The Investors Who Think Hazelnuts Will Be the Next Pistachios

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1:52Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, you know, I've never had Nutella before. 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. And you know, I've never had the Dubai chocolate before either. I know. Again, my sympathy for you just continues to expand. So as everyone knows, you know, I'm just like a real ahead of the curve guy on most things.

2:27I was really ahead of the curve on having nut allergies. Because now like all kids basically have nut allergies, it seems like, or like half the kids in any of my kids' class. But I was like really early on in the 1980s. You were having nut allergies before it was cool? 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. It's so good. Oh my God. I mean, there is nothing better than eating Nutella out of a spoon.

3:03Or sorry, eating Nutella out of a jar with a spoon, preferably with a glass of milk. Like, it is so good. It looks good. Dubai chocolate. Have you had it? I have, but I'm not that enamored with it. Interesting. I remember, like, it was probably a year and a half ago, and I just started seeing, like, signs. I was like, we have the Dubai chocolate. Oh, they're everywhere now. But the other day I went to the local deli on my block 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 as just some sort of chocolate with some sort of creamy pistachio in the middle.

3:41And if you break it open, it looks good on social media. That's pretty much it. I do find it kind of funny that this 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. 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.

4:18They 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 discussed much, maybe because of my own, you know, I'm allergic to talk about these topics. Well, there is one nut that you can eat. That's right. Almonds. Almonds. And I still managed to poison you once with almonds. I feel really bad about it. How did that happen? I don't know. So for listeners, I didn't do it on purpose. I bought him some of those Korean nuts that we've been talking about in the snack food episode and they were almonds.

4:50So we thought they were OK. But like laced with something else. Yeah. I guess. I didn't die. Yeah. So that's always a plus. 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 and the chocolate business and how these work just because I want to learn more about the world, even when I cannot partake of its goodness. I think that is a very worthy cause. The one thing I would say is this is really interesting from just an investment and business perspective, because you have heard every once in a while people do get really excited about nuts as an investment.

5:33And the example I'm thinking of is, remember Michael Burry? Almonds and water. 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. I don't think so either. 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 U.S. housing market, he has now shifted his attention to almonds. No, no, no. They said water. They didn't even say almonds would have been funnier. It was very strange. Anyway.

6:06Yes. What can we learn? through the medium 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. 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 hazelnut industry, and they're based in Dubai. We're going to be speaking with Burton Flynn and Ivan Netunov. They are managing partners at Terranova Capital. They scour the world for interesting stories.

6:42They're based in Dubai. Burton and Ivan, thank you so much for coming back on Odd Lots. Thank you so much for having us. Yeah, thanks for having us. I just have like a really simple question. In Dubai, is it just called chocolate? Or do they also specify that it's Dubai chocolate even when it's in Dubai? You know, the original Dubai chocolate is called Fix. And so in Dubai, there's Fix chocolate, and then there's the knockoff, you know, 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.

7:20Somebody 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 a piece. Oh, that was a good guess. Yeah, it was. Wait, how much of that is the cocoa price versus the pistachio price? Because we've seen both of those kind of go up recently. Well, I mean, this was before any of that went up, right? So this is all just margin based on marketing, I think, branding. 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 We sort of covered it when we talked to you in 2020, but presumably we have a lot of listeners who haven't listened to that episode.

8:05Why don't both of you tell us how you approach your work, discovering new things, interesting things around the world? 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 GARP investing, right? Growth 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, you know, we believe that a good stock, you know, it has to be a good business plus something that's fundamentally misunderstood.

8:50So 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 2000 companies. We've conducted 2600 meetings in the past six years with both of us in all of those meetings.

9:27Most 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, you know, and understand how it's affecting their business. So we get kind of a global view based on a bottom up perspective. So how did nuts actually get on your radar other than, you know, a friend gave you 25 bars of overpriced luxury chocolate? it? 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.

10:04Then 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.

10:52Let'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 what we found was actually quite, you know, it was really, really, really interesting. Well, before we actually get to the hazelnuts, I'm curious. You mentioned there were these media reports of pistachio shortages or skyrocketing prices. And then you said, but that's debatable. What actually is happening? You know, I don't know.

11:30I don't know. I don't think we have like a pistachio index on the terminal, although I've never actually looked. I think a lot of them come from Iran, which might also complicate things. Right, which might also. But actually, 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? Actually, quite a lot has to do simply with weather. 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.

12:10So 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 all the pistachios in the world to produce Dubai chocolate. But 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.

12:49So it's a supply story more than a demand story for pistachios, at least. It could be both. Could be both. But without the supply shortage, there would not be such severe price appreciation. How did Turkey get into the hazelnut business? Because they seem to have made a conscious decision to actually, you know, nurse this particular type of agriculture. 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.

13:31And 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 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, you know, the consequences to the supply can be severe.

14:21Thank you.

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15:33To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side. The point is, you're engaged with your investments, and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously.

16:14Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosures. 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?

16:49And then what is the exchange process like? I don't know. I assume there's not hazelnut futures. But talk to us about that process by which the nuts get to the processors and then into a finished product. 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.

17:28So 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. So and then once a year, this all gets consolidated. The farmers sell their hazelnuts to wholesalers and then the entire chain starts. It's quite fragmented. And, you know, 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.

18:09It's a bit hilly. It's much harder to have these huge fields of hazelnut plantations. It's a longstanding tradition, and it's very, very hard to bring any innovation into the Turkish hazelnut farming. 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? Well, this is exactly the kind of situation we love, actually, is opaqueness.

18:52Because it means that it's difficult for others to kind of access the information. And so the way we approach it is we try to find primary sources, right? And so 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 experts on hazelnuts, even though we didn't know anything about them two months ago.

19:34So what do you look at in terms of just pricing? There is pricing. It's not something you can pull up on Bloomberg. So basically, when we were talking to the COO of this hazelnut operating operator, he said that, you know, it's basically a price that is called on the phone. I mean, this is like old school trading practices. There are no hazelnut futures. It's nearly impossible to trade hazelnuts through any agricultural exchanges. And it makes this market so inaccessible that 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 publicly listed hazelnut processing company in the world.

20:26And 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 find the party that can sell these 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 difficult one to access.

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22:05It's all there. Plus an industry leading 3.8 % APY high yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principal. Brokerage services for US listed registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure.

22:39Introducing the all new Adobe Acrobat Studio, now with AI-powered PDF spaces. Do more with PDFs than you ever thought possible. Need AI to turn 100 pages of market research into five insights with a click? Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. Something I'm interested in, you know, this idea of there not having been much productivity gains in the actual farming of hazelnuts.

23:19And 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 could have competitively priced wheat 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 combine out there on a giant field. And then you have other commodities that are inherently labor-intensive because it's not so easy to automate. What have you seen, as you have gone around the world to various frontier markets, the sort of range by which some commodities lend themselves to productivity gains and some don't?

24:05For example, in this hazelnut industry, 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.

24:45And 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 10 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 hazelnut business. 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.

25:34As you pointed out, Chile doesn't have that much rainfall, and so they have to do something in order to foster this industry. Why did they decide on hazelnuts in particular? 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. So it wasn't a 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 growing agricultural commodities.

26:18It's industrialized. It's possible to make it large scale. And they just needed to add irrigation, and that would be it. The other thing is that it provides a very nice diversification for them, right? Because as we're talking about, there was a huge weather event that disrupted the supply in Turkey. Turkey is the vast, vast majority of the production. So for them to have the crop in an entire different hemisphere with different conditions provides some sort of diversification. 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?