Due to the holidays at the end of the Islamic fasting month of Ramadan, this week there was little movement in the Turkish hazelnut market. However, this week we could again see that prices have decreased once again. Although we have seen a permanent downward trend in prices in recent weeks, we would like to point out that this does not necessarily a further trend is to be derived. Several trends are currently converging in the market and the direction for the coming season is not yet clear.
Why prices have fallen?
First of all, we should take a look at why prices have fallen so sharply in recent weeks. The volume that is currently being traded is relatively low. This means that the trade of a few lots determines the current market price. Thus, the level is also not very stable.
“Reeskont” loans
In our opinion, the decline in commodity prices that we are seeing at the moment is not currently demand but is due to the instrument of “Reeskont” loans introduced by President Erdogan’s government. This was introduced two years ago to prevent the population from exchanging their own money in foreign currencies and thus stabilize the Turkish lira. In simple terms, it is a fixed-term deposit account in which the state assumes the exchange rate risk.
In the beginning, the interest rate was approx. 3 percentage points above the current interest rate. This option is available for private but also for corporate accounts. In the beginning little use was made of this option, but it is now becoming increasingly popular, due to the interest rate level. Savers can enjoy interest rates of 25- 30 %. As this interest rate currently seems more attractive to many than the increase in value of hazelnut kernels, we see that raw material traders, crackers and a few farmers, who still have stocks, are parting with the commodity, sometimes even at a loss, in order to invest the money in the bank. This effect is currently contributing to the fact that raw commodity prices have fallen to a level that was not originally expected.
Selling hazelnut or interest rate
In the meantime, this has led to certain excesses that have been sanctioned by the state. For example, some exporters sold goods below cost in order to obtain favorable subsidized export credits. But then immediately reinvest the money in the “Reeskont” credits described above and with the difference of the interest proceeds to compensate for the loss on the sale of the hazelnut kernels.
The next two months traditionally see the start of deals for the Christmas business with the retail trade. Therefore, both buyers and sellers are currently thinking about where the price level will be coming season. Here it shows the dilemma in planning and the different expectations of the respective lots.
New lower prices can be expected
The drop in the price level is currently encouraging buyers in their assumption that the price level in relation to the availability of raw materials and demand and that at the latest by the new lower prices can be expected throughout the season.
In addition, trade is currently signaling to the industry that you can’t even negotiate with prices that are higher than in the previous season. For some products with a high nut content, the hazelnut price is therefore the most important price driver. Therefore, deals at the current level are currently inconceivable for many, as the prices are still a good 0.50 EUR/kg above the level of last year’s deals.
In Turkish local currency terms, raw material prices have risen by 45% in the last 12 months (peaking at 60%). However, the exchange rate compensated only about 35% of the price increase for European buyers.
However, if we refer to the starting price at the season in September, there we were at 44 TRY/kg. This price was not formed by a free market economy, but by setting a state-guaranteed purchase price. If you put the price at the time it was fixed in relation to the U.S. dollar, the farmers received an estimated value of 2.75 – 3.00 USD/kg for their commodity. Due to the political uncertainty in Turkey, it is impossible to predict the development of the exchange rate. Therefore, the price for the coming season will be set by the
TMO only shortly before the start of the harvest at the end of July / beginning of August. Sales that take place before are in principle purely speculative sales.
Inflation published by the Turkish authorities has been moving in recent months between 50 to 60% compared to the previous year. The desired price of the farmers is at least the previous year’s price adjusted for inflation at 50%. That would be equivalent to a price of 66 TRY/kg. That would currently be a plus of 20% compared to the current market price. TMO has probably had positive figures in recent years thanks to clever action generated. It is questionable which political mandate the TMO will receive after the election.
Bullet points
- The risk of frost can now be ruled out for the coming harvest.
- Little trading activity mainly due to the public holidays at the end of the fasting month of Ramadan.
- Commodity prices drop again – A stable exchange rate results in more favorable export prices.
- Price level of crop 2023 is now increasingly becoming a topic of discussion, although many buyers still didn’t even cover for the 3rd quarter.