APC C ROADMAP F P FOR R FUT UTURE RE • 16 FEBRUARY 2019
• Pecan industry facing several challenges, and pain points exist for both growers & shellers • Pecans lag other tree nuts on key dimensions – Pecan awareness is low, demand is flat… – …while other tree nuts are growing on back of nutrition and snacking trends Case for change – 'Adversarial' industry practices hinder industry's ability to grow Key messages • Meanwhile, supply growth in other markets (e.g. South Africa, China) presents potential oversupply situation if no change in demand • We have a great product and the potential to grow demand for it… • ...but must work together collaboratively to solve challenges & move industry forward 2
There are many structural challenges grounded in the nature of the pecan market • Variations in growing costs both across & within regions • More costly to grow pecans than other tree nuts • Pressure from low-cost Mexican growers and shellers 3
2 Case for change Growing costs: High variance by region, differing ability to bear price swings Profitability at market price of $3.00 per in-shell lb. Profitability at market price of $1.75 per in-shell lb. • Approx. 2017 max price • Approx. 10-year low (ex. recession; inflation-adjusted) 2 1 Cost per acre ($) Cost per acre ($) 1800 180 190 1900 200 2000 210 2100 220 2200 230 2300 2400 240 2500 250 260 2600 2700 270 280 2800 290 2900 300 3000 1800 180 1900 190 200 2000 210 2100 220 2200 230 2300 240 2400 250 2500 260 2600 270 2700 280 2800 290 2900 300 3000 800 800 800 800 East East 900 900 900 900 Yield per acre (in-shell lbs.) Yield per acre (in-shell lbs.) 1000 100 1000 100 1100 110 1100 110 Central Central 1200 120 1200 120 130 1300 1300 130 140 1400 140 1400 1500 150 1500 150 1600 160 1600 160 170 1700 170 1700 180 1800 180 1800 190 1900 1900 190 200 2000 200 2000 … … 280 2800 280 2800 West 3 West 3 Loss of China demand, increasing in-shell supply, and — = Profitable cost/yield ratio other factors could lower in-shell prices — = Unprofitable cost/yield ratio Specific MX grower economics TBD, though structurally — — = Breakeven point advantaged given lower costs 1. Price / in-shell lb. paid by China of ~$2.93 in 2017 2.Inflation-adjusted price of US average in-shell of $1.73 in 2012 3. "West" includes West Texas Source: Nature's Finest Foods; USDA; UC Davis; UGA; Market interviews
2 Case for change Production expense: Pecans more expensive to grow than other tree nuts Regardless of region, pecans generally cost more to grow vs. other tree nuts given lower yield per acre Pecans Almonds Walnuts Pistachios Representative Representative Representative Representative Representative Pistachio East West Almond cost Walnut cost cost Growing cost ~3,200 to 3,750 ~3,750 to 3,900 ~2,000 ~2,500 ~3,300 to 4,900 ($/acre) ~1,000 ~2,000 ~5,000 to 6,000 ~2,600 to 2,800 In-shell yield (lbs/acre) - ~45% ~55% 43.5% 1 50% % meat - Meat yield ~450 ~1,100 ~2,200 to 2,600 ~1,300 to 1,400 ~2,200 to 3,000 (lbs/acre) ~$4.40 ~$2.30 ~$1.40 to 1.45 ~$2.80 to 2.90 Meat at growing ing c cost ($/lb) ~$1. $1.50 t to $1. $1.70 ~$3.10-$3.60 Weighted Average Cost per pound highly variable—both across and within regions—given differences in scale, yield, weather, alternate bearing seasons, etc. 1. Based on USDA ERS "Fruit and Nut Tree Yearbook" average walnut kernel yield Note: Growing cost per acre excludes amortization of land and tree/establishment investments. Almond figures reported in meat yield basis only. Source: Almond Board; UC Davis; USDA; market interviews
Mexican shellers: US shellers 2 Case for change are under pressure & struggling to compete vs. Mexico Ranges of total shelling costs ($ / meat lb.) Mexican shellers benefit from lower costs With right processes / ~$0.70-$1.80 US shellers investments, and tailwind from lower transport costs, some US shellers competitive Larger MX shellers ~$0.45-$0.85 with MX shellers 0.00 0.50 1.00 1.50 2.00 Directional cost estimates; excludes carrying / transportation costs & mill loss Source: Market interviews 6
1 Case for change Consumer demand: US pecan demand significantly lags other tree nuts today 'Top of mind' awareness 1 of pecans in US is Ten-year US pecan consumption stagnant while low relative to other mainstream tree nuts other tree nuts have experienced growth International markets account for majority of pecan % of respondents that consumption growth (4-5% annually) recalled each tree nut 1 60% 56% Almond 72% 43% Walnut 52% 40% 31% Cashew 25% 18% 20% Pistachio 19% 15% Pecan -3% 0% -20% 0% 20% 40% 60% 80% Almond Cashew Walnut Pistachio Pecan % volume consumption growth from '06-16 (kernel basis) 1. Unaided awareness question in July 2017 survey asks for top 3 nuts respondent recalled. Note: Pistachio consumption is in-shell Source: Exactcast APC Research July 2017, INC Statistical Yearbook
2 Case for change Transaction model: Many pain points from how growers & shellers transact today Recurring pain points from interviews and stakeholder survey Growers Shellers Pecans are the de- centralized, Wild West of Significant upfront capital Tension between growers nuts…I think pecan commitment and high and shellers on price and growers over time would yield interest expenses do better if they adopted a [new transaction] model. Every time I look at the Market risk, and pecan model and the No ability to capture "sandwich position" adversarial relationship, upside if demand grows between in-shell price it’s like being in a and pecan prices rise increases and retail different world [relative negotiations to almonds & pistachios]. Source: Market interviews; quotes from interviews with almond and diversified tree nut growers
The industry is at a crossroads and in need of a paradigm shift • Imminent global supply growth threatens to create pecan surplus • If we do nothing, 2018 may be a glimpse into our future • We must unite to address these challenges 9
2 Case for change Signi nificant supp pply coming ng o online f ne from S. Africa & & China na, a and i d if no corres espo pond nding ng c chang nge e to consum umer er d demand, nd, m market et w will b be hit w with s surpl plus us Annual pecan production across top markets Millions of pounds, in-shell US South Africa Others China may produce up • Mexico China to 5-10% of global pecan 16 116 supply; may affect U.S. ~1% 9 10% imports 91 ~1% 403 145 10% 88 South Africa to 36 • 34% 12% 10 348 continue rapid growth, 9% 5% ~1% 37% comprise >10% of world 8 294 supply in ten years – ~1% 44% 1.2B lbs 949M lbs well suited to cater to 324 680M lbs Chinese demand 48% 411 • Must stimulate demand 43% 516 to capture new supply 43% and diversify global demand beyond China 2017 2022 2027 Base case estimate of supply; sources of supply growth may vary based on actual productivity of S. Africa, China, & others Source: USDA FAS/GATS; USDA NASS/ERS; SIAP-SAGARPA; Comenuez; SAPPA; Industry Interviews; Stakeholder survey Forecasting does not account for cyclical nature of crop, or loss of production capacity due to Hurricane Michael; should be viewed as directional approximation
1 Case for change Fragmented industry groups must work together to address challenges Associations by tree nut Pecans Almonds Walnuts Pistachios • • • • National American Pecan Council Almond Board of California Walnut Board Administrative Committee • • National Pecan Shellers Association California California Walnut for Pistachios • • • U.S. Pecan Growers Council, Inc. Almond Alliance Commission American Pistachio Growers • National Pecan Federation • Industry's geographic American Pecan Board dispersion and limited • Regional Southeastern Pecan Growers Association • resources make Western Pecan Growers Association • • • • collaboration difficult, State Alabama Pecan Growers Association Central California Sacramento Valley California Pistachio Research • Arkansas Pecan Growers Association Almond Growers Walnut Growers Board but not impossible • • Arizona Pecan Growers Association Association Association* Arizona Pistachio Growers • • California Pecan Growers Association Central Valley Almond Association • Georgia Pecan Growers Association Growers Association • Georgia Pecan Commission Ex: Blueberry growers / • Louisiana Pecan Growers Association processors make decisions • Mississippi Pecan Growers Association as a united industry • New Mexico Pecan Growers Association • despite having orgs. North Carolina Pecan Growers Association • Oklahoma Pecan Growers Association across 20+ states • Texas Pecan Growers Association • West Texas Pecan Growers Assoc. • Texas Pecan Board Total No. 21 4 3 4 Indicates FMO Source: USDA
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