The Investors Who Think Hazelnuts Will Be the Next Pistachios

Summary

Odd Lots Podcast Summary: "The Investors Who Think Hazelnuts Will Be the Next Pistachios"

Release Date: August 14, 2025
Hosts: Joe Weisenthal and Tracy Alloway
Guests: Burton Flynn and Ivan Netunev, Managing Partners at Terranova Capital

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Introduction

In this engaging episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the intriguing world of hazelnuts, exploring why some investors believe hazelnuts could become the next big opportunity similar to pistachios. The discussion is enriched by insights from Burton Flynn and Ivan Netunev, managing partners at Terranova Capital, who specialize in uncovering unique investment opportunities in frontier markets.

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From Pistachios to Hazelnuts: Shifting Investment Focus

The episode begins with a light-hearted conversation about personal experiences with different chocolates, setting the stage for a deeper exploration into the hazelnut market. Tracy Alloway emphasizes the cultural significance and widespread love for hazelnut-based products, particularly highlighting their role in popular items like Nutella.

Notable Quote:
"I genuinely feel really sorry for you for never having Nutella. I feel like you are missing out on one of the best things in life."
— Tracy Alloway [01:25]

Joe Weisenthal introduces the idea that despite the popularity of hazelnuts, they are often overlooked in investment discussions compared to other nuts like pistachios.

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Terranova Capital's Investment Strategy

Burton Flynn and Ivan Netunev explain their approach to identifying investment opportunities. Their strategy centers on Growth at an Unreasonable Price (GARP), where they seek companies with significant earnings growth that are misunderstood or overlooked by the market.

Notable Quote:
"We look for really huge earnings growth that is being completely misunderstood or completely overlooked because we believe that a good stock has to be a good business plus something that's fundamentally misunderstood."
— Burton Flynn [07:38]

They emphasize a bottom-up approach, conducting extensive research, monitoring insider transactions, and engaging directly with CEOs to uncover promising investments.

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The Dominance of Turkey in Hazelnut Production

A significant portion of the episode focuses on Turkey's role in the global hazelnut market. Ivan Netunev provides a historical perspective, highlighting that Turkey produces about 70% of the world's hazelnuts through a highly fragmented system of 600,000 farmers.

Notable Quote:
"Today there are 600,000 farmers that grow hazelnuts in Turkey, producing about 70% of all hazelnuts worldwide."
— Ivan Netunev [13:58]

They discuss the traditional farming practices in Turkey, which rely on small, family-owned farms that lack large-scale industrialization, making the market both resilient and susceptible to disruptions.

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Challenges in the Hazelnut Supply Chain

The discussion shifts to the various challenges facing the hazelnut industry in Turkey, primarily focusing on weather-related events and pest infestations.

Impact of Weather Events:
Ivan Netunev details a devastating frost that occurred in April 2025, which destroyed approximately 40% of the expected hazelnut crop. This event significantly impacted global supply, reducing it by about 35%.

Notable Quote:
"This year, the Ministry of Agriculture in Turkey now estimates this year's crop to be at around 450, 460,000 tonnes, which is about 40% lower supply than expected."
— Ivan Netunev [24:27]

Pest Infestation:
They also discuss the brown marmorated stink bug, an invasive species that has been causing substantial damage to hazelnut crops since settling in Turkey in 2017.

Notable Quote:
"There's another kind of small creature named the brown marmorated stink bug, which... can destroy from 10 to 20% of the entire hazelnut crop in Turkey."
— Ivan Netunev [24:27]

These challenges highlight the vulnerability of the hazelnut supply chain to environmental and biological factors.

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Investment Implications of Supply Shocks

The conversation explores how supply disruptions translate into investment opportunities. With a reduction in supply and consistent demand, hazelnut prices are poised to rise, benefiting processors and investors who can strategically manage inventories.

Inventory Management:
Ivan Netunev explains how hazelnut processors utilize weather prediction models to manage their inventories, allowing them to capitalize on price spikes.

Notable Quote:
"The processor applies mathematical models and weather prediction to manage their inventories... If you have inventory and you hold onto it and then sell it later, you make some profits."
— Ivan Netunev [28:57]

Price Dynamics:
Historical data from previous frosts show that hazelnut prices can increase by 3.5 to 4 times before stabilizing, presenting significant profit margins for those with strategic inventories.

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Demand Trends and Market Drivers

Despite challenges, the demand for hazelnuts continues to grow steadily. Ivan Netunev notes a 30% increase in demand since 2014, with an annual growth rate of 2-3%.

Major Buyers:
A crucial player in the market is Ferrero, which purchases 25% of the global hazelnut supply annually for products like Nutella.

Notable Quote:
"Ferrero buys a quarter of the entire global hazelnut supply every year."
— Ivan Netunev [31:04]

This significant demand from major corporations underscores the importance of hazelnuts in the global confectionery industry.

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Comparisons with Other Commodities: The Case of Cocoa

Burton Flynn draws parallels between the hazelnut market and other commodities like cocoa, discussing how supply shocks can create lucrative investment opportunities. He highlights that companies adept at managing these disruptions can see their stock prices soar as commodity prices spike.

Notable Quote:
"These sorts of global events can provide really huge opportunities if you do the work right."
— Burton Flynn [34:19]

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Future Outlook and Agri-Tech Innovations

Looking ahead, the guests discuss potential shifts in global hazelnut production, particularly the emergence of Chile as a significant producer. Ivan Netunev projects that Chile could become the second-largest hazelnut producer within the next decade, thanks to advancements in irrigation technology and large-scale agricultural practices.

Notable Quote:
"The projection is that Chile will become the number two producer of hazelnuts in the world in about seven to ten years with a production capacity of 200,000 tons a year."
— Ivan Netunev [23:03]

Agri-Tech Potential:
There is a discussion about the role of agricultural technology in increasing productivity and mitigating supply chain vulnerabilities. However, challenges remain due to the fragmented nature of farming in key regions like Turkey.

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Conclusion: Navigating a Complex Market

The episode concludes with reflections on the interplay between supply disruptions, demand growth, and investment opportunities within the hazelnut market. Joe Weisenthal and Tracy Alloway emphasize the importance of thorough research and strategic inventory management in capitalizing on niche commodity markets.

Notable Quote:
"Any piece of produce that photographs well, et cetera, is going to be big. I mean this is why people drink."
— Joe Weisenthal [44:16]

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Key Takeaways

• Turkey's Dominance: Produces 70% of the world's hazelnuts through a fragmented system of small farmers.
• Supply Challenges: Weather events and pests like the brown marmorated stink bug significantly impact supply.
• Investment Opportunities: Strategic inventory management and understanding supply-demand dynamics can yield substantial profits.
• Growing Demand: Steady increase in global demand, driven by major consumers like Ferrero.
• Future Production Shifts: Potential rise of Chile as a significant hazelnut producer through agri-tech advancements.

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This detailed exploration provides listeners with a comprehensive understanding of the hazelnut market's current landscape, challenges, and investment potential, highlighting why hazelnuts may indeed be the next big opportunity in niche commodity investing.

Transcript

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with.

[Karen Moscow]

Context and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Joe Weisenthal]

Bloomberg Audio Studios Podcasts Radio News hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

[Tracy Alloway]

And I'm Tracy Alloway.

[Joe Weisenthal]

Tracy, you know, I've never had Nutella before.

[Tracy Alloway]

I know that. I think we were talking about this the other day and I said, and I mean this 100% and I don't mean it to come off badly, but I genuinely feel really sorry for you for never having Nutella. I feel like you are missing out on one of the best things in life.

[Joe Weisenthal]

And you know, I've never had the Dubai chocolate before either.

[Tracy Alloway]

I know. Again, my sympathy for you just continues to expand.

[Joe Weisenthal]

So as everyone knows, you know, I'm just like a real ahead of the curve guy in most things. I was really ahead of the curve on having nut aller because now like all kids basically have nut allergies, it seems like. Or like half the kids in any my kids class. But I was like really early on in the 1990s.

[Tracy Alloway]

You were having nut allergies before it was cool.

[Joe Weisenthal]

I was having nut allergies before it was cool. I'm aware that people love Nutella. I'm aware that people love Dubai chocolate. Or some people do. Or they at least like posting about it on Instagram and all things pistachios, et cetera. And yes, but I take it it's all good stuff.

[Tracy Alloway]

It's so good. Oh my God, it's. I mean there is nothing better than eating Nutella out of a spoon or, sorry, eating Nutella out of a jar with a spoon. Preferably with a glass of milk. Like, it is so good.

[Joe Weisenthal]

It looks good.

[Tracy Alloway]

Dubai chocolate.

[Joe Weisenthal]

Have you had it?

[Tracy Alloway]

I have, but I'm not that enamored with it.

[Joe Weisenthal]

Interesting. I remember, like, it was probably like a year and a half ago, and I just started seeing, like, signs. It's like, we have the Dubai chocolate.

[Tracy Alloway]

Oh, they're everywhere now.

[Joe Weisenthal]

But the. The other day I went to my. The local deli on my block and. And they had five. Just on the counter, they had five different versions, five different companies selling it, five different products that you could buy, which I take is just some sort of, you know, chocolate with some sort of creamy pistachio in the middle. And if you break it open, it looks good on social media.

[Tracy Alloway]

That's pretty much it. I do find it kind of funny that this, like, viral chocolate has come out of Dubai, of all places, which doesn't necessarily have a strong confectionary history, but it has certainly tapped into various luxury markets. So I think that's what's going on.

[Joe Weisenthal]

I was looking through the conference call transcripts on the Bloomberg a few weeks ago, and I was looking like, what companies have talked about this? And there's one big Swiss publicly traded chocolatier. And they talked about it and they talked about. I guess it was a woman in Dubai just started making it. Then they called it the Dubai Chocolate. Anyway, they were talking about how fast they adapted to TikTok trends, et cetera. But I guess the business of nuts and how it works, not something that we discuss much. Maybe because of my own, you know, I'm allergic to talking about these topics.

[Tracy Alloway]

Well, there is one nut that you can eat.

[Joe Weisenthal]

That's right. Almonds.

[Tracy Alloway]

Almonds. And I still managed to poison you once with almonds. I feel really bad about it.

[Joe Weisenthal]

How did that happen?

[Tracy Alloway]

I don't know. So for listeners, I didn't do it on purpose. I bought him some of those Korean nuts that we'd been talking about in the snack food episode, and they were almonds, so we thought they were okay.

[Joe Weisenthal]

But, like, laced with something else. They were almonds. I guess I didn't die.

[Tracy Alloway]

Yeah, so that's always a plus.

[Joe Weisenthal]

I didn't kill my co host anyway, despite my own. Because I'm a journalist dedicated to learning about the truth about the world. I will get over my personal biases against nuts in pursuit of journalistic truth and learning more about how all these businesses work, the chocolate business and all these work, how these work, just because I want to learn more about the world, even when I cannot partake of its goodness.

[Tracy Alloway]

I think that is a very worthy cause. The one thing I would say is this is really interesting from just investment in business perspective, because you have heard every once in a while people do get really excited about nuts as an investment. And the example I'm thinking of is, remember Michael Burry, ALMONDS and water, 10 years ago? Yeah. His whole thing was invest in almonds because they're so water intensive. It's basically a play on water shortages. I don't think it worked out that well so either.

[Joe Weisenthal]

I'm kind of curious. Yeah, that was like, at the end of the Big Short, that very cryptic ending where they're like. And after betting against the collapse of the US housing market, he's now shifted his attention to almonds. No, no, no.

[Tracy Alloway]

They said water. They didn't even say almonds.

[Joe Weisenthal]

Anyway. Yes. What can we learn through the medium of. Of nuts? Anyway, very excited to say that we have a couple of guests today who have been doing a lot of work on nuts. Someone. A couple of guests, I think we talked to them about five years ago during the pandemic. They're interested in frontier markets. They go all around the world looking for interesting opportunities that are off the beaten path. They've been doing some research on the nut industry and they're based in Dubai. We're going to be speaking with Burton Flynn and Ivan Netunev. They are managing partners at Terranova Capital. They scour the world for interesting stories. They're based in Dubai. Burton and Ivan, thank you so much for coming back on Odd Lots.

[Burton Flynn]

Thank you so much for having us.

[Ivan Netunev]

Yeah, thanks for having us.

[Joe Weisenthal]

I just have, like, a really simple question. In Dubai, is it just called chocolate, like, or do they also specify that it's Dubai chocolate even when it's in Dubai?

[Burton Flynn]

You know, the original Dubai chocolate is called fix. And so in Dubai, there's fixed chocolate and then there's the knockoff other kinds of chocolates and the fix chocolate. I didn't know this when I received it as a gift once, actually about six months ago, the first time I had it, somebody brought it to my house. They brought me five bars as a gift, and we ate them that week. And then later I found out that these bars go for, like, $25 apiece.

[Joe Weisenthal]

Oh, that was a good guess.

[Burton Flynn]

So I did. Yeah, it was.

[Tracy Alloway]

How much of that is the. The cocoa price versus the pistachio price? Because we've seen both of those kind of go up recently.

[Burton Flynn]

Oh, well, I mean, this. This was before any of that went up. Right. So. So this is, this is all just margin based on marketing, I think branding.

[Joe Weisenthal]

So what do you tell us generally speaking, besides the fact that you're in Dubai, actually tell us about the work that you do. We sort of covered it in when we talked to you in 2020, but presumably we have a lot of listeners who haven't listened to that episode. Why don't both of you tell us like how you approach your work, Discovering new thing, interesting things around the world.

[Burton Flynn]

First of all, what we look for, our objective is to find stocks that can double in 12 months. And the way that we do that is we look for basically, you guys know, growth, Garp investing. Right, Growth that at a reasonable price. We are not Garp investors, we are growth at an unreasonable price investors. We go out and we look for really huge earnings growth that is being completely misunderstood or completely overlooked because we believe that a good stock, it has to be a good business plus something that's fundamentally misunderstood. So the way that we do this is we approach it from several different angles. One is that on a daily basis we're looking at Insider transactions, basically CEOs buying shares of their own companies. We find that to be a really strong signal. We also look for companies that have very good leading indicators to their earnings and we try to monitor those. And then also periodically we like to reach out to all of the companies we've met. And at this point we together, Ivan and I have met over 2,000 companies. We've conducted 2,600 meetings in the past six years with both of us in all of those meetings, most of those were with CEOs. And so we like to reach out periodically and just ask about topical situations that are happening. The most recent one was the Trump tariffs and understand how it's affecting their business. So we get kind of a, a global view based on a bottom up perspective.

[Tracy Alloway]

So how did nuts actually get on your radar other than, you know, a friend gave you 25 bars of overpriced luxury chocolate?

[Ivan Netunev]

Well, you know, it's an interesting story because we are based in Dubai. So just by definition, we are right in the center of this Dubai chocolate hysteria. Like you see Dubai chocolate bars everywhere in the grocery stores, then you see them when you order food online, you see them on the billboards. And you know, sometimes you hear from people that haven't been in touch for like 10 years and then they message you and all they want is not actually even ask how are you doing? But they just want you to ship some Dubai chocolate to them by some express courier delivery. And it's fun. A lot of media has written about the Dubai chocolate phenomenon. And I think there was also a claim that Dubai chocolate led to some severe shortages of pistachios and skyrocketing prices of pistachios, which is debatable. But one day we were in the office and we were just joking around and we were saying, look, pistachios are such a kind of a hot niche commodity. Now let's have a look at something else. What about hazelnuts? Because they're also used in chocolates and so on, even in some of the variations of the Dubai chocolate, the knockoff ones. And we checked the recent news about hazelnuts just to see what's going on with the hazelnuts. And, and what we found was actually quite, you know, it was really, really, really interesting.

[Joe Weisenthal]

Well, before we actually get to the hazelnuts, I'm curious, you mentioned there were these media reports of pistachio shortages or skyrocketing, skyrocketing prices. And then you said, but that's debatable. What actually is happening? You know, I don't know. I don't know. I don't think we have like a pistachio index on the terminal, although I've never actually looked.

[Tracy Alloway]

I think a lot of them come from Iran, which might also come.

[Joe Weisenthal]

Right, which might also. But like, actually, what, like, how do you. What is happening in the pistachio market? What has been the effect so far as you can tell, from the Dubai chocolate craze to the actual trade in pistachios?

[Ivan Netunev]

Actually, quite a lot has to do simply with weather. It's not only. It's not only the Dubai chocolate demand, but a lot of that has to do with the weather. And just the weather was not favorable enough and the crop was not good enough. So as simple as that. So because I remember there was one expert on pistachio supply chain and he was saying that basically there is now so much talk and a lot of media articles claiming that it's all about Dubai chocolate. But in reality, Dubai chocolate doesn't use the raw pistachios. You know, it's a paste and the paste is very, very diluted. So you don't really need like all the pistachios in the world to produce, to buy chocolate. But, you know, if the weather events affect the crop, then of course the price of the commodity will go up. And this is something that also happened to the hazelnuts this year.

[Tracy Alloway]

So it's a supply story more than a demand story for pistachios. At least.

[Ivan Netunev]

It could be both. Could be both. But without the supply shortage, there would not be such severe price appreciation.

[Tracy Alloway]

How did Turkey get into the hazelnut business? Because they seem to have made a conscious decision to actually nurse this particular type of agriculture.

[Ivan Netunev]

Yeah, it's a long story which goes back thousands of years. And the situation is that Turkish Black Sea region is naturally the best region in the world to grow hazelnuts, because hazelnuts need a cool winter. They also need sunny, warm spring and also need a rainy summer. And this is exactly what the Turkish Black Sea region gives them. And they've been cultivated in Turkey for thousands of years. So Today there are 600,000 farmers that grow hazelnuts in Turkey and There are over 5 million people in Turkey who are in some way involved in the hazelnut farming or trading. Trading business. So it's a very, very long history. It just came naturally. It's just where the hazelnuts grow. In a given year, Turkey produces about 70% of all the hazelnuts in the world. So the concentration in this industry is huge. It's like 70% of all hazelnuts. So if something happens to the Turkish hazelnut crop, the consequences to the supply can be severe.

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with.

[Karen Moscow]

Context and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Joe Weisenthal]

What is the market structure of the Turkish hazelnut industry? How fragmented are those 600,000 farmers? Is it huge agribusinesses that dominate the trade? And then what is the exchange process like? I don't know. I assume there's not hazelnut futures. But talk to us about like that process by which the, the nuts get to the processors and then into a finished product.

[Ivan Netunev]

Yeah, so there's 600,000 farmers. They are quite fragmented. It's basically some artisan, mom and pop farmer shops. And then there are some wholesalers who buy hazelnuts from the farmers when the harvest time comes around, which is actually next week. And then as wholesalers, they might sell their hazelnuts to the exporters, and then the exporters sell them abroad. Or some of these wholesalers, they also act as exporters. So, so basically, if you compare the hazelnut industry in Turkey to the one in Chile, then the Turkish one is much more old school. It's very small orchards, it's family businesses, it's some standalone farms. Whereas for example, in Chile it's kind of industrial scale. And then once a year this all gets consolidated, the farmers sell their hazelnuts to wholesalers and then the entire kind of chain starts. It's quite fragmented. And you know, the, the quality of the entire hazelnut production in Turkey is lower than in some other parts of the world. Because also it's not only the history, it's also kind of the terrain. It's a bit hilly. It's much harder to have this huge fields of hazelnut plantations. It's a long standing tradition. And it's very, very hard to bring any innovation into the Turkish hazelnut farming.

[Tracy Alloway]

Okay, so you have a traditional business that's resistant to innovation in an emerging market that is very, very fragmented and also pretty untransparent because it's not like you can look up a single benchmark for hazelnut prices. How do you deal with, I guess, the opaqueness of a niche commodity like this when you're evaluating an investment?

[Burton Flynn]

Well, this is, this is exactly the kind of situation we love actually is, is opaqueness because it means that it's difficult for others to kind of access, you know, access the information. And so the way we approach it is we try to find primary sources. Right. And so in this, in this case, we have had the opportunity to talk to the world's largest hazelnut processing company and basically understand the market situation from them, you know, and then kind of collaborate this with other sources that we find and, you know, continue to ask them questions to understand the market situation. But, you know, it's possible that we might be the, you know, some of the world's best, best experts on hazelnuts, even though we didn't know anything about them two months ago.

[Tracy Alloway]

So what do you look at in terms of just pricing?

[Burton Flynn]

There is pricing. It's not something you can pull up on Bloomberg. So basically when we were talking to the CEO of this hazelnut operator, he said that it's basically a price that is called on the phone. I mean this is like old school trading practices.

[Ivan Netunev]

There are no hazelnut futures. It's nearly impossible to trade hazelnuts, you know, through any agricultural exchanges. And it makes this market so inaccessible that it's, it's very hard, it's very hard for a regular investor to play it. I mean, I think the only way to play the hazelnut market is probably through this only listed public, like the only publicly listed hazelnut processing company in the world. And it's listed in Turkey, which also is not so easy to access. But when it comes to hazelnuts themselves, it looks like you just need to, to find the party that can sell this hazelnuts and you just buy the bags, the tons of hazelnuts. But you also need to find the transportation, you need to find the storage and then you need to find a buyer when you want to sell. So it's a very, very difficult one to access.

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead you get the latest stories with.

[Karen Moscow]

Context and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world with reporting back by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Joe Weisenthal]

Something I'm interested in, you know, this idea of there not having been much productivity gains in the actual farming of hazelnut. And I'm sort of fascinated by the degree to which different commodities inherently lend themselves to varying levels of mechanization in production. Right. And so you know, you could have competitively priced wheat in that's grown in America, competitively priced wheat that's grown in Russia, competitively priced wheat or corn that's grown in Brazil, all because there's very little labor involved. You have like one, one combine out there on a giant field, and then you have other commodities that are inherently labor intensive because not so easy to automate. What have you seen, you know, as you have gone around the world to frontier various frontier markets, the sort of range by which some commodities lend themselves to productivity gains and some don't, you.

[Ivan Netunev]

Know, for example, in this hazelnut industry, right, we can look at Turkey, which we discussed, it's artisanal. And then we can look at something like Chile. So by nature, Chile is not necessarily the best place for growing hazelnuts because it doesn't have enough moisture. However, if you manage to provide enough irrigation, then you solve that issue. So in Chile, for example, you can grow hazelnuts with a much, much higher yield than in Turkey. You can have huge plantations of hazelnuts, you provide irrigation, and then you can get probably five, six times more hazelnuts per hectare of land than in Turkey. And this is something that started happening in the last several years. And the projection is that Chile will become the number two producer of hazelnuts in the world in about seven to ten years with a production capacity of 200,000 tons a year, which still compared to the Turkish supply capacity of 800,000 tons a year is quite small, you know. And this just kind of underlines the sheer importance of the Turkish market for the hazelnut business.

[Tracy Alloway]

Do you have any idea why Chile decided to go in on hazelnuts? I'm just very curious about how they make these decisions because, you know, it's not necessarily a completely natural crop. As you pointed out. Chile doesn't have, you know, that much rainfall. And so they have to do something in order to foster this industry. Why did they decide on hazelnuts in particular?

[Ivan Netunev]

The initiative comes from the bottom up. So, for example, this largest hazelnut processor that's based in Turkey, they decided to expand in Chile. It wasn't Chilean government initiative, it was the corporate initiative, because they looked at many different countries. They looked at New Zealand, where it's more hilly, which would be more difficult. They looked at Latin America. And in Chile there is this great culture of basic, of growing agricultural commodities, right? It's industrialized, it's possible to make it large scale, and they just needed to add irrigation and that would be it.

[Burton Flynn]

The other thing is that it provides a very nice diversification for them, right? Because as we were talking about, there was a huge weather event that disrupted the supply in Turkey. Turkey is the vast, vast majority of, of the production. So for them to have, you know, the crop in an entire different hemisphere, you know, with, with different conditions provides, you know, provides some sort of diversification.

[Joe Weisenthal]

What do you tell us about that weather event specifically? Since this seems to be central to your interest, how big of a deal is it? Is it a one off? And second of all, like, give us the overall sort of supply, demand imbalance that you analyze right now for the hazelnut market.

[Ivan Netunev]

Every about 10 years there's a big frost that happens in Turkey. So the previous ones happened in 2004 and 2014. And this year there was a very, very major frost in April which destroyed one third of all Turkish hazelnuts. Basically, in a few days, one third of the entire crop was destroyed. And frost like this, as I said, they happen once every 10 years, they are quite one off. But the thing is that this year Turkey had a very, very warm spring. So the hazelnut trees started developing much earlier. And then when the frost happened, they were exposed to this huge risk and they got damaged really badly. Now this is one thing, so the frost destroyed one third of the Turkish hazelnut crop. The second thing is there's another kind of small little creature named the brown marmorated stink bug, which only settled in Turkey in 2017, but it has become so widespread that in a given year it can destroy from 10 to 20% of the entire hazelnut crop in Turkey. So we read some academic research about it, it was fascinating. On top of the frost, you also have the stink bug. But then that's not the entire story. Then there's also the heat. And in the western Black Sea region in Turkey this year, the summer was the worst summer in the last 65 years, the hottest, the driest summer. And what does it mean? It means that the hazelnuts that did survive the frost, that did survive the stink bug, they will not develop as well as they should have because they need moisture, the nuts, the kernels, they need the moisture, but without the moisture, without the water, with this huge, like dry, hot weather, they will be damaged, they will be underdeveloped, some of them won't develop at all, at all. So just to give you some numbers, the expectation for this year's crop was 768,000 tons of in shell hazelnuts in Turkey. Now, after the frost, after the stink bug impact and after the heat, the Ministry of Agriculture in Turkey now estimates this year's crop to be at around 450, 460,000 tonnes, which is about 40% lower supply than expected. This is for the initial hazelnuts now, kind of going back to this heat, if you look at the kernels, then the kernels will be impacted even more. So last year, for example, the yield, which is measured as the proportion of the weight of the kernel to the weight of the entire hazelnut, was 48%. This year, it will be much lower. So the actual hazelnut kernels, which is what's important, will probably be in shortage by about 45, up to 50% this year. So now the entire Turkish crop might suffer by 45, 50% this year, which means the entire global crop of hazelnuts might suffer by 35%. And the demand for Turkish hazelnuts is 320,000 tons for the export and 70,000 tons for the domestic use. So 390,000 tons of kernels. This is kernels. And the production of kernels this year in Turkey will probably be half that. So we are looking basically at a supply which will be half of the demand.

[Tracy Alloway]

Joe, I have to say that I am unfortunately very familiar with marmorated brown stink bugs, because they've made their way to New England, too.

[Joe Weisenthal]

Oh, really?

[Tracy Alloway]

Yeah, they're invasive there, too. And in the winter, they really like to crawl into old houses and just.

[Joe Weisenthal]

And they really smell, huh?

[Tracy Alloway]

If you scare them, they smell okay. Or if you kill them and they just sort of fly around and make a lot of noise anyway. Okay. The thing I don't quite get about this particular investment, I guess I understand there's a shortage, a potential shortage of hazelnuts, and that could translate into higher wholesale prices. But how does that actually feed into higher prices or profits for the hazelnut processor, who, I assume, you know, has to pay the higher prices on the wholesale end, and then maybe they can charge higher prices for it at the retail end, but, you know, it's not guaranteed that that margin is going to go up.

[Ivan Netunev]

Well, first of all, they have some inventory which they have built over the past season. And the thing is, the processor applies mathematical models and weather and weather pattern prediction models to manage their inventories. So this year, when there was a very, very warm winter and early spring, they knew that if some kind of frost happens, it doesn't have to be a severe frost, because the hazelnuts already developed quite a bit. So if something happens, then the damage will be severe. So they managed to increase their inventory. Right. This is one thing. The price in the market, of course, will go up a lot. We looked at the previous frosts in 2004 and 2014, so their prices for hazelnuts went up about 3 1/2 4x from just before the frost to about one year later. Right. So if you have inventory and if you hold onto it and then you kind of sell it later, you make some profits. But also, even when you buy from the farmers and when there is this shortage of hazelnuts in, in the world, you can kind of command higher margin and the buyers will have to paid, you know, because they have no other option.

[Burton Flynn]

The inventory reported on their Q1 financial report was $164 million, which is I think something like a third of their market cap. And that's, you know, that's before the increase in prices.

[Joe Weisenthal]

What is the structural demand story for hazelnut? So again, we're, you know, with the pistachio question. We know that whether, whether it's the demand that's driving the price or the supply, we know that demand has been booming. Maybe the Dubai chocolate trend will fizzle out at some point. But for, we don't know. But for hazelnuts, what is the long term structural demand outlook look like?

[Tracy Alloway]

Because we already have hazelnut chocolate, which is already.

[Joe Weisenthal]

Yeah, right. And it's already been huge. And Nutella has been a staple of the Internet and people talking about it and the culture for a long time. Is it rapidly growing still? Has it plateaued? What's happening there?

[Ivan Netunev]

It's not growing rapidly, but it's still growing. For example, from 2014 until now, the demand for hazelnuts went up more than 30% overall. So I would say it's probably like a 2, 3% a year growth, which is still there. So it's slow, but it's going up. And you mentioned Nutella. Just wanted to mention very interesting fact. So Ferrero buys a quarter of the entire global hazelnut supply every year. So. So it sounds really fascinating, you know, that one single kind of entity just buys the quarter of the entire supply.

[Tracy Alloway]

So one of the really interesting things I think that's been happening in the world certainly since 2020 is this idea of overlapping emergencies. That's Isabella Weber's term. But this idea that, you know, something dramatic always seems to be going on and it always seems to be sparking some sort of shortage. And we've certainly seen that in the world of commodities. And I can rattle off a bunch of, you know, pretty like niche ones that had some sort of supply squeeze. So cocoa, obviously, orange juice, wheat during Ukraine, Russia, hazelnuts now, maybe pistachios earlier. Would you expect as more of these happen for those markets to become maybe more financialized or maybe more easy for Investors such as yourselves to invest in.

[Burton Flynn]

Well, I don't know about it making it easier to invest in, but I think that these kinds of events create huge opportunities. You know that you mentioned cocoa. Cocoa is really interesting because this is actually something that we studied last year and we came across a stock which is one of the only stocks that you can sort of play Coco and it's listed in Malaysia and it's, you know, it doesn't have massive liquidity but it has, has sufficient liquidity. And we had noticed last year of course there was a weather event that caused the cocoa, you know, cocoa supply to drop by about 14%. You know, this is because in West Africa they produce 70% of the global cocoa supply. You know, we started looking at potential plays on cocoa. By the time we found this stock that we looked at, it had already played out. But what we did was we created a case study to understand kind of how this timing worked out. What we found is actually that the cocoa prices increased several months before the stock price had increased. So again, it's another case of kind of an obscure company that people weren't really watching even though there's sort of an obvious play. The other really interesting thing that we noticed about this company is we looked at the insider buying disclosures and the CEO and the management were buying like crazy the stock leading up to, or you know, kind of as, as the weather event and the cocoa supply situation was, was developing. So I'm not sure about, you know, providing better access, but I think that these sorts of global events, you know, can provide really huge opportunities if you, you know, if you kind of do the work right.

[Tracy Alloway]

But for cocoa, I mean you could just go out and buy a future, right? Or I think there's even a Cocoa ETF now. Why not just do that? Is that because your expertise is sort of in single stock businesses or you don't want to become a commodity player?

[Burton Flynn]

We're not top down investors, we're very much bottom up investors. And so, you know, so, so when something like this is happening, of course you can play the trend of the, you know, the, the cocoa price itself, but that, you know, that's obviously going to also depend on kind of the market dynamics. What we find is that there's bigger opportunities in sort of a second order, which is a cocoa company that's going to benefit from these prices, their earnings, but the earnings lag a quarter or two quarters and the stock really gets rewarded when they start producing the earnings. At least in these sorts of markets. That's why we see this as a more interesting way to play it than just writing the, you know, the trend of the, the futures prices.

[Joe Weisenthal]

Can you talk, you know, you mentioned finding a random cocoa company in Malaysia and the due diligence work you have to do, reaching out to management. Can you talk about the state of essentially IR in frontier markets? Right. We go to a website like an American big company, like a Pepsi or something, and they have this incredibly full IR page that has, you know, their presentations and the number of the, you know, the main person and all their earnings, etc. How varied is the quality of IR in the markets that you look at?

[Burton Flynn]

Hugely varied. And so in the case, you know, in the case of this hazelnut processor, they only have investor relations materials basically in Turkish, which is, you know, of course you can, you know, if you do the work, you can, you can translate this stuff easily these days. But, but what we found over the years is that some companies have very good investor relations practices and some don't. And we've selectively taken opportunity to basically teach companies how to improve their investor relations practices. Basically we give them free consulting after they've become portfolio companies on basically best practices on investor relationship. What we've seen is that some companies have been highly willing to engage with us to improve their investor relations practices. Other companies have kind of shied away from it. And we actually looked at the results of companies that we engaged with and we found that the companies that were willing to engage with us were three times as likely to see their stock prices double in the 12 months following our engagement than other stocks that we had bought in our portfolio. So it could be on the one hand that these recommendations are very valuable, that companies now are going out to the market and sharing how great their business is and investors are learning about that. Another explanation could be that it's a feedback loop and that companies that have really great things to tell are the companies that, you know, are happy to go out and talk to the market, whereas, you know, if they really don't have great things coming down the pipeline, they don't really want to go out and make a lot of noise.

[Joe Weisenthal]

Yeah, Tracy, I had a friend of mine, this was like 20 years ago, etc. But he was engaged in some forms of like frontier market investing and he thought there was like a pretty big alpha opportunity in essentially doing exactly what Burton just described. I think he once told me about, I don't know, a chain, some company that owned a lot of gas stations in Laos or something like that. And the Opportunities that it's like here, can I just like help you build out your IR page? Because your financials are really compelling and almost nobody, nobody even knows about them or could figure it out even if they wanted to.

[Tracy Alloway]

Did it work?

[Joe Weisenthal]

I don't know, but it's. But it seems like an interesting idea.

[Tracy Alloway]

Okay, so if we look at the past 2014 frost, the past precedent, how long did that actually have an impact on prices or how long did it take for hazelnut prices to normalize?

[Ivan Netunev]

What happened in 2014? The price started going up in March 2014, right after the frost when the degree of destruction became clear. And then it reached its peak at the end of April, early May 2015, so the following year. And then by that time usually it's quite clear if the new crop of the new year will be substantial or not. So in that case, it was quite a good crop. And the prices started going down quite quickly. So the price went up over three and a half X from March 2014 to May 2015 and then it dropped, I would say about 50% in just one one and a half months.

[Tracy Alloway]

So I still have time to buy Nutella before the big price spike.

[Ivan Netunev]

Yeah, you know, when we looked at it. So first there is like a 30% spike from the time of the frost till August when the harvest starts. And then from August to late April there is kind of the most of the price increase happens in that timeframe.

[Joe Weisenthal]

I just have one last question and it was inspired by a tweet I saw yesterday from the Chinese embassy in the US and they're talking about the de desertification that they're doing in China, essentially turning desert into arable land. And I'm curious what you're seeing if that's something that you're thinking about. I mean we're so used to talking about disruption coming from China from a manufactured standpoint, but in terms of its own, I mean it has a lot of land. Much of it historically has not been arable. They're trying to reverse that, which you can obviously do if you have sufficient access to irrigation technology and electricity, etc. When you look out in the long term hazelnut supply story you mentioned Chile growing. Is this going to be a big story? And more, is this a story that you're thinking about in ag markets, whether hazelnut or general China turning itself into a sort of a man made breadbasket.

[Ivan Netunev]

Everything is possible, but it's a very, very long term top down trend. So our job is we are emerging markets investors traveling the world in search of Hidden gems through bottom up opportunities. So I mean, it's possible, but again, it's a very long term, top down sort of trend. And as I mentioned, Chile might produce double the number of hazelnuts they do today in 10 years. But then who knows what's going to happen to the weather patterns in Turkey in 10 years? Because it looks like, you know, the winters are becoming warmer and the summers sometimes are becoming drier and hotter and I think the predictability is getting worse.

[Joe Weisenthal]

Burton and Ivan, thank you so much for coming back on odd lots. I've learned a lot about hazelnuts which I didn't know about and I hear they're good, but I still don't know. But now I have to take our word for it. I can't taste them, but at least I know something about them.

[Burton Flynn]

Now.

[Ivan Netunev]

To us, hazelnuts taste much better than Dubai choice chocolate. At least it's much healthier.

[Joe Weisenthal]

Well, yeah, thank you, Tracy. I think your invocation of overlapping emergencies is really apt. Like we're going to be doing a lot of these episodes in the future about all kinds of niches, commodities over the years.

[Tracy Alloway]

It does feel like that. And there are some technological solutions that I guess can help at the margins. But even in that conversation, Burton and Ivan were talking about, you know, this Turkish processor, they have weather technology. So they had an early sign that the hazelnuts had grown, you know, big early, which made them susceptible to a potential frost. And so they started building up their inventory and then lo and behold, the frost hit and they're in a relatively good position. That's good for them, but it doesn't expand the absolute supply of hazelnuts. Right?

[Joe Weisenthal]

Yeah. I feel like ag tech is like a really interesting story. You know, we did that episode with the lentil king of Saskatchewan several months ago and I feel like there are sort of two different things. Because farmers in any country, as he noted, are always going to be among the politically most protected class. Politicians feel some sort of obligation to protect farmers almost always. On the other hand, like any other good, you know, there's going to, at least in theory, be opportunities for genuine productivity gains. And if Chile is stronger at irrigation, etc, it'll be interesting to watch the sort of like interplay between like technology that gets applied to growing anything, cultivating anything, including in Chile and maybe in the future in China, versus the political desire and sort of legacy producers to, you know, protect the small artisan farmer on the hillside.

[Tracy Alloway]

Yeah, that's right. There is that tension and it becomes more prominent the more overlapping emergencies that we see.

[Joe Weisenthal]

I think the problem for hazelnuts is that they're brown and they could. It's just never going to go viral the same way because it just does not that green. The pistachio, whether it's in chocolate or now you know, you see them a lot more like on top of a croissant, shredded up, etc. Like that's just made for 20, 25 in a way that a hazelnut isn't.

[Tracy Alloway]

Also. Sorry, but hazelnut chocolate is already a classic.

[Joe Weisenthal]

No. Yeah, I don't really like it's already. It's mature.

[Tracy Alloway]

Maybe someone can come up with green hazelnuts.

[Joe Weisenthal]

Yeah. Genetic engineering.

[Tracy Alloway]

Yeah.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

That's the next frontier of viral chocolate.

[Joe Weisenthal]

Making genetically engineered nuts better looking produce. I mean that really is going to be the key, right? Unironically, any piece of produce that photographs well, et cetera, is going to be big. I mean this is why people drink.

[Tracy Alloway]

Matcha glitter infused hazelnuts. Okay, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at Carmen Ermine, Dash o' Bennett at dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content go to bloomberg.com oddlots Review the Daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlauds.

[Tracy Alloway]

And if you enjoy Odd Lots. If you like it when we talk about niche commodity markets and short squeezes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes. Episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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