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Thirty years ago, Turkey produced 80% of world’s hazelnuts but it has hit its production limit and, as global demand for hazelnuts continues to rise, the country’s dominance is falling. Environmental problems, a difficult political environment and talk about unfair labor inspire large groups to look for other suppliers.

Hazelnuts are the world’s second most valuable tree-nut crop after almonds, thanks to the European confectionery market and the expanding health consciousness of western consumers anxious to capitalize on the nut’s antioxidant qualities. Currently Turkey and Italy grow most of the world’s hazelnut crop, used most notably in the popular ‘Nutella’ spread. However, in recent years Turkey’s market has become extremely volatile. Tobacco, corn and rice used to be the main crops grown in the Turkey’s Black Sea coast but after a government subsidy scheme in the 1970s that encouraged hazelnuts – the wide roots of the trees pack in the soil and reduce erosion – in addition to growing demand from confectioners and an ideal growing climate, hazelnut production took off.

As with other ingredients whose global production is concentrated in one country, world hazelnut supplies have been vulnerable to price fluctuations. A frost in the Black Sea region several years ago drastically reduced supplies and saw the price skyrocket. This volatility – coupled with the fact that the regions in Turkey climatically favourable to hazelnut production have now reached maximum capacity – have prompted some manufacturers to turn to other ingredients while suppliers have been exploring other sourcing regions.

A series of other aspects have not helped the hazelnut industry: One of Erdogan’s economic “reforms” was to open Turkish markets to foreign competition. Hazelnut growers were so incensed at the government’s base price for their produce that they organized a large march under the banner of “Justice for Hazelnuts.”

On the mountains of Bhutan, where happiness is akin to holiness, a quiet agricultural revolution is taking place. Dotted along the vertiginous Himalayan slopes are millions of young hazelnut trees. It was the vision of an entrepreneurial couple, Daniel Spitzer and Teresa Law, who dared bring commercial hazelnut production to Bhutan. In 2010, Spitzer established Mountain Hazelnuts, a smallholder farmer-based company designed to take advantage of the growing demand for hazelnuts from European confectionery and snack producers in Asia. Spitzer initially planned to build his hazelnut business in western China – where he had a proven track record
of developing large scale projects – but the devastating Sichuan earthquake of May 2008 prompted many farmers there to abandon their land to move to the cities to work on reconstruction.

At about the same time, Bhutan announced it would consider foreign investments. Spitzer did some research and discovered that the tiny kingdom, cradled by the Himalayas and wedged between India and China, had climate and soil characteristics perfect for growing commercial crops of hazelnuts. Bhutanese farmers, despite a high rate of urban migration, were well used to tending the steep slopes. Digging out his contact list from over thirty years of working in Asia, Spitzer and his team met with hundreds of potential stakeholders. They built credibility with government officials and people in the villages, working with experts on agricultural studies, land surveys and training programs for the farmers. Public of cials helped spread the word amongst farmers. Months later, Mountain Hazelnuts was born.

Great business, good deeds
Mountain Hazelnut’s business model is deceptively simple but not without considerable risks. Using hazelnut saplings grown in their own nursery in Bhutan, Mountain Hazelnuts distribute them to farmers to plant on fallow land that has no commercial use. An agreement brokered through the Bhutanese government allows farmers without land to participate in the project by leasing land from the Government. Mountain Hazelnuts then provides agricultural inputs and training to ensure that farmers know best how to care for their young shrubs. Once the trees ourish and bear nuts, the farmers sell the crop back to Mountain Hazelnuts at a guaranteed minimum price.

Each full-grown tree can yield 4 to 6 kilos of nuts to be sold to Mountain Hazelnuts. With the typical rural household in Bhutan earning a cash income of less than $500 a year, these incremental earnings based solely on the sale of the hazelnuts will help farmers dramatically boost their incomes. By improving the lives of these farmers Mountain Hazelnuts is also hoping to stem the crippling ow of younger Bhutanese villagers migrating to urban areas. By planting on thousands of acres of overgrazed and deforested foothills, the company also hopes to halt hillside erosion.

The story of Daniel Spitzer and Teresa Law has inspired interest by big money: This year ResponsAbility Investments AG of Switzerland has announced to invest up to 3 bn US$ in hazelnut production – in Bhutan.
It’s investing in hazelnut production on the slopes of the world’s tallest mountain range, hoping to provide them to products such as Nutella. Producers don’t want to depend on hazelnuts from Turkey, said Rochus Mommartz, chief executive officer of the Zurich-based fund. Mommartz, who has worked as an adviser in more than 40 developing countries, helping regulators and governments on the legal framework, is leading the $3.3 billion fund into some of the poorest areas of the globe, betting on companies the mainstream investor may not have heard of.

As markets across the developed world have seen returns trimmed by record low interest rates and reduced volatility, investors are increasingly buying passive products such as exchange-traded funds. 
ResponsAbility is at the other end of the spectrum, investing in countries where there isn’t a benchmark and only limited markets. They buy private debt and equity in finance, agriculture and renewable energy, with about 80 percent invested in debt and 20 percent equity.

Not Philanthropy

It’s not “philanthropy,” he said. “We’re looking for return. There’s a need – it’s a good investment. It’s an investment in the real economy. It’s not an investment in some instruments.” Spread out over about 550 companies in almost 100 countries, its holdings also include investments in mobile payments in Egypt, microfinancing in Georgia and cashew nuts in Togo. The fund, whose biggest clients are Swiss pension funds, targets a net return of 15 percent to 18 percent on its agriculture private equity investments.

The asset manager is tapping demand for funds that take into account environmental and social concerns. They can also work as a hedge for institutional investors, given their low correlation with other asset classes, Mommartz said.

The “challenge” lies in exiting its investments, according to Mommartz. In bigger markets such as India and Brazil, an initial public offering is an alternative, while elsewhere options may include selling to international banks targeting a new market or to global food brands seeking vertical integration.

Securing Input
“They need the commodity, there’s strategic interest from different parties,” he said. “We will see more of this, because securing the input goods is more and more important for companies.”

Major risks are also political interference and macroeconomic stability, according to Mommartz, who hedges currency risk for the debt funds. “There are certain countries we don’t do business,” such as Somalia, he said. “With a high political risk.” And for those willing to bet on Bhutan and Togo, it pays not to watch the nuts grow. “Patience is what it needs,” he said. “An investor that looks at monthly returns and monthly liquidity. We can’t do that.”


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