# **4.2.4. Simulation: FUNPI contribution and cashew processing**

Another goal of the government is to stimulate cashew processing in Guinea-Bissau by using part of the tax revenue on the export of raw cashew for this. In Table 11 we simulate an interaction between FUNPI contribution and increasing capacity of processed cashews. The cost structure of new processors was provided by the World Bank.<sup>12</sup> Scenario XIV in Table 11 adds 4 processing plants of 200 ton each. The new equilibrium does not change significantly from the equilibrium with FUNPI contribution (II). We only emphasize that in the new equilibrium, 12 percent of the extra volume would come from additional production (92 out of 800 tons) while 88 percent (708 out of 800 tons) would come from reduced raw cashew export opportunities.

**Table 11. Base Scenario – FUNPI contribution and cashew processing**

|**Policy**|**(I) Base**<br>**Scenario -**<br>**no FUNPI**|**(II) = (I) +**<br>**FUNPI**|% change<br>(vs I)<br>|**(XIV) = (I) + FUNPI**<br>**+ 4 cashew**<br>**processors (200**<br>**ton each)**<br>|% change<br>(vs I)<br>|**(XV) = (I) + FUNPI**<br>**+ 1 cashew**<br>**processor (20,000**<br>**ton)**|% change<br>(vs I)|
|---|---|---|---|---|---|---|---|
|_International Price (USD/ton)_|799.88|799.88||799.88||799.88||
|_Trade taxes (USD/ton)_|93.50|199.88||199.88||199.88||
|_International Price net of taxes (USD/ton)_|706.38|600.00|-15.1%|600.00|-15.1%|600.00|-15.1%|
|_Intermediate Price (USD/ton)_|519.54|426.66|-17.9%|427.16|-17.8%|439.24|-15.5%|
|_Farm-gate Price (USD/ton)_|435.95|351.00|-19.5%|351.46|-19.4%|362.49|-16.9%|
|_Exporters + cashew processors profit (USD/ton)_|73.80|67.20|-8.9%|68.21|-7.6%|88.92|20.5%|
|_of which, exporters (USD/ton)_|70.23|61.78|-12.0%|61.48|-12.5%|54.37|-22.6%|
|_of which, cashew processors (USD/ton)_|348.26|441.14|26.7%|440.64|26.5%|428.56|23.1%|
|_HHI exporters and cashew processors_|487|510||505||585||
|_Traders profit (USD/ton)_|40.94|34.66|-15.3%|34.70|-15.2%|35.52|-13.2%|
|_HHI traders_|256|256||256||256||
|_Quantity (tons)_|156024|140000|-10.3%|140092|-10.2%|142272|-8.8%|

For the simulation to be meaningful, we run a stretch scenario in which processing capacity increases from the actual 2,000 tons to 20,000 tons (see Scenario XV in Table 11). Besides being a theoretical exercise, the grounds for this exercise are the expectations expressed in CNC (2012), mentioned in Section 2. Such an increase in processing capacity would affect positively intermediate and farm-gate prices, partially compensating the effect of the FUNPI tax. Specifically, farmer prices would decrease by 16.9 percent (rather than 19.5 percent with FUNPI contribution alone) while trader prices would decrease by 15.5 percent (rather than 17.9 percent with FUNPI tax alone). The new demand of raw cashews for processing would induce additional production (which would contribute 13 percent, or 2,272 out of 18,000 tons), but most significantly would substitute for export opportunities (87 percent of additional raw cashews). The reduction of almost 16,000 tons, formerly available for exports, would affect negatively exporters’ market share and their profitability (12 percent in addition to the reduction from FUNPI tax). But the increase in intermediate price still allows for individual firms to make profits in the new

> 12 Inasmuch quantities of raw cashews bought by processors are subject by capacity constraints the relative profitability of new vs. old processors is irrelevant for the equilibrium.

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