Setting the Stage: The Crucial Roles of Tree Nut Exports
Almonds, walnuts and pistachios account for more than one third of the value of California farm exports (which average about $21 billion per year). Almonds are the leading export commodity and each of these three tree nuts have ranked within the top 5 of California’s exported commodities every year for the last decade. On average, about 60 to 75% of tree nuts produced in California are exported to foreign markets.
Markets Targeted in Trade Turmoil are crucial to Tree Nuts
California tree nuts are exported to many countries the world over and this diversification of the destination portfolio reduces potential losses from trade disrupted with one or two partners. A current concern is that trade has been disrupted or threatened with several large trading partners simultaneously—the European Union (EU), Canada, Mexico, India, Turkey, and China/Hong Kong.
When the Unites States placed new tariffs on steel and aluminum and added or threatened additional new tariffs, these trading partners responded with new tariffs of their own or threatened trade actions on imports from the United States, including tree nuts. For example, since April 2018, China has implemented two rounds of retaliatory tariffs on tree nuts. Tariffs on almonds, pistachios, and walnuts shipped to China have increased by 40 percentage points each. NAFTA countries of Canada and Mexico have targeted some agricultural products but have not included tree nuts. Turkey raised tree nut tariffs by 20 percentage points, but the simultaneous collapse in its currency, which has been associated with the broader trade turmoil, has devastated imports there. India announced they would increase tariffs on almonds and walnuts by 20 percentage points, but in September 2018 postponed their implementation until November 2, 2018.
The demand for California tree nuts has declined and we project further declines without some resolution. About 28% of California tree nut exports from 2015 through 2017, which averaged $7.2 billion annually, were shipped to China/Hong Kong, India, and Turkey. China and Hong Kong purchased a total of $1 billion in tree nuts annually and were the largest destination for California pistachios, accounting for 39% of total export value.
Estimates of the Impact of Tariff Increases on Tree Nut Revenues
Using averages from 2016 and 2017 US tree nut exports and production to represent the current market, we estimate the potential impact of trade disruption on the prices of tree nuts and the potential loss to US producers.
We consider how the price is likely to be reduced as tree nuts that would have been shipped to the now restricted markets are sold instead in the markets that are still open. We make three important simplifications. First, we treat the restrictions as prohibitive. Even when the tariff increase is not especially high, as in Turkey, other market disruptions have limited imports. Moreover, informal government measures, in addition to tariff increases, can restrict imports in important cases. Second, we treat the estimated share of the US exports to Hong Kong which are destined for China as also restricted. However, we have not yet included US exports to Vietnam, a large share of which likely was destined for China, in our estimates of losses. Third, we estimate price declines in the markets that are still open by determining the percentage increase in nuts that must be sold in those markets and the potential substitution for US nuts from other suppliers or other products.
Since US almonds are the dominant source in world markets (and therefore have few viable substitutes), we assume that a one percent increase in the quantity of almonds in the US market will result in a decrease in price of greater than one percent (i.e. a demand elasticity of -0.8). For pistachios and walnuts, of which the US produces smaller but still substantial shares of the world market, we assume that a one percent increase in the quantity now shipped to the still available markets will cause a one percent price decline (i.e. a demand elasticity of -1.0).
Table 1 shows that, given these assumptions, the diversion of these tree nuts from the restricted markets would result in a decline in price of 18% for almonds, 16% for pistachios, and 15% for walnuts. This would result in a loss to tree nut producers of about $2.3 billion.
These price and revenue impacts could be mitigated in two major ways. First, price declines would be minimized if the US exports that had been destined for the restricted markets could be shipped elsewhere while nuts from other suppliers could easily replace US nuts in the newly restricted markets. If such trade reshuffling were quick and easy then losses would be small. Unfortunately, with large US market shares for each of the tree nuts considered, such reshuffling is neither quick nor easy, and decades spent developing complex relationships cannot be replicated in a few weeks. Second, if remaining buyers could absorb many more nuts with little decline in willingness to pay, then prices would decline only slightly. But, consumers have other options and generally need lower prices to consume more, and food processing customers must be induced to change their product mix or ingredient ratios. Such changes take time and price incentives.
Looking forward
The export market success of the California tree nut industries is derived, in part, from many years of effort by the industries. Consistency in offering high quality products at globally competitive prices established the reputation of California as a reliable source of tree nuts for global customers. The current trade turmoil may damage this reputation by introducing concerns regarding future contracts and marketing agreements.
Trade turmoil between importers and the United States creates incentives for importers to consider competitors and encourages competitors to scale up production. For example, Chile, where walnut production increased 126% from 2012-2013 to 2017-2018, may expand its walnut export markets that had been dominated by the United States. Once lost, it could take years for US suppliers to regain trust and markets.
Trade turmoil is especially worrisome for tree nut producers. About one-fourth of planted area for almonds and pistachios and more than 10% for walnuts in California are still non-bearing, meaning producers made long-term investments in market growth and secure export expansion. Increased uncertainty about export markets will directly increase the risk of these investments
