Almond Marketings   Kirby Moulton January 25, 1994   KEYWORDS: global competition, price and income effects

Successful marketing has been a key to profitable operations in the industry over the past two decades. It developed the demand that was necessary to absorb ever increasing supplies at prices that would sustain growers, processors and handlers. Average annual produ1ction of almonds in California increased almost 4-fold between 1970/73 and 1989/92, but average revenues per acre, after correcting for inflation, decreased by only 15 percent. At least part of this revenue decline may have been offset by increased operating efficiencies over the past 2 decades. But even if not, growers were far better off than if industry had not succeeded in expanding the demand for almonds.

Almond growers make a marketing decision the moment they plant their trees. The site they select, the varieties they plant, and the orchard they design affect the size, quality and quantity of their production. These choices affect grower prices and the ease with which the crop may be sold. Irrigation, pruning, fertilizing, pest control and other cultural practices also influence the marketability of the almond crop. Thus the most important marketing decision facing a grower is how to produce a product that meets the needs of the market.

A practical way for most growers to analyze the market is to seek information and recommendations from handlers that will help them match their product quality characteristics against market requirements. For example, a small but growing demand for small almonds in a regional market may provide a good outlet if the grower can reach that market through a handler. Specialized high quality markets may offer an alternative to standard industrial production for some growers. Since handlers are "on the market" regularly they are in a better position than the majority of growers to evaluate market needs.

Few of California's 7,000 almond producers are also handlers, although their number has increased. Consequently, they face an array of potential buyers (handlers) who become the first link between the grower and the ultimate market. The Almond Board of California listed 105 handlers of almonds in October 1993. Handlers are the first level in the marketing chain. They acquire product from growers and may sell it to other handlers or processors or directly to the trade.

The greatest volume of almonds moves through integrated handler-processing-marketing organizations. Data on handler shares are not published and they vary according to crop size and industry conditions. While there are differences between industry sources as to current (1993) shares, a plausible estimate is as follows:

The number of handlers has increased dramatically over the past decade as growers and others try to gain more of a foothold in the market. The new firms are not all successful and the total number of firms fluctuates depending on economic conditions. There were 6 fewer handlers listed in October 1993 than in January 1991. It appears that industry concentration has remained about the same in recent years, with the top 6 or 7 firms handling about 80 percent of the crop, although shares among the various handlers have changed. Probably none of handlers outside of the top 10 individually handled more than 1 or 2% of the crop. The economic impact of these small firms is difficult to measure. Economic theory would suggest that by offering more marketing choices for growers, they provide a more competitive environment for determining grower price. Their impact on product price would depend on the size and number of handlers relative to the number of buyers. However, larger handlers contend that the presence of numerous small handlers contributes to price instability, erodes grower loyalty to handlers and makes longer term marketing strategies more difficult.

The Almond Board also listed 73 California trade sources and the various almond packs and products that they offered in September 1993. This was an increase of 23 sources from November 1990. The roll contains only those firms that have requested to be on it, and therefore is not as complete as the handler list, on which product offerings are excluded. The products offered by the trade sources include eight different types of industrial packs, five types of consumer packs, and 3 almond products (paste, butter and oil).

None of the trade sources offered a full line of each of the three product categories. All of them handled industrial packs; more than half (38) handling only this category. Predictably, those offering a greater number (7 or more) of individual pack items also tend to have a greater selection across the 3 categories. For example, those 15 firms handling seven or more packs offered on average 2.4 consumer packs and 0.6 products, while the 52 firms handling 2 to 6 packs handled on average 0.33 consumer packs and 0.2 products.

There is no single marketing strategy that fits all California almond growers. Once the production decisions have been made, each grower needs to evaluate marketing alternatives according to criteria that are personally important. Some of the commonly used criteria are expectations about: marketing effectiveness, fairness in business dealings, long term profitability, costs of marketing, flexibility in the relationship, prices, payment terms, and strength of the relationship over a long term.

Grower prices for almonds are derived from the market prices received by handlers. Cooperative members share in the returns of the cooperative, after deductions have been made for operating expenses, according to the volume and quality of product that they supply. Supply contracts between growers and proprietary handlers typically cover production from an indicated acreage or block and do not specify price. The term is usually one year or five years, with a premium payable for long term contracts to reflect reduced administrative expenses.

Three to five payments may be made to growers during the course of the marketing year. Under some contracts up to 90 percent of the final price may be paid by the end of the calendar year and under other contracts 90 percent may be paid by the following April or May. Proprietary handlers generally determine the firm contract price in the summer following harvest at which time the season's results are known. A final payment is then made to growers that brings their total return up to the contract price.

Almond prices increased 47 percent from $0.75 per pound to $1.10 per pound between 1970/73 and 1989/92 (Table 1). They also varied a great deal, ranging between a low of $0.54 in 1970 and a high of $1.92 in 1986. The average year-to-year price change was about 29 percent, indicating substantial price variability. The variability often resulted from weather induced production changes, often caused by early season rain or frost. The period 1987-89 was one of unusual price stability.

Source: USDA, ERS, Fruit and Tree Nuts, TFS-266, July 1993.

Two other factors are critical to understanding price results in the almond industry: the rate of inflation that eroded price gains and the increase in productivity that allowed grower survival at lower price levels. Although average prices increased by 47 percent over a 22 year time span, inflation robbed all of the gain and "real" (inflation corrected) prices dropped by 52 percent. An increase in yields from 806 pounds per acre to 1,373 pounds was a tribute to better varieties and improved management but still inadequate to offset completely the price loss.

Agricultural prices often offset yield changes so that revenues per acre remain relatively stable. This was not the case for the almond industry. Average revenues per acre varied about 30 per cent from year to year between 1970 and 1992, very similar to the annual price variations. They reached a peak of $1,776 in 1992 and a low of $464 in 1971. Thus cash flow planning remains difficult because of the variability of revenue flows.

Variations in cash flows per acre remained significant even after correcting for inflation. "Real" revenues per acre changed each year, on average, by 29 percent between 1970 and 1992. They declined from $1,286 in 1970-73 to $1,090 in 1989-92. The high point in "real" terms was $2,271 in 1979 and the low point was $672 in 1983.

The experience of the past two decades indicates that the almond industry is risky since it is subject to significant variations in production, yields, prices and income. It also tends toward over-supply since acreage and yield have expanded more rapidly than demand, causing real prices, revenues and profits to decline. This makes effective risk management a critical part of a grower's strategy and places emphasis on cash flow planning from year-to-year.

The best way for a grower to manage risk is to become a very good grower and businessman. Most growers appear to specialize in almonds even though a crop diversification strategy might help them hedge against swings in almond revenues. Growers understand that almond prices are cyclical and that returns from good years are needed to offset the losses of bad years. Those growers that follow a diversification strategy tend to grow other tree or vine crops that might use similar equipment and require compatible technical knowledge. The assumption is that good and bad prices will balance out among the crops in a given year. Price hedging practices such as forward pricing and futures markets that are used to reduce risks for annual crops like feed grains are not applicable to almonds, although crop insurance is applicable. From an industry perspective, there is a compelling need to continue the industry's aggressive product and market development activities so that production increases can be sold at profitable prices.

The USDA Foreign Agricultural Service monitors foreign production and marketing of almonds and provides valuable market information for growers and processors. The following discussion is derived primarily from data published by that organization.

Although California clearly dominates almond production and trade, it faces intense competition in export markets, particularly in the European Community. The competitive sources of almonds are as follows, based on annual averages for the period 1990-1992.

Spain's production potential has always been worrisome. Almonds are planted to 1.6 million acres, of which almost 120,000 acres are non-bearing. Typically almonds are produced from small orchards or plots as a sideline for farmers that focus on other crops for income. Most almond orchards (about 90 percent) are not irrigated and yields are quite low, in the neighborhood of 400 pounds per acre. Some of the non-bearing acreage is likely to be in irrigated areas and subject to modern farming techniques that can produce up to 1,300 to 1,400 pounds per acre (the average yield from irrigated orchards was 1,200 pounds, in-shell, for 1985-89). Spain is likely to remain as an important competitor in future years.

Italian production changed relatively little over the past decade but dropped almost in half from its level 20 years ago. Disease and more profitable opportunities in other crops caused the decline. Italy will continue to be a more important import market than export competitor. Production in Greece may grow slightly, but currently is almost at the stabilization level sought by the Greek government. New and more productive plantings in Portugal may increase production capacity but will have little impact on the export market.

Competition in almond markets is affected by government subsidy policies. The European Community offers a subsidy on almonds sold to non-EC countries other than the United States. In 1992/93, the subsidy (or export rebate) to Spanish exporters amounted to about 7 cents per pound of shelled almonds. The Spanish government also offered a subsidized export payment insurance program. The EC subsidy program was also available to Greece and Italy.

The EC Tree Nut Program was initiated in August 1989 to assist in the modernization of existing orchards. This program, like others in the Community, provides low cost credit or outright grants for approved improvement programs. Spain is seeking funds through this program, Greece is slow in adopting it, and Italy probably will not use it much.

Portugal has benefited from some investment programs under both the EC and the World Bank. These have brought an estimated 4,200 acres into modern cultivation. The Turkish government has a history of intervention in agricultural sectors, usually controlling planting or credit terms to reach certain objectives. The United States has no subsidies to almond producers unless a value is assigned to subsidized irrigation water.

California is the world's major producer of almonds and is highly dependent on export markets. It accounts for about two-thirds of global production and 84 percent of world exports. In the period 1990-1992, about 65 percent of its shipments went to export markets and the remaining 35 percent went to the domestic market.

The domestic market absorbed over 185 million pounds of almonds in 1991/92. The major domestic user of almonds is the confectionery industry, primarily for the making of candy bars (Table 2). The industry used almost 60 million pounds in 1991, or 32 percent of total domestic utilization. Consumer products are the second most important domestic market category, accounting for 32 million pounds in 1991. This represents a 25 percent decline from its consumption of over 42 million pounds in 1989. Food processors, primarily cereal manufacturers took 28 million pounds. Nut salters, who, in turn, sell to other users and often in the form of nut mixes, bought 19 million pounds, as did ice cream manufacturers. Food service firms and bakers are also important users of almonds.

Source: Blue Diamond Growers, Almond Facts, 1987 and Annual Report, 1988/89, and Sales Department private communication for 1991 data.

Food processors and confectionery manufacturers made a big difference to the almond industry between 1980 and 1991. The growth in their usage outstripped that of the total domestic market and gave them significantly larger market shares than they had enjoyed previously. Together, these two industries upped their consumption by 57 million pounds, while all other users increased usage by 32 million pounds. The food service and baking industries also increased market share in this period, while consumer products, nut salters, and ice cream manufacturers lost share, even though their shipments increased. Domestic consumption increased 94 percent during this period.

Export demand for California almonds expanded more rapidly than domestic demand in the 1970s, but during the 1980s, both markets grew at about the same pace. This resulted from increased industry attention to the domestic market but did not change the industry's dependence on export markets which continued to absorb about two-thirds of all shipments.

Shipments to the domestic market averaged 90 million pounds annually in 1978-80 and 183 million pounds per year in 1990-92; exports averaged 181 million pounds and 363 million pounds during the same two periods. Although the absolute growth in exports, 182 million pounds, was nearly double that of domestic shipments, the percentage change was very close. The export market is heavily weighted toward shelled almonds as illustrated in 1992/93 when the export of shelled almonds was 339 million pounds and of inshell almonds was 33 million pounds.

The major export destinations and their percentage export share are: Germany (30.4), Japan (14.4), United Kingdom (6.4), France (5.7), Netherlands (6.2) and Canada (5.0). The greatest part of export shipments (79 percent) goes to markets in developed countries and most of these are in Western Europe. This distribution has important implications for the future. Per capita income in the developed countries and several emerging countries in Asia is expected to grow more rapidly than in most under-developed countries, and this creates favorable market conditions for almond sales. The reliance on Western Europe is unusual for California agricultural exporters who, typically, are finding themselves more dependent on Asia and other regions. There are risks in dealing with the European Community. Although almond tariffs under the GATT will be reduced and this should stimulate trade, internal policies of the EC favoring domestic producers could erode California's market. Nevertheless, the large volume of the EC market makes the presence of California almonds essential if total demand is to be met.

California almond handlers have also sought markets in Latin and South America, Asia, Oceania and Africa where preferences for almonds have yet to be strongly developed. Together, these markets (except Japan) took only about 12 percent of shelled exports but over 90 percent of inshell exports in 1992/93. They hold promise because there is a sufficiently large upper income population to support greater demand for almonds. The U.S. government reported that almonds were exported to 74 different countries and territories (e.g., Hong Kong) in fiscal year 1992.

Export prices were relatively stable during marketing years 1988/89 through 1991/92, varying between $1.29 and $1.46 per pound. Prices among countries differ according to product mix, shipping schedule and market conditions. In 1991/92, the average price to Germany was $1.36 while prices to Japan were $1.58 and to England were $1.50 per pound.

Exchange rate variations affect the local currency prices paid by export customers. For example, between 1990/91 and 1991/92, the U.S. dollar price to Germany went up by 10 percent, but the price in German marks rose by 13 percent and caused less sales than might otherwise have been achieved. In Japan, the dollar price went up 13 percent but the yen price increased only 5 percent. The most notable exchange rate effect was experienced between 1984 and 1987 when the dollar plummeted to one-half of its value against the German Mark and the Yen, and by lesser amounts against other currencies, making almond prices far more attractive in most countries.

The North American Free Trade Agreement eliminated Mexico's tariff of 20 percent ad valorem for shelled almonds and 15 percent on inshell almonds on January 1, 1994. The U.S. tariff is eliminated as well. Almond tariffs imposed by the European Community are already low, but will be reduced still further when the results of the GATT Uruguay Round are implemented. The price effect will be small and should have little impact on sales.

Summary

California dominates world production and trade in almonds. Its efficient production and processing methods have stimulated expansion and its marketing skills have succeeded in vastly enlarging world almond markets. The almond business is risky as evidenced by variable prices and incomes and it has a tendency to over-production as evidenced by declining "real" revenue per acre. Growers have responded by planting less and reducing bearing acreage from its peak in 1986-87. Some have integrated into processing, or encouraged others to do so in order to obtain a larger share of the "almond dollar." Processors operate in an export-dependent industry characterized by a few very large handlers and a large and variable number of small handlers. In the short run, the almond industry may face some difficult times resulting from the aftermath of global recession, political uncertainties in central and eastern Europe, and subsidized competition from Spain, but over the long pull the diversity and robustness of global markets promises a brighter future.

Kirby Moulton is with the Department of Agricultural and Resource Economics, University of California, Berkeley, CA.

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