Almond Acreage Growth Runs into International Trade Issues

Abstract

California almond tree acreage has expanded by roughly three-fold since 2000. As a result, the industry is more reliant on foreign buyers to purchase the growing supply. Combined with the acreage growth, recent international trade disputes and supply chain problems have resulted in an oversupply of California almonds, with end of year inventories close to 30% of the harvest. We investigate the role of trade disputes and supply chain issues on the economics of the California almond industry.

Introduction

Almonds are the most valuable crop produced in California, and over 70 percent of the harvest is exported internationally. The annual value of almond exports is over $4.5 billion, far higher than any other agricultural product shipped out of California. Grower prices for almonds are down over 25 percent since 2019, and are now below production costs for those farmers who are paying high prices for irrigation water. Warehouses are full, and temporary storage is being relied upon. The economic problems facing almond growers started with the 2018 United States-China trade war and then were exacerbated by the shipping container problems on the West Coast. Recently, trucker protests at the port of Oakland over California’s Assembly Bill 5 (AB5) law have slowed almond exports further, just as the new harvest comes in.

Trade war retaliatory tariffs imposed by foreign buyers cost the almond industry almost 325 million pounds (or $875 million) in lost export shipments from April 2018 through April 2022. The impact of 2021/22 shipping container disruptions was even larger on an annualized basis, reducing almond exports by an estimated 290 million lbs. (or $870 million) between a shorter April 2021 to April 2022 period.

Table 1 summarizes California’s almond supply and demand from 2016/17 to 2021/22. As shown in Table 1, for the August-July marketing years, from 2016/17 to 2018/19, growth in almond exports kept up with the expanding domestic supply, and the industry enjoyed relatively high producer prices. These trends were then interrupted in the 2018/19 marketing year after the implementation of retaliatory tariffs by foreign trading partners in response to the U.S. launch of the trade war. Almond inventories started to build up, and as a result, prices declined. The 2021/22 container shipping disruptions at California ports compounded the trade-war effects. The supply and demand situation has eased somewhat because the drought and low crop prices have curtailed water use and lowered the 2022 harvest volume by about 10% from the previous year. However, the strong U.S. dollar and rising input costs provide new headwinds for the almond industry.

Table 1: California almonds supply and demand (in billion lbs.).

Note. * Estimated. The supply and demand data are from the Almond Board of California. The producer price are from the National Agricultural Statistics Service, and the price for marketing year 2021/22 is estimated by the authors. The unsold ending inventory is defined as the carry in as of August 1, plus the marketable crop, minus total shipments delivered and committed at the end of the marketing year (Aug-Jul).

Retaliatory Tariffs and Shipping Container Backlogs

In 2018, the U.S. government implemented new import tariffs on steel (25%) and aluminum (10%), and the stated reason was for national security. The main countries targeted by these tariffs were China, Canada, Mexico, and the European Union, but other countries were also affected by U.S. tariffs. Several countries responded by imposing retaliatory tariffs on unrelated imports from the United States. These duties restricted U.S. almond exports considerably. China levied a 45% and Turkey a 10% import tariff increase on in-shell and shelled almonds from the United States. India followed in June 2019, increasing import tariffs on U.S. almonds to 17% for in-shell and 32% for kernels, exceeding India’s WTO-bound tariff rates.

Table 2 summarizes our estimates of the export losses due to retaliatory tariffs imposed by our trading partners, for the marketing years 2017/18 to 2021/22.  We used a statistical model to estimate the export response to retaliatory tariffs for California almonds, accounting for the reallocation of exports among retaliatory and non-retaliatory markets after the tariffs were imposed. The model accounts for unobserved characteristics through high-dimensional fixed effects and uses historical trade data from January 2017 to October 2019 to calculate the almond-specific trade responses to the retaliatory tariffs. We then used those estimates to predict the trade effects for marketing years 2017/18 to 2021/22. We report trade impacts for China, India, and Turkey because they all imposed retaliatory tariffs against California almonds. The current marketing year includes estimated export losses until April 2022. As a result of the retaliatory tariffs, more than 325 million lbs. (or $875 million) in California almond exports were lost. Foregone almond exports to China (-240 million lbs.), Turkey (-50 million lbs.), and India (-35 million lbs.) drove these trade losses. The trade effects were equally large for in-shell and shelled almonds to China but more pronounced for in-shell almond exports to India. The export losses peaked in the 2019/20 marketing year when the volume of almond exports to retaliatory countries was almost 120 million lbs. below the counterfactual level.

Table 2: Foregone almond exports to China, India, and Turkey (in million lbs.).

Note. *The 2021/22 marketing year (August to July) includes data through April 2022. The in-shell quantity was converted to lbs. using a conversion factor of 0.7. All data is reported in million lbs. kernel equivalent and the total by export destination is provided. These are authors’ estimates.

Since the 2019/20 marketing year, the annual loss in exports was halved due to the Phase One deal with China, implemented in March 2020, and Turkey’s unilateral reduction of its retaliatory almond tariff from 20% to 10% in May 2019. Today, the almond industry faces significant uncertainty over the potential for the Chinese government to end the current tariff exemption process. With stalling U.S.-China trade negotiations, a failing Phase One deal, and raising tensions over Taiwan, the Chinese government could halt the tariff exemptions for U.S. almonds.

Recently, China and India have negotiated favorable trade agreements with Australia. As a result, Australian almonds can be imported into China at a 0% tariff. After Australia’s new trade agreement with India is ratified, almonds from Australia can be imported to India under a significantly lower tariff than U.S. almonds. However, it remains to be seen whether Australian producers can capitalize on this opportunity given the considerable time and resources it needs to expand production further in the Murray-Darling basin with its extreme water issues.

The 2021/22 shipping container disruptions also cost the California almond industry. Almonds destined for export filled warehouses and temporary storage as the industry grappled with the transportation disruptions at California’s ports. We conducted an event study, which is an empirical analysis of how the market responds to a significant event, to measure the trade effects of port congestion on containerized almond exports from California ports. We used historical trade data for California ports to measure how the 2021 port congestion and container shortages impacted almond exports. Our model controlled for unobserved factors with port-product-year and port-product-month fixed effects. We assigned May 2021 as the treatment month and constructed an event window of eight months before and after the pre-treatment month of April 2021. The statistical model identified the treatment effect by comparing containerized almond exports in 2021/2022 with those from 2014 to 2018. The volume of California fruit and tree nuts exports was 19% below the counterfactual level between May 2021 and January 2022. The estimated trade effects were driven by many factors, including limited access to containers for agricultural exports, port congestion, and higher freight rates.

Table 3 shows the projected export shipments for major trading destinations in a hypothetical world without the container shipping disruptions. We estimate that shipping container disruptions reduced California almond exports by 290 million lbs. (or $870 million) between Q2/2021 and Q1/2022, varying considerably during the marketing year and depending on the export destination. The most significant losses were recorded during Q4/2021 and Q1/2022 when the volume of almond exports was about 25% below the counterfactual level. These trade losses translate into aggregated foregone shipments of about 95 million lbs. in Q4/2021 and 100 million lbs. in Q1/2022. India recorded the largest estimated reduction in export shipments (-50 million lbs.), followed by Spain (-35 million lbs.) and China (-20 million lbs.).

Figure 1: Foregone almond exports due to shipping container disruptions for the top five export destinations and the rest of the world (in million lbs.).

Note. The elasticity estimates for container trade disruptions in January 2022 were used to estimate export losses for Q1/2022. The in-shell quantity was converted to lbs. using a conversion factor of 0.7. All data are reported in million lbs. kernel equivalent. These are the authors’ estimates.

Conclusion

California almond exports have been harmed considerably by foreign tariff retaliation in response to the 2018 U.S. initiated trade war. Retaliatory tariffs reduced California almond exports by almost 325 million lbs. (or $875 million) from April 2018 through April 2022. These trade losses occurred in major export markets that had experienced significant growth due to rising incomes and shifting demand for high-quality tree nuts. The changing trade environment challenges the leading position of California almond producers in foreign markets. Recently, the Australian government has negotiated free trade agreements with China and India that will allow Australian almonds to enter these growth markets under very favorable terms, possible undercutting U.S. market share. However, this will depend on whether Australia can overcome the challenges associated with expanding almond production.

Global container shipping disruptions compounded the adverse effects of retaliatory tariffs, harming California almond exports even more than trade retaliation did. Between April 2021 and April 2022, almond exports were about 290 million lbs. (or $870 million) below the counterfactual level. The most significant losses were observed in markets in India, Spain, and China. The container shipping disruptions peaked in Q4/2021 when California almond producers experienced foregone sales of about $350 million. Considering back-to-back near-record crops, significant carryover of inventory, and pressure on storage capacity, the almond industry is well placed to expand exports without facing major supply chain disruptions and an uncertain trade policy environment.

The industry lost considerable export opportunities in recent years, with implications for the domestic market by putting downward pressure on producer prices and increasing storage costs. Without trade retaliation and container shipping disruptions, we estimate the unsold ending inventory would be about 75% below the current level. In addition, the trucker protest at the port of Oakland against AB5 laws in July 2022 further undermined the recovery of containerized almond exports. The trucking delays raised the expected carryover by 50 to 65 million lbs., putting the ending inventory for the 2022 market year at a record of over 840 million lbs, or about 30% of the marketable crop. This considerable increase in almond inventories since the beginning of the trade war will likely depress prices for the next few years.