Quality Issues Expected
The walnut harvest in Ukraine is set to kick off under difficult conditions with the ongoing occupation of growing areas and a hot and dry summer. A decent-sized crop is expected, at more than 100,000 metric tons (mt), but the crop quality is in doubt.
More than 80% of Ukraine’s walnut areas are on small-scale, family-owned farms, with production from these farms representing around 70% of the total crop. Walnuts on these farms are produced under extensive orchard management, with little pest control or intensive fertilization practices. Russia’s occupation of Ukraine exacerbated the situation, making access to inputs more expensive, and even rendering them unavailable altogether. Even with access to pesticides and fertilizers, small households are reluctant to invest in these inputs given the low returns on investment.
The situation was made worse by the ongoing drought and high temperatures experienced over the central regions of the country, where most walnuts are grown. Most of these areas only received around 60 to 70% of normal rainfall over the last three months, with temperatures as much as 4°C higher than usual during the important nut-filling stage. While this might not be immediately apparent when the crop is harvested, a lower shellout rate can be expected. A shell-out rate of 42 to 44% is normally expected, but it could be lower this season due to the scorching conditions.
Low Price and Large Carry Over Stock
The price of Ukrainian walnuts has sharply declined in the past two years due to a walnut oversupply, which has put significant downward pressure on prices. Furthermore, there is a surplus of lower-quality walnuts available worldwide. Ukraine's walnut industry faces a substantial risk where export contracts may go unfulfilled due to the ongoing war. Consequently, buyers have chosen to explore alternative suppliers to mitigate this risk. Walnut prices have been under pressure globally, but Ukrainian prices have decreased comparatively more.
Ukraine’s walnut exports tanked in the 2022/23 MY. In the first three quarters of the marketing year, from Sep-22 to Apr-23, Ukraine exported a mediocre 46,595 mt of walnuts on an in-shell basis. When export numbers are finalized, total exports for the marketing year could be only 53,000-54,000 mt, compared to the five-year average of 84,412 mt and last year’s 59,923 mt.
Based on these export projections and earlier supply and demand estimates from the United States Department of Agriculture’s Foreign Agricultural Service in Ukraine, ending stocks at the end of Aug-23 were as high as 53,000 to 54,000 mt. The large ending stocks could worsen the quality situation, as these walnuts will be in storage for more than 12 months, leading to a further gradual quality degradation.
Total supply for 2023/24 could top 150,000 mt. Sellers could have an uphill battle exporting these large volumes, especially considering the quality concerns. This will keep prices under significant downward pressure.
Source: Tridge, Adapted from USDA FAS
Tough 2023/24 MY Due to Weak European Demand
Ukrainian walnuts gained popularity in the European Union (EU) and the United Kingdom (UK) between 2019/20 and 2021/22. European demand for nuts was more robust during this period, as the pandemic prompted a focus on healthy eating. Ukraine benefited from the demand, and more than half of its exports were snapped up by Europe. As the landscape changed post-pandemic, Ukraine walnuts were also the first to suffer despite comparatively lower prices.
Ukraine’s exports fell in 2022/23, and its exports to the EU and the UK fell comparatively more. Regaining market share in Europe will be an uphill battle, and this will be the primary focus for exporters. As global nut prices have fallen, consumption in the Middle East, which is notably price-sensitive, has increased. This region presents a promising opportunity for Ukrainian exporters. However, walnut prices are expected to face significant pressure as the Northern Hemisphere harvest begins. Ukraine might struggle to offload its lower-quality walnuts, particularly the surplus from the 2022/23 season. The anticipated crop for the 2023/24 season, also expected to face quality issues, will be equally challenging to market. Additionally, the rising competition from countries like China and Moldova might lead to one of the most demanding marketing campaigns in the walnut industry's history.
Source: Ukraine State Statistics Service, ITC Trade Map