Rabo AgriFinance analysts have published a five-year outlook for walnuts, and the market looks to be flattening after record growth. Yet promising signs lay ahead for long-term market opportunities, despite a tumultuous year for port congestion, a supply chain crunch and a potentially deepening drought.
The new report follows a record production year globally, at 2.34 million metric tons, capping a 5% annual growth rate for the last decade, which makes a decline in production—of about 3% this year—all but inevitable. David Magaña, a senior RaboResearch analyst covering fresh produce and tree nuts, told Agri-Pulse the average 2022 U.S. crop should be somewhere between the record progress last year and the more modest 2019 year.
Planted acreage has growing only marginally over the last few years and the current prices are not likely to either incentivize more plantings or to pull a large number of acres out of production. The expectation of lower production and availability led to stronger prices at the start of this marketing season, but recent months have brought downward pressure on prices, said Magaña. This is due to a 20% drop in exports from this time last year—the same drop as seen in the almond industry.
David Magaña, senior RaboResearch analyst
“If exports don't recover, you may miss some marketing opportunities, given these logistical bottlenecks that marketers are facing,” he said, adding that shortages for containers, chassis and truck drivers will likely create problems going into 2023. “We could see container prices declining a little bit by the second half of 2022. However, I don't think we can expect that container rates will go back to pre-pandemic levels.”
In comparison, pistachio exports have kept pace over the past year, driven by record production and strong marketing campaigns promoting quality, food safety and protein benefits. This while competitors are experiencing lower production, with the Iranian pistachio crop down as much as 50% due to catastrophic weather events, according to Magaña.
U.S. walnut producers, however, are seeing more competition in the international trade market. With a 14% annual growth rate, Chile has been rising quickly by improving both quality and quantity, leading to more exports to markets traditionally dominated by U.S. products, like Germany, Spain and India. Magaña warned that the U.S. continues to face tariffs in India and China. Like many California products, walnuts are still prized for the high quality and attention to food safety, serving as “a differentiator” in exporting markets.
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One silver lining to the increased competition is that having more walnuts of good quality could drive demand higher. Magaña pointed to the avocado industry as a case in point. About two decades ago, few Mexican avocados were entering U.S. markets and California growers worried about granting access to the imports.
“But what we've seen is that having a more consistent supply and consistent quality has been driving more consumers to buy that commodity on a more regular basis,” he said.
More competition for walnuts could propel new collaborations with some Chilean exporters, allowing the industry to grow and expand into new markets, benefiting food manufacturers and retailers with a more reliable supply.
Constraints in the supplies of crucial inputs are also adding pressure to profit margins. Fertilizer prices are up as much as 300% over last year due to elevated gas prices in Europe and geopolitical issues. Shipping delays are limiting equipment supplies. And two dry winter months are leading to uncertainty for water supplies this year.
“If we don't see any more rain, we will be in the third year of drought, and that could be putting some pressure on yields,” said Magaña. “If we consider likely impacts on yields from deficit irrigation last year in some regions, we could be facing not a good combination of things.”
Magaña does see opportunities on the far horizon though. Many food retailers, manufacturers and restaurants are setting aggressive sustainability targets for cutting greenhouse gas emissions throughout the supply chain, known as Scope 3 emissions.
“Walnuts—and California tree nuts in general—are well-positioned to take advantage of these aggressive targets,” he said, adding that doing so would open up new long-term contracts for growers.
California farmers are also taking advantage of plant-based diets and more plant-based menus offered in restaurants, he noted.
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