The ability to provide account-specific products and services represents a major change from the days of uniform product offerings. While these services can be costly, many shippers are finding that they enable them to become preferred suppliers to large buyers, potentially stabilizing demand and somewhat lowering market risk. Many California grower-shippers obtain products from other countries during the off-season, sometimes via joint ventures. This enables shippers to extend shipping seasons and sell products produced in several locations via one marketing organization, maintaining a year-round presence in the marketplace.For example, shippers based in Salinas, California, also commonly ship out of the San Joaquin Valley, Imperial Valley, southwestern Arizona, and Mexico. The rapid growth in multi-location firms has contributed to the integration of the Mexico-California-Arizona vegetable industries, in particular.Because most vegetable crops are not perennials, the location of production can shift readily, based on relative production and marketing costs and growing season. Increasingly,bato bucket buyers are contracting with grower-shippers for high-volume perishable items to stabilize prices, qualities, and volumes.
While contracts were relatively common in the food service sector, they are new to retail. The entrance of super centers to food retailing has led this change as these mass-merchandisers focus on driving costs out of the distribution system. The introduction of contracting is likely to have structural implications at the grower-shipper level, since shippers need to offer large, consistent, year-round volumes to meet buyers’ contracting requisites.The evolution of the California produce industry has enhanced its efficiency by cutting marketing costs and improved communication of consumer demand back to growers. However, the consolidation of purchasing within the hands of a few large buyers raises concerns about oligopsony exploitation of producers. Perishable crops, which must be harvested, sold, and marketed within a very short time frame, tend to give growers relatively little bargaining power in dealings with buyers. Sexton, Zhang, and Chalfant and Richards and Patterson analyzed this issue recently for several fresh fruits and vegetables. Although the results differed among the commodities studied, in general the authors concluded that retailers were often able to reduce prices to growers below competitive levels as a consequence of their market power. In addition to apparently exerting buyer market power for at least some commodities, the manner in which retailers set prices to consumers for those commodities can also have an important effect on producer welfare. To the extent retailers exercise oligopoly power to consumers by marking up the price of a commodity above full marginal costs, they reduce sales of the commodity, an outcome detrimental to producers. Further, evidence from scanner data shows that retailers set prices for produce commodities with little regard for the underlying trends in the farm commodity market. For example, among 20 retail chains studied by Sexton, Zhang, and Chalfant, nine maintained the same weekly price for iceberg lettuce over the two year period from 1999-2000, despite wide fluctuations in the FOB price received by producers.Table 3 illustrates the wide variability among four Los Angeles retail chains in setting prices for iceberg head lettuce and iceberg-based bagged salads.
The table contains the correlations in the weekly retail prices charged by the various chains for iceberg head lettuce and the various brands of iceberg-based bagged salads .Correlation coefficients fall in the range of –1.0 to 1.0 , with values near zero indicating very little correlation between the movements over time for the particular price pair. Each chain’s head lettuce price is positively correlated with the FOB price , but the correlations are much lower than if the retailers were merely adding a cost-based mark up to the FOB price. Correlation between retail and farm pricing essentially disappears for the bagged salads, however. In all cases, the correlations are nearly zero, and in some cases are negative, meaning the retail price moved on average in the opposite direction of the farm price. To understand retailer pricing for fresh produce commodities, one needs to appreciate that the modern retailer sets prices for 30,000 or more product codes.Pricing decisions are not made with an eye towards profitability of any single product, but, rather, are oriented toward the profitability of the entire store. The produce section is traditionally a source of high profits for retailers, and, because of the importance consumers attach to produce, retailers can use their produce aisle as a way to differentiate themselves and attract consumers to the store. Accordingly, stores’ pricing policies for produce vary widely. Some stores prefer to offer consumers stable prices week in and week out . Other stores regularly feature produce as a sale item, so prices vary dramatically from week to week . Neither pricing strategy is likely to be beneficial to producers. Sexton, Zhang, and Chalfant demonstrated that retailers who maintain stable prices over time despite fluctuations in sales and price at the farm level cause lower producer income on average because price must fluctuate even more in those sectors, such as food service, which do not artificially stabilize price, in order for the market to clear.Marketing arrangements are different for processed foods, including fruits and vegetables, nuts, grains, meats, and dairy.
Growers in these industries sell to processing firms rather than to food retailers. Like the food-retailing sector, the food processing sector has also become increasingly concentrated, and effects of high processor concentration can be especially severe in terms of their impacts on grower processor relations. Most raw farm products are generally bulky and perishable, making shipment costly and limiting growers’ access to only those processors located within a limited radius of the farm. For example, broilers are generally shipped 20 or fewer miles, and processing tomatoes are hauled 150 or fewer miles. Thus,dutch bucket hydroponic even if many processors operate in an industry nationally, typically only one or a few firms buy from a given geographic region California food processors are themselves a diverse lot. A key distinction is whether or not the processor has successfully developed its own brand identification. Processors with successful brands are able to capture a price premium in the market. Examples of California processors with leading brands include Blue Diamond , Sunsweet , Heinz , Del Monte , Sun Maid , Diamond , Lindsay , and Sunkist . Processors who lack dominant brands sell primarily to food service buyers and to the private label market. Private labels refer to retailers’ house brands. These brands generally sell at a discount compared to major brands, resulting in a lower return for the processor. Great variety also exists in the form of business arrangements among growers and processors. Grower-processor relationships can be thought of as comprising a continuum with pure “arm’s length” exchange or spot markets at one extreme, and grower-processor vertical integration at the other extreme.In between the extremes are various forms of contractual relationships between growers and processors. Pure arm’s length exchange or spot markets are increasingly rare. Two key factors have contributed to the decline. First, as the number of firms buying in a given geographic area has declined, the efficiency of price discovery in spot markets diminishes, and concerns over buyer market power escalate. Second, arm’s length transacting is a poor way to coordinate activity and transmit market information between buyers and sellers, and this type of coordination has become increasingly important in meeting consumers’ demands in the marketplace. The processing tomato industry illustrates some advantages of vertical coordination and problems of conducting transactions through spot markets. Unlike tomato sectors in many other countries, tomato production in California consists of two completely separate, dedicated industries rather than a single, dual-usage industry; tomatoes are grown either for processing or for fresh usage. Tomatoes are perishable and costly to transport. Thus, processors have an incentive to procure production near their processing facilities. Timing of production is also critical. Tomatoes must be harvested immediately upon ripening and then processed quickly to avoid spoilage. The efficient operation of processing facilities and the effective processing of the harvest require that a processor’s deliveries be spread uniformly over an extended harvest period of 20 or more weeks. Similarly, processors specialize in producing different types of tomato products.
Some plants produce only bulk tomato paste, which is then remanufactured at other locations into various processed tomato products, while others produce whole tomato products. The preferred type of tomato to grow depends upon the intended finished product. Delivery dates and product characteristics cannot be communicated effectively through spot markets. Nor will a central market work when processors are interested in procuring product only in the vicinity of their plants.Thus, the California processing tomato industry transacts essentially its entire production through grower-processor contracts. These contracts specify the specific acreage the product is to be grown on, variety of tomato to be grown, delivery dates, and premiums and discounts for various quality characteristics. Price terms in these contracts are set with the intervention of a producer bargaining cooperative.Cooperatives are firms that are owned by the producers who patronize them, although many cooperatives also do business with nonmembers. California is home to many large and important food-marketing cooperatives. Producers who are members of a marketing cooperative essentially have vertically integrated their operation downstream into the processing and marketing of their production. A number of incentives can account for producer cooperative integration, including avoidance of processor market power, margin reduction, and risk reduction . Cooperatives are the leading marketing firm in several California agricultural industries including almonds , walnuts , prunes , citrus and raisins . However, the recent years have represented difficult times for some California marketing cooperatives. Tri Valley Growers , a fruit and tomato processing cooperative, formerly the second largest cooperative in California, declared bankruptcy in the summer of 2000. Around this same time the Rice Growers Association, a large and long-lived rice milling operation closed its doors, as did Blue Anchor, a diversified fresh fruit marketer. Reverberations from the failure of these prominent California cooperatives were felt nationally and caused some to wonder whether the model of cooperative marketing was well suited for 21st century agriculture. Indeed cooperatives do face some important challenges competing in the market environment we have described here. As noted, retailers prefer suppliers who can both provide products across an entire category and provide them year around. Cooperatives are traditionally organized around a single or limited number of commodities and member production is likely to be seasonal. Cooperatives can attempt to surmount these difficulties by undertaking marketing joint ventures with, for example, other cooperatives, and sourcing product from nonmembers, including internationally. However, cooperatives may face impediments relative to investor-owned competitors in pursuing such strategies. For example, various laws affecting cooperatives specify that at least 50 percent of business volume must be conducted with members. Joint ventures with firms that are not cooperatives are not afforded legal protection under the Capper-Volstead Act.Doing business with nonmembers may also adversely affect a cooperative’s membership, if it is perceived that most of the benefits of the cooperative can be obtained without incurring the financial commitment associated with membership. This issue was important for TVG when it appeared that tomato producers selling to TVG under nonmember contracts received a better deal than member growers. Cooperatives may also face challenges in procuring the consistent high-quality production that the market place now demands. Cooperatives usually employ some form of pooling mechanism to determine payments to members. In essence, revenues from product sales and costs of processing and marketing flow into one or more “pools.” A producer’s payment is then determined by his/her share of the total production marketed through each pool. The problem with some pools is that high quality and low-quality products are commingled and producers receive a payment based upon the average quality of the pool. Such an arrangement represents a classic adverse selection problem, and its consequence is to drive producers of high-quality products out of a cooperative to the cooperative’s ultimate detriment. Cooperatives can obviate this pooling problem through operating multiple pools and/or by designing a system of premiums and discounts based upon quality, but the key point is that investor-owned competitors face no similar hurdles in paying directly for the qualities of products they desire.