Press release
, François-Xavier Branthôme
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Processing Tomato Industry Trends: Global and California Perspectives for 2024 and 2025.
“There’s at least some initial indication that perhaps some customers of China have opted to move towards the US or the EU as alternative supplies”
In a special edition of TOMATO BITES by Morning Star, colleagues Aaron Giampietro and Mark De La Mater provide an insightful discussion on the most pressing topics impacting the market at the end of the 2024 California processing season, diving deep into the key developments and future outlook for the processing tomato industry.
“Aaron Giampetro: Hello everyone. This is Aaron Giampetro with the Morningstar Packing Company with your fall 2024 Tomato Bite update. I am joined today by Mark De La Mater, Morningstar colleague, whose insights and expertise and understanding of the market and industry are really vital as we break down what happened in the global production for 2024, what we anticipate moving forward, both globally and here in California, and some of the insights we gained as we went through this production year.
Mark, thanks for joining us.
Mark De La Mater: You're welcome. Thanks for asking.
So, first question, a big question.
Looking at the global production we saw in 2024, we had a pretty good inventory buildup from 2023's crop, which is right around 44.4 million metric tons. The party continued into 2024, and we ended up with about 45.8 million metric tons. A new global record. Good job. So, can you help us understand a little bit about global production specifically, where production occurs, the different attributes that go into inventory build and production numbers? Just so we can get our arms around what happened globally.
I think it's always a good idea to put some historical context to what we're looking at. So when we look at 2023, 2024, two back to back years of record production that both exceeded our best estimates of what current global demand is, we've seen that happened before. And we saw it happened in 2014, 2015, and we saw it again back in 2009, 2010. And the pattern that seems to repeat itself is we see these periods of two years of overproduction, which immediately follows by a period of reduced production, declining prices, until inventory levels get back to a point where there begins to be pressure on the supply chain. And then at that point we see production rebound and/or we see prices begin to rebound, and then of course, production rebounds. And we repeat that cycle all over again.
Let's go back and look at 2009, 2010. Those two years of production were primarily driven by California, the EU, China, and Turkey. So those four major producing regions really drove what happened in 2009, 2010. Then we jump forward to 2014, 2015 and again, California, the EU and China were the primary drivers of that event. But really, if we're being honest, California and the EU, where they continued to increase production into 2015, were really the ones responsible for driving things over the cliff…
- In that last cycle.
… In that last cycle. But now we're looking at 2023, 2024. And here I think it's safe to say that China has been the primary driver of what's occurring today. And when you look at Chinese production, China increased production in 2023 by about 30% from the previous year, and then in 2024, they increased production by 30% again. So if you look at 2024 production, compared to 2022 production, you're up by over 65% in a market where consumption is considered to be relatively flat. And on top of that, when you look at Chinese production in the year prior to those two years of increasing production, if you go back to 2008 and you go back to 2012, Chinese production in those two years was relatively low and was probably below what China's equilibrium production level should have been.
But when you look at 2022, 2022 was at a five year high for China and was probably right at, and maybe even a little above, what China's long-term equilibrium position should have been at. So to increase by 65% is really hard to understand. It has obviously has a significant impact on the market place. And when we look at that, l will say if we look at that through the window of a US observer or an EU observer, we would have to say that the behavior is economically irrational.
I mean, it's clearly gonna have a negative impact on the market place. It's clearly gonna lead to significant reduction in pricing globally, if you look at history; so it appears to be irrational. And what I would throw out perhaps - and this is just a supposition on my part - if you look at it from an internal Chinese perspective, maybe there is some rationality there. In particular, if you looked at it from the perspective that perhaps Chinese producers of industrial processing tomatoes are processing tomatoes, in general, if they’re working in concert with the Chinese government to try to provide some level of economic stability in Xinjiang Uyghur autonomous province, then perhaps their behavior makes total sense in that they’re not really being driven by an economic motive. They're being driven more by a political motive. But looking at it globally, it makes it very difficult when one of the major exporters, or actually the major exporter in the world, is behaving in a way that is not economically motivated.
It would be pretty typical for China to have an output based model where output defines prowess or advancement. And surely I would say, I would imagine at times too, over the last few years, China's been increasing their technology, their yields, processes have been increasing as well.
They've definitely been improving. There's no doubt about that based on the information that we get out of there. But again, to see these kinds of production that is so far out ahead of what any reasonable estimate of global demand is, it's just hard to come up with a reasonable economic motive. And so I think you have to look for a non-economic motive for that kind of behavior.
The output theory…
Right.
So, production then really can be rationalized by consumption. And we have been told that consumption of China processed tomato products have been increasing in China. We do look at global, consumption is relatively flat, moderately increasing, certainly not 60 plus percent over the last two years.
Right. We could only wish…
We could only wish. So as we look at the production results for 2024, and we look at consumption being moderately increasing, and as we said, building up excess inventory here now in China, what do you anticipate we'd see in the market moving forward over the next 12 months?
So, I mean, I think at a macro scale, given what's happened in the industry as far as the amount of supply relative to demand, there's gonna be some downward pressure on pricing globally. I mean, that almost seems a given; but it is possible that some things are gonna be a little different than they have been in the past. For anyone who hasn't had a chance to see Martin Stillwell's presentation at the World Processing Tomato Congress in Budapest, l would highly recommend going on Tomato News and looking it up. And one of Martin's comments - and Martin is probably the leading expert on the global processing tomato industry - one of his comments was essentially that, well, he thinks this time around China's gonna find itself sitting with a lot of inventory come the end of the 2024 crop year. And I think that is absolutely the case. I think China have perhaps made a big bet that they would be able to have enough of a disruptive impact on the industry to increase their movement and at least mitigate the overproduction that occurred. When you look at what's been happening in the marketplace, like when we look at the US, but in the first nine months of 2024, US exports of bulk tomato paste have gone up dramatically.
And they've gone up dramatically; they've gone up dramatically within the NAFTA region, which is probably to be expected, but they've also gone up dramatically in the EU and the Far East, and to a certain extent in Oceania. And these are markets that China has played a big role in. So it does look like, perhaps, the EU, for example, and also within the EU, one of the major areas where these increases have occurred has been in Italy and in particular in southern Italy with southern Italian processors who would typically be pulling heavily from China. And we're seeing significant inroads into that market. So there's at least some initial indication that perhaps some customers of China have opted to move towards the US or the EU as alternative supplies and China may find itself carrying out just a huge inventory position, going into the next crop year.
From our perspective as California producers, right now, our exports are moving up very nicely. We're expanding share into some markets that we haven’t been a big participant in, in over the last couple of years. And that's all very, very promising. So I think our message is that we don't need to be overly concerned about competing with China in some of these larger marketplaces like the EU, south America, certainly not NAFTA, but even to a certain extent in the Middle East; that this time around China may have misunderstood what their market power was and what some of these consumers, especially the European consumers, how they would be, are responding to China's overproduction.
So just as politics may have driven Chinese production higher, politics outside China and the EU, NAFTA are also defining how these trade patterns are gonna materialize over the next 12 months.
Yeah, absolutely. I don't wanna say it's a mirror, but it's like a two-sided sword to potentially - again, this is just my supposition - that if China is making decisions based on economic stability in the Xinjiang Uyghur Autonomous Region, similarly western countries, in particular the EU and the United States, are also making decisions about the acceptability of Chinese imports, based on what's going on in Xinjiang.
Right.
So it works both ways and, we'll see what happens.
So as we looked at the 2024 crop in California, California processors did shoot for a pretty good size crop in January, about 11.6 million short tons. And came in finally all said and done at about 11 million short tons. So we did see a gap from budget versus actual. We had some challenging conditions with heat in July. And some would see that maybe the reduction could hurt inventories.
However, we do know that inventory is really the defining factor for how you should view production.
How do you wanna look going into the next crop year? So do you mind explaining for us a little bit, how did we look going into 2024 crop, and then what do we anticipate, decisions being made between now and the 2025 crop? How will we be forecasted to enter into 2025?
I mean, a good question. So, you're absolutely right; our 2024 production ended up being a little bit lower than what the initial intentions were, but offsetting that was back in 2023, our production was significantly higher than what the intentions were. So going out of 2023, we had a significantly higher inventory position than we had planned on, and probably somewhere around six months of stock on hand going into the 2024 crop as of July 1st.
So let's say, you know, if we call July 1st the beginning of the crop year, then, so going into that crop year, we probably had somewhere around six months of inventory on hand.
So even with the lower - less than anticipated - production level in 2024, we still have more than adequate coverage to meet our domestic and our export demand.
It looks like right now, if exports stay on track and assuming normal domestic and NAFTA demand, that we would expect to probably come out of the 2024 season, so, on July 1st, 2025, with somewhere around four to four and a half months of inventory on hand. So from an industry perspective, that’s probably a little higher inventory than the industry really feels it needs to carry. So expectations would be that we'll probably see California at least intend to drop total production by a little bit, maybe down to 10.5 million tons as a target. And with that 10.5 million ton level, again, assuming, normal exports and normal domestic and NAFTA demand, then we'd expect to see inventories going into the 2026 season, July of 2026, at right around three months of stock on hand. And from an industry perspective that is what I think is felt as being a long-term stable equilibrium position for inventory that provides very adequate coverage and ensures a stable supply chain, but at the same time doesn’t overburden the processors with carrying excess inventory and increasing their working capital costs. So that would sort of be that - I think that's probably what we're gonna be looking at.
So the three months, or so, would be enough where you're not hitting the bottom end of the alarm bell for pricing. Or the top end of surplus for pricing. You maintain a nice equilibrium right around that point.
Yeah, exactly. And you're exactly right. So when inventories get too low, just like we were talking about on the international scene, we see sudden up strong upward pressure on pricing; when inventory levels get too high, we see strong downward pressure on pricing.
When inventories stay in sort of that sweet spot of maybe around three months of coverage, two and a half to three months of coverage, we see pricing staying pretty stable, no disruptions in the supply chain and everybody's happy.
And with enough room to handle the usual 4 or 5% possible variability between years in terms of crop yield or weather dynamics on crop yield.
Right, exactly. And that's where - that really is a sweet spot for the industry. And the industry does try to adjust. So when - if you're at that three month level and you miss your production by a little bit, then you're going to increase production the next year to get that inventory level back up. Just like if you have a great year and your inventory levels end up going up a little bit, then the next year you adjust downward. But you're basically trying to keep that level of inventory at a relatively stable point where you can guarantee a solid supply chain, but at the same time, not excessively burden the industry with working capital…
…Or put excessive swings on the grower base...
Exactly. And also not put excessive swings on the grower base.
So when we talk about grower base, supply and demand clearly plays a factor on the tomato price. Inputs, fertilizers, pesticides, energy, play a role on the price as well as competing crops. So it seems like everywhere you look around the world, they have the same three pressures, supply demand, competing crops and inputs.
What is the story telling us for California specifically for 2025? What should we expect?
If you look at the trend in California's yields on processing tomatoes, I think it’s fair to say that at least in the short term, if we're looking, you know, not looking out twenty years, but looking out over the next five years, yields have probably plateaued. But at the same time, we all know, or at least we all believe, that there's gonna continue to be some upward pressure on the farming costs. So with upward pressure on costs and yields having plateaued being basically flat, there's probably not a scenario where we could expect to see a trend of downward prices in the industry. So that's certainly not - would not be a reasonable expectation anytime over the next five, six years.
In terms of just looking at the 2025 crop as a single data point, 2024 yield was down a little bit from 2023, but when you look at the 10-year average in California, it was basically right at the average. So there shouldn’t be a lot of pressure for growers to feel that they need to see an increase in price to adjust for yields. I mean, they’re basically right at their 10-year average. And that was even like you mentioned, Aaron, that was even after experiencing some severe heat issues that definitely had an impact on the yield in 2024, you know, offsetting that is competing crops, and right now at least the outlook is that prices for Pima cotton are gonna be up and that's gonna make Pima slightly more competitive than it has been in the last year or two, which is gonna put some pressure on demand for acres, especially in the southern part of the growing area, especially like in Fresno County, Kings County, Merced County. So ignoring specifics like, diesel prices, fertilizer costs, and things like that, just looking at yields and pressure from competitive crops kind of counterbalancing themselves, and it doesn't look like there's gonna be any - we don’t see any real surge in pricing. I don’t see, I don’t think in terms of any of the key cost drivers, on the horizon for the next 12 to 18 months. So my take would be that probably we could expect to see pricing in 2025 be pretty close to where it was in 2024. I mean l would be surprised to see any kind of really sharp upward movement, but l would also be surprised to see any really sharp downward movement.
So we could be talking a few percentage points, a few percentage points adjust.
Yeah, that would be, that would be my guess, but certainly nothing on the horizon that would make you expect to see a real major shift.
So certainly without that next technological breakthrough in yield right or anything around growing, we're gonna see somewhat steady, if not slightly increasing prices over time. But certainly as a processor, we can look at investments in technology that helps us adapt to varying conditions in the field, be it protecting color, better enhancing viscosity, using different separation technologies like decanters or also looking at harvesting technology, getting top of the line state-of-the-art equipment that can do very productive harvesting, optical sorting.
All of that can really help us enhance the partnership with the growers, to make sure that what we can get from the field can make its way to the factory efficiently and get converted in a very high quality manner.
Yeah, absolutely.
The way customers have confidence that they hear news out of California, we have the right level of investment to handle those swings and make sure that we can make something good with the tomatoes that come in.
Absolutely. Yes. Yeah.
Well, Mark, thank you so much for joining us. This has been an excellent time learning about what's happening in the world. Always appreciate your insights.
Oh, I always enjoy being here with you.
And thank you everybody for joining us. If you have any questions, please feel free to reach out to us directly. We wish you very happy holidays and an excellent new year to come. Thank you, Mark.
Yeah, thank you very much".
Original video here: TOMATO BITES by Morning Star
Stay tuned: the conversation will continue during the 2024 Tomato News Online Conference with Aaron Giampietro and a panel of international processors ...
Source: The Morning Star Packing Company
