After the hazelnut market had been quite lively in recent weeks, a certain cooling off could be felt again this week. Buyers on both the Turkish domestic market and the export market switched back to a wait-and-see attitude, even though some market participants are warning of further price increases. The main arguments of the pessimistic camp are a shortfall in the market leader and the imminent expectation of an adjusted purchase offer, as well as the potential risk of frost and the danger of a poor coming harvest.
Panic reaction from buyers?
The arguments may each be valid in their own right, but buyers also know that this time of year is always characterized by rumor, uncertainty and speculation, so there is currently no panic reaction from buyers. For most, the current prices mean a loss-making transaction and the hope of not having to realize losses leads to a postponement of the decision
Warnings
1. Frost risk
Let’s take a look at the arguments of the warning voices. The risk of frost exists every year. However, this only occurs every 10 years or so. Since the last frost was 10 years ago in hazelnut market, there may be a certain statistical probability. However, this argument can also be relativized by the fact that if there were to be a frost, prices would rise drastically. As we have already seen at the beginning of this season some contracts have been renegotiated due to unforeseen developments, we can certainly philosophise about the sense of hedging for this reason, although to our knowledge most contracts have been fulfilled despite high losses by exporters.
2. Quality of coming harvest-Bug problem
The next argument, that of a potentially poor coming harvest, is also difficult to grasp. The vegetation is currently still at such an early stage that, at best, extreme trends could be discussed. After exporters were unable to present a valid harvest estimate last year, even in May, the veracity of the current statements can certainly be questioned. To put this into perspective, however, it must be said that there were also estimates last year in May that predicted the actual value. However, the estimate of the prevailing voices in the export union was published. This shows once again that objectivity has to give way to personal interests, which is why all opinions, depending on the sender, must always be scrutinized. A great deal of trust has been squandered here in recent years in hazelnut market. In addition to the quantity of the harvest, the quality factor should not be underestimated. The fact is that the marmorated stink bug has spread massively across the region. This has already led to major problems in Georgia and Turkey has not yet found an answer to it, just like the other origins. Therefore, this argument should not be completely neglected.
3. What will the market leader do?
Apart from the factors that are subject to nature, the point of undercoverage of the hazelnut market leader is the most serious one to be discussed. According to most of the usual suppliers, the market leader still has around a third of its requirements to cover. As the market leader is not cutting back on quality, there is indeed a certain need for action, as the quality of the 2023 harvest is not as good as previous harvests. Some people are therefore assuming that the final cover will be provided in the near future and that this would only be possible with a high bid. In principle, this is understandable, but the market leader is acting very differently under the new leadership and does not appear to have any interest in a further increase in prices. There are also those who say that the market leader has a certain amount of cover and alternative procurement channels to monitor the situation for the time being.
Role of TMO
One point that is often not mentioned in the discussion is the role of the TMO. This is also under massive pressure. For example, exporters have long been putting pressure on the management to become active and release volumes onto the market. There is also pressure from the authorities/politicians to release the tied-up liquidity. The farmers, however, the largest group in terms of numbers, would not like it if the TMO were to sell their stocks (at favorable prices), as this would weaken their position. Ultimately, the decision lies with the President, who has repeatedly interfered in this matter.
Pricing Strategy
If you look at the development of raw material prices from the TMO’s perspective, it has always tried to keep the price at around USD 3/kg for a kg of hazelnut kernels in shell (between USD 2.85 – 3.15/kg depending on the year). If the current exchange rate is assumed to remain stable until the new harvest and a new government minimum price is anticipated on the basis of past data, this would be around TRY 97/kg and therefore far below the current market price (currently between TRY 108 – 112/kg depending on the region).
Inflation compensation
A sales campaign by the TMO is therefore a political event even at the current time. It can therefore be assumed that a campaign will only take place after the national local elections at the end of March. To put this into perspective, however, inflation in Turkey remains above 60% and a certain amount of inflation compensation can therefore be expected. In recent years, the depreciation of the exchange rate has always led to some compensation for European buyers. This is unlikely to be the case in the coming season.
New President to the Central Bank
The Turkish Central Bank is doing everything in its power to keep the exchange rate as stable as possible and thus bring the price spiral to a halt. However, there has also been another change here. After just a few months in office, the current head of the central bank (Hafize Gaye Erkan) has resigned. She did not give exact reasons, there are only rumors about favored appointments to positions within the central bank, but nothing more is known to date. The new head is 41-year-old Fatih Karahan, who is also an advocate of a restrictive monetary policy. As the position of finance minister (Simsek) was not up for discussion, it can be assumed that Karahan will also continue the monetary policy of his predecessor. Accordingly, a strong signal is expected following the upcoming meeting of the Monetary Policy Committee on 22 February.
Market Speculation and Export Dynamics
The coming weeks are likely to remain exciting for the hazelnut market. There are speculators who believe that prices of 150 TRY/kg are realistic in the coming months, but there are also those who expect the situation to ease. Much will also depend on the further course of exports. After very strong figures in January, exporters are hoping for a recovery in the second half of the year, as the alternative origins are slowly running out of stocks. While time is playing against exporters on the one hand, it is also playing in their favour on the other. It is therefore understandable that certain customers are tired of the situation and want to close the season now due to the potential risks. However, a warning should be issued at this point. Should there be a freeze, we would be heading for an extreme situation, so it is important to have signed contracts with a strong partner, even if they are currently a little more expensive than the cheapest offers on the hazelnut market. As a result, the offers from exporters are still far apart.
We do not expect the situation to change significantly in the coming week. Although most buyers have not yet completed the current season, interest in the 2024 harvest is already starting to increase. However, there are still no sellers. The uncertainty is too great.
With regard to the exchange rate, we also do not expect any major changes next week; as mentioned above, this will probably only become relevant in the following week.
Bullet points
- Raw material prices at origin remain stable, despite low demand, as there is speculation that the market leader will be active.
- Export price lists, on the other hand, are falling slightly as demand has declined again.
- The exchange rate continues to show a certain degree of stability. However, the market is eagerly awaiting the results of the meeting of the Monetary Policy Committee under the new head of the Turkish Central Bank on 22 February.
- Rumours about possible risks regarding the new harvest are dominating the discussions. Buyers have so far taken this in their stride.
- The export price lists continue to vary greatly, depending on the position of the exporters.
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