The past trading week was dominated by the INC, with most market participants adopting a wait-and-see attitude and correspondingly little willingness to buy. This was mainly due to rumours during the week that a significantly more positive harvest estimate would be published than had been discussed recently. This was then confirmed on Friday morning. With a forecast of 760,000 mt, the publication is only slightly below the first forecast of approx. 790,000 mt based on the flower count from the spring.
As a first step, we would comment on the figures as follows:
- The Italian harvest is expected to be above average in terms of quantity this year. Italy will therefore be attractive on the market again next season.
- Assuming stable domestic consumption, Turkey estimates export figures for the coming season at approx. 310,000 mt, which is significantly lower than this season. The minus of approx. 25,000 – 30,000 mt can be explained by a decline in demand from Italy, as they will probably buy significantly less from Turkey in the coming season due to the very good harvest.
- The harvest size for Turkey raises concerns even among many Turkish exporters. Doubts are openly expressed about the estimate, as it is too optimistic. It is very rare for two such good harvests to follow one another directly, and the correction due to night frosts is clearly underestimated at about 5%. Statistically, these doubts could also be substantiated, as shown in the adjacent graph of the harvests of the last few years. Usually, some exporters do another count in July. Since most business for the fourth quarter and beyond usually takes place before then, this estimate is unlikely to have much impact.
- Fortunately, we can see that the corrections to the last estimate and the seasonal trend are significantly smaller than in the past. Overall, the harvest estimate only deviated by slightly more than one per cent. There have been years when the correction was more than eight percentage points.
- Overall, the global production of hazelnut kernels is growing steadily. This trend will continue, as many plantations have been established worldwide in recent years, but they are not yet producing at total capacity. Analogous to the expanded supply, the demand for hazelnut kernels has also grown worldwide, but not continuously. There are years of growth but also years of decline. However, we see a dangerous trend: the supply grows faster than the demand, resulting in a steadily increasing surplus.
- The Chinese market is becoming increasingly important. Once as a customer of Turkey and as a growing country for the nuts, the quantities produced in China remain domestically.
- The investment in expanding the plantations in Chile is now slowly bearing fruit. We are now seeing a steady increase in production here every year. Most of the quantities go to the market leader and/or remain on the American continent.
- Georgia and Azerbaijan indeed continue to assert themselves as alternative markets. While the kernels from Azerbaijan are considered high quality, Georgian kernels still have the image of being difficult to process. Therefore, kernels from Georgia continue to be the price leader in the market and will probably remain so next season, as the origin will face oversupply. On the other hand, sales in these countries are strongly oriented towards Russia. How this will develop because of the war in Ukraine remains uncertain, although most expect the business relationship between the countries to remain constant.
Overall, the presentation sends a signal to buyers. More hazelnut kernels will be available than needed, and the surplus will increase. Therefore, the buyers’ expectation is clearly one of at least constant, if not falling, prices. Due to the strong competition in the industry and the mostly good negotiating position of the buyers, we assume that the wish will probably be granted. However, we view this with a certain degree of scepticism. After all, sales below the current level can currently only be realised if one bets on an increasing weakness of the Turkish lira. This is almost impossible to assess in the current political situation, so this should be regarded as pure speculation. However, we expect many exporters to be increasingly inclined to speculate.
On the other hand, it should be noted that despite an increase in supply, prices do not necessarily have to be lower. It should be noted that most origins are at least oriented toward what is happening in Turkey. According to the published figures, Turkey will end the season with a surplus of about 105,000 mt. Probably about 50’000 mt are currently still in the TMO’s inventory. The remaining quantity is the exporters’ “permanent stock” to fulfil current contract obligations. This means that there will hardly be any freely available commodity during the harvest transition. The market, therefore, relies on farmers to release the crop into the market. We have seen in the past that farmers have withheld the commodity en masse as they were not comfortable with the prices offered. Considering the incredibly high inflation in Turkey, it can be assumed that the farmers will demand a corresponding compensation for inflation. Going At the beginning of the 2021 harvest, the price for farmers was around 24 TRY/kg. If one takes the inflation of the last months of almost 70% as a basis, one could assume approx. 40 TRY/kg as a demand, which roughly corresponds to the devaluation of the Turkish Lira over this period (approx. 56%).
The future role of the TMO in the market is therefore eagerly awaited. Currently, the market price for raw materials is about 38.5 TRY/kg. The TMO’s asking price for the stock sale is higher, so there will probably be no buyers for it now, given the situation. In order to sell the commodity now, the expectation of rising prices would have to prevail, which it does not now. Therefore, the question is whether the TMO will hold the commodity or whether it will reduce its selling price. It would also be possible to publish a high purchase price for the coming harvest. However, this would mean that a large commitment would have to follow to influence prices not only in the short term. Therefore, purchasing at least 100,000 mt and holding the current position is mentioned as an order of magnitude. It is also unclear whether the forecast of more than five per cent more sales compared to the current season is feasible for the coming season, as the signs worldwide are not pointing to growth. The lower the sales and the higher the transition, the greater the expectations of the TMO. After having “made money” in recent years, the TMO has some leeway, especially in the coming presidential elections in 2023. However, this then means having to engage in a big way.
In summary, the situation is no more apparent for Turkish exporters. The release of a large crop is more dangerous than beneficial for them, so we continue to expect a divided market in the coming weeks. The expectation of higher prices would probably have made the market less risky. Still, on the other hand, moderate prices guarantee good sales because exporters also want to avoid a big overhang carried over from year to year. Therefore, the coming reaction of the TMO is essential for the development of the coming years, but we do not expect a statement until the end of July at the earliest. Until then, it remains up to the individual risk assessment of the sellers.
Concerning the exchange rate, it should also be noted that the Turkish lira trended slightly weaker again in the course of the week. Therefore, we also saw a slight weakening in prices.
bullet points
- Export Union publishes a very positive harvest estimate of 760,000 mt at INC.
- The second-largest producer (Italy) also presents a very good harvest estimate of 140,000 mt.
- The expectation of buyers is now that the market will fall.
- This situation puts sellers at risk, as the purchase price for the 2022 crop cannot yet be estimated, as there are no statements from the TMO in this regard and the farmers’ agreement is also uncertain.
- We expect a very different market in the coming weeks, as each seller will assess the situation differently.
- Turkish lira continues with a tendency to weakness. Therefore prices are also slightly down.