Pistachios Update

Prices are beginning to take shape for the 2010 California pistachio crop. Current offers are up from opening offers of two weeks ago. Volume is light, but picking up steam the 2010 harvest approaches.

Pistachio kernels remain in short supply. Pricing for kernels are expected to remain firm until late October, and settle when 2010 new crop kernels become available.

The 2010 crop remains an enigma. It's an off crop year, but most estimates put the crop size equal to or greater than the on 2009 crop. The crop bloomed late, and was followed by the coolest spring and summer in more than 10 years. Nut size appears to be large, but shells are thick, and there is concern the combination of large nut size and thick shells may cause higher than normal levels of closed shell. Typically, off years have lower levels of closed shell, and larger nut size. The question remains, is this an off year?

Last week Nichols saw the first fully mature nuts. Based upon that and conversations with growers, they expect limited harvesting to begin during the week of 6-September. Harvest should be fully underway during the week of 13-September. There appears to be little difference in maturity between the different production areas, so they expect the harvest to be compressed. Harvest usually begins 1-September to 5-September. The latest they have begun receiving pistachios in the past 15 years was in 2006, when they began on 14-September. 2010 is a late year, but it is not going to be the latest year on record.

Estimates of the crop range from 330 million pounds to 390 million pounds. Anything between 330 million and 390 million pounds is much greater than past off crops. The reasons behind higher expectations is due to:

1. Increased bearing acreage
2. Good crops on younger trees, few of which had good crops in 2009.
3. High nut fill percentage. In 2009 nut fill was much less than expected.
4. Large nut size but this can be deceiving.
5. Most orchards look much better now than earlier in the growing season.

Nichols estimate of the crop last month was 330 million pounds. Although the crop looks better to them than a month ago, 330 million pounds is still their best estimate.

We will continue to keep you advise once harvest begins, and we have an update on crop sizes and markets.

Following a cooler and wetter than average spring, summertime temperatures in the pistachio producing regions of California have returned to normal. Nut filling typically begins in early July. Nichols saw nut fill begin between 10-July and 15-July this year, and while it was at the latter end of the normal fill period, it was not as late as some had predicted.

2010 is an 'off' crop for California, and there is little pressure on hullers and growers to start harvest early. In recent years, the harvesting capacity in California has grown faster than the ability of processors to hull and dry the crop. As a result, harvest of 'on' crops start earlier in the maturity cycle than 'off' crop years so as to not overwhelm processors during the peak of the harvest season. Many growers shake early harvested orchards twice during 'on' crop years, but are reluctant to do so during 'off' crop years due to low yields. This year, growers will begin harvest late to allow the greatest amount of nuts to mature, and hullers will not be overwhelmed by a late start due to the smaller crop size. Later than average crop maturity and growers waiting longer to harvest will result in one of the later harvested crops in recent memory. Nichols doesn't expect the harvest to be in full swing until about the 17th to 20th of September.

According to Nichols, nut fill appears to be higher than typical this year, and is much better than last year. With this in mind, most estimates of the crop are slightly higher now than before nut filling began. On the negative side, later harvested crops are at much greater risk to elevated levels of Navel Orangeworm (NOW). Nichols estimate of the crop is 330 million pounds, but others in the industry believe the potential is greater. The fact is that no one knows the crop size until the crop is harvested.

NOW damage is the greatest quality risk to the effective marketing of California pistachios. Consumer tolerance for NOW infested nuts is very low, and NOW is prime vector of aflatoxin, which affects the industry's ability to export to key markets. Nichols doesn't yet know the risk of the 2010 crop to NOW infestation, but there is some good news, and some bad news about potential infestation levels.

The good news is that most California processors now pay significant premiums for deliveries with low levels of NOW. As a result, growers now have an economic reason to control NOW through sanitation, early harvest, and judicious pesticide applications.

The bad news is the potential for a late harvest. As outlined above, Nichols expects harvest to start late this year. Late harvested crops always have the potential for higher NOW damage. It will be interesting to observe how growers react to conflicting economic signals of the desire for late harvest to avoid re-shaking trees, and the incentive of premiums for low NOW. As the premiums for low NOW damage have only been in place for most packers since last year, its unknown how growers will respond.

Minimum grower prices for the 2010 crop have been announced, and at approximately $2.45 per inshell pound net to the grower, translate to wholesale prices for US extra #1, size 21/25 unroasted open inshell pistachios in the $3.70 to $3.80 range. These price levels are considerably higher than 2009 crop opening prices (close to $1.00 higher) Combined with larger crops in Iran and Turkey, it is not known if the opening price will correctly ration the shorter 2010 crop supply.

We do know pistachios will be in short supply during September and most of October. With minimal carry-in to the 2010 crop, and an expected late harvest, demand for early shipments from the 2010 will be strong.

As the crop matures toward harvest, well keep you updated!

In Pistachios, attention amongst suppliers and buyers has moved from current crop to the upcoming 2010 crop. Buyers are beginning to show interest/concern towards new crop pricing. Speculation is in the $3.50 to $4.00 range for raw US extra #1, size 21/25 open inshell pistachios. Some suppliers will most likely offer 21/26, 22/26, or another size instead of the benchmark 21/25 size.

Nichols does not expect pricing to firm, and offers to come forward until minimum grower prices are established in mid or late July. This year is looking to be a difficult year to determine the correct opening price for the industry, as there are many unknowns, and very little carryout to buffer unexpected shortages. Here's a short list of factors that will influence pricing, both before and after the 2010 crops are harvested.

Iran and California are the largest producers and exporters of pistachios. Iranian production is speculated upon, but the actual crop size is not ever known. The best estimates of crop sizes are determined months after harvest based upon export volume. Current news out of Iran is that Iran has a good, but not a great crop this year. Expectations are lower due to lack of chilling in prime production areas. It will be larger than 2009 crop, and much larger than the frost ravaged 2008 crop. Current estimates are 180,000 to 200,000 metric tons, or 400 to 440 million pounds.

The California crop was expected to be a better than average "off" crop. Due to a very cool spring, and well above average rainfall in April and May, many producers believe the crop potential has been reduced. Many nuts aborted due to the cool, wet weather. There are concerns pollination was affected by rains during bloom as well. Earlier speculation of the crop size at 300 to 400 million pounds has been replaced by estimates in the 300 to 350 million pound range. In addition to expected reductions in the total crop, the wet and cold spring has delayed maturity, and most growers believe harvest will be later than an average year. This will put more stress on the already expected low carry-in to the 2010 crop, and have a significant effect on early season shipments.

Through May, China has imported 55 million pounds of pistachios from California. Historically they like to buy cheap and run up prices, but if industry prices hold, one is unsure of what and how much they will purchase this year from California.

Shipments of California pistachios to the domestic market are up 42% from the prior year. If wholesale prices this fall are 20% to 30% higher than last year, effecting retail and promotion pricing it will certainly have an effect on consumer purchases but to what extent is unknown.

From August, 2009 to December, 2009, the euro, on average, purchased 1.46 US dollars. Currently, the euro will purchase 1.23 US dollars, and exchange rates are volatile. We know the euro will be weaker against the dollar this fall as compared to last year, but don't know how much weaker.

The potential exists for volatile pricing during the 2010-11 marketing year due to the factors listed above, and a lack of carry-in at all origins to buffer the effect of unknown crop sizes. Stay tuned and we will continue to keep you advised as things develop.

It's been quite an interesting ride in the pistachio industry during the 2009-10 marketing year. The industry started the year with similar October inventory levels to prior years (with the exception of 2007, which was much higher), but due to very strong shipments, the April month end inventory is the lowest in many years. This translated to the rapidly increasing prices we saw over the past 6 months.

Pistachio shipments finally began to slow in April. Open inshell shipments averaged 32.5 million pounds for the first 7 months of the marketing year. In April, 19.6 million pounds were shipped. With only 79 million pounds of open inshell inventory remaining at the end of April, shipments will have to slow further over the remaining 4 months of the marketing year if supply is expected to last.

Pricing will most likely hold firm or increase over the remainder of the crop year. Most packers are sold out, nearly sold out, or oversold. Open inshell inventories held by packers at the end of the 2009-10 crop year will be close to zero. In fact, if it were not for some position re-sells, pistachios purchase opportunities would be limited.

Exacerbating the problem of minimal carryout inventory has been what appears to be the slow development of the 2010 crop. Weather in California has been unusually cool and wet during April and May, and the 2010 crop is behind normal development for this date. As a result, harvest may well start later in September than usual, and new crop shipments will be delayed. Its suspected that there will be a significant premium for September /October shipments from the 2010 crop.

Despite being slow in developing, the 2010 crop appears to be a better than average off crop. Young trees have heavy crops, but as is the case every year, appearances can be deceiving. The 2009 crop was shorter than expected due to high levels of blanking caused by poor pollination. The overlap between male and female trees this year was good, but untimely rains may have limited pollen, especially on young trees.

At this point in time, most packers believe the 2010 crop will be around 350 million pounds, plus or minus 50 million pounds. Obviously, a 300 million pound crop will command higher pricing than a 400 million pound crop, especially this year when the carry out from the 2009 will be miniscule.

The The rapid increase in prices over the past 2 months indicates packers at origin are fully committed. The prices are extraordinary, but very little volume is changing hands at these levels

The message remains the same. Very strong demand in Asia, particularly China, and in the USA has absorbed the entire 2009/10 supply. Shipments remained strong in January, though not at the record levels set in December. Shipments to China are triple last year. To put this in perspective, shipments to China are nearly equal to exports of all of Western Europe. Shipments to the domestic market, still the largest market for California pistachios, are up 38% versus last year.

Remaining inventories will only support shipments at 18-20 million pounds of open inshell per month, versus 35.5 million pounds per month for the first 5 months of the marketing year. The good news is that export shipments are expected to drop off substantially over the remainder of the crop year, particularly to China. Retailers in China sell enormous volumes during Chinese New Year, which requires a large export volume to China early in the crop year.

Due to the supply shortage expected this summer, interest in the size of the 2010 crop in California and Iran will be high. General expectations for the California crop are 300 million pounds to 400 million pounds.

The last off crop in California was 2008, with total production at 278 million pounds. Californias bearing acreage in 2010 will be at 137,000 acres versus 118,000 acres in 2008, an increase of 16%. The additional acreage into production is young, and will not produce a full crop, but given the wet and cold winter, has the potential to add 25 million pounds to the total. Newly producing trees in 2008 are now two years older, and should produce 10 million pounds more than 2008. If older orchards produce the same as 2008, this gives up the potential for about 310 million pounds. Nichols believes 400 million pounds is optimistic, as trees fully producing in 2008 will have to produce 30% more in 2010 than 2008 to reach 400 million pounds. 300 million to 350 million pounds produced in 2010 is a more conservative estimate, but in their opinion, more like the range. Now heres the disclaimer: the track record of the industry at estimating crops is not good, as pistachios are unpredictable.

It is known that growers will take good care of their trees in 2010. Pistachios have been profitable to growers for the past several years, and as a result, growers are willing to spend what is necessary to maximize their crops. Available water supplies are still an issue, although marginally better than 2009 in the major producing areas, and considerably better in others.

The monthly shipment numbers are in and Pistachio shipments in November continued their very strong trend, both in domestic and export markets. Price increases are following the strong shipment numbers. Export enquiries for new sales are decreasing as most customers have covered their short-term needs.

Domestic shipments are up 17% over the levels of a year ago. It appears that strong promotional efforts have increased retailer promotions for the 4th quarter. Price levels in the domestic market still trail export pricing. Kernel prices in particular have been extremely strong, and continue to rise. There were limited carry-in stocks of kernels and shelling stock (closed shell, undersize, dark stained nuts) to this season, and as a result, limited availability of kernels. Adding to the shortage has been the requirement by most processors to have raw pistachio kernels pasteurized prior to shipment, which adds to processing times. The most difficulty continues to be the lack of availability.

Export shipments have been very strong. Shipments to China and Hong Kong are up 41% vs. last year, while shipments to the rest of the world are down slightly. The increase in Chinese shipments is not surprising. As China attempts to increase its domestic consumer market, it is buying larger quantities of a variety of foodstuffs. Most notable in comparison to pistachios is the large increase in almond shipments to China this year. Almond shipments to China are up 65 % this marketing year vs. last year, on a par with the increased pistachio shipments.

As always, let us know of any specific questions that you may have. We wish for continued prosperity to our customers in the New Year, and for a joyous holiday season.

Pistachio prices are continuing their upward march since before the 2009 harvest began. Increasing Shipments with a smaller supply than expected, and it all adds up to a hot market for California pistachios. Domestic and export open inshell shipments for the 2009 crop year are up 5.7% over last year’s numbers.

Prices for US extra #1 Raw open inshell are now quoted at $3.50-$3.60 per pound. US extra #1 kernels are quoted at $6.40-$6.50, with at least one packer quoting $7.00 per pound. We don’t believe much has been sold at these levels, but there is active demand at slightly lower levels.

At 354 million pounds, the 2009 California crop was certainly less than expected. Following record crops in 2005 and 2007, with more bearing acres in 2009, it was expected the 2009 crop would exceed the 415 million pounds harvested in 2007. Add to this a smaller than expected Iranian crop, and very small Turkish crop, and the world supply in 2009 is much smaller than anticipated prior to harvest.

Shipment numbers have been strong. Export inshell shipments are down 2.7% for the first two months of the year versus last year’s record numbers, but up 55.6% versus 2007 shipments. Most expect exports to continue at a rapid pace. Domestic shipments are up 27.8% over 2008, and movement in November and December should remain at elevated levels.

It is expected that we will end the year with some carryout, shipments must slow down considerably from their current pace. Some of the slow down is seasonal.. As of the end of October, California packers are holding 100 million less pounds of inshell inventory than this time 2 years ago, while open inshell shipments have gone out 30% faster than the same period 2 years ago.

Most growers are optimistic about the 2010 crop, given that young trees and a number of older orchards had less than record crops in 2009. The rainy season has just begun in California, and thus far, there has been little rain. As we move through the current marketing year with supply tightening, expectations of the 2010 crop will play an increasing role in moving prices up, down, or sideways.

October 2009

After what continued to be overall positive news in regards to the 2009 crop, it now appears to be smaller than expected by most packers, and certainly less than 400 million pounds that Nichols expected. Through October 10, when the crop was 99%+ harvested, 347 million pounds were (as reported) received by California packers. Thus, the final crop is not expected to be more than 350 million pounds. Even before the announcement, inshell prices were moving up and as a result prices for inshell and kernel pistachios are now close to the same level as this time last year.

Thus far this crop year, these forces are winning, as prices have marched upward for the past two months. Will they continue to rise, or are we at or near the top? Here are some forces pushing back:

While the supply of inshell pistachios appears to be adequate to meet demand over the next 12 months, it is less clear for kernels. Kernel carry-in to the 2009/10 marketing year was minimal, as were carry-in levels of shelling stock and closed shell. With relatively high open inshell prices, and very little artificially open (AO) in-shell carried in from last year, more closed shell is expected to be converted to AO’s this year than last year, reducing the quantity of closed shell to be shelled for kernels. Both of these factors, and the good quality of the 2009 crop will combine to reduce the quantity of pistachio kernels available over the next 12 months. Result, a firm kernel market.

Demand for California pistachios at present remains strong, and continues to come from existing and new markets. This is a market to watch.

As Pistachio Processors near the end of receiving the 2009 crop, there are a number of things that are now known about the crop:

Pistachios continue to defy gravity, economic conditions, and supply conditions. The market has strengthened considerably, despite good crops in Iran and California. Export demand is particularly strong, coming from all corners of the globe, but particularly in China and the EU.

The market has strengthened due in part to a smaller than expected California crop and continuing weakness in the US dollar. One thing to remember: expect a large “off” crop in 2010. Many young orchards produced less in 2009 than 2008, and are poised to produce large crops next year. Nichols expects the 2-year supply (2009 and 2010) to exceed the past two years, as has been the pattern for the California pistachio industry.

We could see a split market between the EU and rest of the world during the 2008/09 marketing year. This will happen if the California crop is smaller than expected, of lower quality than expected, or both. Let’s look at situation in the EU and the rest of the world from both supply and demand over the next 18 months.

The total supply of pistachios suitable for the EU may be smaller than previous years. This could occur for two reasons: The carryover from California, while large, is not suitable for the EU due to the EU’s very low tolerance for aflatoxin, and the 2008 crops from both California and Iran will be smaller than 2007. We won’t know until mid September, once a substantial portion of the crop has been harvested, as to the quality of the crop from either origin.

At the same time as the supply for the EU may be less than desired, we expect demand from the EU to be strong relative to demand in the US market. In terms of euros, prices this fall will be at similar levels to previous years. In addition, most major European retailers have fixed prices through the end of December, so retail prices will not reflect higher wholesale prices until January, 2009.

For non EU markets, most notably the US market, the supply of pistachios is much greater. The carryover of open inshell will be the largest in California’s history, and much of it is suitable for these markets. In the US market, increased wholesale prices rapidly translate into higher consumer prices and a slowdown in consumption. When prices increased nearly $1 from September, 2004 to September, 2005, shipments to the US market slumped 19%. Added to increased retail prices are reductions in disposable income for many consumers due to rapidly increasing gasoline and food prices.

Thus, we have a situation of one market (EU) with a potentially tight supply and relatively low consumer prices versus another market (USA) with ample supplies and weakening demand. How wide the price spread between the EU and US markets becomes is largely dependent upon the quality of the 2008 California harvest.

Paramount Farms announced its minimum price guarantee for the 2008 crop this week at $2.03 to $2.10 for open inshell, and $2.65 for kernels. Based upon this information, we expect EU inshell prices to open at about $3.25 per pound, and domestic prices around $3.00. These are our estimates, and we believe very little business has been conducted thus far. Nichols is still not yet ready to offer new crop. The spread will widen or shrink this fall, dependent upon the quality of the crop.

For the most part, the 2007crop continues to progress well. There are still major concerns about water supplies in a large part of the production region, but most of the impact of diminished supplies will be felt next year. Another dry winter will have major impact on the size and quality of the 2009 crop. Kernel filling began in the past few days, so we expect harvest to begin on time, and later than the very early 2007 crop.

As we have made you aware, things have changed quickly in the pistachio business. From a situation of declining crop, slowing demand, and price deterioration for 24+ months, it has been a dramatic and shocking turnaround. Since the beginning of the 2007-08 marketing year, we have seen the dollar continue to weaken, export demand explode in traditional and non-traditional markets, domestic shipments at a record pace, prices firm for several months, and then explode after the damaging freeze in Iran 2 months ago. We have gone from the largest supply in history to potential shortages in 7 months.

The 2008 crop, while still an off crop, is developing well. It is expected that the crop will exceed 250 million pounds, and could easily reach 300 million pounds. The greatest threat to crop size and quality this year is water shortages being experienced by many California producers. The question of the month is where to price new crop? We can’t remember a year with more contradictory signals to interpret as this year. The upward and downward forces are summarized in the table below.

Nichols believes the greatest mistake the Pistachio industry could make would be to repeat the 2005 experience, when prices opened over $3/pound, an increase of 50% from the prior year. Demand slumped, greater than necessary inventory was held, and as growers made a small fortune, processors lost money. To remain healthy over the long run, all segments of the industry must show a positive return. This is particularly important given the expected increase in crop size. $200 to $400 million investment in processing facilities will be necessary over the next 10 years to handle pistachios already planted!

Current EU quality US extra #1 100% naturally open raw inshell, size 21/25, FAS Ca is about $3.15 per pound.. Very little product is moving at these levels; most shipments are from lower priced contracts set earlier in the season. Kernels are in short supply for both domestic and export markets. Prices range depending upon quality.

The pistachio market remains active with many inquiries and little available product, particularly for the EU. This is surprising only 5 months removed from the largest crop and largest supply in the history of the California pistachio industry. Nichols expects open inshell shrink from this crop to be high, given the poor quality of crop receipts during the second half of the harvest season. Further to this point, shrink will be realized over a long period of time, and won’t fully be reflected by industry statistics until the end of the 2008/09 marketing year. Shipments are strong for this time of year, and only limited by processing capacity. This is typical for Nichols as well whose lead-times have increased due to longer production times.

Defects from the poor quality 2007 crop remain a problem, with insect damage being the greatest issue. Hand sorting costs have more than doubled from a year ago. Despite capacity additions, additional hand sorters, and lengthened work hours, it has been difficult to meet the increased demand for pistachios this year due to very slow sorting rates. As a result shipments have been delayed, and business has been disrupted by those delays in shipments.

The pistachio industry in California continues to rapidly expand. Approximately 19,000 acres will be planted this year, bringing the non-bearing acreage to almost 80,000 acres. It will take the equivalent of 16 new plants, equal in capacity to Nichols Farms’ facility, to process this acreage within the next 10 years!

A question we hear quite often is “What will be the impact of all this additional acreage?” It is a tricky question to answer. We can reasonably estimate the pistachio supply 10 years from now, but how and where will the additional crop be marketed? Over the next three issues of their monthly newsletter, Nichols will look at growth possibilities and expectations in the following areas: exports, pistachio kernels, and domestic open inshell.

In the meantime, we will continue to keep you advised of all developments.

Shipments and prices are up for California pistachios. It appears that export shipments for the first four months of the marketing year have been very strong. Domestic shipments are almost back to levels shipped during the beginning of the 2004 marketing year.

Prices have risen about $0.30 per pound since the beginning of harvest last September. EU cleared shipments are at the top of the range, due to stricter quality requirements. Most unsold, in shell pistachios are now held by one company. As such, it is difficult to make an accurate determination as to where pricing will go over the remainder of the crop year. It is felt that currently there are enough in shell pistachios to meet end users needs over the next 18 months. Price increases and/or decreases will come about due to the concentration of remaining supplies.

Availability of water remains the number one concern for most California pistachio growers. As of mid January, the rainy season is about 50% complete, with rainfall totals in most of California slightly below normal. Nichols does not expect water availability to substantially curtail the 2008 crop, but should water supplies prevent growers from applying optimal water requirements this year, the 2009 crop and beyond may be affected.

Winter chilling accumulation, critical for uniform bloom and maturity, appears to be adequate in most production areas, and should not have an impact on 2008 production. The 2008 crop is expected to be substantially smaller than the 2007 crop. Most early estimates are 200 million pounds to 250 million pounds.

Pistachio Prices began the year at close to $2.50 per pound for US extra #1, size 21/25, raw 100% naturally opened pistachios. As most involved in the industry expected, prices fell for the remainder of the crop year due to sluggish sales and burdensome inventory levels. The Transition to the very large 2007 crop led to further price declines. Since harvest, the market has strengthened on improving sales, the lack of EU available goods, and lack of processing capacity. Most did not see this coming, and no doubt many in the industry are surprised at the recent market strength.

Below is a comparison of inventory levels through November for the past 4 years. The values shown are for open inshell. As can be seen, the year will end with a substantially larger inventory than any previous year. A large portion of this inventory will not be usable for extra #1 due to higher defect levels in the 2007 crop.

Shipments on the other hand have improved in 2007, and the current rate of shipment is equal to the 2004-05 crop year. The increased rate of shipments and additional processing required to process the lower quality 2007 crop are the principal reasons prices have risen in the 4th quarter of 2007. Most expect prices to moderate in 2008 as seasonal demand slows.

The 2007 harvest is complete; at 410,095,836 pounds received, it is the largest crop ever produced in California. The crop is large, nut size is small, and quality varies significantly between producers and production areas within California. Some production regions and growers within those regions suffered extremely high insect damage, while others were at normal levels. Unseasonable rains caused high levels of staining from some orchards. Closed shell percentage varies all over the board, with some growers averaging less than 2%, and others greater than 30%. On the positive side, nuts from this crop are roasting beautifully, and the flavor is outstanding! It will certainly appears that this will be a crop to discuss for some time.

The final crop size is 18% percent greater than the previous record crop produced in 2004. In the below chart, we can see the quality of the 2007 crop compared to the past three years. For the first time in a number of years, forecasts of the crop size (such as Pistachios at 400 million pounds) were right on the money! 80% of the crop should be usable as naturally open in-shell, with the balance being sold as closed shell and artificially open (AO's) in-shell, or shelled for kernels.

Movement and interest has been strong for inshell, kernels, and closed shell. Inventory levels held by customers are minimal, as domestic and export users consumed stocks while waiting for the lower priced new crop to arrive. Existing users are planning more promotions, and new users, particularly on the export side, are looking to buy California pistachios because of the reduced price, weakness of the US dollar, and quality and reliability of California shippers.

Pricing has strengthened a bit in the last month to six weeks. Because of the small nut sizes, 18/20's are almost nonexistent. Most have not quoted 18/20's for several weeks, but the premium over 21/26 is at least $0.25 if one can get quotes.

On the surface, a strengthening market seems contrary to the large crop and large supply. Reduced prices from last year and low inventory levels of buyers have combined to create a large demand for shipments in October and November. Most would believe this strong demand has pushed prices up marginally, as production schedules are filling up for the next two months. Another factor is the final crop was very close to estimates from the industry, and less than numbers speculated upon by those attempting to push prices down prior to harvest.

While prices are stable, and shipments are strong at the present, we still must look out 6 months to see if renewed interest by retailers, and improved consumer demand achieve the desired effect. The Pistachio industry needs to increase shipments this year 20% to 30% over last year to work through burdensome carryovers and increasing production.

The 2007 California pistachio harvest is officially in full swing! They were about a week later than expected in hitting capacity. Other than the later start date, the expectations for the 2007 crop are being realized. The crop is large, nut size is small, and some orchards are already showing significant staining, despite the early calendar date.

With the crop about 40% harvested, Nichols can begin to draw some conclusions about the crop. Nut size is small from all harvest regions, and they expect it to remain small throughout the remainder of harvest. The premium for 18/20’s will widen substantially from $0.10 to $0.15 quoted last month. (Nichols Farms has temporarily withdrawn from 18/20’s until they get more sizing information). They do expect to have marketable quantities of 26/30’s this year, for the first time since 2004.

Yields are about as expected for older orchards, and better than expected for young orchards. While they can’t extrapolate yields on individual fields to the overall crop size, older orchards on average are about the same as 2004: some yields are a bit higher, and some are a bit lower. Given an additional 15,000 to 20,000 bearing acres since 2004, it is reasonable to expect the crop to be close to the 400 million pounds expected by the industry.

The closed shell percentage is all over the board. It is low in young orchards, and variable in older orchards, mostly dependent on crop load. We are told they have seen closed shell as low as 1%, and as high as 35%, with an average of 19% thus far. This compares with 11% from the 2006 crop, and 19% to 21% for the 2003, 2004, and 2005 crops. Thus, while closed varies widely from orchard to orchard, it is right at historical averages.

Staining has begun to show up in some areas. It was unusually hot and humid in Central California from Late August through September 3^rd, which together with spotty rains on August 26^th and 30^th, contributed to increased staining in some older orchards. Staining will surely increase from here on out, but it remains to be seen if it becomes a significant problem.

Finally, it is being reported that they are seeing higher insect damage levels than expected for the beginning of the season. Nichols has been encouraging growers to confer with their pest control consultants about the probability of increased insect damage, and the necessity to treat insect pests should their harvest be delayed past September 10^th.

The market has been relatively quiet for the past month. Most users are attempting to work down existing stocks in anticipation of lower priced new crop. We expect most buyers to wait a bit longer to see where prices shake out before making significant commitments. Buyers don’t see a shortage of pistachios over the next 12 months, and neither do we.

The next report will come out toward the end of September, as harvest approaches completion.

Pistachios This is the calm before the storm in the California pistachio industry. The crop is maturing; we won’t know much more about the size of the crop until harvest begins. Grower minimum prices have been established by most packers. Buyers and sellers are just beginning to conduct business, but most are waiting until the market settles before contracting serious volumes.

The crop continues to progress well under nearly perfect growing conditions. We should have a good idea as to the beginning of harvest within the next two weeks, once hulls begin to separate, signaling the impending harvest. They have just begun to see hull separating from the shell so for sure, harvest will indeed be on the early side this year! Expect that they will be in full swing by the beginning of September. Sizing appears average to slightly below average, and much smaller than the 2005 or 2006 crops. We don’t expect sizing to be as small as the 2004 crop, when 18/20’s were almost nonexistent. We expect insect damage to be low due to the size of the crop, unless growers are delayed in harvest.

Staining is likely to be considerably higher than the previous two crops due the earlier harvest under warmer conditions, delays in processing due to the large crop, even maturity throughout the state, and possible delays in the start of harvest due to prune harvest overlapping with pistachio harvest. Because of the early harvest, it will be quite warm during most of the harvest season. Pistachio hulls break down (decay) much faster under warm conditions. The result of hull breakdown is increased staining. This problem may be exacerbated should the crop be as large as predicted, leading to delays in processing at the huller. Harvest delays are possible due to a lack of available harvesting equipment. While the pistachio crop is early, the prune crop is about normal in maturity, and some of the equipment will not have completed prune harvest when the pistachio crop is ready to start. Finally, it appears the crop will mature in all production areas at about the same time. Generally, the south end of the production matures first, and then progresses north, but we don’t see a variation in maturity this year. Rarely have we seen such uniform maturity within the tree, the orchard, and the state.

We won’t know about the percentage of closed shell until harvest begins. Generally, large crops have higher closed shell, but there have been numerous exceptions to this trend. All in all, a good quality, very large crop is expected. It will test the abilities of harvesters and hullers to get it processed in a timely fashion.

Pistachios are moving briskly! This is welcome news to processors in an industry beset with falling prices and building inventory. Nichols believes the shipment numbers to be mostly accurate, as they’ve begun to see movement to Russia, Romania, and other non-traditional US markets. A shortage of Iranian pistachios has definitely firmed the market, and has contributed to the largest May export shipments ever! Included in the export numbers is a spike in shipments to Belgium and Germany; these shipments may include forward warehousing by California packers, but are not truly sales.

Domestic movement was strong in May. At current price levels, its believed retailers are ramping up promotion and lowering retail prices. The fact that so many food items: meat, milk, peanuts, cereal, etc. have increased in price has not hurt either.

For the second consecutive month, prices have held for raw, 100% naturally opened US extra #1 inshell pistachios, size 21/25. There is a small premium for 18/20’s, approximately $0.05. US extra #1, 80% whole kernel prices have had varying price ranges depending upon quality, although we have heard of some kernels priced at low levels and it is suspected that the quality of kernels offered at this level is not the best.

The 2007 crops in both California and Iran continue to mature, and both are expected to be large. Weather conditions for crop development in California have been ideal for the past month. Nichols observed kernels beginning to fill on June 18th. This is quite early, and indicates harvest will be on time, or earlier than average.

One concern for many growers is water. Due to the drought this past winter, and pumping restrictions imposed by environmental concerns, growers in a significant portion of the state face moderate to severe water shortages. Many doubt this will have an impact on the quantity of the 2007 crop, but it could have an impact on the quality (smaller sizes or increased closed shell). Some growers are so short on water supply that they are signing 3-year processing contracts without any price guarantee in exchange for one year’s supply of water!

For the first time in a long time, California pistachios are generally on par with, or cheaper than Iranian pistachios. This has led to increased inquiries from non-traditional destinations for California pistachios: Eastern Europe, Russia, the Balkans, and China. As Iran doesn’t begin shipping new crop until October following harvest, most users will need to cover their needs through November out of the current crop. Nichols expects the price inversion relative to Iranian pistachios to last until new crop begins shipping, as inventory levels are much tighter in Iran than in California. It is likely that this situation will lead to increased exports from California over the next 4 to 5 months. Prices of US X#1 100% naturally open raw inshell pistachios have responded by stabilizing at the levels equal to last month, and for the first time this marketing year prices have held steady for more than a month.

During most of last year, market reports focused a significant amount to the development and estimated crop size of the 2006 crop. This was appropriate given fears of a small, poor quality crop. It is certainly not the situation this year. Pistachio growers uniformly believe the 2007 crop to be large, with most estimates in the 400 million pound range. Combined with a substantial carryover from the 2006 crop, supply for the upcoming season will not be a concern unless something very unusual happens between now and harvest. In fact, there are concerns by some growers of having enough hulling, drying, and storage capacity to harvest the 2007 crop in a timely fashion. Last year, Nichols predicted processors would be reluctant to invest in additional capacity due to very high minimum prices, but did not expect it too become reality this soon!

Iran also expects a large crop, on the order of 230,000 to 270,000 metric tons (500 to 600 million pounds). Turkey will have a shorter crop than 2006. Carryin from the 2006 crop in both countries should be minimal. It is clear that the world supply of pistachios will be substantial for the 2007/08 marketing year.

Given that supply should not be an issue, it makes sense to focus on shipments and inventory levels the 2006/07 marketing year winds down, and transition to new crop begins. Historically, the California Pistachio Commission has collected these statistics from California processors on a monthly basis, aggregated them, and distributed the results to any interested party. In the next month or two, the Administrative Committee for Pistachios (ACP) will assume the role of collecting, aggregating, and distributing inventory and shipment statistics.

Nichols believes the statistics are somewhat useful, but could be better. Specifically, they feel they, as processors supplying the statistics need to be audited. Why? There is little uniformity in how the processors report the numbers. Here’s an example. In the past 4 months, processors have reported inventory adjustments (unexplained shrink) of almost 14 million pounds of open inshell inventory. Why is this unusual? It’s almost 25% of what was shipped during the same period! Typically, during processing and roasting, 2% to 5% shrink occurs, due mostly to moisture loss during roasting and breakage in processing. Now Nichols does not believe anyone is intentionally reporting increased shrink to reduce inventory levels, but without an auditing system no one can be certain. In the absence of an audit procedure, only shipment data should be reported, not potentially inaccurate inventory data. An auditing process will educate processors, thus ensuring consistent and accurate inventory and shipment reports. It should not be used to try to count every pistachio in each handlers inventory; this is nearly impossible task.

It is imperative that buyers and sellers trust the data collected and reported; the absence of trust renders the reports useless.

There isn’t a lot to write about the pistachio market these days. Product shipments are continuing to pick up modestly compared with a year ago, and prices are continuing to slide. The weather of recent weeks has not been conducive to crop development, but the 2007 crop still appears to be very large.

Very little has happened in crop development over the past two weeks. Cold and rainy weather persisted during most of the period, following exceptional bloom period weather. The rain will definitely cause disease pressure to increase, and raise operational costs, but at this point, Nichols sees very little impact on production. Nuts are sizing on the tree, and shortly we will be able to see the full potential of this year’s crop.

Two things for certain are the 2007 crop is much larger, and much earlier than the 2006 crop. Below are photos from the same orchard taken on April 20, 2006 and April 24, 2007. A picture is worth a thousand words!

Movement continues to pick up over previous year shipments, but lags well behind the 2004-05-crop year. Retail prices in many parts of the USA remain at high levels, an impediment to increasing movement. Retail checks conducted by Nichols Farms in the past 30 days showed an average retail price greater than $5.00 per pound. It continues to be expected that retail and wholesale prices will drop significantly from current levels this fall upon receipt of the large 2007 crop. Clearly, this is needed to reverse three years of declining domestic sales as shown in the accompanying graph.

Demand at present is light. Raw US extra #1 pricing is down about $0.05 in the last month, continuing a trend starting in the fall of 2005. We expect pricing to bottom within the next 3-4 months, as we move into the new crop-marketing year.

At this time of year, we generally begin to look at prospects for the upcoming California pistachio crop, and its impact on supply and pricing. It is known that the upcoming crop will be large, and we’ll have a large carryover from the 2006/07 marketing year. If the crop is larger than expected in 2007, that will most likely meant that it will be smaller in 2008. Thus, the 2007 crop size is actually not as critical as in past years.

With that being said, the industry continues to expect a large crop in 2007. Bloom is early and uniform, starting the last week of March, compared to late April during 2006. Because the bloom is early, the harvest should be much earlier than last year, and closer to the typical start in early September. The bloom looks uniform, which increases the potential size of the crop. Weather has been ideal, and the forecast for the next 10 days is good. As a result pricing continues to erode due to the overhang of supply.

Movement continues to be ahead of last year’s sluggish pace, but not expanding as fast as they would like to see. At the halfway point of the 2006/07 marketing year, total shipments are 3% ahead of last year, but 30% off the record pace of the 2004/05 marketing year.

One question that continues to be heard is: “what will the minimum price be for the 2007 crop?” We understand this question, as growers want to budget for the upcoming year. Establishing price levels this year will be a tricky process for processors to growers. Clearly, the high prices of the last two years have been good for growers. They have been very hard on processors, as most have been squeezed between high guarantees to growers and diminishing consumer demand (due to high prices). They’ve been hard on retailers who’ve lost profit and sales volume, and on consumers, who have to pay 30% to 50% more for pistachios than two years ago. The minimum price for the upcoming season must be high enough to prevent prices from collapsing downward, but not so high as to curtail demand, as has been the case the past two years.

Nichols will be analyzing the potential of the 2007 and 2008 crops, as well as demand and carryover over the next several months before announcing their minimum 2007 crop price. Nichols is confident that the price levels for 2007 crop will be profitable for growers, but will allow market prices to return to levels where movement will exceed the 2004/05 marketing year.

February 2007

As we approach the mid point of the 2006/07 marketing year, some trends have been established. First, we can see shipment numbers rebounding from the low levels of last year. The industry is up 3% year to date versus 2005/06, but since the end of October, they’re up 19% over last year. With five months of shipment data, we can begin to estimate the industry position entering the 2007/08 marketing year. Second, we have seen a slow decay in prices, not only this crop year, but for the past year and a half. Since our last report, the market appears to be off another $0.05 per pound.

As reported last month, increasing shipments are a good sign for the pistachio industry. In the graph below it can be seen that three components of the estimated final crop year open in-shell usage add up to total disappearance. They are:

Each of these components add up to the fourth column for each year – total disappearance. To get to the final number, they’re estimating 5 million pounds of shrink for the balance of the year, and shipments equal to the 2004/05 crop year. Total disappearance is estimated at 190 million pounds, a 10% increase from year earlier levels. Please remember these are estimates, and are based on 5 months shipping data.

One thing we expect to see when prices turn around is a big increase in movement. Nichols has maintained for some time that the CPC numbers exaggerate changes in inventory, as they do not measure wholesalers, retailers, or roasters inventory, only primary processors. For 18 months all these segments of the chain have held minimal inventory due to continuing price declines. When prices stabilize or increase, Nichols believes we’ll see a temporary jump in shipments due to inventory shifting from primary processor to others down the chain.

We expect the 2007/08 marketing year to be good for everyone involved in growing, processing, and marketing pistachios. The crop will be large, with grower prices at profitable levels, though not artificially inflated as during the past two years. Quality should be good, thanks to the high quality carry-in from the 2006 crop, and the supply will be plentiful. We expect movement to be the highest in history, as we build on momentum currently in place. Processing should return to profitability after two very poor years. All in all, for Pistachios, we like to think the picture looks bright!

The pistachio industry ended 2006 with the highest shipment total in 26 months. Not since October 2004 have shipments of open inshell pistachios exceeded last month. This is good news for the industry, as it continues the trend of increasing shipments begun this past October. December shipments are well ahead of year earlier numbers, and slightly ahead of December, 2004 shipments, but for the crop year, they are still well behind both 2004 and 2005.

Increasing shipments are a very good sign for the industry, as they have a lot of pistachios to move. During many of the past 10 years, supply was inadequate at the price level sold, and they ran out of supply prior to new crop being available. However, in the past two years, the situation reversed. The past two years they’ve had a greater than necessary supply at the given price levels. Inventories have increased despite 2005 and 2006 being less than record crops.

Prices have been flat or declined for the past 18 months. Raw 21/25 US x#1 100% naturally opened inshell is now in the $2.45 to $2.50 range, although we hear of (unconfirmed) prices a little below these levels. Both buyers and sellers should be asking the question: How much longer will the decline continue, and how much further will prices fall? While no one has the answer to that question, the trend of increased movement is a good indicator we could be getting close to one.

On the supply side, last month we wrote they were behind in chilling. What a difference a month makes! Most recently they have had 19 consecutive days of below freezing minimum temperatures, and chilling hour accumulations in all of California’s pistachio producing regions are at or approaching adequate levels. This is a far cry from last year, when they were wearing shorts all month in January! Adequate chilling in all production areas adds to the potential of the upcoming crop, but does not assure anything.

With the Blooming months ahead of us, we will continue to keep you advised of new developments.

The pistachio market is quiet at the moment. Buyers remain on the sidelines or buying short term, as inshell supplies are adequate. Prices seem to have resisted downward movement because of grower price obligations by processors. Every $0.01 decline comes out of their collective hide.

The other fact is prices have reduced movement to the point where the same processors are nervous about how large the carryout will be to the 2007 crop year. It is expected that 2007 will be an “on” year, and speculation about crop size varies widely, but most estimates are 300 million pounds or greater. Nervousness about movement and carryover levels has contributed to slow downward movement in prices during the past year.

The good news in the industry is that shipments are starting to rebound. As expected, the very weak September shipments compared with year earlier numbers were a reflection of buyers finishing low priced contracts signed during 2004, and shipped in September, 2005. The same situation did not exist this past September, and with expectations of declining prices, very little volume was shipped. October, 2006 shipments were even with the same period in 2005, and November shipments are well ahead of year earlier levels. In addition, stocks held by retailers, wholesalers, and roasters have to be significantly lower than either of the past two years. It is expected that these lower inventory levels translate into increased industry shipments over the remainder of the 2006 crop year.

As to the 2007 crop, size is unknown, but some:
First, they are off to a bad start in terms of winter chilling. It has been warm through most of November and December, with very little valley fog that they rely upon on to accumulate chilling hours. Second, the 2006 harvest was exceptionally late, denying pistachio trees time to accumulate energy for the 2007 crop before dormancy. It is Nichols opinion that strong crops are preceded the previous fall by an early harvest, then warm, dry weather in September and October. This pattern allows maximum energy accumulation in the tree prior to dormancy, and allows the following crop to get off to an excellent start with high yield potential. They didn’t have these conditions this past fall due to the late harvest.

It is very early, but these observations do portend the 2007 crop will not be a huge “on” crop. More to say on 2007 crop prospects as we approach bloom next spring.

Happy Holidays

The final results for the 2006 crop are in at 237 million pounds, including 200 million pounds of open inshell. The quality characteristics of the 2006 crop are much different from previous crops. While the 2006 total crop is down 16.0% from a year ago, open inshell receipts are off only 6.7%, while closed shell receipts are down a whopping 61.3% from 2005. These numbers are also evident in looking at the total supply over the past 3 crop years: in all three years the total supply has been the same, but this year we have almost 30 million pounds of additional open inshell and 30 million pounds less of closed shell.

The effects of the 2006 crop quantity, quality, and total supply can be applied as follows:

First, open inshell prices will remain lethargic for the remainder of the year. There is adequate supply, and little chance of price increases over the next 10 months. At the same time, it is not expected that prices will decline from current levels until late in the marketing year, when the industry begins the transition to 2007 crop pricing.

Second, it is expected that kernel prices for the EU and Japanese markets will remain firm for the balance of the year. Kernels destined to these markets must meet exceedingly strict aflatoxin residue standards. The best way to ensure compliance with strict aflatoxin residue standards is to produce kernels from sinker closed shell, which may be in short supply before the crop year ends. Sinker closed shell typically has very low levels of aflatoxin. Note when it comes to Sinker Closed Shell product, it is difficult to predict as no statistics are kept on sources of kernels in inventory, or the breakdown in receipts and inventory of floater closed shell versus sinker closed shell. The same situation for kernels in the domestic market is not expected, as there should be an adequate supply of kernels from other sources to meet demand for the upcoming year.

US x#1 raw open inshell prices have declined about $0.10 in the past 3 weeks, as the total inshell supply became known. Further decline is not expected because prices are now compressing against guaranteed grower prices. Kernel prices remain firm.

Shipments during October 2006 were equal to October 2005. While this is encouraging in light of poor September shipments, it is short of what is needed for the remainder of the year. Nichols expects shipments for the balance of the 2006 crop year to exceed year earlier levels. By how much is a very good question!

Receipts for the 2006 crop through October 15, 2006 totaled 211 million pounds. The final crop should be close to 230 million pounds. This is larger than expected going into harvest, but not greatly over expectations. 85% of the crop is open in shell; the five-year average from 2001 to 2005 was 77%. Total supply for the 2006-07-crop year will be 359 million pounds. A summary of total supply from this crop and the prior two crop years, as well as disappearance (shipments plus processing losses) for the prior two crop years is shown below:

The one amazing thing about the 2006 crop was not the size of the crop, but the quality. Its been said by both growers and processors who have been in this business since it started in California say this is the highest quality crop they have seen. Stain is exceptionally low, closed shell is very low, and insect damage is negligible. Nichols Farms pays a $0.05 per in shell pound bonus to their growers with less than 0.5% insect damage in their open in shell deliveries. This year 46 out of 46 growers received the bonus, and the weighted average insect damage was 0.04%! It’s not known why or how it happened, but Nichols is encouraging their growers to farm the same way every year.

The focus will now go to crop movement. Movement is expected to rebound a bit from the down year in 2005, with total disappearance around 250 to 260 million pounds; greater than the 2005 crop, but less than 2004. Why? First of all, the shock of last year’s opening price increase has dissipated. Second, prices are down a bit from last year, adding to retailer margins, and providing additional incentive to promote the product. Domestic retailers are again promoting pistachios, which drives movement.

Carryout to 2007 will be 100 to 110 million pounds, down 20 to 30 million pounds from this year. The 2007 crop should be 300 to 320 million pounds, not a record breaker, so total supply next year could increase 60 to 100 million pounds over average levels for the past 3 years. However, there is much to occur before we get to next year! Further, it is to the industry’s advantage to carryover a significant amount each year for the simple reason that crop size can vary substantially and unpredictably. What works against holding substantial carryover inventory are declining prices, as packers are reluctant to hold crop at a substantial cost when it will be less valuable a year from now.

Most buyers are contracting over shorter periods, as there is little fear of shortages. After 13 months of gradually declining prices, this is not surprising. Most on the selling side hope and expect prices to stay near current levels until next fall, while most buyers are expecting further declines. Kernel demand has picked up, as buyers have become aware that there is little shelling stock in the current crop, and the availability of premium kernels from sinker closed shell pistachios will be somewhat curtailed.

Pistachio harvest has passed the peak and will begin to wind down this coming week. One thing they never expected was the exceptional quality of this crop. All year it was warned that the variable maturity of the 2006 crop might lead to quality problems and reduced yield. It was always expected that there would be higher levels of closed shell pistachios due to a larger than usual portion of the crop being immature at harvest, as well as increased staining and insect damage.

None of it happened. While we don’t know the exact quantity of the crop, we do know the quality of the crop appears to be excellent. Insect damage and closed shell are less than recent crops, and much lower than expected. We had previously reported on more than one occasion that nut size appeared small, but in fact nut size is larger than average. The only negative aspect of this crop is many open inshell nuts are too open. The nuts are open so wide there is very little shell holding some nuts together. They are fragile, and it is expected that they will have significant processing losses due to breakage.

The size of the state crop remains open to some debate. Receipts through the end of September totaled 86.8 million pounds. During this time period, Nichols Farms received 47.5% of its estimated total crop. Nichols believes their receipts were ahead of most processors, thus their estimate is that 40% to 45% of the state crop was harvested through September 30th. If only 40% of the crop was harvested as of September 30th, then the total will be 216 million pounds, but if 45% was harvested, then the crop will be 195 million pounds. Until the next receipts report is released on October 20th, there will be a number of opinions about the crop size. On balance, both opinion and early receipts reinforce the thought that this crop may be slightly larger than pre-harvest estimates.

Regardless of crop size, there will be more inshell pistachios available due to a higher percentage of the crop being open inshell. September receipts were 84.6% open inshell versus the prior five years at 76.5%. As mentioned previously, closed shell is much lower than previous years at 7.3% of September receipts versus the prior five years at 18.2%. Shelling stock makes up the balance of the crop at 8.1% of September receipts versus 5.3% in the prior five years. The higher levels of shelling stock are the only indication of the poorer quality crop that was anticipated.

Shipments during the past several months, with the exception of last month, have improved, as buyers and consumers adjusted to price increases initiated last fall. September shipments were under year earlier levels, particularly in the domestic market. We attribute much of this decline to accelerated shipments last year, as buyers rushed to complete old contracts at lower prices. This pricing disparity did not occur in 2006, so there was little incentive to accelerate shipment. We expect movement in the final quarter of 2006 to meet or exceed year earlier levels.

In summary, the quality of the 2006 crop should be well received by consumers, and there looks to be adequate supply to meet increased demand.

Pistachio harvest has finally begun in California. As of September 17, 2006, and Nichols believes that at this point the harvest is 1 to 2% completed in the state, while they have received about 3% of expected final volume.

The comments below regarding the 2006 crop must be taken with a grain of salt, as it is very early in the harvest season! A week from now, it may look very different! With that said, and after completing harvest on two fields, Nichols does have some opinions about the crop worth sharing:

First, it appears the nut size will be slightly smaller than average. Nut size will be considerably smaller than 2005, and larger than 2004. The average ounce count in 2005 was 21.5 nuts per ounce; in 2004 it was 24.9, and for the small sample we have this year it is 23.8 nuts per ounce.

Second, quality thus far is excellent. This is not a revelation; quality is usually excellent early in the harvest season. However, staining was higher than usual in 2005 from the beginning of harvest, and thus far, there is virtually no stain, as has been the case in most years other than 2005. Non-splits are very low, which is a bit unusual at the beginning of harvest. This correlates well with what we’ve seen in the field.

Third, Nichols expectation of variable maturity within the orchard is true thus far. They are seeing a large volume of nuts remaining in the tree after shaking; they are mostly immature nuts. Immature nuts are attached very tight to the stem, and usually don’t come out of the tree upon shaking. A quality and quantity analysis in the first harvested field showed about 25% of the edible crop, and 40% of the total weight remained in the tree after shaking. About 50% by weight of the nuts remaining in the tree after harvest were edible splits, while 35% by weight were blank (empty shell) nuts. If the 2006 crop comes up short of expectations, it will be due to the variability in maturity reducing harvestable yields.

Fourth, the crop is very late. We had them go back into their records to see the earliest and latest dates of harvest for the past 15 years, and the 2006 crop is definitely the latest by about a week. The later date of harvest may help in some ways, and hurt in others. Cooler temperatures will help: harvesting will run smoother, and the trees will shake better. Late harvest will hurt quality from the standpoint of potentially greater insect damage, and greater risk of rain during the harvest season.

Fifth, and finally, yield is a bit less than expected. Please do not draw conclusions from this, rather use it as a point of information. Most of the other observations should hold true throughout the harvesting period, but yield is highly variable. We will have a much better idea on yields in another 10 days. It could be due to 25% of the crop remaining in the tree, or to the high quantity of blank nuts. After we receive product from other production areas, we’ll have a much better idea as to the size of this crop, and will report back at a later time.

Nichols does not expect 25% of the edible crop to remain in orchards throughout the state and throughout harvest. This number will drop as the harvest progresses. Added to this though, are losses of the crop to insect damage, decay, and bird damage as we progress through harvest. As most growers want to wait until the majority of the crop matures before harvesting, these losses may be substantial this year, particularly losses to insect damage because mature open pistachios will sit on the trees much longer than usual before being harvested.

The 2006 crop continues to develop slowly, with the beginning of harvest not yet in sight. Nichols believes the 2006 harvest will begin around September 10 to September 15, but don’t expect things to pick up until after September 20th. In 2004, their first loads came in on August 19th. It certainly seems to be late year for pistachios.

Shipments during July continued to show the same pattern as previous months: slow domestic movement, and improving export movement. Domestic shipments, in fact, were the lowest since February 2002. Exports, on the other hand, were higher than 2005 levels for the 3rd consecutive month. Domestic movement is down 21% from last year, and 27% from two years ago. In fact, the industry shipped more pistachios to the domestic market through eleven months in each of the prior five crop years, from 2000 through 2004, than it has this past year.

As we get closer to harvest, both sellers and buyers are becoming more nervous about prospects for the 2006 crop, which appears to have strengthened prices. Prices have not increased because of improved movement. For at least the past 15 years, roasted/salted prices have been $0.10 higher than raw prices, but the spread has widened to $0.15 per pound, mostly because the value of the product has increased 50% over the past couple of years. Typically, there is about 3.5% weight loss (mostly water) from roasting. As prices the cost of this shrink has increased 50%, from 6.3 cents per pound to 9.5 cents per pound. Other factors include increased packaging material costs for roasted pistachios relative to raw, more expensive roasting equipment, increasing maintenance costs, fuel costs, and labor costs.

This crop continues to puzzle most growers and processors. To the casual observer, the crop doesn’t look too bad. Upon closer inspection, there is a high percentage of empty, or blank, nuts. Anywhere from 30% to 50%of the nuts on a tree, depending upon location and tree age, are devoid of kernels. The west side of the San Joaquin Valley and young trees are higher in blanks, while mature trees on the east side of the San Joaquin Valley look better. The difference is mostly lack of winter chill, as young trees require more chilling, and the west side of the San Joaquin Valley historically has less chilling.

Most in the industry continue to think the crop is 170 to 190 million pounds, but as an Industry they don’t have a great track record of estimating either small or large crops. Other than the blanking issue, there are several other issues that could affect the final harvested crop. First, due to the crop being so late and small in size, there will be increased insect pressure at harvest. Second, the crop is variable in maturity, which may lead growers to delay harvest until most nuts are mature. This delay may lead to increased losses due to excessive staining, decay, and additional insect damage. However, with all the negatives to the 2006, it still appears to us to be significantly better than 2003. Excepting for one week of very hot temperatures in July, the growing season has been good. With an open fall, and experienced growers making correct decisions on harvest date and controlling pests, this could be a decent crop.

One thing is certain about the 2006 crop-marketing year: it will be the largest carry-in ever! With one month remaining in the 2005 crop marketing year, total inventory stands at just under 173 million CPC pounds, or 61% of total receipts from the 2005 crop. Nichols expects open in shell carry-in to the 2006 crop to be approximately 90 million pounds, and total carry-in to be approximately 140 million pounds, CPC basis.

The last time the industry held such large inventories at year-end was prior to the disastrous 2003 crop. The carry-in that year was critical in maintaining momentum to move the big crop in 2004. Many in the industry are wondering if history will repeat itself this year. The difference between today and the situation in 2003 is twofold: first, prices are 50% higher now than in August, 2003, and second, they have a much larger supply due to greater carry-in and the 2006 crop being considerably larger than the 2003 crop. While Nichols sees some parallels to 2003, they doubt there will be any shortage of pistachios during 2006 as there was in 2003.

The Pistachio crop continues to develop, but we don’t know much more about the 2006 crop than reported previously. The pistachio crop looks larger now than this past May, but there are many questions left unanswered until harvest begins. Was the crop pollinated during the lousy bloom and post bloom weather? Will nuts fill, or will blanking be high this year? Will the crop mature for a timely harvest? Will the crop mature uniformly? Nut fill began at the end of June this year, right on time. Nichols believes this is another indication of non-uniform development, as we know much of the crop bloomed very late, and as of late July many nuts have not filled. The lack of uniformity this year makes estimating the 2006 crop difficult, and prone to error.

Adding to the unknowns about the upcoming crop has been the recent bout of extremely hot weather. In late July there were 7+ days of 110 F (43.5 C) temperatures throughout the pistachio production area. This is the hottest stretch of weather that can be remembered. Pistachios handle hot weather better than most other crops, but we can’t imagine this hot spell has helped the crop, and probably delayed maturity of the 2006 pistachio crop.

Shipments in May and June were equal to last year, and considerably ahead of prior years. For the first time all year, export open inshell shipments in both May and June exceeded year earlier shipments. Domestic shipments, though, continued lackluster. Year to date open inshell shipments in the domestic market for the first 10 months of the marketing year are at 72.5 million pounds, versus prior year shipments at 91.5 million pounds. It is interesting to note the decline in domestic shipments over the past 3 years. Shipments year to date during the 2005/06 crop year are down 21% from a year ago, 28% from two years ago, and 13% from three years ago. Rapid price increases over the past year are responsible for the downturn in domestic demand shipments.

Pricing has stabilized, as the market is active, as customers are booking a portion of their needs for the upcoming year. Concern about the size and quality of the 2006 crop is driving the market at present.

At Nichols annual grower meeting on July 12th, they announced their final grower pricing for the 2005 crop, and minimum grower prices for the 2006 crop. They were pleased to announce their highest ever return on the 2005 crop at $2.28 per pound for open inshell pistachios, and $2.20 per pound for edible kernels from shelling stock. The 2006 minimum price for open inshell was announced at $1.80 per pound (including quality premiums), and $1.75 for kernels from shelling stock. This is the 3rd consecutive year of open inshell pricing at $1.60 per pound or higher. As an FYI, they have purposely set the minimum price below their expected 2006 final return, as they believe the current system of setting very high initial grower prices to be detrimental over the long term to growers, processors, retailers, and consumers. Nichols believes that the industry can help shape demand via promotion and advertising, but we must be responsive to marketplace signals such as increasing inventories and sluggish demand. Setting very high initial prices removes the ability of our processing industry to respond to these signals.

If the industry continues to set very high initial prices, there will be a tremendous disincentive for processors to expand their operations, or for new entrants into the processing business. In fact, we’ve seen an exodus from the processing business over the past several years. Why? The potential profits are not worth the required market risk. Ten years from now there will be an additional 80,000 acres of producing pistachios, and lack of processing capacity may become a substantial problem.

Now, with that being said, Nichols does not argue that the high minimum prices have been of tremendous benefit to pistachio growers over the past 5 years. It has resulted in higher wholesale prices of pistachios, which translated into higher grower prices and record profits for producers. Reasonable minimum grower prices stabilize the market by setting a floor on wholesale prices, and allow producers to budget minimum cash flows. The true winners under the present system are integrated grower-processor operators who can afford to lose on processing operations because pistachio growing is profitable. The losers under the present system are non-integrated growers and processors, as well as consumers who have seen prices increase substantially. Growers are winning in the short run, but the economics will change unless tremendous investment in the processing industry occurs continuously over the next 10 years. Processors are losing in the short run, but may be winners over the longer term if pistachio supply exceeds processing capacity. You need only look at the wine industry to see what happens to grower prices in years when crops exceed the capacity of wineries to process and store the harvest.

Nichols Farms has taken the middle ground by providing a minimum price level well in excess of production costs, but not so high to prevent us from responding to market conditions. Should their assumptions about the 2006 crop size and movement at current price levels be inaccurate either high or low (as they most probably will be), they will have the ability to adjust wholesale pricing upward or downward a moderate amount. Together with promotion and advertising programs, this will allow them to move greater volumes of pistachios at profitable levels.

Last month we began to look at potential of the 2006 crop. We now have a little better definition of the crop potential for 2006, but this crop is difficult to estimate because it is so late in developing. In addition to what appears to be shrinking potential for the 2006 crop, demand has picked up. Shipments in April were slow, but May has been a very busy month, as domestic shipments are rising with increasing retail promotions, and export shipments are well ahead of prior months.

First, let’s take another look at the NEW crop potential. The situation in Kern County and much of the Westside (Fresno, Kings Counties) is still confusing. There are more nuts on the trees than was thought possible a month ago, but this is not the entire story. Many nut clusters are composed of very small nuts, many of the nut clusters are exhibiting symptoms of heat stress from the mid 90’s to 100 degree temperatures during mid May, leaf footed bugs are causing sporadic damage, and finally, maturity from nut cluster to nut cluster varies substantially on the tree. Madera County and the rest of the state are in better shape, but the crop in these areas does not appear to have the potential of the 2004 crop due to late bloom and pest problems. As a result Nichols has revised their crop estimate from last month downward approximately 10% to a possible 2006 crop size of 195 million pounds.

An analysis of the breakdown of their estimate by production region is worth taking note. During 2003 and 2004 all production regions were in step; either all large crops or all small crops. 2005 was different story, as Kern and Kings/Tulare/Fresno counties had large crops while the rest of the state experienced a short crop. Nichols expects this situation to reverse this year, with Madera having an “on” year, and most of the rest of the state an “off” year. With at least a portion of the state having an “on” year, plus an increase in bearing acreage of 20%, they thankfully don’t expect a repeat of the disastrously small 2003 crop. Please remember these are estimates only; this crop has the potential to vary substantially higher or lower than the numbers shown. What is clear, though, is this crop is well short of expectations prior to bloom.

The other important comment to share is about the potential quality of the 2006 crop. It is early to judge quality, but what is seen thus far is not encouraging. Maturity varies widely on the tree, and from tree to tree, an indicator of poor quality at harvest. Nut size appears to be very small. More will be known about nut size in a month after shells harden, but high May temperatures mentioned earlier may have prematurely ended shell expansion, and limited the maximum nut size for much of the crop. Yield estimates are generally made for the entire crop: open inshell, closed shell, and shelling stock. The average open inshell percentage of the total crop for the past 10 crop years is slightly less than 78%, with a maximum of 81%, and minimum of 73%. It would not surprise Nichols to see the open inshell percentage as low as 70% this year. Fortunately, carryover from the 2005 crop will be good quality.

Open inshell total supply for the next 16 months, provided Nichols estimate of the 2006 crop at 195 million pounds is accurate, will be approximately 280 million pounds. At present, the industry holds 142 million pounds of open inshell inventory, and Nichols expects 130 to 140 million open inshell from the 2006 crop (based on 195 million pound total crop). Desirable carryout into the 2007 crop is 40 to 50 million pounds; this volume is necessary to keep supply moving to market prior to new crop availability. Thus they have 230 to 240 million pounds available as an industry for the next 16 months, with the greatest variable being the size of the 2006 crop. Given that the last two such 16 month time periods resulted in total usage of 215 million pounds (May’03 to Aug’04) and 254 million pounds (May’04 to Aug’05), supply should be close to demand, and thus the importance of monitoring the 2006 crop as it matures.

At the same time supply for 2006/07 is shrinking, demand is improving. Industry shipments in April were down 20% from April a year ago. Nichols Farms May shipments, however, have been very strong. They are interested to see if the industry numbers mirror their results for May. Along with strong shipments has been active contracting by export and domestic customers. Prices have moved up $0.15 in the last month.

Typically by the end of April, the California Pistachio Crops are 3 weeks past peak bloom, and nuts are beginning to size. As being witnessed, this is not a typical year. Unseasonably warm weather from November through mid-February, and cold and wet weather from mid-February through mid-April has delayed bloom several weeks. Close to 50% of the state’s bearing acreage had dormant oil applied during January and February to enhance and accelerate bud break. This is a common treatment for early bearing pistachios after warm winters. The oil treatments, to some degree, replace chilling hours. At any rate, most trees which had oil applied will hit peak bloom between the 20th and 25th of April. Trees not treated with dormant oil (mostly older trees) for the most part will not hit peak bloom before this week. Most cannot remember a later bloom than this year.

In addition to the late bloom, many orchards are exhibiting wide variations in bloom date. We typically see some variation, both within the tree and within the orchard, but it strikes that this year the variation is wider, in some cases much wider. These observations are made mostly in looking at oiled trees, as they are further along in bloom.

Much has been made of inadequate chilling this past year, particularly on the west side of the San Joaquin Valley. Visually, they do not see much difference between east and west side orchards as to time of bloom, or variability within the orchard as bloom. They do see a very light bloom on the west side of the San Joaquin Valley, and a more variable situation on the east. Correlating their field observations to historical yield records (shown on attached graph), appears difficult. Production records are county based, most of which encompass both the east and west side of the San Joaquin Valley. Fortunately, the two largest counties of production, Madera and Kern, have their main production on opposite sides of the San Joaquin Valley. Most of Madera’s production is on the east side of the Valley, while most of Kern’s is on the west side. Kern and Madera Counties together account for 2/3 of California’s bearing acres, and slightly more than 2/3 of the annual yield from 1999 through 2005. Most west side Kern County orchards had high (on year) yields in both 2004 and 2005; this year there are very few blooms in either young bearing trees or mature bearing trees. Madera is a different story. 2005 was a down year, and 2006 appears to have very good potential, at least as related to the quantity of bloom. Both old and young trees have sufficient bloom for large crops.

So what does this mean? First, the growing season weather and harvest weather are critical this year. Because bloom is so late this year, further delays in maturity due to poor growing season weather could push the harvest well into October. Second, yield may be lost to variability in maturity. As Pistachios are only harvested once (sometimes twice in an “on” year), variable maturity often translates into less yield and lower quality. Over-mature pistachios are consumed by birds, insects, or disease, or have excessive staining if recovered. Under-mature pistachios quite often remain in the tree, may not have split, or may have the exterior hull still adhering to the shell. Both late harvest and maturity variation have the potential to reduce yield or lower quality. While California still has the potential to produce 250 million pounds, Nichols now thinks it likely the crop will be smaller. Their best estimate at this time is 220 million pounds, but future events could change that opinion higher or lower. Supply will not become constrained unless the crop size moves below 180 million pounds, which is possible, but not likely.

Recently news out of Iran reports that the Iranian crop potential has also been reduced because of warm winter weather. Current estimates are 180 to 200 thousand metric tons, with minimal carryover from the 2005 crop.

Shipments during March continued the same trend as previous months, although domestic shipments are showing some signs of recovery. For the year to date, open inshell shipments are down 22% versus the prior year. March domestic shipments were ahead of February and down only 15% from year earlier levels. Exports year to date are down 20% from year prior, and March shipments were also 20% lower than March a year ago. We are seeing some life in the market, as both shippers and buyers have concerns about the new crop. For the time being, prices that were weakening have firmed and at least one shipper has withdrawn from the market. It is expected that prices will stay in a narrow range for some time unless a dramatic problem develops or becomes evident with the 2006 crop.

For the year thus far, the industry has shipped 93.3 million pounds of open inshell pistachios to the domestic and export markets. This represents a 23% decrease from last year, 5% decrease from the 2003/04 marketing year, and up 1% from the 2002/03 marketing year. Thus, while shipments are down substantially from last year, they are not far off prior levels. Export open inshell shipments are down 20% from last year, but up 48% over 2003/04, and up 29% over 2002/03. Of greater concern are decreased shipments to our domestic market. Domestic open inshell shipments are down 25% from last year, 29% from 2003/04, and 17% from 2002/03. Of even greater concern is there have been no shortages of product for the last 6 months, unlike the 2003/04 marketing year.

Inventory at the end of marketing year will likely be 90 to 100 million pounds of open inshell, or 135 million pounds total, including closed shell, shelling stock, AO’s, and kernels. At current shipment rates, this represents about 7 months worth of inventory. 7 months of inventory is not an alarming number in and of itself, but the trend of increasing inventories and declining shipments is of concern. We won’t know if 7 months of supply is positive or negative until the size of the 2006 crop is known.

Most growers and processors believe the 2006 crop to be 225 to 300 million pounds. Nichols tends to be a bit more conservative regarding the 2006 crop, as their range is 200 million to 275 million pounds. They believe the crop will be smaller because of the warm winter and back to back large crops for most of the state’s orchards.

For consumption to increase, reasonable prices for growers and consumers are needed. Depending on the size of the crop, we may or may not have to increase shipments over current levels, but given Nichols estimates of the crop and projected carryover, we think it likely. Prices have come down considerably since last fall as consumers told the industry prices were too high by buying substantially less than prior years. We are now close to the correct level with current range for US extra #1, and we expect movement to pick up for the remainder of the marketing year. In short, we believe a number of factors determine quantity shipped, but processor promotion, CPC’s generic programs, and price all have important roles.

February is a quiet time in the pistachio industry. Movement typically begins to slow, and thoughts begin to turn to new crop prospects and pricing. This is certainly true this year, but there is a bit more anxiety amongst processors due to falling prices and large inventories.

We have seen enough of the marketing year to get a good handle on movement, which continues to be down substantially from last year. Current open in shell inventory is 175 million pounds, and we expect movement to average 10-11 million pounds per month for the balance of the year. Carryout inventory will thus be approximately 100 million pounds. This will be the largest carryout in our industry’s short history, but not far in excess of the carryout to the 2003 crop.

Prices continue to hold in the high $2.00 range, but there are certainly weak sellers offering occasional lots below these levels. Some reselling is also going on in the market, as customers that have overbooked due to slow off-take are dumping excess inventory. We have no idea how long this market will remain sloppy, but cant help but doubt it will end before the harvest of the 2006 crop.

Below is a chart showing predicted opening wholesale prices based on 100 million pounds of carryout to new crop, and movement to reduce next year’s carryout to traditional levels (35-65 million pounds). The second graph is grower price predicated on 100 million pounds carryout to the 2006 crop and the wholesale prices shown in the previously described chart. The assumption here is that processors will be partially compensated for holding over high priced stock from the 2005 crop, and make a reasonable return on the 2006 crop. This has not been the situation in the industry recently, so it may not necessarily be a good assumption.

If carrying costs of holding over 2005 crop are not considered, grower prices will be higher and/or wholesales prices lower. Growers will be short-term winners, while processors, re-baggers and consumers will be losers. Retailers will increase margin and not be affected. Over the longer term, this is not a healthy situation for our industry.

We expect wholesale and grower prices to come down from 2005 levels. How far will be determined by the size of the 2006 crop, and whether or not costs of carrying over a substantial portion of the 2005 crop is considered in setting grower and wholesale prices.

Shipments in December were decent in both export and domestic markets. Total shipments for the first 4 months of the marketing year are on par with the 2002 and 2003 crop years, and well behind the 2004 crop year. January numbers will be very interesting to see, as they will reflect for the first time close to 100% new crop pricing at much higher levels.

After 4 months of the marketing season, what do they in the industry know? First, that they have more than enough pistachios to satisfy demand at current price levels. Second, consumer demand is off, but they can’t yet quantify how much. They should know within the next 2-3 months if demand is off 15% or 40%. Third, there has been significant price erosion in the past two months. Raw prices are off $0.25 to $0.30 from opening. For the most part the weaker prices are believe to be short sellers or speculators sensing weakness in the market, and attempting to push the market down further. It is, however, expected that the market will settle in the $2.65 to $2.75 per pound range for raw US extra #1 until more is known about the potential of the 2006 crop. It is also felt that all pistachio processors (that means every single one, provided they are telling the truth) are losing money on every pound at these price levels.

One interesting thing Nichols has observed in the past 3-4 months is the reaction of pistachio growers to higher prices and slowing demand. As most in the industry are aware, pistachio growers sell almost 100% of their crop on a “pool” basis. Minimum prices are specified, and if the market rises after the contract is signed, growers participate in the price increases. The minimum prices this year were high relative to previous years, so growers have locked in a very profitable year. Price risk is entirely with processors this year. The interesting thing observed is that many pistachio growers are not happy with the current situation. While very happy with their crop and return for 2005, they see the current high prices as borrowing against future crop prices, and understand price disruptions as they have seen over the past few months shake buyer’s confidence. Several have offered to take a price reduction so they can move the crop at more reasonable price levels! It seems growers of pistachios are more in tune with how their product is marketed than most agricultural producers.

While Nichols does not expect, and have not asked, growers to reduce their guaranteed price for the 2005 crop, they do expect grower price guarantees to come down significantly for the 2006 crop. Depending upon how much demand is down, and the expected 2006 crop size, guarantees could range from $1.30 to $1.80 per pound. Expectations are for demand to be down about 20% over last year, the 2006 crop to be about 250 million pounds, and minimum grower prices to be about $1.50. This will provide an excellent return to growers, reduce wholesale prices to manageable levels, move consumption up (but not to 2004-05 levels) enough to consume a large portion of the carryover inventory, and allow processors to recover a portion of their losses from the 2005 crop.

In regards to the legal update within the industry; Paramount last week amended their lawsuit against the California Pistachio Commission (CPC) with the addition of 9 new claims and demands for relief ($). Paramount is now demanding the CPC not collect assessments from ANY growers, or expend ANY funds. They not only don’t want their assessments used for generic advertising, production research, and government affairs, they don’t want our assessments spent either! Further, they are now suing the CPC claiming the election process is unfair; the districts are not fair, and one person, one vote is unfair and unconstitutional. Paramount wants the CPC stopped, and wants compensatory damages; in other words, they want not only their assessments back, they want the assessments paid the CPC by all other pistachio growers.

The accompanying chart below shows some interesting trends in pistachio shipments thus far this season. After continual steady increases in shipments to the domestic market from 1996 through last year, shipments thus far during the 2005-2006 crop year have dropped sharply. Exports, though not as strong as 2004, still continue quite strong. Overall shipments, though lagging 2004 by move than 15 million pounds, are still the second highest on record.

One could explain the slowdown in domestic shipments by noting purchasers had raised inventory levels at the end of last year, and have been drawing down stocks since higher priced new crop became available. The only problem with this theory is shipments during the last three months of 2004-05 crop year were only 1.5 million pounds greater than the year earlier period, while shipments for the first 3 months of the 2005-06 year are 11.1 million pounds behind the previous year. Clearly, higher wholesale prices have slowed down the domestic market quite dramatically. The effect is somewhat exaggerated by the numbers, as we expect there has been a significant decrease in inventory held by retailers and wholesalers this year versus 2004.

There has been some continued erosion of prices over the past month, but it has been sporadic. Most of the lower prices are due to a lack of buying interest, and some packers are jumping at the chance to make a sale, any sale. This has certainly been the quietest November most can remember, at least in terms of sales inquiries. Current prices are hard to determine, but there have not been abundant sales at any levels.

Finally, a quick update on the legal battle within the pistachio industry between Paramount and the California Pistachio Commission (CPC). As was reported in the California papers earlier this week, Paramount was granted an injunction allowing them to escrow funds that would have gone toward advertising, promotion, and government relations. Based on the PR released by Paramount, and largely regurgitated by local newspapers, this could appear to be a great victory for Paramount. It was a significant victory for the California Pistachio Commission. Business will continue as usual, as the judge rejected almost every single demand made by Paramount. Paramount asked that reserve funds be frozen, the judge rejected the claim because Paramount had supported CPC programs at the time the assessments, now held in reserve, were paid. Only 2 growers were allowed to join Paramount’s suit; the judge rejected all others on the basis that they had no objection to the CPC’s programs, but were only joining in at Paramount’s request. This suit has a long way to go before final judgment is passed, but the CPC will continue to operate its successful programs, and continue to enhance California pistachio growers returns both now and in the future.

The pistachio market is very quiet. The California pistachio industry is very noisy. Nichols for instance would like things the other way around, but it’s not their choice.

Prices are between a rock and a hard place. The market wants to force down prices, but high field prices are holding them steady. As such, there is no place for prices to go, and they are stuck at the $2.85 to $2.95 level for raw US extra #1, size 21/25.

Inventory is more than adequate to keep buyers content to buy spot, rather than contract. Most buyers see little risk of rising prices, and a reasonable expectation of lower prices due to large inventories and slow shipments. Let’s take a closer look at shipment and inventory levels.

Certainly October, at 7.8 million pounds, was a very slow month for domestic shipments. The year prior, 15.5 million pounds were shipped domestically during October. However, open inshell shipments for the first two months of the new crop year at 37.1 million pounds are very close to the 4 year average from 2001 to 2004 of 37.4 million pounds. One reason shipments have lagged during the beginning of the New Year is shipment schedules at the end of the 2004 crop year were accelerated, as buyers took shipment on low priced contracts. Thus, the shipment data for the past 2 months may not correlate very well with actual consumption. The industry will need a couple more months of shipment data to confirm changes, if any, in consumption due to higher price levels.

Inventory numbers are much more straightforward. They have plenty of pistachios in California for the remainder of the 2005-06 crop year. Open inshell inventory is at 223 million pounds as of November 1st. This compares to 209 million pounds last year on the same date, and 212 million pounds on November 1, 2002. Nichols anticipates off-take for the remainder of the year to be 140 million to 160 million pounds, so ending open inshell inventory will be 50 to 70 million pounds at the end of next August…..there are plenty of pistachios for the remaining 10 months of the crop year.

The question everyone will be asking is: Is this too much, or too little carryout inventory? At this point in time, Nichols does not think it’s too much. If the 2006 crop is very large, they will have been wrong, but they don’t see a huge crop next year. Back to back large crops, along with a late and prolonged harvest in 2005 are impediments to a large crop in 2006. Young trees will have good crops next year, but older orchards will show the stress of back to back large crops. Nichols early opinion is the 2006 crop will be under 300 million pounds. If true, 50-70 million pounds is a correct amount of carryout.

Finally, the California pistachio industry is awaiting a decision on Paramount’s lawsuit against the California Pistachio Commission (CPC). Oral arguments were heard on November 14th, but as of the 28th, no decision has been issued by the court as to Paramount’s request for a preliminary injunction. A decision is expected in the next couple days, and we will forward on anything we hear.

The 2005 harvest is now complete, and the crop received to date is 281 million pounds. The 2005 crop was clearly a very good “off” crop. Open inshell receipts were 213 million pounds, resulting in total open inshell supplies for the 2005-06 marketing year of 262 million pounds. Total open inshell supply during the prior year was 260 million pounds. The difference in supply is negligible; the quality of supply between the years is very different.

Because of very high grower prices, combined with the variation in maturity of this year’s crop, many growers harvested orchards a second time. Harvest cost is approximately $200 per acre. Breakeven for second harvest was only 90 pounds per acre this year, and on Nichols own orchards, they harvested from 150 to 900 pounds per acre. They estimate 10% to 15% of the 2005 open inshell crop came from second harvest. Second harvest product was high in stain, and sometimes in insect damage.

Combined with the approximately 25 million pounds of second harvest product were 48.5 million pounds of open inshell carryover from the 2004 crop. This carryover was mostly small sized (26/30) count. Finally, the 2005 crop was high in stain from the beginning of harvest. In summary, from the 2004 crop we had a supply of clean, uniform, and small-sized open inshell. From the 2005 crop we have 10-15% second harvest, 18.5% small-sized carryover, and approximately 70% (183 million pounds) large sized product with heavier stain levels.

What does this mean to the market? That is a difficult question to answer, especially given the much higher price levels compared to one year ago. We think purchasers will react to the larger crop size and total supply by continuing to hold off purchases as long as possible, expecting price declines. On the other hand, with grower prices at current levels, there is little motivation for processors to reduce price. Nichols thinks prices will remain flat for the remainder of the year at the $2.95 level for US extra #1 Raw, with occasional short term discounting by individual processors to meet cash flow requirements. There will be adequate supply of inshell pistachios, especially large sizes. Carryout to next year will increase marginally, but the quality of the carryout will be poor: a variety of small and large sizes, with high stain level and insect damage.

Looking out to next year’s crop, Nichols expects the crop to be down from the 2004 record “on” crop. Why? Two reason: First, many orchards produced back to back large crops in 2004 and 2005, and will rest in 2006. Second, as opposed to the very early harvest in 2004, the 2005 harvest started late, and ran late due to second harvest. When harvest is early, the trees have extra time to produce and store food for following year’s crop. Such was the case in 2004, and a very good 2005 “off” crop resulted. The last time prior to 2004 when such an early harvest occurred was the record 1997 crop. Instead of an “off” crop in 1998, the industry experienced another record crop. It is believed the same scenario occurred in 2004 and 2005.

The 2005 pistachio harvest is 80% completed as of 26-September. Nichols estimate for the 2005 crop is now 260-270 million pounds. On Tuesday, 20 of September, thunderstorms swept through the pistachio producing areas of California. There was some damage from rain, and minimal yield loss from high winds, but most of the pistachio crop avoided weather problems. One processor received 2.7 inches of rain in 35 minutes, and was shut down for several hours. Thunderstorms and rain are forecast again for this last week in September.

There are a number of good things and bad things about the current crop. As previously reported, nut size is very large. Nichols average ounce count from the 2005 crop is 21 nuts/ounce versus 24 nuts/ounce in the 2004 crop. They have found sizes as large as 12/14 in this crop, but at the same time there are high levels of dark stain and light stain (11% vs. 5% in 2004) from some areas and growers, as well as high levels of closed shell. Defects in closed shell are high this year, probably due more to summer heat than insect damage. A significant portion of the final crop will come from re-shaken orchards. This fact cannot be overlooked; as much as 10% of the final crop may come from re-shaken orchards. The combination of high field prices and variable maturity will lead to more re-shaken orchards than ever before. Quite often this product cannot be used for inshell, due to high levels of insect damage and stain. They expect the harvest to continue, because of re-shaken orchards, into the 2nd half of October, and to inflate the final crop size.

Final shipment numbers for the 2004-05 crop year are in, and it was a very good year for the California Pistachio industry. Open inshell off-take at 212.6 million pounds was 26% over the previous crop, and total off-take at 282.7 millions pounds was up 47% from the prior year’s level of 192.5 million pounds. Final inventory of open inshell came in at 48.5 million pounds. This is 0.5 million pounds less than forecast last month, and 5 million less than forecast in May, 2005. Much of this product is already sold, and a high percentage of this product is small sizes (very small sizes from one packer), and also includes stained product. We view this level of carryover as bullish for prices.

Nichols is expecting shipments for the 2005-06-crop year to be even or slightly less than 2004-05, and carryout of pen inshell to the 2005-06 crop at 40 million pounds. Exports will be up over the previous year by 10% to 20% as more customers convert to California pistachios from Iranian pistachios. Domestic shipments will be down a like amount, largely because current price levels have cut demand. Because of the two consecutive large crops, it is expected that the 2006 crop will be smaller than 2004.
Shipments will remain strong through December, especially in export markets. Higher consumer pricing will hit domestic markets first, and then export markets early next year. Changes in wholesale pricing is not expected to occur until late in the crop year, and only then if shipments fall short or exceed expectations, or the 2006 is larger or smaller than current expectations.

The 2005 harvest is now underway, and approximately 20% of the crop has been harvested. Nichols is beginning to see some trends about this crop, but the crop size wont be known for 7 to 10 days.

What is known is the crop is good sized, both in quantity and nut size. Most growers are reporting
yields better than expected, in some cases equal to or better than 2004 yields. Growers on the west side of the San Joaquin Valley are reporting very good yields. East side and northern orchards are yielding less than the 2004 crop, but much more than 2003. Nut size is very large. The average ounce count of deliveries to Nichols Farms thus far is 21.7 nuts per ounce. They expect 30% or more of the crop to be 18/20’s this year (versus 4% last year), and for the first time ever, they will have a significant amount of 16/18’s. 26/30’s are nonexistent.

Some other characteristics of the crop are as follows:
1) Maturity is uneven, making it difficult to determine harvest timing.
2) Staining on eastside nuts is high due to the above maturity variation and heavy morning dews
3) Insect damage thus far is low, as would be expected. Due to the late start, over 50% of the crop will be harvested after the next flight of navel orange worm, and insect damage could become a problem for the second half of harvest.
4) Closed shell is variable, but generally on the low side. It is definitely lower than the 2004 crop on the western and southern side of the San Joaquin Valley. Northern and eastside orchards are higher in closed shell than 2004. Defects in closed shell are higher than typical, probably due to the extreme summer heat.
5) The harvest will be long and drawn out due to the maturity issue. Due to high field prices, growers have incentive to capture every nut. Some are planning on shaking trees twice, and others will use hand crews to capture nuts not removed by mechanical shakers. Others are waiting for more nuts to mature before harvesting, and all these factors lead to an extended harvest.

Thus, in summary, Nichols expects the 2005 crop to be a good one. Quality of the second half of harvest is a concern, but overall yields are good, and better than expected. Closed shell is down, staining is up, nut size is large, and insect damage has the potential to be higher than last year.

We will send out a second update later this month in approximately 10 days when we are given a better feel as to the size of the crop and carryout inventory from the 2004 crop.

August 2005

The 2005 harvest is just around the corner. Nichols expect the earliest harvesting to begin during the week of August 30th, and expect peak deliveries from September 10th to September 20th. They should have some idea of the total crop size around the 2nd week of September.

This crop continues to impress them. Size appears good, quality is excellent, and there is a minimal damage from disease. Maturity is variable across the tree and orchard, but no more so than an average year, and far less variable than the 2003 crop. The disease issue was of considerable concern to east side and northern growers due to the inclement weather in April and May of this year. The maturity issue is crucial, as pistachios are typically harvested only once. The more even the maturity, the higher the harvest efficiency, and the greater the crop. One reason the 2003 crop was such a disaster was this maturity problem. Millions of pounds of good pistachios were lost because the harvest occurred when the pistachios were immature (wouldn’t come out of the tree) or over mature (higher stain, insect levels, kernel decay). Nichols doesn’t see this happening in 2005, at least not yet.

Shipments for the 2004 crop year will be by far the greatest on record. Open in shell receipts from the 2004 crop were 254 million pounds. They are forecasting disappearance (the combination of shipments and processing shrink) for the 2004 crop at 211 million pounds, and carryout to the 2005 crop at 49 million pounds. Total receipts from the 2004 crop (including closed shell and shelling stock) were 347 million pounds. They are forecasting disappearance for the full year at 282 million pounds, and total carryout to the 2005 crop at 79 million pounds.

Pricing for new crop is fir. New crop business is picking up, but many buyers are contracting for lesser tonnage over shorter time periods than previous years, as they are unsure of demand at current price levels. We expect little change in prices until harvest is well underway, and only then if the crop is much larger or smaller than current expectations. A total crop less than 200 million pounds will produce moderate price increases, and a crop over 250 million pounds will pressure current price levels.

One thing we always think about is the impact of the current crop on the next year’s production. Should the crop come in at 250 million pounds, we would expect the 2006 crop to be something less than record crop in 2004. Many orchards will have produced consecutive large crops, and won’t produce a large crop in 2006. Put another way, an unexpected larger state crop this year will most likely reduce the size of next years crop. Thus, even a very large off crop this year (250 million pounds) will not affect wholesale pricing much, as expectations for the following year will be reduced.

We don’t expect price declines for another reason as well. Field prices for pistachios have risen another $0.10 per pound since last month, and any decline in market price will put additional pressure on processor’s margins. Growers are happy about the price they will receive for the 2005 crop, but many are concerned the high price levels will lead to building inventories above desirable levels.

NICHOLS FARMS SHIPS 100% NATURALLY TREE OPENED PISTACHIOS!

Much has happened in the pistachio industry during the past month. Minimum grower pricing for the 2005 crop has been announced by most packers, and ranges from $2.10 to $2.19. The effect of the grower-pricing announcement has been met with joy by growers, and dismay by retailers and wholesalers. The effect of the announcements will definitely firm pricing for delivery to retail and wholesale users, as packers are unwilling to ship goods at a loss. Other developments during the past month were the beginning of nut fill for the 2005 crop, sales activity for the 2005 crop picking up, movement of the 2004 crop continuing strong, and Paramount’s resignation from the California Pistachio Board.

Nut fill began the last week of June, and is right on time. Harvest should begin the first week of September. We had expected nut fill to start later due to the exceptionally cool spring and early summer, but this was not the case. Most growers believe this will be their best “off” crop in many years. Nichols observations are that nut fill looks very good, with few blanks and uniform kernel development. Shell size is much larger than last year, and larger than normal. It is not possible to determine if the crop will be high in closed shell until harvest is underway. We still have 8 weeks until harvest begins, and many things can still go wrong or right, but the crop at this point in time looks good. Nichols have raised their estimate of the crop to 250 million pounds from 220 million pounds last month.

Sales for delivery during the 2005-06 marketing year are picking up. Current crop pricing is still in the $2.95 to $3.05 range for US extra #1 naturally tree opened 21/25 raw pistachios. New crop pricing is in the same range. Shipments of old crop through June have continued to be strong, especially in export markets. Nichols expect shipments to remain strong through August, as buyers complete delivery of lower priced contracts from old crop. It will be very interesting to see how shipments are going
this coming September, October, and November after current pricing has taken full effect.

Nichols is forecasting the open inshell supply for the 2005-06 crop year to be approximately 240 million pounds. This is composed of 45 million pounds carried out from the 2004 crop, and new crop receipts of 195 million pounds (250 million x 78% open inshell) open inshell. Much of the carry in will be small sizes, stained, or with other defects. They’re expecting total off take to be flat or slightly less than the current year at 200 to 210 million pounds. Unlike two years ago, they will have enough pistachios, but there may be limitations on certain sizes and grades as we get toward the end of the year. 30 to 40 million pounds of open inshell are necessary to transition from one crop to the next without shortages and breaks in delivery.

As always, NICHOLS FARMS SHIPS 100% NATURALLY TREE OPENED PISTACHIOS!

This is the doldrums for the pistachio industry. The appearance of the California crop is unchanged from last month, and will be the same next month. There is very little news to report, as most shippers and buyers have not yet begun contracting for new crop, and old crop movement is steady with most shipments off contract, and limited spot sales. Movement during May was quite strong, pushing shipments for the year up 19% over the 2003-04 crop year. Export shipments are up 77% during this time period, while domestic shipments are down 9.4% during the same period. Is this an early indication of price affecting demand?

Attached is a summary of the forces working against each other over the next few months. It’s also pretty close to conversations between buyers and sellers.

New crop pricing is now the issue occupying the thoughts of buyers and sellers. For the most part, the current crop is sold, and uncertainty about where pricing will go is greater this year than for several years. Opening prices will be much higher than 2004, with a supply that could be much less to slightly more than 2004. Supply of open inshell pistachios is composed of the 2004 carryout plus 2005 crop received minus carryout to 2006 crop. Here are three possible scenarios for supply.

Opening prices for US extra #1 21/25 will likely be in the $2.80 to $2.90 range. Roasted product will be $0.15 higher, and 18/20’s will command a $0.15 premium over 21/25’s. Nichols expect these price levels to hold from the present until at least November. From that point, pricing will be determined by which of the scenarios above actually occurred. Prices have the potential to be very volatile this year, given there are equal chances for tight supply due to a small crop (small supply scenario) and diminished demand due to 40% price increases from 2004 opening prices.

World supply of pistachios is similar to the California situation. Iran’s expected very large crop, estimated at 280,000 mt (618 million lbs.) prior to their freeze, is now estimated at 160,000 mt (353 million lbs.). Total world supply, as presented at the INC meeting in Berlin earlier this month, was estimated at 430,000 mt for 2005 versus 412,000 mt for 2004. However, the 2005 supply numbers include substantial increases for Turkey and Syria, both of whom export little and have no system to accurately determine crop size or total inventory.

Turkey, for example, estimates supply on a dried, inhull basis, not a dried, inshell basis. Nichols believes the total supply for 2005 available for export to be considerably less than 2004 due to limited supplies in Iran and the USA.

The phrase of the month is Frost damage. Enough to send chills down a growers spine. Earlier this month, several nights of freezing weather severely damaged the 2005 Iranian pistachio crop. This was to be the “on” year for the Iranian crop, with estimates ranging from 240,000 to 280,000 metric tons (530 to 618 million pounds). The freeze reduced the potential by approximately 40%, or 240 million pounds. Put another way, the equivalent of the entire 2005 California crop was lost!

The crop damage and size of the crop in Iran is subjective. There are no production or shipment statistics similar to California. The estimates above are an average of several sources close to the Iranian crop. We do not truly know. The most serious freeze damage occurred in the Rafsanjan area. Rafsanjan is the largest production area in Iran, and had more orchards in an “on” year than elsewhere in Iran. Rafsanjan is the equivalent of Kern County in California, although the production area in Iran covers a much larger area than California. Larger sized pistachio varieties were the most affected. Perhaps the most telling indication of the damage were price increases in Iran following the freeze. Prices rose about $0.10 per pound immediately following the freeze from already historically high levels.

The freeze in Iran has already had an effect on US prices. Where prices heretofore appeared to be softening somewhat, they have now firmed. There are substantial trades by resellers in both the domestic and export market as the supply is allocated to those most in need of pistachios. Shipment numbers for California pistachios in March were flat with previous year’s numbers in total, but exports were up 3 million pounds, and domestic shipments down a like amount. This continues a trend since November of domestic shipments trailing year earlier totals each month, and exports higher than year earlier totals. Since November, exports are 48% higher than year earlier, while domestic shipments are off 20%. As discussed last month, this is partially due to the strength of the dollar, but mostly due to high domestic retail prices resulting from a more direct link between processors and retailers in the US than abroad.

Because of the freeze in Iran, and resulting decrease in world supply, it is believed that the shipment trend of increasing exports and declining domestic shipments will continue throughout the rest of this year, and all of 2005 crop year. We were concerned opening price levels 40% higher than last year would have a dramatic effect on shipments to both domestic and export markets, but now see strength in the export market for the next 18 months.

Pistachios in California are now in the nut expansion period, and we are getting a better idea of the crop potential. Most growers report this is potentially a good or excellent “off” crop. More than one grower has told Nichols that this is the best looking “off” crop they’ve experienced. However, we’ve seen “off” crops that look good before, but harvestability and/or quality was poor. The past three “off” crops have been 66% (1999), 67% (2001), and 39% (2003) of the previous “on” crop. Throwing out the disastrous 2003 crop, we believe the potential crop to 60% to 70% of the 2004 crop, or 208 to 260 million pounds. Combined with carryout of the 2004 crop, supply should be adequate to meet demand, but it will be tight. Should the crop come in the low side, pistachios will be scarce and expensive this time next year.

The keys to determining pistachio pricing for the next 18 months will be as follows: Shipments of pistachios to the domestic and export markets. Size of the 2005 US and Iranian crops Strength of the US dollar Prices of competing nuts. Which of these factors are most important? Which factors can be measured? Lets take a quick look at what we do, and what we don’t know about these factors.

The impacts of the weaker US dollar and high prices of competing nuts have definitely pushed prices higher over the past 8 months. Quantifying this effect is difficult, and predicting future trends even more so. Fortunately, while these factors have an effect on pistachio prices, it is far less than shipments and size of the 2005 crop. This leaves us with crop sizes and shipment numbers (a crude measure of demand) to determine where prices will go for the next year and one half.

We won’t know the crop size until mid September for California or late October for Iran. Clearly, the potentially most volatile time for prices will be this fall as the market discovers the size of the 2005 crops. For the other 16 months, shipment numbers will have the greatest effect on price movements. We watch shipment numbers very closely for this reason.

So far this year, shipments are up substantially in the export markets, and flat in the domestic market. Overall shipments of inshell pistachios are up 25%, and pistachio kernel shipments are up 32% for the first 5 months of the crop year (Sept.04 through Jan.05). The industry shipped large volumes in September and October last fall to fill empty pipelines, but since November, 2004, open inshell shipments are only up 2.4% over the prior year. Which way will the rest of the year go? At the present, it is impossible to determine. We will keep watching, as shipment numbers will be best indicator of price direction for the next 6 months.

At the present, there is still some upward pressure on prices, but at the current levels demand has slipped, and processors are selling some of their intended “reserves” for the upcoming short crop. We do not expect any significant price changes for at least another 2 to 3 months. Current levels for US extra#1 open inshell are still $3.05-$3.10 for raw and $3.20 to $3.30 for roasted/salted. Kernel prices have continued to rise due to still rising demand, and are in the $5.10 to $5.25 range for extra #1 80% whole kernels.

Late January 2005

Open inshell pistachio supply at the beginning of the 2004-05 season was 260 million pounds. 92 million pounds have been shipped or lost to shrink, 115 million pounds are committed, leaving 53 million pounds, or 20% unsold. This 20% will have to satisfy uncontracted demand and provide carryover to the 2005 crop. No wonder prices have spiked over the $3.00 level. The current price levels are necessary to pry crop away from packers planning to hold over a portion of the 2004 crop as insurance against a poor 2005 crop.

Attached is a summary of shipments through December, 2004, as well as anticipated shipments, shrink (adjustments to inventory), receipts for the 2005, and anticipated demand for the remainder of this crop year and next. It is Nichols belief that they have sufficient pistachios to meet demand, provided the 2005 crop is decent. Kernels should be plentiful, as there is sufficient closed shell and shelling stock to meet rapidly increasing demand.

Shipments have been strong through December. It will be interesting to see if shipments continue on their record pace through the rest of the year. Interesting because most shipments through December were contracted at much lower prices than current levels. Through December, open inshell shipments were 27% higher than the last “on crop” year. Nichols is projecting this to slow to around 9% for the remainder of the year. Shipments over the next several months and the anticipated size of the 2005 crop will determine opening prices for the upcoming crop.

FYI it was just learned on Tuesday that Paramount Farms has acquired Gold Coast Pistachio, and will take possession in March of this year. Purchase price was $21mm, and included the plant and equipment, but not any of Gold Coast's orchards.

Not much happening at the moment. December was quiet for Pistachios; it usually is the last couple of weeks of the month. No relief in pricing at this point, but we think we've peaked out on kernel prices; don't know yet about inshell.

Weather has been good for upcoming crop; it has been cold and wet. This does not ensure a good crop, but minimizes the chances of repeating the very poor crop of 2 years ago. Most in the industry place the prospect of the new crop at 200 to 250 million pounds; we certainly need this much.

Nichols is now planning an expansion of their huller to increase their capacity 30 to 35%. Part of the work will be done before the 2005 crop, and part before the 2006 crop.

The 2004 pistachio harvest is now complete. California growers produced a record 354,104,558 pounds, breaking the 2002 record crop by 17%. The crop was much higher in closed shell than 2002, as closed shell was up 78% over the 2002 crop, and open inshell was only up 7% over the 2002 crop. What do the numbers mean as the industry markets this crop and the 2005 crop over the next 22 months? Let’s begin with prospects for the 2005 crop, then look at supply over the 2004 and 2005 crop years.

Prospects are for a better than average off year crop in 2005. The 2004 summer was mild, with little water stress and healthy trees despite the heavy crop load. Assuming average winter chilling and 2005 growing season weather, California could easily produce 200 to 250 million pounds in 2005, or more than double the last off crop in 2003.

Assuming a 225 million pound crop, and we all know assumptions can be very dangerous, the two year supply from the 2004 and 2005 crops will be 580 million pounds. The previous two year supply was 407 million pounds. Open inshell supply will be 430 million pounds from the 2004 and 2005 crops versus 317 million pounds in 2002 and 2003, a two year increase of 35%.

Prices have risen $0.40 to $0.50 over the past two months in response to very strong demand, more customers booking larger volumes to avoid shortfalls created by the short crop last year, higher closed shell in the 2004 crop, and increased demand from Europe. As a result, all California processors have sold most of the 2004 crop. Before the season began, most processors planned on carrying over 15% to 30% of the 2004 crop into 2005. Many still want to hold that amount over, but some have sold beyond the level to carryover even lesser amounts. As a result, there are still unsold pistachios from this crop, but they are not on the market at any price; hence the rapid price increase.

We believe from what has happened that the current prices will hold for the balance of this year, and may soften or increase next summer based on offtake this year, and expectations for the 2005 crop. In any case, pistachios will be available, but may be more expensive than in past years.

Harvest of the 2004 is nearing completion. Through the end of September, processors reported receipts of 335 million pounds. We expect another 10 to 15 million pounds will come in during October, and a total crop size of 345 to 350 million pounds. A very respectable crop, but less than some had anticipated.

Our industry continues to rapidly grow. The 2000 crop was 242 million pounds, 60 million larger than the previous record. The 2002 harvest resulted in a 302 million pound crop, followed by this year at about 350 million. Our industry has doubled in size since 1998! What is more amazing is the demand side of the industry.

Shipments during September came in at 27 million pounds, compared to September, 2003 at 16 million pounds. Truly amazing considering there was no carryover available to ship at the end of August! Commitments are at 193 million pounds already, for total sales in this crop year of 220 million pounds, and harvest hasn’t even finished. The magnitude of demand, and the fact that 70% of this crop is already sold explains the strength of the pistachio market.

Prices have continued to rise, as demand must be cooled a bit to prevent the industry from running short of product. Current prices are in the $2.50 range for 21/25 US x#1, although supplies of this size will be short this year. Various estimates put the sizing at: 0-2% 18/20, 30-60% 21/25, and the balance 26/30 and smaller. Quality is good despite the small size. Kernel demand is very strong, with prices for kernels ranging from $4.25 to $5.00, depending on quality.

Part of the reason for increased demand is the short Iranian crop. This was to be the large crop in Iran, but a combination of freezing temperatures and wind storms reduced the crop by 50% to 60%. Prior to harvest, most estimates of the Iranian crop were 100,000 to 120,000 metric tons, but as harvest has progressed, these estimates have been downgraded to 95,000 to 110,000 metric tons, and prices for Iranian pistachios have increased faster than California, although starting from a lower level.

Harvest of the 2004 crop is well underway. The first inbound loads was received by Nichols on August 22nd, 19 days earlier than the 2003 crop. As of September 3rd, Nichols was about 30% complete in receiving the crop.

The impression of the crop is favorable. Stain and insect damage are relatively low. Closed shell is variable and higher than expected. Nut size is smaller than the 2001, 2002, and 2003 crops; it is similar to the large crop in 2000, when nut size was very small.

There have been numerous reports of very small size and very high closed shell from other processors. Although Nichols has seen some of this, they are not seeing it at the levels reported.

Most growers are happy with yields, but few are ecstatic. The crop did not mature evenly on the tree in many orchards, making harvest timing difficult, as growers weigh the decision to give up either the early maturing or late maturing portion of the crop. Many orchards will be harvested twice this year. Nichols still feels that the crop will yield about 320 to 340 million pounds as reported earlier, even though others had estimated as high as 370-400 million pounds. Most growers are reporting similar yields to 2002, and young orchards are producing heavier crops than in recent memory.

Prices have risen about $0.20 to $0.25 cents per pound in the past month. This type of increase was not expected, but in light of concerns of small sizes and high levels of closed shell, it is not surprising. Most processors have moved to the new levels to limit sales until they have a better idea of their crop volume and quality, as well as the total state crop volume and quality.

The first report of new crop receipts will be released October 10th.

August 2004

Pistachio movement continued strong in June and July. Kernel consumption has increased most dramatically on a percentage base year over year.

Prices have steadily moved up from new crop since the original offers in early spring but we do not expect additional upward movement from this level. 18/20's are moving at a $0.15 per pound up charge to 21/25's. This may increase or decrease depending on the quantity of 18/20's in the 2004 crop. Approximately 14% of each of the last two on crops were 18/20, but it appears nut size is smaller this year due to the early spring hot weather.

The current estimate of the 2004 crop range from 300 to 375 million pounds. Nichols Pistachio estimate is 320 340 million pounds. Carry-in to new crop will be the smallest, and availability in August will be the tightest in many years. The good news is that this years crop will be early, and shipment of new crop will begin in the middle of September.

Despite a large expected crop, prices are expected to remain firm at current levels. There are two reasons behind the higher price levels. First, California harvested a record crop in 2002, followed by a small crop in 2003. Low prices during 2002 allowed record shipments and insufficient carryout to the 2003 crop, with shortages and steep price increases during the 2nd half of the 2003 crop year. Slightly higher prices this year will allow enough products to be carried in to the 2005 crop year to mitigate shortages. The second reason for higher prices are cost increases at the processor level. Grower prices are much higher this year, as the two largest processors have announced grower prices at $1.47 per pound, an increase of $0.27 per pound from the 2002 crop. Added to this increase are substantial increases in natural gas, transportation, worker's compensation and health insurance, and processor's costs are up $0.32 per pound from the 2002 crop year. Wholesale prices are up about $0.30 per pound versus two years ago.

Most of the growing area has been slightly drier than preferred, with most storm patterns being mostly northerly within the state. Some very southern areas did get a good amount of rain. More good news is that Chilling hour accumulation has been better than last year which in most locations was above 900 hours by mid February.

With the trees well rested from this past seasons off year, a nice size 2004 crop is expected.

California pistachio producers were expected to produce 144 million pounds of
marketable pistachios this season.

A recent California Agricultural Statistics Service (CASS) objective
measurement survey estimated this year's harvest to produce 180 million pounds. Based
on the survey and past production data, marketable open in-shell is estimated
to reach 144 million pounds, approximately 80 percent of total production.
This is an off-year for alternate bearing pistachios.

Last year California's pistachio producers produced a record 302.4 million
pounds. Marketable open in shell reached 241.6 million pounds.
In contrast, the 2001 off-year crop produced 160 million pounds with 125.8
million pounds of marketable open in-shell, representing 78.5 percent of the
total production.

For 2003, the overall average number of clusters per tree decreased 42
percent to 462 from the previous year. The average cluster per tree for Atlantica
(616 clusters per tree), Pioneer Gold 1 (372 clusters per tree) and Pioneer Gold
II (606 clusters per tree) all decreased from the previous year by 47, 38 and
43 percent respectively. The average number of nuts per cluster increased
considerably from 13.8 to 20.6 nuts per cluster.

Crop Year	2004	2005	2006	2007
Total Open In-shell	75%	68%	84%	80%
Total Shelling Stock	6%	8%	8%	7%
Closed Shell	19%	24%	8%	13%
Total Crop	100%	100%	100%	100%

Scenario	Carryout to 2005 Crop Year	2005 New Crop (at 78% of total crop)*	2005 Crop Year Consumption	Carryout to 2006 Crop **	Percentage of Previous Crop Year Receipts***	Consumption vs. 2004-05 Crop Year

Small Supply	50	140	(180)	10	55%	-10%
Expected Supply	55	164	(200)	19	64%	0%
Large Supply	60	187	(220)	27	74%	9%

* The average percentage of open inshell is 78% for the past 10 years
** 10 million is the minimum carryout
*** The past three "off" years open inshell supply have been 40%, 67% and 76% of previous "on" year

Through December			Open Inshell	AO	Closed	SS	Kernels
	Shipments	Sep-Dec '04	(89.0)	(6.5)	(4.5)	(0.2)	(4.8)
	Shrink	Sep-Dec '04	(3.0)	5.2	(21.6)	(6.0)	6.9
	Inventory	Dec. 04	168.8	1.7	46.7	15.3	4.9
Jan-Aug. 05
	Shipments	Jan-Aug '05	(100.0)	(8.5)	(3.0)	(0.1)	(9.0)
	Shrink	Jan-Aug '05	(3.5)	8.8	(21.4)	(9.0)	6.3
	Inventory	Aug. 05	65.3	2.7	22.3	6.2	2.2
New Crop est.			total crop:			225.0
			Shipment increase over '04-'05			10%
	Receipts		175.5	0.0	33.8	20.9	0.0
	Supply		240.8	2.7	56.1	27.1	2.2
	Shipments		(207.9)	(16.5)	(8.3)	(0.3)	(15.2)
	Shrink		(7.7)	14.0	(43.0)	(15.0)	13.2
	Carryout		25.2	0.2	4.8	11.8	0.2