Onion and Garlic Market Report- August 2019
The 2019 US onion crop harvest is now ~50% complete with 100% of acreage harvested in the Desert (Imperial Valley, Southern California) and Arizona. The organic harvest was also completed on time in late May. Yields from all these regions have come in slightly better than plan, driven by improved solids.
Harvest activity has begun in Kern County and the westside region of the California Central Valley. Part of this area experienced unseasonal storms and hail during late May. This has adversely impacted yield and quality of some of the incoming raw material.
Extra-low micro production from all regions continue to remain below historical averages, limiting current availability. Due to the wet weather during May and June in the Tule Lake region of Northern California, planting was delayed, but the crop is progressing well at this time. Harvest will begin in October. After considering the combined impact of over/ under yield, the overall US onion crop estimate remains unchanged from our last forecast.
Market demand, which picked up at the end of Q1 has remained steady through Q2 and is beginning to show more strength at the end of the quarter. Market pricing during Q2 has been firmer than in the previous quarter, driven primarily by shortages in extra-low and low micro availability and higher costs of irradiation and freight costs.
Olam Egypt’s 2019 White onion harvest was completed by mid-July. The crop has come in largely at plan and crop yield has improved over the last year driven by better crop management practices.
Overall quality this season has turned out well, with a large proportion of raw material meeting low micro / extra- low-micro standards. The crop has managed to withstand the impact of sandstorms and reduced water and power in some areas and has shown strong resilience in Egypt’s hot climatic conditions.
The Egyptian 2019 summer yellow onion harvest was also completed by mid-July. The crop size is higher than last year by ~15-20%, primarily due to stronger prices in both the fresh as dehydration markets. Overall Egypt pricing for both white and yellow onion has seen a sharp increase over Q2, 2019 driven by local price increases in the fresh market as well as reduced supply and higher pricing from India.
India’s 2018-19 late Kharif (winter) dehydrated white onion crop production is estimated to be down ~60-65% over last year. A combination of weak market pricing over the last year (driven by excess carryover inventory from the previous 2 seasons) coupled with erratic and poor monsoons in the key growing regions this year have led to a sharp drop in supply. Reduced availability of fresh onions forced many processors to stop operations during Q2. As carryover inventories depleted, both fresh and dehydrated onion markets have seen almost doubling of market prices over the last 2-3 months. The Indian government has been forced to scrap a 10% export subsidy on fresh onions to contain prices in the local market.
- While current inventories of US onion are adequate to service market demand for most fractions / micros through the end of the year - specialty piece fractions and low/ extra low micro items remain in tight supply and will command healthy premiums.
- Irradiation costs have moved up sharply (by 50-100% over last year), owing to cobalt related cost increases and will drive up prices further/ increase demand for extra low micro SKUs.
- Conventional US onion prices are also expected to correct upwards 5-10% for grower cost-push inflation, higher transport and fuel costs, higher regulatory compliance costs and increased labor rates.
- The 2018-19 Winter crop is now fully sold out. 2019 Summer onion prices are likely to remain buoyant driven by
high local prices and shortages from India.
- Egypt white onion availability is stable for the moment but could erode quickly if availability from India/China is
inadequate. Prices are likely to rise sharply in such an event.
- Indian dehydrated onion prices are significantly elevated from levels prevailing last year and are expected to remain firm for the rest of the season. Availability of good quality material is increasingly difficult to find.
- Chinese pricing is likely to mimic Indian pricing for most markets. Chinese onion prices to USA continue to be subject to increased tariffs of 25% over prevailing base duties of 29.8% as part of ongoing action by USTR. This situation is unlikely to change in the short term.
The 2019 garlic harvest began in early July and is about 20% complete. Weather conditions are normal at this time and yields in the Southern California / Arizona region have come in at plan. However, yields in the Westside region (Central California) have been adversely impacted by the unseasonal thunderstorms and hail which was experienced in late May 2019.
While the full impact to the crop will only be known by early October, preliminary estimates put the crop damage at 20-25%. Olam’s Organic garlic crop has been fully harvested and the crop yields are in line with conventional Westside garlic.
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The Chinese 2019 crop harvest was completed by July. Overall crop production came in ~30% lower than 2018 levels. As expected, this led to a sharp spike in both fresh and garlic flake prices. As of early August, fresh garlic prices were up ~330% from 2018 levels at the same time last year. Similarly, open market flake prices were up over 70% from 2018 levels. Carry forward flake inventory from CY18 is estimated at ~0.5M MT and new crop flake production is almost non-existent given the elevated fresh garlic prices. Chinese market sentiment in origin continues to remain bullish and speculators are actively covering open market flake at the moment.
Most destination markets still have adequate dehydrated garlic coverage through end of Q3 2019 and destination inventory (especially in U.S.) appears plentiful as importers brought in material ahead of proposed duty increases in USA. Buyer interest in the U.S. is therefore currently low and customers are expecting Chinese prices to weaken in light of the large carry over inventory. In Europe however, destination inventories and buyer coverage appear to be much lesser than in the U.S. and customers are actively covering material at the moment.
- Despite the potential risk to the CY19 crop, Olam’s ability to service current conventional and organic contracts for California garlic will not be hampered in anyway. After the 2016 crop shortage, the company took steps to adjust its inventory carry-out norms to prevent potential crop shortages. Now, there is adequate inventory cover to meet all commitments and take on recontracted business with core customers. Spot pricing, however, is expected to increase by 15-20%.
- Meanwhile, Olam has a stable supply of California Econ garlic, which offers a great cost-savings opportunity for some applications and attractive pricing arbitrage versus Chinese premium garlic powder.
- Similarly, Olam’s Premium California garlic has been found to provide superior cost-in-use benefits across a wide range of applications, enabling reduced total spend compared to Chinese garlic. In addition, all of Olam’s California garlic enables customers the opportunity to “premiumize” by allowing them to claim the following:
- California grown
- Peanut-allergen free
- Certified Gluten-Free
- Non-GMO Project Verified
- 100% Traceable
- AtSource plus compliant
- If Chinese CY19 prices remain buoyant, we could potentially see increased demand for U.S. garlic in the recontract
cycle in Q4, 2019, at prevailing price levels.
- European and Asian customers are increasingly coming to the market to recontract Chinese garlic at prevailing price levels. As this momentum grows, there is a lower probability of any sharp downward movement in Chinese garlic prices. Origin flake prices are therefore projected to remain rangebound until the end of the year.
- Chinese dehydrated garlic imports into the U.S. continue to be subject to 55% import tariffs as part of the ongoing action by USTR.
- The U.S. administration has announced a 10% increase in import duties on another $300B worth of Chinese imports. This US-China trade situation is therefore tenuous at the moment and could still witness possible retaliatory action from both sides in the near to medium term. Chinese dehydrated garlic buyers in USA need to develop strategies to de-risk themselves from overdependence on Chinese garlic imports for their needs. Chinese dehydrated garlic prices for US market are likely to remain elevated and potentially volatile for the next 2-3 months.