By
Bruce Grim
Washington State Grower
A look back over our shoulder
every once in awhile serves not only to confirm for us where we have
been but also to give us better perspective on where we are –
or should be – heading. So it is with the tree fruit industry.
Let us start by reviewing some recent trends to see if they provide
a better perspective on the course corrections needed for a successful
future. The new can of paint has just finished being stirred, so let
me start this paint job with some broad brush strokes!
Retail consolidation and concentration with the concomitant increase
in market share amongst the largest players is well documented. While
this was taking place, many of us in Washington State had our collective
heads in the sand and tried to keep doing what we had been doing and
expecting the old result. With fewer buyers, we endeavored to cut
price to maintain market share only to see our competitor cut even
further. The death spiral created by this ever-tightening spiral of
ruinous, cutthroat competition only served to drive growers and warehouses
out of business for a host of reasons. New varieties were gaining
favor and growers who did not see this trend coming (and their warehouses)
found themselves insolvent or bankrupt.
Orchard removal of unprofitable varieties or strains of certain varieties
ensued. Replant programs that provided needed diversification to those
who could afford this avenue were implemented. Some old timers tell
me that the 1968-1969 winter freeze was the best thing that ever happened
to the industry because the replanting that ensued saw many acres
of higher-coloring Red Delicious strains replacing Starking and common
Delicious blocks. Whether we some day come to view the upheaval of
the “turn of the century” as more good than bad remains
to be seen.
Consumer tastes were changing. While Red and Golden Delicious and
Granny Smith are still popular, varieties new to our growing area,
such as Gala, Braeburn, Jonagold, Fuji, Cameo, Pink Lady and others,
have been gaining in popularity. Fewer Red Delicious apples are being
grown. It is anticipated that slightly more than 50 percent of the
2004 crop will be comprised of Golden Delicious, Gala, Fuji and Granny
Smith evidencing a continuing modification or the state’s crop
mix.
Not only was the production mix changing, the consolidation and concentration
seen on the retail side was now being mirrored on the production/packing
side of the industry. Big guys got bigger. A recent economic survey
noted that 64 percent of the production in the state is in the hands
of 10 percent of the producers. Warehouses formed marketing alliances;
some merged outright. It is not a stretch to suggest that the 10 largest
warehouse/marketing organizations likely sell upward of 80 percent
(if not more) of the cherries, pears and apples in the state.
Since the 1930s, the Washington Apple Commission (WAC) operated as
a commodity commission utilizing mandatory grower assessments to advertise
and promote Washington’s flagship agricultural commodity. Following
the line of cases that invalidated mandated assessments (including
a case specifically involving the WAC) the WAC ceased domestic merchandising
activities. Those activities would henceforth be provided by individual
marketing organizations. The impact of the elimination of many commission
activities (field staff, category management, communications and public
relations, advertising, etc.) has on the industry remains to be seen.
Marketing groups appear to be addressing the desire of retailers for
“one-stop shopping” in that they want to source apples
– and perhaps pears and cherries – along with other value-added
services. Coupled with marketers now having access to their own pool
of funds for merchandising, those expenditures are utilized in directly
impacting that marketer’s manifest. The tailoring of a merchandising
program to each marketer’s needs is a departure from the one
size fits all programs under WAC. The question of which is better
is moot; we are operating under a different system, and there is no
going back.
Of particular note is the extent to which the industry has embraced
the notion of grower marketing cooperatives as provided under the
Capper-Volstead Act. Clearly, the extent to which communications and
cooperation has increased in the industry is palpable.
Providing marketers with better information affords them the opportunity
to make better marketing decisions. Separate associations have been
created for apples, pears and cherries and they are entering their
fourth year of operation. The Marketing Associations is comprised
of the Washington Apple Growers Marketing Association; Washington
Pear Marketing Association; Mid-Columbia Pear Marketing Association;
and the Northwest Cherry Marketing Association with headquarters in
Wenatchee, Wash.
Of the current issues impacting the industry, one is worthy of discussion
because of its national impact. Domestic apple distribution is accomplished
through retail grocery outlets. This is not to say that food service,
institutional and roadside outlets are not important, but the fact
remains, most apples are purchased at grocery stores. Does this mean
there is a degree of dependency here? Yes, but probably less than
you might think.
First, apples are one of the largest profit centers not only in the
produce department but in the entire store. Retailers make money selling
apples.
The second part of this is a bit more complicated. A recent article
in the World Apple Reports’ October issue dealt with how retailers
treat revenue received from vendors seeking to get their products
on the shelf. Whether you call them vendor allowances, slotting fees
or something else, some companies treated these dollars as revenue
and booked it as such and others –correctly – treated
these as a reduction in cost of goods sold. Accounting niceties aside,
the author noted that one retailer for fiscal 2002 had received $2.2
billion in such vendor or contract allowances. An online check of
that retailer’s financial statement revealed a net loss of more
than $800 million. In short, absent the dollars received from vendors,
the company would have lost in excess of $3 billion.
Monetary incentives to retailers are important to their bottom line.
Whether you are a commission operating under a state commodity commission
statue, federal or state marketing order or a private company, make
certain that when you provide monetary incentives to retailers that
you are receiving measurable value for your remittance. Be certain
that you are creating lift with your program that moves more product
than was being moved previously. Time and volume are key issues to
be dealt with in setting up promotional programs.
Looking once again to the future, the question presents itself as
to what extent will increased cooperation in the market place lead
to achieving fair returns to growers, handlers and retailers? Without
question, the realization that a symbiotic relationship needs to exist
is gaining a foothold. Growers returning less than their production
costs will not achieve sustainability.
To what extent will greater marketing cooperation and coordination
take place between marketers in Washington and those in Pennsylvania,
for example, or among marketers throughout the United States? Time
will tell. The competition to see who can render more services to
the retailer should lead to higher prices; the competition for shelf
space through ratcheted price reductions in an effort to maintain
market share will erode FOB prices as surely as night follow day.
We have two courses to follow: We may either keep to our solitary
track and do what we think is best for our operation and everybody
else be damned, or we may seek and encourage greater cooperation,
communication and alliance building.
“Change” is what has defined the apple industry in the
United States. Still, one would think that in every still frame captured
at any moment in time that we are getting negatives of people and
events to whom/which the concept is like a foreign language they do
not speak. We need to remove the blinders to see that the path toward
prosperity will be better trod by those working cooperatively than
by those working in a ruthlessly competitive fashion.
Finally, the international trade issue must be met head on squarely
and realistically. We want access to markets where trade barriers
(tax, tariff, phytosanitary issues and the like) are not artificially
erected and maintained. For countries wanting access to our markets,
the same issues and concerns must be addressed and met. We do not
want products admitted to the United States that bring with them pests
that could decimate our orchards. We do not want fruit coming into
this country that will raise food safety issues and exposure to pesticides
long banned or never approved for use in this country. For all countries
seeking access to our markets, sound science must trump political
science in the decision making process.
China becomes of immediate concern because of the geo-political role
it could play in its particular part of the world. The education of
our elected officials and department heads must continue through the
efforts of the U.S. Apple Association so that no agricultural commodity
becomes the sacrificial pawn in the world game of chess.
One also must understand the predatory nature of China’s entry
into the world apple market to better understand the problem. China
does not adhere to free market economic ideals nor does it allow its
currency to freely float. Huge production increases were not in response
to supply and demand in the world market, but as a result of considered
governmental policy aimed at capturing the world juice concentrate
market. How long will it take the lure of high prices in the major
world markets to see the shift to high levels of exports? Probably
not long once the quality issues are addressed. Whatever the country’s
true production costs, it is unlikely anyone will be able to produce
more cheaply.
Whatever the true subsidy levels in the E.U. and U.S. markets, pressure
to reduce or eliminate them will continue. This should spur discussion
abroad as well as in the United States as to the appropriate national
policy on agricultural production. And this should not occur rhythmically
at the time the next Farm Bill comes before Congress for consideration.
This question must be addressed: To what extent does this country
– or any country – want to be reliant upon foreign producers
for food production?
Well, the paint can is about empty, and it’s time to clean the
brush!
