There are few specialty crop success stories better than the ones being written about several California nut crops — most notably, almonds, pistachios and walnuts.
In these past years of economic uncertainty as growers battled drought and other calamities, being a producer of agricultural products remained a risky business…unless you were a typical grower of tree nuts. Since 2006, California has doubled its production of almonds yet the market price has continued to rise. Growers of pistachios and walnuts have been in a similar situation of increasing volumes and increasing markets.
And there appears to be no end in sight. Bob Klein, who is the manager of both the California Pistachio Research Board and the California Pistachio Administrative Committee, said he does not see a scenario in which supplies can catch up with demand over the next several decades. He was speaking specifically of pistachios but indicated that the future is at least equally bright for almonds. Klein said the U.S. Department of Agriculture’s Foreign Agricultural Office has estimated that demand for all food will double by 2050 because of increasing populations and rising incomes. Even if pistachio demand only grows by 50 percent in the next few decades, Klein said it will be difficult for growers to keep up.
Declaring he is not a marketing expert, he said the numbers tell the story. The total world production potential (considering above average yield) of all pistachio trees in the ground today — including those that have not reached full production — is about two billion pounds. “If demand increases to just three billion pounds by 2050, I don’t know where those supplies are going to come from.”
California growers continue to increase their acreage but he said there is hardly enough land suitable for pistachio production in the world to meet that demand. Not to mention others factors, including competing crops, lack of water and the high cost of entry into the business.
It is with this type of research and much more that Rabobank International issued a report on the nut industry last fall titled “Riding the Growth Curve — Can U.S. Tree Nut Exports Continue to Defy Gravity?” The report came out of the department of longtime Western Growers member and financial expert Vernon Crowder who is senior vice president and senior analyst for Rabobank’s Food & Agribusiness Research and Advisory Group. “The drought has changed the situation a little bit,” he told WG&S in mid-March, “but all three nut crops are absolutely in a positive situation. We believe demand is going to continue to increase.”
From strictly a business standpoint, he said Rabobank believes investing in these crops with loans to growers is an excellent business opportunity “as long as the grower can show access to water for the life of the crop or at least the life of the loan.”
Crowder, Klein and the others interviewed for this story pointed to many different factors leading to their bullish outlook but it all boils down to supply and demand. For many reasons, it just does not appear that supply of these nuts can keep up with demand.
The Rabobank publications reports that over the past five years U.S. exports of almonds, walnuts, pistachios and pecans have nearly doubled reaching about six billion pounds in 2012. For all but pecans, which do face stiff competition from South Africa and are grown in only small numbers in California, these rising export volumes were met with rising prices. And this year, with some reduction in volume in both pistachios and almonds, field prices for these crops could go through the roof.
“The U.S. tree nut industry finds itself in an enviable position,” says the Rabobank report. “Strong international demand has kept grower prices high for most nuts during the past five years, despite production barreling ahead with large, often record-breaking crops.”
The report looks at the potential for competition and notes that an uncertain economic situation calls for “prudent expansion decisions” with growers “erring on the side of caution.” But Crowder admits that the numbers do pencil out. He said California nut growers should expect higher costs because of the drought but said most growers will be able to make their crop by cutting back on acreage of non-permanent crops and diverting the water saved on that acreage to their nut and other permanent crops.
“If you are borrowing money, clearly we want to see what type of water system you have and what your plan is for the coming years,” he said.
Almonds have been one of the fair-haired children of the specialty crop industry for a long time. Volume continues to increase; sales are doing likewise; and the market price continues to rise as well. According to statistics from the California Department of Food and Agriculture, almond sales for 2012 were pegged at $4.35 billion, placing it second behind grapes at $4.45 million.
The Almond Board of California publishes an annual Almond Almanac, which paints a very nice picture for the industry. Jenny Nicolau, senior specialist, industry relations for the commodity group, pointed out many facts in the on-line version of the book that reveals the positive outlook for California almond growers. In 2004, California almond growers had approximately 570,000 acres of almonds in the ground. That number has increased every year for the past decade and in 2013, it was estimated that there were 810,000 acres in the ground. Numbers haven’t been crunched yet for non-bearing acres for 2013, but in each of the previous years, the non-bearing acreage averaged in the neighborhood of 80,000 acres. The basically means that at the current time growers are increasing the acreage by about 3 percent new plantings each year.
At the same time, yields are improving and so total volume increases are outpacing acreage gains. In 2004, the California almond industry shipped more than one billion pounds from that 570,000 acres. The volume shipped dropped to 914 million pounds in 2006 but has increased almost every year since. In 2013, the state shipped 1.85 billion pounds of almond meats out of a total crop of about 2.11 billion pounds. That number was topped the previous two year with 1.87 billion in 2012 and 1.9 billion in 2011. Because of the lack of water this year, the estimates are for the crop to be a bit lower. But by all accounts, California has enough almond trees in the ground to top 2 billion pounds on an annual basis as it has done for the past three years. On an annual basis California has been producing about 80-85 percent of the world supply. The second largest producer is the European Union with 6 percent, followed by Australia with 5 percent and Turkey with 2 percent. All other countries chip in another 5 percent.
And while both the acreage and production were rising rapidly, what was happening to the market price? The same thing…at least for the past five years.
In the 2008-09 season, California produced a record crop of 1.8 billion pounds of which only 1.4 was marketed. Consequently the field price dropped to a $1.46 per pound. That was less than any of the previous five years and only about half of the 2005-06 price which was $2.81 because of a relatively short crop. But since then supplies have increased and so has the field price. In 2013 on a total volume of 2.11 billion pounds (third largest crop in history), the field price was $2.58 per pound (the second largest price in history).
With regard to almonds, the Rabobank paper reported that there is only “limited potential for increasing competition to U.S. almonds.” Analyzing many other areas on a country by country basis, Rabobank found that no area is poised for big growth in the foreseeable future. For example, in discussing China, the report says: “China produces almonds as well, but their larger scale attempts to increase production have been unsuccessful so far.” Likewise, Rabobank says production in Spain and the European Union is not expected to grow significantly due to decreasing government support and increasing urbanization. Australia has been plagued with low yields and continual water shortage issues.
The California industry remains very optimistic. The 2013 Almond Almanac discuses global marketing developments in an understated but very clear way: “Over the last several years there has been solid, stable growth in established markets, such as the U.S. and Canada, where consumers continue to show increased awareness and interest in healthy eating options. In emerging markets, such as China and India, despite recent shipment volatility, there has been substantial long-term growth, and there continues to be strong future potential due to a burgeoning middle class with greater disposable income.”
Being a financial institution, Rabobank takes a typically conservative approach, but they can’t quite hide the value of an investment in the almond industry. “The Coast Looks Clear but Beware the Oversupply Spiral” is the headline on their section discussing opportunities for U.S. growth. Rabobank says the industry is in a very good and competitive position and acknowledges that it has been in a “rapid growth phase, where production and prices have basically risen in unison…”
But the report wonders when a more normal phase will occur with supply catching up to demand. “Agriculture is littered with examples of markets that straight-lined strong growth rates with investments to match, only to later discover that demand was finite or even fleeting.”
Almond production does allow for relatively easy entry as the trees can produce a crop within three years, which is less than other nuts and even many other permanent tree crops. Nonetheless growth has been measured for the past handful of years. Almond orchards need good land and good water to be good producers and that is in short supply and appears to be a naturally limiting factor.
Bob Klein, who discusses the bright future for California pistachios in the next section, is envious of the marketing opportunities for almonds. He said the ingredient market, which takes a very big percentage of the almond crop, continues to grow and gives growers a baseline option every year.
Klein of the Pistachio Board said that one of the most important factors that will most likely keep pistachios in a demand exceeds supply situation for many years is that entry to the industry is very expensive and so very limiting. “It takes about six years before you get any crop at all and at least 10 years before you can break even,” he said.
Consequently, growers, or investors, have at least $10,000 per acre into the crop before they harvest their first pistachio. And because the industry is fairly well automated with mechanical pruners and harvesters, most commercial orchards have to be on the larger side just to be able to economically harvest the nuts. Klein said a 30-40 acre orchard is about as small as one should be to make it worthwhile to either buy a $250,000 harvester or contract with a commercial harvester to come harvest the nuts. “If you have three or four acres, you probably couldn’t get a commercial harvester to come out to the orchard,” he said.
The long period of no production also tends to create a barrier in the developing countries that might be suitable for pistachio production. To grow properly and produce a marketable crop, Klein said pistachios need a Mediterranean climate. That means cool winters and long, hot, dry summers. Rain during the last stages of growth can drastically reduce the size of a crop by promoting foliar diseases.
With this climate need in mind, the Pistachio Board executive took a mental trip around the world stating that much of China is not well suited to pistachios and tropical climates won’t do at all. Some of the South American countries (Chile and Argentina) have the right climate but the tradition and stability of the governments do not tend to attract investments where you don’t get your money back for at least a decade. “Pistachios are capital intensive and those countries have a history of government instability.”
Australia has the right climate in some areas but their water problems are worse than in California. The same can be said for the Middle Eastern region of Iran and Afghanistan. And each of those countries also has government instability issues. Turkey has some potential but it is still an agrarian society and having land being unproductive for a half a dozen years or more is almost impossible. Some South African growers are looking at pistachios but so far that country only has about 1,500 acres. As a point of reference California has about 225,000 acres in production and another 75,000 acres that are not yet producing.
And even if a grower is in the perfect financial position and perfect place to grow pistachios, he might put in almonds instead, which have a great marketing story and produce a crop within three years.
Pistachios do have some advantage over almonds. According to Klein, you can grow a pistachio tree on marginal ground that has a high level of salinity with irrigation water that is also high in salts. “Pistachios will thrive on water that will kill an almond tree,” he said.
Pistachio trees can also survive periods of drought. In fact, Klein said in the San Joaquin Valley on arid land west of Kettleman City, there are wild pistachio trees growing. Because they don’t get sufficient water — about four acre feet per year is what they need — they are not producing a crop…but they are not dying either. Klein said it appears as if a pistachio tree can survive on very little water and then come back to normal production within a year or two. That is very good news in these periods of drought, which may become more common in the future.
Another advantage pistachio trees have is that they appear to have a very long life. “The first ones were planted in California in late 1960s and none of them have been removed. Now we believe they will last and continue to increase production for 50 years…maybe 70 to 80 years. You may be able to grow them (commercially) until they are too massive to shake.”
It is the shaking method that is used to harvest about 98 percent of California’s pistachio production, as well as the production of both almonds and walnuts. A larger harvester clamps its large mechanical hands around the trunk of a tree and shakes it until the nuts fall off. “It takes about a minute and a half to do one tree,” Klein said.
The pistachio industry uses catch basins on its harvesters so there is very little labor needed to harvest the crops. The other tree nuts have the production fall to the ground where it is swept up.
Klein was reluctant to give an average yield per acre because of wide variances and the tendency to have one heavy year followed by a light year. Statistics from the Pistachio Administrative Committee show that average production tends to float in the area of 2,500-3,200 pounds per year with the high water market of an average of 3,700 pounds per acre reached about a decade ago. Last year the opening contracted orchard price for pistachios was $2.20 per pound for clean, in-shell split pistachios. As the season wore on, there were reports of spot market prices north of $4.00 per pound.
For the past several years, bearing acreage has increased by about 25,000 acres per year from about 150,000 bearing acres in 2011 to just slightly more than 200,000 in 2013. This year’s acreage has been estimated at 225,000 acres with another 75,000 of non-bearing acres. Doing the math, and estimating continued growth at the same pace, by 2020, the California crop could be close to 400,000 acres and average yields still would barely meet the current global demand. Even moderate growth in demand over that time period, will mean the crop is still in a demand exceeds supply situation.
Klein does not expect that situation to change anytime soon.
Like its brethren — almonds and pistachios — the price, production and acreage curves all show that they have been moving in an upward fashion since the beginning of this millennium. And in fact, in the past two years, prices have shot up even at a faster pace. And like almonds, California growers are the predominant producers of walnuts. The California walnut industry is made up of more than 4,000 walnut growers and about 100 walnut handlers. The 2013 walnut crop has been estimated at about 495,000 short tons, which is virtually the same as last year’s record crop of 497,000 short tons. California walnuts account for more than 99 percent of the commercial U.S. supply and control roughly three-fourths of the world market.
In 2000, California had about 200,000 acres and that number has increased almost every year since. Today, the state has more than 240,000 acres with approximately 227,000 acres considered bearing nuts. About 11,000 new acres were planted in 2013, continuing a trend of more than a decade of increased plantings. It takes a walnut tree five to seven years to produce a crop but then it remains productive for about 100 years. According to a California Walnut Commission fact sheet: “Walnuts do best on fertile, deep, well drained, non-stratified, loamy soils. Under ideal soil conditions, roots can be found to depths of 10 feet or more. Walnut trees can grow 100 feet tall.”
Production has grown at even a faster clip than acreage. In 2000, the state produced about 220,000 short tons, so the crop has more than doubled in 13 years. In 2007, the crop was off significantly dropping to about 320,000 short tons. Since then the increases have been steady.
The prices have also climbed steadily for the past five years. In 2000, California walnut growers were paid an in-field price of 62 cents per pound. Over the next four years the prices hovered around that figure before hitting 70 cents per pound in 2004. In 2007, the short crop produced a very high market of $1.15 per pound, a 40 percent increase over the previous year. The following year saw a big spike in production as the crop grew by about a third. As to be expected, the field price dropped significantly to 64 cents per pound, barely better than eight years before.
But since then, like the other California nuts, it has been a march toward more trees, more production and higher prices. From 2009 through 2012, production jumped about 25 percent to near the 500,000 pound level. At the same time, the price went from 86 cents per pound to $1.52 per pound in 2012.
In a press release last fall estimating the size of the 2013 crop, which is harvested from September to November, the California Walnut Board expressed much optimism for the future of the industry: “Global demand for walnuts remains at an all time high because consumer awareness of the versatility and nutritional benefits of walnuts continues to grow," said CWC Chief Executive Officer Dennis A. Balint. “With over 100 published health research papers, people are increasingly aware of the many health benefits walnuts provide.”
In fact, the number of consumers eating walnuts to improve their health has doubled in the past five years.
In the Rabobank report, the one caveat it has about continued profitability in the California walnut history is the presence of China looming as a competitor. According to Rabobank, China is the world’s largest producer of walnuts having about a 39 percent share of production. However, China is a net importer of walnuts and is the world’s largest buyer of walnuts. The Rabobank report states that China’s production has made it “the most significant source of competition for U.S. walnuts, albeit mainly within the Chinese market itself.”
But allaying the fears that China could greatly cut into California walnut sales, Rabobank observes: “Despite steady growth of Chinese walnut production over the past decade, demand from China’s expanding middle class has continued to outpace its domestic supply, providing an opportunity for U.S. producers.”
China has increased its production at the rate of 9 percent per year for the past decade but Rabobank said there is a limited amount of arable land available. On balance, the report strongly indicates that China’s increasing production will not keep up with its own demand.
Chile is also noted as a competitor to the United States. It has about 3 percent of the world’s walnut production and has also experienced rapid growth in the past decade. It has a price advantage over U.S. walnuts but Rabobank says the increasing cost of labor there “could cause Chile to lose the price premium advantage of its hand-cracked walnuts in the future.”
By virtually any measure, the future looks bright for California almond, pistachio and walnut growers. The Rabobank report notes that walnuts have the greatest threat from competition, but it concludes on a very positive note: The “U.S. tree nut industry stands poised to fulfill stable growth expectations over the longer term, reflecting the continued strength of global demand pulled by China’s future as a robust middle-class consumer market and by the increasing trends of taste and health among aging consumers in key markets worldwide.”
Any grower with land in the right zone should at least give tree nuts a look.
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