By Rod Nickel
WINNIPEG, Manitoba (Reuters) - Chocolate makers' dependence on hazelnuts from a single major producer, Turkey, has sent Italy's Ferrero SpA searching for new suppliers to satisfy consumer cravings, from eastern Canada to Chile and Australia.
The farmer recruitment efforts of Ferrero, one of the world's biggest hazelnut buyers for its Nutella spread, may loosen Turkey's grip on the $2.8 billion industry, which is prone to volatile prices and tight supplies.
Turkey, at odds with the United States over a failed coup last year, produces 70 percent of the world's hazelnuts, leaving buyers such as Ferrero, Kraft Heinz Co (O:KHC), Mondelez International Inc (O:MDLZ), and Nestle SA (S:NESN) vulnerable.
Last month, Ottawa contributed nearly C$500,000 to a project testing tree varieties in the province of Ontario. Ferrero is helping fund the project and hopes to see farmers plant 25,000 acres of hazelnut trees by 2027, from about 400 currently.
An Ontario farmer can earn 10 times more per acre from hazelnuts than corn, according to one estimate.
Expansion efforts are also underway in Serbia, Chile, Australia, South Africa and the U.S. state of New Jersey, said Barb Yates, an agronomist with Ferrero in Canada.
"Everyone is looking for new places to plant hazelnuts," said Jaime Armengolli, owner of Chilean grower and processor Agricola La Campana. "Yields are good. Costs are low. Growers are very optimistic."
Chile's shelled hazelnut exports topped 6,500 tonnes in 2016, nearly five times the previous year’s exports, according to government statistics.
Frost in 2014 damaged Turkey's crop and spiked prices, alarming buyers who use hazelnuts in chocolates, pralines and liqueur.
Then this spring, the state-run Turkish Grain Board (TMO) bought large volumes to prop up sagging prices.
"(Ferrero) realized having all their eggs in one basket was a danger," said Adam Johnston, who trades hazelnuts at Scotland-based Freeworld Trading.
Ferrero's strategy is not driven by short-term events, and the company expects Turkey to remain a major producer, said Ferrero spokeswoman Francesca Fulcheri.
But the global expansion has cast a chill over the Turkish industry, where farms are small, use costly manual labor and produce relatively small yields.
"Turkey's hazelnut sector is already threatened and will deteriorate unless we are able to increase efficiency and decrease the cost," said Kadir Durak, a board member at Turkish processor Durak Hazelnuts.
PROFIT POTENTIAL
Hazelnut kernel prices can swing as much as 10 percent per week, and currently sell for about $5,600 per tonne, down from more than $17,000 in 2015, according to Freeworld.
An Ontario farmer can net C$2,000 per acre growing hazelnuts, said Adam Dale, professor emeritus at University of Guelph. Corn by comparison might net about C$210 per acre, not including land costs, according to industry and government data.
That profit potential and the assurance of selling to Ferrero's local plant will attract Ontario farmers, said Linda Grimo, who helps manage a tree nursery in the province.
"Farmers are hesitant by nature. I think it’s taken awhile for people to recognize (Ferrero's) level of commitment."
New hazelnut growers must wait for any windfall, however.
Costs of starting an orchard may take a decade to recover, Dale said. With up to 270 trees planted per acre, Ferrero's Ontario target would require some 6.8 million trees, he added.
In Australia, Agri Australis Pty Ltd, a Ferrero subsidiary, has planted 900,000 hazelnut trees in southwest New South Wales since 2014, a spokesman said.
Ferrero is also active helping growers through research and development and with practical growing issues, said Trevor Ranford, spokesman for Hazelnut Growers of Australia.
Commodity trader Olam International Ltd (SI:OLAM) depends heavily on Turkey but started buying hazelnuts in nearby Georgia last year too, because "diversification is crucial," said Brijesh Krishnaswamy, Olam's senior vice president of edible nuts.
Oregon growers produce hazelnuts mostly for the in-shell market, including China, but work by Ferrero agronomists has led to more plantings for the confectionery market, said Larry George, co-owner of two processors, George Packing Company and Northwest Hazelnut Company.
"In the future we will sell huge volumes to them," he said.