There was one comment in the Annual Report last Friday that particularly caught my eye. The extract below is from page seven of the report:
...Additionally, we are assessing opportunities to diversify into other tree nuts, where we can utilise our expertise around multi-site orchard management, processing and strategic marketing...
This is certainly a first. As back far as I can remember, Select Harvests has always maintained that it is a pure 'almond play'.
If my recall is correct, several years back Surandy mentioned that he asked at one of the AGMs if the company would consider diversifying into pistachios, and they didn't seem to be particularly keen on the idea at the time.
I don't think it is a bad thing they are investigating this, however, as there is some merit in the idea of diversifying into other types of tree nuts.
The most significant risk faced by Select Harvests is the impact of extreme weather, and no matter how much the company improves the efficiency of their farm operations, there is always that chance that they could face a crop wipe-out as the result of adverse meteorological conditions. This factor is always going to cause some angst amongst shareholders.
Although many of the company almond orchards are spaced far apart in terms of distance, broadly speaking all the orchards fall within the same climatic zone.
If it is very wet in Loxton, it will probably be wet in Hillston, and when it is dry in Griffith, it will more likely than not it will be dry in Paringa. This was illustrated starkly in 2017, when the crop came in well below expectations due to unfavourable weather conditions (in the end they raked in 14,100 t, compared to the expected c. 16,000 t).
To a certain extent such 'acts of god' are inevitable, however as SHV is listed company, I think it is crucial to limit the damage, given the inevitable flow-on impact on the share price.
From my perspective, there are two possible paths the company could follow in order to achieve this.
The first option would be to plant almond orchards in a completely different climatic zone, away from the 'three borders' region in south-eastern Australia where most of the local almond orchards are located.
The most obvious option here would be the Swan region in the south of Western Australia.
There are some attractions here, and I certainly think it is inevitable that WA will one day become a major almond growing region, given the scarcity of land suitable for growing almonds around the world. That said, I don't think the company is quite ready to return to the west, given the debacle of the West Australian project early in this decade.
The other alternative would be to expand overseas. In my opinion, the risks of expanding overseas outweigh the rewards. All things considered, Australia is surely one of the best places to grow almonds in the world, and I think you'd be hard pressed to find a more attractive almond growing region overseas.
Option number two, of course, is the idea that was mooted in the Annual Report last week: diversify into other types of tree nuts.
The advantage of this is two-fold. Firstly, many types of nut-tree can be grown in a broad swather across Australia, and are not limited to the Mediterranean climes of the south-east and the west of Australia as is the case with almonds. This means that the nut-trees don't need to be bottled up in one region, as is the case at present.
The second advantage is that some types of nut-trees are hardier than almonds, and thus are better placed to cope with the type of weather extremes we saw back in 2017.
This then begs the question: what type of nut-tree would be suitable, assuming the aim is to the reduce the adverse impact of extreme weather?.
I think there are two types of trees that stand out: pistachios and walnuts.
Walnuts have a deeper root system than almonds, which means they tend to hold up well against strong winds, in contrast to almonds, which are often blown over. This deep root system also helps them cope with drought, at least in the early stages.
Another difference is that, whereas commercial almond orchards are restricted to
Mediterranean zones, walnuts can be grown across a much wider area. On top of that, walnuts are wind-pollinated, and thus don't require bees.
There is a downside to this: both these factors mean that walnuts can be grown across a vast swathe of territory around the world, and thus the walnut price tends to be in the lower band of tree nut prices.
What of pistachios?. Like walnut trees, pistachios are wind-pollinated, and so growers of this type of tree crop don't need to worry about finding bees to pollinate their crops every year, as is the case with almond growers.
Another similarity is that pistachio trees have a deep root system, which helps them in drought conditions.
Unlike walnut trees, however, pistachios are limited to the Mediterranean-type climatic zones. The trees have a higher tolerance for salinity than almonds, however, which might suggest they have a slightly borader range than almonds.
One topic I haven't considered yet is 'chill hours'. If almonds, walnuts and pistachios don't get a certain minimum number of 'chill hours' over the colder months, this tends to retard crop production. According to David Doll's website, almonds only need 600 hours of chill, compared to 800 for pistachios and 900 for walnuts. Here, almonds have an advantage over the other types of nut trees.
Finally, there is the water question. As is suggested by the graphic below, pistachios use more water than almonds, whereas walnuts require significantly less water than both almonds and pistachios.
This suggests that if Select were going to move into pistachios, they will probably need to find some niche region which is suitable for pistachios, but not ideal for almonds, otherwise the thirsty pistachios are going to end up competing with almonds for a limit water supply.
If given the choice, I'd probably opt for pistachios over walnuts, but both tree types have their pros and cons.
(20min delay)