferred variety (CG7) at a competitive export parity price of US$450-500. In an environment were lack of foreign currency poses the greatest threat to international trade, some key informants claim South Africa has an established reputation of being lenient in offering open terms and special bartering arrangements (another potential threat to Malawian groundnut imports). The following conclusions may be drawn based on information gathered from key informants, the Central Statistical Department, FAOSTATS and literature review: 1) The Zimbabwean groundnut subsector has experienced progressive decline in production; however in recent years per capita consumption of groundnuts as an alternative source of protein has increased due to several factors, including lack of access to more expensive sources of protein by the increasingly poor population. 2) Zimbabwe s groundnut imports from the Southern African region particularly from South Africa have been relatively high since 2000 possibly due to lenient trading terms and customer loyalty. 3) Research done by Michigan State Food Security II project in Zimbabwe revealed that smallholder adoption of improved groundnut seed in Zimbabwe is constrained by limited commercial demand for groundnuts, lack of information about the benefits of using new technology and inadequate access to new seed. Also, the decline of extension services in both countries following budget cutbacks simply means smallholders today lack a reliable source of information about the benefits of improved varieties. 4) The potential clearly exists for increased Malawian groundnut exports into Zimbabwe provided the price falls between US$425-500 even that trade may be seriously hampered by lack of foreign exchange and the competitive strength of South Africa. In order to better understand the conditions under which Malawian exports to Zimbabwe would be profitable will require a brief analysis of export parity price (EPP) calculations for groundnuts CIF Harare. Malawi Mozambique South Africa

Table 5. EPP Calculation for Malawian Groundnuts Destined for Zimbabwe EPP at prices offered by Zimbabwean importers of Z$ 20 million/mt CIF Harare CIF Harare (Z$/MT) 20,000,000 CIF Harare (US$/MT) 500 Insurance (US$/MT) 1.2 Freight (US$/MT) 68.0 FOB Lilongwe (US$/MT) 430.8 FOB Lilongwe (MK/MT) 53,419.2 Financial Costs (May-Oct) 9,615.5 Loading (MK/MT) 150.0 Fumigation (MK/MT) 500.0 Documents (MK/MT) 125.0 Internal transportation and storage (MK/MT) 3,720.0 Farmers' price per MT (MK)* 39,308.7 Price per Kg (MK) 39.3 * Delivered at community collection centers South Africa Groundnuts are a major crop in the context of the South African food processing industry; they constitute a source of oil, cake and confectionery products, which range from breakfast cereals to ice cream toppings, peanut butter and snacks. According to estimations of industry leaders consulted, over 46 percent of domestic supply is transformed into confectionery products, with about a third being sold in roadside stands as roasted groundnuts. Peanut butter manufacturing constitutes the second use of relevance (33 percent), while about 20 percent is crushed to produce oil and cake (Figure 19). The bulk of domestic production takes place in the north-western regions of the country, with Western and North-western Free State producing over 30 percent, the North- West Province 57 percent and the Northern Cape 9 percent of national groundnut output (2004). Figure 19. Main uses of Groundnuts in South Africa, 2005 Peanut Butter 33% Groundnut Uses. South Africa, 2005 Oil and Cake 20% Other Uses 1% Confectionery 46% Domestic groundnut output is typically inversely correlated with maize production (with a one-year lag), as most legumes compete for land with maize. Therefore, all else being equal, groundnut production generally decreases following years of high regional demand for maize, especially considering that South Africa is the preferred maize supplier for the Southern Africa Region. This was particularly evident following the food emergency of 2001-2002, which resulted in a 50 percent reduction in groundnut output in 2003. Figure 20 shows depicts this scenario by presenting an annual time series of production and area grown to groundnuts, compared with the trend in maize production (MT divided by 100 and with one-year lag). This trend in groundnut production is further