THE GLOBAL MACADAMIA MARKET: QUO VADIS?

Stefan Scheepers (PhD), Chalico Consulting (Pty) Ltd.
Email: stefan@chalicoconsult.co.za, Mobile: 082 377 8516
Publication: AmberCircle April Newsletter
Date: 27 April 2023

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The global and South African macadamia industry is a young and emerging industry which started with
commercial primary production activities, and with focussed processing and marketing initiatives, in
the mid-1940s and 1960s respectively. Today, it finds itself in transition between the late introductory
and early growth phase of the product lifecycle. Finding itself in the early stages of the product
lifecycle, and thus industry development, the South African and global industry is typified by a dynamic
and continuously changing value chain and marketing structure, which present the industry with
prominent challenges and related questions.

Based on the available South African price data, both real producer and wholesale prices between
1996 and 2007 reflected a price cycle of moderate intensity, on average spanning a four-year period
between consecutive down cycles. Contrary to the four-year price cycle expected to repeat itself in
2011, nominal and real producer and wholesale prices continued to grow strongly. The extended
strong and consistent price growth period experienced from 2007 onwards, conflicting with the
regularity of previously observed down cycles, prompted a prominent question of “when will this
macadamia price bubble burst?” in the minds of all direct and associated participants in the
macadamia value chain.

To find an answer to this burning question and, finding inspiration from the writings of Clem Sunter in
his book titled “Flagwatching”, an independent macadamia “flagging” study was performed in 2018
on the South African macadamia industry. Flagwatching in short involves the identifying of key
flags/indicators i.e., pertinent micro- and macroeconomic drivers that are positively or negatively
transforming the global macadamia industry and which could be used to build alternative future
industry scenarios based on observed flag signals.

The aim of the independent study was to forecast South African and global macadamia production
quantities and assessing the impact there of, if measured against global demand trends, on future
supply surpluses and price trends. This comparison of growth in global supply quantities vs global
demand would also then assist processors/marketers to focus on market and product development
initiatives to prevent possible surplus stock buildup negatively affecting prices as well as timeously
expand on factory processing capacity. Ultimately this global industry forecast would enable South
African commercial banks to anticipate a possible down swing in the macadamia industry affecting
primary producers’ ability to service debt thus necessitating commercial banks to review their lending
policy into an industry potentially facing head winds.

As the saying goes, “forewarned is forearmed” and empowers one through scenario preparation to
do appropriate strategy development and implementation and manage any anticipated industry
opportunities or negative occurrences.

Without getting bogged down in the technicalities of the forecasting processes and models and
assuming all INC published data related to key variables influencing global supply and demand of
macadamias is accurate, the following supply and demand trends emerged from the independent
flagwatching study:

• Global demand growth from 2018 onwards projected at 14 % per annum.
• Global supply growth from 2018 onwards at 18 % per annum (flagwatching study).
• Global supply growth from 2018 onwards projected at 24 % per annum (Australian study).
• Supply projected to start exceeding demand during 2018 harvesting season.
• Supply and demand imbalance to peak during 2022 harvesting season with maximum induced
downward pressure on price.
• Demand and supply to re-break even expected in 2023 and expected to last into 2024 with
price remaining under pressure.
• Demand recovery and expected to once again exceed supply in 2025 with first signs of limited
price recovery.
• Based on above observed trends the 2018 anticipated negative price cycle was projected to
last seven years i.e., until 2025.
• Significant projected price recovery expected during the 2026 season.

Post the 2018 private flagwatching study and, with the assistance of emerging actual supply and
demand literature markers confirming projected raised flags, reality started playing out when early
price warning signals transmitted in 2021 and showing its full impact in 2022 confirmed the onset and
deepening of the fourth global price down cycle. While the flagwatching study and related forecast
remained relatively simple by limiting its focus to observed supply and demand trends since 1996 and
assuming the 2007 status quo of limited market and product development being maintained, a whole
plethora of unusual and unexpected exogenous as well as underestimated endogenous factors to the
macadamia value chain impacting on supply, demand and price formation in reality scrambled the
global industry into an extremely complicated and near chaotic situation in 2022.

The main exogenous factors negatively influencing demand and that could not be anticipated or
controlled by the global industry include:

• Long term Covid closure of the Chinese economy and thus reduced demand from the biggest
global off taker of mainly superior styles of kernel and high-quality NIS for snacking purposes.
• Ukrainian/Russia war imposing, mainly an energy driven recessionary cycle on the whole of
Europe and the UK thus forcing consumers to reconsider and reconfigure spending habits
away from luxury to essential goods and services.

The main factors endogenous to the industry negatively influencing demand and which has been
underestimated by the entire and mainly production focused global industry for its impact include:
• The consistent international underestimation of emerging exponential Chinese macadamia
production quantities replacing imports (demand) from SA and Australia with own product
and who in turn has to find other supply absorbing markets (demand) of which the urgency
of development has been neglected.
• The gross neglect of all global macadamia industry bodies, grower’s associations and
processor/marketer entities in their effort to pro-actively and progressively develop new
markets and product lines into which an expected tsunami of nut supply from vast plantings
of maturing orchards could be marketed into.

The projected as well as actual occurrence of supply to exceed demand is basically the result borne
out of observed endogenous factors being neglected in terms of research and flagwatching by
everybody involved in the macadamia value chain from farm level to processor marketer level and,
also including industry bodies not part of the value chain but performing an industry supportive roll.
The listed exogenous factors, popularly referred to as Black Swan events however compounds the
extent of supply and demand imbalances and the impact there of on depressed prices.

If the global industry casts its research net wider than purely production (supply side) enhancing
research and, in parallel invested some time and money into demand side research (proactive product
range, market and consumption/consumer development as well as consumer price sensitivity
research) in preparation to keep abreast with growing supply, the impact of the current industry
downturn could have been anticipated and softened. The happening of exogenous factors negatively
impacting on demand are beyond the control of the entire industry value chain but its compounding
impact on reduced demand and price collapse would have been less severe if the endogenous demand
influencing factors were under control. It is important to take note that although the occurrence of
exogenous factors influencing the world economy is beyond the control of any business it can very
well be anticipated and planned for if consistent attention is given to the opinions of reputable
futurists. The laughter caused by this last remark is deafening but what makes the global macadamia
industry different than prominent global corporates who sees the contribution of futurists and
forecasting as indispensable to the long-term sustainability of their business?

So, what can be expected from the macadamia market and its impact on the industry going forward?
Unless primary producers change tack and remove orchards to be replaced by alternative crops, global
macadamia supply will remain inelastic (difficult to adjust) in its ability to reduce growing supply
emanating from large planted areas of young orchards progressively coming into production. Growing
supply over the medium to long term is thus a given and will be difficult to favorably manage as a price
formation variable.

To favorably manage demand as positive contributing variable to price formation would primarily
require the elimination of the exogenous demand limiting factors of a Covid closed Chinese economy
and the ending of the Ukrainian/Russia war.

China’s recent reopened economy is rebounding strongly thanks to the gradual recovery of Covid
disrupted supply chains. Reopened Chinese markets will progressively assist to absorb a portion (most
probably limited to better quality style grades) of the imports previously blocked due to Covid while
servicing lower quality demand from own production.

Russia’s war in the Ukraine has far reaching global consequences causing, according to the most recent
IMF’s World Economic Outlook report, global growth to decline from 6.1 percent to 3.4 percent in
2022. Despite the boost from China’s reopening the IMF expects global economic growth to remain
below 3 percent in 2023. Economic activity is slowing in the United States and the Euro Area, where
higher interest rates dampen demand. Global economic slowdown is concentrated is advanced
economies and especially in Europe and the UK where economic growth is expected to fall below 1
percent in 2023. It is projected for about 90 percent of advanced economies to see a decline in their
growth rate during 2023. Some positive momentum is however coming from emerging Asian
economies. India and China are expected to account for half of global growth in 2023. Global economic
growth is expected to remain slow for the near and medium term.

Removing the recessionary impact of the Ukraine/Russia war on European consumers will over time
allow for the implementation and taking effect of industry-initiated demand stimulating strategies.
European countries will however, should the Ukrainian/Russia war be ended today, continue to drive
through their long-term strategies to de-link their dependence from Russian energy sources by
establishing own sustainable supply over the next few years. Energy cost driven inflation in the Euro
Area will not subside over the medium term thus forcing European consumers to continue to prioritize
expenditure patterns away from non-essential luxury goods including expensive types of tree nuts.
When and if current 2022 and 2023 lower macadamia prices at producer level eventually cascade
down to consumers it will be important to keep in mind that all consumer income classes have been
subjected to the same global economic “reset” process. New levels of consumer income classes
supposedly to have been financially empowered to consume more macadamias thanks to reduced
prices, thus stimulating global demand, does not exist any longer because of their deteriorated
personal economic position along with the macro economy of the region. Anticipated increased
demand and related price recovery is expected to be a prolonged process that might stretch well
beyond the flagwatching forecasted date of 2025. The IMF however has a more positive outlook and
expect global economic growth recovery from the second quarter of 2024 onwards. Most importantly
and encouraging is the expected global economic recovery over the following three years which
allows, depending on individual financial positions of value chain participants for the forward planning
on how to survive present difficult economic conditions or expand operations by utilizing emerging
horizontal integration opportunities.

Keeping in mind the IMF anticipated global economic recovery a few final questions remain.

• Is the global macadamia market really over supplied or is it rather a case of demand being
limited through consumer price resistance thus limiting demand and consumption to only the
top earning income levels of consumers?
• At what magnitude and rate is macadamia price reductions passed on through the value chain
by processors, value adders, wholesalers and retailers to consumers in order to facilitate the
stimulation of demand from a wider spectrum of consumers now supposedly being able to
afford lower priced product?
• Are value adders, wholesalers and retailers “tail coating” current cheaper stock on the back
of remaining expensive stock into the value chain and so postponing the transmission of
reduced prices towards the consumer supposedly intended to stimulate consumption and
demand growth?
• How fairly was 2022 and 2023 price reductions and the impact thereof on margins of all value
chain participants transmitted backwards into the value chain?
• Taking current market conditions into consideration what will a fair equilibrium price at
consumer level be where demand is optimally stimulated while allowing all value chain
participants to realize reasonable profits?
• Is it possible for a horizontally fragmented and uncoordinated processing “community” to
establish stable and sustainable marketing structures and platforms to the benefit of
themselves and those who’s product they process and market?

For the macadamia supply and value chain to decongest and get surplus stock flowing at an acceptable
producer price appealing to a wider consumer audience all value chain participants will have to, for
the benefit of the industry accept the fact that the rules of the global macadamia market have to
change. The macadamia market rules have to, due to exponentially growing supply quantities,
inevitably change from dealing with a no longer applicable position of limited supply, high value
product for exclusive consumption during special occasions and high-income earners mainly, to
trading in large quantities at a lower price available to a larger spectrum of income level consumer
situation.

This industry event of coinciding exogenous and endogenous market influencing factors has,sadly and
very difficult to accept by primary producers, relegated macadamia nuts, although superior in eating
experience and health attributes, to a general tree nut in terms of price. Although price recovery is
projected it remains difficult to see prices ever recovering to pre-Covid levels.

Other mature agricultural industries have over their respective lifespans shown that one has to accept
industry maturing and normalization/reset cycles, even more so in a young macadamia industry, and
be prepared for the reality of marginal primary producer, production regions and processors/marketer
(large and small) losses through forced exit or horizontal integration, thus bringing the industry reset
process full circle with only economically sound value chain participants and production areas
remaining in the industry. The macadamia industry is not unique in its voyage to maturity and many
agricultural industries (Citrus, avocado) however much further progressed in its life cycle still
experience cyclical phases of reset. The more mature an industry the less frequent and volatile the
reset process consequences experienced as previous reset cycles have over time removed marginal
industry value chain participants unable to read and adjust to the signs of testing times to come.

It is imperative that national and global macadamia industry bodies accept market research and
flagwatching responsibilities of exogenous and more importantly endogenous macadamia economic
drivers within the industry in order to provide guidance too and, enable respective industry value
chain participants to match future product format supply and demand as close as possible. Identified
flags will greatly assist with creating planning and decision-making capacity regarding the required
rate of market and product development needed to absorb growing supply as well as being able to
match processing capacity with projected future supply into processing facilities.

All early indicators, with cognizance of recently newly added and existing expanded processing
capacity, signals a looming lack of sufficient South African factory processing capacity. This expected
lack of sufficient processing facility will mainly be caused by growing supply and the rapid change in
global off taker preference away from NIS to kernel. Lack of available processing capacity is thus
expected to be the next major constraining industry factor impacting on product flow through the
value chain and price formation processes. The lack of processing capacity at factory level timed to hit
the SA industry in full force within the next few years and the impact there of on the macadamia value
chain is a discussion topic for another day.