COVID-19 presents as the biggest imminent threat to the walnut market. However, the impact will not be realized until the lock down is eased, and the economy attempts to return to normal. The versatility of the walnut, its health benefits, and current competitive pricing suggest that the industry is in a strong position to meet this challenge. The fertile, rich central valley in California is home to the majority of US walnut growers; however, the ongoing threat of bugs and changes to the water supply laws could potentially impact not only the US but the global walnut market. Overall the walnut market is in a strong position going forward, given the interdependent niche markets for walnut products that are developing.
- The global market is currently seeing a competitive price on walnuts. This has created a degree of stability within the industry, ensuring producers are rewarded for their efforts while maintaining a high-quality product.
- Several different regional markets within the industry are slowly increasing their consumption rates. The increasing popularity of the walnut is contributing to this growth. This means that the product does not over saturate the market, despite new players entering the industry.
- The cost of production is relatively low, meaning that it is relatively easy for new players to enter and leave the marketplace. There is also plenty of small scale industry expansion options for the players that include cracking, processing, packing, and certification.
- One of the main strengths of the walnut industry is the versatility of the product, which has resulted in several sub-markets developing within the industry. These markets are all performing strongly and include the walnut milk and butter markets. The versatility of the walnut has seen it become a strong contender as a plant-based meat substitute.
- Walnuts have been recognized as having many health benefits related to anti-aging and cardiovascular health. This has seen the popularity of the walnut increase among consumers.
- One of the strengths of the product is that it does not require cold storage when harvested. This helps to keep the costs of production down for the growers and processors.
- The ability to inter crop due to the large amounts of agricultural land between strengths presents an alternative revenue source to growers.
- There are many instances of cross border operations were the supply chain is split between multiple countries. This can mean that growing and processing occurs in different countries. While the resulting savings are beneficial to the producers in question, it also means that there is a potential for the supply chain to be disrupted if there are issues in a particular country or region.
- The cross border operations also make the market susceptible to currency fluctuations, which have the potential to exert a negative influence on the growth of the market.
- There is plenty of opportunity with the walnut industry to add value and diversify. The premium and organic markets are examples of sub markets that add value to the product, others include the oil, milk butter, and flower markets. There is also potential to diversify into the niche ethnic markets associated with the middle east and within the European Union.
- The Asia Pacific region is one of the larger emerging markets, the increased consumption being seen in this market is an opportunity for walnut producers, representing increased demand for the product.
- Many developing countries have had difficulties competing with developed countries, however improved quality control and international certifications will help to create a more standardized product. They will enable the products from developing countries to compete on a level playing field with the established players.
- The properties of the walnut present a range of unexplored options relating to products that can be developed to maximize their health benefits. Research continues into the benefits the walnut offers, meaning new marketing and product opportunities are still being developed and will continue to present in the foreseeable future.
- Currently oil prices are hitting record lows, it remains to be seen if this will be ongoing as the lock down is lifted. Should oil remain low, there is an opportunity for walnut producers to lower their production costs and increase profitability due to a decrease in distribution costs.
- When it comes to threats, the elephant in the room currently is COVID-19 and its ongoing impact. The reality is that the current lock down being imposed by many countries will impact a variety of different markets, most likely in a negative way. Until the economy returns to normal, it is impossible to predict just how disruptive COVID-19 will be on the walnut industry.
- Weather and climate issues have the potential to threaten the ongoing growth of the walnut industry. The severe drought in California in 2015, for example, impacted heavily on the walnut market, with the US and California in particular, responsible for a significant proportion of the walnuts on the global market. New water restrictions mean that areas of farmland within the fertile central valley of California are likely to be lost to production.
- The high standards and quality of European and US growers and producers presents as a threat to the development of several emerging markets that do not have the same quality control and certifications, making it harder for them to compete. Several developing markets have improved their internal systems so that they are becoming more competitive.
- Three of the markets that the US exports to, China, India, and Turkey have placed tariffs on the walnuts they import. The tariffs were placed on US goods to these markets in retaliation to the ongoing trade issues between the US and China. These measures have threatened the stability of the industry. They also threaten the ongoing competitiveness of the global market. Although the US government was able to shield the industry through a trade relief package to offset the losses caused by the trade war with China, it remains an ongoing threat.
TRENDS IN WALNUTS
- Nuts in general have been shown to have health benefits. There is an increased emphasis on consuming nuts as part of a healthy diet. There is research that suggests walnuts can assist in reducing body weight. They are also a good source of omega 3.
- Walnut milk is linked with a range of health benefits including obesity, early aging, and hair loss. It is believed that the vitamin B7 contained in walnuts can be used as a hair loss supplement. It also helps to lower cholesterol levels.
- These health benefits, when coupled with the growing consumer consciousness toward consuming healthy diets, it is clear that this is a trend that does not show any sign of slowing in the immediate future.
- Recently, the number of products on the market made with walnuts has grown exponentially, with a range of new products touting the health benefits of walnuts. Two companies that have recently taken advantage of this trend are Elmhurst Milked Walnuts and Mariani Walnutmilk that have launched walnut butters that market the health benefits of walnuts.
- In Japan and Korea, walnuts can be found in a range of healthy snacks, ranging from beef jerky to ready to go meals. In Turkey, walnuts are being incorporated into a range of both sweet and savory traditional dishes in an attempt to gain the health benefits they offer.
Substitutes For Meat Protein
- Meat alternatives are becoming more popular by the day to the extent it has been one of the hottest food trends over the last year. Walnuts are increasing seen as a substitute for meat given there meaty texture.
- In fact, the current trend toward substitute meat proteins has opened a whole new market to walnut producers, When coupled with the benefits to cardiovascular health, which include cholesterol, blood pressure, endothelial function, and inflammation, the walnut is rapidly climbing the nut popularity ladder.
- Recent studies have shown that the popularity of plant based proteins is continuing to rise, with nearly 90% of consumers open to plant-based meat substitutes.
- The California Walnut Board looking to cash in on this trend has launched a two-pronged marketing campaign promoting the versatility and health benefits of walnuts. The retail program involved 8,000 grocery stores including retailers Target, HEB, Harris Teeter, and Food Lion. This campaign aimed to reach 37% of US households.
- The second prong saw them launch the "Power of 3" in nine countries; their first global campaign. This campaign emphasizes the health benefits of walnuts and the high level of omega 3 contained in them. Unfortunately, COVID-19 has likely impacted on both.
INSIGHTS INTO CALIFORNIA TREE NUT GROWERS
- Due to a decrease in demand from the food industry, the tree nut farming industry is expected to experience a slow down in growth. However, this is likely to be partially offset by an increased volume in food purchasing for individual or personal consumption.
- It is hopeful that the impact of COVID-19 on tree growers can be mitigated by government assistance packages. Tree growers are likely to qualify for the federally funded small business relief fund announced recently.
Drought and Water
- Since 2016, the price for major tree nut crops, such as almonds and walnuts, has remained consistently high. Although in 2015, the industry had a difficult season in California due primarily to severe drought. This resulted in decreased production levels and falling economic output.
- The central valley in California grows 99% of the walnuts in the US that are sold for export. It also produces 80% of the globe's almonds. It is renowned for its fertile soils, which create optimal growing conditions for tree nuts.
- With the growing popularity of tree nuts increased pressure has been placed on the water resources of the central valley. To put this in perspective, the growing of almonds in the region requires the same amount of water as the Los Angeles and San Francisco populations consume in a year.
- The groundwater basins have been over utilized for years, especially in times of drought, leaving them dangerously low. Unfortunately with the increasing numbers of tree nut and fruit growers flocking to the region has contributed to the growing pressure on water resources.
- When coupled with the introduction of the Sustainable Groundwater Management Act in January 2020, requiring farmers to decrease the amount of groundwater they are pumping from their wells, the harsh reality is some of the fertile farmland of California'central valley will not survive. Tree nut growers will be just some of those impacted by the water restrictions, which has the potential to impact on world prices, due to the market share held by those in this region.
- When this is coupled with the growth in demand for products from interdependent markets, such as nut-milk growth, there is good reason to be optimistic regarding the future of the tree nut market.
- Almonds are already leading the nut-milk market, and walnuts are increasingly looking like they will follow suit.
- Walnut milk has been used heavily in the personal care industry in Japan in recent years. With an aging population prepared to invest heavily in anti-aging products, the demand will remain high for walnuts in the foreseeable future. The walnut milk market is expected to grow at a rate of 7.9% annually through to 2027.
- One thing preventing the walnut milk market from experiencing unprecedented growth is the high cost of the walnut itself. In this regard, COVID-19 may assist the walnut milk market with the price likely to fall at least a little due to the over supply created by the food and hospitality industry shutdown.
Californian Walnut Market
- The Californian walnut market produced 686,000 tonnes of in-shell walnuts in 2016. This is compared to 606,000 tonnes the year before. In 2007, the state produced less than half of the current crop, 328,000 tonnes. This illustrates the extent to which the Californian walnut market is growing.
- Growth has somewhat plateaued since 2016, with 2018 the latest figures available. In 2018 the Californian walnut market produced 690,000 tonnes of walnuts.
- There are two reasons for this. The development of a number of innovative and new products that have won favor with the consumer are contributing to this growth. Production has also been expanding across the state as more growers are entering the market.
- California Walnut Board & Commission, Marketing Director Jenifer Olmstead said, "Walnut growers are reaping the benefits of innovative new products that attract consumers, The inclusion of walnuts in well-known products, as well as higher volume uses, benefit growers in two ways. First, there is an increased demand for walnuts overall to meet customer needs for nutritious foods, and second, these types of products can use different varieties, as well as grades, of walnuts without compromising taste."
- Flavored kernels are a popular snack in Asian countries. Walnuts are being used with increasing frequency as a texture and flavor ingredient in spreads and sauces. The most common being hummus and pesto. Walnuts are also increasingly being incorporated into traditional dishes in a number of countries. These are just some of the innovative ways that walnuts from California are being marketed and sold.
- Cashews, Peanuts, and almonds are other nuts grown in California that are experiencing similar product development and growth. Other innovative producers are looking to create products with the by products of production like shell husks.
Pest and Bug Control
- Pests and bugs remain one of the major challenges facing the California tree nut growers. Over the last year, the Brown Marmorated Stink Bug has emerged as an ongoing threat to the almond growers in California. Although the bug is not widespread in the commercial areas, it is still as significant challenge, with some of the affected farms suffering losses of up to 30%.
- The Lower Naval Orange worm is a particular challenge to the almond and pistachio tree nut growers in California. The Orange worm is able to produce three or four generations of bug in just one growing season. The bug infests the nut when there is hull vulnerability or poor shell sealing. The larval feeding can also cause fungal infections that further contaminate the fruit. One of the key ways to prevent infestation is by adopting overwintering sanitation, as it is the nuts left behind on the ground to rot at the end of harvest that the bug first finds a home in.
- Another pest that tree nut growers need to content within California is the ant. Again the almond is one of the crops most affected. The ant enters through the shall and effectively removes the entire nut leaving only the empty peel behind. Ants can cause considerable damage in a relatively short time; often before the grower is aware, there is an issue.
WALNUT MARKET INSIGHTS
Genetically Engineered Trees
- Walnut trees are known to be resistant to rot and to exhibit rapid growth, making them a potential candidate for woody bio fuel stock. The potential is such that like Monsanto and ArborGen are among the biotechnology companies that are investing in a genetically engineered blight-resistant tree, such is the potential.
- Duke Energy is investigating the reputation of the chestnut tree for being a heavy consumer of carbon, looking to plant them on mine sites as part of the retribution process in Central Appalachia due to the carbon offsets they come with.
- It is hoped by using both conventional and genetically engineered trees, the population of American chestnut trees that were decimated by blight can be restored. The genetically engineered trees are using three-quarter American chestnut and one-quarter Chinese chestnut. It will be interesting to see if this impacts the public opinion regarding these genetically engineered chestnut trees, given China's role in COVID-19.
- To date, fruiting has been prevented in these genetically engineered trees, but this may be allowed in future crops. This raises a range of issues that will require food safety and quality for both humans and animals to be assessed.
- It would likely cause considerable disruption to the walnut market if the walnuts of genetically engineered trees be cleared for human consumption and able to be sold commercially.
- The Asia Pacific market is currently viewed as the largest emerging market. It currently sits behind the North American and European markets in terms of consumption, but the growing popularity of the chestnut is contributing to notable market growth in the region.
- All generations in Asia are invested in the health food markets, and walnuts are positioned, as a premium food with considerable associated health benefits, which has seen their popularity rise.
- Also, contributing to the increased walnut consumption in Asia is the fast-growing middle class, which has accompanied rapid urbanization and increased numbers of working women in the region, and an associated demand from this demographic for nut-based food and beverages.
- There are a wide range of different varieties of walnuts, with one of the world's leading varieties being the American Chandler variety. Walnuts are typically harvested in Fall, meaning that the Northern hemisphere harvests between August and November and the Southern Hemisphere between March and April.
- The primary producers from the Northern Hemisphere are United States, India, China, France, Italy, and Eastern Europe, while Chile and Australia are the primary producers from the Southern Hemisphere.
- There are several specifications regarding the sale of walnuts. When they are sold in-shell, the shell cannot be broken; it must be whole. There can be small surface cracks.
- Moisture content is important. For fresh, in-shell walnuts, there must be a moisture content of at least 20%. Dried in-shell walnuts have a maximum moisture content of 12%, while there is a 5% moisture content maximum for walnut kernels.
- When selling walnut kernels, they will be classified into one of the following five categories: halves, chipped kernels (the portion represents three-quarters of one-half), quarters, large pieces, and broken pieces.
The European Market
- Italy, Spain, and Germany are currently the largest European importers of walnuts. The Netherlands and Austria also present opportunities with high consumption rates per capita. Poland and the Czech Republic present as an opportunity to exporters with increasing consumption rates.
- The European market is expected to grow in the medium to long-term. Consumption rates will ultimately determine the growth of the market, but with the trend toward looking for protein from other sources besides meat, there is definite potential for the walnut market to increase current consumption levels.
- The volume and value of walnuts in the European market have increased, on average, 11% annually over the last five years. The growth in the market has mostly been met by increased imports from developing countries, in particular, Chile.
- 73% of European imports are kernels and 27% as in-shell walnuts. The main suppliers of in-shell walnuts are the US, France, Chile, and Australia, who supply approximately 90% of this category of walnut. The heterogeneous walnut cultivars in developing countries mean that they often struggle to obtain uniform kernels inside the shells.
- One of the current trends in the walnut market is towards vertical integration. This is happening on a global scale, as more producers look to incorporate more of the production process under one roof or under the same company umbrella.
- In Europe a number of the leading nut companies are looking to invest in processing plants or walnut orchards in other countries. This brings with it certain challenges around product consistency and quality. Besana Group, one of the leading nut producers, processors, and traders in Italy has recently announced plans to expand in this manner across Europe and Centeral Asia.
- This has also been seen among the Californian Walnut growers, where Carriere Family Farms is an example of a company that has moved in this direction.
- One of the main advantages of integrating operations vertically is that economies of scale come into play, meaning that savings are created through the cost efficiencies created of one company carrying out multiple roles in the supply chain.
WALNUT INDUSTRY RELATIONSHIPS AND PLAYERS
- Developing countries are increasingly impacting the global walnut market. Chile in particular has increased production over the last few years. This has seen the number of walnuts imported into Europe by these countries increase at a rate that is superior to that of the US, the primary supplier of the European walnut market.
- Other developing markets that are increasing their supply to established markets, often at the expense of the US market share, are Moldova, the Ukraine, China and India.
- It is interesting to note that while the US increased the value of exports to the European market between 2016 and 2017, this was due to an increase in walnut prices. The volume remained constant at 88,000 tonnes. Chile on the other hand managed to gain some market share from the US increasing its volume from 16,000 tonnes to 28,000 tonnes over the same period.
Leading US Players
- Three of the leading players in the US walnut market are Carriere Family Farms, Empire Nut Company, and Sacramento Valley. These three players provide a good oversight of how relationships within the walnut industry are structured. Carriere Farms has been used to illustrate the relationships between growers, processors, and marketers.
- Carriere Family Farms (Carriere) is located in Glenn, California, and produces ten different varieties of walnuts, including the popular Chandler, Howard, and Hartley. They produce walnuts year-round and export their product globally. Carriere cultivates a network of growers within the region to meet the demand for their product. They have a team of growers ranging from small to large scale and are actively seeking new growers.
- Despite the name, Carriere has transitioned from a grower to a processor and marketer of walnuts. It acts as the center of a hub of growers, processing the walnuts for the market. In partnership with Borges of California, they have established a year-round in-shell processing plant. A shelling processing line was introduced in 2006.
- The in-shell processing line is orientated toward speed, with walnuts needing to be processed and shipped before 1 November in order to needs of the European market. By contrast, the shelled walnut market operates throughout the year. Carriere has recently added a cold storage unit which increases their ability to process larger volumes of walnuts.
- The Safe Quality Food Institute (SQFI) is recognized internationally by retailers and food service providers who require a credible food safety management system. Their SQF certification program ensures that a consistent product is produced for the market. It is recognized by the Global Safe Food Initiative.
- The SQFI states its mission "is to deliver consistent, globally recognized food safety and quality certification programs based on sound scientific principles, consistently applied across all industry sectors, and valued by all stakeholders."
- By creating a global certification standard, the walnut industry ensures that industry, customer, and regulatory requirements are being met by all those involved in the growing, processing, and selling of walnuts. As the SQFI states, "it is about establishing a sound food safety program in your facility to protect your brand, your buyer, and your bottom line."
- The certification received from the SQFI requires the producers to implement a comprehensive food safety management system. The processes are then reassessed each year with an annual audit.
- Part of the role that the SQFI plays is assessing and certifying local organizations to assess quality within their own markets. Once qualified, the SQFI carries out audits to ensure that standards are maintained across the market.
- One of the major challenges currently facing the walnut market relates to labor standards and the emergence of several developing counties as walnut exporters. This has created several issues for the global walnut market.
- Growers in developing markets in Vietnam and India will often process the walnuts in their homes, meaning that it is difficult to maintain quality and monitor for safety and working hours. When working in factories that process the walnuts, the pay is very low, and the workers are often exposed to smoke and chemicals, depending on how the walnuts are processed.
- The Fair Labor Association (FLA) has recommended that those importing the products pay particular attention to all of the players in their supply chain and develop an established code of conduct with accompanying easily identifiable performance measures. Given the limitations of monitoring, there is an expectation by the FLA that companies ensure there are multiple channels, including private channels, available to workers to report issues.
- India's walnut orchards are primarily of seedling origin and scattered form which has the unfortunate consequence of producing walnuts of variable quality. Walnut growers also suffer from a lack of suitable propagation techniques and resources, a difficult climate, and pollination issues, which have contributed to a long juvenile period for plants and low harvests.
- Southwest Missouri contributes to US walnut production volume. Some of the issues that are specific to the region include the high levels of rainfall annually which can prevent the harvest of walnuts at optimal times due to machines being unable to access the orchards. This has seen the region look to early harvests to counter the problem.
- Chile's previously fragmented walnut industry experienced a boost in 2017 when the Chilean Walnut Commission and Chile Nut entered an agreement to work together. The Commission primarily represented dealt with the export industry, while Chile Nut represented producers. Under the agreement, 90% of Chile's walnut growers and 80% of exporters are represented. This has allowed for a less fragmented and more consistent approach within the industry and strengthened the export of walnuts from Chile.
To identify trends affecting the walnut market, we reviewed a range of industry publications, media publications, market reports, and expert commentary. The trends we have identified are those discussed in multiple articles from these sources and had expert commentators talking.
When identifying the insights relating to each different topic area, there have been a couple of instances where the information we would like to have presented is simply not available in the public domain, or if it is, then it is superficial in nature and does not contain sufficient detail to be useful. We extensively searched the aforementioned sources for this information prior to coming to this conclusion. In these instances, we have substituted another similar insight. This is particularly relevant in the industry relationships section, where we were forced to discuss the key players and industry setup due to the availability of information.