The success of a seaweed development is dependent on a commercially viable trading business developing concurrently with the production of farming. The greatest incentive to the primary producer is the instant cash payment for supplies and the continuity of the purchasing organisation.
The objective of a cottonii development programme should not be only to create cash earning opportunities for the poorest sections of Samoan communities, but also to obtain the highest possible return to the farmer, while at the same time maintaining an economically sustainable export business. In a totally free market the emphasis is likely to change where the objective is for the trading organisation to obtain the highest possible return, at farmer incomes that just sustain the minimum level of production necessary. To some extent this explains why Pacific Island cottonii exports have, to date, been able to compete on the world market with exports from the Philippines and Indonesia, in spite of higher ocean freight rates.
In Samoa there are already established companies with experience in exporting and purchasing crops such as copra and kava. One such company that already has the existing business infrastructure to undertake cottonii purchasing and export is Wilex Cocoa & Coconut Products Ltd. There are other exporters of fish and agricultural products such as Albacorp, who would also be in a position to enter a cottonii export business.
Farmer price stability and the certainty of frequent regular payments for production are key factors which promote the success and sustainability of any new farming development. Consequently, some Government intervention to limit the number of traders/exporters is desirable, either by licence or by the allocation of exclusive concessions to coastal areas. A completely free market is likely to result in a number of itinerant and under-capitalised entrepreneurs entering and leaving the cottonii purchasing business, and generally causing uncertainty at the primary producer level.
If a Aleipata Mulifanuaa, or Asau development is successful, the volume of production is likely to be small (<500 MT/year) for the first three to four years. It would be advantageous if just one company handled this export under licence, which would be likely to result in the best marketing option for Samoa's production.
A list of capital items necessary for a company to trade in cottonii is given in Table II. The list assumes that the company already has an established office with computing and communication systems.
Table II
Clock scales × 2 for village weighing
Platform scales × 1 for warehouse weighing
Laboratory oven × 1
Top-pan laboratory weighing balance × 1
Hydraulic seaweed press × 1
One manual press, sourced from Indonesia at USD 2,100 CIF could initially be used until the volume of production justified a hydraulic press.
The capital required to cover fixed costs is relatively small, but there is a large cashflow requirement for continuously purchasing seaweed supplies from producers. The high cashflow results from a long period between the time of seaweed purchases from suppliers to the time when the exporting company receives income from export sales. If sales are made CIF then the company also has to finance the sea freight to the buyer's foreign port. If a long-term foreign buyer/supplier relationship is established, then it is common for up to 90% of the CIF value of consignments to be paid on shipping documentation. The buyer may agree to purchase stock at an agreed FOB price, which reduces cashflow requirements. When a company has established credibility as a reliable supplier of acceptable quality product, it is not uncommon for some foreign buyers to provide bank to bank ‘Letters of Credit’ (LC), for periods of two to three months before the shipment of orders. LCs are frequently used to support bank loan applications for additional funds to finance operating cashflow requirements.
Apia has regular shipping to several foreign ports, and it is possible to ship 20 foot containers to Europe without devanning and vanning at a transhipment port. The standard practice is to load 20 – 21 MT of product in a 20 foot FCL. If the agreed selling price is for example USD 530/MT, then the FOB value of one FCL is USD 10,600 – 11,130.
If family farms are initiated in Samoa, the exporters accumulated net operating cashflow will of necessity increase in the first years of development. With respect to fixed operating costs there are obviously economies of scale, but even if no farming problems were experienced, it would take in the region of two years for developing farmers to reach a production level of 20 MT per month.
The commercial viability of the export business is obviously very sensitive to the price paid to suppliers, sea freight rates, the CIF export price, and Samoan Tala/USD exchange rate. Income from sales is received in United States dollars and most of the ocean freight costs are paid in USDs. The current exchange rate used is about USD 0.3553. Any decline in the Tala against the USD significantly improves the overall viability of the export business.
A budgeted price paid to any Samoan farmer of Tala 0.75 per kilogram for dry product is recommended. This recommended starting price can be re-evaluated by the exporter after the first export sales are made. Because of the historic cyclic nature of world cottonii prices there are advantages in planning for an operational buffer against fluctuations, both up and down, in export prices over time. Stability in the farmer price provides the primary producer with a level of certainty which is a key factor in developing and sustaining a viable annual production.
Domestic road freight from Asau in Savaii to Apia was quoted at SAT 500.00 per 7 MT (SAT 0.0714/kg) by one Savaii based freight company. It would be a commercial decision for the purchasing/exporting company as to whether to establish differential pricing between Savaii and Upolu suppliers, to allocate the additional freight costs of Savaii consignments. A SAT 0.02 – 0.03/kg farmer price difference would cover the increased freight costs for Savaii. Alternatively any Upolu production could cross subsidise additional Savaii freight costs.
Consideration can be given to shipping the first production from any new development in well packed non-returnable polypropylene bags, which can be loaded to a maximum 16 MT in a 20 foot FCL. This increases the freight costs per tonne, but delays the capital outlay on pressing equipment and hence minimises the investment risk. As the volume increases and becomes more certain, manual seaweed presses or hydraulic presses can be installed to obtain the 20 – 21 MT loading and reduce per tonne costs.
Freight rates for FCLs from Apia to Europe (Hamburg) via Sydney were quoted at USD 3,000 (Trans Am). Documents showed that at least one 20 foot container had recently been shipped to Europe at USD 2,248. An increase in volume is likely to attract more competitive rates than the quoted USD 3,000. There is also shipping to Europe via Korea on the Bali Hi shipping line. One shipping company operating in the region frequently offers cheaper rates for the Pacific to Sydney section in order to back-fill empty returning containers.
70%–80% of the 130,000 MT plus of seaweed consumed annually by the world carrageenan industry is farmed cottonii from Indonesia and the Philippines. However, these figures can be misleading, as Philippine statistics are based on moisture contents higher than the industry standard of 35%. Furthermore, more than 60% of the Philippine harvest is now consumed by local processing industries, and, similarly, the developing Indonesian processing industry is consuming an increasing proportion of their local production. Large volumes of cottonii are also exported from these countries in a semi-processed form. The market for raw sun-dried cottonii outside of the Philippines and Indonesian processors is therefore considerably less than the world harvest, and is estimated to be around 30,000–40,000 MT/annum, although precise figures are difficult to assess because of the commercial sensitivity invoked by foreign buyers. The development of processing in SE Asia has caused some European processors to look outside this region for additional supplies of cottonii, to the benefit of any Pacific Island producers.
The production of cottonii is, from a technical point of view, not difficult, and there is no shortage of farming area in the Philippines and Indonesia. Production levels from these countries are therefore largely dictated by farmer prices which directly relate to demand. As might be expected, annual increases in demand for cottonii are not always regular and predictable. Consequently, supply and demand imbalances have occurred, resulting in world price instability (Fig. 9). It is also interesting to note that since 1991 prices for cottonii from the Pacific Islands have never fallen below USD 590/MT CIF, and due to exclusive sole-supply agreements, prices have been cushioned against both the low and high extremes.
The marketing options for a potentially small Samoan production are either to compete on the open market, supplying one or more customers, or to enter into an exclusive agreement with one customer. The highly volatile market prices over the last nine years illustrate the unpredictability of free market trading, and highlight the advantages of an exclusive supply agreement:
World prices for raw sun-dried cottonii are dictated by the Philippines, currently the largest exporter. Indonesia, with its lower labour costs, is likely to increase market share over the next few years.
The Philippines and Indonesia can oversupply the market. Consequently, at times foreign buyers will not necessarily need to purchase supplies from the Pacific Islands.
The importance of a forward supply agreement that guarantees the sale of production cannot be overstated. The alternative, free market trading, would require cashflows possibly double or even treble in size, as seaweed stocks accumulate prior to individually negotiated foreign sales. Marketing costs would also contribute significantly to recurrent fixed costs.
A production of 200–500 MT/year would probably require some trading with at least one of the three multinational companies that dominate the world purchasing of cottonii, and it is therefore logical to develop a long-term supplier relationship with at least one of these foreign buyers. At least two of the international processing companies have a history of assisting new farming developments in return for some access to future production. This assistance may take the form of supplying field assistants, financial contributions, small loan guarantees, and more commonly, the provision of ‘Letters of Credit’ for forward consignments of seaweed. These two buyers have now been purchasing from Pacific Island producers in Kiribati and Fiji for a number of years. The forward supply contract in Kiribati with the Copenhagen Pectin Company has been critical to the viability of the cottonii production in that country. A similar picture appears to be emerging in Fiji with a relationship with FMC. A representative of the largest cottonii buyer, FMC, recently visited Fisheries Division in Samoa and discussed supply and prices. While prices remain confidential, it is clear that the multinational buyers are also attracted to forward supply contracts with new producers. Consequently, if agreement is reached on price, the sale of any production from Samoa can be guaranteed, at least to a production of over 1,000 MT per annum.
