Alston, Julian M.

Christian, Jason :

Murua, Juan R. :

Sexton, Richard J.

European consumers easily substitute Californiaalmonds ( above ) for Spanish almonds . Left , California has become the worldâ??s dominant producer and exporter of almonds . Restrictingflow of almonds to export markets may raise profits Julian M . Alston o Jason Christian o Juan R . Murua o Richard J . Sexton largest almond exporter , Italy is now of - Californiais the worldâ??sdominant Over the past 25 years , California has ten a net importer of almonds . The other producer of almonds . Statistical ~ ~ ~ ~ ~ h ~ ~ ~ ~ ~ r ~ ~ ~ ~ ~ ~ ~ d major exporter , Spain , has increased al - Of demand for almondsin mond production grew from less than mond production ( fig . l ) , but its exports the UnitedStates and six leading 45,000 tons [ kernel weight ) in 1965to have changed little . Although the United States remainsia over 230,000 tons in 1991 , With a farmState export markets suggest that Cai - the largest single market for Californ value of $ 541million . The Golden fornia can raise revenues and now supplies upwards of 85 % of the almonds - U.S . consumption has profits in the short run by restrict - world almond hade . 37,500 tons annu - grown steadily from ally in the early 1970sto well over ing Sales to major export markets . Along with increased world produc - 100,000 tons currently tion , the almond industry has experi - - foreign mar - However , in the long run , Spain or enced changing demand kets , as a group , have grown faster other producers may offsetthose Californiaâ??s rapid rise in the almond ex - than the domestic market . Some 60 % of short - rUngains by increasingPro - the 1991 - 92crop was sold on the ex - port market has been accompaniedby duction . Italyâ??s decline . Formerly the worldâ??s port market . CALIFORNIA AGRICULTURE , NOVEMBER - DECEMBER 1993 7 Major markets for California almonds Marketing of California almonds is have developed in Japan and the Euro - regulated under a federal marketing or - pean Economic Community ( EC ) coun - der . This order provides authority for tries of Germany , France , Italy , the the Almond Board of California , an Netherlands and the United Kingdom . industrywide organization comprised of Essentially , all the almonds consumed in growers and handlers , to regulate the Japan are supplied by California , but the flow of almonds to domesticand export largest single export market for Califor - markets . Decisionsmade by the Califor - nia almonds is Germany . Germany ac - nia almond industry have a major im - counts for close to 30 % of total Califor - pact on almond prices in other countries , nia almond exports , and since 1980 , and understanding the relationship be - California has supplied 70 % of the Ger - tween prices and the flow of almonds toe man almond market . California enjoys the various markets helps it to manag Fig . 1 World almond supplies , by produc - similarlylarge market shares in France : wisely its strong position in the world 1965 - 89 . ing countries , 58.5 % , the Netherlands : 56.8 % and Great market . Britain : 81.7 % . Our study estimatesthe relationships between the consumption of almonds and almond prices , prices of substitute commodities , and consumers ' incomes in the United States , Japan and the five major European almond - consuming countries.The consumption of almonds from all sourcesin these countries over the past 25 years is shown in figure 2 . Our study extends prior work on al - mond demand . Alston and Sexton ( Cali - fornia Agriculture , July - August 1991 ) ana - lyzed a single , aggregate demand function for U.S . almonds using recent data . Bushnell and King ( GianniniFoun - dation ResearchReport No . 334 , Sept . 1986 ) studied almond demand in indi - vidual countries as well as in total , but they analyzed data only through 1980 and thus were unable to investigateim - portant recent developments in the in - dustry . Price and quantity Fig . 2 Almond consumption by major almondconsuming countries . Sources : Food & Ag - riculture Organization , Almond Board of California . The most important factor influenc - ing purchases of a product such as al - monds is price . Knowledge of the price - 350,000 4 World consumption ( actual ) quantity relationship is crucialbecause - it + Demand , 7 countries ( actual ) permits individual firms or an industry - a - Demand , 7 countries ( fitted ) wide organization like the Almond n300,000 h f Board to identify return - enhancing E m prices or quantities placed on the mar - ' 5 250,000 ket . The relationshipbetween price 3 charged and quantity sold is quantified - as the price elasticity of demand , which g 200,000 5 Y 150,000 c 0 + 100,000 50,000 - T 0 1 I I I I I I I I I I 1970.197219741976197819801982 1984198619881990 Years Fig . 3 World almond consumption ; actual and fitted values from the 7 - country model . 8 CALIFORNIA AGRICULTURE , VOLUME 47 , NUMBER 6 per capita consumption of almonds in U.S . al - prices of Italian , Spanish and measures the percentage of change in each country was a function of four fac - monds between 1961and 1989 . Table l sales due to a 1 % changein price . If de - tors : ( 1 ) the price of almonds in that shows that these correlationsare very mand is very elastic , sales will be signifi - country , ( 2 ) the prices of competing high . Correlationcoefficientsrange from cantly affectedby a small changein nuts , ( 3 ) income in the country as mea - - 1.0 to 1.0 . A coefficient close to 1.0 price . An inelasticdemand changes only sured by per capita consumption expen - shows that the two prices are closely re - a little when prices change . ditures and ( 4 ) the prices of producer or lated - a change in one is usually The price elasticity of demand is a consumer goods that affect demand for matched by a change in the rother.ovides critical component of a successful al - almonds , as measured by the countryâ??s The top portion of the table p mond marketing strategy because the consumerprice index ( CPI ) . correlationsamong the prices ; the bot - revenue impact of withholding almonds For statisticalpurposes , allmonetary tom portion contains correlationsin the from the market hinges upon the price variables were deflated by the appropri - logarithms of those variables ( roughly response . If prices rise by more than 1 % ate CPI . We investigated a variety of equivalent to percentage changes ) , a in response to a 1 % decrease in quantity , functionalforms for the demand rela - more stringent test . grower revenues will rise . tionships . In allcases , the double log The very high correlationbetween Demand and substitute products specificationfit best , so we are reporting prices earned by U.S . , Spanish and Ital - results for that model . In double log ian almonds suggests that they are close Another factor affecting almond de - models , all variables are converted to substitutes and are considered essen - mand is consumersâ??incomes . For most and a linear relation - natural logarithms tially the same . To illustrate this point , goods , people buy more as their incomes ship among the variables in log form is suppose a disruption in the supply ofnish increase.Our analysisreveals that this specified.The double log model pro - Spanish almonds drives up the Spa general rule of thumb also holds for al - vided a direct measure of percentage price , if Spanish and U.S . almonds were monds . ( elasticity ) relationships between al - poor substitutes , the rise in the Spanish The prices and quantities of substi - mond consumption and explanatorye . price would have little effect on the price tute goods also affect demand for ansum - variables such as prices and incom De - for U.S . almonds . Table 1indicates that product . If almond prices rise , co pending upon data availability , all mod - this scenariodoes not occur . For this rea - ers may substitute filberts ( hazelnuts ) els were estimated using annual data for son we did not distinguish between U.S . , for almonds . either 1961 - 89 ( U.S . , the Netherlands , Spanish , or Italian almonds when we set Despite Californiaâ??s large share of the Italy and Japan ) or 1970 - 89 ( Germany , up our statisticalmodels to assess de - jor world almond trade , it still faces impor - France and Great Britain ) . The results of mand for almonds in each of the ma tant competitionin export markets , most the demand analysisare summarized by consuming countries.Rather , we esti - notably from Spain . The presence of for - country in table 2 . mated total almond demand in each of eign competitorsmeans that a given The adjusted R2 column reports the the major consuming countries . To ap - country does not depend solely on Cali - . percentage of the variation in each this estimated total demand to Cali - ply fornia almond producers for its supply countryâ??salmond demand over the pe - fornia , we can derive the residual de - Rather , California fills the demand that riod of the analysisthat is explained by mand for Californiaalmondsby adjusting remains after taking account of foreign the statisticalmodel . This percentage total demand for the Californiashare in supplies . This residual demand is derived 75 % for Great Britain to 96 % varies from each market . by subtracting the volume of outside for Japan . supply from total almond demand . Demandanalysis Note that the price elasticities of total To assessjust how readily consumers demand are all negative and , with the In our statisticalmodels to measure will substitute other products for U.S.al - exception of the United States , less than almond demand in each of the major monds , we calculatedthe correlation 1.0 in absolute value . This means that ina consuming countries , we assumed that coefficentsbetween the average export all major countries to which Californi inelas - exports almonds , total demand is tic . In other words , a given percentage increase in price induces a correspond - ingly smaller reduction in sales . This key result held in general across alternative specifications of the statisticalmodel . However , in the European countries , California does not fulfill the total de - mand for almonds but , rather , the re - king sidual demand that remains after ta account of Spanish supply . Column 2 contains estimates of the residual de - mand elasticities . ( We computed these elasticitiesby multiplying the total de - mand elasticity by the reciprocal of the U.S . market share in each country . Our calculation assumes that Spanish supply is unresponsive to price in the short term . ) For the United States and Japan , where Californiasuppliesthe entiremar - ket , the two price elasticitiesareidentical . CALIFORNIA AGRICULTURE , NOVEMBER - DECEMBER 1993 9 tistical models for 1970 - 89indicated that The California almond industry , op - our models captured 97.9 % of the varia - erating through the Almond Board , af - tion in almond demand over this period . fects the almond market by regulating 3 plots the full volume of world Figure the quantity of almonds on the market , consumption of almonds over this pe - re - which in turn , influencesprice . Our riod , with actual demand and with p analysis of residual demand elasticity dicted demand from our statisticalmod - implies that a given percentage decrease els for the seven major consuming in the volume of almonds placed on the countries . market will induce a correspondingly greater increasein price in all major con - Conclusions suming countriesexcept the United The results from our study offer sev - Statesand the Netherlands . Decreasing eral important implicationsfor market - salesby withholding almonds from ing California almonds : these markets will increasegrower rev - Inelasticdemand for California al - and almond markets elsewhere concern - enues because price rises proportionally monds in export markets suggests that ing the importance of substitute nuts . higher than quantity falls . the industry can raise prices and profits Filbert prices were found to be the only Potentiallyimportant in terms of sthe in the short runby restricting the flow of nut prices to sigruficantlyaffect almond Almond Boardâ??s marketing strategy i almonds to these markets . Short - run demand , and even the filbert effect was the indication that demand for almonds gains from pursuing this strategy may found only in Germany , France and then - in the United States appears to be more be offset in the long run by a loss in mar - Netherlands . The European confectio elastic ( salesrespond relativelymore to ket share if competingproducers , such ery industry can replace almonds with a price change ) than demand in our ma - as Spain , increasetheir production in re - filbertsin many of its processes . In con - jor export markets . Usually export mar - sponse to higher almond prices . trast , in the United States , Japan , and kets have a more elastic demand than Where resale of almonds amongity Great Britain , our analysis suggests domesticmarkets . The implication of countries is not easy , price elastic of there are no good almond substitutes . this finding is that the California indus - demand differences among consuminging This outcomeis probably related tothe try should consider allocating a greater countries can be exploitedby restrict fact that almonds are more often used as proportion of its almonds domestically flows of almonds to countrieswith less a snack food in these markets and as , a and restrictingthe amount of almonds elastic demands . The most direct way to recognizable stand - aloneingredient for the export markets . implement this type of price discrimina - such as slivered almonds in cereals and Eventually , however , higher prices tion strategy is to restrict sales to the Eu - on cakes , rather than as a ground - up , nd and revenues triggered from improved ropean market . However , because Spain processed ingredient for marzipan a marketing strategies can be expected to is a major competitorto California in the other confections . trigger increasedplantings of almonds European market , this strategy will also The numbers reported in column4 and consequentlygreater supplies , notm - encourage expansion of the Spanish al - measure the response of almond sales to only from California but also from co mond industry . 1 % increasein the filbert price . For ex - a petitors such as Spain . Although nnewder Promotional campaignsfor California ample , we estimated that a 1 % increase California supplies would come u almonds in general need not focus on in filbertprices in Germany would in - the authority of the Almond Board , the positioning almonds relative to other duce about a 0.25 % increasein almond same is obviouslynot true for acompeti - in nut products , because these nuts do not salesbecause , for example , food proces - tor supplies . A competitorsuch as Sp appear to be good substitutes for al - sors would replace some filbertsin their can free ride on Californiaâ??s supply monds . recipes with almonds management activities . This long - run re - Spanish almonds substitute closely In our estimate of Italian almond im - sponse to increased profitability of al - for California almonds in several nkey port demand , the cross product effect re - mond production is difficultto measure , European markets . Thus changesi fers to the Italian almond harvest . aThet but it could offset short - run profits and Spanish almond production have an im - result indicates , not surprisingly , th as the industryâ??s decision makers should portant impact on the California indus - the Italian harvest increases , imports of consider that risk when evaluating mar - try.It may be wise for California to in - almonds into Italy decreases . The mag - ket controlstrategies . vest resources to better monitor the nitude of the estimated effect suggests a The estimated income elasticities ( col - Spanish industry and develop early and 2 % decreasein imports for each 1 % in - umn 3 ) are all positive , confirmingthat accurateforecasts of the Spanish crop . crease in the Italian harvest . Translating as consumers â?? purchasing power in - this percentage effect into physical creases they buy more almonds . The es - JulianM . Alston and Richard J . Sexton areis quantities indicates that a 1ton reduc - timated magnitude of the income effect , Associate Professors , and Jason Christian tion in the Italian harvest results in an however , differsrather widely among Visiting Post - Doctoral Scholar in the De - increasein almond imports of about a countries , ranging from a high near 2.0 UC partment of Agricultural Economics , half ton . for Japan and Italy to a low of 0.15 cfores Davis . Juan R . Murua isformer Visiting Togetherthe models presented in this Great Britain . In part , these differen Post - Doctoral Scholar , Department of Agri - report form a quite accuraterepresenta - may reflect the differentuses to which cultural Economics , UC Davis , and cur - tion of the bulk of the world demand for almonds are put in the various coun - rently Economist with Servicio De almonds . The seven countriesincluded tries . They may also indicate that our in - lnvestigacion Agraria , Diputacion General here account annually for between 70 % and . come variables are - insome cases picking De Aragon , Zaragoza , Spain . and 90 % of the worldâ??s almond dem up the effect of other , unmeasured vari - The authors are grateful to Hoy Carman A goodness - of - fit coefficient calculated ables that influencealmond demand . for contributions to this project and insight - between actual demands in these coun - Our analysisrevealed a distinction ful comments on this manuscript . tries and their fitted values from our sta - between the European almond markets CALIFORNIA AGRICULTURE , VOLUME 47 , NUMBER 6 10