The Promise of Our Industry

Notes taken from our Autumn 2020 newsletter.

Completing The Jigsaw – The Making Of Our Industry

How can our our industry fulfil the promise that it began with and what was that promise anyway?

The best kinds of businesses take people with them, engender enthusiasm and give stakeholders prosperity, a sense of success and being part of something good. This sense of wellbeing comes from profitability and sustainability. When we set out to grow walnuts commercially we all expected that profit would come sooner and more easily. There are a multitude of other benefits but profitability is at the heart of the promise.

So let’s clear away the clutter and ask what are the stand out factors that need addressing.

Fulfilling The New Zealand Walnut Industry’s Promise.

By Nelson Hubber

This discussion is about what we expect from commercial walnut growing. A key point is that in this article we are looking at walnut growing in New Zealand as an industry, not a sideline interest. Though growing walnuts as a hobby is entirely legitimate, it is not what this article is about.

If walnut growing is to sustain us it must return sufficient income. 

How much should we expect to be paid and how can this be increased?

The Californian walnut industry is a good one to benchmark returns against. They produce over 650,000 tons a year and are the biggest traders of walnuts in the world. They have a big influence on the international market for walnuts.  Last year (2019) Californian growers, for good quality Chandlers, received US .75¢ per pound, a ten year low. This year they expect to receive US$1.00 to $1.15 per pound for the same quality of nuts. (Source private grower)

  • US$.75¢ per pound equals NZ$2.60 per Kg (8 March 2020 exchange rate)
  • US$1.00 per pound equals NZ$3.46 per Kg (8 March 2020 exchange rate)

Same Ballpark As Us
Like all commodities there are price fluctuations but it can be seen that the Californian price paid to growers is in the same ballpark as ours. In 2016 the average Californian price to growers, averaged over the total crop of 689,000 tons, was equivalent to NZ$3.16 per kg. (Source USDA National Agricultural Statistics Service, 8 March 2020 exchange rate)

What Factors Affect The Price We Receive?

The Diagram below.
The majority of our production is processed into kernel by one of two processors so the following diagram looks at the factors that make up walnut kernel value in our market place.

  • The prices used in this diagram are generalised estimates of the wholesale kernel value.
  • The purpose of the diagram is to draw a picture of the factors that make up the price that New Zealand walnut growers receive from nuts that are processed into kernel. 
  • Read the diagram from the bottom up. (As the walnut kernel value increases)
  • Comments and explanations are shown below the diagram. 


Reading The Above Diagram From The Bottom Up.

The Covid 19 lockdown will affect our economy in a big way but the principals in this diagram remain the same.  
Kernel Values are approximate wholesale rates. 

Return To Growers
The red block at the bottom of the diagram shows that if the grower is paid $3.00 a kg in shell then the kernel that is retrieved actually costs the processor $7.89 a kg. This is because the yield from NZ walnuts is about 38%. For the same reason if a processor pays $4.00 in shell then the kernel costs them $10.50 per kg. 
So kernel on the start of its path to market already has a value of around $7.90 to $10.50 per kg, even although it’s still not out of its shell at that stage. 

$11.50 Kg. Commodity Price Constraint
The first price constraint that arrises in the New Zealand market is that reasonable quality imported kernel can be bought at wholesale for around $11.50 per kg (Depending on international prices, exchange rate and season etc.) There’s not much margin in this if our kernel cost $7.89 per kg before cracking and sorting and virtually no margin if it cost $10.50. 

$3.50 kg. Basic Value Adding
Cracking and sorting doesn’t add value over the imported product because the imported kernel is cracked and sorted as well, but packing and delivering does. Basic processing like grinding for a baking ingredient does as well. Freshness and being a local New Zealand product are features that also add value. This increase in value is estimated to be $3.50 a kg so the kernel is now worth $15.00 a kg, but this doesn’t leave any space for an additional payout to the grower.  

$5.00 kg. Standard Value Adding 
Adding value through marketing, branding, packaging, promoting, strong selling and strong distribution channels.
All food processing businesses need to carry out the activities described here to greater or lesser extent. How well this is done determines how much extra value is added.
Making a big thing out of features like New Zealand grown also falls into this category.
In the case of our walnuts, the top grade benefits the most from this type of value adding. If we arbitrarily take the figure of 40% of the kernel being top grade it leaves 60% in a lower category and this is harder to add value to. This is why the estimate of value increase is held to $5.00kg.

Middle Market Price Constraints
Normal middle market price constraints come into play here because the walnuts are competing with every other food product and all are well branded and packaged, otherwise they wouldn’t be on the shelves. Value is constrained because either consciously or unconsciously the shopper compares value with every other value. If standard value adding is well done it will reduce the constraint and enable more to be earned. 

$3.00 kg Attribute Value Adding
In the case of walnuts organic and spray free are attributes that add value. Attributes are positioned above “standard” in the value hierarchy on the diagram because they build on the values of the standard or normal product. We have estimated this at $3.00 to take the average kernel value to $23.00. Remember that this is the wholesale value.
Organic and spray free are attributes added by the grower more than the processor. 

Innovative Value Adding
Through insightful unique product enhancement and development. 
If unique values are added to a product by a private enterprise then it’s likely that the value may not be shared with suppliers. However in the case of walnuts we have a cooperative that would return value to growers if it could rise to the challenge of executing the creativity and experience required. Successful innovation is needed, there are a lot of risks and it doesn’t work in a group unless there’s an empowered leader. Successful implementation of new ideas is not easy and not that common but if achieved the added value has the potential to be remarkable.
Vision, leadership, drive, creativity, skill, expertise, nuanced planning, culture, experience, courage and resources are required. Not a small list. Of these the biggest required factors are visionary leadership and stakeholders prepared to take the risk.

  • However it is wrong to assume that innovation has to be a big king hit type of thing. A culture of innovation can be started and fostered in small things such as how products are packaged and distributed. Starting small and fostering an inclusive innovative culture is likely to lead to the experience, trust and understanding that will result in success. 
  • It is also wrong to assume that someone else will do this for us. The drive for innovation can only come from those who have an actual stake and heart in the industry.


Conclusions About The Price Promise

  • Last updated in 2005 our Manual, in Section 3, Chapter 10, page 3 discusses the price paid to growers. The manual uses payouts based on kernel weight not in shell weight. These prices are Optimistic $10.50 and Pessimistic $6.50.  (Converted to in shell weight these values are $3.99 or $2.47 respectively) 
  • Therefore the current payouts are still in the same ballpark as “promised”.  (Inflation has been low)
  • Yield is the first area where promise hasn’t been fulfilled. The manual uses 45% crackout whereas our current actual crackout is about 38% 
  • Production is the second area where the income promise hasn’t materialised. Once again our manual uses kernel weight which converted to in shell weight is, low production 2367 kg per hectare and high production 4208 kg per hectare
  • If growers can find ways to increase production to the expected levels and manage walnuts so that they have a higher yield then the income promise may still be kept.
  • The kernel value price diagram and extensive notes used in this article have been provided to give a more detailed understanding of why the price paid to us per kg is likely to remain in the same ballpark.
  • The path to extraordinary high per kg prices is possible if insightful unique product innovation is brought into play and a share in the value derived is returned to growers.

Final Conclusion

  • We are all actually in the same ship together so if growers can find ways to increase crackout and production per hectare and if the cooperative can move into higher valued walnut products then our industry still has the potential to be pleasantly profitable in the way that it promised.

Some Random Notes About The Price Promise

  • Products that are well marketed, branded and sold into niche markets are likely to receive more stable prices.
  • Growers might be able to capture income from the whole value chain by processing and selling the product themselves.
  • As a general rule, in today’s business environment there are two types of businesses that are the most profitable;

1.Those that are lean and extremely cost conscious and sell goods at low prices.

2.Those with unique niche products that command higher prices.

Generally businesses trading in the middle of the market find it harder to be profitable. 

A processor that adopts the very lean model is likely to be continually profitable in itself, but not likely to able to offer high prices to its suppliers.

In Shell Walnuts And The Price Paid to Growers.

In shell nuts were left out of the discussion about the price promise. This is because the price NZ consumers will pay for them has almost no potential to rise and remain stable and high. The reasons for this are that we will have consistently rising tonnages and competitive retail pricing will be required to increase consumption. Greater volume of sales, yes. Consistently higher prices for in shell, no. 
As well as this what happens to the Californian walnut market will probably be increasingly connected to ours. The reason is because in a volatile world the Americans will be more aggressively trying to find places to sell their walnuts. Some of their crop may find its way here as an in shell product.
Here’s what Alpine Pacific, one of California’s most successful walnut marketing companies, recently wrote about in shell. 
“Inshell sales, while important, are opportunistic and volatile. Yet somehow people get taken by surprise every time the inshell market suddenly drops off a cliff and it happens all the time.”

In shell walnuts are a commodity, finding markets for them might move walnuts to market but it’s unlikely that they prices recieved will be rewarding.  

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New Zealand Walnut Industry Group