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Australia • 14 October 2022

CEO Report

Larry McHugh, CEO at Marquis Macadamias

The Perfect Storm – what happened to macadamias prices?

It’s late 2022, and we are living in a world that has profoundly changed over the last three years. In 2019, the world had no idea what was to come and how it would change our everyday lives. Then, in early 2020, Covid struck, and lockdowns spread around the globe. Each country dealt with Covid in their own way, but in all countries, it changed the economic balance. Things that we took for granted, such as the availability of toilet paper, were suddenly no longer a certainty. We could no longer travel to other countries or to our neighbouring states.

Initially, macadamia sales continued as usual, with consumers treating themselves to some luxury whilst sitting at home awaiting freedom. The first signs of problems appeared when ingredient sales in the USA began to slow as cafes, restaurants, bars and convenience stores closed. And by the end of 2020, these closures created a small worldwide stockpile of styles 4, 5 and 6.

Through 2021 the Covid pandemic continued to heavily impact our ability to travel, as countries continued to move in and out of lockdown. The 2021 crop was not substantially larger than previous years, but China changed the way it purchased Nut in Shell (NIS) and started consuming more 22mm+ sized NIS, with sales of 20-22mm NIS significantly decreasing. Processors in most origins cracked this smaller NIS instead of selling it as in shell. Unfortunately, smaller NIS produces a larger proportion of styles 4, 5 and 6, adding to the stockpile still on hand from 2020. The drought-affected Australian crop produced a much larger proportion of halves and chips than normal in 2021, further exacerbating the problem. It wasn’t easy to grow the market for these styles when manufacturers and retailers were not investing in product development.

Late in 2021, processors worldwide started dropping prices on these smaller styles to reduce stock and increase cash flow. From December 2021 to March 2022, the price of ingredients styles fell steeply. When prices fall, our customers are less inclined to sign forward contracts because they are not sure how low the price may go, and they are aware that they may lose money if they hold expensive stock.

As we commenced the 2022 selling season, there was a lot of hesitation in the market and contracting. Thus cash flow was slow, which resulted in some processors dropping prices even further, which in turn created more uncertainty amongst our customers.

The NIS buyers in China were very slow to contract in 2022. Typically, most NIS contracts with processors around the world would be executed by May. This year, only a small percentage was contracted by this time. The threat of not being able to sell crop as NIS and instead having to process it, resulted in some processors dropping prices further. Kernel customers were aware of the situation in China, and this made them even more hesitant to contract forward due to the possibility of a large amount of kernel entering the market later in the year.

At the beginning of the year, the China crop was forecast to grow from 30,000t in 2021 to 50,000t in 2022. The crop is now predicted to be slightly bigger than that. The increasing macadamia crop in China has allowed Chinese buyers to wait longer to contract in 2022 than in previous years. The China crop harvest commences around September each year which better aligns with the major consumption times, which are from November through to Chinese New Year in January or February.  By using the China crop, customers avoid buying stock early in the year and storing it until it is used late in the year.

Ongoing lockdowns throughout China have continued to create logistics and economic issues resulting in reduced sales of many products, including macadamias.  The good news is that Chinese customers eventually started buying, but at prices that were approximately 20% lower than in 2021. At the time of writing this article, NIS prices are still falling.

Compounding the problem, in 2021 world shipping became very expensive, and it was challenging to secure shipping space. The cost of getting product to market increased dramatically and shipping delays resulted in customers receiving stock months later than when they required it. A lack of stock in some markets, like the USA,

 slowed demand as our customers concentrated on products they could obtain and sell.

During 2022, it has gradually become easier to travel and many aspects of life seem to be back to normal. Still, we are starting to see the longer term effect of the Covid pandemic on the Australian and world economy. Shipping remains expensive and difficult to obtain, the war in Ukraine is adding to the post covid problems as Europe enters hard economic times. We have seen rapidly rising fuel costs and central banks trying to slow inflation by raising interest rates worldwide. As a result, the cost of almost all inputs at our factories and within our customer’s supply chains have increased. The Central banks aim to slow consumer spending, ultimately slowing macadamia consumption to some degree.

Adding to the already difficult situation, South Africa recently released a revised crop forecast announcing that their crop is 19% larger than they had previously forecast. This has further pushed supply ahead of demand, and now the pricing of whole kernel is also being impacted.

Until recently, whole kernel prices had been relatively stable, but over the last two months, we have seen significant price reductions in some markets. The combination of slower NIS sales, and a larger crop in South Africa, has resulted in processors from that origin offering lower prices for whole kernel to customers around the world.

Falling prices in all styles are putting pressure on contracts signed earlier in the year at higher prices, threatening to further reduce our income.

The cost of operating our factories is also increasing particularly the costs of many essential supplies including gas, electricity, labour and transport. In addition, it has proven to be very difficult to get a full complement of staff to run our Lismore factory this year with the floods forcing many people to leave the area and a general labour shortage across Australia.

Factory costs are also influenced by seasonal events.  In 2022, the heavy rain and flooding in our Southern growing regions have resulted in a higher than usual percentage of commercial grade kernel, which increases sorting costs and reduces the sales value of the crop.

The current situation sees the sales value of the crop decreasing, while processing costs are increasing. This is against a background where Grower input costs are also rising with prices for items such as fertiliser and fuel prices increasing steeply along with most other input costs.

Macadamias are not alone in this perfect storm. The price of other nuts, such as almonds and cashews have also fallen as similar pressures affect their industry. Although the price of macadamias is not tightly linked to other nuts, many of our customers also use these other nuts, and if the price differential between macadamias and other nuts becomes too large, customers move to use more of the other nuts. This is particularly evident in mixed nuts. In China, macadamias compete against other in shell nuts such as almonds and pecans. Low almond prices encourage our customers to buy and sell more of them rather than take a risk on macadamias.

Looking forward

If favourable exchange rates continue into next year, the situation for Australian growers may improve, but there is still a way to go to increase usage sufficiently to keep demand ahead of supply. As we work to increase sales, we will face considerable global economic headwinds. We have also reached a period where recently planted trees in all origins are starting to produce, and the growth rate of the world crop will increase albeit with seasonal variations.

Despite the issues we are currently facing, the medium term outlook for the industry is very good. Reduced pricing for macadamias will drive demand and we have already seen increased interest in using our product. There are many companies who know our product but have not had the supply, or the pricing, to enable them to use it. There are also still large sections of the world population who do not know what a macadamia is.  Increasing supply will see macadamias used by more people in more parts of the world. Marquis has commenced a sustained sales and marketing effort that will help grow demand. Charles Cormack’s report in this edition of the Nutshell gives more details on our sales efforts.

Covid and its economic fallout will continue to impact our industry. Marquis acknowledges and accepts the challenges that lie ahead of us and we are already concentrating resources on sales and marketing whilst reducing the cost of processing. Steve Lee’s article in this edition of the Nutshell gives more details on processing.

I would like to take this opportunity to thank you for supporting Marquis, we are keenly aware of the financial difficulties the current market creates and are working hard to increase returns to you.

Sales & Marketing

Charles Cormack, CEO at Marquis Marketing

The global outlook for macadamia demand and sales is becoming increasingly challenging. The sales and marketing team is working extremely hard to find and activate new opportunities and volume and to maintain existing contracts, even with long-term loyal customers.

I am sure that, as growers, you are well aware of the economic headwinds we are facing in all of our major markets. Macadamia products are often a premium and discretionary purchase, which puts pressure on consumer demand in most markets. Anecdotally macadamia retail sales are down between 6% and 10% in the USA and a similar amount in Europe. In China, the Mid-Autumn Moon festival sales were reportedly down 40% to 50%. With high in-market inventory and prices falling, buyer sentiment is very low.

In September, South Africa officially announced a crop increase from 57 723t to 68 522t (an increase of over 10 700t) and anecdotal reports of a larger than-forecast Australian crop are spreading through the markets.

All our competitors are sitting on high levels of unsold stock, and cash flow is becoming the game’s name for many players. Competition for new sales opportunities is fierce and, in some cases, like a Dutch auction, as buyers play suppliers off against each other, driving prices down to levels we haven’t seen in more than ten years. 

So, in this environment, what is Marquis doing to make the best of difficult times, increase sales and move more products? What are the positive indicators and good news stories?

We are working hard to ensure that higher-priced contracts signed at the beginning of the year are fulfilled and are using this opportunity to secure additional volumes at lower prices.

We are working very hard with our existing retail customers, who have direct access to the consumer, to encourage promotions and new product launches to stimulate demand. We are starting to get some traction with a major retailer in Australia, who plan to promote macadamias in the lead-up to Christmas. A large retailer in Korea is also launching and heavily promoting a new brand of snack product in November. Both these promotions should drive significantly increased sell-through and sales for us. We are also negotiating with a major retailer in the USA to promote and discount existing lines, change recipes in some products to include more macadamias and launch several new products quicker, some of which we have been working on for more than a year.

With covid travel restriction finally lifted earlier this year, the sales team is back on the road again, with two trips to the USA and two to Europe in the past six months. We were also able to attend the INC in Dubai for the first time in 3 years, and this month we are attending the SIAL Paris, the largest European food and drink trade show, where we will have a presence on the Austrade stand. We have been able to visit a mix of existing and potential new customers on these trips. Our pipeline of potential customers is very healthy, and there are many active opportunities that we are working on. These include two high-end global chocolate and confectionary brands in Europe and a top-five retailer in the USA that we do not yet supply.

In the past four months, we have also been successful in reaching agreements with several agents/wholesalers in Europe and the USA, which will enable us to reach many smaller accounts in those geographies (through having stock available in the market), and will also get us in the door of some significant multinational brands that would otherwise take years to access. We have appointed new agents in Europe, Canada, and different regions of the USA. This has already led to a 600t contract to the USA, with genuine potential to lead to more volume.

Charles Cormack - GENERAL MANAGER MARQUIS MARKETING

With our recently established new product development capability, we are also working hard with existing and new customers to launch new products to market, either private label or through our own Marquis brand. This includes working with two major USA retail brands with a significant presence in China to launch two new retail snack products.

We are also making some real headway with oil sales and recently signed two bulk container load contracts for refined cosmetic grade oil into Asia. We are confident that we will continue to build oil sales momentum and achieve higher prices for this product than in the past.

Talks are in motion for a potential paste supply contact with a nut milk manufacturer with a global footprint that could eventually lead to paste sales in the hundreds, if not thousands, of tons.

On the new market development front, we have been doing work scoping out India and are in active talks with several potential importers. We’ve been working with an agent to introduce us to several snack manufacturers and major retailers in the Mumbai region. Tariffs to India are still very high and will take a few years to come down, but the time is now to do the leg work, establish the channels to market, and start building it up. We will likely visit India in February to establish partnerships.

With the sales outlook remaining challenging for the next few years, we have recognised the need to strengthen our sales team and are recruiting additional resources to start as soon as possible.

Whilst wholesale prices continue to fall, it can be challenging to have an optimistic outlook for the future, but there is a path to recovery. There is no doubt that the lower prices have stimulated significant renewed interest in product development and product launches with many of the major consumer brands and retailers. There are many active development projects in progress, but this process sometimes takes up to 18 months or more. The whole industry has an overhang of inventory that must be worked through, and the demand stimulated by the lower prices should achieve this in the next two years. The next season will be tough as excess stock clears, and hopefully, the world economy works its way through difficult times. We are hopeful that prices will begin to recover in 2024. However, it is unlikely that prices will return to the highs of 2020 again., We also believe that the much larger price gap between wholes (snacks) and half and chips (ingredients) is here to stay and will continue to stimulate demand in the ingredients sector.

As supply continues to grow rapidly, particularly in South and East Africa, macadamias will find their place as a more mainstream product, albeit still in a premium position. Prices should stabilise at a sustainable level for growers, consumers, and the supply chain alike, and Marquis will continue to play an essential role in helping to stabilise the industry for the long term.

Factory Operations

Steven Lee, Chief Operation Officer

The 2022 season has been a very long and challenging one for us all. The good news is that 2022 is almost over, however, there are still many complex challenges to overcome in the market and in the general business environment, which will not be resolved this year. A further concern is the forecast of another La Nina weather pattern for 2023, and with soil moisture levels already high, it makes for a nervous time for growers and residents in Northern NSW.

The harvest in Bundaberg is close to completion, with crop volumes generally in line with expectations for most growers. Quality has been reasonably good, with Premium kernel levels of 34%, Commercial grade 2% and Rejects in line with the long-term industry average of 3%.

The Northern Rivers crop has seen higher than normal Sound Kernel Recovery at 35%, although 6% of this is Commercial grade and 29% Premium. Reject levels have been stable at 3% for most of the year, with Immaturity and Insect damage topping the list in Lismore and Internal discoloration and Insect damage being most prevalent disorders in Bundaberg. With 17% of the Sound kernel delivered to Lismore being Commercial grade, it has made sorting very difficult, with only subtle differences between Premium and Commercial grade proving quite a challenge even with our new colour sorters.

The Northern Rivers and Nambucca harvest will linger on for a few more weeks as growers observe withholding periods for lace bug sprays and dodge intermittent wet weather to pick up the last of the crop.

Both factories are still processing at full speed, with almost 75% of the crop processed. It has been one of the most challenging seasons for processing, with further tightening of specifications for the NIS market in China and significantly higher demand for whole kernel early in the season.

The factories have adapted to these demands on the run and are continuing to look at ways to be more flexible, efficient and recover more value from the crop delivered. We are acutely aware of the challenges that growers are also facing on farm, with a decrease in NIS prices and increased input costs for fertilizer, fuel, chemicals and labour, to name a few. Marquis is working with our growers on strategies to reduce costs whilst maintaining yield in these tough times.

As we have mentioned in recent meetings, the current disparity between market pricing for Whole kernel and Halves, along with the difference between Premium and Commercial grade has led the company to consider changes to the 2023 pricing system to better reflect current market conditions. For those of you that have been in the industry a long time, you will recall that there were times when Commercial grade kernel was paid at a discounted rate to Premium grade kernel, and a Whole kernel adjustment was included as part of the consignment value calculation to reward growers who delivered consignments containing higher levels of Whole kernel.

 We are working through some system options and will keep growers informed as the system develops. 

In addition to the weather and market challenges, we have seen increases in energy costs, transport, packaging and a general shortage of staff to keep all areas of our factories operational. If you know anyone on the lookout for factory work, please get them to contact us by email at  [email protected] for the Lismore factory or [email protected] for the Bundaberg factory. 

My management style may have been described as ‘tight’ at the recent AGM; however, I think “fiscally responsible” is a better description – although my wife may disagree! Even in good times, we are looking to lower operating costs and squeeze more out of our existing infrastructure. We are continuing to concentrate in that area as the market tightens. Some notable recent achievements are in our Chip sorting line that now runs with a single manual sorter, where we historically ran with four manual sorters and produced a lower quality product. We have found and utilised a lower cost external storage option for NIS for the 2022 season. Our investment in a paste mill is adding value to lower grade products. The new cold room at Lismore is full, resulting in significant savings on cold storage charges in a period when we are carrying high levels of inventory. We’re also working on our IT systems to optimise our fulfilment of customer orders with the most appropriate stock.

While it’s easy to focus on the negatives faced this year, every one of those challenges represents an opportunity for us to do better. As the saying goes ‘If you dislike change, you’re going to dislike irrelevance even more”.  Marquis is committed to ongoing change and continuous improvement; it’s worked for us since 1983 and will see us come through the current challenges.

Ausmac is just around the corner.
See you on the Gold Coast!

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