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Walnut Production & Consumption in Ukraine Falling

The USDA Foreign Agricultural Service (Post) forecasts Ukraine’s walnut production at 106,500 metric tons for marketing year (MY) 2023/24, similar to MY2022/23. Production fell in 2022 because some production areas are currently in occupied territory at the time of the report writing. Exports are slow, plagued by quality issues, constrained logistics because of armed conflict, and growing competition in international markets. Domestic consumption of walnuts is a mixed bag. The number of refugees that left the country is pushing it down while lowering consumption of imported tree nuts due to decreased disposable incomes by the population keeping it up. Ending stocks increased for each consecutive MY while domestic prices are sliding down.

The State Statistics Service of Ukraine (SSSU) published official walnut production numbers for CY2022. The total walnut reported area is 17,100 ha, a 5.5 percent decrease compared to the previous CY. The main reason behind the area drop was the loss of control by the Ukrainian government over certain regions of Donetsk, Zaporozhe, Luhansk, Mykolaiv, Kharkiv, and Kherson regions, which were occupied as the result of the armed invasion by Russia, which started in late February 2022. Total walnut production is reported at 107,660 MT, a 6.7 percent decrease compared to the previous year. Post accepts these as MY2022/23 estimates.

The MY2023/24 production number forecast is based on the following production area assumptions by Post:

-A slight decrease in production area in the household sector as some trees are retiring out of production, and usually, households are reluctant to replace these with new ones.

-There will be no increase in production areas by enterprises. Establishing new tree plantations is a long-term investment that seems especially risky during the active phase of armed conflict.

The resulting MY2023/24 production area forecast is 16,900 hectares, a one-percent decrease compared to the previous MY.

Below is a graph that depicts the Normalized Difference Vegetation Index (NDVI), a standardized measure of healthy vegetation. High NDVI values indicate healthier vegetation. Low NDVI values indicate low or no vegetation. Based on the year-to-year comparison of NDVI for Ukraine, presented below, FAS Kyiv would like to note that MY2023/24 growing conditions since June 2023 went below the long-term average (black line on the graph below) and started to resemble those observed in MY2022/23.

The available information about subsurface soil moisture (see the relevant picture below) does not suggest improving growth conditions in the short term.

Based on NDVI’s similarities with MY2022/23, Post forecasts MY2023/24 walnut production at 106,470 MT, similar to MY2022/23, with the potential to revise it downwards should the situation with soil moisture continue to deteriorate.

Most walnuts harvested in Ukraine are produced by individuals or small private family farms, harvesting trees on their land or near their farms. This category of producers is not typically concerned with applying fertilizers and agrochemicals and uses manual labor for harvesting and shelling walnuts. Harvested walnuts are typically sold to intermediaries, who assemble batches designated for export.

The production area farmed in such an extensive manner has decreased in the last several years. For CY2015, over 95 percent of the Ukrainian total walnut production area was on small, private, family farms. These farms represented 73 percent of the total Ukrainian walnut production area for CY2022. Post predicts this downward trend in walnut production on family farms will continue in the medium to long term as aging trees are losing their productivity and being chopped down. However, it should be noted that family farms still enjoy a dominant position in production volumes as they hold an absolute majority of the bearing tree area compared to industrial growers – 81 percent for CY2022.

Since 2009, Ukrainian farmers have begun developing walnut orchards for commercial purposes. The average size of these commercial orchards ranges from 20 to 50 ha. Some regions, especially Central and Southern Ukraine, require irrigation to secure expected yields. At the same time, orchards in the northern part of Ukraine may experience lower yields because of the cooler climate. That is why around 30 percent of all commercial walnut gardens are located in the Vinnytsia region (Central Ukraine), according to SSSU data for CY2022.

The growth in commercial production farms in pre-war years could be attributed to continued state financial support for orchard and berry producers (please refer to the Policy Section for more details) and the opening of the agricultural land market in Ukraine (see Policy Section). Industry reports note that farmers invested in developing high-yield commercial orchards of multiple walnut varieties, installing irrigation systems, and applying fertilizers. In southern Ukraine, seedlings could be planted in autumn, but in northern Ukraine, it is still advisable to plant in spring to avoid winter frost damage for newly planted trees. Walnuts are generally harvested from the end of September through the end of October.

According to SSSU’s data, commercial growers did not plant new walnut orchards for CY2022, which indicates that professional growers are reluctant to get involved in long-term investments during the active phase of armed conflict with Russia. It should be noted that the initial investment required to establish an orchard range from $1,200 to $1,800 per ha. According to Post’s estimates (see PSD table at the end of the report), stocks are peaking because of export issues (see Exports Section). The wide availability of the product (including low-cost and low-quality generated by the households) is the main factor pushing down domestic walnut prices (see Walnut Export Prices Graph in Trade section). Subsequently, low prices are triggering a drop in profit margins of commercial growers, thus discouraging them from getting on board with the new investments.

Tighter competition (both from domestic households and foreign competitors) forces existing commercial producers to become more efficient. According to a recent media report (in Ukrainian), one of the industrial growers, farming 91 hectares of trees, has purchased a tree shaker and harvester to speed up harvesting and be less dependent on the hired workforce. Specialization is one of the signs that Ukrainian walnut farmers have started perceiving it as their primary business.

According to industry experts, the main body of existing industrial walnut orchards was planted 8-12 years ago with seedlings that would reach their full potential after ten years since they were planted. New walnut orchards can be expected to reach their full potential from four to five years after initial planting. FAS Kyiv notes that improvements in plant genetics may make walnut production more appealing for new companies considering entry into this business.

Producers prefer Ukrainian-origin seedlings. However, due to increased demand and the inability of local seedling producers to meet the higher demand, some new seed varieties are imported from neighboring countries, like Moldova and Belarus, which feature similar growing conditions. Some growers are experimenting with imported seedling varieties to gain a competitive advantage in yield and quality. The Ukrainian State Registry of Plant Varieties (in Ukrainian) lists approximately 39 different walnut varieties in CY2023, allowing commercial growers to pick and choose commercially sustainable varieties in their area.

Most of Ukraine’s household walnut producers do not treat trees for diseases. However, with more commercial walnut production coming online and taking over poorly managed and aging orchards, these newly established commercial producers reportedly pay greater attention to production technologies (beyond irrigation) to increase growing efficiencies. For example, these growers are researching ideal growing areas, investing in nurseries to improve genetic stock, and applying fertilizers and pesticides to their orchards.

Sorting is predominantly done manually to ensure the quality and consistency of the product batches. Walnut production in Ukraine is still mainly a labor-intensive business, with most walnuts harvested by hand or rudimentary nut-picking devices in family farms used by the previous generation of growers. According to industry sources, family farms are known for their product’s unstable quality, pushing them into the low-level segment among foreign buyers.

According to industry reports, commercial walnut production yields have increased, as well as the quality of their product. The majority of farmers did not initially consider installing shelling equipment at the stage when they were establishing their orchards. It happened because they relied on the opinions of suppliers of walnut seedlings, who were promising unrealistically high prices for in-shell walnuts to benefit their sales. Commercial growers ended up directly competing with family farms, which naturally had lower production costs and thus could sustain lower asking prices in the in-shell walnut market.

Recognizing the price spread between shelled and in-shell walnuts (see Walnut Export Prices Graph in Trade section), the most advanced walnut producers started purchasing a wide range of equipment, allowing them to shell and pack their product to avoid competition at the crowded, low-end in-shell market. According to industry experts, the average conversion rate between shelled to in-shell walnuts in Ukraine ranges between 33-38 percent. This ratio is expected to improve in the future with the development of commercial production. Conversion rates for the recently established walnut orchards average around 55 percent. However, the share of these plantations is still relatively small, so the impact on the national average is minimal.

The latest trend is that farmers started applying for long-term banking credits to establish vertically integrated production clusters, including an orchard, a processing facility with a packaging unit, and a certified quality control lab. For example, a walnut producer received a $15 million credit payable within seven years issued by the state-owned UkrExim Bank (in Ukrainian) in CY2021. Post is not aware of any similar investments for CY2022.

Another part of the business for commercial growers is walnut wood, used for local furniture manufacture. Additionally, some wood is exported. Commercial walnut growers plant other trees during orchard development to harvest wood after a few years.

Other products related to value-added walnut production are treated leaves for medicinal use and walnut (green/young nut) preserves. In recent years, Ukrainian consumers’ demand for walnut oil has increased, primarily from EU importers. There is also some domestic demand for walnut oil as a critical ingredient in the premium segment of natural cosmetic products.

Continue reading the full report from USDA-FAS HERE.

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