Paragon Foods

Traditionally, this is a quiet time of year for this commodity as the new crop is being collected, transported to the shelling plants and assessed for quality and volume.

First indications are that 2008 crop will be normal in terms of the amount collected.

This is the wet season in the Western Amazon and we are used to hearing stories of roads and bridges being washed away. Transportation difficulties tend to be the norm rather than the exception.

Except: Due to the weather pattern called ‘La Nina’ bringing large amounts of moist air from the Eastern Pacific, The Andes are suffering unusually high rainfall. This is now flowing into the Amazon tributaries and causing flooding in areas normally spared.

Nobody can predict how this will disrupt the Brazilnut crop until the story plays out in real time, but delays are inevitable. At the moment we are looking at up to 6 weeks.

In the meantime we must humbly eat Brazilnut pie because the shortage we were expecting to bite towards the end of 2007 has not come to pass. This is because demand for xmas sales was subdued, probably due to the supermarkets ignoring this item. Several seasons ago, when inshell brazils became unavailable due to aflatoxin problems, Kernels were promoted as a seasonal alternative. Generally this did not occur during xmas 2007.

We do not, however, expect 2007 crop prices to fall significantly as the stocks are in strong hands and we have until at least early May – in a normal year - for the new crop to arrive in any volume.

We understand that in times of uncertainty - which we are certainly facing in the larger financial and banking fields – buyers tend to be cautious.

This may explain why so little forward business has been concluded in Brazils. However, with just about every agricultural commodity seeing unusually large increases in price, it is becoming apparent that the falling U.S. dollar is buying less, making it unlikely that we will see weakness in this market any time soon.

Like the seas, this market is forever on the move as the many factors that drive the price upwards and downwards continuously change.

So far this year we have seen a relatively quiet and orderly increase in prices by more than 35%. But it is questionable whether the calmness is set to remain in place.

2007 crop appears to be much shorter than last year as producers are reporting difficulty in securing sufficient raw in shell material to meet the annual demand of about 25,000 m.t.

Here is how the numbers compare:

2006:

Carry in from 2005 : 3,200 m.t.

Bolivian Prod/n : 17,600 m.t.

Peruvian Prod/n 2,400 m.t.

Brazilian Prod/n 2,400 m.t.

Total: 25,600 m.t.

2007:

Carry in from 2006: 1,600 m.t.

Bolivian prod/n 14,400 m.t.

Peruvian prod/n 1,200 m.t.

Brazilian prod/n 1,600 m.t.

Total: 18,800 m.t.

So it is beginning to look like supply will be down 6,800 tonnes or about 425 containers or 25% this year.

The shortage appears genuine. Even at the much higher prices which are reigning now,

we are finding difficulty in obtaining offers from origin and most suppliers will not even hazard a counter.

However, second hand sources may be willing to take profits on their earlier purchases and with the summer lull now fast approaching, it is possible that we may see a cap on the market at current levels for the next few weeks.

Price considerations aside, we think that exhaustion of supply is a real possibility later this year.

First 2008 crop arrivals will not start to trickle in until during April.

It may be that the rise in prices so far will destroy demand for the missing 25% of the crop.

We saw demand destruction during the short crop of 2005 but prices then peaked at more than 50 % above the current level and also the dollar was much stronger then. Although we have seen $ strength recently due to the bond market inferring higher interest rates, we consider that the greenback will resume its slide before too long as more central banks start to hedge their reserves into alternative currencies.

If you agree, you may wish to consider keeping your forward nut purchases in dollars .

If you have not already done so, we suggest that a serious look at cover for last quarter 07 and first quarter 08 for your Brazil nut supply is essential.

In our humble opinion buyers need to have a good hard think as to whether they can continue to pay higher and higher prices for their supply, because if they can not, someone else will.

Remember who told you first. Look at our previous reports.This market has more bull in it than Pamplona. We have nothing to offer you at the moment, if you do decide to make a move, contact us and we will try to help.

Forward prices have been weak until recently as shippers at origin look to make sales to raise finance for their annual seed purchases.

But those needing to buy spot in the next few weeks will not find themselves benefitting from this situation.

Stocks in European warehouses have never been so low and replenishment is not on the horizon.

There is nothing unsold afloat, nothing on our books due to be shipped for at least another week which means a continuing hole in the supply for at least 6 weeks.

Then, for ' a while ' anything that does come afloat will be sold whilst on the high seas. We can not predict how long that ' while ' will be, but only after the pent up demand backlog in Europe is resloved

Expect the premium spot over March shipment to increase in the next few weeks, even if, as now looks possible, the forwards themselves start to firm up in the interim.

This is a market to be brave in. On a forward basis, prices in £ have dropped considerably during the first days of 2005.

Do not be fooled, however into thinking that these prices will continue into the coming months, there are specific reasons for the current weakness which have the potential to disappear like the morning mist.

They only have eyes for the supply side scenario and with seed prices at an all time high,they need to make sales in order to finance this years operations. Accordingly they have been offering lower and lower during January in order to make a start whilst, worldwide, buyers have been taking a breather whilst they literally take stock of the situation. To be fair, prices were overdone in the last quarter of 2004 and a correction has been overdue.

High prices have long arms and, accordingly, this years crop is certain to be a large one as rainforest inhabitants break their backs to cash in on the high seed prices.

I'm afraid that if you are looking for any further bearish news in this report, you will be disappointed.

Last years crop was also brought in under historic high price circumstances and it has all been sold.

The crop size is only 30 to 50,000 tonnes, compared with ten times that amount for Hazels, for example. So even a sizeable increase in supply is relatively insignificant compared with other major tree nuts.

If you normally have forward cover for tree nuts, have to have them for your production, and are waiting, hoping, praying even, that prices will fall in the coming months because it always has in the past, then in my humble opinion you will be disappointed and wrong footed.

The reason for the high prices is not poor crops but a huge groundswell of increased global demand for these products following a plethora of news confirming that eating nuts will improve your health.

We have heard from some customers that brazilnut sales to the supermarkets are up by 100% year on year.

Brazilnuts, as you will be aware, are the best natural source of Selenium. Eating 2 brazilnuts per day, as more and more people are learning, can help to prevent cancers, heart disease and a raft of other disorders and illnesses. In the early stages of HIV infection, the virus neutralises Selenium in the body and it is becoming recognised that taking a supplement of this trace element can actually conquer aids!.

Divide the largest possible Brazilnut crop by 365 and share it out 2 nuts per person. How many people can be fed? answer about 22 to 25 million. This compares to a world population of 6.4 billion.

On a slightly less ethereal note, suppose you were a nut mixing operation, at current forward prices, wouldn't you be planning to put in as many brazils at half the price that Almonds and Hazels are at.

In short, do not expect the current low prices to reign for too long, take cover before it is too late.

It is clear that the reason for the current runaway bull market in Brazil kernels is due to greatly increased demand, perhaps 25% on the year.

It appears that This nut has been promoted from 'Whole food' to 'Health food'. The recent and ongoing press articles encouraging people to eat 4/5 brazilnuts per day if they want to keep healthy is keeping sales of packed brazilnuts high at the supermarkets.

The increases in price have, until recently been absorbed to a greater extent by suppliers to the supermarkets and a great deal of pain has been felt.

Additionally the word on Brazilnuts' health giving properties has spread worldwide and fresh demand is springing up in places as diverse as Israel and Morocco.

Not that the supply has been any smaller than usual, indeed 2004 crop may be one of the largest on record as prices were historically high when the raw nuts were collected last winter.

In other words, the jungle was scoured for nuts last year, It is unlikely that supply can increase significantly in 2005.

The free on board price is now at $4.00 per lb. The historical high, prior to this year was $2.10 . At the moment there is no let up in the demand.

The big question is whether and by how much these higher prices will dampen demand in the longer term.

Our guess is that there has been a paradigm shift in demand which will not put healthy eating buyers off and that higher prices will be the norm for brazil nuts.

Macadamia nuts have been selling at between £7 and £12 per kilo for many years.

The total crop size on Brazils is 30,000 m.t. Compare to Hazelnuts, for example 500,000 m.t.

High prices will definitely rein until at least May 2005 as the first shipments of new crop during Feb/March will be snapped into the jaws of a market bereft of stock.

Only when the supply pipeline is refilled later in 2005 will we see what longer term effect higher prices are having on the overall demand situation

All time highs are being made at the moment as the problems of the past few months start to bite.

The small crop has been repeatedly delayed by late rains, industrial disputes in production, civil strife, bridges down and port strikes.

All this comes at a time of unprecedented fresh demand from the U.S.A. (healthier eating) and many other countries with developing middle class economies and populations looking to eat and snack healthier.

The Sunday times recently listed Brazilnuts as the top anti - ageing food of all.

Raw seed arrivals from the primary rainforest will soon slow dramatically as the Amazon rivers, currently filled with Andean snow melt and seasonal rains starts to drop. No self respecting commercial barge owner will sail on a falling tide, especially if the tide is annual.

So the situation is difficult to say the least. Spot prices are around $2.60 per lb ex store. Afloat around $2.35 per lb F.O.B.

In our earlier report we suggested that when the supply pipeline started to fill, prices would start to fall. At the time of writing the shortages are still reigning with only a few containers afloat unsold to ease the situation.

The big news is on the forward market where the diiscount on future months is rapidly reducing into the future, now higher prices have been established through till the end of this year as it becomes apparent that supplies will dry up completely before the end of this year. This will inevitably affect 2005 crop in a similar way as no material will be arriving between December and April. So 2005 prices are now beginning to firm in line.

Thinking forward, raw nut prices will be very high at the start of 2005 crop. This may force some, or maybe more than some of the smaller shippers out of business as they do not have the funding to buy. This may, again, cause problems but this time in production capacity.

All in all, the two major Bolivian producers have played a clever hand of cards, they are in the driving seat for the forseeable future, the only questionmarks being:

To answer Q1: There will be more collected, no doubt but this is limited by the non existent communications infrastructure in the jungle. A normal crop is around 30,000 tonnes. Compare to the Turkish hazelnut crop of 500,000 tonnes. Lets say a miraculous 50% increase in Brazil supply is achieved, this is still only 45,000 tonnes.

Q2: £1000 per tonne increase is only 10 p on a 100g supermarket pack where they are charging £1.37 per pack. inelastic when people are looking for the healthiest of foods.

Today We see a confused situation with high prices remaining in place for spot material, whilst forward prices decline sharply as we move forward.

The question is, how much material will it require to refill the supply pipeline and when will the pressure be relieved?

Shipments have been made in March. These will start to arrive in the next few weeks, however we believe that they will all be spoken for until late April/early May.

At origin, there are two conflicting stories depending upon the availability of raw nuts from the jungle.

Firstly, In Riberalta, Bolivia, due to the high prices paid by the strongest two shippers, many of the smaller processors are not able to procure green nuts and are asking for extensions across the board for deliveries from March/April to Sept/Oct to go forward to 2005 crop.

However, the stronger (and larger) two shippers have paid fancy prices for their material and appear to be holding prices up in the hope that they can control supply.

They may be successful, but the odds are against high prices remaining in place throughout this season as 'high prices have long arms' meaning that the collectors in the jungle have every reason to find and sell as many nuts as they can find whilst prices at the factory goods inwards door remain high.

Brazil will play a more active part in this years scenario as they gear up to produce more brazil kernels and sell into the higher prices.

We expect prices to go into serious decline from May/June onwards as buying interest fades into the summer and the supply pipeline fills.

Demand
All the above assumes a steady pattern of demand with a tailing off of new orders as the price increases. We think this may be the curve ball in traders expectations in the future as more and more exports to the hugely populated countries of China and Russia continue.

We have stock in all positions and would be glad to assist with any specialist grades which you may require.

Cashew Nuts
Prices are steady at the very low levels they have been at for some months.

Demand has been lacklustre whilst supply is increasing due to increased yields from new types of tree.

We are not expecting any large increases in price in the forseeable future. The cashew trade worldwide needs to find new places to sell to and to promote increasing sales in it's traditional markets.

As prices fall, the pro rata processing cost becomes a higher percentage of the overall cost. This will serve to put the brakes on further falls.

Almonds
The Californian crop is estimated to be 920 million lbs, this is slightly more than earlier predictions of 880 million but has not changed market sentiment.

April shipments were high, continuing the trend for increasing exports helped by the weakening dollar.

Although dollar prices are considerably higher, due to the decline in the U.S. currency, almond prices remain the same in Europe as last year.

Hazelnuts
Prices remain stagnant whilst demand is lacklustre.
2003 crop is expected to be normal. No big changes are expected in the market.

Pecans
Always a high priced item due to its popularity with the American domestic market and long delay between planting and reasonable crop yield. No fall in prices is expected imminently. Buy now to secure forward supplies.