Nut lovers are facing a supply crunch on their favourite bar snacks. First it was soaring peanut prices, now cashew prices are surging as bad weather hits key growing areas.

“Prices are going through the roof,” says Ian Dyas, who handles cashews at London-based nut traders CG Hacking.

Excessive heat and lack of rain linked to the El Niño weather phenomenon earlier this year affected cashew producers in Africa and Asia, while a rise in labour costs in India as well as an import tax has led to numerous processing plants being idled.

Tight market

Cashew prices have jumped a fifth from the start of the year to about $4.20 a pound, with buyers facing a tight market for the rest of the year. Michael Stevens, a trader at Freeworld Trading in Edinburgh, says: “The rest of this year will be very tricky.”

The high prices are likely to worry cashew buyers, including retailers and food processors who use the tree nut in a range of foods including biscuits, cereals and sauces such as pesto, say traders.

International nut buyers are already reeling from a sharp fall in peanut supplies caused by flooding in Argentina and drought in South Africa. Peanut production in Argentina, a leading exporter, has fallen about 25 to 30 per cent from the previous year, and prices on the “spot” market have disappeared due to the lack of sellers, says Martin Masopust, director at Netherlands-based trader Bohemia Nut.

Vietnam and India are the two largest producers and exporters of cashew kernels. The two countries process raw nuts that they produce as well as importing raw material from Africa, including Ivory Coast, Tanzania and Benin, and re-exporting the processed product.

Saharan winds

The cashew market started rising once processors began to panic after El Niño delayed the Vietnamese crop in March. Exports from Africa were also delayed after the stronger-than-normal Harmattan winds from the Sahara hit the crop in west Africa.

“The adverse weather has decreased both quality and quantity from these origins,” says Corrina Hutchings, analyst at commodities data company Mintec.

Production for 2016 could fall about 4 per cent to 708,000 tonnes, according to early estimates by the International Nut and Dried Fruit Council.

The delays and poor yields meant that packers in Vietnam, who had overcommitted their sales, were forced to delay shipments. This in turn caused a shortage on the European market, further pushing up prices.

While some buyers sought to wait out the rally for further raw nut supplies from Africa to Vietnam and India, the quality and supply volumes have failed to improve, forcing them to scramble in a thin market.

Many buyers were unprepared and had not signed forward contracts, say traders. “Because people had initially thought there would be good crops, they had little forward cover,” says Mr Dyas.

The tight supply situation has been aggravated by the troubles facing India’s cashew processors. A rise in labour costs ate into profit margins, leading to facilities being idled, while a new import tax on raw cashew nuts has also crippled the sector, leading to lower export flows from the country.

Traders are now nervous about the cashew rally, as higher prices will incentivise more production, leading to a sharp fall in prices. On the demand side, they forecast reduced demand from large retailers. Supermarkets and other large buyers will next month start the tendering for their purchases for 2017 at current prices, forcing them to reduce the quantities they contract.

A decent crop next year combined with reduced purchases could mean a “real drop in prices next year”, says Mr Stevens.

Almond harvest

Nut lovers might take comfort from the expected bumper almond harvest in California, which produces about 80 per cent of the world's supplies. Almond prices have more than halved from the year before, after several years of increasing.

However, high prices weighed on demand, while forecasts of a good crop this year also depressed the market. Almonds are now the cheapest tree nut, priced between $2.25 and $3 a pound depending on the grade, compared with cashews, pecans, Brazil nuts, walnuts and pistachios which are all above $3.50.

“This is a complete 180-degree-turnaround from last year,” says Mr Stevens, who adds: “I would expect good sales of almonds for 2017 as supermarkets will start tendering using this new lower price.” – Copyright The Financial Times Limited 2016