Walnut Market Analysis

Group member: Jessica, Tai, Zoe, Roson Walnut Market AnalysisTo Be DiscussedBackground

Market Power

Price Factors

Regression Model

Case Studies

Background

Walnut Background

Walnut Fruit Two major varieties of walnuts are grown for their seeds:Categories

In every category, walnut has two basic form:

6Climate requirementWarm weatherSunshineAverage annual temperature range: l0-14 Minimum temperature :-16 Maximum temperature not :38

Processes

Farmer Process (Whole)Seedling graftTrees planted, irrigationsystem installedTrees pruned, irrigated and fertilized( Year 4, first crops)Trees produce full crops

Farmer Process( Annual) Processors

TechnologyGrafting

Grafting is used to increase nut production on otherwise healthy trees and should be preformed when the host tree is fairly youngGrafting involves taking a twig from aMature walnut tree and inserting it into the bark ofanother younger walnut tree.

If grafting is done properly, the new twig will eventually attachitself to the tree and begin growing as a new limb.

10Technology CONTInsecticide

Nutritional ValueElements

Alpha- Linolenic Acid(the plant-based omega-3 essential fatty acid)Antioxidants(slow down the process of ageing)

Main Benefits Nutritional ValueUnique among nuts, walnuts contain the highest amount of alpha-linolenic acid (ALA), the plant-based omega-3 essential fatty acid, required by the human body.As one of the best plant food sources of omega-3s, a one-ounce serving of walnuts provides 2.5 grams of ALA. A growing body of science is beginning to uncover a variety of benefits that ALA/omega-3s may provide to our bodies. While most nuts contain monounsaturated fats, only walnuts are comprised primarily of polyunsaturated fat (13 grams out of 18 grams total fat). Dietary guidelines recommend that people keep total fat intake between 20 to 35 percent of calories, with most fats coming from sources of polyunsaturated and monounsaturated fatty acids.13

Walnut Market Background

Leading producerLeading consumerMetric Tons

Source: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdf15Leading ExportersLeading ImportersMetric Tons

Source: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfWorld Market thicknessYearExportsProductionThickness2007/08296,9001,037,45028.6%2008/09357,0001,184,70030.1%2009/10416,2001,285,70032.4%2010/11466,8001,335,60035.0%2011/12474,1001,455,70032.6%Source: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfCountry2011/12China700,000United States418,200Ukraine115,000Turkey80,000Total1,455,700CR490.2%Country2011/12China758,200EU171,300United States142,200Turkey117,300Total1,407,600CR484.5%ProducersConsumersExportersCountry2011/12United States275,400Ukraine100,400Chile36,500China17,300Total474,100CR490.6%ImportersCountry2011/12EU125,000China75,500Turkey51,500Japan29,500Total434,900CR464.7%Source: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfRegulation and Policy AnalysisWalnut Marketing BoardThe role of the BoardThe marketing board is funded by both government and all handlers.

Each handler should pay certain percentage of fee for boards expenses.

And the board uses these money to support research project for product

21Policy Analysis: Volume RegulationThe marketing board regulate the walnuts export through two ways: volume regulation and grade and size regulation. First we focus on the volume regulation. There are three steps for volume regulation.

First, estimation. The board would estimate each handlers product, carryover and storage ability each year

Second, the marketing board recommend free, reserve and export percentage for each handlers production. Free percentage or free walnuts refer to walnuts for domestic market only. Reserve walnuts are only for export. But not all of them would be exported. The export percentage is recommended by the board.Here I would like to say reserve percentage is not quota. Since each handler register in the board have reserve obligation , and reserve percentage is based on handlers capacity. But the purpose of such regulation is the same, to limit export quantity, push up world price and exercise market power

Third step is revision percentage. At the middle of each marketing year, August 1st, the board would review all free reserve and export percentage to see if there is any extra foreign demand

22Policy Analysis: Grade and size RegulationsThe second way to regulate the market is through grade and size. The marketing board has requirement for all walnuts, especially reserve walnut. Moreover, the board can put specific requirement to any lot of reserve walnut.

What the board is trying to do is price discrimination. They are trying to sell high grade walnut with a higher price so that the board has more market power for high grade product.

But of course there is a problem: how to sell your high grade product. 23Policy Analysis: Control over Substandard walnuts the solution from the board, control over substandard walnut.

In the US, substandard walnuts can only for manufacture into oil, livestock feed which is uncompetitive to existing markets.

And if you have production or storage of any substandard walnuts you have to report it to the marketing board

So that foreign buyer with higher willingness to pay can only buy high grade product with high price24

The US is earning high profit from walnut export constantly.Dose Regulation Work? Next question is: if these policy works. The answer is yes. We collect data from USDA and World Bank for walnuts export price and grower price in last 30 year.

And we find out that on average, the margin that the US gains from export walnuts is 35.5% standard deviation is 0.105 which is really small. Means the US return from walnuts export is constant over years

However, policy is not the only factor to effect price. Next we will introduce some other factor.

25Price FactorsFactors affect priceNow, we will talk the factors which will affect prices. You can see, this is a increasing price trend. The price constant increased during past 30 years.27Factors affect priceThis is our structure model. We will divide price factors into two parts: demand and supply. In the demand part, there are three factors which are healthy information, Asia income effect and exchange rate. In the supply part, policy will be the main factor we will discussed.28Factors affect priceSupply PartsFactors affect priceFirstly, we will talk about the factor in supply part which is policies. We will mentions two main US policy in this part. We will analysis the impacts of those policies.29 Factors affect price: PolicyThe Rules and Regulations (Effective Data: Jan 1,2011) Original Regulation 1. All shelled walnuts are inspected and certified by DFA of California.

2. By-products are inspected and certified Walnut meat: pieces smaller than 3.175 millimeters.Before manufactory: all shelled walnuts are inspected and certified before manufacturing by the American Council for Food Safety & Quality(DFA) to ensure the walnuts meet marketing order requirements for U.S. commercial grades.Walnut pieces may be further manufactured by chopping them into smaller pieces, or ending products. Pieces smaller than eight sixty-fourths of an inch (3.17500 millimeters)are considered a by product of this process and are called meal. Walnut meal is sold in to the market for industrial use, such as in commercial bakery products. We call all those product as by product of walnut.The murtiple inspection certified on walnut meal30Factors affect price: PolicyNew Regulation

1.Ending product are Inspected and certified

2.By-product are inspected and certified31Eliminating the need for multiple inspection for the same product (walnut meal).Improve processor efficiencies by eliminating duplicative inventory tracking.The price of walnut meal will decreased.Factors affect price: PolicyImpact: improve the manufacturing process byThis rule imposes no additional reporting or recordkeeping requirements on California walnut processor in order to shift certificate number from each original lot of shelled walnuts is transferred to the meal certification.

32Market Access Program(MAP)Factors affect price: Policy Objective: MAP program is designed to assist U.S. organization by providing funding for projects that address sanitary, phytosanitary (fato'sntri), and technical barriers that prohibit the export of U.S. specialty crops. The MAP funds were utilized to develop a walnut pest management alliance.33Factors affect price: PolicySource :http://www.fas.usda.gov/info/factsheets/mapfact.aspImpact:

Factors affect price: Policy35Factors affect price: PolicySource: USDA ERSThis is usful policy to improve export volume36Factors affect price Demand partFactors affect priceNew Function of WalnutImpact: increase consumers incentive to buy walnut.

Indian Case Factors affect price: Healthy informationMost time, the government and organization publish a function of walnut will increase consumers incentive to buy walnut. We found one example in indian. After the organization published that information, the demand . As a result, the wholesale 38Factors affect price: Substitution goodsFactors affect price: Substitution effectCorrelation rate: 0.783542 Source: FAO STATIn the graph, there are increasing lines. The walnut price and almond price almost increased at almost same time. All the theoretital analysis of price40Factors affect price: Exchange rateExchange rate(RMB/$)

http://www.oanda.com/lang/cns/currency/historical-rates/When the dollar depreciate, the price of walnut increase. The decreasing rate is greater than increasing rate. The impact of supply are higher than impact of demand side. All above price analysis are theoretically.41Econometrical Analysis42Econometrical Analysis Data Selection

Data Collectionhttp://faostat.fao.orghttp://data.worldbank.orghttp://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1377

To analyze walnut price, we collect data from FAO, the World Bank and USDA.

43log(Pw) = 0 + 1log(e1) + 2log(e2) + 3export% + 4GovtF + u0

Most important factor is the export percentage that the board imposed can affect price change, which support our conclusion.Econometrical Analysis: LOG RegressionHere we establish a log regression modal to estimate different factors and their effect to the percentage change of walnut export price. Here Pw refers

From the regression we can see that all variables are statistically significant if we set 95% as confidence interval. R^2

The Most important factor is the export percentage that the board imposed to the market, which support our conclusion of policy analysis.

44Pw = 0 + 1e1 + 2e2+ 3exportQty +4Pwg + 5Pa + v0

Most important factors for price level are exchange rates. But export quantity dose not affect price level a lot. Econometrical Analysis: Linear RegressionHere, we are trying to estimate not just change of price, but also price level, so we have the linear rogation model.

One interesting thing there is: price of amend is no statistically significant, even if pa and pw are highly correlated with each other. There are two reason come in to my mind.

First, the volume of amend production maybe really small.

Second, if the US is exporting amends, pa and e1 are linear correlated, then this modal has great bias.

But export quantity dose not affect price level a lot.

Most important factors for price level are exchange rates, which is reasonable since eu and chine are two main importers.

Next we will discus about eu and china

45Case Study: The Walnut StoryUS Storage of Walnuts VS. Prices The Walnut Story in EUEU Walnut Market OverviewSource: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfStable and High Demand in EUThe EU population totals about 500 million with an average GDP per capita of around USD 30,000.They want to make more informed purchasing and consumption decisions. Variety, convenience, nutrition and health are - besides price - other important factors for making purchase decisionsMainly purchased in Winter timeIncreasing purchase over the year due to perceived nutritional benefitsSnack, ingredient in home cooking, by-products for further processing, and ingredients in bakery and pastry industry Processing and snack industry are large usersWalnut cooking oil

50Domestic Production:France : Net exporter, 85% export to EU ItalySpainImport: 69% walnut supply from the US

Stable Supply in EUPromotions: Non price promotionTrade Shows Education Guide

Walnut Market in EUa versatile, high-quality snack or ingredient that adds value to foods prepared at home as well as to processed foods.

52The Walnut Story in ChinaChina Walnut Market OverviewSource: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfPopularity of walnuts increases Awareness: increasing knowledge of nutritional values of walnutsPerception: American walnuts perceived of better qualityTaste: American walnuts taste less bitter

Income increases over the years, more disposable income Demand from middle class and young adults increases tremendously, drives up the price

Rising Demand in ChinaResult : Import from California doubled from 2008 to 2009 Price doubled over 3 years period between 2008 to 2011 (e.g. improved education among Chinese, promotional campaign by American walnut exporters)

55Consumption VS. Production Increasing consumption and productionconsumption demand exceeds productionIncreasing imports, shrinking exports Used to be a net exporter, became a net importer since 2008Weak US dollars VS. strengthening RMBChanging direction from export driven to consumption drive economy in China

Demand VS. Supply in China

China Walnuts Import & ExportSource: http://www.fas.usda.gov/psdonline/circulars/TreeNuts.pdfCultural, Climatic, Geographical ChallengesHigh investment, low return in the first few years

Preventing the production to meet internal demandProduction Challenges in ChinaPoverty Alleviation Program (subsidies to existing farmers)Forestation Program (subsidies to plant on deserted land)Cropland conversion Program(subsidies to convert cropland to walnut "forests")

58Production is expected to increase dramatically in 5 - 10 years (esp. in Yunnan Province) Poverty Alleviation Program Forestation Program Cropland conversion Program

Production increases is expected by improving Technology motivated by government supportWalnut Drying technology Traditional wood or coal fire oven VS. modern technology (improve taste) Making walnut milk and walnut oilProduction Improvement in ChinaLocal government provide incentives to farmers, processing plants59

Market Outlook in ChinaEU MarketMatureRoom to expand

China MarketGrowingLots of room to expand

Opportunities in Walnut MarketDont miss your chance to Invest

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