Pecans have long been a steady source of income for farmers in the United States. Southern farmers produce two-thirds of the world’s supply and U.S. consumers have been the main source of their business. According to the U.S. Department of Agriculture, the current price of $2.14 per pound for pecans is nearly twice as high as three years ago. What has caused this sharp spike and what does the future hold for the pecan industry?
David Wessel argues in a recent Wall Street Journal article that the global growth in pecan revenues can be largely attributed to the product’s emerging popularity in China. Only five years ago the Chinese market for pecans was virtually nonexistent. It appears that one of the primary causes of this growth is the perception that pecans provide greater health benefits than other nuts. Chinese consumers hoping to avoid Alzheimer’s and other similar diseases are eating pecans to strengthen their brains.
Although the short-term benefits are obvious, demand increases are alarming for many pecan farmers without a long-term business strategy. Demand for their pecans has always been relatively constant with a distribution network limited to local regions. Increasing supply in the pecan industry is not quick and easy to accomplish. Growing new plants can take eight to ten years, which may be too late for farmers to satisfy demand.
With no reliable forecast of whether or not pecan demand is a quick fad, businesses throughout the pecan distribution network must make tough decisions when planning long-term capacity strategies. Farmers speculating that the popularity will continue to grow are spending as much as $6000 per acre for land that will rapidly depreciate if they are wrong.
Shellers, bakers and retailers must carefully consider whether they can commit commit to high prices when there is no guarantee whether downstream demand will continue providing them with the return on investment that they need. As prices continue to rise, some customers will shift their demand to other nuts as substitutes to pecans.
Some pecan packaging companies are following the food industry trend discussed recently on this blog of reducing the size of packages to maintain a constant per unit cost. Rather than selling bags of pecans for a higher price, these producers will simply package fewer pecans in each bag. Consumers may continue to buy the nuts without realizing what they are losing. While pecan pies, cakes and ice cream have been a uniquely American delicacy, it is conceivable that China will push American consumers right out of their own market.