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Feb. 25 (Bloomberg) -- The worst California drought on record is forcing Jeff Schmiederer to spend $1.1 million on two new wells for his 1,200-acre almond orchard. Trees got so little water in 2013 that this year’s harvest may drop 25 percent, and the damage may be even worse in 2015.
“You’re making next year’s crop this year,” Schmiederer, 49, said by telephone from Mendota, in the arid central valley that supplies 81 percent of the world’s almonds. With state water allotments cut to zero, Schmiederer’s wells may only help get irrigation to about 75 percent of normal. “I’m right on the edge of my water needs. Next year could be a disaster.”
Prospects for fewer California almonds are forcing buyers to pay at least $3.10 a pound, 10 percent above the record average in 2006. Prices already were surging since 2009 as demand outside the U.S. almost doubled in a decade to 1.3 billion pounds (590,000 metric tons). The nut, which ancient Romans tossed at newlyweds as a fertility charm, is a snack food used in everything from Hershey Co.’s Almond Joy candy bar and WhiteWave Foods Co.’s Silk almond milk to Indian chocolates, French pastries and German marzipan.
The drought is boosting prospects for Australian grower Select Harvests Ltd., whose shares tripled in the past year, and prompted buyers including Hain Celestial Group Inc., a U.S. maker of Almond Dream milk and natural and organic snacks, to pledge price increases for consumers. The cost of nuts is rising even as global food costs tracked by the United Nations are down 15 percent from a record in 2011.
After three years of drought in California, the biggest U.S. agricultural producer, farmers may face $5 billion on lost revenue as they struggle to secure water for everything from milk, beef and wine to some of the nation’s largest fruit and vegetable industries. Municipalities have imposed restrictions on watering lawns and washing cars, and the drought stirred interest in desalination plants and $15 billion tunnels to deliver water to cities in Southern California.
About 91 percent of the state was in severe drought as of Feb. 18, compared with 24 percent a year earlier, and 68 percent was rated extreme, which means major crop losses and widespread water shortages or restrictions, data from the government-funded U.S. Drought Monitor show. The driest regions are in the central valley, home to most of the orchards that in 2012 produced about $4.8 billion of almonds, California’s third-largest agricultural product, after milk and grapes.
Hot, dry summers and cool, wet winters typical for the central valley provide ideal growing conditions for almonds, which first arrived in California from Spain in the mid 1700s. Farms around Fresno, 188 miles southeast of San Francisco, are the biggest producers. The state has dominated global supply since the late 1970s, with growers doubling the amount of land devoted to the nut over the past two decades to more than 800,000 acres, government data show.
“As California goes, so goes the market,” said David Doll, a farm adviser at the University of California, Davis. “If we have a significant reduction, the price will respond.”
While the state’s harvest is still six months away, some farmers are tearing up older trees that can’t get water while buyers see signs that supplies will tighten.
Hilltop Ranch Inc., which processes 60 million pounds of almonds annually, is paying $3.10 to $3.60 a pound. Dean Nelson, a co-owner of Sierra Valley Almonds LLC in Madera, said new supplies cost about $3.40. Keith Rigg, the general manager at Minturn Nut Co., said he is spending $3.15 to $3.90. Those prices are at least 20 percent higher than the average of $2.58 in the 12 months that ended July 31 and above the record of $2.81 in 2006, U.S. Department of Agriculture data show.
“We fully expect to be over $3 this year” on average, Hilltop President Dave Long said by telephone from Ballico, California. “That’s a conservative number. Prices have come up in the last month probably 20 or 30 cents.”
Export prices in December were $3 a pound, up 27 percent from a year earlier, the USDA reported yesterday.
Even before 2014, almonds rose for four straight seasons from a six-year low of $1.45 in 2009 as output gains failed to keep pace with demand from the U.S., the largest consumer, and from an expanding middle class in Asia, the industry-funded Almond Board of California said. Americans eat 15 percent of almonds as snacks and the rest is used for ingredients, while Chinese consumption is 90 percent as nuts, the board estimates.
“In the last couple of years, our supply has been more or less static and demand has been charging ahead,” said Richard Waycott, president of the Modesto-based almond board.
California shipped a record 588.4 million pounds to U.S. consumers in the 12 months through July 31, up 94 percent from 2006, almond board data show. Over the same period, foreign shipments, mostly to China, Spain, India and Germany, more than doubled to 1.278 billion pounds from 610.4 million.
Worldwide retail sales of all packaged nuts more than doubled in the past decade to $16.3 billion in 2013, with the U.S. accounting for about a quarter of the market, according to researcher Euromonitor International, which forecasts sales of $20.4 billion by 2018.
Almonds have grown in popularity as incomes rise in developing countries and more people see the nut as a healthy, easy-to-eat snack right out of the bag, said Matt Hudak, a research analyst at Euromonitor in Chicago. Prices haven’t risen high enough in the U.S. to deter consumption, he said.
Before this year, the jump in prices was being “driven by demand, rather than a lack of supply,” Cassie Keyse, the communications manager for Sacramento-based farmer cooperative Blue Diamond Growers, the world’s largest almond processor, said in an e-mail. The 104-year-old company makes salted snack nuts and is seeing sales growth in its value-added products, including Almond Breeze milk and Nut Thins crackers, she said.
In India, where almonds are used to make sweets and garnish curries, prices have jumped 39 percent in the past year on the National Commodity & Derivatives Exchange and are 83 percent higher than five years ago. A weakening rupee, which dropped 13 percent against the dollar in the past year, also is making it more expensive to import the nuts from California.
“Our purchase costs for almonds have risen by more than 50 percent in the past three months,” said Jagdish Aggarwal, who buys as much as 551 pounds (250 kilograms) each month for his Bengali Sweet House and Pastry Shop in New Delhi. “Prices of almost all the raw materials have risen,” said Aggarwal, whose family has been selling sweets for 76 years. He added that he has yet to pass on the higher costs to consumers.
In China, where the economy has expanded five-fold in the past decade to become the world’s second largest, rising incomes are helping to fuel increased demand for meat, dairy products and nuts eaten as snacks. California doubled almond shipments to China since 2009 to 208.2 million pounds last year, industry data show.
“China has been forced to grow more almonds and other types of nuts because of higher prices from different parts of the world,” said Cheng Hung Kay, the Hong Kong-based director of CHK Trading Co., a nut trader, broker and processor. “The common consumers in China can’t afford to pay that high price.”
About 90 percent of European almond consumption is ingredients for sweets and pastries. About a third of the output from Spain, the continent’s top grower, is used to make turron, marzipan and other sweets, according to the Spanish Institute for Foreign Trade. Almonds with a white sugar coating known as peladillas are a traditional Spanish Christmas treat.
Last year, Spain’s almond harvest declined 31 percent because of unusually wet, cold weather in February, when trees begin to bloom, Eurostat data show.
The prospect of reduced U.S. supply may be a boon to Australia, the world’s second-largest grower. The Almond Board of Australia estimates the harvest that began this month may reach 173.3 million pounds, matching last year’s record, at a time when prices are rising. The board said maturing young trees will help expand capacity to 198 million by 2017.
Select Harvests, an Australian grower and processor, saw its shares more than triple in the past 12 months in Sydney. After prices for the 2013 almond crop jumped 29 percent to A$6.60 per kilogram ($2.69 a pound) from a year earlier, the 2014 harvest may fetch 10 percent to 15 percent more, according to the Thomastown, Victoria-based company.
“The drought in California, which is unprecedented, will likely keep prices firm and at or around current levels until the end of the year,” Ashok Krishen, managing director of edible nuts at Singapore-based Olam International Ltd., said in an e-mail. “The true impact of any current drought on any plantation will be felt in subsequent years.” Shares of Olam, a commodity broker that operates orchards in California and Australia, have jumped 17 percent this month.
Costs already are rising for buyers, including Minturn Nut in Le Grand, California, which processes about 78 million pounds of almonds a year. That may extend the increased prices for consumers, which already is hurting demand in some emerging export markets, said Rigg, the general manager.
“Almonds have been under cost pressure even prior to the drought,” John Carroll, executive vice president of Lake Success, New York-based Hain Celestial USA, said Feb. 4 on an earnings call. “We’re ready to pass on pricing that addresses where the costs are going for the next crop,” he said, adding that the company will disclose price increases in 30 days.
The benefit of higher prices for California growers will be limited by declining output.
Schmiederer, the farmer who is drilling more wells, said this year’s yield decline will be his biggest ever caused by drought. He plans to pull out 200 acres of his aging almond next year because its too expensive to maintain them, after his water costs surged to $500 an acre foot from $330 in 2013.
“It’s definitely going to be affecting the bottom line,” said Schmiederer, who last year harvested about 3.36 million pounds of almonds. “We have a lot of question marks.”
--With assistance from Chanyaporn Chanjaroen in Singapore, Phoebe Sedgman in Melbourne, Rudy Ruitenberg in Paris, Alex Davis in Hong Kong and Pratik Parija in New Delhi. Editors: Steve Stroth, Joe Richter