By Katie Brokaw, Agribusiness Consultant
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Pistachios, like almonds, have been a very profitable crop for California growers and handlers in recent years. With wholesaler and grower prices well above breakeven, and strong demand from around the world, growers have been raking in revenue and planting trees at a rapid pace on both the west and east sides of California's Central Valley. However, unpredictable international demand combined with the current California drought could turn the fortunes of pistachio growers.

Growing area, yields, and water use

California pistachio production has increased 136% over the last 10 years, largely due to new plantings in the Central Valley. Acreage increased from 83,000 acres in 2002 to 178,000 in 2012. Pistachio trees have a long establishment period; they get their first deliverable crop in the sixth year after planting – three years later than almonds. Pistachios are also strongly alternate bearing, so growers and handlers must manage the crop across two years. For mature orchards (10 years and older), on-year yields average 5,000 pounds per acre, compared to off-year yields of 3,000 pounds.
Initial pistachio plantings were on the water-challenged west side of the Central Valley where State Water Project (SWP) water now costs around $250 per acre foot -- $1,000 per acre. Newer plantings are going in on the east side (east of Interstate 5). More than half of these new plantings rely on wells, not the SWP. While wells cost $250 M to $500 M to install, they reduce ongoing water costs dramatically to between $50 and $125 per acre foot. Water is a significant cost, as pistachio trees require four acre feet per year, double the amount of water required to grow tomatoes, another popular Central Valley crop.
Yet even west side plantings that rely on SWP water are very profitable at current grower price levels, which hover around $2.00/lb. At this price, with two-year average yields of 3,500 lbs. per acre for mature orchards, growers gross $7,000/acre and net $4,300/acre on the east side and $3,800/acre on the west side. At current costs, break-even grower price is $0.80/lb. for east side growers and $0.95/lb. for west side growers.

Production and grower price

California produces 99% of American pistachios, and has grown to be a significant player in the international market. The state accounts for 39% of world production and 54% of global exports of pistachios, followed by Iran with 42% of exports.
California pistachio growers and marketers have benefited from increased world demand for this snacking nut. Even as production has trended upward, grower and wholesale prices have improved. Ten years ago, when production was half of today's levels, grower pricing was at or just barely above breakeven; today, grower pricing is more than a dollar per pound above breakeven.
California pistachio production and grower price
 

Strong export demand

Most of the increase in pistachio production over the last decade has been absorbed by overseas markets. These markets typically import in-shell nuts in bulk form.
Most of increase in U.S. pistachio production is exported
 
With 60% of the U.S. crop now exported, U.S. pistachio producers follow international market developments as closely as domestic ones. The most important export market has traditionally been Europe; however, two years ago, China overtook the EU as the largest importer of U.S. pistachios. This was a shocking development because as recently as 2008, China's pistachio imports were only one-third as large as the EU's. China and Hong Kong now import 27% of U.S. pistachios.
U.S. pistachio shipments by destination, 2011/2012
 
One country the U.S. must keep an eye on in international markets is Iran, the world's second largest pistachio producer. While the U.S. reimposed a ban on Iranian imports in 2010, Iran ships to regional markets like Iraq and the UAE, and competes with the U.S. in the EU and China/Hong Kong markets. In general, Iranian pistachios are considered lower quality (i.e., lots of shell stain and high levels of aflatoxin, a carcinogenic mold that grows on nuts, seeds, and legumes) than American pistachios, but still adequate for the lower tier buyers in some overseas markets. While Iran suffers from periodic drought and poor water quality, new acreage has been planted in recent years. In 2012-13 Iranian exports were expected to increase 20% to an estimated 308 MM in-shell lbs. (vs. U.S. estimated exports of 396 MM in-shell lbs.).

Factors behind growth in demand for U.S. pistachios

Demand for U.S. pistachios has been growing steadily for several reasons. First, many EU buyers replaced Iranian pistachios with U.S. nuts about 15 years ago when the EU became more focused on food safety. Iranian pistachios have extremely high levels of aflatoxin. Second, in 2009, Paramount Farms launched a high-powered and quirky, U.S. marketing campaign for its Wonderful® brand of pistachios entitled "Get Crackin", and new TV commercials and online videos continue to be rolled out today. Not only did this campaign increase awareness for the Wonderful® brand, but also contributed to the transformation of a generic nut, previously sold in bulk, into a packaged snack that today competes in the broadly branded, salty-snack category with chips, pretzels, and peanuts. Third, as China's emerging middle class attained more disposable income, their demand for all protein sources, including nuts, also increased. The Chinese have also become more concerned about food safety – there is increasing demand for U.S.-grown nuts versus the lower quality Iranian product. Finally, pistachios have been especially well-received in China because of the smiling appearance of the open in-shell product. Pistachios are nicknamed the "happy nut" in China, and are given as presents during Chinese New Year celebrations.

Looming question: Will export markets continue to absorb future increases in production?

The big question for the California pistachio industry is how long this amazingly profitable run can last. By 2017, all of the currently non-bearing acreage will be in full production and crops are expected to average 800 MM lbs., a 60% increase over the current biennial average production of 497 MM lbs. Assuming current drought conditions continue, increasing water costs will likely drive up pistachio production costs. And as more of the crop is exported to China, the relative strength of the dollar and the sustainability of Chinese demand are factors which will affect the future health of the California pistachio industry.
Katie Brokaw
Katie Brokaw is an agricultural processor consultant in Wells Fargo's Agricultural Industries department. Her portfolio includes the largest pistachio grower and processor in the United States.
She serves on the boards of the Farm Bureau of Ventura County (California) and her local mutual water company. She is also a member of the Ventura County Ag. Futures Alliance Roundtable, a group dedicated to keeping agriculture viable and sustainable in a county under urban development pressure.
Katie lives on an avocado ranch with her husband and three children.
 

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Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.