KERMAN PROVINCE, Iran (Reuters) - For some Iranians, it’s a galling thought: the United States may oust Iran as the world’s largest producer of pistachio nuts this year because of one of the worst harvests ever in the Islamic Republic.

A worker sorts pistachios by hand during a final inspection before packing at a processing factory in Rafsanjan, southeast of Tehran, September 23, 2008. REUTERS/Caren Firouz

The popular nibble is Iran’s main export commodity outside the oil sector, earning it more than $1 billion last year, and providing many people with jobs in the arid, southeastern province of Kerman, which has 140,000 pistachio farmers.

Unusually cold weather during the flowering in April dealt a blow to the 2008 crop, which farmers say is down by as much as 75 percent from last season’s record of 280,000 tons (617.3 million pounds).

The shortfall has helped push up pistachio prices but not by enough to compensate for lower volumes, they say.

The poor harvest follows a severe drought that is forcing Iran to import millions of tons of wheat and causing power shortages in the world’s fourth-largest crude producer.

“We actually never had production as low as this,” said Behrooz Agah, whose grandfather pioneered exports of the split-shelled nuts in the 1930s.

“For Iranian pistachio farmers, yes, it is a crisis,” he said, standing in sweltering heat amid rows of trees with bunches of the red-green nuts growing in desert-like terrain.

Agah said he expected export revenue to fall to $350-400 million and that this year’s frost would also hit the 2009 crop.

Though pistachio prices have now jumped after a period of stagnation, margins have been squeezed by double-digit inflation -- running at an annual 27 percent -- and rising costs.

The relative stability of Iran’s rial against the U.S. dollar has not given those selling abroad any major relief.

Mehdi Agah, Behrooz’s uncle and a board member of Iran’s Pistachio Association, said the country was experiencing the so-called Dutch Disease, where the value of a currency is strong because of lucrative oil or gas exports, hurting the ability of other sectors to compete internationally.

“Already the carpet industry has lost business to the Dutch Disease,” he said, referring to another export earner.

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JOB LOSSES

Economic consultant Saeed Laylaz said Iran’s imports were growing faster than its non-oil exports, making the country more sensitive to the price of crude, which has plunged from a July peak of $147 per barrel on deepening global economic gloom.

Iran relies on windfall gains from its hydrocarbon wealth for its budget and to pay for surging imports of goods, which are forecast to almost double to $83 billion between 2005-2010.

“We are three times more dependent on oil revenue than 10 years ago. This is a huge change,” Laylaz said in Tehran.

The International Monetary Fund warned in a report in August that Iran’s swelling current account surplus could swing into deficit in the medium-term if oil went to $75. Crude this week traded just below $90 a barrel.

For Iran’s pistachio farmers, however, the most pressing problem is this year’s crop failure at a time of growing demand from new consumers in countries such as China and Russia.

Big farms employ hundreds of mainly Afghan laborers during the harvest in September. But this season warehouses stand half-empty and machines lie idle.

“Workers are going to be laid off,” said Ali Alizadeh, who manages a processing plant where the nuts are cleaned and dried. He expected the firm’s exports to fall by around 70 percent.

OLD FOE TAKES LEAD

The pistachio problem alone would be serious enough in a country where the official jobless rate is around 10 percent, but there is also a political dimension.

The Sarmayeh business daily said last month the United States might this year produce more pistachios than Iran for the first time.

“Americans are using all advertising tools and their financial power for victory in this market,” it quoted Mohammad Hossein Karimipour, head of the agricultural commission of Iran’s Chamber of Commerce, as saying.

The United States has more than doubled production in the last decade to 416 million pounds (about 190,000 tons) in 2007, most of it in California. With a good pistachio year usually followed by a weaker harvest, California’s output is expected to fall to 260-270 million pounds in 2008 but this would still be more than many are forecasting in Iran.

Barring any major weather problems, “we would expect to have a crop next year of around 425 million pounds,” executive director Richard Matoian of the U.S. Western Pistachio Association said.

Washington severed ties with Tehran shortly after Iran’s 1979 Islamic Revolution and the countries are now also at odds over the Islamic state’s disputed nuclear activities, which the West suspects are aimed at making bombs. Iran, which is under U.S. and United Nations sanctions, denies the charge.

A report in the Iran Daily newspaper in June said the United States tried “to improve its position in the global war of pistachio production and export by undermining Iranian trade in every way.”

Others are more sanguine. Mehdi Agah said he expected Iran to take back the number one spot next year.

SELLER’S MARKET

He and others in Kerman, a province of 2.7 million people where pistachios are the main source of income for one fifth of the population, played down the Californian angle and said water shortage was their chief concern.

Mohsen Jalalpour of Kerman’s Chamber of Commerce said lack of water after years of below average rainfall could cut output.

The Pistachio Association is hoping for government backing to help shift production to other parts of Iran where there is more water, for example in the west. “If we do this ... there will be no fear of American competition,” said Mehdi Agah.

U.S. producers might use water and land more effectively but Iranian farmers say nobody can rival the taste of their pistachios, which are also used in sweets and ice-creams.

Some producers also said rising demand and prices meant there was room for both Iran and the United States.

China has emerged as Iran’s biggest export market after sales to Europe took a hit in the last decade due to concerns over aflatoxin, a carcinogen produced by a fungus that grows on the pistachio nut under certain conditions.

Iranian producers say they are addressing the aflatoxin issue and that European interest is picking up again.