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COOPERATIVES, MARKETING ORDERS AND BALANCING SUPPLY AND
DEMAND IN THREE PERENNIAL CROP COMMODITY SUBSECTORS

By

Donald Lee Hinman

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Agricultural Economics

1994

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ABSTRACT

COOPERATIVES, MARKETING ORDERS AND BALANCING SUPPLY AND
DEMAND IN THREE PERENNIAL CROP COMMODITY SUBSECTORS

By

Donald L. Hinman

Perennial crop industries have tried different approaches and have had different
experiences in attempting to balance supply and demand. Three crops (tart cherries,
almonds, and raisins) were selected for comparative analysis of actual and potential roles
of various vertical market coordination institutions in improving subsector supply-demand
balance.

Two significant problems complicate the coordination of supplies with demand in
perennial crop subsectors: 1) short-run problems due to annual fluctuations in supplies and
2) long-run challenges relating to substantial overplanting that can result in persistent
overproduction. The combination of inelastic demand and annual supply fluctuations
results in wide price fluctuations for some commodities.

Types of cooperatives and alternative marketing strategies employed by cooperatives
were investigated. Committed integrated marketing cooperatives (CIMCs) in the almond
and raisin subsectors market a significant portion of member production through strong
national branded consumer products. In their roles as food manufacturers, these CIMCs
work through their brand position to influence consumer demand and retailer
merchandising. They have the ability to significantly influence the demand side in order to
help balance subsector supply and demand. A committed commodity marketing cooperative
(CCMC) lacks a strong national brand franchise, but focuses on selling large volumes of
processed products to food manufacturers and the food service industry along with retaining

a commitment to being a reliable supplier of a commodity such as tart cherries.

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Long run supply-demand balancing approaches that were investigated included
approaches to reduce acreage when overplanting had occurred and to avoid overplanting.
Raisin acreage reduction has been accomplished to some degree through the Raisin
Diversion Program (RDP) as part of the raisin marketing order. An orchard removal
incentive program for tart cherries was proposed but never implemented.

Supply management programs were analyzed, with emphasis on federal marketing
orders. Three main types of supply management provisions of federal marketing orders are
commonly implemented to mitigate the consequences of annual supply fluctuations. Reserve
pools address the problem of annual supply fluctuation through storing a portion of grower
deliveries in large-crop years and releasing some or all of the storage reserve in short-crop
years. Market allocation provides another stabilization approach by removing excess
product in large crop years from the designated major markets. The third set of provisions,
non-production or non-harvest diversion, provides additional flexibility in managing excess
supplies. A major contribution has been to alleviate some of the negative consequences of
supply instability by helping to promote increased sales and to prevent erosion of demand
through more stable commodity supplies.

Supply management provisions of the federal marketing orders have also helped
dampen price declines in large crop years, thus mitigating the negative impact on growers.
Econometric models of the tart cherry and almond industries were developed to estimate
the impact on grower prices of implementing a federal marketing order in each of those two
subsectors. Estimated price impacts were substantial in some years of marketing order
implementation (up to a 20% difference in grower prices for tart cherries), but impacts were

moderate in other years.

To my mother, Jean S. Hinman

ACKNOWLEDGMENTS

I owe a significant debt of gratitude to two people who contributed greatly to the completion
of this research. Dr. James Shaffer, my major professor, suggested the general topic, provided
overall guidance and was instrumental in obtaining the funding that made this project possible. Dr.
Donald Ricks, my research supervisor, provided valuable insights into the workings of perennial
crop subsectors and spent countless hours of his time to give me guidance, recommendations, and

encouragement. Both of them read several drafts and offered comments that continually improved
the dissertation.

The thoroughness which Dr. John Staatz brought to the task of reading and editing the
dissertation was both a blessing and a curse. His numerous incisive comments and suggestions
greatly improved the final document. Dr. Christopher Peterson and Dr. Thomas Pierson also
served on my dissertation committee and provided helpful insights. Thanks to each of you.

The patient support offered by my wife, Susan Allen, was another necessary ingredient of
my success. Nor will I forget the gentle needling and words of encouragement coming from my two
stepchildren, Glenn and Virginia. I look forward to spending more time with you all.

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TABLE OF CONTENTS

List of Tables .......................................................
List of Figures .......................................................

CHAPTER 1: INTRODUCTION ........................................

Research Objectives .............................................
Research Methods ..............................................

CHAPTER 2: SUPPLY-DEMAND BALANCING PROBLEMS ................

A Short-run Supply Issue: Challenges to Coordinating Supply and Demand
Because of Annual Supply Fluctuations ........................
Long-Term Supply Trends and Overproduction .......................
Tart Cherry Supply-Demand Balancing Problems .....................
Almond Supply-Demand Balancing Problems ........................
Raisin Supply-Demand Balancing Problems ..........................
Long-Run Raisin Supply-Demand Balance Issues ................
Concluding Comments ..........................................

CHAPTER 3: THE SUBSECI‘ OR FRAMEWORK ........................

The Subsector Framework .......................................
The Price System and Vertical Coordination .........................
Example of Vertical Coordination Problems:

The Behavior of Food Retailers and Manufacturers ..........

Other Factors Affecting Price Transmission in the
Subsector ..................................
The Impact of Annual Supply Variation .......................
Analysis of the Effects of Merchandising ................
The Impact of Merchandising .........................

Consumer Demand: Matching Product Attributes to Consumer
Preferences .......................................

Market Coordination Mechanisms and Balancing Subsector Supply and
Demand ...............................................
Advantages of Cooperatives ......................................
Types of Cooperatives and Balancing Supply and Demand ..............
Summary ....................................................

vi

XII

1

3
4

6

6
16
20
3O
35
37
42

43
46

61
61

67

71
74
76
81

CRAFT

CHAPTER 4: DEMAND ISSUES AND COORDINATION .................. 85

Demand Expansion and Cooperatives .............................. 85
Commodity Marketing .......................................... 86
Undifferentiated Commodity Markets and Annual Supply

Fluctuations ...................................... 87
Brand/Value-Added Marketing ................................... 88
Elements of Brand / Value-Added Strategies: Advertising, Promotion,

and Merchandising Activities ......................... 89
Demand Expansion and Contraction in Response to Annual
Supply Fluctuations ........................... 91

Elements of Brand/Value-Added Strategies: Market Development . . 93
Elements of Brand/Value-Added Strategies: Market Research and

Product Development ............................... 94
Product Development: Branded Consumer Products ....... 96
Product Development: Value-Added Ingredients .......... 100
Demand Expansion Responses for Extended Periods of Overproduction . . . . 103
Response to Overproduction by the Almond Marketing
Cooperative ...................................... 104
Example of Raisin Generic Promotion as a Response to
Overproduction .................................... 106
Generic Demand Expansion: Interrelationships with Other Marketing
Efforts ................................................ 107
Cooperative Efforts to Reflect Demand Expansion Results to Grower
Members .............................................. 109
Summary .................................................... 113

CHAPTER 5: USES OF SUPPLY-DEMAND BALANCING APPROACHES IN

THREE PERENNIAL CROP SUBSECTORS ....................... 117
A Short-run Supply Issue: Problems in Coordinating
Supply and Demand Because of Annual Supply Fluctuations ....... 117
Federal Marketing Order Supply Management Programs ............... 121
Goals of Federal Marketing Order Programs ................... 121
Reserve Pool Storage with Federal Marketing Orders ............ 123
Market Allocation ....................................... 125
Non-harvest or Non-production Diversion ..................... 127
Non-harvest Diversion Under the Tart Cherry Marketing
Order ..................................... 127
Non-production Diversion Under the Raisin Marketing
Order ..................................... 128
The Tart Cherry Federal Marketing Order .................... 130
A Proposed New Federal Marketing Order Program ....... 133
A Proposed Supply Management Program Through a
Cooperative ................................ 134
Summary of Tart Cherry Supply Management ............ 135
The Almond Federal Marketing Order ....................... 136

vii

The Raisin Federal Marketing Order ......................... 140
Comparison of Marketing Order Supply Management in the Tart

Cherry, Almond, and Raisin Subsectors ................. 145

A Long-Run Supply Issue: Reducing Acreage Through Orchard or Vine
Removal ............................................... 149
A Long-Run Supply Issue: Approaches to Avoid Overplanting ........... 152
Market Information and Projections ......................... 153
Limiting Cooperative Membership ........................... 154
Stock Tonnage Contracts .................................. 155
Acreage Contracts ....................................... 157
Interrelationships Between Demand Expansion and Supply Management . . . 158
Summary .................................................... 159

CHAPTER 6: SIMULATION OF FEDERAL MARKETING ORDER PRICE

IMPACI‘S ................................................... 165
Tart Cherry Marketing Order Simulation ........................... 166
The Tart Cherry Model ................................... 167
Bearing Acreage and Production ...................... 170
Carryin Stocks, and Seasonal Supply .................... 172
US. Domestic Demand and Market Allocation ........... 176
The Full Model and Solution Process ................... 179
Overview of Tart Cherry Econometric Model ....... 179

Model Structure Showing Equations and Solution
Process .............................. 180
Model Performance ................................ 182

Simulated Alternative Scenario: Non-implementation of Federal
Marketing Order .................................. 184
Method of Analysis ................................. 184
Tart Cherry Model Results ........................... 190

Estimated Marketing Order Supply Restriction
Impacts for the Five Years of

Implementation ........................ 190
Impact of Using the Tart Cherry Marketing Order in
Other Large Crop Years ................. 196
Almond Marketing Order Simulation .............................. 200
The Almond Model ...................................... 202
The Estimated Equations ............................ 202
Full Model and Solution Process ...................... 205
Overview of Almond Econometric Model .......... 205
Model Structure Showing Equations and Solution
Process .............................. 206
Model Performance ................................ 208
Simulated Alternative Scenario: Non-implementation of Almond
Reserve ......................................... 209
Method of Analysis ................................. 210

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Estimated Price Impacts Without Marketing Order

Implementation .............................. 210
Raisin Marketing Order Simulation ................................ 216
Comparison of Three Marketing Order Simulations ................... 221
Suggestions for Model Improvement ............................... 226
CHAPTER 7: SUMMARY AND OVERVIEW ............................ 228
Supply Instability, Uncertainty and Coordination Problems .............. 229
Nature of the Uncertainty Facing Subsector Participants .......... 229
Consequences of Supply Variability in the Three Subsectors ....... 230
Analytical Methods Used to Illustrate Supply-Demand Imbalance . . . 231
Problems of Vertical Coordination Between Subsector Stages ............ 232
The Role of Committed Marketing Cooperatives ..................... 234
Demand Expansion Roles of Committed Marketing Cooperatives . . . 235
Changing Roles of Committed Marketing Cooperatives ........... 239

Future Research on the Role of Committed Marketing
Cooperatives ...................................... 240
Long-Run Supply-Demand Balancing ............................... 240
The Role of Supply Management .................................. 243
Supply Management Provisions of Federal Marketing Orders ...... 243
Modeling Federal Marketing Order Price Impacts ............... 244

Differences in Use of Supply Management Among the Three
Subsectors ........................................ 247
Applications to Other Commodity Industries ................... 249
Implications for Marketing Order Establishment for Other Commodities . . . 251
The Role of Commodity Promotion and Research Programs ............. 253
Additional Policy Implications .................................... 254
Concluding Comment .......................................... 257
BIBLIOGRAPHY ................................................... 258
APPENDIX A ...................................................... 261

List of Tables

Table 1. Production Changes in Four Perennial Crops, 1967-1992 ................ 9
Table 2. Short Versus Large Tart Cherry Crops and Comparison of Revenue and
Price ...................................................... 10
Table 3. Short Versus Large Raisin Crops and Comparison of Revenue and Price . . 11
Table 4. Short Versus Large Almond Crops and Comparison of Revenue and
Price ....................................................... 12
Table 5. Production Variability Measures For Selected Perennial Crops .......... 15
Table 6. Number of Years from Planting on Bearing and Typical Life Span for
Three Perennial Crops .......................................... 18
Table 7. Vertical Stages in Agricultural Subsectors .......................... 43
Table 8. Effects of Temporary Merchandising Techniques on Product Movement . . . 65
Table 9. Food Product Attributes ....................................... 68
Table 10. Examples of Coordinating Mechanisms in Three Perennial Crop
Subsectors ................................................... 73
Table 11. Types of Cooperatives in Fruit, Nut, and Vegetable Industries ......... 77
Table 12. Alternative Marketing Strategies in Perennial Crop Subsectors ......... 86
Table 13. Tart Cherry Marketing Order Effect on Supplies .................... 124
Table 14. Short-run Impacts of Marketing Order Supply Management on Firms at
Various Subsector Stages ....................................... 161
Table 15. Variable Identification, Tart Cherry Model ........................ 168
Table 16. Structural Relationships of the Tart Cherry Modell .................. 169
Table 17. Bearing Acreage Equation Estimated by OLS ...................... 171
Table 18. Frozen and Canned Pack, Estimated by
Seemingly Unrelated Regression ............................ 173
Table 19. Canned Carryin Stocks and Frozen Carryin Stocks Estimated by OLS . . . . 175
Table 20. Three Stage Least Squares Estimates of the US. Demand and Market
Allocation System for Tart Cherries ............................... 177
Table 21. Goodness-of-fit Measures of Dynamic Sequential Predictions of Key
Endogenous Variables, 1965-1990 ................................. 183
Table 22. Determination and Uses of Restricted Tonnage Under Tart Cherry
Marketing Order .............................................. 186
Table 23. Tart Cherry Marketing Order Simulation: Quantities of Cherries Stored
and Released ................................................. 187

Table 24. Simulated Impact of Tart Cherry Marketing Order: Estimated Changes in
Frozen f.o.b. and Grower Prices in Response to Quantities Stored and

Released .................................................... 191
Table 25. Grower Revenue and Net Change in Revenue With and Without Tart
Cherry Federal Marketing Order, Based on Simulation Model ........... 195

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Table 26. Determination and Uses of Restricted Tonnage Under Simulation of Tart

Cherry Federal Marketing Order .................................. 198
Table 27. Simulation of Tart Cherry Federal Marketing Order Implementation

in 1982, 1987, and 1989: Impact on Frozen f.o.b. and Grower Price ........ 199
Table 28. Variable Identification: Almond Model ........................... 201
Table 29. Bearing Acreage Equation Estimated by OLS ...................... 202
Table 30. Domestic Almond Demand Estimated by Three Stage Least Squares . . . . 203
Table 31. Almond Grower Price Equation Estimated by OLS .................. 204
Table 32. Export Sales Equation Estimated by OLS ......................... 205
Table 33. Goodness-of-fit Measures for Dynamic Sequential Predictions of Almond

Model Variables, 1973-1989 ...................................... 208
Table 34. Estimated Price and Quantity Changes Without Almond Marketing Order

Implementation, 1980-1989 ...................................... 211
Table 35. Estimated Grower Revenue With and Without the Almond Marketing

Order Reserve ................................................ 215
Table 36. Tart Cherry Market Supply With and Without Use of the Federal

Marketing Order, 1972-1975 ..................................... 261
Table 37. Tart Cherry Supply in Years Following Marketing Order Use, With and

Without Market Order Use in 1972, 1975, 1980 ....................... 262

 

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List of Figures

Figure 1. US. Tart Cherry Production and Bearing Acreage, 1950-1991 ..........
Figure 2. US. Almond Production and Bearing Acreage, 1950-1991 .............
Figure 3. US. Raisin Production and Raisin Variety Grape Hectares, 1966-1991 . . . .

Figure 4. Illustration of Tart Cherry Grower Price Level Changes Due to Changing

Long-Term Supply Conditions, 1972-1989 ...........................

Figure 5. Relationship of Average Grower Cost to Tart Cherry Price Levels, 1972-

1990 ........................................................

Figure 6. Michigan Tart Cherry Grower Total and Variable Cost with Yield of 2.6

Tons/Acre ...................................................

Figure 7. Michigan Tart Cherry Grower Prices Compared to Variable and Total

Cost at Average Yield Each Year .................................

Figure 8. Michigan Tart Cherry Grower Total and Variable Cost and Revenue Per

Acre .......................................................

Figure 9. Average U.S. Tart Cherry Production, Average Sales, and Bearing

Acreage .....................................................
Figure 10. US. Total Tart Cherry Production and Total Sales, 1950-1991 .........
Figure 11. US. Average Almond Production and Average Sales ...............
Figure 12. Domestic and Export Almond Sales, 1964-1991 ....................
Figure 13. US. Almond Production and Total Sales .........................

Figure 14. Raisin Type Grape Bearing Acreage and Acreage Harvested for

Raisins ......................................................

Figure 15. Harvested Acres, Average Production and Average Sales for NTS

Raisins ......................................................

Figure 16. Percentage of Raisin Type Grapes Dried for Raisins and Comparison of
Quantity of Grapes Dried for Raisins versus Quantity in All Other Uses,

1966-91 .....................................................
Figure 17. Comparison of California Raisin Grower Price and Production Cost . . . .
Figure 18. US. Total Raisin Production and Total Sales, 1964-1991 .............

Figure 19. Simplified Overview of Main Marketing Channels in Processed Perennial

. Crop Subsectors ..............................................
Figure 20. Demand Schedule with Pricing on the Nines by Grocery Retailer ......
ngufe 21. Retail Price and Product Movement for Supply Increase or Decrease . . .
ngure 22. Farm Level Demand .........................................
FlSure 23. Effect of Supply Increase on Tart Cherry Grower Price per Pound .....

Figure 24 Effect of Supply Increase on Manufacturer Price per Can, Tart Cherry Pie
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ANNUAL SUPPLY DECREASE: FOUR SUBSECT OR STAGES
(Fig. 26 through Fig. 29)

Figure 26. Impact of Supply Decrease on Growers (Stage One) ................ 56
Figure 27. Impact of Supply Decrease on Processors (Stage Two) .............. 56
Figure 28. Impact of Supply Decrease on Manufacturers (Stage Three) .......... 57
Figure 29. Impact of Supply Decrease on Retailers (Stage Four) ............... 57

ANNUAL SUPPLY INCREASE: FOUR SUBSECTOR STAGES
(Fig. 30 through Fig. 33)

Figure 30. Impact of Supply Increase on Growers (Stage One) ................ 59
Figure 31. Impact of Supply Increase on Processors (Stage Two) ............... 59
Figure 32. Impact of Supply Increase on Manufacturers (Stage Three) ........... 60
Figure 33. Impact of Supply Increase on Retailers (Stage Four) ................ 60

ANNUAL SUPPLY INCREASE WITH MERCHANDISING: FOUR
SUBSECTOR STAGES
(Fig. 34 through Fig. 37)

Figure 34. Impact of Supply Increase on Growers (Stage One) ................ 62
Figure 35. Impact of Supply Increase on Processors (Stage Two) ............... 62
Figure 36. Impact of Supply Increase on Manufacturers (Stage Three) ........... 63
Figure 37. Impact of Supply Increase on Retailers (Stage Four) ................ 63
Figure 38. Effect of Temporary Merchandising on Retail Demand With Supply
Increase ..................................................... 65
Figure 39. Coordination Linkages of Subsector Stages with Consumer Demand . . . . 69
Figure 40. Comparison of Tart Cherry Grower Prices With and Without the
Federal Marketing Order, 1972-1986, Based on Econometric Simulation . . . . 193
Figure 41. Comparison of Grower Net Return With and Without Tart Cherry
Federal Marketing Order, 1972-1986, Based on Econometric Simulation . . . . 193
Figure 42. Comparison of Actual Almond Grower Price to Simulated Price Without
Reserve................. .................................... 214
Figure 43. Mean Grower Prices for Grapes for Drying, 1964-1985: Actual and
Alternative Scenarios Based on French and Nuckton Simulation .......... 217

Figure 44. Mean Grower Net Revenue, Grapes for Drying and Crush, 1964-1985:
Actual ‘ and Alternative Scenarios Based on French and Nuckton.

Simulation ................................................... 217
Figure 45. Raisin Grape Grower Price, Actual and Simulated Without Marketing

Order, 1964-1985 .............................................. 220
Figure 46. Grower Net Return to Dry and Crush, Actual and Simulated Without

Marketing Order .............................................. 220
Figure 47. Raisin Grape Grower Price, Actual and Simulated Without Marketing

Order and With Reduced Planting Response ......................... 220
Figure 48. Grower Net Return to Dry and Crush, Actual and Simulated Without

Marketing Order, Reduced Planting Response ....................... 220

 

 

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CHAPTER 1: INTRODUCTION

The uncertainty facing participants in the food marketing system contributes to
mismatches between supply and demand for various agricultural commodities. Both climatic
and human factors contribute to this uncertainty. The weather is frequently a major cause
of substantial annual supply fluctuations. Human factors are also important in that mistakes
are made in agricultural production and investment decisions because of a number of
reasons including the difficulty of accurately predicting important economic variables.

These factors contribute to problems of economic coordination in commodity
markets. Shaffer distinguishes four kinds of coordination.‘ Micro-micro coordination takes
place within an individual firm. Micro coordination refers to coordination between firms,
such as between firms operating at two adjacent stages of a subsector. Macro coordination
is the overall balancing of supply and demand in a commodity subsector in terms of
quantities and qualities. Macro-macro coordination refers to the supply and demand of
goods and services at the level of the national economy. This research focuses on macro
coordination and hereafter all references to coordination mean macro coordination in terms
of this classification.

The framework used in this research for examining the issues related to matching
supply and demand is a subsector approach, which views the flow of an agricultural
commodity from grower to consumer through various marketing channels as a vertical
system consisting of several stages. Matching supply and demand in terms of both quantities
and characteristics of commodities at each stage of the vertical system is part of the process

of vertical coordination. There are complex interactions between these stages. Decisions

 

1James D. Shaffer, "Thinking About Farmers’ Cooperatives, Contracts, and Economic

Coordination," in Cooperative Theory: New Approaches, ed. Jeffrey S. Royer, Washington
DC: USDA, ACS Service Report 18, July 1987, 61-62.

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made at various points in the marketing channels for a commodity may help or hinder the
match of supply and demand.

Mighell and Jones define vertical coordination as "all the ways of harmonizing... at
each stage in the vertical production-distribution system."2 The research reported here
takes only a slice of that broad concept by focusing on certain means to harmonize the
system, specifically, improving the match of quantities supplied and demanded both on an
annual basis and over the longer run, and the matching of the characteristics of commodity-
based food products with consumer preferences. It also compares the processes of vertical
coordination in subsectors with various types of cooperatives, marketing orders, and other
coordinating mechanisms. The research gives primary emphasis to certain stages of the
vertical market system. Much of the analysis focuses on grower-first handler transactions,
which corresponds to stages two and three of the five stages of a subsector as presented in
Chapter 2.

The analysis concentrates on selected perennial crop commodities. These
commodities have significant problems in coordinating supplies with demand. Analysis of
those problems provides an opportunity to examine a variety of institutions which have
evolved (or have been proposed) to respond to these problems.

The study focuses on two supply conditions common to a number of perennial crop
subsectors: (1) annual supply fluctuations which are primarily related to weather conditions
and (2) long-term changes in acreage and productive capacity that may lead to periods of
over-production and under-production relative to typical levels of quantity demanded. The
long-run supply-demand balance for many perennial crops is a cyclical type of phenomenon

in which periodic overplanting can lead to persistent commodity industry overcapacity

 

2Ronald Mighell and Lawrence Jones, Vertical Coordinatiop in US. Aggiculture, USDA,
Economic Research Service, Farm Economics Division, Agricultural Economics Report No.
19, February 1963.

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problems. At the same time, production of perennial crops often fluctuates sharply from one
year to the next.

Demand conditions are also significant. Farm-level demand for a number of
perennial crops is typically price inelastic. The combination of inelastic demand and annual
supply fluctuations results in wide price fluctuations for some commodities. Changes in
consumer preferences on product characteristics, such as the trend toward less consumption
per capita of sweetened desserts, have also had considerable impact on demand for certain
commodity-based processed food products.

Perennial crop industries have tried different approaches and have had different
experiences in attempting to balance supply and demand. Three perennial crops were
selected to be the focus of this analysis: tart cherries, almonds, and raisins. These three
crops were selected for comparative analysis because each of them has: (a) faced problems
of overproduction at one time or another, (b) developed broad-based programs involving
joint industry decision-making to address collective problems, including federal marketing
orders, and (c) had large marketing cooperatives playing significant marketing and vertical

market coordination roles.

1.1 Research Objectives
The first objective of this research is the description and diagnosis of the instability
and coordination problems that characterize the markets for each of the three perennial
crop commodities. This objective is addressed in chapters two and three. Chapter two
examines and compares supply-demand balancing problems for tart cherries, almonds, and
raisins. Chapter three introduces the subsector framework and then presents, both
conceptually and with examples, problems related to the interaction between subsector

stages that hinder effective coordination.

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The second objective is to compare the role of various marketing organizations in
the three commodity subsectors. To accomplish this, chapter three introduces a system of
categorizing market coordination arrangements and their roles in coordinating supply and
demand.

The third objective is to examine a variety of coordination approaches used to
influence demand and supply in the three subsectors. Chapter four focuses on demand-
related issues and coordination. Chapter five examines supply management roles and
institutions, with particular emphasis on cooperatives and federal marketing orders.

Chapter six deals with the fourth objective, which is to assess the impact on grower
prices of supply management that has been undertaken through the use of federal marketing
orders. Econometric models are developed to analyze the magnitude of the impact of
federal marketing orders on tart cherry and almond prices. Comparisons are made with the
results of a study of the raisin marketing order.

Chapter seven presents a summary and overview of this research, including some
perspective on the impact on the commodity subsectors of various market coordination

arrangements.

1.2. Research Methods

Interviews with a number of participants in the three perennial crop commodity
industries provided valuable information on conditions in the three subsectors and
approaches used by various firms and organizations to address supply-demand balancing
problems. People from cooperatives, the staff of marketing order administrative boards,
universities, and government were interviewed. A review of past research, trade
publications, as well as cooperative bulletins and newsletters also provided key information.
Data on production, sales and prices were collected from a number of published sources,

both government and private.

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Some written portions of this research were reviewed by certain key informants who
had previously been interviewed to verify information and obtain additional perspectives on
the analysis and issues addressed. This iterative process improved the accuracy of the
research results presented herein and also widened the author’s understanding of market
coordination arrangements in the three subsectors.

Marketing order price and revenue impacts were analyzed by developing
econometric models of the tart cherry and almond subsectors. Comparisons were made of
the results of these models with previously published research on the economic impact of
the raisin federal marketing order.

‘To set the stage for the following chapters, chapter two presents an overview of the

supply-demand balancing problems in each of the three perennial crop subsectors.

 

 

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CHAPTER 2: SUPPLY-DEMAND BALANCING PROBLEMS
IN PERENNIAL CROP SUBSECTORS

Two significant problems complicate the coordination of supplies with demand in
perennial crop subsectors: 1) short-run problems due to annual fluctuations in supplies and
2) long-run challenges regarding the need to avoid serious overplantings that can result in
persistent overproduction. Equilibrium conditions of supply and demand for a number of
perennial crops tend to occur infrequently and can be transitory due to the combination of
substantial crop fluctuations and long-term trends in orchard or vine capacity which may or
may not match demand trends.

Supply and demand are in approximate balance when average market prices for a
commodity approximate average cost per unit plus a normal return on investment for typical
growers. In contrast to the situation of approximate balance, when supplies are excessive
grower prices are frequently well below cost of production because total supply is not well
coordinated with demand. This chapter examines and compares the supply-demand

balancing problems that face each of the three commodities.

2.1. A Short-run Supply Issue: Challenges to Coordinating Supply
and Demand Because of Annual Supply Fluctuations

Major coordination challenges arise because while supplies of perennial crops can
fluctuate widely from year to year largely because of the impact of weather conditions,
demand tends to change in a relatively gradual trending pattern over a period of several
years. This situation can cause substantial problems for growers and firms at various
subsector stages.

Although annual supply fluctuations for a number of perennial crops are due

primarily to fluctuating yields resulting from variable weather conditions, for a few perennial

Figure

“We 3.

7

Figure 1. U.S. Tart Cherry Production and Bearing Acreage, 1950-1991

 

 

500

f/\ ’70

500- :so
ing Acres _ ’5
a: j 5
8 400 ’50 g
35; ~40 =
6 300 < _ g
.— U
a ’30 ‘
200- ~ g
35 Prediction ~20 g,
_ a:

100 ‘ l- 1 0

 

 

 

o rTTTTTYTTYTTVYTYTYTVTVI‘FYTTTTI'ITYI‘YTT'To
50 53 56 59 62 65 68 71 74 77 80 83 86 89
CropYear

Figure 2. U.S. Almond Production and Bearing Acreage, 1950-1991

 

   
     

 

800 450
700 a “400
J
g 600 ‘ Bearing Acres #350
‘ >300 "
35001 §
§ ‘ (250 §
3 400 « p
(z: - i200 I;
l
r: 300 i150 g
1 <
E 200 s ”00
‘ Production
100 ‘ r50

 

 

 

o 'U—YTYYYY'U'YVVV'r'VYVW'TYTYT VVVVVV IIIYY—YYYO
50 53 56 59 62 65 68 71 74 77 80 83 86 89
Crwa

Figure 3. U.S. Raisin Production and Raisin Variety Grape Acreage, 1966-1991

 

300
5004
450i Rdsin Variety Grape Bowing Acres
" "250
A 400 ‘
g 350 ‘ i- A
‘- < u
.0
o ‘ b
8 3004 ”0 §
5 Production __ g
‘6— 250 “ 5
r m
§ 200 - ”5° ‘52
« 2
O 150‘ "
E ..
100 ‘ " 100
‘i
50 " "
50

 

 

 

o T V V I Y Y T 7 r V I I U 1 V T—Y—Y Y Y Y I T V 1' V
66 68 7O 72 74 76 78 80 82 84 86 88 9O
Crop Yea

crops 1
coninl
raisin

utilizat
produc
for rais
raisins.
Figure
m6 0“
dlli in g

Ganja-(m

8

crops such as raisins, year-to-year changes in market utilization decisions by growers also
contribute to annual supply fluctuations. There have been a few weather-induced short
raisin crops in the last 25 years (1972, 1976, 1978). In addition, year-to-year shifts in
utilization of raisin-type grapes have also had a significant impact on the quantity of raisins
produced in some years. Raisin producers can respond to alternative market opportunities
for raisin-type grapes by choosing between selling for crush (wine-making) and drying for
raisins. This accounts for some of the year-to-year changes in raisin production shown in
Figure 3. In addition, a relatively steady 12-15% are sold for fresh market and for canning.
The overall level of raisin-type grape bearing acreage has primarily followed gradual trends
during the last 25 years. The reasons for the rise and subsequent decline in the 19708 and
1980s are explored below.

Figure 1 and Figure 2 show substantial year to year changes in the level of
production of tart cherries and almonds even though the number of bearing hectares
changes gradually. Note that in these figures, production level is indicated on the left
vertical axis and bearing acreage on the right vertical axis. The magnitude of annual tart
cherry supply fluctuations is one of the most pronounced for any U.S. agricultural
commodity. Tart cherry supplies are often double or half the level of the previous year.
Annual supply fluctuations for almonds increased to some degree in the 19803 as the overall
level of supply rose substantially.

Perennial crop production variability can be characterized by considering the range
of annual change (highest and lowest magnitude) and the number of short crops and large
crops that occur in a given time period. Some of this data is summarized in Table 1. Tart
cherry annual change in production compared to average shipments of the previous four
years ranged between 58% and 180%. Almonds had a similar range (68%-194%), but
raisins are somewhat less variable by this measure. However, the number of short crops

(10) was significantly greater for tart cherries than for the other crops.

9

Table 1. Production Changes in Four Perennial Crops, 1967-1992

 

 

 

 

   
   

 

Production as a Percentage of Previous Number of Short and Large
Four Years Average Shipmentsl Crops’
Smallest Largest No. of Short No. of Large
Percent Percent Crops Crops
i Tart Cherries 58 180 10 10
Almonds 68 194 3 14
46 152 4 12

 

 

 

 

 

 

1Based on Table 2, Table 3, and Table 4. The first year of comparative data is
1967 because the earliest year for which there is complete raisin data is 1963.
2 See text for definition of short and large crops.

The terms "large crop” and ”short crop" require clarification. In this analysis, a large
crop year is defined as a level of production of 120% or more of the average of the previous
four years’ shipments. A short crop year is a level of production that is 85% or less of the
average of shipments of the previous four years. Table 2 (tart cherries), Table 3 (raisins),
and Table 4 (almonds) indicate the general magnitudes of what constitutes large and small
crops both in terms of quantity differences and percentage differences between: (a)
production in a given year and (b) a four-year moving average of past shipments.

The ”large crop year" threshold figure of 120% or more for tart cherries is
appropriate because during the operation of the federal marketing order, the administrative
board that acted in an administrative and oversight capacity (known as the Cherry
Administrative Board) proposed that one or more supply management provisions be
implemented, or have issued documents stating that such would be their policy, if crops were
of that general magnitude or greater.

For raisins, large crops, defined as deliveries by raisin growers of 120% or more of

average shipments for the previous four years, generally yield negative net revenue, as

Tal
Y

_ 3 2 are ; 3 Q at... Q Q Q Q me Q Q Q 8.5 Q K fix Rex ......\..

10

Table 2. Short Versus Large Tart Cherry Crops and Comparison of Revenue and Price

+I—F—n

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Crop Short Diff. Between Prod. as Pct. Total Average Annual Price Net
Size‘ versus Prod. and Pre- of Previous 4 Reve- Annual as a Pct. of Revenue”
(mil. Large vious 4 Yrs. Years Average nue Grower Previous 4 (cents per
lbs.) Crop Anghipments Shipments (mil. 3) Price Years Avg. lb.)
(mil. lbs.) (¢/lb.) Price
1965 354 large 59 120 16.1 5.0 73
1966 180 short -130 58 24.3 13.8 228
_ 1967 178 short -104 63 30.6 17.5 210
: 1968 276 -2 99 41.5 15.2 147
1969 317 large 71 129 23.3 7.8 61 II
1970 2.51 22 109 17.9 7.6 56 ll
1971 280 41 117 27.7 10.0 83 -0.4
: 1972 312 large 55 121 22.3 8.3 82 -2.0
i 1973 175 short -96 65 33.1 18.9 224 +2.7
1974 265 18 107 48.9 18.5 165 +6.2
1975 291 large 52 122 25.1 10.2 73 4.1
1976 147 short -93 61 36.8 25.1 180 2.1
1977 211 44 121 61.9 29.4 162 + 13.6
1978 181 short -31 85 79.3 43.8 211 +253 "
1979 170 short -31 85 80.5 47.2 174 +235
1980 218 large 39 122 43.3 20.2 56 -3.1
1981 135 short -55 71 59.1 44.5 127 6.8
1982 311 large 138 180 34.6 14.1 36 -9.8
1983 155 short -31 83 71.5 46.6 148 -4.0
1984 255 large 86 147 64.0 25.0 80 -5.6
1985 286 large 103 156 62.8 22.4 69 -5.9
1986 224 22 111 44.3 20.3 75 -14.2
1987 359 large 154 175 22.4 7.8 27 -16.9
1988 236 2 101 43.8 18.7 99 -7.7
1989 264 13 109 35.3 14.5 84 -11.9
1990 209 short 48 81 36.6 18.1 118 -8.4
1991 190 short -64 75 88.1 46.4 313 8.9
1992 335 large 101 143 55.2 17.6 72 -2.5

 

 

 

 

 

 

 

 

 

‘Crop size, total revenue and price data from Noncitrus Fruits and Nuts (NASS. USDA). Total revenue is farm value.
"Average annual U.S. tart cherry grower price minus grower costs per lb.("Cost of Producing Cherries,‘ Mich. St. Univ.)

 

Price

«gm PL: MaN fla~ J.\ 321‘ «QN N.\ 13. .N Y. fidN

 

in:

 

 

 

2...... m2...»

23$ NQQWTTEEWEQ

”“3

\W.\
2m.

 

11

Table 3. Short Versus Large Raisin Crops and Comparison of Revenue and

 

 
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price
= 1
Difference Prod. as Pct. Annual Net
Between Prod. of Previous 4 Revenue Annual Price as a Revenueb
and Previous 4 Years Average (mil. 3) Price Pct. of Pre- (5 per ton)
tons) Crop Years Average Shipments (3 per vious 4 Yrs.
Shipments (mil.lbs.) ton) Avg. Price
19615 241.4 54.0 200 -3
1966 258.2 57.7 206 -9
1967 161.3 short -29 85 53.8 297 1
1968 2405 large 49 126 70.0 266 113 2 II
1969 229.8 large 38 120 66.8 266 110 -2 II
1970 176.3 -17 91 54.6 283 109 -3
I 1971 174.5 - -18 91 63.8 329 118 -6
! 1972 90.2 short -104 47 58.8 560 196 17
1973 200.7 29 117 168.9 754 210 24
1974 213.1 large 45 127 145.4 602 125 -1
n 1975 252.6 large 83 149 188.2 665 118 -8
1976 134 short -40 77 199.8 706 109 45 ’n
1977 220.3 32 117 208.6 840 123 25
1978 865 short -104 46 243.8 1067 152 108
, 1979 261.7 large 90 152 347.9 1151 140 37
1980 250.6 large 83 149 372.3 1205 128 27
1981 224.4 large 43 124 336.6 1315 123 12
1982 206.2 17 109 336.7 1153 97 -50
1983 336.2 large 125 159 2325 587 49 -50
1984 295 large 78 136 212.4 635 60 -163
1985 303.6 large 74 132 1 211.8 612 66 -135
1986 244.5 -4 98 209.7 757 101
1987 323.1 large 54 120 290.9 817 126
1988 324.1 32 111 326.0 898 127
1989 3933 large 87 128 420.1 977 127
1990 354.9 39 112 354.5 903 105
1991 314.0 25 108 332.2 963 105
1992 353.1 n/a n/a 329.4

 

 

 

‘Crop size. shipments—Thompson seedless only.'1‘ota| revenue (farm value), price (all raisins):Noncitrus Fruits & Nuts.
bWeighted grower price for grapes dried for raisins and for crush, minus grower costs per lb. Cost data available through
1985 only (French and Nuckton, Ag Econometric AnalEis of the California Raisin lndustg).

12

Table 4. Short Versus Large Almond Crops and Comparison of Revenue and Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

‘ Year Crop Short Difference Prod. as Pet. of Total Average Annual Price as
Size‘ versus Between Prod. Previous 4 Years Revenue Annual a Percentage of

‘ (mil. Large and Previous 4 Average (mil. 3) Grower Previous 4 Years

. lbs.) Crop Years Average Shipments Price Average Price

1 Shipments (mil.lbs.) ($/lb.)

1 1965 79.1 45.0 0.57
1966 95.0 51.9 054
1967 82.2 44.6 054
1968 80.6 < 1 100 44.5 055
1969 1323 large 50 160 73.9 0.56 102
1970 148.4 large 55 159 80.1 0.54 98
1971 160.7 large 54 151 87.1 0.54 98 II
1972 150.1 23 118 98.1 0.65 119 II

‘ 1973 154.7 13 109 200.0 1.29 226
1974 229.3 large 85 158 170.1 0.74 98
1975 185.6 35 123 128.0 0.68 80
1976 283.8 large 125 179 184.0 0.65 78
1977 313.1 large 130 171 264.5 0.84 102
1978 181.0 short -36 83 262.5 1.45 202
1979 376.0 large 144 162 579.0 154 171
1980 321.8 62 124 473.3 1.47 131
1981 407.4 large 138 151 2995 0.78 59
1982 346.7 large 62 122 311.1 0.94 72
1983 241.9 short -64 79 231.9 1.04 88
1984 586.9 large 284 194 446.1 0.77 73
1985 464.7 large 133 140 360.6 0.8 91
1986 251.6 short -120 68 461.6 1.92 216
1987 659.7 large 289 178 648.0 1.00 88
1988 590.0 large 173 142 600.1 1.05 ' 94
1989 4885 40 109 480.9 1.02 86
1990 656.2 large 198 143 598.0 0.93 75
1991 485.9 ~30 94 564.2 1.19 114

 

 

 

 

 

 

 

 

 

 

 

‘Crop size, total revenue and price data from “Almond Statistics" (Almond Board of California) and Noncitrus Fruits
and Nuts (NASS. USDA). Total revenue is farm value. Net revenue is not computed due to lack of cost data.

indicatl
criteria
period

levels [I

represe.
Exceplic
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Prior 101

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13

indicated in the last column of Table 3. Large almond crops are defined by the same
criterion, ranged from 122% to 190% of prior four-year average shipments, during the
period 1965-1992. During the 19808, crops of that magnitude were associated with price
levels that ranged between 59% and 98% of prior four-year average prices.

These criteria, based on comparisons of production to prior average shipments,
represent only an approximate means to define large and short crops, because there are
exceptions in each case. For example, 1977 tart cherry production was 121% of shipments
for the previous four years, but should not characterized as a large crop year because prices
were high enough to yield positive net revenue for typical growers. The previous year’s crop
had been quite short (61% of the previous four years’ shipments). The percentage
comparison also needs to be viewed with caution for raisins. The late 19708 was a period
of strong raisin export demand, so that prices were 123%-140% of prior four-year averages
even in large crop years (as defined by the 120% of prior four year shipments criterion) and
were even higher in short crop years. With almonds, large crops by the 140% definition
prior to the 1980s were not associated with low prices (e.g., price levels substantially below
price levels in the prior four years). Thus the percentage comparisons provide one useful
general indication of what represents large and short crops, but the comparisons should be
made with caution. It would have been preferable to establish net revenue as the main
criterion for assessing what are large and small crops, but sufficient data were not available
to do so.

Crop size has a significant impact on price fluctuation. When large tart cherry crops
occurred, prices in those years were 83% or less of the average prices for the previous four
years. Prices ranged as low as 36% (1982) and 27% (1987) of the previous four-year
average, as shown in the second to the last column of Table 2. Also, in most large crop
years, prices ranged from under one cent to seventeen cents below estimated average cost

of production, as shown in the last column in Table 2.

 

 

L8
as they ha
have been
Slings hal
ctplanatio
inelastic a
$83181 me

T31
Years than
17% for t;

14

Large crops have not had as strong a downward price effect with almonds and raisins
as they have had with tart cherries. For raisins, the magnitude of the supply fluctuations
have been proportionally smaller than for cherries. The magnitude of year-to-year supply
swings have in a number of cases been larger than for almonds than for cherries, so the
explanation of less price variability lies both in the fact that almonds are not as price
inelastic and because certain marketing institutions (federal marketing orders) provide
greater means to mitigate the impact of large supplies.

Tart cherries have had more severe annual supply fluctuations during the last 25
years than have almonds or raisins. Average annual percentage changes in production were
17% for tart cherries, 15% for almonds, and 10% for raisins for the period 1965-1992.
Production variability for these three crops is compared to other perennial crops in Table 5.

Additional measures of variability include INS and the coefficient of variation.3 Tart
cherries rank as the most variable perennial crop by two of the three measures for the
period 1965-1992. The high CV for almonds for 1965-1992 (0.59) is because mean
production in the denominator of the CV calculation was low.

Considering the more recent period 1981-1990, it is evident that almond production
variability has increased substantially and appears to have become more variable than tart
cherries when measured by INS or CV. However, the figures in Table 1 indicate that tart
cherries have a more serious production variability problem in terms of frequency of short
crops when considering the period 1967-1990. On the other hand, there has been only one
short tart cherry crop since 1983 because tart cherries have been in a period of excessive

plantings.

 

3INS is an index measure of variability or instability known as the variance of annual
percentage change. See Ian Dalziell, ”Sources of Agricultural Marketing Instability,"
Unpublished Ph.D. dissertation, Michigan State University, 1985. The coefficient of
variation is the standard deviation divided by the mean.

15

Table 5. Production Variability Measures For Selected Perennial Crops

 

 

 

 

 

 

 

 

 

 

 

 

1965-1992 1981-1992

Average Coeffi- Average Coeffi-

Annual cient of Annual cient of

Percentage Vari- Percentage Vari-
Changel ation2 INS3 Change ation INS
Tart Cherries 16.6 0.26 1674 19.4 0.26 2123
Almonds 14.3 0.59 1442 18.0 0.29 2144
Hazelnuts 15.2 0.42 1420 17.6 0.31 1764
I Raisins 9.3 0.25 664 7.6 0.14 292
[ Plums 6.7 0.20 287 8.6 0.14 435
Sweet Cherries 8.5 0.21 476 75 0.15 412
Freestone 6.8 0.15 312 7.8 0.13 375

Peaches

Blueberries‘ 8.1 0.34 386 4.1 0.15 72
Apples 3.9 0.20 104 3.9 0.12 128
l Nectarines 4.7 0.41 133 3.8 0.10 90

 

 

 

 

 

 

 

1Average annual percentage change is the average of year-to-year percentage changes,
which are measured as a percentage of the average production for each pair of
adjacent years.

2Coefficient of variation is the standard deviation of production divided by the mean.

3INS is the variance of annual percentage change. This index of variability effectively
dctrends a data series. If production increased by a constant proportion each year (e.g.,
10% per year), there would be zero variance and consequently INS would equal zero.

‘Blueberry data are through 1990 only.

Of the three industries, the tart cherry industry has experienced the largest annual
price swings; the coefficient of variation for cherry prices for the period 1964-1989 was .65.
The comparable figures for raisin and almond prices were .50 and .41, respectively. The
higher price variability for tart cherries was due mainly to the larger relative swings in tart
cherry production combined with price inelastic demand. All three commodities exhibit
price inelastic demand, as evidenced through price flexibilities (approximately the inverse

of demand elasticities).

A
for tart cl.
raisins as
evidence .

variability

Pe
Occurs wit
overPFOdu
growers m
m'elpfodu
t a Wiser

to take a0

the [0m 1]
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me 8368.
Pitt impact

all"re.

mils to

 

16

Analysis in Chapter 6 indicates that grower price flexibilities are approximately -2.0
for tart cherries and -1.4 for almonds. Nuckton and others computed price elasticity of bulk
raisins as -0.2, approximately equivalent to a price flexibility of -5.0.‘ Although the
evidence suggests that raisin price flexibilities are higher, tart cherries have higher price

variability due to larger swings in production.

2.2. Long-Term Supply Trends and Overproduction

Periods of overproduction occur in various agricultural subsectors. If overplanting
occurs with perennial crops, those subsectors may experience excess production capacity,
overproduction and prices below typical grower costs for a number of years. Individual
growers make acreage expansion decisions that in the aggregate may result in considerable
overproduction capacity for the subsector when the new acreage reaches bearing age. This
is a consequence of secondary uncertainty, which arises because growers are often unable
to take account of the aggregate consequences of their planting decisions. Growers have
limited knowledge of the planting intentions of other growers and of the consequences of
the total impact of those planting decisions on future supply and prices. Also, growers
generally make planting decisions in the belief that their individual decisions will not affect
the aggregate supply. When many growers plant at the same time, as is often the case, the
net impact on total productive capacity can be large. Primary uncertainty is due chiefly to
supply variability attributable to climatic and biological factors such as those discussed
above.

For a number of crops the result is similar: periods of high prices typically lead

growers to form overly optimistic expectations regarding future profit levels and to plant

 

‘C.F. Nuckton, B.C. French, and 6C. King, An Econometric Analysis of the CM
321W. Gianninni Foundation Research Report No. 339, University of California,
December 1988, 30. The point of means elasticity was computed at the 1983 values.

new acr
cannot l
result in
after the

the late

17

new acreage to the point where productive capacity is significantly expanded. If demand
cannot be expanded by a commensurate amount, these expansionary plantings sometimes
result in a level of supply which leads to economic losses by growers for a number of years
after the new acreage begins bearing. For example, expansionary tart cherry plantings in
the late 19708 resulted in a period of large supplies and low prices beginning in the mid-
19808.

As shown in Figure 1 at the beginning of this chapter, tart cherry bearing acres
declined steadily after 1964 and leveled out around 1978. Largely in response to high prices
in the late 19708, growers made substantial new plantings in the late 19708 and early 19808.
Bearing acreage began to rise significantly around 1983, and in the second half of the 19808
serious overproduction problems became evident. (A tart cherry tree is defined as "bearing”
in the sixth year after planting.)

Though many perennial crops exhibit some type of long-term cycle, it is more
pronounced in some crops, such as tart cherries, than in others. The longer-term cyclical
production pattern for cherries contrasts with the almond market, which has seen fairly
steady long-term growth in both demand and supply (despite large year to year variation).
Almond demand expansion has been more effective in keeping up with large increases in
production than has tart cherry demand expansion.

Almond demand expansion has been facilitated in part by the fact that almonds are
relatively inexpensive to store. Due to significant almond production variability, large
inventories are sometimes carried over into a subsequent marketing year. The combination
of collective storage through a federal marketing order (examined in Chapter 5) and storage
by the almond marketing cooperative and other firms helps reduce the likelihood that
shortages of supply will subsequently affect demand or that higher prices from short-run

fluctuations will send false signals to producers about future price prospects.

 

tl’l—‘llial 811
are also

Vegetable
This 600.
0(”10:41:15
and (he .
milks

Wilma.

Fear. {of '

18

Table 6. Number of Years from Planting on Bearing
and Typical Life Span for Three Perennial Crops

 

 

 

 

 

 

 

 

Years from Typical
Planting to Economic Life
Bearing for Tree/ Vine
Tart Cherries 6 20-35
Almonds 5 20-35
Raisin-type Grapes 3 several decades

 

Supply-demand balance problems for perennial crops differ considerably from the
typical situation with annual crops, and the typical supply-demand coordination mechanisms
are also different for perennials than for annual crops. Markets for annual processing
vegetables are coordinated to a large extent by preplanting contracts with prices specified.
This coordinating mechanism is rarely used with perennial crops. Annual preplanting
contracts for annual vegetables facilitate rapid adjustments to supply-demand imbalances,
and the processing firms that provide the contracts with growers typically use market
analyses and predictions of market conditions for the upcoming year in determining
contracted quantities. If excess production of a certain annual vegetable occurs in a given
year, for example, the contracted acreage can be reduced in the following year.

In contrast to annual crops, adjustment periods for perennial crop acreage usually
last a number of years because of the large fixed investments in bearing acreage, the time
lag between planting and bearing, and the long life span of perennial crops. The typical life
span for an almond or tart cherry orchard is 20 to 35 years, and for raisin-type grapes,
several decades. Downward adjustments made by growers in removing orchards or
vineyards in response to low returns due to excess capacity are usually slow. However, when

returns have been low for a number of years, substantial acreage may be removed in a

telntiveh

of cycles

remove t
of incom
income ti
lemming
enterpris.
however,
general jl
CO“Worth
“tilt 50ml
because 0
01 other g
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Ar
gel-3’5 er

apflated l

19

relatively short period of time.5 The pattern for cherries illustrates a common occurrence
of cycles in production.

All optimizing rule in economic theory recommends that an economic decision to
remove trees or vines be based on a grower’s estimate that the net present value of a stream
of income from a particular block is less than the sum of (a) the net present value of the
income that could be obtained from an alternative use of that land minus (b) the cost of
removing the trees and the loss in value of assets that cannot be redeployed into alternative
enterprises. Knowledgeable extension agents with experience in fruit industries indicate,
however, that growers generally do not make such explicit calculations but instead make
general judgments using approximate figures. The agents have observed that growers
commonly compare current or recent prices to variable and perhaps fixed and total costs
with some vague thoughts about the future. The predictions are understandably vague
because of the uncertainty that growers face, especially uncertainty relating to the actions
of other growers of the same crop. A common result is periods of grower overinvestment
in orchards or vines (as well as the associated equipment) and slow downward adjustment
in acreage once the excess plantings have occurred.

Another factor contributing to long-term oversupply problems is that even if some
growers exit from production, their orchards or vines often stay in production, in some cases
operated by a new owner who may have purchased the orchard at a loss to the original
owner.‘ Overcapacity problems can thus plague a perennial crop industry for many years.

Examination of tart cherry acreage trends over the last 40 years (Figure 1) indicates

that bearing acreage has risen and fallen two times, suggesting a cyclical pattern. In

 

sLarry Hamm, "Food Distributor Procurement Practices: Their Implications for Food
System Structure and Coordination," Unpublished Ph.D. dissertation, Department of
Agricultural Economics, Michigan State University, 1981.

6Dr. Donald Ricks, Dept. of Agricultural Economics, Michigan State University,
Personal communication.

20

contrast, a fairly steady and pronounced long-term upward trend is evident for almonds
since the 19608 (Figure 2) with a leveling off since the mid-19808 and a slight downturn in
the 19908. Figure 3 indicates that Thompson seedless grape bearing acreage, after
remaining fairly steady for many years, rose sharply in the late 19708 and early 19808 and
then began to decline in the mid-19808. Thompson seedless grape production represents
approximately 90% of all raisin-type grape production. Raisins produced from Thompson
seedless grapes are called Natural Thompson Seedless raisins (NTS).

The preceding pages have provided a general overview and comparison on the short
-run and long-run supply-demand balancing problems for the three commodities. Now the

supply-demand balancing problems for each of the three commodities are examined in more

detail.

2.3. Tart Cherry Supply-Demand Balancing Problems

This section examines both short-run and long-run supply demand balancing
problems in the tart cherry subsector. The effect on production and market supplies from
the combination of weather-induced annual fluctuations in yields and the longer-run cyclical
nature of bearing acreage often sends confusing market signals to growers and processors.
For example, it is difficult to determine to what extent high or low cherry prices in a given
year are the result of short-run annual supply fluctuations and to what extent the prices
reflect the longer-run supply-demand balance related to the cyclical phenomenon. It is
especially difficult for growers to interpret where the industry is in terms of productive
capacity when the industry is near a turning point in the long-term cycle and then has an
unusually short or unusually large crop. Acreage figures which might help growers interpret
these trends are published too late and too infrequently (every four years) to serve as an
effective guide to decision making. Thus although it is clear that short tart cherry crops in

1990 and 1991 were partially due to weather-induced short-run fluctuations, opinions

differed

short cr

over-cat
product
some di

analfiet

demand

with sup

21

differed among growers, processors, and other industry participants on whether or not these
short crops represent a turning point in the long-run cycle of productive capacity.’

In the long-run cyclical pattern of tart cherry bearing acreage, periods of industry
over-capacity and under-capacity are interspersed with periods of approximate balance of
productive capacity with demand. The impact on supply and demand, prices and costs of
some different periods of the production cycle in the most recent twenty-year period can be
analyzed using Figure 4 and Figure 5.

The years 1972-1975 were a period of approximate balance between supply and
demand at a remunerative price. Price P,, resulting from the intersection of demand D.
with supply 8. in Figure 4, represents a price level that is consistent with generally moderate
levels of supply.

Extending that price level on a dotted line over to Figure 5 is intended to show that
the 1972-1975 period was a period in which grower prices approximated average total cost
of production (ATC) for typical well-managed grower firms, represented by the flat portion
of the ATC curve.

The next period in the tart cherry cycle, 1976-1981, can be characterized as a period
of general under-capacity of production in relation to potential demand, with frequent short
crops and unusually high prices received for cherries. This is shown graphically by the shift
from S. to Sb and the rise in the price level to Pb, which is considerably above typical grower
cost of production in Figure 5. Growers responded to high prices during this short supply
period with substantially increased plantings, resulting first in a transitional period of
approximate balance of supply and demand from 1982 to 1984 and then a period of chronic

over-capacity during the period 1985-1989. Over-capacity is shown graphically by the supply

 

7Dr. Donald J. Ricks, personal communication.

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23

shift to S, which results in generally low grower prices. Pc in Figure 5 is below grower total
cost and variable cost per pound.

The preceding graphs illustrate the meaning of long-term imbalance between supply
and demand of perennial crops by showing the effects on grower price levels of changes in
tart cherry productive capacity at different periods of the production cycle. During the
period of declining tart cherry acreage, frequent shortages led to price levels well above
grower costs in most years. Subsequent heavy plantings resulted in grower price levels
below typical grower costs.

It is important to put more precise meaning into this discussion of excess production
and shortages with actual price and cost figures. Graphical comparisons of tart cherry prices
with cost of production in Figure 6, Figure 7, and Figure 8 help to do this. Michigan tart
cherry cost of production data was obtained from cost estimates carried out in 1971, 1979,
1984, and 1989. Total and variable production cost figures at an average yield of 2.6 tons
per acre for the four survey years are plotted in Figure 6 with connecting lines to illustrate
the cost trends (2.6 tons per acre was the approximate statewide average in recent years).
Costs beyond 1989 were increased at a constant rate of 2% per year. The sharp increase
in average total cost (ATC) between 1979 and 1984 and the decline between 1984 and 1989
were due largely to changes in the cost of land and orchards, which represents in part the
capitalization into land and orchards of the higher expected stream of income resulting from
high tart cherry prices in the late 19708 and early 19808. Since ATC is itself influenced by
grower prices for tart cherries, comparisons of price and ATC as a measure of imbalance
and supply and demand should be done with caution, and greater reliance should be placed
on comparing price and variable cost.

A production cost time series for the entire period was constructed by interpolating
between survey years using the assumption that both variable and total costs changed by

equal increments each year. The original cost survey figures were presented as costs per

Ton

UCJOQ

LOQ 9.9.00

hut: Cl kmu Q

Ix 9:»er

24

Figure 6. Michigan Tart Cherry Grower Total and Variable Cost with Yield of 2.6
Tons/Acre

 

    
 
   

 

 

 

 

 

 
      
   

 

 

 

70 a
60 a
'0 SO -
c
as. ..
L 40 ‘
O
a q
U!
"E 30 a
8 1 Total Cost per Pound
20 a
10 ~ .
Variable Cost per Pound
q
19'70'19'72'19'74'19'76'19'78'19'8619'82'19’8439’86‘19‘88'19'90: 9'92
Figure 7. Michigan Tart Cherry Grower Prices Compared
to Variable and Total Cost at Average Yield Each Year
70 4 197245 1976-81 1982-84 1985-90
Approximaf. Frequent Approx. Persistent
‘ Balance Shortages Balance Overproduction
50'} . L : : # F%
50 r
g / ,.
o ‘ alt’
a. 40 q l Total Cost
3 per Pound
o, a
*3 :50 4
8 -i
20 Price
ax 3".
10 + ‘3‘. ,
-i "" Variable Cost per Pound
o I I I I I I I I I I I I j 7 I I I I I I 17 I I I I I I I
1965 1970 1975 1980 1985 1990

Source: Price data from "Noncitrus Fruits and Nuts. ' ERS/USDA. annual summaries.
various years. Cost data: see previous figure.

 

Harri
250(

200C

1500

DOLLARS

1000

500

25

Figure 8. Michigan Tart Cherry Grower Total and Variable Cost and Revenue Per Acre
2500

 

1 978
2000 a Total Cost per Acre

Revenue Per Acre

1500: I ‘

1000‘

l

DOLLARS
‘

l

P” V

1987

500« /

- Variable Cost per Acre

 

 

O

 

r r j—T I I I

19'70' 1975 '19'80' ' ' ' 1

'19'35 '19'90' '
acre. The time series per-acre cost figures were then divided by actual annual average yields
per acre to give the total and variable costs per pound at average seasonal yields.
Harvesting costs were included as the number of cents per pound. The resulting cost figures
were plotted with bold lines to form the ”cost band” in Figure 7.

Figure 7 compares grower prices to grower cost per pound. Annual average
Michigan grower prices for processing were plotted on the same graph with each year’s price
appearing as an asterisk. Michigan prices are typically about equal to U.S. prices since
Michigan produces over 70% of U.S. tart cherries. Thus comparison of Michigan price and
cost of production is a reasonable approximation for the entire U.S.

Figure 8 compares grower returns per acre (gross revenue) to cost per acre. Costs

per acre are computed by taking the cost survey figures (which were per-acre figures) and

adding costs that were given in cents per pound (multiplied by average yields per acre).

Both
relative to pr
such as in 19
total cost of j
0i productio
Ol’erproductit
Variable cost

Comp
Production (b.
Cherry Sales v.-
“idence of ex
incentive pmg

Compa
helps illustrate
0‘3ng PiOdu
by a it‘l'ear m0
image of the
Wmmmm

quantiu'eS of [a

26

Both Figure 7 and Figure 8 indicate that when short crops occur, prices are high
relative to preceding or succeeding years and are often well above total cost of production,
such as in 1977-1979. In large crop years such as 1975 and 1980, prices tend to drop below
total cost of production of a typical grower. When prices are consistently below total cost
of production, such as from 1985 through 1989, this provides evidence of persistent
overproduction. In the very large crop year of 1987, gross revenue per acre was below
variable cost of production.

Comparisons of production and sales forecasts showed that estimated average
production (based on a 1990 orchard survey) is likely to exceed projected processed tart
cherry sales well into the 19905.8 The orchard survey and related analysis provided some
evidence of excess tart cherry productive capacity upon which plans for an orchard removal
incentive program were developed. Orchard removal issues are examined in Chapter 5.

Comparing average tart cherry production with average quantity sold in Figure 9
helps illustrate the problem that supply shortages tend to constrain long-run demand growth.
Average production (plotted as bars in Figure 9) is computed by multiplying bearing acreage
by a 4-year moving average of yields. Potential average annual sales are computed as the
average of the two highest years out of the previous four, based on the assumption that
annual sales could have stayed at the highest levels attained in recent years had sufficient
quantities of tart cherries been produced to meet that demand. Four year periods were
selected as the most accurate means of estimating averages due to the improved averaging
effect of having two high production and two low production years. Tart cherry sales are
defined as equivalent to processed movement, which is computed as beginning inventory
plus pack minus ending inventory. The tart cherry pack is the quantity processed as frozen,

pie filling, and canned.

. “Cherry Marketing Institute, ”Report on Michigan Tart Cherry Survey," Okemos,
MlChigan, 18 January 1991.

lbs.)

Prod. and Sales (mill.

27

Figure 9. Average U.S. Tart Cherry Production, Average Sales, and Bearing Acreage

 

    
    
  
      

 

 

 

 

500 60
1972-75 1976—81 1982-84 1985-90
450 * Approx. Frequent Approx. Persistent r
Shortages Balance Overproduction
r) 400 ~ -50
:3 Potential
=. 350 ‘ Average Sales ' A
"’ U)
\E/ 300 " -40 8
a . Average Production 0
g 250 - ; - c
m m
"g 200 - e L:50 8
. _ o
O I Z <
15 150 ‘ i :j -
O z
h . .
0- 100 J i'20
so - t
° . . 10

7b r7h 7k '7k 75 3b 'ai 'a4rah '8a '9b
Crop Year

The resulting graph in Figure 9 is consistent with Figure 7 in that the same cyclical
periods are also evident though less pronounced. One can observe during the period 1976-
81 that the reduced productive capacity from declining acreage resulted in average
production generally below potential demand (average annual sales). Although average
production is equal to average sales in 1977, one should note the pattern over several years
rather than in one particular year. The general downward trend of average annual sales
from 1976 to 1980 provides some evidence that one key impact of shortages during that
period was dampened demand. When acreage and production began to rise around 1982,
demand growth lagged behind.

The preceding discussion focused on the long-run cyclical aspect of tart cherry supply
instability. The focus now turns to annual supply fluctuations. Supply instability combined
with inadequate storage is a major aspect of the problem of balancing subsector supply and

demand on an annual basis. Figure 10 illustrates the annual supply fluctuation problem by

28

presenting Mal sales and 16.1%! production rather than moving averages as in Figure 9.
The problem of frequent shortages is evident. There were ten years with short crops
between 1966 and 1991 as defined by the criterion in Table 2. The short crop years were:
1966, 1967, 1973, 1976, 1978, 1979, 1981, 1983, 1990, and 1991. A key occurrence in each
of these short crop years was that total sales dropped off sharply due to the reduced
supplies. Another key factor is that because of the risks associated with storage by
individual firms, during most years there is generally little processed product stored to meet
the short crop possibilities. Some alternative coordination mechanisms for dealing with this
problem are examined in Chapter 5.

However, some stabilization through storage did occur during the years of general

excess capacity in the late 19808. Although tart cherry processors have generally tried to

Figure 10. U.S. Total Tart Cherry Production and Total Sales, 1950-1991

 

 

 

 

’10; 350 ‘
g . Production , Sales
8. 300 ~
c -
=2
:5] 250 " . 1
m ‘ I I r
3 200 ‘ . .
< .
m l l
g 150 -
4 . ‘.
E, 100 ~
.—
8 ..
8 50 ‘
a: .
a.
o .J

66 68 70 72 74 76 78 80 82 84 86 88 90
Crop Year

29

have as little carryover as possible, the prevalence of large crops during that period meant
that some processed product was stored because of the difficulty of selling the larger
quantities in commercial channels. Note that the graph in Figure 10 shows that production
levels in 1986 and 1988 were well below sales. Although at first glance those graphs appear
to indicate that shortages could have a negative impact on demand (because of the gap
between production and sales) this was not the case. In both of those years, there were
large carryin stocks due to heavy production in 1985 and 1987. In addition, production
levels were approximately 111% and 101%, respectively, of the average of prior years’
shipments. Thus sales did not decline, largely due to the stabilizing effect of stored cherries.
However, tart cherry industry observers have noted that although large stocks in those years
did have a stabilizing effect, most interseasonal storage is unplanned storage. The large size
of cherry carryover stocks in those years was largely due to handler inability to sell large
additional quantities. Industry observers caution that storage by processing firms will
generally not be adequate to mitigate the problems caused by supply volatility, including the
lack of product in short crop years.

Further evidence that 1986 and 1988 did not represent shortage years is that in 1986
and 1988 average grower prices were on average about 14¢ per pound and 7c per pound
lower than total grower costs (see Figure 7).

Although bearing acreage changes little from one year to the next, production
continues to be subject to wide annual fluctuations throughout various phases of the tart
cherry production cycle. Wide fluctuations in prices were especially noteworthy during
certain time periods such as the 19703 and early 1980s, when large year-to-year changes in
production were particularly frequent.

Large production in a given year can push grower prices below annual variable costs,
causing severe economic hardships. The 1987 national tart cherry crop was very large and

Michigan grower prices averaged approximately 8c per pound, which was 3c less than annual

variah

pounc

deuce
a hug

Short 2

IEgardi
Pattern
POUndS
the Ear}

alfigh l

7L
““533:

Figure

30

variable costs of growing and harvesting for a typical grower and 17¢ less than total cost per
pound (see Figure 7).

Since cherry demand is price inelastic, especially at the farm level, even large
decreases in grower price result in only small increases in the quantities of cherries sold in
a large crop year. Significant demand expansion is not easily achieved within a period as
short as one year.

Due in part to the problems encountered in trying to stabilize markets through
storage by individual firms, a tart cherry federal marketing order supply management
program was established to facilitate storage on a collective basis. The coordination role
played by marketing orders is examined in Chapter 5.

2.4. Almond Supply-Demand Balancing Problems

In contrast to tart cherries during the last 25 years, the longer-run almond situation
regarding acreage and production has not been cyclical but rather has shown a sustaining
pattern of long-term expansion. Production rose from an average of less than 100 million
pounds annually during the mid-19605 to an average in the 500-600 million pound range by
the early 19908. Bearing acreage reached a peak in the early 1990s and then continued on
a high plateau with a slight decline.

The question of whether periods of overcapacity occur in the almond subsector is
illustrated graphically by comparing average production and average annual sales in
Figure 11.’ It is useful to compare 1972-1979 with the period beginning in 1980. The
period 1972-1979 was selected for comparison because the seventies were years of strong
almond demand in which the almond marketing order was not used. Prior to 1972 and after

1980 the almond marketing order was regularly used in large crop years.

 

’Average production (plotted as bars) is calculated by multiplying the three year moving
average of yields by bearing acreage. A three-year moving average of delivered sales is
plotted on the same graph.

Sltuam

31

Figure 11. U.S. Average Almond Production and Average Sales

 

800 450

\l

O

O
1_

0’
O
O

    

   
 

Average
Production . .
Bearing Acres . I ; 1 I I s

.......

0|
0
O

O
........
OOOOOOOOOOO

04
O
O

000000000000
0000000000000

Prod. and Sale: (mm. lbs.)
.5;
o
o

OOOOOOOOOOOOOOOO

OOOOOOOOOOOOOOOOOOOOOOO

OOOOOOOOOOOOOOOOOOOOOOO

 

 

Crop Year

During the period 1972-1979, the bar graph representing average production in
Figure 11 and the line graph representing average sales are about the same height,
indicating approximate equality of production and sales and thus an approximate balance
of supply (productive capacity) and demand. Even though bearing acreage was increasing
steadily, oversupply in the U.S. market was not a big problem because increasing quantities
of almonds were exported as can be seen in Figure 12. U.S. sales rose and fell and then
rose again during that period, but the overall sales had a gradual upward trend. The
situation changed in the early 1980s, however, when production capacity began to rise
sharply due to improved yields and rising acreage.lo Generally weaker economic conditions
in much of the world led to faltering export sales in the early 19808. Almond exports began
to rise again in the mid-1980s, but a very short crop in 1986 substantially disrupted the

pattern of increasing export sales (this is examined in more detail below).

 

l"Average yields rose from 850-880 pounds per acre in the late 1970s to over 1000
pounds in the early 1980s (measured as three year annual averages).

32

Figure 12. Domestic and Export Almond Sales, 1964-1991
400

 

04 (N
O U!
0 O
l l

N
0|
0

Export Sales

   
 

100 4 Domestic Sales

Domestic and Export Sales (1000 tons)
a. a: '5’
o o o

 

 

 

I I III rfI I I I I I I I I I I I I I

0 64 66 68 70 72 74 76 78 80 82 84 86 88 90
Crop Year

The net result of these factors was a period of overcapacity in the 1980s. From 1980

on, the bar graphs in Figure 11 representing production are generally above the line

representing average sales, providing one indication of general overcapacity. Production

above sales levels was either stored as carryover stocks or disposed of in alternative sales

outlets that did not compete with sales in the primary commercial channels. In some years

this was accomplished through the operation of the federal marketing order reserve, which
is explained in Chapter 5.

The fact that there were many years of large supplies is also evident from examining

the graph in Figure 13 which compares actual annual delivered sales (versus a moving

 

average of sales in the previous graph) and total U.S. production of almonds. Production
levels in 1984, 1987, 1988 and 1990 were particularly large relative to sales and production
and levels in prior years.

One would expect large crops such as these to result in prices below cost of

production, as was shown to be the case with tart cherries. However, because of a lack of

\J

O

O
__..__L__.{

(II 0‘!
O O
O 0

Jul

:5
O
O

N
O
O

PRODUCTION AND SALES (million lbs.)
5 "c’;

o O
‘J‘J‘Aw—J. _._L_.__—L—_

33

Figure 13. U.S. Almond Production and Total Sales

 

700

Production
400 'l
300 ‘ Soles
\
200 -
°°‘ I [I I |
DJ I II I l

66 68 70 72 74 76 78 80 82 84 86 88 90
Crop Year

1

01

O

O
l

l

U"
C
O
l l

J

J

l

PRODUCTION AND SALES (million lbs.)

1

 

 

data, a meaningful price-cost comparison across time could not be made for alrnonds. Part
of the difficulty in developing time series data for costs is that production costs are highly
variable across production zones because of differing land ownership or tenancy
relationships among growers and because of other factors.

The magnitude of annual swings in almond production has increased along with the
average level of production. Table 5 in section 2.1 shows that average annual percentage
change for almonds was 14.3% for the period 1965-1992, but had increased to 18.0% for the
period 1981-1992.

Figure 13 also shows that short crops (well below sales) were particularly evident in
1978, 1983, and 1986.11 The situation was somewhat different for 1989 and 1991, as will

be discussed below. In 1986, the general unavailability of almonds and record high almond

 

11Production in those years was 83%, 79%, and 68%, of average sales for the previous
four years.

34

prices ($1.92 per pound versus prices ranging from $0.77 to $1.04 for the three preceding
years) resulted in a loss of sales outlets that hampered subsequent demand grth when
production levels later rose to substantially higher levels.12

The question arises as to whether the shifts in quantities sold from year to year with
the variation in supplies represent shifts in demand or movement along a fixed demand
curve. The evidence suggests both. The graphs indicate that when production increases in
year after a short crop, sales generally recover to levels somewhere near previous years of
comparable production levels, which suggest that only movement along a demand curve has
taken place. The evidence that the demand curve has also shifted in more anecdotal.
Interviews with handlers revealed that sales of certain types of manufacturer buyers will
cease buying in response to the unavailability, at least for several years, suggesting that
preferences have changed--the manufacturers change their product offering to consumers
to food products with a more reliable supply.

This situation is similar to the dampening of demand associated with the tart cherry
shortage period in the 1970s and in 1981 and 1983, in which the reduced supply and higher
prices contributed to a decline in demand. The juxtaposition of the very short crop year in
1986 and two large crop years (1987 and 1988) led to a significant policy change regarding
the operation of the almond reserve under the federal marketing order. Subsequent to
1986, almond reserves were used increasingly as a means for collective industrywide storage
to reduce the likelihood of shortages as occurred in 1986. Referring again to Figure 13, it
is evident that a stabilizing effect did occur in 1989 and 1991 since sales did not drop off as
had occurred during previous short crops. This was due to storage of almonds both through
the almond marketing order reserve and through storage by individual handlers. Supply

management through federal marketing orders and other means is covered in Chapter 5.

1“Blue Diamond Growers, Inc., ”Annual Report 1987-1988.” Price data from "Statistical
Tables,” Almond Board of California, various years.

com
sum
3UP.

Whel

Slead
and v
addiu'

subs.

35
2.5. Raisin Supply-Demand Balancing Problems

A key factor that differentiates the raisin supply situation from that of the other two
commodities is that shifts in market utilization of grapes in a given year affect the raisin
supply. The raisin supply depends not only on the amount of raisin variety grape bearing
acreage and yields but also on market utilization decisions by growers. Growers decide
whether to dry the grapes for raisins or to sell them in one of three alternative market
outlets: (a) crush (winemaking), (b) fresh (table grapes), or (c) canning. Since the
proportion of the crop used fresh and for canning has remained relatively constant at 12-
15%, the grower decision that has the greatest effect on the annual raisin supply is between
drying grapes for raisins or selling them for crushing into grape juice for wine-making.
Growers switch back and forth between the crush market and the raisin market based on
expected relative returns and the availability of the crush market in a given year.

Figure 14 shows that although the overall level of raisin-type grape acreage has been
steady for many years (up until the early 19805), grower decisions to shift between the raisin
and wine markets has caused acreage harvested for raisins to vary considerably.13 This
additional factor of uncertainty and supply volatility contributed to the difficulty of balancing
subsector supply and demand.

Weather has also played a role in raisin production variability. Frost damage in 1972
and post-harvest rain damage in 1976 and 1978 affected the crop on a substantial proportion
of the Thompson grape acreage as shown by the decline in acreage for those years in

Figure 15 for ”N18 Raisin Harvested Acres.” The reason that acreage declines in years of

 

1"The data series for the graph of "Acres Harvested for Raisins” in Figure 14 was
computed by multiplying total raisin-type grape bearing acreage time the percentage of
grapes dried into raisins. The graph is intended only to demonstrate that changes in market
utilization have a considerable impact on raisin production (the line representing production
in the graph is raisin production, not production of raisin-type grapes). It should be viewed
only as an illustration of utilization changes from year to year over the time period shown
and not as a precise measure of acreage harvested for raisins in any given year.

PRODUCTION (1000 tons)

36

Figure 14. Raisin We Grape Bearing Acreage and Acreage Harvested for Raisins

 

 
    
 
  
   
   

 

 

 

300
500 ‘
450 4 Raisin Variety Grape Bearing Acres
‘ ”250
I”? 400 ‘
g 4 Temporary Non-production of Acres _ A
"' 350 ‘ through Marketing Order .3
° ‘ ~2oo S
8 300 - S
v- . Production 0
v l- .C
2 250 - :3
9 ‘ tn
$53 200 q “‘50 3:
a - _ 2
a: 150 a
Q_ -
100 ‘ ~100
50: Acres Harvested for Raisins _
0 T I I I I I r I I I I I I I I n I I I I I I I I I I SO
66 68 70 72 74 76 78 80 82 84 86 88 90

Crop Year

extreme weather is that significant portions of grape acreage typically destined for the raisin
market are diverted to other uses (such as alcohol distillation) during those years because
the grapes on those acres are damaged.

However, it is evident that even without weather extremes in those three years, raisin
grape acreage varied considerably from year to year. The "normal weather acres”
represented by the dotted lines in Figure 15 are an estimate of what acreage would have
been had there been normal weather conditions in 1972, 1976, and 1978. The "normal
weather" acreage data points for those three years were computed by averaging the bearing
acres before and after the low production years in question. The purpose of doing this is
to show that considering the whole period from 1966 to 1991, acres harvested for raisins

varied considerably from year to year even without weather extremes.

37

Figure 15. Harvested Acres, Average Production and Average Sales for NTS Raisins

 

800 _ 1 80
750 .. 1983: Lcrge acreage increase (due to decline NTS Raisin r-

in Thompson gape: used in wine ”0""3l’d [170

700 ‘ Acres» : 1 60

650' :150

500 .1972. 1976. 1978: Adverse weather: Dotted lines :140

represent estimated normal weather acres -1 30

550- \ , .......... ”120
500‘ \ :110

 

 

A
(I)
r:
o
eh
o
0
° 1:
C o
d ' " O
3 450 AAvergge Production” :100 o
a CfOS lmOS OVOVO IO "'
8 400 ...... 9" :90 v
'o 350 - ~ . -30 3
I: : _ ; ” g
u 300 s _ 3. _ . . :70 2
c -° : ° .° -.° _
:9; 250 . . Average So as I I I . 3 9 : I I Pg?)
3 200 ‘ e t e e e e e e e e e e e e e ..
'3 q I ‘2 I I I l I I I I 3 :40
L 150 O 0 O O 0 0 0 O O O O O O 0 -30
m 0 O O O O O O O O O O O O P
100 ‘ I ‘2 I 2 I I I I I I I 3 ~20
soggggs 2222222  -1o
o I I I I I I T T 0

 

66 68 70 72 74 76 78 80 82 84 86 88 90
Crop Year

2.5.1. [nag-Run Raisin Supply-Demand Balance Issues

Turning to long-run issues, the first step is examining trends in overall productive
capacity for raisins. Figure 14 indicates that for a number of years from the 1960s until
around 1980, raisin variety grape bearing acreage remained relatively steady. However, in
the early 1980s the rise in raisin-type grape bearing acreage was due in part to grape grower
expectations that they could take advantage of the strong wine market to sell greater
quantities of raisin-type grapes for crush.“ Thompson seedless grape juice had
traditionally been an important ingredient in California wines. However, various factors
altered the situation to the detriment of raisin growers. The booming California wine
business in the late 1970s also brought about substantial planting of varietal wine grapes,

much of which directly competed with Thompson grapes for blending in generic wines. San

 

“Nuckton and others. WWW

38

Joaquin Valley bearing wine grape acreage doubled during the 19705. Also, a California law
was passed in 1983 increasing the proportion of juice from varietal grapes in each bottle
labeled with a particular variety, thereby reducing the proportion of Thompson grape juice.
California wine sales began to slacken in the 19805 and the high value of the dollar in
relation to a number of other currencies encouraged wine imports. Due to the sharp
reduction in the quantities of grapes accepted into the traditional crush market outlet,
Thompson seedless grape growers substantially increased raisin production in the early
1980s.”

This turn of events is depicted graphically in Figure 16, which compares the tonnage
of Thompson seedless grapes dried for raisins and tonnage used in other outlets. In the
years just prior to 1983, the percentage dried for raisins was 50-60%, with about 30% of the
grape tonnage crushed for wine. However, in 1984 the percentage used for wine dropped
to 14% and the percentage dried for raisins jumped to 74%.

Figure 15 helps to clarify further the issue of overproduction and shortages by
comparing average raisin production with average sales (a three year moving average).
Average production is computed by multiplying bearing acres times a three year moving
average of yields. The graph indicates that a significant amount of acreage did not produce
raisins due to weather factors in 1972, 1976, and 1978. These weather-induced short crops
appear to have somewhat offset a general trend to overproduction beginning in the mid-
1970s. The graph also shows that grape acreage harvested for raisins increased sharply in
1983 (148% of the previous year’s acreage) due to the aforementioned large-scale shift from
crush to raisins by many grape growers.

This sharp increase in raisin supply meant a sudden severe imbalance between supply

and demand, resulting in a large drop in average grower price from $1153/ton in 1982 to

 

l”Nuckton and others, t ' al s's oft e ' omia Rais' dust 1-2.

 

Quami

 

Fresh Tons (Thousands)
N
C)
(3
3

 

39

Figure 16. Percentage of Raisin Type Grapes Dried for Raisins and Comparison of
Quantity of Grapes Dried for Raisins versus Quantity in All Other Uses, 1966-91

 

   
 
    

 

 

 

 

4000 100
' 19794932: Percentage Percentage dried for raisins h
3500 ~ dried for raisins ls so-soz. lumps '0 747° in 1983 as '90
percentage used for wine percentage used for wine -
‘ averages 30%. drops to 14%. ’80
A3000" / .-
3 ' '70
§2500s *
:9: ‘ Percent Dried ~60 +
l— for Raisins * g
v2000‘ary. _50 r;
g .Dried _ a
t a
"' 1500-2657,.s : 3 5 _40
'5 : .2 :
8 ‘ ‘ E . as s 22:: 2 ~30
“1000‘ ii: ;:5:555:55335 E ’
-Ii.’i:"iiii.iiiiiiii. E '20
5°°‘3.'.’.‘..'." iiiiééiliiééiéiiéé 1,0
_
_ ::.::.,.:::.::::::se::e,:: -0

 

 

66 68 70 72 74 76 78 80 82 84 86 88 90
Crop Year

$587/ton in 1983. This was the beginning of a period of over-capacity, as evidenced by the
comparison of price and average cost of production in Figure 17.“ Thus interdependence
with the wine market was a major factor contributing to raisin oversupply problems in the
1980s.

The downturn in the wine market resulted in sharp increases in raisin market
supplies beginning in 1983. This was because a number of growers who had historically sold
gapes for crushing shifted more heavily into raisin production. These circumstances

brought about several responses by raisin industry organizations, one of which involved

 

“The price series used was the average annual price for all raisin varieties (W
Emjg and hints, NASS, USDA). Production cost for NTS raisins is based on multiplying
wine varietal grape cost of production by 1.09 (to account for extra costs of drying and
handling) and converting to nominal terms by multiplying by the GNP price deflator and the
drying ratio to make gape costs equivalent to dried raisin costs. Comparing the price of
all raisin varieties to the cost of a single variety (NTS) is a reasonable approximation since
NTS production represents 90% of all raisin production. Cost figures were obtained from

Nuckton and French, MW 73

40

Figure 17. Comparison of California Raisin Grower Price and Production Cost

 

1500 ‘
1400: 1982 Price=$1153
1300 . \7’
12003
1100 ~
1000;
900:
800:
700 .
5001
5003
4003
300:
200:
100:

Dollars per Ton

 

Production Cost 1983 ӣ64587

 

 

 

I I I I I I I I T I I I I I I I I I I I I I I

O r v r
1965 1970 1975 1980 1985 1990

establishing a progam to encourage gowers to discontinue production temporarily by
trimming vines or to remove acreage from production permanently under the Raisin
Diversion Progam (RDP). The sharp shifts in bearing acreage beginning in 1984 shown
by the dotted lines in Figure 14 are due to implementation of the RDP through the federal
marketing order. Producing acreage declined for three successive years, although most of
that acreage was removed from production only temporarily. The dotted lines in Figure 14
indicate the number of acres that were removed from production in specific years. Fewer
acres were removed under the RDP after 1986 because the supply-demand balance began
improving. The RDP is explained in more detail in Chapter 5.

Figure 18 also shows year to year variations in the difference between production
and sales, with results similar to tart cherries and almonds. The gaph shows that there were
five years between 1964 and 1990 with production well below the level of sales of previous

years, but in only three of those years did sales decrease significantly due to the shortages:

41

Figure 18. U.S. Total Raisin Production and Total Sales, 1964-1991

 

400

q

350 a

Production
200 4 Sales
150 s
100 d
o .r

66 68 7O 72 74 76 78 80 82 84 86 88 90
Crop Year

N ()4
UT 0
o O
1 1 1 1 1 1 1

1

Production and Sales (1000 tons)

U!
C
l

l

 

 

1972, 1976, 1978. Thus, one factor that the raisin market has in common with the markets
for almonds and tart cherries is the potential for reduced demand due to shortages. As with
almonds, the changes in sales levels appear to reflect both movement along the demand
curve and a shift in demand. In the years following shortages, raisin sales recover to levels
somewhere near where they were in years prior to the shortage. However, it takes several
years to recover to levels fully consistent with prior sales trends, indicating that an inward
shift in the demand curve has taken place, followed in many instances by renewed
promotional efforts to shift the demand curve outward. However, of the three commodities,
the problems of potential shortages are the least serious with raisins.

As with the other crops, the question should be posed as to whether interseasonal
storage by raisin firms could mitigate the potential problem of annual supply variability. The
answer appears to be no, since the irregular pattern of shortages makes it unlikely that

individual firms could anticipate the changes in production well enough to store sufficient

42

quantities to avoid a shortage. To deal with this problem, an industry-wide storage progam
has been organized through a federal marketing order. The industry as a whole is not
necessarily any better at forecasting shortages than are individual entrepreneurs. However,
collective storage through a marketing order facilitates sharing the costs of storing sufficient
quantities to mitigate the problems caused by shortages. Federal marketing order supply

management progams are examined in Chapter 5.

2.6. Concluding Comments

In summary, the three perennial crop industries examined in this research face some
common problems, including annual supply fluctuations and the long-term challenge of
balancing industry productive capacity with potential demand. Of the three crops, cherries
and almonds have experienced the largest year-to-year variations in production and raisins
the least variation over the period of study (1965-1992). The three industries also differ in
the degee of price variability, with cherry prices being the most variable. The raisin
industry faces a challenge which has no parallel in the other two industries: volatility in
raisin production partially due to multiple uses for raisin variety gapes and the resulting

interdependence with the wine industry.

CHAPTER 3: THE SUBSECTOR FRAMEWORK AND A CLASSIFICATION
OF ORGANIZATIONAL RESPONSES TO COORDINATION PROBLEMS FOR
THE THREE PERENNIAL CROPS

This chapter introduces the subsector framework used to examine the means to
respond to the supply-demand balancing problems introduced in the previous chapter. The
subsector framework is used to examine marketing problems related to vertical coordination
performance.

In addition, a major purpose of this chapter is to introduce a system of classifying
certain key coordination actions that have been adopted or considered in perennial crop
subsectors. To accomplish this, a means of classifying cooperatives is introduced to help
explain potential differences in the contribution that types of cooperatives can make to
balancing supply and demand for a commodity.

3.1 The Subsector Framework
A useful component in examining the problems of supply-demand balancing is to

view an agicultural commodity production and marketing system as a commodity subsector.

A subsector consists of a series of stages from the gower to the final consumer stage.l7

Table 7. Vertical Stages in
Agricultural Subsectors

Stage 1. Growers

Stage 2. Initial Processors/ Handlers
Stage 3. Food Manufacturers

Stage 4. Retailer-Wholesalers

Stage 5. Consumers

k

 

l7Bruce Marion. jIhe 9122211112. tion and Performance of the 9.8. Eood System, Lexington:
D.C. Heath and Company, 1986. Input supply is also generally considered to be a stage in

the subsector, but is not included here because input supply is beyond the scope of this
analysis.

43

——l

An example I

Table 7. The s

 

prices, contra.
marketing cc
organizations.

This a1
(We 1 and .
l'tnically linke
or IOFs”) are
I0 consumer to
chmYSUbsecto

Figure ;
00mlllOdllies flC
m Ploducz lo
throngh a COOp
booming 1 gm
Dimming Or ha

44

An example of an agicultural subsector with five vertically linked stages is presented in
Table 7. The stages are linked by a number of vertical coordination mechanisms including
prices, contracts, verbal ageements, and various institutional arrangements, including
marketing cooperatives, marketing orders, and generic commodity promotional
organizations.

This analysis focuses largely on the gower and initial processor/handler stages
(stages 1 and 2 in Table 7) and their approaches to supply-demand balancing within the
vertically linked marketing system. Growers and initial processors/ handlers (cooperative
or lOFs“) are collectively referred to as the "industry.” The vertical stages from gower
to consumer for each commodity are hereafter referred to as the almond, raisin, and tart
cherry subsectors.

Figure 19 shows typical major marketing channels through which perennial crop
commodities flow. For a processed commodity, marketing alternatives for gowers selling
raw product to firms in the initial processor/handler level (stage 2) include: (a) selling
through a cooperative, (b) vertically integating downstream as an individual firm by
becoming a gower-processor, or (c) selling to investor-owned firms that engage in
processing or handling. This research is primarily concerned with first of these three, that
is, the role of marketing cooperatives in the vertical system.

Some Stage 2 firms are primarily commodity processors and typically sell a portion
of their processed tonnage to food manufacturers for industrial use as an ingedient. Other
cooperatives and IOFs process and sell a significant portion of gower deliveries as branded
retail food products. In such cases where a firm is both initial processor and manufacturer,
two or more subsector stages are vertically integated within the firm. For example, a large

c00perative that markets a portion of its tonnage as brand-name manufactured products to

 

mIOF = investor-owned firm, as distinguished from a cooperative, which is a patron-
owhed firm.

 

 

45

Figure 19. Simplified Overview of Main Marketing
Channels in Processed Perennial Crop Subsectors

 

Grower
Production

i

 

 

 

 

 

Maketing
Cooperatives

hltid Processors/Hmdlers:

 

lOt's Grower-
Processors

 

 

/,

 

Food

 

Marufactu'ers ‘

 

 

1x

 

 

Firms

Food Service Grocery Retail-

Wholesalers

 

 

 

 

Export

 

 

 

 

\/

 

 

 

Consuners

 

retailers can be characterized as vertically integated between the initial processing and food

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

manufacturing stages for the branded portion of its total tonnage marketed.

Food manufacturers and initial processors/ handlers may sell in one or more of three
main market channels (Stage 4 of Figure 19): (1) food service wholesalers and retailers, (2)
gocery retailer-wholesalers, and (3) export. Brokers and other specialized marketing firms

can play major roles at various stages of distribution, but such firms were excluded from

Figure 19 to simplify the presentation.

This framework provides a means to examine problems related to pricing and

vertical coordination focusing on the standard operating procedures of retailers and food

manufacturers.

 

 

manufacturers.
example of a r
pie filling. Th
supply and do

“try 1:
level with the
acOmmodiry.
”‘5 dillinstre;
”We“. do ;
concerned abc
Space for a pa
Particular {00c
generally have
Pmducing {00d

regarding the o

plot'ldlnga fella!

 

 

46

3.2. The Price System and Vertical Coordination

Much of the value of the coordination mechanisms that are the focus of this research
is their role in facilitating and complementing the coordinating role of prices. The effect
on coordination of the standard operating procedures (SOPs) of retailers and food
manufacturers, particularly as they relate to pricing, is explained in this section through the
example of a representative commodity-based consumer food product, canned tart cherry
pie filling. The purpose will be to show that certain pricing SOPs can hinder the flow of
supply and demand information through the vertical marketing system.

Why is there in some cases incomplete coordination of supply changes at the farm
level with the manufacturer stage and retailer stage? Coordinating supply and demand for
a commodity and its various related retail products is complicated by the fact that firms in
the downstream stages of a commodity subsector, including food manufacturers and
retailers, do not have a crop-commodity focus. Retailers have little incentive to be
concerned about conditions in a particular subsector. In deciding whether to provide shelf
space for a particular product, retailers compare the potential profitability of carrying a
particular food product with a set of alternative products. Raw product supply changes
generally have generally little impact on key retail decisions. Manufacturers focus on
producing food products lines targeted at various market segnents, and their chief concern
regarding the commodity is to have a reliable supply. In the view of manufacturers,
providing a reliable supply is the function of gowers and initial processors.

The business practices and strategies of retail and manufacturing firms can
frequently hinder the transmission of market information on supply and demand in a
commodity subsector. An example of this problem is related to the common retail practice
of “pricing on the nines," in which typical prices charged per pound or per item are, for

example, $1.19, $1.29, $1.39 and so on. This practice is based on the observation that for

certain gocery products, consumers tend not to appreciably alter purchased amounts over

 

  
    
 

amgup
behavioral ten
grocery retail

the cost of too

be reflected at

This '11
lilting on th
difierences be
pie filling Tl
that is nearly
WWIme
WTflmg;
the “1101331,:
the ”Miler;
lilolesaje pric.
Change the m;
60min“, Pricing

in ”(We $1.29
dc”land Schedule

We

\

6- Hart
4.37%“) ECQnO

 

47

a range of price changes, up to nine cents per pound or per item. Because of this
behavioral tendency on the part of consumers not to respond to price changes in this range,
gocery retailers tend not to change retail prices on these individual gocery items even if
the cost of food ingedients may have dropped by as much as nine cents. When this practice
is applied to commodity-based processed food products, this hinders the flow of information
on supply conditions from gower to consumer, since significant increases in supply may not
be reflected at the retail level.”

3.2.1. Example 01' Vertical Coordination Problems:
The Behavior of Food Retailers and Manufacturers

This illustrative example relates to the above-mentioned gocery retailer SOP of
pricing on the nines. Retailers observe that consumers respond very little to price
differences between, for example, $1.30 and $1.39 for a consumer-sized can of tart cherry
pie filling. Thus demand is highly inelastic and can be represented by a demand schedule
that is nearly vertical in that range, as shown in Figure 20. Although the intersection of
supply schedule S, with the demand schedule indicates that a price of $1.37 would be
charged, this is not what is commonly practiced by retailers for many products. Instead, if
the wholesale price per can plus a standard retail margin is anywhere in that ten-cent range,
the retailer’s SOP is to round up the price charged consumers to $1.39. Only if the
wholesale price plus the standard margin is above $1.39 or below $1.30 will the gocer
change the retail price per can, and the price will be increased or decreased by 10 cents to
continue pricing on the nines. Thus the demand schedule becomes more elastic at a point
just above $1.29, $1.39, etc. Since demand is similarly inelastic for each segnent of the
demand schedule, retailers will tend to price on the nines in a number of different price

ranges.

 

"Larry G. Hamm, ”Food Distribution Procurement Practices: Their Implications for
‘ Food System Structure and Coordination,” unpublished Ph.D. dissertation, Department of
Agricultural Economics, Michigan State University, East Lansing, 1981.

 

Cir

1111
to:
I‘m,

 

48

Figure 20. Demand Schedule with Pricing on the Nines by Grocery Retailer

P=$1.49 4
D Demand schedule is more elastic at
points such as these where retailers
price on the nines.
P=$1.39 —~ ‘ ,
=$1.37

Sa
Consumers respond little to price
P=$1 .29 — \

differences in this range.
P=$1.19 A "l

00

 

 

 

 

 

Q

The discussion above appears to imply that the segments in the demand schedule
are vertical, representing infinitely inelastic demand. However, the segments are drawn to
represent highly inelastic demand, but not infinite. What this means is that if pricing on the
nines is commonly practiced for canned cherries, then quantity adjustments are taking place
in other parts of the tart cherry market. Other tart cherry products are accumulating as
inventories or having prices reduced. However, it is assumed for purposes of this analysis
that this effect is not large, and that the impacts of retail price non-responsiveness to supply
changes represent a significant problem in vertical coordination as described below.

Assuming supply schedule S,| as the point of comparison from which to continue the
analysis, the next step in the example is to examine what happens with a supply increase or
decrease. A larger crop is represented by a supply shift to St, in Figure 21, where standard

supply-demand analysis would indicate a price of $1.31 would prevail. However, since 8,,

intersects the same segnent of the demand schedule as S,, retailers tend to charge the same

 

49

Figure 21. Retail Price and Product Movement for Supply Increase or Decrease

P=$1.49 — '30 5b
D\7 Sc
P=$1.41 _
P=$1.39 — /‘
=$1.37 /
P=$1.31 / .
“'K

 

 

 

1:41.29 _ ///

P=$1.19 -

 

 

 

00 3c Q

retail price as before ($1.39) due to pricing on the nines. Due to the ability of the retailer
to charge a price of $1.39 despite the higher level of supplies of that commodity, the
quantity demanded at retail stays at the same level (0.), that would be expected if the
supply schedule intersected the demand schedule at the point where price equals $1.39. If,
however, an even larger crop causes a shift in supply to Sc, supply intersects demand in the
next lower segnent, and the retailer will round the price charged per can to $1.29.

A smaller crop is represented by a supply shift in the opposite direction, from S,| to
8,. In this case, supply intersects the next higher segnent of the demand schedule and a
price of $1.49 is charged. Even though in this example the magnitude of the shift would
suggest that a price of $1.41 be charged, the retailer charges $1.49 due to pricing on the
nines. Although the supply shifts to SI, and S,' are of about the same magnitude, the supply
increase to S. results in no change in price while the supply decrease to 8,, results in a price

change of ten cents. This provides a partial explanation for the common experience of food

50

manufacturers that retailers will readily increase price in response to a shortage, but resist
lowering price in response to increased supplies and lower gower and wholesale prices.
This is a key aspect of the lack of effective vertical coordination that can occur in perennial
crop subsectors due to retailer SOPs.

It should be noted that farm level demand does not exhibit the stepped character of
the retail demand function. This partly because only a portion of farm sales are destined
for a single retail consumer product such as pie filling. The remainder of the crop is sold
for industrial use in food service and as ingedients in the manufacture of other food
products where the demand is somewhat more price elastic. Retailer behavior and
consumer demand for retail processed products nevertheless exert a strong influence on
farm level demand. In addition, SOPs relating to raw product pricing at the gower-first
handler stage do not suggest a stepped demand function, so the gower level demand
function is represented by a straight line.

Because of inelastic demand at the farm level, large crops represented by 8,, and Sc
in Figure 22 bring about steep price declines from P. to Pb and PC but only small increases
in quantity demanded from Q. to Oh and Q. A short crop represented by a supply shift to
Sd induces a substantial farm-level price increase from P. to Pd.

Further insight is gained by examining pricing at several subsector stages as shown
in the following gaphs (Figure 23, Figure 24, and Figure 25). Since the price impact at the
initial processor stage is similar to that of the gower, the processor stage is not presented
separately. The key here is the effect on pricing behavior resulting from the manufacturer’s
awareness of the retailer tendency to price on the nines. The manufacturer in this example
(Figure 24) has a stepped demand function similar to that of the retailer, and the
manufacturer’s sales prices range from $1.15 to $0.91. These representative price levels

were determined from a retailer price of $1.49 per can including a 30% goss margin.

51

Figure 22. Farm Level Demand

 

 

 

 

P 5Q Sb
Pd - D d 50
Pa
Pb —
Pc -
4.90 t i
Qd Qb QC Q

Representative manufacturer price levels were determined by declining from $1.49 in eight
cent increments, representing approximately a 30% margin at each retail price level.

If supply shifts from S,I to 3,, the manufacturer keeps the price at $1.07 based on the
observation that retailers will generally not change the price per can for a supply shift of
that magnitude. Thus, typical consumer behavior of being unresponsive to price changes of
less than ten cents, if it is combined with the ability of retailers and manufacturers to hold
prices at the upper end of a ten-cent range, results in no increase in sales of consumer-sized
cans of pie filling despite a nine cent decrease in gower price due to the large crop
(Figure 23).

The quantity represented by Q. minus Oc is surplus and may become unsold
carryover stocks at the processor level. Other possibilities are that the surplus will not move
beyond the gower level and will either not be harvested or if the cherries are harvested they

will not be sold. Thus price declines may occur in this situation at the processor and gower

52

Figure 23. Effect of Supply Increase on Tart Cherry Grower Price per Pound

$0.27“4

$0.18 ‘

 

$0.361,

9-eent weer
price dedte

 

l 1

00 l’ ‘Oc

0b 0

Figure 24 Effect of Supply Increase on Manufacturer Price per Can, Tart Cherry Pie Filling

P=$i .49 ‘4

 

P=$1.39 *

P=$i.29 —

=$1.19 A

 

 

Sc

“hwyhpaep. menu.
SateSc. Wreflceeerteeper
eat 10 Metefljt

 

03 02
on 0

Figure 25. Effect of Supply Increase on Retail Price Per Can of Tart Cherry Pie Filling

P=$1.15 ‘4

P=$i.07 -‘

 

=$o.99

 

P=$O.91 —

 

 

03' 02
Ob Q

53

levels, but not at the manufacturer and retailer level, indicating ineffective coordination
between subsector stages.

In the event of a very large crop (a shift from S, to Sc), the retailer will price on the
nines and drop the price per can ten cents from $1.39 to $1.29 (Figure 25). The
manufacturer reduces price by the same amount to 99¢. However, the impact is larger at
the gower level (Figure 23). Grower price drops by 18¢, but there is little additional
increase in sales. When this occurs, the limited effectiveness of passing market signals
relating to supply conditions downstream to consumers indicates that there are problems of
coordinating supply and demand for commodity-based processed products. Large crops can
thus bring about sharp price declines to gowers, yet even significant declines in gower
prices frequently result in only small increases in quantity demanded at retail. Note that up
to this point, the analysis assumes that there are no promotions, coupons, or ”two for $2.79"
specials that alter these relationships. The effects of merchandising and promotion are

introduced later.

3.2.1.1. Other Factors Affecting Price Transmission in the Subsector
Other retailer SOPs such as product-line pricing can also hinder transmission of
price sigials in a subsector. Cherry pies provide a useful example. Suppose that a large
crop brings about a nine cent decline in the price of raw cherries and a ten cent decline in
the price per pound of frozen cherries. The frozen cherry price change is lower since there
are 1.11 pounds of raw cherries in a pound of frozen cherries.” If one pie uses one pound
of cherries, ingedient cost declines by 10¢. In our example, a gocery store carries a line

of frozen fruit pies (cherries, apples, and blueberries) all priced originally at $3.79. The 10¢

 

z"Substantial weight is lost through pitting and sorting cherries, and some of the juice is
lost. After adding back sugar and freezing the cherries in the form known as "five plus one”,
one pound of the frozen product contains the equivalent of 1.11 pounds of the original raw
product.

54

decline in ingedient cost is not likely to induce substantially increased sales because the
retailer prefers to maintain the same price for the entire line. One reason is that the
retailer is aware that a price change of less than ten cents is not likely to induce many
consumers to purchase additional cherry pies. Since the retailer does not change consumer
prices in this example, the manufacturer tends to adopt a parallel pricing structure involving
ranges within which changes in raw product price changes will not induce any price changes
at the manufacturer level.

An additional factor is that the raw product cost of processed food products is often
a small part of total cost. Therefore in many instances changes in raw product cost due to
shifts in production levels from year to year have little impact on the manufacturer’s pricing
decisions for particular food products.

Manufacturers also have long planning horizons for making pricing and promotion
decisions. By the time supply changes become evident in a given year, a manufacturer may
already have pricing and promotion decisions in place for the year, and if so, will see little
advantage in changing those decisions because tart cherry supplies have increased in that
particular year. In this example, lower gower and processor price by themselves are again
unable to provide adequate subsector coordination to signal consumers of increased
supplies. Supplemental mechanisms such as promotion and merchandising of commodity-
based products can improve coordination in this situation.

3.2.2. The Impact of Annual Supply Variation

Annual supply variation in perennial crops contributes to vertical coordination
problems in part because of problems relating to transmission of price signals vertically
through the subsector stages. In this section, vertical coordination problems are illustrated
through a series of supply-demand diagams that represent vertically linked subsector stages.
The diagams show the impact on prices of annual supply fluctuations at several subsector

stages. The ”stepped" character of the demand curves in the previous set of diagams is also

55

applicable to the demand curves shown below. However, to make the diagams more
readable, the demand curves below are not represented with separate segmented steps, but
with a straight line. The first set of diagams appear in Figure 26 through Figure 29,
illustrating the impact of a short tart cherry crop (a decrease in annual supply).
Interpretation of the gaphs begins by looking first at Figure 26, the gower level (stage one
of the subsector) and then moving sequentially through Figure 27 (processors), Figure 28
(manufacturers) and Figure 29 (retailers).

The supply-demand gaphs represent exchange between subsector stages. The
intersection of supply and demand at the gower level (stage one, Figure 26) indicates the
gower price and a quantity of raw cherries which is exchanged between the gower stage
and the initial processing stage. Figure 27 (stage two) represents exchange between the
initial processor and the food manufacturer. Quantities in Figure 27 are processed cherries
sold at f.o.b. processor prices. Figure 28 (stage three) represents exchange between the food
manufacturer and the gocery retailer, with the quantity and price of canned tart cherries
on the horizontal and vertical axes. Exchange between retailers and consumers is shown in
Figure 29 (stage 4), with price representing the retail price charged in gocery stores, and
quantity is the amount of canned tart cherries sold by gocery stores to consumers.

Given that overview of what the gaphs represent, the next step is a more detailed
analysis. Tart cherry industry observers indicate that supply decreases are reflected more
effectively through the vertical system than are supply increases, and this is what is shown
in the gaphical analysis. Returning to Figure 26 (stage one), an initial equilibrium is
represented by the intersection of SI and D., with price P. and quantity 0.. With a short
crop in a particular year, raw product supply shifts from S. to Sb. Linking this gaph by
dotted lines with gaphs representing downstream stages is a means to illustrate a key aspect
of vertical coordination -- the means by which the supply decrease is reflected vertically

through the subsector stages.

56

ANNUAL SUPPLY DECREASE: FOUR SUBSECTOR STAGES
Figure 26. Impact of Supply Decrease on Growers (Stage One)

Sb
11/

 

Pb

 

Pb'
Pa

 

 

Db

\..

0

Short crop: Raw product
supply shifts from So to Sb.
This is reflected vertically
through the subsector
stages.

 

Pb

Pb'
Pa

 

 

Ob 00

Figure 27. Impact of Supply Decrease on
Processors (Stage Two)

 

75" a

Processed supply shifts

 

 

Db

from So to Sb.

\..

 

Ob

 

Dc

 

57

Figure 28. Impact of Supply Decrease
on Manufacturers (Stage Three)

 

 

 

Pb ‘ “Sb 0 Responding to lower
'processed suppfies,

(Pb)' manufacturers cut

Pa l back on promotions,

merchandising
allowances, etc.

Db\ Do

Ob 00

 

 

 

 

Figure 29. Impact of Supply Decrease on Retailers (Stage Four)

 

 

Pb l “Sb 0
Pb' With reduction in manufacturer—
Pa sponsored promotion, retailer

 

” reduces merchandising and
demand shifts from Do to Db.

Db Do

 

 

Ob Oa

 

 

58

In Figure 27 (stage two), the impact of the smaller crop is to shift processed cherry
supply from S. to Sb. Responding to lower levels of processed supplies coming from
processors, manufacturers in Figure 28 (stage three) cut back on merchandising allowances
and other forms of promotion. With the reduction in manufacturer-sponsored promotion,
the retailer (Figure 29, stage 4) responds by reducing merchandising activity, which has the
effect of reducing demand, shifting D. to Db. Although the supply decrease by itself would
have meant an increase in price from Pa to Pb, due to the dampened demand from reduced
promotion, the price increase is smaller, rising from P. to Pb’. This price change is reflected
upstream in the vertical system to manufacturers, processors and gowers with prices
differing at successive stages by the amount of the retail, manufacturer and processor
margins.21 Thus the vertical transmission of price changes due to moderate supply
decreases in this example is accomplished reasonably effectively.

The same is often not true, however, for supply increases. Beginning with Figure 30
(stage one), the intersection of S. and D represent an initial equilibrium. A large crop is
represented by a shift in raw product supply from S. to 8c in Figure 30 and correspondingly
processed supply in Figure 31 shifts from S, to 8,. However, the supply increase may not
be effectively vertically coordinated beyond the manufacturer stage to the retailer stage
(Figure 33).

Returning to the gaphical analysis, Figure 30 shows that if supply changes
originating at the farm level indicate a price change of up to 9¢ at retail, price may remain
at P. and not decline to Pc, which would have been consistent with the shift in supply from
S. to Sc. The lack of a price decline in this example is attributed to the above mentioned
retailer standard operating procedure of ”pricing on the nines." Manufacturers (Figure 32)

respond to this retailer practice by holding their price at P” despite the supply increase.

 

21These margins may vary from time to time depending on market conditions and the
strategies of different firms.

59

ANNUAL SUPPLY INCREASE: FOUR SUBSECTOR STAGES
Figure 30. Impact of Supply Increase on Growers (Stage One)

 

  
 

 

 

 

 

 

’50
D Sc
Pa
Large crop: Raw product
supply shifts from So to
(Sc and price declines, but
P the supply increase is not
C / effectively reflected to
manufacturer and retailer
stages.
00 00
Figure 31. Impact of Supply Increase
on Processors (Stage Two)
éa
Sc
Pa

 

Processed supply shifts
from So to Sc. Processed
price declines.

 

Pc /

 

 

00' 0c

 

 

60

Figure 32. Impact of Supply Increase
on Manufacturers (Stage Three)

 

   
 
   
 

Sc
Pa
Due to manufacturer and
retailer SOPs, retail price
remains at P0 despite
Pc d supply increase to Sc.

Without additional
merchandising, quantity
demanded remains at 00.

 

 

00 01:

 

 

 

D Sc
Pa
Due to retailer SOPs, price
remains at P0 despite
supply shift to Sc.
P Without merchandising,
o"

quantity demanded
remains at 00 and (Qa-Qc)
is unsold grower surplus.

 

 

00 0c

 

61

Without additional merchandising, quantity demanded remains at Q.. As discussed above,
the quantity represented by 0. minus 0. is surplus and may become unsold carryover stocks

at the processor level or unharvested cherries at the gower level.

3.2.2.1. Analysis of the Effects of Merchandising

This outcome of unsold stocks or unharvested cherries can be altered somewhat with
effective merchandising by manufacturers and retailers. Figure 34 through Figure 37
represent the same situation with a supply increase depicted in Figure 30 through Figure 33.
The difference is that merchandising by manufacturers or retailers stimulates increased
demand at the retail level as shown by the shift from D. to Dc in Figure 37. Price remains
at P. due to pricing on the nines by the retailer, but quantity demanded at P. increases from
Q. to O... This has the effect of improving coordination, since the quantity sold (0..) more
nearly matches the quantity produced by gowers (0.). There is improved vertical
coordination through the subsector stages since the increase in demand due to increased
retailer merchandising increases the quantity of raw product demanded at the gower level
(stage one).

The purpose of this gaphical analysis has been to show that pricing SOPs can hinder
the flow of supply and demand information through the vertical marketing system, and that
effective merchandising can improve the situation. The next section deals with some of the
specific means by which merchandising accomplishes this.

3.2.2.2. The Impact of Merchandising

Because of these problems in coordinating demand with short-run shifts in supply,
manufacturers and generic promotion organizations rely partly on various non-price methods
such as couponing to reflect supply changes to consumers and to increase sales. Table 8 and
Figure 38 show the effects of various alternative merchandising techniques on product

movement.

62

ANNUAL SUPPLY INCREASE WITH MERCHANDISING: 4 SUBSECTOR STAGES
Figure 34. Impact of Supply Increase on Growers (Stage One)

/sa

 

Pa

Increase in demand
from retailer and
manufacturer increases
quantity of raw product
demanded from 00 to
Om.

PC“ /QDC

 

 

 

 

Oa Qm AVOC

Figure 35. Impact of Supply Increase
on Processors (Stage Two)

 

 

 

 

ea
0
Pa
Pc “ / a DC
00 Om lOC

 

 

63

Figure 36. Impact of Supply Increase
on Manufacturers (Stage Three)

 

 

 

éd
C
Pa
Pc _ / DC] DC
00 Om iQC

 

 

Figure 37. Impact of Supply Increase on Retailers (Stage Four)

Dc
DO 0

 

P0

With merchandising, Da
shifts to Dc. Price remains
at P0, but quantity
demanded increases

Pc - from 00 to Om.

 

 

Oa Om iQC:

 

 

64

Table 8 shows a number of merchandising actions that can be taken in retail stores
to increase sales temporarily. The techniques in the first and second categories in Table 8
are all non-price methods to communicate with consumers about specific products. The
third category indicates that combinations of several techniques plus price changes have the
strongest impact. Merchandising with methods such as these can contribute to improved
vertical coordination when they are implemented to increase sales in response to increased
supplies due, for example, to a large crop. Since normal pricing SOPs are often not
adequate in adjusting retail sales to changing supply conditions in the subsector, the
merchandising can provide very important supplemental coordination roles.

However, retailers rarely undertake merchandising efforts on behalf of specific
products on their own. They must be induced to undertake specific promotions by
manufacturers, other suppliers, or generic commodity promotion organizations. For
example, a manufacturer may offer a promotional allowance of five cents per can, provide
in-store display materials, and induce an ageement from the retailer to run a newspaper
advertisement. In some cases the manufacturers will pay an advertising allowance for a local
advertisement and possibly offer coupons.

Figure 38 shows that one effect of the merchandising is to temporarily shift the
demand schedule to the right so that the supply schedule representing the large crap (8.)
intersects the DD"... demand schedule (which reflects the impact of merchandising) at a
point that will bring forth increased sales. The sales increase is the difference between O.
and Qm- Price is not changed, so this represents the application of non-price coordination

methods. Within a week to possibly a few weeks after the end of a promotion, the
merchandising effect wears off, demand shifts back to the left, and sales return to their pre-
PrOmotion level. If only a single promotion is undertaken, this promotional impact is
particularly likely to be short-lived for commodity-based products considered to be of minor

impox-tance from the retailer’s point of view, including tart cherry products. For this reason,

65

Table 8. Effects of Temporary Merchandising Techniques on Product Movement .

 

 

 

 

 

 

 

Technique Description impact on
Sales'
1. Use of off- a. End-aisle display with special price compared to shelf
shelf (special) location with same special price. No advertising. +420%
displays b. Same as 1a. but with the addition of more colorful,
elaborate signs +542%
2. Use of shelf a. Use of simple sign with no advertising and no product
signs with name identification + 5%
no price b. Use ‘of sign with product name identification and price
reduction specified but no advertising +39%
c. Use of simple ”as advertised“ sign to point out advertised
product on shelf compared to same product without a sign. + 124%
3. Combinations a. Product advertised in newspaper with special price
of various combined with a simple shelf sign ”as advertised at iota” + 194%
techniques b. Same as 1a. above with the addition of end-aisle display +629%
c. Same as lb. but with manufacturer ”theme sale" making use of
store-wide banners, point-of-purchase materials, etc. +782%
:-

 

1Impact of a specific promotion may last for up to several weeks after the promotion takes place, after
which product sales will generally return to the pro-promotion level.

The results reported above are from a special study conducted by Progessive Grocer in 1970. The
numbers are intended only to provide a general picture of the impact of alternative merchandising
techniques, and reliance should not be placed on specific percentages. Percentage changes in sales in
response to promotions vary geatly by commodity, market and time period. These figures represent
averages of several products over several time periods. The study consisted of testing various
merchandising techniques in sets of one company‘s stores matched for volume, design, size, and
demogaphies. Reported in: Larry G. Hamm, ”Food Distributor Procurement Practices: Their Implications
for Food System Structure and Coordination.” Unpublished Ph.D. Dissertation, Dept. of Agricultural

Economics, Michigan State University, East Lansing, 1981, 416-17.
_

 

Figure 38. Effect of Temporary Merchandising on Retail Demand With Supply Increase

 

 

 

P=$i.49 4
P=$i.39 -*
P=$i.29 —
Dmerch
JJ+Omch Q

66

to have a significant impact on increasing sales as a means to respond to increases in supply
at the farm and processor level, there needs to be several related promotions timed
sequentially throughout the year.

It should be acknowledged that promotions including coupon offerings generally
reduce the price of a food product, e.g. a price of 59¢ is reduced to two for 99¢. Coupon
promotions are frequently targeted to the more price responsive buyers. Increases in sales
that result from the coupon promotion are therefore represented in economic analysis both
in terms of moving along the demand curve as well as shifting the curve. Nevertheless, the
analysis about the role of merchandising and promotion in coordinating demand with
variable supply still holds.

Hamm offers useful observations that help to put the foregoing analysis into
perspective. Writing in 1981, he pointed out that brand manufacturers were getting out of
the commodity business, largely because returns were higher with more highly processed
foods and because of the additional cost incurred by marketing commodity-based products
with variable supplies. Some 10F branded food product manufacturers that continued to
market commodity products have tended to rely on processors to supply product for the
manufacturer label. The processor then bore the risk and cost of supply variability. Hamm
pointed out that manufacturers thus avoided the need to bear coordination costs by shifting
the coordination role to upstream stages in the subsector (processors and growers). As the
brand manufacturers have reduced some aspects of their vertical coordination role, private
label processors have had to increasingly bid against each other for retail buyer attention.
A frequent result is that is insufficient merchandising and increased reliance on price as the

main coordination mechanism. In large crop years inventory backs up and the private label

67

suppliers bear the cost. In short crop years, supplies are depleted quickly and retail prices
may be higher than economically necessary.22

Thus many manufacturers no longer perform the role of inducing retailers to
undertake merchandising to increase sales of commodity-based food products. Alternative
coordination mechanisms that fill the supply-demand balancing roles as IOF food

manufacturers have shifted away from those roles are introduced in Section 3.3 below.

3.2.3. Consumer Demand: Matching Product Attributes to Consumer Preferences

Another dimension of coordination addressed in this research is that of matching
product attributes, grades, qualities, and varieties with consumer preferences. Table 9
provides an illustrative list of key product attributes. The linkage between food product
attributes and the vertical production-distribution system is illustrated below in Figure 39
using a concept map which combines Table 9 and the subsector stages in Table 7.23

As shown in the diagram, consumers have buying strategies which are based on
tastes and preferences for perceived specific attributes of food products. Firms at various
stages of a particular subsector attempt to use various coordination mechanisms to
determine the product attributes and appropriate quantities desired by participants in
downstream stages. Price is a primary coordination mechanism, and other ones include
contractual arrangements, grades and quality specifications and other forms of market
information. Firms adapt production, handling, processing, and distribution methods to
produce food with the attributes that they perceive are preferred by consumers and to

provide the necessary services to intermediate customers who are in downstream stages in

 

22Hamm, "Food Distributor Procurement Practices.”

23Adaptation of diagram from Deborah H. Streeter and others, "Information Technology,
Coordination, and Competitiveness 1n the Food and Agribusiness Sector, mm

W December 1991, 1467.

68

Table 9. Food Product Attributes

 

Variety

Availability
(e.g., seasonal versus
year-round)

Convenience

Price Stability
Taste

Color
Quality
Nutrition

Food Safety

 

 

Environmental Impacts

 

the subsector. Firms also develop marketing strategies which are based on attempts to
discover consumer tastes and preferences and/or to influence them. For branded food
product manufacturers (cooperatives or IOFs) as well as commodity-oriented firms and
organizations, marketing strategies are directed at discovering and influencing the
merchandising SOPs of retail food distributors. This elicitation of preferences and
development of strategies to provide products and services to match those preferences is
part of the process of coordination.
Large food retail firms are in some respects more able to identify key characteristics
and potential demand for food products than are commodity processors or growers.
However, Hamm points out that retail food distributors have little incentive to transmit that
demand information to firms upstream in the vertical system. Instead, the characteristics
and variety of food products offered to consumers are largely determined by the standard
Operating procedures of, and interactions between, purchasing agents and merchandisers of

large retail chains on the one hand, and marketing agents of food manufacturers on the

69

Figure 39. Coordination Linkages of Subsector Stages with Consumer Demand

Stages in Agricultural Subsectors / Consumers
M

 

 

 

 

 

 

 

 

 

 

 

 
 
  

 

 

 

 

 

 

 

 

 

    
 

   
 

 

ed by Banting Strategies Buying Strategies _——M on $332.32;
\ \ / et rout
iscovery
. SOP t Do -
mar Prices MW suit; 5.33..

 

 

 

 

 

    

 

 

 

 

 

   
  

 

 

   

 

 

 

 

 

 

 

w alers Product attributes
r Coordination \acltates /
-~ Food '
' eds
Mautachrers ] Mecmn sms use m -_.
k hformation
I...“
_ hmd ' d through Availability
Processor/
7 Convenience
Hmders Coordination [ )—

 

 

 

 

 

 

 

ttroudi regains
\ [Price Stcbility ]—-
W... M.

“V009“ Timing/Schedding

 

 

 

 

 

Nutrition
Consistency/ ‘ "9*” Em 50f“), }_
Assurmce

 

 

 

 

 

 

 

Environmental
Concerns '

other. The outcomes of these interactions severely limit the effective access of new products
and products from new and small firms.”

A key part of the interaction between retailer and manufacturer is that retailers need
to be convinced by manufacturers that a particular new food product will be accepted by
consumers. Retailers generally expect manufacturers to carry out market research to
determine consumer preferences and the means by which product characteristics can be
designed and promoted to appeal to those preferences. The market research, test marketing
and promotion are costly undertakings often beyond the reach of small firms.

Growers, processors, manufacturers and others in the production-distribution system

need detailed information about product demand, including preferences for specific product

 

2“Hamm, "Food Distributor Procurement Practices."

70

attributes, in successive steps of the vertical chain. Food manufacturers generally invest
significant resources in market research on consumer preferences. Large brand
manufacturers generally have quite effective market research and new product
development. However, such research is generally not oriented toward increasing sales for
food products from a particular commodity. For this reason growers of a specific
commodity whose production is increasing, or is highly variable, have incentives to take
collective action in the form of supporting commodity-oriented organizations that carry out
market research and generic commodity promotion that can contribute to subsector
coordination. How that is carried out is examined in Chapter 4.

In markets coordinated primarily by prices, demand is articulated primarily through
decisions to buy or to refrain from such actions. However, food products have a number
of actual and potential attributes, and sales data in such markets provide very limited
information about consumer preferences. Since it is costly for consumers to express their
preferences directly to commodity processors, manufacturers, other suppliers, and growers,
the most likely consumer reaction to dissatisfaction with any particular attribute is not to
buy the product.25 Thus there are difficulties in transmitting information on consumer
preferences for product attributes to firms in successive stages of a commodity subsector.
This contributes to problems of balancing supply and demand.

Thus there is a role for supplemental coordinating mechanisms which address the
problems and shortcomings of relying primarily on market prices to balance supply and
demand for perennial crop commodities. The graphical examples above illustrated the

problems of vertical transmission of pricing signals through states of a perennial crop

subsectors. Part of the function of cooperatives, marketing orders, commodity promotion

 

EA. 0. Hirschman, Mm Cambridge: Harvard University Press, 1970.

71

commissions and other marketing institutions is to facilitate the price system in the task of

vertical coordination. The nature of those coordination mechanisms is examined next.

3.3. Market Coordination Mechanisms and Balancing Subsector Supply and Demand

Coordination mechanisms for market exchange between growers and IOF handlers/
processors take a variety of forms, a few examples of which include open price contracts,
contracts in which prices or price formulas are specified, non-contractual and verbal
agreements and so on. Another alternative that may facilitate subsector coordination is
vertical integration through combined ownership of farms, initial processing and food
manufacturing (combining subsector stages one, two and three from Figure 19 in section
3.1). Vertical integration could help gain market access for growers, and problems of short-
run supply variability could be addressed through large scale storage. However, vertical
integration through combined ownership of farms and processing facilities adjacent vertical
stages such as processing and is not the dominant pattern observed in perennial crop
subsectors. Although grower-processors operate in both the tart cherry and almond
subsectors, they do not play a significant market coordination role.

Given the conditions described in Chapter 2 and the coordination problems
introduced in this chapter, a key question is what market coordination mechanisms are best
suited to helping to improve the balance of supply and demand in a subsector? The
prevalence of cooperatives and the existence of certain types of government-facilitated
coordination in the raisin, almond, and tart cherry subsectors suggests that other types of

grower-IOF coordination mechanisms are often inadequate for addressing supply-demand
balancing problems in certain subsectors.

The foregoing graphical and discussion of the consequences of supply variability

show that grower-IOF coordination mechanisms can and do fail to address supply-demand

balancing problems in certain subsectors. Chapter 4 and Chapter 5 explore in detail the

72

ways in which cooperative coordination and government-facilitated coordination offer
alternatives.

This last term requires some clarification. In a broad sense, numerous aspects of
coordination across markets are facilitated by government. Market exchange is facilitated
by performance of such functions as contract enforcement, establishing standards, and
determining which individuals have which specific rights when interests conflict. There also
appears to be some overlap between cooperative coordination and government-facilitated
coordination in that the very existence of cooperatives depends on enabling legislation such
as the Capper-Volstead Act. However, in this research the term government-facilitated
coordination is used more narrowly to apply to some specific instances where government
action is initiated to address a specific set of market coordination problems. These
government actions include the creation of federal marketing orders and financing of generic
commodity demand expansion organizations if these are supported by a state or federal
marketing order.

In the second category in Table 1 (government-facilitated coordination mechanisms)
are two supply-demand balancing mechanisms: federal marketing order supply management
and generic commodity demand expansion. Federal and state marketing orders are a form
of collective action by growers (and in some cases processors) that can facilitate some forms
of industry-wide cooperation in managing subsector supply or demand-related problems.
Growers can vote to establish a marketing order for improved industry marketing

performance based on legal guidelines established by the federal government or by some
indiVidual state governments, with mandatory provisions that generally apply to all growers
and handlers in a market. The almond and raisin federal marketing orders have both been
in effect for over 40 years. The tart cherry federal marketing order was in effect from 1972

‘0 1 986. Marketing order supply management issues are examined in Chapter 5.

73

Table 10. Examples of Coordinating Mechanisms in Three Perennial Crop Subsectors

 

      
 
  
    
  
 
    
  
 
    
  
 

Coordinating Mechanism Almonds Raisins Cherries

 

COOPERATIVE COORDINATION

#1 Committed Commodity Marketing Cooperative X
#2 Committed Integrated Marketing Cooperative X X

#3 Cooperative/Corporation Joint Venture X
#4 Bargaining Cooperative X X

 

GOVERNMENT-FACILITATED COORDINATION
Federal Marketing Order Supply Management

 

 

 

 

A. Reserve Pool Storage X X X
B. Market Allocation X X X
C. Nonharvest or Non-production Diversion X” X
D. Acreage Removal X”
Generic Conunodity Demand Expansionc
A. Research and Development F S F,S
B. Advertising and Promotion F S S,N
C. Export Promotion F ,OF F,OF,S F,OF,S,N
D. Allocation to New Product Development F F F
Through Federal Marketing Order

 

'IOF - Investor-owned firm, as distinguished from a cooperative, which is patron—owned firm
I'I'he Raisin Diversion Program reduces raisin grape acreage temporarily (through spur pruning) or
permanently (through vine removal).

cFrafederal marketing order; OF=other federal government programs; S=state marketing order,

 
 

 

An important issue related to generic commodity demand expansion is how the

programs are funded. Raisin and tart cherry promotion programs are funded by mandatory
grower assessments arranged through state marketing orders in some states. Major
organizations for carrying out these programs are the California Raisin Advisory Board
(CALRAB) and the Cherry Marketing Institute (CMI). Almond generic promotion is
funded and carried out through the federal marketing order administrative board, the
Almond Board of California (ABC). The role of government-facilitated coordination is
examined in more detail in Chapter 5.

The discussion above suggested that since retailers and non-grower-owned food
manufacturers are not commodity-oriented, coordinating supplies from agricultural

production with consumer demand is generally left to firms that m commodity-oriented,

74

including agricultural marketing cooperatives. But what specific advantages do cooperatives

have in addressing commodity supply-demand balancing problems?

3.4. Advantages of Cooperatives

Cooperatives do not play these coordination roles in certain commodity subsectors
by accident, but rather because they have some advantages in organizing certain marketing
functions for their members that are growers of the commodity in question. This section
presents briefly a few of the key arguments in the agricultural economics literature regarding
these advantages. The arguments do not pertain to marketing of any specific crop. Staatz
points out some of the reasons why cooperatives in some cases are the preferable means to
organize transactions between growers and downstream stages in a subsector".

“A farmer cooperative firm...represents a looser form of vertical integration than a
vertically integrated IOF...Stockholders in the cooperative firm agree to eschew
competition among themselves in their marketing and input supply activities but
continue to make the rest of their decisions independently. Cooperative firms
therefore allow their members to capture many of the advantages of large-scale
marketing, input production, and strategic planning while still permitting farmers to
make most of their farm-level decisions themselves. Thus while there are often
strong reasons for vertically integrating between farming and certain marketing and
input supply activities, the decentralized nature of cooperatives make them a more
efficient way of carrying out that integration than an IOF.”

Another reason for the existence of agricultural cooperative firms is the preservation
of grower market options. Growers facing the prospect of large capital losses on farm assets
if they have no market because of the closing of an investor-owned processing plant are
often motivated to purchase the processing facilities to convert them into processing-
marketing cooperatives. Growers organized into cooperatives are likely to be willing in

many cases to operate market facilities that IOFs have abandoned because cooperatives take

into account the joint profitability of farming and marketing, not simply the profitability of

 

2‘John Staatz, "Farmers’ Incentives to Take Collective Action Via Cooperatives: A
Transactions Cost Approach," in 00 e ative eo : New roaches Jeffrey S. Royer,
ed., Service Report 18, Agricultural Cooperative Service, USDA, July 1987, 98.

75

marketing functions alone. Peterson addresses this issue in his classification of cooperative
strategies. He developed a taxonomy of six returns strategies and six risk management
strategies followed by cooperatives. Peterson refers to the strategy of producing returns for
growers in times when non-cooperative firms would abandon a market as a ”maintain the
market" strategy.”

However, the joint profitability argument alone is not sufficient to explain why
cooperatives exist, since growers could renegotiate contracts with IOF marketing firms to
make the latter more profitable and thus preserve their market options. There must be
reasons why this renegotiation of contracts sometimes does not take place. One reason is
that if growers bargain collectively, they may choose not to make price concessions due to
grower uncertainty as to the IOF processor’s true financial situation. If supplies and prices
are volatile, IOFs can incur heavy losses if they have to commit to a raw product price
before they know what prices they will receive for their processed products. In a
cooperative, there can be a somewhat more open flow of financial information among
system participants, and farmers can have more confidence that a reduction in prices is not
due to opportunistic behavior.28

This brief discussion of coordination roles leads us to a related question: Since there
are many types of cooperatives, which ones are most suited to deal with the above-
mentioned supply-demand balancing problems? The following section presents four types

of cooperatives.

 

”Christopher J. Peterson, e o 'c ole of icultural Coo erat'v : etu sa
W Unpublished Ph.D. dissertation, Cornell University, 1992.

”Staatz, 'Farmers’ Incentives to Take Collections Via Cooperatives," 92-93.

76
3.5. Types of Cooperatives and Balancing Supply and Demand

Two particular types of cooperatives have the greatest potential to contribute to an
improved balance of supply and demand in a subsector: (1) committed integrated marketing
cooperatives and (2) committed commodity marketing cooperatives.” A key aspect of both
types of committed marketing cooperatives is that although their priority commitment is to
their members, they are large enough to be committed to influencing markets and marketing
of the commodity as a whole through various means. New product development and market
development achieved by these types of cooperatives results in greater overall sales of the
commodity. The cooperatives also engage in other activities beneficial to other marketing
firms such as dealing with legislative and regulatory matters and seeking to reduce foreign
trade barriers. Examples of the cooperatives appear in Table 11. As shown in Table 11,
additional types of cooperatives that have important roles in the three subsectors include
bargaining cooperatives and cooperative-corporation joint ventures.

This section briefly presents and defines several types of cooperatives and is
intended only to set the context. Analysis on the role of cooperatives in coordinating supply
and demand appear in Chapters 4 and 5. A key question is how one distinguishes CIMCs,
CCMCs, and other types of cooperatives.

1. Committed Commodity Marketing goperative (CCMC). CCMCs have a goal of
influencing demand and prices as well as maintaining strong marketing programs for a
particular commodity. The CCMC may also at times attempt to influence market supplies
through storage or other means. These cooperatives do not have a strong brand position,
in contrast to committed integrated marketing cooperatives (#2 below). CCMC members
typically make up a large proportion of the total number of producers of the commodity,

and the cooperative is usually the largest marketing firm in a commodity subsector, or is

 

2"The terms committed commodity marketing cooperative and committed integrated
marketing cooperative are adapted from work by Ronald A. Knutson.

77

Table 11. Types of' Cooperatives in Fruit, Nut, and Vegetable Industries

 

 

 

 

 

t Type of Cooperative Examples from California Examples from Michigan

i and Florida and other states

' l. Committed Commodity Citrus Central' 1. Cherry Central
Marketing Cooperative (Florida) C00perative
(CCMC) 2. MBG Marketing

2. Committed Integrated 1. Blue Diamond 1. National Grape
Marketing Cooperative 2. Sun Maid C00perative (Welch)
(CIMC) 3. Sunkist 2. Ocean Spray (MA)

i 3. Cooperative/Corporation Curtice-Burns Profac

Joint Venture (NY, MI)

‘ .

1 4. Bargaining Cooperative 1. Raisin Bargaining Assn. 1. MACMA-AAMA(MI)

t 2. Calif. Canning Peach Assn. 2. Hazelnut Growers

! 3. Calif. Canning Pear Assn. Barg. Assn. (OR)

 

 

 

'No longer in business

among the largest. An example of a CCMC in Florida was Citrus Central, which has now
gone out of business. Although no longer in business, the quantity of citrus fruit marketed
through the cooperatives represented a significant proportion of total Florida citrus
production. Unlike Sunkist, Citrus Central did not market member production under a
brand name.

Michigan-based examples of CCMCs include Cherry Central Cooperative (CCC),
a federated c00perative in the tart cherry industry, and MBG Marketing, a centralized
COOperative in the blueberry industry. Cherry Central was formed to strengthen marketing,
and to a lesser extent pricing, in cherry commodity markets. Influencing cherry prices has
not been a major goal in recent years. Today CCC markets a variety of processed and fresh
fruits and vegetables. It is one of the largest marketers in the U.S. of processed cherries,
blueberries, and apples. Cherry Central currently has 17 processor members in Michigan,
Utah, and Wisconsin. Most of the members are cherry processing cooperatives, although
several are grower-processors. MBG Marketing is a member of CCC and is the sole

supplier of blueberries to Cherry Central.

78

The goals and achievements of Cherry Central include influencing demand,
maintaining strong marketing, and advancing grower and industry interests. However,
because it is mainly involved in commodity marketing and does not directly market
consumer branded products, it can be categorized as a committed commodity marketing
cooperative rather than as a committed integrated marketing cooperative. Sales of
consumer retail products, which provides the means for vertical coordination with
downstream market levels, are achieved in part through membership in Profac cooperative,
which has a joint venture arrangement with Curtice-Burns, an IOF food manufacturer.
Cherry Central also markets some products under consumer brands, (through Curtice-
Burns/Profac), but these are not strong national brands such as Sun-Maid or Blue Diamond.

2. Committed Integgated Marketing Cooperative (CIMC). CIMCs are more completely
integrated than CCMCs in that they market a significant portion of their commodity as
strongly branded consumer products. CIMCs thus provide an additional dimension beyond
the CCMC by providing more direct access to retail consumer markets. An advantage that
CIMCs have over CCMCs and other types of cooperatives is that prices are generally more
stable at retail market levels and the benefits of this increased stability can be passed
upstream to the growers.30 In Peterson’s taxonomy, pursuit of this risk management
strategy of integrating into a more stable final market, is referred to as ”selective vertical
integration."

Examples of such cooperatives based in California with strong national brands are
Sun Maid (raisins), Blue Diamond (almonds) and Sunkist (fresh citrus). Additional

examples from other states include National Grape Cooperative (which markets processed

 

3"Ronald A. Knutson, "The Impact of Cooperatives on Market Performance, Subsector
Coordination, and the Organization of Agriculture," in Agricultural Cooperatives and 1h;

priic Interest: Egoceedings of a Noah Centrai Regional Research Committee Sponsoged
Wozkshop, St. Lpuis, MQ, lime £8, 1972, NC. Project 117 Monograph 4, Research

Division, College of Agricultural and Life Sciences, University of Wisconsin, Madison,
September 1978, 306.

79

grape products under the Welch’s brand) and Ocean Spray (cranberries). This research for
focused on Sun-Maid and Blue Diamond because it emphasized the almond and raisin
subsectors.

Peterson’s classification of cooperative strategies provides insights on how to
distinguish types of cooperatives. Peterson classified twelve cooperative strategies: six
strategies that are designed to improve member returns and six strategies that intended to
reduce grower risk.31 Two of Peterson’s twelve strategies help define a CIMC: 1) the risk
strategy of integrating into a stable final market and 2) the return strategy of serving a
”missing" final consumer market. A missing consumer market in the context of this research
means the potential additional sales of commodity-based retail food products that could
occur if new food products were developed or if sales were expanded into new geographic
locations. Both Sun-Maid and Blue Diamond are able to reduce risk to their members
through returns that are steadier due to more stable prices on their sales of branded retail
products than are obtainable from bulk commodity sales of raisins or almonds. In addition,
by development and promotion of new products and seeking additional market niches, both
cooperatives are expanding sales for their members by serving "missing” final consumer
markets. In so doing, they also serve a key supply-demand balancing role by increasing
demand for products for which supply has been increasing. The means by which the
cooperatives accomplished this task are the subject of Chapter 4.

Sun-Maid Growers of California was created during the 19308 to provide additional
market outlets for growers of raisin-type grapes. The cooperative markets a variety of retail
package sizes and types under its brand name and it currently holds about a 50% share of
the U.S. retail market for packaged raisins. The cooperative also markets significant

quantities as industrial ingredients to food manufacturers. Sun Maid membership

 

31Peterson, :1th mnpmig Bole pi Agziculturai Cooperatives.

80

represented between 25-30% of total raisin production during the second half of the 19808.
Sun Maid currently has approximately 1300 members.

The California Almond Growers Exchange was formed in 1910, but was renamed
Blue Diamond Growers of California in 1987. Rapid grth of California almonds since
the late 19608 propelled Blue Diamond into becoming the world’s largest almond marketing
firm. The cooperative’s share of total California almond production has fluctuated around
50% in recent years. Historically its share has been as high as 60%. Blue Diamond
membership was approximately 4500 members in 1992. Although branded retail sales are
important, a large proportion of the cooperative’s tonnage is sold in raw bulk form or as
value-added ingredients for food manufacturers and food service customers. During the late
19808 and early 1990s, Blue Diamond was also selling 60-70% of its member’s production
into the export market.

3. @pgrativelCogporagion Joint Venture. This arrangement combines a food
manufacturing firm with a more commodity-oriented cooperative. An example is the long-
term joint venture agreement between Profac Cooperative, the members of which supply a
number of fruits and vegetables, and Curtice-Burns, Inc., which markets a number of
branded food products. In the past, several joint ventures in the Florida citrus industry have
also operated under somewhat similar joint venture arrangements.

The joint venture approach represents another example of a more flexible approach

to vertical coordination than is likely with ownership integration of vertical stages in a
subsector. One major contribution of such an arrangement is to balance supply and demand
for cherries, which may involve the cooperative’s use of stock tonnage as a means to limit
the quantities that the cooperative will accept in surplus periods. However, stock tonnage
is not used by some joint ventures. This approach is discussed in more detail in Chapter 5.
4. W. Bargaining cooperatives typically negotiate prices and

sometimes other terms of trade with processors. A major contribution to vertical

81

coordination and balancing supply and demand is that the bargaining process provides a
means to bring a great deal of supply and demand information to bear on the raw product
pricing process. Bargaining cooperatives are also frequently influential in the support and
maintenance of supply management programs through federal marketing orders and are
generally supportive of demand expansion programs through generic commodity demand
expansion organizations.

California examples include the Raisin Bargaining Association, California Canning
Peach Association and California Canning Pear Association. In Michigan, MACMA-AAMA
bargains on behalf of producers in various Michigan commodity industries, including apples,
asparagus, and tart cherries. MACMA-AAMA is the Michigan Agricultural Cooperative
Marketing Association, which has historically been affiliated with American Agricultural

Marketing Association (AAMA).

3.6. Summary

A goal of this chapter was to make the case that a perennial crop subsector that
relies primarily on market prices and exchange arrangements between growers and IOF
handlers can experience significant coordination problems. The analysis of supply variability
leads to several observations about perennial crop subsector impacts and actions to improve
coordination. The foregoing pages described several factors that make sales of commodity-
based food products relatively unresponsive to price declines that are unpublicized or
otherwise unaccompanied by additional promotion. Food manufacturers and retailers
recognize that the purchasing behavior of many consumers regarding certain processed food
products is not very price responsive. As a result, SOPs of manufacturers and retailers
include not changing certain retail food product prices despite changes that may have
occurred in the cost of raw product due to volatility in agricultural production. Specific

SOPs that were examined were pricing on the nines and product line pricing. In both eases,

82

raw product costs can vary over a substantial range before any retail price changes are
made. When price changes are made, they tend to move in substantial increments such as
ten cents per unit.

An additional reason for the lack of price responsiveness is that the raw product cost
of processed food products is often a small part of total cost. This reduces the pressure to
adjust the selling price of the product in response to changes in the raw product cost.

Also important is the competitive environment facing manufacturers and retailers.
Retail stores carry thousands of products and decisions relating to pricing and price changes
of individual food products depend on strategies developed to draw customers into retail
grocery stores. These retailer strategies are in turn affected by the competitive actions of
other retailers in the market area. Changes in raw product cost of food products from a

particular commodity generally have very little impact on these decisions. Food

manufacturers also have long planning horizons, and this is an additional reason that and

their promotional and pricing decisions are not likely to be significantly altered in response
to raw product supply fluctuations and changes in raw product cost.

However, even if sales of certain processed food products are not generally

1' espOnsive to price changes alone, food product sales often mm responsive to a large number

or Promotion and merchandising efforts. Retailers can be influenced to undertake

merchandising actions to increase sales of particular food products. Such efforts to

influence retailer merchandising generally come from food manufacturers. However, large

bratitled food product manufacturers promote their own products and have no incentive to

undertake such efforts for food products from a particular commodity in response to
problems of supply variability.

The graphical analysis showed that this lack of price responsiveness can result in big

Price . .
and revenue dechnes at the grower level in large crop years. These problems of

sfiqm coordination can be addressed by collective action by growers. Although firms at

83

various subsector stages feel the consequences of the coordination problems, growers have
the greatest incentive to undertake such action due to the severity of the negative impacts
of supply volatility.

At the grower level is the issue of individual versus collective benefit of taking action
in response to supply variability. There are benefits to all growers if total demand for a
commodity expands. However, for individual growers and individual IOF processors and
manufacturers, the benefits of promoting food products as a "commodity" are not likely to
exceed the costs. However, if funds can be collected to undertake promotional campaigns
of sufficient size, there is often a benefit from generic commodity promotion. A greater
payoff to promotion comes from successful differentiation of commodity-based food

products through developing a brand franchise.
Growers can express their collective interest in market expansion for commodity-
based food products through the coordination mechanisms introduced in the previous
section. C00perative coordination mechanisms included CIMCs and CCMCs. Committed
integrated marketing cooperatives can expand demand by developing and promoting food
prod nets with a cooperative brand franchise. Committed commodity marketing cooperatives
gen erally command a sufficiently large proportion of total supply to enable them to influence
man ufacturers to undertake new product development and promotion. Govemment-
facilitated coordination mechanisms make up another major category. Growers can support
generic commodity demand expansion programs by assessing money from growers (and

sorne‘iixnes handlers) and allocating that money to promotional programs.

Reliable supplies of raw product and predictable prices are key factors in getting an
adecl‘lélte payoff from investment in promotion and in achieving effective product
dlff‘e l"fitntiation and new product development. The reliability factor is a key aspect of

Pet‘s
“admg IOF food manufacturers to undertake food product promotion involving a

84

perennial crop commodity. The coordination mechanisms developed to address this issue,
particularly federal marketing orders, are the subject of Chapter Five.

Another goal of this chapter was to develop the framework to gain a general
understanding of how cooperatives, and in particular committed marketing cooperatives, can
address the coordination problems posed by the supply volatility described in Chapter Two.
This framework is used in the next chapter to examine specific demand expansion efforts

of CIMCs and CCMCs in the tart cherry, almond and raisin subsectors.

CHAPTER 4: DEMAND ISSUES AND COORDINATION
The previous chapters presented some of the problems associated with balancing
supply and demand in perennial crop subsectors. The next step is to look at how certain
roles played by committed marketing cooperatives and generic commodity promotion
organizations address the problems of balancing supply and demand for perennial crops.
This chapter examines both short-run demand issues relating to annual supply fluctuations
and also long-run demand issues relating to the need to expand demand to balance supplies

during periods of overproduction.

4.1. Demand Expansion and Cooperatives

Contributing to the ability of CIMCs and CCMCs to perform vertical market
coordinating roles such as demand expansion are: (1) cooperative membership that includes
a large proportion of producers of a commodity and (2) a brand position through successful
product differentiation of commodity-based retail products, and in some cases substantial
financial resources that the cooperative can apply to developing and marketing new
products. The strong brand position and new product development abilities of large
coo[Jeratives in both the almond and raisin subsectors have enabled them to expand demand

for member tonnage and indirectly influence overall demand for those commodities.
Depending on cooperative market position and resources, cooperative demand
expansion efforts tend to involve one or both of two main strategies: a commodity marketing
Strateg' or a brand/value-added marketing strategy. Table 12 presents some of the key
(inferences between the strategies. A commodity marketing strategy for a cooperative
involves selling member production as a relatively undifferentiated commodity.

Coo . . .

peratrves that emphasrze a commodity strategy over a brand/value-added strategy

Us“
a‘11), have little capacity to develop new retail products for consumers.

85

86

Table 12. Alternative Marketing Strategies in Perennial Crop Subsectors

 

Commodity Marketing Strateg Brand/Value-added Marketing Strategy

 

-Sell undifferentiated commodity -Have strong retail brands and market a
variety of value-added food products
designed to meet consumer preferences

 

-Emphasize sales of members production -Focus on meeting consumer desires with a
primarily with existing products to benefit wide variety of products & services based
producers on consumer wants & preferences

 

-Usually have little capacity to develop new -Have ability to develop a series of new

 

 

 

 

products for different types of consumers products for different types of consumers
preferences
4.2. Commodity Marketing

A large proportion of almonds, raisins, and tart cherries are sold as relatively
undifferentiated commodities by both investor-owned processors / handlers and cooperatives,
including those cooperatives that have strong consumer brands. Because of the strong price
competition and little product differentiation in commodity marketing, there are usually
lower margins for the firm with this strategy than in the branded and value-added
categories.

However, the almond cooperative and some competing commodity marketing firms
have some impact on their sales volumes in the commodity portion of the market by
emphasizing high quality and guarantees of more reliable supply to attract the "quality

buyers” while leaving "price buyers" to be supplied by other handlers.32 Thus even within
the relatively undifferentiated commodity market, there are degrees of product
dift‘fi‘vl‘entiation. The same is true to varying degrees in the other two subsectors.

For example, in the commodity-oriented "brown almond" market, the almond

perative will emphasize quality factors such an unusually low incidence of ”foreign

\

h
M Blue Diamond Growers, 1nc., July 1986, 39.

87

material." The cooperative also has "self-certification" arrangements, in which buyers will
accept deliveries without inspection because of the buyer’s confidence in the cooperative’s
quality.33 These cooperative approaches reduce transactions costs and facilitate

coordination in regard to quality characteristics.

4.2.1. Undifferentiated Commodity Markets and Annual Supply Fluctuations
Expanding or contracting demand as annual supplies fluctuate has been attempted
to the extent possible in undifferentiated commodity markets. In a large-crop year, major
attempts are usually made to sell larger quantities into the commodity markets, primarily
through lower commodity prices, and prices to processors and growers may fall to very low
levels. A short crop will usually cause commodity prices to rise, perhaps substantially.
Cooperatives may need to ration the short supplies to key industrial and food service
customers to whom they sell their commodity as ingredients. Both of these instances
represent movement along a demand curve, which should be distinguished from shifting of
the demand curve resulting from demand expansion programs. Demand expansion efforts
in times of large supplies may include increased food service promotions and extra efforts
‘0 induce industrial food manufacturer customers to expand use of existing products and if

POSSible to introduce new products.

This relatively undifferentiated commodity market plays a key role in almond supply-
demand coordination particularly in regard to the substantial annual supply fluctuations.
A key part of Blue Diamond’s strategy involves remaining a reliable supplier not only to
bl.2“‘l<ied product markets but also to the major customers to whom they sell almonds as an
industrial ingredient. To carry out this strategy in an environment of fluctuating supplies,

“I e
cooperative uses the commodity market as the place to make adjustments in quantities

\

Interviews with cooperative representatives.

88

marketed in accordance with the size of a crop in a particular year. In a large crop year,
increased quantities will be sold into the commodity market by the cooperative as well as
by other firms. In short crop years, the almond cooperative will cut back sales to the
undifferentiated commodity market to safeguard supplies to brand markets and key
industrial and food service customers. The raisin cooperative uses a similar strategy to act

as a reliable supplier to key customers in branded and value-added ingredient markets.”

4.3. Brand/ValueAdded Marketing
In contrast to commodity marketing, cooperatives that use a brand/value-added
strategy focus on maintaining a strong brand position and meeting consumer preferences
with a variety of established products and new products. Sun Maid and Blue Diamond have
had the ability to employ brand/value-added demand growth strategies to varying degrees
in the raisin and almond subsectors. They also use commodity marketing strategies for a
substantial proportion of their tonnage. If a cooperative has a substantial market share of
the subsector as a whole and is successful in expanding demand for its members’ products,
the cooperative’s efforts are likely to have a significant impact on overall commodity

demand in that subsector.

Key elements of brand/value-added strategies to expand demand for member
t"titlage include: (1) advertising, promotion, and merchandising, (2) development of new
ma l"l<ets, (3) market research and product development. These types of activities are likely
to be especially emphasized by large cooperatives with strong brands. Cooperatives that are
also food manufacturing firms (including Sun Maid and Blue Diamond) differ from typical
1a rge investor-owned food manufacturing firms in that cooperatives often undertake these

St
ens Specifically to sell profitably quantities of a commodity grown by their grower members

\

Interviews with cooperative representatives.

89

rather than just attempting to expand volume and profits without regard to a commodity,
which tends to be more common with IOFs.

The first of these elements (advertising, promotion and merchandising) addresses
in part the short-run problems relating to the lack of effective vertical coordination in some
perennial crop subsectors. Chapter 3 illustrated how some retailer practices and the lack
of a commodity orientation at the retailer level can contribute to supply/ demand imbalances
resulting from annual supply fluctuations. Chapter 3 also discussed conceptually how
advertising, merchandising and promotion can improve the vertical transmission of
information in a subsector so that changes in supply are reflected to consumers. What
follows now is a discussion of some specific means by which advertising, promotion and
merchandising are carried out. Subsequent sections present how cooperatives implement

the other above mentioned elements of brand/value-added strategies.

4.3.1. Elements of Brand/Value-Added Strategies:
Advertising, Promotion, and Merchandising Activities

Before going into the details of what specific actions are undertaken by cooperatives,

it is useful to set the stage with some general points about advertising, promotion, and
merchandising activities. Hamm points out that brand manufacturer strategies for
ad“"‘Bl’tising, promotion, and merchandising include three main components: (1) retail trade
o"iet'sted promotions, (2) consumer—directed advertising, (3) a sales force of either brokers
or the manufacturing firm’s own employees.35 These strategy components are in part
Oriel"lted toward eliciting certain merchandising responses from food distributors such as

grocery chains.

Branded food manufacturers (both cooperatives and IOFs) use a wide variety of

Feta -l

\

Hamm, ”Food Distributor Procurement Practices, 435.

trade promotions, including paying various types of allowances to retailers (e.g.,

90

advertising and merchandising allowances), point-of-purchase display materials, distribution

of coupons redeemable through purchase of specific products by consumers, and a number

of other merchandising techniques. In addition to media advertising to achieve product

differentiation and to build consumer brand loyalty, consumer-directed promotion focuses

promotional allowances for retailer advertising in local newspapers and other media as a

means to increase the likelihood that retailers will accept and follow through with the retail

trade promotions offered by the manufacturer. The manufacturer’s field force (sales staff

or brokers) carries out a variety of field tasks for the manufacturer sometimes including

labor support in those retail stores which are using manufacturer promotions and monitoring
compliance by retailers with manufacturer’s stipulated conditions.36

In the retail consumer product market, actions and strategies of cooperatives with

strong brands resemble to a degree those of IOF branded food manufacturers. These

actions taken by committed marketing cooperatives such as those that are the subject of this

research are intended to create awareness of their commodity-based products on the part

Of consumers and to induce merchandising responses on the part of retailers so as to

coordinate demand with supply levels. This is a major aspect of balancing supply and

del‘lland that is undertaken by committed marketing cooperatives.

The raisin and almond cooperatives use all three above-mentioned components

typical of brand manufacturer strategies in marketing their branded retail products. The

spe‘izific timing of promotions, intensity of media and print advertising, and other strategic

detzisions are made with the goal of maximizing sales with the promotional resources they

have available.
The raisin cooperative has advertised its branded consumer products in the

br
QE‘chcast and print media, frequently in coordination with point-of-sale promotions. They

\

Hamm, ”Food Distributor Procurement Practices,” 432.

91

have also used a multi-brand approach in which they advertise jointly with branded products
with which raisins are frequently consumed, including ready-to-eat breakfast cereals and hot
cereals.” Raisin marketers, including Sun-Maid, have used clay animation advertising
featuring the ”dancing raisins” as a successful part of their advertising. This award-winning
advertising campaign was pioneered by a California-based generic promotion organization
supported by raisin growers and packers known as the California Raisin Advisory Board
(CALRAB).

Methods used by the almond cooperative to appeal to consumers include advertising
in magazines, newspapers, radio, and television as well as in-store displays and consumer
couponing. They also advertise in trade publications to reach wholesalers and retailers in
both the retail grocery business and in food service.”3 In addition, the almond cooperative
also uses national tie-in advertising with other branded products.

Thus the CIMCs in the almond and raisin subsectors undertake a number of actions
in the arena of advertising and promotion related to their brand retail products designed
to elicit merchandising responses from retail food distributors which will in turn bring about

increased consumer purchases. This plays an important role in balancing of supply and
demand by improving the coordination of consumer demand for commodity-based processed
f00d products with member supplies that represent a large proportion of total annual

supplies.

43.1.1. Demand Expansion and Contraction in Response to Annual Supply Fluctuations
As the size of the crop varies from year to year, commodity subsector participants

att'i‘d'npt to vary the quantities demanded for the commodity as much as possible. In a large-

\

”Wm Spring 1982. 21.
”W California Almond Growers Exchange, 7-8.

92

crop year, brand marketers and generic commodity promotion commissions may expand
advertising, promotion, and other demand expansion efforts. Among these activities
oriented toward grocery retailers and wholesalers are expanded trade advertising,
promotional allowances, and encouragement ’ of more in-store displays and special
merchandising. For marketers with strong brands, and for commodity promotion
commissions with sufficient funding, consumer advertising may also be increased in the
large-crop years. Many of these kinds of demand expansion activities are commonly scaled
back temporarily in years of short-crop supplies. By varying the magnitude of their
promotional, advertising, and demand expansion programs, these subsector participants
attempt to alter demand to more closely conform with the supply for a given year.

Despite efforts by firms and organizations within the commodity subsector to expand
and contract demand to conform with annual supply fluctuations, the degree to which this
can be quickly accomplished is often quite limited. Market demand expansion for branded
products is expensive and to be very effective needs to be accomplished over a period of
several years through consistent, concerted efforts that are planned well in advance. Since
the planning horizon for effective demand expansion for branded products is multi-year,
relatively stable annual supplies and prices are important for successful implementation of

demand expansion efforts. Programs that address supply stability are the subject of
Chapter 5.

Large annual fluctuations in supplies thus tend to conflict with the standard
oPerating procedures of most major brand marketers. The limited ability to modify demand
cluantities is especially noteworthy when an unusually large crop occurs and a large increase

in demand would be desirable to balance the large supply.

Demand expansion is especially limited for tart cherries by the variability and

uncertainty in price and supply. National brand food manufacturers are reluctant to invest

In eJtpanding demand for cherry products because of this high degree of uncertainty.

93

An example of the limited ability to modify demand quantities in the short run is
illustrated by the tart cherry situation in 1987, a year with a very large cherry crop. National
crop size increased by 136 million pounds from the previous year to approximately 358
million pounds, which was 61% larger than the previous year’s moderately sized crop. Even
though supply had increased by 136 million pounds over the previous year, there was only
a much smaller increase in sales of 35 million pounds made up of: (a) an additional 15
million pounds sold in commercial markets (11% of the increase in supply) plus (b) 20
million pounds purchased by the U.S. Department of Agriculture (USDA) for government
feeding programs. Even the small increase in quantities sold was achieved only with a very
low grower price, which approximated 36% of typical grower unit costs. This 1987 example
from the tart cherry subsector, while perhaps an example of extreme circumstances,
illustrates forcefully the difficulty in expanding demand substantially from one year to the
next to conform with annual supply fluctuations. This example also illustrates again that
farm-level demand is often highly inelastic, which is characteristic of a number of perennial
crops.

In a short-crop year, a combination of higher prices and a decline in promotion and

advertising activity reduces quantity sold. However, the reduction in consumer and
manufacturer purchases that occurs may not be easily reversed when demand expansion

efforts are re-emphasized in a subsequent large-crop year.

4.3.2. Elements of Brand/ValueAdded Strategies: Market Development
Market development includes increasing sales by opening up new markets in foreign
cOlllitries or in the U.S. Strategies for development of new markets in all three subsectors
haVe involved export market development, domestic market expansion and increased sales
to the national school lunch program and other commodity feeding programs of the U.S.

Department of Agriculture. Export markets have grown dramatically for almonds and

94

raisins to the point where up to two thirds of almond production and about one third of
raisin production is now exported.39

Partially in response to expected large increases in supply, Blue Diamond has played
a large role in export development through opening up various countries to California
almonds, carrying out promotional activities, developing distributor networks and
encouraging reduction of trade barriers. Up until the mid-1970s this effort was facilitated
by a policy of pricing marketing order reserve almonds for export below U.S. prices through
the market allocation provisions of the almond federal marketing order (the marketing
order is examined in more detail in section-5.2.7 of Chapter 5).

As the export market became a large part of total almond sales, it came to be
considered a primary market and no longer a residual market into which excess supplies
could be shifted in large crop years. Secondary markets are residual markets into which
excess supplies can be shifted without affecting sales in regular commercial channels, which
are the primary markets.

Raisin export market development also involved market allocation through the
federal marketing order. As with the almond marketing order, market allocation involved
pricing reserve raisins for export below domestic U.S. prices. Since the mid-1970s, the
Specific pricing mechanism for raisin exports has been altered and has become the Export

Incentive Program, which is explained in Chapter 5.

4.3.3. Elements of Brand/Value-Added Strategies:
Market Research and Product Development

Market research is undertaken to determine consumer preferences and market

segrnentation trends as they relate to food products, and how to fill specific market niches

\

39"Statistical Tables, California Almonds,” Almond Board of California, Sacramento CA,

3:220us years. ”Marketing Policy,” Raisin Administrative Committee, Fresno CA, various
rs

95

by developing food products that appeal to different types of consumers using almonds,
raisins, or tart cherries. When applied to specific commodities, market research can be a
means to help adapt products from that commodity to consumer preferences and hence to
aid in effective demand expansion. The effective demand expansion can, in turn, help
marketing firms such as cooperatives to coordinate demand and supply better. As indicated
in Figure 39 (section 3.2.3 of Chapter 3), committed marketing cooperatives can develop
marketing strategies based on consumer buying strategies which are in turn based on
consumer preferences for specific product attributes.

Product development provides specific ways to exploit the demand potential, taking
account of supply conditions in a commodity subsector. The information derived from
market research is used to develop products, initiate different packaging methods, or
determine which special services can fill specific market niches. If supplies are expected to
continue steady or to grow, new product development is a key part of a strategy fulfilling
consumer preferences and eliciting specific behavior from retail food distributors intended
to maintain or increase sales of commodity-based products.

That strategy includes developing new food products, sizes, and packaging as a
means to help maintain or expand the number of facings on supermarket shelves. Facings
are the number of containers of a particular brand of food product that are juxtaposed on
Supermarket shelves. Expanding the number of facings increases the visibility of the food
PI‘Oduct and the brand name and helps to ensure continued or increased sales. Failure to

Persuade retailers to keep a certain number of facings for a set of products can be
detrimental to sales. One study showed that reducing facings from four units to two units,
with no change in the price or shelf location, can reduce sales by 48%. Similarly, reducing

f“Kings from three units to one can reduce sales by 58%.40 Means such as those to

\
“’Source: W. See footnote to Table 8 in section 3.2.3., Chapter 3.

96

maintain consumer exposure to commodity-based retail food products are particularly
important in light of the limited coordinating role played by prices of processed commodity-
based products as discussed in Chapter 3.

New product development is focused both on developing branded retail products and
on increasing uses of the commodity as a value-added ingredient. Licensing the use of the
cooperative’s brand name with branded food products manufactured by other firms is
another way to increase marketplace exposure and sales.

What follows now is a more in-depth look at the brand/value-added strategies
followed by cooperatives in each of the three subsectors. Strategies related to branded

consumer products are examined first, followed by use of the three commodities as value-

added ingredients.

4.3.3.1. Product Development: Branded Consumer Products

Cooperatives and other firms and organizations that are oriented towards the
interests of growers and handlers of a specific commodity can enhance subsector
coordination by exploiting consumer preference trends to develop products to appeal to
those consumers as a means to maintain sales when supply and demand are in an

approximate balance and to increase sales when supplies are expanding.
An additional strategy firms use for expanding branded product sales is providing
Setyices that meet the needs of intermediate customers such as retailer-wholesalers and
bl'Okers. For example, the almond cooperative has for a number of years purchased other
tree nuts for resale, thus allowing the cooperative and its brand brokers to offer an array
of nuts to their customers. Another example of providing services is the joint selling
arrangement Sun- Maid raisin cooperative made with several other cooperatives. The joint
s"Hi-"s agency (Sun-Diamond) facilitates the ability of the sales staff and brokers to offer an

array of products to retailer-wholesalers. Offering an array of products increases the ability

97

of the cooperative (operating in its role as a food manufacturer) to influence retail food
distributors to carry more products and to engage in merchandising activity that increases
sales and thus helps create the capacity to more effectively coordinate demand with
changing supply levels.

In all three perennial crop subsectors, a significant proportion of the tonnage is
marketed as consumer retail products. Approximate percentages are 40% for tart cherries
and raisins.“1 Figures on the proportion of the almond market in retail products were not
available. Demand expansion through the branded consumer product approach is
accomplished by developing products for sale on supermarket shelves with attributes that
appeal to a consumer population that is becoming increasingly segmented and whose
preferences are changing over time. The connection between food product attributes and
subsector stages was illustrated in Figure 39 (section 3.2.3. of Chapter 3). In recent decades,
consumers have demanded increased convenience in food preparation, and have shown
increasing preference for foods compatible with a healthy lifestyle, including lower calorie
”light” foods. For example, to appeal to health-conscious consumers concerned with salt and
fat, Blue Diamond introduced salt-free and dry roasted almonds.

Sun-Maid has had strong national consumer brand name recognition for several
decades for raisins as a snack food and as an ingredient for home baking. Beginning in the
late 1970s, the cooperative introduced several new consumer products which involved
combining raisins with other dried fruits and nuts to increase sales for both snacking and

hOl‘rie baking. Improved packaging materials and different retail sizes were also introduced

 

 

, “Madgeting Pplig reports from the Raisin Administrative Committee in recent years
mdicate that approximately 40% of raisins marketed are in packaged form for retail markets
an? about 60% are sold in bulk. Tart cherry statistics from recent years indicate that pie
fining represents about 17% of total sales and that the amount of frozen cherries that is
rem anufactured as pie filling represents another 20-23%. Source: Red Tart Cherries: szp
Rika tisties and Magket Analysis, (Michigan Agricultural Cooperative Marketing Association-
ed Tart Cherry Growers Marketing Committee; American Agricultural Marketing
Association-Cherry Advisory Committee), Lansing, Michigan, various years.

 

 

98

to spur consumer sales. Since the cooperative has a large proportion of the branded retail
raisin market (50%”), such actions contribute to subsector coordination by maintaining or
expanding the facings on supermarket shelves, and thus retail sales, in the face of steady and
increasing production in recent years. Data presented earlier indicated that reducing facings
has a significant impact on reducing sales of processed food products.

Certain actions by a cooperative with a large retail market share contribute to
balancing supply and demand by attracting environmentally conscious consumers and/or
other segments of consumers and thus enhancing demand for a commodity-based product
with excess capacity. For example, to address consumer concerns over natural resource
conservation issues, Sun-Maid in 1992 announced its intention to pursue a policy of
searching for means to make its packaging recyclable and to use fewer resources where
possible. The cooperative also noted the importance of informing consumers of these
“environmentally friendly“ actions.“

The almond marketing cooperative has moved over the years in the direction of
increasing emphasis on branded consumer products as a prime demand expansion strategy.
Due to Blue Diamond’s very large branded retail market share of almonds (over 90%“),
these actions represent an important part of long-term subsector coordination due to the

large increases in almond production that were projected when these initiatives were begun.
In the 19503 Blue Diamond launched its original flavored almond snack products, and
subsequently expanded into a large product line with a number of flavors by the 19803. The
000perative moved from a position of being mostly an industrial almond supplier well into

the 19708 to the point where by the mid-1980s "the largest single specialty segment is

\

”Peter Penner, President of Sun-Maid Growers, Inc., personal communication.

W Sun Diamond Growers, Inc., Spring 1992, 14 and 21.

“Steve Easter, Blue Diamond Growers, personal communication.

99

consumer products," representing about 30% of Blue Diamond sales."s Blue Diamond has
steadily increased the variety of almond-based consumer products and package sizes sold
on supermarket shelves. To further increase the exposure of almond products to consumers,
Blue Diamond developed other products designed to be sold in the supermarket produce
section.“ All of these actions contributed to increased almond sales by appealing to
different types of consumers, by placing products in different sections of retail grocery stores
and through maintaining product exposure and facings on retail shelves. These actions
represent an important set of marketing strategies including some forms of non-price
coordination that take account of retailer SOPs.

The tart cherry subsector also provides an example of this approach. Certain tart
cherry processing cooperatives sought commodity demand expansion opportunities in
branded retail product marketing by purchasing the pie filling divisions of some major brand
manufacturers that were interested in divesting themselves of these divisions.47
Consumer-sized canned pie filling showed a trend toward replacing canned cherries in the
1960s and 1970s as consumers were attracted to the increased convenience of pie filling.
Pie filling was marketed under a few strong regional brands. To tap into this trend and as
a means to get into branded product marketing, Cherry Central Cooperative acquired a pie
filling division.

By acquiring a brand, Cherry Central became a committed integrated marketing
cooperative for a period of time. Advertising and promotion and other demand expansion

activities undertaken for their branded retail products were a means to improve supply-

 

”Aimpnifiamtp, Blue Diamond Growers, Inc. May/June 1985, 3.
“ 979- 0 California Almond Growers, Exchange, Inc., 8.

"Donald J. Ricks and others, e Tart C e Subsecto f U.S. 'cu t e: A ev'

W N .C. Project 117, Monograph 12, Research Division,
College of Agriculture and Life Sciences, University of Wisconsin - Madison, July 1987, 26.

100

demand balancing. The promotional efforts of the cooperative were undertaken to elicit
merchandising responses by retailers to maintain and increase sales of various cherry-based
retail food products partly in response to changing tart cherry supply levels.

The pie filling division of Cherry Central was sold after several years to a food
manufacturer-cooperative (Curtice-Burns/Pro-Fac). In so doing, Cherry Central’s brand
acquisition strategy was replaced by a re-emphasis on working with existing food
manufacturers to expand tart cherry usage. Without a direct ownership link to retail
markets through a brand franchise, Cherry Central became once again a committed
commodity marketing cooperative, and supply-demand balancing actions were pursued by
working with other food manufacturers. Curtice-Bums/Pro-Fac carries a full line of fruit
pie filling which includes tart cherry pie filling; they have several regional brands of pie
filling Having other types of pie filling in addition to cherries enhances that firm’s ability
to influence food distributors to carry tart cherry pie filling and perhaps at times to engage
effectively in merchandising activities. More recent tart cherry demand expansion efforts
have involved developing branded fruit snack products and "light" pie filling to appeal to the

more nutrition-conscious and healthy lifestyle consumer segments.

4.3.3.2. Product Development: Value-Added Ingredients

An additional strategy pursued by cooperatives in each of the three subsectors is
selling their commodity as ingredients to food manufacturers and to the food service
business. Their value-added ingredient strategies enable growers to sell into a more diverse
set of markets. Providing value-added ingredients involves considerably more than just
supplying bulk quantities of almonds, raisins, or tart cherries. Cooperative efforts are
directed toward filling increasingly specialized manufacturing niches with products tailored
to specific manufacturers’ or food service distributors’ needs in terms of quantity, quality,

special handling, and packaging. Key national trends to which each of the cooperatives have

101

addressed their strategies are the increasing preference for convenient, healthy foods and
the substantial growth in food service. Some efforts are also made to promote
nontraditional and nonfood uses of the products.

Since the cooperatives represent a significant portion of total U.S. production in each
of the three subsectors, these marketing efforts and innovations contribute to supply-demand
coordination by expanding demand. Food service and manufactured products such as
breakfast cereals, in which almonds and raisins are key ingredients, represent significant
areas of growth in the U.S. food system into which growers can market increased levels of
production.

Blue Diamond’s strategy for meeting the demand for more specialized ingredients
and exact specifications for ingredients has been to work closely with the manufacturers to
determine their needs and to supply the specific cuts, type of packaging, and services
required. Cooperative personnel spend months or years working jointly with a manufacturer
to develop a product with an exclusive niche in terms of variety and quality of almonds that
their members can fill.‘8 Ready-to-eat breakfast cereals have been a major area of sales
growth in the area of value-added ingredients. Beginning around 1980-81, new product
development with almonds as key ingredients increased significantly in such diverse areas
as dry mixes, liquor, diet foods, condiments, frostings, and nonfood uses (shampoos and
cosmetics).

Around the same time, the almond cooperative significantly increased its
involvement in the food service market by signing an agreement with a major national food

49

service distributor. The cooperative developed special cuts and packaging to meet the

special needs of different parts of the highly segmented food service industry.

 

‘3 e o 98 -89 Blue Diamond Growers, Inc., 8.
”MW California Almond Grower’s Exchange, 6.

102

Blue Diamond also developed separate strategies to deal with the specific needs of
new categories of customers that were becoming increasingly important, including the
military and organizations that sell snack food products such as small packets or cans of nuts
for fund raising purposes.’0 1

Bakery products (bread, cakes, cookies) have traditionally been a major outlet for
raisin use as an ingredient, but additional products and uses are needed, for example, to
market the increased levels of raisin production that have been rising since the early 19805.
Cooperative research and development staff work closely with marketing personnel to
develop alternate uses for raisins and derivatives (raisin paste and juice concentrate).
Nonfood uses include alcohol and processing of tobacco products. Ready-to-eat breakfast
cereals with raisins as ingredients has been an important part of demand growth through
the 1980s and up to the present.

A statement issued by Sun-Maid expresses that an important part of value-added
ingredient strategy is that the cooperative puts considerable effort into delivering “what
industrial customers demand, on time, in affordable quantities.“l To be capable carrying
out the strategy, Sun-Maid must control reliable supplies and have prices stable and
predictable enough to encourage food manufacturers to adopt product development
strategies using raisins. This is a key coordination role played by a CIMC. Details on how
supply management is accomplished to provide more reliable supplies is examined in
Chapter 5.

An additional method for expanding sales of both raisins and almonds is licensing
other manufacturing firms to produce food products with ingredients supplied by the

cooperative and bearing the cooperative brand label. For example, the raisin cooperative

k

”W California Growers Almond Exchange, 11.
"Snnflamandfim Fall 1987. 32.

103

licensed other firms to produce raisin bread, English muffins and other bakery products and
to sell the products with the Sun-Maid brand name. The almond cooperative increased
almond sales by licensing the production of various products with their brand name,
including ice cream, frosting, and a cream cheese and nut product.

Tart cherry cooperative strategies for value-added ingredient demand growth have
involved increasing the number of products in its traditional sweetened dessert category and
also seeking more nondessert uses. The cooperative, other processors and the generic
demand expansion organization work with manufacturers to maintain the tart cherry
position as part of the frozen pie market and to expand the use of cherries in a number of
other desserts, baked goods, and new products such as cheesecake, turnovers, and strudel,
fruit snacks, cookies, muffins, and yogurt.52

Thus product development for commodities as value-added ingredients in
manufactured food products and food service is a major growth area due to changing
demographics and consumer preferences. The exploitation of these areas for demand
expansion by cooperatives whose membership constitutes a significant proportion of U.S.

production represents an important aspect of coordinating demand with expanding supplies.

4.4. Demand Expansion Responses for Extended Periods of Overproduction

During periods when supply and demand are in approximate balance, most firms,
including cooperatives, maintain substantial interest in demand expansion programs for the
purpose of industry and firm growth both for the handler firms and the growers of the
commodity. At other times if the subsector is faced with overproduction so that prices are

below the most typical range of grower costs, demand expansion is likely to be accentuated

 

52Ricks. We 34-

104

as an important way to help achieve a supply-demand balance which results in grower prices

that more nearly cover their costs.53

4.4.1. Response to Overproduction by the Almond Marketing Cooperative

Beginning in the 19808, almond subsector participants became concerned over
expected large increases in almond production due to continual expansion of plantings. A
major response of the cooperative was to emphasize new product development as a means
to expand demand. One of the key new products was almond butter which was in some
respects an alternative product to peanut butter. Among the cooperative successes in terms
of increased sales was convincing a confectionery food manufacturer to use almond butter
in a new candy bar. Generic demand promotion involving all almond handlers through the
federal marketing order also played a role in expanding almond butter sales. The Almond
Board of California established a market development reserve of between 2% to 10% of
salable crap from 1981 through 1985 so that food manufacturing firms would have a
guaranteed supply for this new product and its markets.’4

Although a major goal for domestic market development was to persuade at least
one peanut butter manufacturer to introduce almond butter into its product line, this goal
has not yet been achieved. However, several new products that include almond butter as
an ingredient have been introduced into European markets. Thus to date there has been a
moderate degree of success with this new product development strategy in increasing
almond sales. To the extent that new product strategies facilitated by a marketing order

program are successful in expanding demand, they help to balance large increases in

 

”Based on interviews with representatives of commodity promotion commissions and
Dr. Donald J. Ricks.

“Almond Board of California, "Almond Statistics," various years.

Sh'
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105

almond production capacity such as the substantial expansion that occurred in the 1970s and
19808.

The response by the almond marketing cooperative to an overproduction problem
in the late 1950s provides another useful example of how cooperative sales strategies and
contracting methods can contribute to an improved supply-demand balance when faced with
a situation of excess supplies. In this example a key factor was lengthening the duration of
the contract to periods longer than one year for cooperative supply arrangements with
downstream firms that manufacture almond products. The purpose was to encourage
introduction of new almond products. The cooperative marketing strategy led to
substantially increased sales and reduction of large carryover stocks that had accumulated
as a result of the large crop.

The year 1959 brought very large almond production (211% above the average of
the previous four years’ shipments), and very strong marketing efforts were needed for the
cooperative to move large additional quantities into commercial channels. The cooperative
had typically offered their customers one-year contracts, but their response to the oversupply
was to offer their main customers two-year contracts with a price in the second year only
slightly above the first year price, which was itself low relative to previous years. The
cooperative strategy was aimed at convincing confectioners and other almond users to
introduce new almond products and guaranteeing the price for two years was intended to
be a significant incentive. Firms are usually reluctant to undertake new food product
introductions, especially ones requiring significant advertising expenditures, without a
reliable supply of the ingredients at a predictable cost.

The result of the cooperative’s marketing strategy was that a number of firms
substantially increased their almond utilization and the cooperative was able to eliminate
a huge carryover. Almond shipments stayed at a permanently higher level from this point

on, demonstrating a key supply-demand balancing role played by the cooperative in response

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106

to increased production. In some subsequent years contracts of varying length longer than

one year were used to induce additional almond purchases to move large supplies.”

4.4.2. Example of' Raisin Generic Promotion as a Response to Overproduction

The raisin subsector has also been faced with the prospect of substantial supply
increases at various times in which the response by raisin marketing organizations played
a key role in attempts to restore an improved balance of supply and demand. A sharp
increase in raisin production in the early 19805 brought about increased generic demand
expansion efforts in an attempt to help correct the significant over-supply situation that
developed by that time. CALRAB developed an advertising program beginning in 1986 that
focused on promoting raisin consumption by overcoming the unexciting image of raisins that
market researchers determined was the perception that held by many American
consumers.“ CALRAB’s widely acclaimed advertisements featured images of dancing
raisins on television and in print and was successful in improving the image of raisins.
Although it is difficult to attribute increases in demand to specific commodity promotion
efforts, this promotional campaign and other CALRAB efforts appear to have contributed
to expanding raisin demand over a period of several years, and in conjunction with a
number of other initiatives, probably helped to reduce the previous supply-demand
imbalance.

Raisin promotion in foreign markets was also increased substantially with the
assistance of foreign market development funds from the U.S. government (the Market
Promotion Program and its predecessor programs of the Foreign Agricultural Service of the

U.S. Department of Agriculture). Although different strategies are developed for each

 

”Steven Easter, Blue Diamond Growers, personal communication.

“Olan D. Forker and Ronald W. Ward, go oomm dig Advertising; @no omim and
W New York Lexington Books 1993

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107

country, in general the focus has been on the raisin as a nutritious and natural food and on
the value of the raisin for fitness and as a snack.’7 These collective efforts by raisin market
participants have helped to significantly expand raisin demand and were in part a response
to the earlier large increase in supplies. Almond and tart cherry export market development

efforts have also been assisted with the U.S. government’s Market Promotion Program.

4.5. Generic Demand Expansion: Interrelationships with Other Marketing Efforts

Kinnucan and others point out that ”the interplay of generic and brand promotion
is a vital issue for industries in which both types of promotion are common.” This is true
for all three subsectors that are the subject of this research, but especially almonds and
raisins, since significant proportions of the total tonnage of those two commodities are sold
through major national brands. Opportunities may arise in which "a collaborative
relationship between private firms and the relevant generic promotion entity makes
economic sense. Scale efficiencies can be realized, advertising costs reduced and
coordination with other marketing tools (e.g., price specials) accomplished.“8 This applies
to cooperatives as well as IOFs. Some of the efforts by commodity promotion organizations
in all three subsectors are oriented towards convincing IOF food manufacturers to use
almond, raisins, or tart cherries as ingredients in various food products and to advertise that
fact.

Committed marketing cooperatives have an interest in generic promotion in two
respects. First, there are likely to be opportunities for collaboration between cooperative

brand promotion and generic promotion. A prime example mentioned above is that Sun-

 

”Forker and Ward, Commodig Advgnising.

”KW. Kinnucan and others, ”Research and Marketing Issues Facing Commodity
Promotion Programs," in D]. Padberg, ed., a a d 'cultural arketi ssues
21s; Century, FAMC 93-1, Food and Agricultural Marketing Consortium, Texas A&M
Univ., 1993, 135.

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108

Maid designed advertising that combined its brand with the dancing raising promotion from
CALRAB’s generic advertising program. Second, since CIMCs and CCMCs also sell
significant proportions of member deliveries as an undifferentiated commodity, the goals of
the boards and management of the cooperative and the generic promotion entity are quite
similar. Kinnucan and others point out that "[m]arketing cooperatives that pursue an
aggressive market-development program may build upon the generic efforts of commodity
check-off programs.”9 Due to this convergence of goals, cooperative support is often a
pivotal factor in the start-up or continuation of a commodity promotion program, either
through bloc voting or through efforts by cooperative boards and management to convince
members to support the generic program in referenda.

Committed marketing cooperatives in the almond, raisin and tart cherry subsectors
have all made efforts to convince members to support their respective generic promotion
programs. Through cooperative newsletters and annual meetings members are frequently
urged to vote in favor of generic promotion in referenda on marketing orders that fund the
generic promotion programs. Raisin and tart cherry growers pay mandatory assessments
for generic promotion through state marketing orders. Almond grower assessments for
generic promotion are arranged through the federal marketing order.

Cooperative and generic demand expansion efforts and the use of marketing orders
have been interrelated in both the almond and raisin subsectors. For example, the market
development reserve for almonds created through the federal marketing order facilitated
cooperative efforts to increase almond sales by providing a guaranteed supply that could be
sold at a lower price to firms engaging in new product development efforts without affecting
other almond marketing channels. Almonds set aside in a reserve in certain large crop

years through implementation of the aband federal marketing order can be supplied at

 

”Kinnucan and others, ”Research and Marketing Issues," 134.

109

prices below prevailing prices in regular commercial channels to certain firms engaging in
new product development. The sales are for limited quantities and are arranged in ways to
prevent any resale into other almond marketing channels. Blue Diamond and other
marketing firms have taken advantage of this marketing order provision to promote new
product development as a means to sell additional almonds during periods of increasing
production and thus to improve the supply-demand balance in the subsector.

Another example of the interrelationship between cooperative and generic demand
expansion is the use of promotional assessments collected from growers through the almond
marketing order to fund both branded product advertising and generic advertising and
promotion. An additional example is the advertising designed by the raisin cooperative that
combined its brand with the dancing raisin theme from CALRAB’s generic advertising
program. These are examples of joint or interrelated efforts by both c00peratives and the

commodity marketing orders to expand demand and thus to reduce an oversupply problem.

4.6. Cooperative Efforts to Reflect Demand Expansion Results to Grower Members

Up to this point the focus has been on the demand side of the cooperative role in
supply-demand balancing for a perennial crap. The purpose of this section is to examine
approaches by which cooperatives in general can expand supply to keep in balance with
demand when demand is growing. Examples are provided related to various perennial crop
subsectors.

With a perennial crop, there is a time lag of several years between the grower’s
decision to plant more acreage and the resulting increase in supplies. If demand is
expanding faster than supply in the interim, the cooperative may adopt supplemental
strategies to obtain the needed additional supplies. These strategies include: (a) taking in
new grower members, (b) encouraging current members to rent or buy more producing

acres, and (c) supplementing cooperative member supplies with some non-member tonnage.

110

Cooperatives in the three subsectors discussed here have used varying combinations of these
strategies when the cooperative’s sales expanded more rapidly than did overall commodity
sales. The tart cherry cooperatives have emphasized new membership at certain times, and
have purchased non-member tonnage to supplement member supplies, but have not
encouraged expansion by current members.

Taking in new grower members can be an important way for certain cooperatives
to grow over the years and can influence the cooperative’s market share. Cooperatives in
two of the subsectors have at various times made special efforts to increase membership
and/or to encourage current members to rent or buy more acreage to meet actual or
anticipated increased sales commitments. Both the raisin and almond cooperatives have take
action from time to time to facilitate orchard or vineyard acquisition by members. These
actions are generally taken during times of substantial demand expansion over several years.
They provide another example of cooperative responses that facilitate coordination of
member supply with demand growth trends.

A major reason why a cooperative uses non-member tonnage to supplement member
grower supplies is uncertainty over whether demand growth or supply shortages are
temporary. Using non-member tonnage to provide a portion of the needed additional
supplies allows the cooperative the flexibility of later eliminating non-member purchases if
demand growth diminishes or demand declines or member supplies increase.

For example, the raisin cooperative initiated a new policy in 1990 of acquiring non-
member tonnage on a regular basis and paying cash at harvest for this tonnage. Prior to
this change, the raisin cooperative relied for many years on obtaining raisins to meet
additional customer supply needs from the marketing order reserve pool (see discussion of
reserve pools beginning in section 5.2.2 of Chapter 5). However, by the late 1980s the
cooperative found that the reserve had become an insufficient source of supply for that

purpose and began in 1990 to purchase a significant portion of its supply from non-

men

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111

members. With the uncertainty of future demand trends, this approach of obtaining extra
supplies from nonmembers also provided a degree of flexibility. The almond cooperative
also supplements supplies with non-member tonnage.

For both the raisin and almond cooperatives, using non—member tonnage to supply
specific additional needs has served as a useful coordination method to deal with fluctuating
supplies or with an uncertain international trading environment. Purchasing non-member
tonnage as needed provides the flexibility to expand raisin or almonds sales in both foreign
and domestic markets, yet cut back non-cooperative supplies quickly if sales slacken or if
member supplies increase. If, for example, export demand falls off due to unfavorable
exchange rates or other factors, the cooperative can reduce non-member cash purchases.

The role of the almond cooperative in overall supply-demand balancing appears to
be declining. In 1991, the almond cooperative announced its intention to aim for an
optimum quantity in terms of tonnage handled per year and to close its membership within
a few years after signing up sufficient members to provide that quantity. Extra tonnage
required to meet customer needs would henceforth be obtained by cash purchase from non-
members. Blue Diamond undertook this change in policy based on some strategic analysis
of the cooperative’s position in the almond industry. With the rise in the number of
handlers (mostly small ones) in recent years, the Board of Directors apparently decided that
cooperative membership would be unlikely in the future to represent as dominant a
proportion of total California almond production as in the past. The cooperative would
therefore accept its reduced share of the market and aim for a quantity of supplies from
members which it could market most effectively and meet all contingencies from

nonmember supplies.“0

 

“W May/June 1991.

112

Another aspect of balancing supply and demand relates to differences in varieties
and quality of perennial crops. Demand for certain qualities and uses for specific market
segments tends to expand more rapidly at certain times than demand for the commodity in
general. Some varieties may meet market preferences better than other varieties. The
c00perative can encourage the desired varieties and qualities by offering higher price
premiums for these. For example, if a cooperative markets a crop with multiple uses (e.g.,
processed and fresh) it may desire to adjust grower returns to favor the market utilization
with the greatest expected demand growth. MBG Marketing, Inc. has encouraged growers
to incur the additional expenses of harvesting blueberries for the fresh market by offering
higher returns for blueberries picked for the fresh market rather than for processing.“1
The cooperative board and management in this situation play a coordinating role by
analyzing subsector demand trends and adjusting cooperative payment policies to elicit
supply responses from growers consistent with the changing trends.

National Grape Cooperative has played a key coordination role in this regard in the
grape juice subsector. National Grape members grow both white and Concord grapes which
are marketed as branded juice products under the Welch’s label. The cooperative has a
dominant share of the branded grape juice market and balances cooperative grape supplies
with demand through acreage contracts with members. In recent years they have
considerably expanded acreage contracts of white grapes in response to expected continued
growth in sale of white grape juice products. This provides an additional example of a

cooperative coordination role in response to demand trends.

 

“John Shelford, Manager of MBG Marketing, personal communication.

113

In both the blueberry and grape examples, cooperatives will not necessarily do a
better job of reflecting premia for more highly desired varieties or packs than would market
prices through grower-IOF coordination. These examples were presented to show where

cooperatives can and have played effective coordination functions.

4.7. Summary

Chapter 2 provided evidence that all three subsectors are subject to considerable
annual supply and price variability and periods of overproduction. Chapter 3 put forth the
argument that the SOPs of retailer food distributors and IOF food manufacturers do not
adequately address the supply-demand balance problems brought about by the supply
variability described in Chapter 2. A major factor affecting growers is the lack of retail
price responsiveness to changes in crop production, which leads to large price and revenue
declines in some large crop years. These problems of subsector coordination can be
addressed in part by grower collective action. One manifestation of grower collective action
presented in this chapter was the means by which committed marketing cooperatives
(CIMCs and CCMCs) can improve coordination in the short run by influencing the
merchandising behavior of retailers. Committed marketing cooperatives provide growers
a means to deal with changes in supply conditions by advertising and merchandising
strategies, including effective access to retail food distributor merchandising through retail
brand franchises of commodity-based food products. Through CIMCs, a significant
proportion of total production of almonds and raisins have been sold as branded retail
products, and the CIMCs in those two subsectors have the resources to expand demand
through advertising, promotion, and merchandising, and to influence retailers to undertake
merchandising to increase sales in response to large crops.

The CCMC in the tart cherry subsector had a brand franchise only for a short period

and has otherwise made efforts to influence other food manufacturers to manufacture and

114

market cherry-based products. In all three subsectors, generic commodity promotion
provided an additional means to influence sales.

Long-run demand issues were also examined. For almonds and raisins, extended
periods of heavy production have posed dilemmas from time to time, requiring efforts to
expand demand. For tart cherries, shortages in the late 19705 reduced demand as some
consumers shifted away from tart cherry products due to several years with high prices and
low supplies. This period of frequent shortages was followed by a period of overproduction
in the mid to late 1980s.

Shifting consumer preferences also affected the food product categories into which
the three commodities are sold. Key trends have included a continuing shift towards more
convenient foods, and more nutritious snacks consistent with a healthy lifestyle (e.g.,
products that are low in fat, salt, sugar, and calories). Those trends have helped sales of
raisins and almonds. Marketing of almonds and raisins has been adapted to shifting
consumer preferences through new product development, merchandising and promotion
efforts.

A significant aspect of evolving consumer tastes and preferences has been a shift
away from sweetened desserts. These trends have contributed to difficulties in increasing
sales of tart cherry products. Tart cherry marketing in the past has focused largely on final
use in sweetened desserts.

Another aspect of demand management has been access to industrial and food
service markets—sales of the commodity as value-added ingredients. The almond and raisin
cooperatives have been heavily involved in industrial new product development as well as
other approaches such as developing joint promotions in conjunction with other branded
food product manufacturers such as breakfast cereal firms.

There is also continuing growth in consumption of food away from the home. The

food service market is becoming increasingly segmented. Considerable efforts of committed

115

marketing cooperatives have gone into increasing sales of the commodities as ingredients
to food service firms. The experience of the almond cooperative has led them to the
conclusion that their retail brand recognition facilitates industrial and food service sales.
Major brand manufacturers of food products such as breakfast cereals will often give the
cooperative preference as a supplier because of the prominence of the branded retail
products.‘2

The almond subsector has been able to achieve reasonably good coordination
performance in part through the efforts of Blue Diamond. The means to adapt to consumer
preferences have included developing a number of new branded products and as well as
expanding the value-added ingredient category. Blue Diamond, along with other firms and
organizations in the almond subsector, has been able to assess the magnitude of the supply
increase and to design strategies to sell the increasing quantities of almonds.

The raisin subsector has faced a different situation. Prior to the mid-19803, the
trend for both raisin production and raisin sales was rather flat. The sharp increase in grape
utilization for raisins beginning in the mid-1980s spurred several actions to increase sales.
Sun-Maid developed a few new products (mainly new sizes and packages) and increased
raisin usage as a value-added ingredient. Both Sun-Maid and the Raisin Bargaining
Association supported a substantially increased role for generic promotion, which helped to
increase sales.

In the tart cherry subsector there is no processor that has a strong national brand
position similar Blue Diamond and Sun-Maid. Cooperative processors have four regional
pie filling brands. These cooperative processors employ some of the brand marketing
strategies used by Blue Diamond and Sun-Maid, but they have less ability to obtain and

maintain continual exposure on supermarket shelves. The pie manufacturers that have

 

“Interviews with cooperative officials.

116

strong brands are not cooperatives and thus do not have the orientation of serving the
interests of the growers of the commodity. Strong brand marketing is thus less predominant
for tart cherries than it is for almonds and raisins. Tart cherry subsector participants must
use marketing strategies that rely little on strong consumer brands, but instead focus heavily
on serving the other market segments, including food service, selling industrial ingredients
to pie manufacturers.

Due to the very volatile nature of tart cherry supplies, efforts to maintain stable
supplies and prices through supply management programs have been a key component of

supply-demand coordination. That is the subject of the next chapter.

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CHAPTER 5: USES OF SUPPLY-DEMAND BALANCING APPROACHES
IN THREE PERENNIAL CROP SUBSECTORS

Chapter 2 introduced the supply-demand balancing problems associated with
production fluctuations. This chapter addresses the subject of how supply management
programs have been used to respond to these problems. Short-run supply issues are
addressed first, and the use of federal marketing orders in each of the three commodity
subsectors is examined in detail. In the case of tart cherries, other programs that were
proposed, but not implemented, are also explored. Then the focus turns to long-run supply
issues: reducing acreage through orchard or vine removal and approaches to avoid

overplanting.

5.1. A Short-run Supply Issue: Problems in Coordinating
Supply and Demand Because of Annual Supply Fluctuations

Since substantial supply variability occurs in all three subsectors, it is important to
ask: What is the value of greater stability? A major value of stability is the collective
benefit, especially to growers and processors, from maintaining demand due to more reliable
supply. From the point of view of commodity industry participants, demand expansion
efforts can be severely hampered if a short crop occurs, resulting in inadequate supplies for
the expanding markets and/ or causing substantial temporary price increases. Lack of
supplies, high prices, and prices that fluctuate widely can constrain demand expansion
because these conditions are detrimental to the needs and requirements of large food
manufacturers and food retailers. Therefore a coordination challenge facing commodity
industry participants, including cooperatives and other processing-marketing firms, is to
provide adequate, dependable supplies and relatively steady prices each year, despite the

possibility of a short crop due to unfavorable weather conditions or other factors.

117

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Consumers also benefit from greater stability. A more reliable supply is more
consistent with consumer preferences since consumers are afforded a greater variety of
products.

The tart cherry situation is illustrative of the problems caused by supply instability.
As discussed in Chapter 3, manufacturers, food service operators, and grocery retailers tend
to respond to the problem of possible shortages by reducing use or exposure of products
which use cherries or other products that are subject to widely fluctuating supplies and
prices. Advertising and promotion activities of branded manufacturers generally decline
with a short crop and some firms may completely drop cherry products from their line.
Even with low prices and more plentiful supplies in subsequent years, some food
manufacturers are reluctant to re-introduce cherries.63

Market introductions of new products require substantial development and
advertising expenditures over a period of several years. Manufacturing firms incur
substantial risks because these market development costs may not be recovered if a short
crop results in supply shortages and considerably higher prices for a key ingredient like
cherries. Although these problems are more pronounced in the tart cherry subsector,
similar problems can also affect efforts to maintain or increase sales of almonds and raisins
as value-added ingredients in various food products.

Thus some of the benefits of stability for perennial crop commodities like these
result from preventing a decline in demand that could occur due to sharply fluctuating
supplies, and thereby contributing to improved balance between supply and demand in the
subsectors. Given this collective benefit to growers and processors, as well as consumers,

a key question is why the potential benefits to individual firms of carrying inventories may

 

“DJ. Ricks, L..G Hamm and W. C. Chase-Lansdale, e a e ubs or o

Agngulture: A Rev evi§v_v of Organization and Performance, N. C. Project 117 Monograph 12,
College of Agriculture and Life Sciences, University of Wisconsin- Madison, July 1982,13.

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119

not provide sufficient incentives for substantial planned storage from year to year to balance
subsector supply and demand. The tart cherry subsector provides an illustration of problems
related to storage by processor firms. The common pattern of large crops tending to
alternate with short crops appears to provide opportunities for processor storage as a means
to balance interseasonal supplies. However, the fact that there are substantial exceptions
to the large-crop/short-crop pattern induces most firms to store very little from year to year.
There is considerable risk from having two or more large crop years in succession.“
Processors indicate that even a single major mistake in year-to-year storage, such as carrying
a large inventory when the following year does not bring a short crop, can severely weaken
or possibly bankrupt a processing firm. Lenders may also refuse to loan to tart cherry
processors for the purpose of storing processed cherries from year to year because of the
risks involved. In addition, due largely to these risks, other firms have not become involved
in a speculative role by storing and subsequently selling these commodities.

There have been substantial risks from storage by processor firms in the almond
subsector as well. The mid-19803 provides an example of the difficulties that can arise in
the almond subsector from pursuing certain pricing strategies to benefit member growers
that involve carrying substantial inventories from year to year. A large almond crop
occurred in 1984 and the almond cooperative ended up carrying a substantial inventory as
one result of their strategy of "holding the market," that is, attempting to prevent the steep
price decline that would otherwise probably result from a large crop. The subsequent crop
in 1985, instead of providing an opportunity to release most of the stored extra supplies,
turned out to be another large-crop year. Blue Diamond again carried a large inventory

into the next year, which was costly. This illustrates some of the problems relating to

 

“Donald Ricks and Larry Hamm, "Tart Cherry Subsector," in Bruce Marion, 1]];

thanjzgtio n and Eedormance of the U. 8, £009 System, Lexington, MA. Lexington Books,
1986,178-186.

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120

storage by individual cooperatives. There are many small almond marketing firms that
compete with Blue Diamond but buy only for their immediate market needs and do not
contribute to year-to-year stability in supplies by maintaining inventories. Under continued
surplus conditions, such firms may gain a cost advantage over large committed marketing
cooperatives that practice an inventory holding policy. Having extra supplies in short crop
years could give a committed marketing cooperative the ability to recoup some of the
competitive advantage that it loses in successive years of large crops. However, short crops
occur relatively infrequently with almonds and raisins.

Raisin production variability has been fairly difficult to predict due to the
combination of occasional weather-induced shortages and variation due to decisions by
grape growers to switch between the raisin and crush (wine) markets. As with tart cherries,
the changing raisin and almond situations have made it difficult to form accurate
expectations for profitable storage.

Due in part to the problems encountered in trying to stabilize markets through
storage by individual firms, federal marketing order supply management programs have been
used in all three subsectors to facilitate storage on a collective basis. The frequency of short
crops is a key issue in determining which type of supply management program is most
appropriate for a particular commodity. In the tart cherry subsector, short tart cherry crops
occurred 10 times between 1966 and 1991 (Figure 10 in section 2.3 of Chapter 2). In each
of those years, supplies dipped well below the level of sales in previous years. This tends to
result in a negative impact on demand in subsequent years. Raisins and almonds each had
five short crops between 1966 and 1991, as shown in Figure 18 and Figure 13. However, in
‘the almond and raisin subsectors, crops that were so short that the shortages significantly
reduced sales compared to previous years occurred only three times each during that time
period, significantly less frequently than with tart cherries. The difference in the frequency

of short crops for tart cherries relative to almonds and raisins has led to somewhat different

121

supply management strategies in the subsectors for dealing with the annual supply

fluctuations, which is discussed next.

5.2. Federal Marketing Order Supply Management Programs

Supply management programs have been implemented in all three subsectors
through federal marketing orders. Federal marketing orders are administered by boards
made up of grower and/ or handler representatives, and by the staff hired by the boards.
The administrative bodies in the three subsectors with marketing orders that are the focus
of this research are the Almond Board of California, the Raisin Administrative Committee
and the Cherry Administrative Board.

This section examines the purposes for which marketing orders were established and
then looks at several of the key operational provisions for almonds, raisins, and tart cherries.
Comparisons of marketing order implementation in the three subsectors are made, followed

by more detailed examination of each.

5.2.1. Goals of Federal Marketing Order Programs

The reasons for establishing the federal marketing orders differed somewhat between
the tart cherry marketing order on the one hand and the almond and raisin marketing
orders on the other. The tart cherry marketing order program had three main goals: (a)
reduction in annual supply fluctuations, (b) more stable prices, and (c) somewhat higher
prices to growers, especially in large crop years. Tart cherry marketing order reserve pool
provisions were used primarily to address the annual supply volatility problem, that is,
frequent occurrences of years with quite short supplies following years with temporary large
excessive supplies.

In contrast, the almond and raisin marketing orders were established primarily for

dealing with periods of persistent overproduction and resulting low grower prices. A 1986

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122
statement from the almond marketing cooperative presents their viewpoint as to why the
almond marketing order was created:“

”The Almond Marketing Order was put into effect in 1950 amid conditions

of near chaos in the almond industry. U.S. production was excessive, and at

the same time inexpensive imports were being delivered to our markets from

such places as Italy and Spain. Growers were suffering. Many were on the

verge of going out of business. Thus the primary purpose for instituting the

order was to provide for volume controls that would allow diversion from the

domestic market in oversupply years.”

The almond marketing order has been used primarily to reduce temporarily
excessive supplies. The supply management provisions have been used mainly to divert
excess production to secondary markets that do not compete with the primary market.
During its early years of operation the almond marketing order was used extensively to
expand exports of U.S. almonds. This was accomplished through use of the market allocation
provisions which are explained below. In recent years the almond marketing order has also
been used to provide some reserves to supplement short supplies in certain short-crop years.

As with almonds, the serious problems associated with large raisin crops have been
recognized for a long time. Studies as far back as the 1930s indicated that due to the
inelastic nature of raisin demand, large crops frequently resulted in burdensome levels of
carryover stocks. Various market control schemes were developed to deal with these
problems. A strong impetus for the creation of the federal marketing order in 1949 was the

serious state of overproduction after the end of World War 11 due to curtailment of the

wartime raisin-buying program, through which large quantities of raisins had been sold.“

 

“California Almond Growers Exchange, Statement by CAGE presented to the Study
Team on Performance Criteria for Federal Marketing Orders, 1986. The study team of Leo
C. Polopolus, Hoy F. Carman, Edward V. Jesse, and James D. Shaffer issued a report
entitled "Criteria for Evaluating Marketing Orders: Fruits, Vegetables, Nuts, and Specialty
Crops,” (National Technical Information Service, 1986).

“C. F. Nuckton, B. C. French, and GA. King. An Egnometric Analysis of the Ca 1119ij
W Gianninni Foundation Research Report No. 339, University of California,

December 1988, 6.

123

In all three subsectors the marketing order programs have included one or both of
two main supply management provisions which may be implemented in large crop years.
These are: (1) a reserve pool storage program and a (2) market allocation (diversion of
excess production to secondary market outlets that do not compete with the main
commodity markets). In the tart cherry and raisin orders a third provision is non-harvest

or non-production diversion. Each of these provisions is now considered.

5.2.2. Reserve Pool Storage with Federal Marketing Orders

With a reserve pool storage program, a portion of the crop is stored in large-crop
years and can be released for sale in a subsequent short-crop year to supplement supplies
so that shortages are reduced. Storage for release in a subsequent short crop period
addresses one of the main supply-demand coordination problems resulting from surpluses
followed by shortages. Since weather-induced shortages can: (1) substantially affect product
availability and prices, (2) hamper the marketing, merchandising and new product
development programs of food manufacturers and (3) reduce shelf space and product
exposure in retail grocery stores, a reserve pool program can reduce the impact of shortages
and help maintain commodity sales by supplementing supplies in short-crop years. Use of
the reserve pool and other marketing order supply management provisions contributes to
supply stability and helps to dampen the decline in grower prices that generally occurs in
large crop years.

Econometric analysis of the tart cherry reserve pool in Chapter 6 indicates that
reserve pool implementation on five occasions between 1972 and 1986 dampened price
declines that occurred in large crop years. Price impacts estimated with the econometric
model varied between two cents (8% higher than the price would have been without the
marketing order) and five cents (35% higher). A raisin market analysis indicated that raisin

prices would have been more variable without use of the supply management provisions of

124

the marketing order."7 The French-Nuckton study also estimated that average grower net
revenue would have been lower without the order. Those results are discussed further in
Chapter 6.

Since large tart cherry crops and shortages in the subsequent year occurred several
times each during the 19705, reserve pool storage was the provision that was emphasized.
For three of the years in which the marketing order was implemented (1972, 1975 and

1980), quantities were stored in a reserve pool and released during the following short crop

Table 13. Tart Cherry Marketing Order Effect on Supplies

 

Year of Marketing Order Use
1972 1975 1980

 

 

 

 

-Mill. lbs. (raw prod. equiv.)-
Market Supply w/o Marketing Order 340.2 287.7 238.1

   
 
 
 
 
 

 

 

 

 

 

 

 

- Following Year Supply w/o M.O. 190.9 175.0 143.3
= Two-Yr. Annual Fluct. w/o M.O. 149.3 112.7 94.8
Market Supply with Market. Order 313.4 282.7 210.3
- Following Year Supply with M.O. 182.5 175.0 147.6
= Two-Yr. Annual Fluct. with M.O. 130.9 107.7 62.7

 

 

 

 

  

 

  

 

 

 

'I\vo-Yr. Annual Fluct. w/o M.O. 149.3 112.7 94.8
- Two-Yr. Annual Fluct. with M.O. 130.9 107.7 62.7
==Reduction in fluctuation with M.O. 18.4 5.0 32.1

 

   

Source: Table 36 and Table 37.

 

 

‘7 B.C. French and CF. Nuckton, "An Empirical Analysis of Economic Performance

Under the Marketing Order for Raisins,” American Journal of Agricultural mngmig
(73:3), August 1991.

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years, somewhat stabilizing supplies over each two year period. Table 13 indicates that two
year reductions in supply fluctuation from use of the marketing order ranged from 5 to 32
million pounds, representing between 2% and 18% of two-year average supply. This
illustrates how reserve pools can be one method of improving the balance of supply and
demand in the short run.

Use of reserve pools is most effective in stabilizing supplies during periods when very
short crops are a frequent occurrence, which was the cherry industry pattern between 1972
and 1983. When large crops do not alternate with small crops on a regular basis, there may
be difficulty in making effective use of reserve pools for commercial markets as supply
management tools. For example, the use of the cherry marketing order reserve pool was

strained by the occurrence in two successive years of large crops in 1984 and 1985.

5.2.3. Market Allocation

With market allocation, supplies are managed for greater stability in primary
markets, reducing the volatility in supplies that would occur without a program. Market
allocation is the removal of excess supplies in large-crop years by diverting a portion of the
excess from primary markets to secondary market uses. Market allocation is a form of price
discrimination, and the usual conditions for price discrimination are applicable. For an
effective market allocation program, a subsector needs to be able to develop significant
secondary markets in which demand is relatively elastic. Program effectiveness is also
enhanced if demand in secondary markets is fairly readily expandable. It must also be
possible to maintain the primary and secondary markets separate from one another.

For almonds, secondary markets under the program have included exports, almond
butter, almond oil, airline snack packets, an almond beverage and other new products. Tart
cherry secondary markets have included juice, exports, puree and dried cherries. Additional

secondary sales outlets common to the almond, raisin, and tart cherry orders over a number

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of years have been U.S. Department of Agriculture feeding programs, including the school
lunch program.

Market allocation can improve coordination by addressing both supply and demand
problems. Diversion of excess supply helps dampen steep price declines in the primary
markets which would otherwise occur in large-crop years. Use of secondary markets for
supply diversion, while maintaining ample supplies for main markets, can help establish new
markets and increase demand through new product development.

Under both the almond and raisin marketing orders through the 1950s and into the
19603, export markets were relatively small but served as significant secondary markets for
market allocation. Export sales steadily increased for both crops, due in part to the
marketing order programs. Export markets have now become very important primary
markets for both commodities.

Market allocation is especially relevant for a subsector which has an historic supply
pattern of several excessive supply years in succession. In contrast to a reserve pool, market
allocation does not by itself supplement supply shortages in short-crop years. This is a
major reason why market allocation and reserve pool provisions are often used together
within a marketing order -- as has been the casein almonds, raisins and tart cherries.

Market allocation is also commonly done to some degree by individual firms in each
of the subsectors. As raw product supplies vary from year to year, processor firms, including
cooperatives, typically make changes in the percentage of their tonnage which goes into
different markets. For example, in a large crop year an IOF or cooperative processor
engaging in both brand and commodity marketing would probably be able to sell only a
limited additional quantity into its branded retail market, and thus may need to shift
excessive supplies into bulk commodity sales, including exports, and into other industrial
sales as ingredients for food manufacturers. Tart cherry marketers have on several

occasions marketed some increased quantities into the juice market in large-crop years. The

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results of these standard business practices in response to fluctuating farm supplies is
somewhat similar to a market allocation program. Use of such a program under a

marketing order increases the extent of these actions and the impacts for the subsector.

5.2.4. Non-harvest or Non-production Diversion
Both the tart cherry and raisin federal marketing order have had provisions that
provide additional options for reducing the quantity of the crop entering the primary
market. The tart cherry marketing order had a non-harvest option provision during the
years that the order was in effect. The Raisin Diversion Program is a non-production
diversion program that has operated as part of the raisin federal marketing order since

1985.

5.2.4.1. Non-harvest Diversion Under the Tart Cherry Marketing Order

To understand the non-harvest provision, a review of the mechanics of the tart
cherry marketing order is helpful. In large crop years, the tart cherry marketing order
administrative board established a ”restricted percentage” based on an estimate of how much
available cherry supplies exceeded the expected sales volume. If, for example, the restricted
percentage were 15%, a processor could market as"free tonnage” 85% of the cherries
received from growers, but had to place 15% of the cherries either in the storage reserve
pool or market them into one of the approved secondary market uses, with non-harvest
diversion as a third option for growers. If a grower chose to leave any portion of that
grower’s crop unharvested, that grower could receive non-harvest diversion credit and the
processor could count as part of the ”restricted" percentage an estimate of the quantity of
cherries that were left unharvested. Growers could thus choose from among several options
for their ”restricted" tonnage: (a) the storage pool, (b) secondary market diversion options

which were made available to them by their processors, (c) diversion credit for non-harvest,

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128

or (d) any combination of these. Growers who chose to participate in the storage reserve
pool paid the costs for processing, storage and carrying of those pool cherries. Thus growers
owned the reserve pool cherries, while processors were paid for their costs of processing
when the pool was formed.

But why was the non-harvest provision included in the tart cherry marketing order?
A common occurrence in large crop years when there is no marketing order is that
substantial tart cherry tonnage was left unharvested because of lack of market outlets and / or
prices so low that it is not remunerative for many growers to harvest. It was recognized in
the design of the order that it would facilitate order operation to have a number of options
by which growers could meet the requirement of diverting a specified percentage of the crop
from the primary market. The non-harvest provision provided an additional option to
reduce overall supplies under certain circumstances. This would contribute to improving the
supply-demand balance in some years that the order was implemented but was used to a
minor degree in most years. Except for the 22 million pounds in 1972 (54% of restricted
tonnage), non-harvest diversion was quite small in most years that the order was used, but
nevertheless helped to reduce supply fluctuations somewhat.

Had the order continued in operation past 1986, there would likely have been more
use of both the market allocation and non-harvest provisions. Since the mid to late 1980s
was a period with few short crops, the reserve pool would have become a low priority
option. Using the reserve pool as a supply management tool to carry supplies until a

subsequent year works well only if there are short craps in which to release stored cherries.

5.2.4.2. Non-production Diversion Under the Raisin Marketing Order
An important federal marketing order provision for addressing raisin overproduction
problems known as the Raisin Diversion Program (RDP) was initiated in 1985 because of

industry overcapacity in terms of raisin grape acreage. One reason for the increased raisin

pl’

129

production was that a significant amount of grape acreage that had previously produced
grapes for the wine market was suddenly shifted into raisin production because of reduced
demand for raisin-type grapes in wine-making. Under the Raisin Diversion Program,
growers were provided incentives to either remove some of their vineyards or to prune their
vines in a way to produce no crop for a given year. This was done to help bring the surplus
supply situation into balance. The sharp reduction in acres harvested for raisins beginning
in 1985 shown in Figure 14 (section 2.5 of Chapter 2) was due largely to temporary non-
production of vineyards from production for one or more years by growers who pruned their
vines. Most of those growers subsequently resumed production of raisins after one or more
years of participation in the program.

Figure 14 shows graphically that the main impact of the RDP has been temporary.
While the upper solid line graph represents the actual acres capable of producing grapes,
the dotted line graph represents net bearing acreage of raisin variety grapes after subtracting
acres removed from production in a given year through the RDP. After reaching a peak
of 284,000 acres in 1984, bearing acres dropped sharply with the implementation of the RDP
in 1985 and 1986. However, most of the decrease in production was temporary (through
pruning), and the number of bearing acres quickly regained earlier levels. Relatively few
vines were actually taken out of the ground. Use of the RDP provision of the federal
marketing order has thus helped mainly to alleviate temporary problems of overproduction.

:Ihe RDP is explained more thoroughly below in the section on the raisin marketing order.

5.2.5. Tart Cherry Supply Management
Supply management programs have been discussed almost continuously within the
tart cherry industry for the past 30 years. A federal marketing order was in effect from
1972 through 1986. This program included a reserve pool, market allocation and non-

harvest diversion options as alternative provisions for managing temporary excess supplies.

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Most other supply management program proposals during the cherry industry’s history have
included some combination of these three alternative approaches.

After discussing the experience with the federal marketing order, some other supply
management programs proposed after the termination of the order are examined. Those
subsequent proposals were: 1) a new federal marketing order program and 2) a supply

management program through a cooperative.

5.2.5.1. The Tart Cherry Federal Marketing Order

The marketing order program represented the culmination of many years of
development and consensus-building in a major attempt to grapple with industry supply
problems. It was the result of agreement among various segments of the industry, including
growers and processors from various states. The marketing order covered Michigan, New
York, Wisconsin and Pennsylvania, but did not include tart cherries produced in Utah,
Oregon and Washington.

During most of the period in which the marketing order was used, the main supply
problem in the tart cherry subsector was widely fluctuating annual supplies. From the time
of initial implementation of the marketing order in 1972 until 1984, the industry progressed
through phases of the long-term supply cycle in which there were frequent occurrences of
years with a large crop followed by short crops (see ? in section 2.5 of Chapter 2). The
primary operational provision of the marketing order was the storage reserve pool. The two
other main provisions, market allocation and non-harvest diversion, were used in a
secondary fashion. In 1972, 1975 and 1980 special emphasis was placed on the reserve pool
as the primary option for intended use. In 1984 and 1985 somewhat more emphasis was
given to secondary market allocation provisions.

In addition to the five implementations of the marketing order program, the industry

planned to use the marketing order in 1982, another large crop year in which production

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was 180% above the average of the previous four years’ shipments. This planned use of the
marketing order in 1982 was, however, not permitted by a combination of OMB and USDA
policies under the Reagan Administration. Subsequently, 1983 brought an extremely short
crop with record high prices. Thus the very large supply fluctuations and market-price
fluctuations of 1982-1983 provided a nearly ideal set of economic conditions for the intended
operations of a cherry reserve pool.

The nature of the industry’s supply problems changed substantially starting in the
mid-19803. Although the most significant supply-related challenge in the 19703 and early
19803 was wide annual fluctuations, by the mid to late 19803 the chief problem had become
persistent oversupplies (Figure 7 in section 2.3 of Chapter 2). This was due to large new
plantings by growers in response to high prices received during the late 1970s and the early
19803. Since by the mid-19803 the industry was entering an over-capacity phase of the
industry’s long-term supply cycle, some changes in the marketing order program emphasis
were needed. Tart cherry productive capacity had expanded to the point that substantially
reduced the likelihood of very short crops with supplies much below potential demand
quantities. Even years with relatively short crops produced quantities above long term
average sales, with market clearing prices generally returning little to growers for their
investments in time and orchards. One means to maintain grower prices in a range
consistent with the cost of production during times when no short crops occur for several
years is to market excess cherries into secondary markets rather than into main commercial
markets.

During use of the marketing order in 1984 and 1985, the marketing order
administrative board responded to the changing supply situation by shifting the emphasis
0f the program to rely somewhat more on market allocation and non-harvest and to reduce
emPhasis on the reserve pool. Despite this shift by the board, most growers continued to

Choose the reserve pool option, even in 1985 when there was a second successive year with

f

The

132

a restricted percentage. In such conditions, growers would be expected to emphasize options
other than the reserve pool. Reserve pool cherries from both 1984 and 1985 were
eventually sold to the USDA for school lunch and other government feeding programs as
secondary market sales rather than being released into main commercial markets, which
continued to be in surplus for several years.

The federal marketing order program might have been modified even further to
adapt the program to changes in the predominant industry supply situation from earlier
(before 1984) from being chiefly one of annual fluctuations to one of persistent oversupply
(starting in 1984 and 1985). Had the marketing order continued to operate, Board policy
making would probably have given even greater emphasis to the market allocation and non-
harvest options of the program."8

This shift in program emphasis might have been carried still further had the industry
been able to implement various proposals which had been considered at length. Among the
industry proposals considered were amendments and modifications to the marketing order
program to permit (1) orchard removal diversion credit, (2) bloom abortion, if technically
feasible, and (3) at-plant diversion of some low quality cherries.

In 1986 the federal marketing order was discontinued by the Secretary of Agriculture
following a continuance referendum. In the referendum, slightly fewer than 50% of the
growers (representing, however, 55% of the tonnage) favored continuation. The decline in
grower support for the marketing order mainly apparently reflected dissatisfaction with the
size and timing of some of the storage and release decisions, rather than disenchantment

with the concept of marketing order supply management. In the view of some growers,

 

“Dr. Donald Ricks, Michigan State University, personal communication. Ricks was a
member of the Cherry Administrative Board from 1979 to 1986.

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better management of the reserve pool would have resulted in better returns to growers

from the sale of reserve pool cherries than was actually obtained.”

5.2.5.2. A Proposed New Federal Marketing Order Program

Low prices and reduced grower and processor incomes during the late 19803 spurred
concern about the continuing tart cherry oversupply situation. Industry leaders devoted
considerable time to analysis and discussion of alternative supply management program
proposals, including a new federal marketing order. The proposed new marketing order was
to be similar to the previous one but with more emphasis on market allocation provisions
and reduced emphasis on the reserve pool. It was intended primarily to handle the
persistent oversupply situation, but also to have substantial flexibility to adjust to some
fluctuations in annual supplies. Inclusion of a reserve pool provision in a standby mode was
advocated by some to be used when the long-term cycle returned to a phase when short tart
cherry crops were again likely occurrences. Others opposed inclusion of a reserve pool
because supply conditions at the time of proposed implementation were not conducive to
its use for annual supply stabilization. Additional proposals included a diversion credit
option for orchard removal to speed up downward adjustment in acreage and a national
generic demand expansion program.7o

Sufficient agreement among segments of the tart cherry industry on the proposed
federal marketing order could not be reached and the USDA indicated an unwillingness to
proceed with hearings without very strong evidence of widespread industry support.
Industry leaders turned to other proposals for supply management including formation of

a new cooperative for supply management.

 

69Interviews with industry participants.

"Donald L. Hinman and Donald J. Ricks, "Supply Management Alternatives for the Tart
Cherry Industry,” Jonrnal of Food Distribution Reseagch, v.23, no.1 (February 1992),57-68.

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134

5.2.5.3. A Proposed Supply Management Program Through a Cooperative

A special supply management cooperative called United Cherry Producers was
formed in the winter of 1990. The original proposed program was focused on the problem
of reducing tart cherry productive capacity through an orchard removal incentive program,
which is examined below in section 5.3. However subsequent proposals for the cooperative
focused on proposed provisions for managing temporary excess supplies in large crop years.
Under the proposal, emphasis was to be placed on market allocation and non-harvest
diversion. A marketing program board operated through the cooperative was to establish
policies for managing supplies in large crop years. In years when supplies were expected
to substantially exceed estimated sales, the board would recommend the percentage of the
current years’s crop to be diverted to secondary market uses or left unharvested. Each
grower could choose whether to (1) deliver the restricted percentage of tonnage to a
processor who made available approved secondary market uses, (2) leave some of the
restricted portion in the orchard, or (3) possibly receive diversion credit for orchard
removal. Another new ancillary cooperative was also proposed by processors to facilitate
the processing and marketing of secondary market cherries that would have been
encouraged or required by the proposed supply management program.

Subsequent proposals called for provisions that would allow the board to re-
introduce a storage reserve pool if supply fluctuations were appropriate for this. The idea
was that a storage reserve approach could again become a useful supply management tool
when short crops again occur frequently, replacing the persistent oversupply situation which
characterized the late 19803.

Cherry industry leaders that proposed this program believed that a sufficient level
of grower participation for an effective supply management program might be obtained
through an organizational structure which called for use of a mandatory program or state

marketing order in Michigan in combination with the supply management cooperative with

135

membership in all cherry-producing states. Use of a state marketing order in Michigan
required hearings and a grower referendum. Hearings were held in 1990 and 1991, but in
neither case was a grower referendum authorized by state government. Obstacles to the
proposed program included certain legal interpretations by the state of Michigan as well as
less than full agreement within the industry regarding the desirability of the program. With
the inability to obtain a mandatory program in Michigan, United Cherry Producers became
inactive by spring 1991.

Short crops in 1990 and 1991, which raised prices and reduced industry inventories,
dampened the enthusiasm among some elements of the tart cherry industry for any kind of
supply management program. By early 1992, some industry discussions shifted to
consideration of a voluntary association of processors to be organized as a new cooperative

for supply management and pricing.

5.2.5.4. Summary of Tart Cherry Supply Management

The tart cherry subsector has seen a number of different proposals for supply
management and a considerable amount of deliberation of different approaches. After
bargaining association efforts to influence supplies through storage and other means in the
19603, agreement was reached among various segments of the tart cherry industry to create
a federal marketing order in 1972. Since the 19703 had a number of years with short crops,
the primary supply management tool with the federal marketing order was a storage reserve
pool program. The tart cherry federal marketing order improved the balance of supply and
demand by reducing supply fluctuations somewhat, thus addressing the problem of
temporary imbalances of supply and demand. Use of the order in large crop years also
benefited growers by reducing the magnitude of price declines compared to normal supply
years, though prices were generally below typical grower cost of production in large crop

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Since the mid-19803 brought a period of increased cherry industry productive
capacity, market allocation would have become a more commonly used tool had the order
not been terminated in 1986. Various proposals have been put before tart cherry growers
and processors in the years since termination, with many of them bearing considerable
resemblance to the supply management provisions of the federal marketing order. A supply
management cooperative was one proposed form of organization, but agreement could not
be reached, in part because short crops, lower inventories and higher prices were occurring
during the period in which the supply management cOOperative was being considered.
During the 1990s, agreement may be reached among industry participants to establish a new

program to improve the balance of supply and demand through supply management.

5.2.6. The Almond Federal Marketing Order

Almond bearing acreage has risen fairly steadily since the 19603, and almond
supplies did not exhibit anywhere near the volatility of tart cherry supplies until the 19803.
Thus throughout most of the history of the almond federal marketing order, it has been
used to remove temporarily excess supplies from the primary market (thus reducing the
magnitude of price declines compared to price levels in years with moderate sized crops)
and using the market allocation provisions to increase demand through building new
markets (e.g., export) and encouraging new product development. With the increased supply
volatility of the 19803, almond reserve policy changed to provide larger reserve carryover
to be prepared for the problem of supply shortages in future short crop years. Reserve
almonds can be (a) released later in the same marketing year for sales into primary markets,
(b) sold into secondary markets such as for new product uses, or (c) released in a
subsequent short-crop year for sale into primary markets.

Use of these three reserve alternatives has varied during the 41 years the almond

marketing order has been in existence. In four of those years, the entire reserve was

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137

eventually released for primary market sales before the end of the same marketing year.
In 25 of the 41 years a portion of the almonds in the reserve was sold into secondary
markets to reduce large supplies in the primary markets; the remainder was released to the
primary market or carried over into the following year. In two years (1987 and 1988), the
entire reserve was carried over into the subsequent marketing year. There were 12 years
in which the almond reserve was not implemented at all because supplies matched demand
at remunerative prices.

Up until 1973, reserve almonds were mainly diverted to one secondary market outlet:
exports. A minimum export price was established by the Board which was lower than the
domestic f.o.b. price. However, the Board did not handle reserve sales for export; almond
handlers acted as agents for the Board in selling reserve almonds at prices at or close to the
minimum price.

Selling almonds at a price below the domestic price in the more elastic export
market was an example of successful implementation of a price discrimination strategy by
the California almond industry. The industry was able to keep the domestic and export
markets segegated so that discounted-price almonds for export were not resold in the U.S.
market. However, why a minimum export price? At first glance, it would appear that
exports sales would be maximized with no minimum price. However, industry observers
have noted that successful adherence to a minimum export price prevented handlers from
unduly bidding against each other on the basis of lower price for sales to what was generally
a limited number of foreign buyers in particular countries. The concern was that substantial
price competition for foreign sales might actually reduce total sales in a given season, if
foreign buyers held back on their purchases waiting for prices to decline further. If the

buyers were convinced that the price would stay approximately the same, they would buy the

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same quantities and they would buy them earlier in the season.71

The minimum export
price was kept low enough to ensure the sale of the entire quantity of almonds diverted to
the secondary market. However, since the lower export price was enforced collectively
through the marketing order, it represented a form of export subsidy by the almond
industry.

Officials of the almond marketing cooperative praise the reserve progam for its
contribution to expanding the California almond export market:72

"Through differentiation of the domestic and export markets, the almond

industry established a foothold in the export market in the 19503. Export

reserves were still in place through the 19603, even though the industry
exported over and above targeted levels. By the 19703 the export market

was self-sufficient, and now accounts for over 60% of industry shipments.”

Since 1973, no minimum export prices have been set by the marketing order board
because export markets had become primary markets, meaning that almonds for export were
henceforth sold without having price concessions arranged through the marketing order.

No marketing order reserves were established from 1973 to 1979 because the almond
industry was able to move all almond production into domestic and export markets at
satisfactory prices. Supply and demand were in closer balance than in previous years.
Favorable exchange rates and increasingly strong demand in foreign markets resulted in
substantial gowth in overseas markets during the remainder of the 19708.

Almond sales into export markets became more difficult with the advent of less ~
favorable exchange rates in the 19803. At the same time, almond industry production levels

continued to increase substantially. Several record-breaking crops occurred in the 19803 --

1981, 1984, and 1987 (the all-time high of 654 million pounds). Large crops also occurred

 

71Interviews with California almond handlers and with Robert Boersma, economist with
the Fruit and Vegetable Division, Marketing Order Branch, Agicultural Marketing Service,
U.S. Department of Agiculture.

”CAGE 1986.

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139

in 1980, 1988, and 1990.73 The Board responded to the oversupply situation of the 19803
by establishing an almond reserve in each of the large crop years.

To use the market allocation provision, new secondary market outlets were needed
in which to divert excess product in large crop years, since the export market was no longer
an outlet for secondary market diversion. Since the industry appeared to be heading into
a period of persistent oversupply, demand expansion efforts would be needed to move the
increased market supplies. The Board thus made the decision to combine the goals of
managing annual supply fluctuation and stimulating market development by creation of a
market development reserve.

How was the market development reserve implemented? When final decisions
regarding reserve disposition were made each year, a portion of the reserve almonds were
set aside in a market development reserve. In each of those years a portion of the almond
reserve was diverted into these secondary market outlets and sold at prices below the
prevailing f.o.b. handler price. The proportion of total marketable supply diverted to
secondary markets ranged from 2% to 10%. Thus beginning in 1982 and continuing through
the 1985 crop year, the almond industry was involved in collective efforts to increase almond
demand through promoting new uses such as almond butter and selling to the USDA school
lunch progam. Additional diversion outlets used under the marketing order (generally for
culls and low quality almonds), were almond oil and livestock feed. A very short crop in
1986 led to cessation of the market development reserve for several years. It was resumed
in 1990, when 7% was allocated for market development.

It is difficult to judge quantitatively how much almond sales have increased due to
these collective efforts to increase demand and to thus reach an improved balance between

supply and demand in the face of very large almond production increases. Figures on the

 

”See Table 4 on page 12 and Figure 13 on page 33.

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140

quantity of sales into new product markets are not available. However, several industry
leaders have indicated that the efforts have probably brought about small to moderate
increases in almonds sales."

Thus the almond industry has used the order to coordinate supply and demand in
several different ways. For the first two decades, excessive supplies were diverted to the
eXport market. In the 19803 use was made of market development reserves and in two years
reserve inventories were carried over to subsequent marketing years. Throughout the entire
period, in large crop years in which reserves were used, the Board "metered out” supplies
to some extent throughout the marketing year by lowering reserve percentages incrementally
one or more times. As described earlier, intraseasonal price declines tends to cause buyers
to delay purchases while waiting for further price declines, so releasing reserve almonds
incrementally helps to ensure that the f.o.b. price would not decline during the season, thus

facilitating steady sales by handlers.

5.2.7. The Raisin Federal Marketing Order

The raisin marketing order has been used to reduce persistent large supplies in large
production years and to balance these supplies with demand levels in the primary domestic
market. In most large crop years, the Raisin Administrative Committee has declared a
reserve percentage which is generally in the range of 10-30% of the crop. Each handler
places in storage a quantity of raisins equal to the specified reserve percentage.

Since short crop years tend to occur only every 2-5 years (see Figure 18 in section
2.5.1 of Chapter 2), in most years the reserve pool is sold for various secondary market uses
including government school lunch and other feeding progams, P.L. 480 exports, sales to

wineries for distilling purposes, and cattle feed. The marketing order also typically carries

 

"Interviews with several almond handlers attending an Almond Board of California
meeting, Modesto, California, June 1991.

the

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141

some reserve pool raisins into the subsequent crop year. If that year has a short crop, the
raisins are released. If the crop is again large, then additional secondary markets are
sought.

Each marketing year the Raisin Administrative Committee decides the proportion
of the upcoming crop to set aside in a reserve after comparing expected levels of sales with
the size of the new crop plus carryin stocks. If the RAC decides that 20% is the appropriate
set-aside percentage, each raisin handler is required to store 20% of the raisins delivered
to their packing house by gowers. The remaining 80% that each handler is allowed to sell
immediately is called "free tonnage.” As the marketing year progesses, the RAC permits
handlers to sell raisins from that reserve tonnage, and handlers may also buy additional
reserve tonnage from other handlers. The release of reserve tonnage for free use in
increments (that is, allowing some reserve tonnage to become free tonnage), is intended to
even out raisin shipments over the course of the marketing year. Thus the raisin federal
marketing order facilitates a steadier flow of raisins throughout the marketing year than
would be the case without the order.

This ”metering out" of the reserve through incremental releases is somewhat similar
to the approach used with the almond marketing order and the reason for doing it is similar.
The incremental release of the reserve has the effect of keeping f.o.b. raisin prices steadier
than would likely be the case if the entire crop were available for sale at the beginning of
the marketing season. Industry participants contend that if prices are steadier throughout
the season, then buyers will make more purchases earlier in the season. This mainly has the
effect of shifting who carries the inventory in the system--from the handler/processor to
firms downstream in the subsector. On the assumption that downstream firms (food
manufacturers and food service firms) are able to gauge effectively their level of sales, this
represents good vertical coordination performance-coordination costs are borne by the

firms most able to bear that cost.

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A key supply-demand balancing issue is how marketing institutions deal with the
problems posed by substantial increases in supplies. As mentioned in Chapter 2, various
circumstances led to a sharp increase in raisin production in the 19803. Several measures
were developed to deal with the large and rapid increase in supplies that occurred. Raisin
marketing organizations were fairly responsive in dealing with industry supply problems such
as occurred in the mid-19803. One measure taken was a substantial reduction in the price
to gowers negotiated by the Raisin Bargaining Association (RBA).

However, the sharp reduction in the RBA-bargained gower price led to other
problems. Many handlers were still holding high-cost carryover stocks from having paid the
higher gower price the year before. Those high cost raisins could be sold by handlers only
at a significant loss because the f.o.b. price had dropped significantly. In response to this
problem, the RAC developed an Inventory Reduction Progam (IRP), in which handlers
could purchase lower-priced tonnage from the marketing order reserve. By combining the
cheaper reserve raisins with the high-cost raisins, handlers could lower the average cost of
their total raisin stocks. The lower costs enabled the handlers to sell their raisins at a price
that substantially reduced the losses they would have incurred without the IRP.

Another response was the creation of the Export Incentive Progam (EIP), which
. facilitated sales to packers of lower-priced reserve tonnage to reduce the net price of
exported raisins to handlers engaging in export sales. This progam is basically a market
allocation to export secondary markets, similar in some respects to the minimum export
price system Operated through the marketing order up until the mid-19703. Under the EIP,
target prices vary by export destination. The cost of reserve tonnage to handlers who
participate in the EIP is calculated in a manner designed to enable them to sell raisins at
competitive prices in eight separate export markets. All packers thus end up with the same
raw product cost for export sales to a specific country. The establishment of costs of reserve

tonnage raisin for export is accomplished through joint industry decision making under the

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Raisin Administrative Committee.75 Foreign buyers are more likely to make regular
purchases of raisins if they realize that prices are not likely to decline throughout a
particular marketing year since all of their potential suppliers face the same basic costs for
raisins during the same time period. The argument is similar to the situation described
above relative to ”metering out” the domestic supplies. By facilitating regular purchasing and
purchasing early in the marketing season, the storage risk is shifted downstream to foreig1
food manufacturers, distributors and other firms that are generally in a better position to
estimate likely sales levels and therefore bear the cost of holding the inventory. Maintaining
the export market as significant sales outlet in this manner is a key part of balancing supply
and demand in the face of frequent large crOps.

Another industry response to the problems posed by large supplies in the 19803, the
Raisin Diversion Progam, was created in part to reduce production and to encourage
reduction of raisin production capacity. Use of this marketing order provision to balance
supply and demand is part of the same decision process as establishing the level of reserve
tonnage. The RAC first estimates the proportion of raisin deliveries that will be placed in
the reserve pool (recall the 20% reserve example above). A key factor in making that
decision is estimating the quantity of raisins needed to maintain reserve tonnage at the
desired level to meet domestic and export demand. They consider how much reserve
inventory is needed to meet buyers’ needs until the new crop comes in, that is, keeping the
"pipeline" adequately filled. If a crop is so large that production will exceed normal
commercial demand plus the pipeline requirements, the RAC has an additional tool to
reduce supplies that year: the Raisin Diversion Progam. Growers who elect to enter the
progam in a given year must agee to prune spurs on their gapevines (resulting in

temporary non-production for one year) or to remove vines entirely from the blocks of land

 

”Nuckton and others, 18.

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accepted for participation in the RDP. Supply is reduced by the amount that land selected
for RDP participation would have produced. With a few exceptions, raisin yields do not vary
geatly from an average of 2 tons per acre, which facilitates reasonably accurate estimates
of raisin production from specific acreage.

Diversion levels under the RDP are based on acreage, and have ranged from a high
of 50,000 acres in 1986 to as low as 15,000 acres in 1987. Diversion through the RDP is
zero in some years; if the expected crop size plus existing stocks do not exceed estimated
market needs, the RDP is not implemented. For example, since 1989 was a relatively short
crop, the acreage diversion level for the RDP was set at zero for that year."

The mechanics of implementation are as follows. Growers that enter the progam
are given certificates by the RAC representing the tonnage of raisins that their land would
have produced. Handlers purchase the certificates from gowers and the handlers use those
certificates to obtain raisins from the reserve pool. Handlers can then sell those raisins as
free tonnage in regular commercial channels.

Thus the value of the RDP is to provide an additional tool to reduce raisin supplies
in large crop years. Also the size of the reserve pool is reduced by an amount equivalent
to the certificates issued to gowers. This means that the RAC does not have to seek
secondary marketing outlets to dispose of that proportion of reserve tonnage that is reduced
by the RDP.

However, the progam is not without its problems. One problem in administration
of the RDP may occur in the following manner. Recall that a number of Thompson gape
gowers sell their gapes for wine, fresh, or canned. A gower who produces Thompson
gapes for these other markets, but has not historically produced raisins, could produce

raisins for a single year and then get paid not to produce by participating in the RDP the

 

“Clyde Nef, Manager of the Raisin Administrative Committee, personal communication.

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145

following year. To the extent that Thompson gape gowers who are not traditionally raisin
producers take advantage of the progam in this manner, the effectiveness of the RDP as
a means to address supply fluctuation problems is diminished.

In summary, key raisin industry responses to the oversupply problems of the 19803
included the Inventory Reduction Progam, the Export Incentive Progam, and the Raisin
Diversion Progam. Collective action measures such as these help alleviate the effects of

persistent oversupplies, thus improving the short-run supply-demand balance for raisins.

5.2.8. Comparison of Marketing Order Supply Management in
the Tart Cherry, Almond, and Raisin Subsectors

The purpose of this section is to make general comparisons of marketing order
supply management for the three selected crops and to raise some specific issues. Use of
the tart cherry, almond and raisin marketing orders differed in the relative emphasis given
to use of specific provisions to deal with supply management problems.

The tart cherry marketing order emphasized the reserve pool. Use of the reserve
pool stabilized supplies by removing excess supplies from the market in large crop years and
releasing them in subsequent short crop years. Reserve pool cherries were also sometime;
released into the primary market in the same year in which the pool was formed, when
market conditions warranted. Diversion to secondary market uses was done to a geater
extent in the mid-19803 as the industry entered a period of oversupply. Because of
continued large crop sizes beginning in the mid-19803, there was less need to supplement
supplies in the following year such as had been done in the 19703 when short cr0ps followed
large crops with geater regularity. Diversion to secondary market uses would probably have

been used increasingly as a supply management tool for tart cherries had the order not been

terminated in 1986. The non-harvest diversion option was used sparingly, except for the first

TE

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146

year of marketing order use in 1972.77 In other years of marketing order implementation,
non-harvest tonnage ranged from 1 to 5 million pounds (between 3% and 13% of restricted
tonnage).

The almond reserve has generally been used for market allocation. Up until 1973,
excess supplies were diverted to the export market at prices below f.o.b. domestic almond
prices. In the early 19803 and in 1990, a different method of market allocation involved
setting aside specific percentages of quantities delivered by gowers in a market
development reserve, ranging from 2% to 10% of gower deliveries.

The almond marketing order has also been used as an interseasonal reserve pool in
recent years. The year 1986 was a short crop year with record high almond prices and large
crops occurred in each of the following two years.78 The general unavailability of almonds
and high prices had a negative impact on demand in 1986 and in subsequent years. The
Almond Board concluded that almond reserve policy should be changed to facilitate having
enough carryover stocks to avoid severe shortages such as occurred in 1986. By decision of
the ABC, almond reserves in 1987 and 1988 were carried over into the next crop year, which
represented a change from previous pool management policy in which the entire almond
reserve quantity was diverted to secondary markets. This policy shift meant that the almond
reserve would henceforth be managed in a way that would allow it to be used if necessary
as an interseasonal reserve pool, similar to the use of the tart cherry marketing order.

A policy of supplementing short crops with reserve pools from previous large crops
is facilitated by having reliable information on crop sizes on which to base release decisions.

Incorrect supply estimates can lead to problems. In the view of a number of almond industry

 

"Donald J. Ricks and others, The Tart Cheny Subsector, 1982.

751986 almond production was just 68% of the previous 4 year’s average shipments. 1987
and 1988 production figures represented 178% and 142%, respectively, of the prior average
shipments.

0f

147

participants, release of the 1988 almond reserve in the early stages of the 1989 marketing
year had a significant price-depressing effect. The problem, in their view, was that the
release decision was based on an estimated new crop size that turned out to have been
significantly underestimated.” This illustrates one of the uncertainties inherent in
managing marketing order reserves. Supply-demand balancing, whether done by individual
firms or with a marketing order, requires good information on which to base decisions to
store and release crops.

Almond reserves have also been used for within-season supply management. For
instance, the initial reserve level has been set at 25% in a number of years. In subsequent
Almond Board decisions taken later in the marketing season, the reserve percentage was
lowered in one or two increments to a final percentage (often 10% or less), if the Almond
Board decides that demand conditions warrant within-season reserve releases.

Incremental within-season changes in the reserve percentage allow flexibility in
supply management. As the marketing season progesses, it becomes clearer how well
current supplies are matched with quantities sold. If the Board members judge that supplies
continue to be excessive relative to likely sales, they can maintain the reserve percentage.
If there are sig13 that the market is strong, then more almonds can be released by steadily
lowering the reserve percentage, allowing handlers to sell more reserve almonds as the
season progesses. If the reserve percentage is lowered too quickly, there is a chance that
the f.o.b. price will start to decline unduly as the season progesses. This is a situation that
the Board generally wants to avoid, because of the Board’s experience that marketing

almonds becomes more difficult if buyers perceive that prices may decline further later in

 

”Views expressed by several almond handlers at a public meeting of the Almond Board
of California, June 1991.

148

the season.80 This type of Almond Board decision-making can be compared to certain
types of within-season decisions by the Cherry Administrative Board. The CAB made fall
and spring release decisions for reserve pool tart cherries taking into account somewhat
similar considerations, based on judgnents about the strength of tart cherry prices and
intraseasonal price patterns that would occur if cherries were released. The CAB sometimes
also wanted to avoid the situation where release of cherries would contribute to a substantial
decline in prices as the season progessed.

After several incremental changes, the reserve percentage may be reduced to zero
and all reserve almonds can be sold. Alternatively, the ABC may decide on a season-end
reserve percentage such as 10%. If a 10% reserve is the final Almond Board decision on
disposition of the crop, then 10% of the marketable supply from a given crop year must be
diverted to secondary markets or carried into a new crop year. The quantity carried into
the new crop year can be released into primary markets if the subsequent crop is not large.
If the subsequent crop is again large, reserve almonds can instead be diverted to secondary
markets. The raisin marketing order follows a similar practice.

The almond reserve has generally been managed in a manner that facilitates demand
expansion goals (such as increased export sales in the 19503 and 19603). Overseas market
development was given a big boost through almond reserve disposal with minimum prices
and promotion for export markets. Exports now represent over 60% of California almond
sales.

In the raisin industry, tonnage set aside in reserves has been used to pursue industry
goals that contribute to improved vertical coordination through increased sales or reduced
supply. For example, the Raisin Administrative Committee sells tonnage out of the reserve

pool for two separate progams designed to mitigate the consequences of excess supplies.

 

”Views expressed by several almond handlers at a public meeting of the Almond Board
of California, June 1991.

149

In the Export Incentive Progam, reserve tonnage is sold to handlers at reduced prices to
enable them to sell at competitive price in overseas markets. In the Raisin Diversion
Progam, handlers receive reduced-price reserve tonnage and in turn compensate gowers
for removing or pruning vines to reduce raisin gape production.

The emphasis up to this point has been mainly on short-run supply management
issues and has served to make some general comparisons of supply management in the three

commodity subsectors. Now the focus turns to long-run issues.

5.3. A Long-Run Supply Issue: Reducing Acreage Through Orchard or Vine Removal

Collective action efforts have also been undertaken in two of the subsectors to
address the long run aspect of supply and demand: the level of agicultural productive
capacity. Market participants in both the raisin and tart cherry subsectors have made
attempts to deal with this issue.

The Raisin Diversion Progam operates under the federal marketing order. As
mentioned previously, its main impact has been temporary since most gape gowers cease
raisin production for one year and subsequently resume production. However, since some
participating gowers have actually uprooted their vineyards, use of this raisin marketing
order provision has helped the long-term supply-demand balance by facilitating a permanent
reduction in the number of acres in production. Nevertheless, the impact remains small
since the proportion of participating gowers that uproot vineyards has generally represented
less than 10% of total acreage involved in the Raisin Diversion Progam in any given year.
Some raisin industry participants contend that the RDP should put more emphasis on
permanent rather than temporary removal, since the temporary removal approach does not
adequately address the problem of overall excess capacity. One way to do this would be to
provide incentives for vine removal every year. Currently the RDP is used only in certain

high production years.

150

Reduction in productive capacity was also proposed in the tart cherry industry but
was never implemented. Tart cherry industry leaders proposed including orchard removal
diversion credit under the federal marketing order. Orchard removal would have been a
fourth option for gowers to participate in the operation of marketing order supply
management in addition to the reserve pool, market allocation, and non-harvest options.
Although this would have been a means to address overcapacity in the subsector, the USDA
did not approve the inclusion of this option in the tart cherry federal marketing order. The
USDA ruled that such a provision could only be implemented through formal amendment
of the order. Since amending the order is generally a lengthy and difficult process, the
order was terminated before amendments were accomplished.

The problem that orchard removal credits was intended to address was that acreage
reduction in response to low prices generally takes place quite slowly, over a period of many
years. Thus the rationale for orchard removal credits was that the balance of supply and
demand during periods of large productive capacity could be improved by providing
incentives to gowers to reduce tart cherry acreage through orchard removal adjustment
procedures.

There were other proposals which were discussed in the tart cherry industry to
encourage acreage reduction. A proposal was developed in 1990 for an orchard removal
incentive progam that would compensate gowers for removing acreage using a fund from
voluntary gower assessments that was to be established for this purpose.

An industry-supported survey documented tart cherry acreage and age distribution
of trees. In a report by the Cherry Marketing Institute, projected production levels were
compared to likely demand gowth trends. The CM] report suggested that removing
sufficient acreage to reduce average production by 40 to 70 million pounds (IS-20% of

average production) could bring supply and demand into approximate'balance after several

151

years.81 There was also widespread belief among industry leaders, based on past
experience, that in the absence of an acreage adjustment progam, lower price would not
soon lead to adjustments in capacity.

The proposed orchard removal incentive plan involved accepting the lowest gower
bids until the target level of orchard removal was achieved. Growers could choose to bid
the amount of money that they would accept to remove certain orchard blocks, up to and
including removal of the gower’s entire tart cherry acreage.$2

Implementation of the ”cherry orchard buyout" was to be carried out by United
Cherry Producers, a new supply management cooperative, which was discussed above in
connection with short-run supply management issues. In implementing the progam, the
cooperative’s board of directors would have determined the appropriate acreage for
removal. A likely board policy would have been to emphasize removal of older orchards
while leaving younger orchards to assure continued adequate supply capacity to meet future
demand gowth. There was some discussion of whether the progam should emphasize
buying out whole farms or paying for removal of individual orchard blocks. A consensus
emerged emphasizing the latter, but permitting both. Bids would have been solicited from
gowers to remove ”viable, productive" orchard blocks, and plans were included to assure
that payment would be made only for removal of productive orchards (not abandoned
blocks). Orchards that were bid for removal would have been inspected by industry

representatives to assure compliance.83

 

”Demand gowth scenarios were projected as moderate increases from sales levels in
recent years (up to 5%). Cherry Marketing Institute, ”Report on Michigan Tart Cherry
Survey," Okemos, Michigan, 18 January 1991.

”Donald Ricks, "Tart Cherry Orchard Buyout Bidding Approaches," Staff Paper 90-24,
Department of Agicultural Economics, Michigan State University, March 1990.

”Donald Ricks, "Tart Cherry Orchard Buyout Bidding Approaches."

 

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The new cooperative and the orchard buyout proposal had strong initial support
from many cherry gowers and processors. A high level of gower enthusiasm for this
proposal was evident from the fact that in spring 1990 gowers representing 73% of national
production and 83% of Michigan production sigred up to participate and pay an assessment
that was intended to generate the necessary funds. However, the industry had set a 90%
participation threshold before they would implement the progam. Since the 90% threshold
was not reached in time for the 1990 gowing season, the progam was not implemented.
This self-imposed threshold was based on the judgment of industry leaders regarding the
extent of free riders they were willing to accept in financing the progam. Subsequent
proposals involved mandatory assessments through a Michigan state marketing order (rather
than the voluntary assessments previously proposed) and combining orchard removal with
supply management provisions to address annual supply fluctuations.

Various factors prevented implementation of the orchard removal progam which
had the potential to bring longer-run supply capacity and demand into closer balance. By
reducing acreage, production in most years would have been closer to the quantities typically
sold in commercial markets. There would still have been large crop years in which
production would substantially exceed the quantities consumed in prior years, leading to
downward pressure on gower prices. However, with reduced acreage the magnitude of the

excess production would have been less, meaning an improved supply-demand balance.

5.4. A Long-Run Supply Issue: Approaches to Avoid Overplanting
A desirable coordinating mechanism to help avoid overplanting of a perennial crop
is one that allows perennial crop supply expansion on a relatively steady and controlled basis
that approximately matches the expansion in demand when demand increases, but also is
effective in helping avoid excessive or unneeded plantings that can cause supplies to expand

much more rapidly than demand. An effective coordinating mechanism also encourages

153

reduced supplies when a market is faced with declining demand trends which cannot be
reversed. Some examples of coordinating mechanisms that attempt to address the problem

of overplanting are discussed below.

5.4.1. Market Information and Projections

One vertical coordination approach to help avoid overplanting that can be used by
cooperatives is providing member gowers with well-researched projections of likely future
levels of aggegate quantities supplied and demanded for the subsector. Forward-looking
market information helps gowers make better informed planting and removal decisions and
somewhat reduces the probability of overplanting. For example, projections may indicate
that commodity supplies are expected to expand more rapidly than estimated demand
gowth, so that prices will likely decline, making many gowers’ operations unprofitable.

Although some cooperatives have tried the approach of providing long-run market
projection information to gowers for planting decisions, its effectiveness is not assured. For
example, because projections in an earlier period indicated a likelihood of overplantings and
future low prices, Blue Diamond at one point tried to discourage its member gowers from
planting much additional acreage. However, Blue Diamond found that this policy was
ineffective since few gowers heeded the advice. Growers generally have little incentive to
restrict production since they are likely to feel that their individual decisions will have such
a minor impact on total supplies that there would be no effect on prices. In addition, Blue
Diamond was later able to expand demand by a considerably geater magnitude than had
previously been expected. Therefore those gowers who ignored the cooperative’s advice
reaped geater benefits from additional profitable sales. Since that time, the almond

cooperative has generally adopted a policy of accepting whatever quantities their members

 

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154

produce and deliver in accordance with their membership ageements, and planning

marketing progams to handle the supplies received as well as possible."4

5.4.2. Limiting Cooperative Membership

Limiting membership is another approach that a c00perative can use to discourage
unneeded additional planting if supplies are projected to be adequate or excessive. This
approach is likely to be most effective if a cooperative sells most of its output under strong
brands and if the cooperative’s share of total U.S. production of the particular commodity
is high. In this case, new plantings might be curtailed somewhat since gowers would have
few good alternative market outlets.

Blue Diamond’s experience provides an unsuccessful example of this approach.
Grower membership was closed in 1984 with the intention of discouraging unneeded
additional plantings, since plantings were rising rapidly and future almond supply increases
were expected to be considerably geater than demand gowth.” However, in subsequent
years the number of acres in production continued to rise and some gowers marketed
expanding tonnage to an increasing number of small handlers. The cooperative’s share of
total subsector tonnage declined as nonmembers substantially expanded total acres in
production and some members exited the c00perative. The policy of closed membership
was ineffective in some respects and membership was reopened several years later to allow
the cooperative to restore membership tonnage to its previous percentage of total

production.“

 

“Steve Easter, Blue Diamond Growers, Inc., personal communication.
85Almond Efams, (49:6) Nov/Dec 1984, 7.
“Almond Ejams (52:5) Sep/Oct 1987, 38.

155

This illustrates a dilemma that cooperatives commonly encounter if they assume
responsibilities for attempting to balance supplies with demand. Such attempts may cause
the cooperative to lose market share of total production if the competition expands supplies
more rapidly. Such an approach may also reduce the cooperative’s overall efficiency
because of reduced volume handled by the cooperative.

Another possibility is that limiting membership may bring supplies into balance with

current sales levels within the cooperative. In that case, through product differentiation and

 

niche marketing, the cooperative may be able to provide remunerative returns to members.
But that may involve shifting the burden of excess supplies to nonmembers and thus the

overall subsector supply-demand balance situation could be worsened.

5.4.3. Stock Tonnage Contracts

Another mechanism to coordinate gower supplies with a cooperative’s demand is
stock tonnage contracts with gower members. This has been used by some cooperatives
in the tart cherry subsector. With this method each gower member purchases stock that
includes the right to deliver specified quantities of raw product to a cooperative processor.
The aggegate amount of stock tonnage for the cooperative is based upon the cooperative’s
demand projections for that commodity. Stock tonnage thus represents a share in the
cooperative processor’s expected market needs. Stock tonnage is used as a long-run supply-
demand balancing tool by the cooperative/corporation joint venture between Pro-Fae
Cooperative and the IOF food manufacturer, Curtice-Burns, with headquarters in western
New York.

A part of the stock tonnage contract often stipulates that the cooperative is not
obligated to take a geater quantity than the gower’s stock tonnage if supplies are larger

than needed by the firm. This provides a strong incentive for the gower to plant only

156

sufficient acreage to produce a quantity equal to the stock tonnage, but no more, unless the
gower has another market outlet.

The stock tonnage approach provides a potentially powerful mechanism for
coordinating gower supplies with the demand for the c00perative’s processed products. As
the cooperative’s demand increases, aggegate stock tonnage can be expanded by a
comparable amount. If demand for the cooperative’s products declines, the aggegate stock
tonnage can be decreased, reducing the amount that members can market through the
cooperative.

The supply-demand balancing impact for the subsector may be substantial if
cooperatives that use stock tonnage market a large portion of total crop production.
However, competitive actions by competitors who do not use the stock tonnage approach
such as private label processors can reduce the effectiveness of the stock tonnage approach
in balancing supply and demand. For example, private label processors that do not use
stock tonnage may be able to purchase residual cherry tonnage from gowers at prices
considerably below the prices paid for cherries covered by stock tonnage. This could enable
them to sell processed cherries at lower prices than the processors that are trying to balance
supply and demand through the use of stock tonnage contracts. By placing stock tonnage
processors at a competitive disadvantage in the sale of processed cherries, such actions by
private label processors are disincentives to using stock tonnage, reducing the potential
coordination impact. The impact of stock tonnage as a coordinating method can also be
reduced if the firms that use it are not effective in expanding demand for the products
marketed.

The stock tonnage approach is most appropriate for cooperatives which market most
of their product through strong brands. Strong brands provide a market segnent somewhat
separate from the unbranded commodity portion of the market. There is less substitutability

for commodity-based branded food products than for raw product sold in undifferentiated

157

commodity markets. In other words, the demand for differentiated products in more
inelastic because there are fewer close substitutes. If too much of a brand product is sold,
the manufacturer will find it more difficult to maintain the price premium. Since supply
requirements for a brand are more predictable than for a commodity, brand marketers can
use stock tonnage to avoid oversupplying the branded market. This approach has been used
for a number of years by the cooperative / corporation joint venture which has a strong brand
position in pie filling.

There is generally less potential for the stock tonnage approach for perennial crop
cooperatives which market much of their products in undifferentiated commodity markets
and this approach has not been widely used by cooperatives which are primarily commodity
processors. If a commodity processor used stock tonnage, other processors could easily
expand output in large crop years to take away sales from the commodity processor

attempting to limit supplies through stock tonnage.

5.4.4. Acreage Contracts

With acreage contracts the perennial crop gower agees to deliver the production
from specified acreage rather than marketing a specified tonnage through the cooperative.
Acreage contracts are a predominant coordinating mechanism for annual processing
vegetables, but this approach is less widespread within perennial crop subsectors.

As with the stock tonnage contract, acreage contracts have the potential to be a
strong supply-demand coordinating mechanism for perennial crops. Under certain
circumstances acreage contracts tend to work most effectively for a cooperative with a strong
brand position for most of its output for reasons similar to the stock tonnage situation.

In the almond subsector, acreage contracts are the most common method for
contracting between gowers and handlers for delivery of almonds. However, acreage

contracts have not been used for long-run supply demand balancing purposes in any of the

158

three subsectors emphasized in this research. In contrast, acreage contracts have been used
extensively to coordinate productive capacity with demand in the gape juice subsector.
Along with the stock tonnage approach, acreage contracts may be used more extensively in

the future by some cooperatives to coordinate gower supplies with its market demand.

5.5. Interrelationships Between Demand Expansion and Supply Management

Demand expansion and supply management approaches should not be viewed as
separate. They are interrelated aspects of the vertical coordination functions. In a number
of subsectors, cooperatives as well as other firms and organizations devote major efforts to
developing strategies and progams for influencing both demand and supply -- often
simultaneously. Effective supply management efforts are commonly used to expand demand.
Important examples of this are storage reserve pools used to supplement supplies in
situations when shortages in a particular year are likely to reduce demand for a period of
several years.

The almond subsector provides an example of the interrelationship between demand
expansion progams and supply management. As mentioned earlier, there has been
complementarity in the goals of development of new products such as almond butter and
the disposition of almond marketing order reserve tonnage into secondary markets that do
not compete with the primary market. These goals were addressed by setting aside a
portion of the almond marketing order reserve as a special market development reserve.
The marketing cooperative was instrumental in encouraging almond butter as a new product
development effort and as a secondary market outlet for the marketing order reserve. In
addition, up until the early 19703, long-range export market development efforts of the
cooperative and of other almond handlers was facilitated by storage of almonds in the

reserve to maintain reliable supplies for export. Thus progams on both the supply and the

159

demand side were used in a number of ways to improve the supply-demand balance and
economic viability of the subsector.

Use of market allocation to encourage new product development was also done
through the tart cherry marketing order. A portion of the quantities of cherries diverted
from the primary market in certain large crop years were channeled into relatively new uses
including juice, puree and dried cherries.

The raisin subsector provides additional examples. Supply management through the
raisin marketing order reserve has also contributed to raisin demand expansion goals.
Although the raisin generic promotion progam is a separate progam, it is closely
coordinated with the federal marketing order supply management progam. In addition, the
raisin reserve pool has contributed to stable supplies for export market development, similar
to the almond situation. Raisin cooperative demand expansion goals are facilitated by
regular purchase of large quantities of raisins from the marketing order reserve pool for sale
in export and domestic markets when these reserve supplies are needed. The reserve thus
helps to maintain steady, dependable supplies for effective demand expansion efforts by
individual firms and for the subsector as a whole.

The interactions and interrelationships of supply and demand approaches and

progams have thus had important impacts on all three subsectors.

5.6. Summary
Chapter 2 characterized the sigrificant supply instability that affects the marketing
of tart cherries, almonds, and tart cherries. Shortages reduce product availability in the year
that the short crop occurs, but sales may also be reduced for succeeding years because
manufacturers may drop certain products, retailers may not continue to carry a product, or
consumers may shift buying preferences to other products. Storage from year to year by

individual processor/ handler firms could potentially help alleviate this problem, but there

160

is often inadequate storage, partially due to the risks to individual firms. Chapter 3 pointed
out that a lack of retail price responsiveness can result in big price and revenue declines for
gowers in large crop years. The negative impacts of supply volatility on gowers provides
sigiificant incentives for gower collective action. This chapter examined some coordination
mechanisms developed through gower collective action to address these problems. Supply
management progams through federal marketing orders have been among the major
approaches.

Price impacts from implementing marketing orders varies by subsector stage.
Table 14 presents some of the key short-run impacts of marketing order supply
management. Large crops tend to have substantial price-depressing effects with all three
commodities, but use of marketing order supply management provisions can partially
mitigate the impact. The f.o.b. price at the processor or handler level (stage 2) is the price
that is most directly affected by the use of supply management provisions of marketing
orders. When any of the three types of provisions are used in large crop years to reduce the
supply of the commodity in primary markets, the f.o.b. price of almonds, raisins, or frozen
tart cherries declines by less than would be the case if all of the gower deliveries were
made available for sale. Processor/ handler and gower prices are improved by the reduction
of excess supplies in the primary markets through the use of the three types of provisions,
either alone or in combination: storage reserve, market allocation, and non-harvest/non-
production diversion. However, individual gowers may be disadvantaged from not being
able to sell all of the crop that they harvest. In addition, net revenue from the sale of stored
or diverted cherries may be less than would have been the case had they been allowed
unrestricted sale of cherries.

Reducing shortages in short crop years through release of marketing order reserves
helps increase manufacturer sales (stage 3) and processor sales (stage 2). Certain

manufacturer efforts to develop new products also benefit from secondary market diversion

161

Table 14. Short-run Impacts of Marketing Order Supply Management
on Firms at Various Subsector Stages

 

 

Subsector Impacts of Marketing Order Supply Management
Stage
I Stage 1: A. Grower prices improve through use of storage reserve, market
Grower allocation, and non-harvest or non-production diversion provisions.

Non-harvest diversion gives cherry gowers more options for
meeting restricted tonnage requirement. Non-production diversion
for raisins provides additional means to reduce supplies.

B. When supply management provisions are used, gowers are
restricted from selling 100% of what they harvest. If they
participate in secondary market diversion, their choices may be
somewhat limited by the options available to the handler(s) to
whom they typically sell their crop. For individual gowers, net
revenue from the sale of stored or diverted cherries may be less
than might have been received had they been allowed unrestricted
sales of cherries.

.l

 

 

 

; Stage 2: A. Release of commodity stored in marketing order reserve helps
Handler/ increase processor sales and reduce shortages in short crop years.
3 Processor B. When supply management provisions are used, processors are

restricted from selling 100% of gower deliveries.

 

, Stage 3: A. Reducing shortage in short crop years through release of stored
1 Manufacturer cr0ps helps increase manufacturer sales.

Certain manufacturer efforts to develop new products benefit from
secondary market diversion allocated to those uses.

B. To the extent that supply management helps to increase f.o.b.
prices and restrict quantities marketed, manufacturers may obtain
less of the commodity at higher prices.

 

 

5 Stage 4: Retailers reflect little or no price impact from marketing order
, Retailer operation, since raw product price changes due to the order are
generally not large enough to bring about retail price changes.
3 Stage 5: A. There is less likelihood that consumer demand will be reduced
Consumer due to retail product unavailability in short crop years when the

commodity is stored and released through reserve pool operations.
Consumers benefit from geater product availability when market
allocation is used for new product development.

Raw product price changes from marketing order implementation is
often not large enough to bring about retail price changes.

B. In some instances, marketing order supply management could
reduce product availability and raise consumer prices.

 

 

 

 

 

162

allocated to those uses. However, to the extent that supply management helps to increase
f.o.b. prices and restrict quantities marketed, manufacturers may obtain less of the
commodity at higher prices.

There may be little change in prices in the other stages. Raw product price changes
due to the marketing orders are in many instances not large enough to bring about retail
price changes. Reasons for this was explained in Chapter 3. Even if a cherry processor
passes along a price change, a pie manufacturer that purchases processed cherries will in
many instances not change the price of pies made from one particular commodity just
because of a change in the price of that commodity. They will likely maintain their pricing
structure for the whole line of pies by leaving the price of cherry pies unchanged. In
general, if the f.o.b price at which manufacturers acquire the processed commodity drops
(within a certain range), they generally do not reduce the manufactured sale price, but will
instead increase their margin due to the lower cost of the commodity used as an ingedient
in food manufacturing.

At the consumer stage (stage 5), one of the major impacts of implementing
marketing orders is that there is less likelihood of unavailability of food products made from
the perennial crop commodity when the commodity is stored in a large-crop year and.
subsequently released in a large-crop year through the operation of a storage reserve pool.
Consumers also benefit from geater product availability when market allocation provisions
are used for new product development. Marketing order supply management could in some
instances, however, reduce product availability and raise consumer prices in some instances.

Several conclusions can be drawn from comparing the operation of the three
marketing orders. The first is that different approaches are emphasized depending on the
supply conditions facing the particular commodity. Market allocation has been the
appropriate tool for much of the history of the almond and raisin marketing orders because

the supply-related problem has generally been one of persistent overproduction rather than

163

frequent shortages. Management of the tart cherry marketing order did not begin to make
sigrificant use of secondary market diversion until 1984 and 1985, which marked the
beginning of a period of persistent overproduction in the tart cherry subsector.

A reserve pool storage progam stabilizes supplies through storing and releasing the
packed or processed commodity. The tart cherry industry used the reserve pool to store
excess supplies in large crop years and to release it in subsequent short crop years. The
almond industry did not begin to use the marketing order for this purpose until after a very
short crop occurred in 1986. Short raisin crops do not occur frequently, so large reserve
quantities are not typically carried over into a subsequent year.

The occurrence of two or more large crops in a row has posed reserve management
problems for marketing orders in all three commodity industries, but especially for tart
cherries and raisins. The juxtaposition of large tart cherry crops in 1984 and 1985 and the
implementation of the marketing order in both of those years posed substantial challenges
to the Cherry Administrative Board for the disposition of the reserve cherries. Similarly,
the large raisin crops of the early 19803 led to substantial reserve management problems.
The raisin industry responded with a series of measures to deal with the persistent large
supplies, including the Inventory Reduction Progam, the Export Incentive Progam, and the
Raisin Diversion Progam. In combination with expanded promotional efforts, both branded
and generic, these efforts have led to improvement in supply-demand balance conditions.

The almond and raisin marketing orders both used the export market for market
allocation for the first two decades of the operation of those marketing orders. Both
commodity industries pursued a strategy of using exports as the main outlet for secondary
market diversion by maintaining a minimum export price below the f.o.b. domestic price.
Both ceased that approach by the mid-19703, by which time export volumes were becoming
significant enough to be treated as primary markets, rather than residual outlets. Since that

time, almond export strategies have been pursued independently by each almond handler

 

 

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164

firm, with most export expansion initiatives coming from Blue Diamond. Over 60% of
California almonds are now exported. The raisin marketing order, however, continues to
use the order to assist in export expansion, though not through minimum export prices.
Instead, the Raisin Administrative Committee uses the sale of lower-priced reserve tonnage
as a means to lower the cost of raisins to handlers engaged in exporting to selected foreig1
markets. In addition, CALRAB facilitates export expansion in selected markets such as
Japan with a branded product supported jointly by the California raisin industry. This
complements brand-oriented export expansion pursued by Sun-Maid and a few other
handlers. Exports have played a major role in improving the supply-demand balance for
both almond and raisins, but only a minor role for tart cherries.

Long run supply-demand balancing approaches considered in this chapter include
measures to reduce acreage and measures to avoid overplanting. Overview comments and
conclusions regarding these aspects appear in Chapter 7.

This chapter has shown that federal marketing orders have been a major factor in
short-run supply-demand balancing in all three subsectors, and that one of the key impacts
from the gower’s vieWpoint has been the ability to dampen steep price declines in large
crop years. The next chapter looks more specifically at the price and gower revenue
impacts in each of the three perennial crop subsectors of using federal marketing orders for

supply management.

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CHAPTER 6: SIMULATION OF FEDERAL MARKETING ORDER PRICE IMPACTS

A number of supply management approaches were examined in Chapter 5, and
federal marketing orders rank as one of the most important. A key performance issue
relating to marketing orders is the magritude of price impacts, especially gower prices,
resulting from use of this supply management tool. That is the subject of this chapter.

Steep declines in prices commonly result from large crops in tart cherries, almonds,
and raisins. Supply management provisions of federal marketing orders have been
implemented in large crop years in these three subsectors in part to reduce the magiitude
of the price decreases from unusually large supplies. Large crops frequently drive gower
prices below the typical cost of production, and use of the marketing order permits
management of a portion of market supplies that would otherwise drive gower returns
further below costs. The effect of the supply management provisions is usually to raise
prices somewhat. The analysis in Chapter 2 showed that tart cherry prices were generally
still below gower cost of production in large crop years even when marketing order
provisions were used. The use of supply management provisions of marketing orders with
certain perennial crops that are subject to significant short-run supply variation facilitates
subsector coordination by providing a more stable supply environment in which gower
prices are also more stable and more closely aligied with gower cost of production.

Econometric models were used to analyze the impact on handler and gower prices
of implementing supply management aspects of the federal marketing order for tart cherries
and almonds. The tart cherry and almond models are similar in structure and both are

based in part on a model of the asparagus industry developed by French and Willett"7 and

 

”Ben C. French and Lois Schertz Willett, ”An Econometric Model of the U.S. Asparagus
Industry,” Gianninni Res. Rpt. No. 340, University of California, September 1989.

165

166

a model of the raisin industry developed by French and Nuckton.88 Model development,
solution method, and simulation results for both commodities are described in this chapter.
Results from the tart cherry and almond models are compared to research results from the
French and Nuckton study of the raisin marketing order. Estimated marketing order

impacts for all three subsectors are examined in light of several performance criteria.

6.1. Tart Cherry Marketing Order Simulation

To analyze the performance of the tart cherry marketing order, price impacts of the
marketing order were estimated by comparing actual season average prices with prices
estimated in an econometric model that simulated prices and quantities over the period
1965-1989. Cherry prices were hypothesized to be higher with the establishment of a
reserve pool and with the use of other provisions of the marketing order and lower in those
years when reserve pools were released to supplement shortages, relative to the situation
that would have existed without the marketing order. The purpose of this aspect of the
research is to estimate the magnitude of the price effects. The model simulates the historical
period assuming in a counterfactual alternative scenario that the reserve was not
implemented in 1972, 1975, 1980, 1984 and 1985. The resulting simulated prices and
quantities are estimates of what would have occurred without supply management
operations of the tart cherry marketing order. The difference between the simulated price
in the alternative scenario and the actual gower price is the estimated impact of not using
the order, or conversely, the value in terms of increased gower prices of using the order

for supply management in certain large crop years.

 

I"’Ben C. French and Carole Frank Nuckton, ”An Empirical Analysis of Economic
Performance Under the Marketing Order for Raisins, merica J on a ic

M August 1991.

167

Another simulation posed the same question in reverse: What would have been the
price impact of using supply management provisions of the marketing order in certain other
large crop years besides the five years in which the marketing order was used? A nearly
ideal set of economic conditions for use of a reserve pool occurred with a very large crop
in 1982. This was followed by a short crop in 1983, during which a reserve could have been
released to supplement the short supplies. Since the marketing order was not used in 1982
and 1983, the circumstances in those years provide a useful opportunity to run a simulation
to estimate the potential price impact of the marketing order.

Although the marketing order was discontinued in 1986, quite large crops occurred
in 1987 and 1989, which again would have provided appropriate supply conditions for the
use of the marketing order. Thus the second simulation focused on estimating the price
impact had the marketing order been used in 1982, 1987, and 1989.

The model included ten econometrically estimated equations. A supply response
equation predicted tart cherry bearing acreage. Other key behavioral relationships that were
modeled included carryin stocks and pack, both frozen and canned. Domestic demand and
allocation to the frozen and canned markets were modeled as a simultaneous system and
estimated by three stage least squares. The ten equations and related identities were linked
in a recursive model that made dynamic sequential predictions over the period 1965-1989
of (a) production, (b) carryin stocks, (c) frozen and canned pack, (d) frozen and canned

movement, and (e) handler and gower prices.

6.1.1. The Tart Cherry Model
The variables in the model are presented in Table 15. Structural relationships
among the variables are presented in Table 16. All data are annual. The time period for
which all the relationships were modeled was 1964-1989. Making 1964 the initial year

provided a sufficiently long time series to yield useful behavioral relationships, and data for

168

Table 15. Variable Identification, Tart Cherry Model

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable A. ENDOGENOUS VARIABLES (RPE = raw product equivalent)
AU Bearing acres, thousands
DC US canner total shipments of TC, million pounds RPE
DCD US consumption of canned cherries (DCD = DC — EC), mill. lbs. RPE
DF US freezer total shipments (movement) of TC (million. lbs. RPE)
DFD US consumption of frozen cherries (DFD = DF - EF), million lbs. RPE
PGPU US season average gower price for TC, dollars per lb.
PGPUAV7 Seven year moving average, gower prices lagged (T -6) to (T -12), dollars/lb.
PPCC Representative f.o.b. canned price, 6/ 10, dollars per lb.
PPFC Frozen TC f.o.b. price, 30-lb tins, 5 per fresh 1b., 1.11 lb. fresh to 1 lb. frozen
OCU;QCUSO US pack of canned TC, million pounds RPE; QCU squared
OFU;OFUSQ US pack of frozen TC, million pounds RPE; QFU squared
OGU US total production of TC, million pounds RPE
QSC US seasonal supply of canned TC (pack plus carryin stocks), million lbs. RPE
QSF US seasonal supply of frozen TC (pack plus carryin stocks), million lbs. RPE
SC Carryin stocks of canned TC, million pounds RPE
SF Carry-in stocks of frozen TC, million pounds RPE

B. EXOGENOUS VARIABLES
EC, EF Canned exports, frozen exports, million pounds, RPE
ID Personal disposable income (billions of dollars)
IPC Index of processing costs, 1967 = 1.0
QNHD Quantity of TC diverted by non-harvest under federal marketing order
QOMA Quantity of TC open-market abandonment
QSCI U.S. domestic supply of canned TC (seasonal supply minus exports;QSC-EC)
QSFI U.S. domestic supply of frozen TC (seasonal supply minus exports; QSF-BF) J
RPSA Quantity of TC set aside in a reserve pool or allocated to secondary market
RPR Quantity of TC released from reserve pool in year following use of pool
T7601 Time shift (0 prior to 1976, 1 thereafter)
YU

 

 

US average total yield of TC, thousand pounds per acre

 

 

 

the
sul
for
Can
pro
inch

POW:

 

169

Table 16. Structural Relationships of the Tart Cherry Modell

 

 

 

Bearing Acreage: Eq. #1 AU, = f(AUt-1,PGPUAV7,, ,0 ,2,T7601
(supply response)
Total Production: QGU, = AU, X m,

 

Canned Carryin Stocks: Eq. #2 SC, = f(SC,,,,QCU,,,,QCUSQ,,,,QFU,,,)
Frozen Carryin Stocks: Eq. #3 SF, = f(SF,,,,QFU,_,,QFUSQ,,,)

 

 

 

 

 

Canned Pack: Eq. #4 QCU, = f(QGU,,DC,_,,SC,,”PPCC,.”EQ)

Frozen Pack: Eq. #5 QFU, = f(QGU,,DF,_,,SF,,,,PPFC,,,)

Canned FOB. Price: Eq. #6 PPCC, = f(DCD,,DFD,,_IQ,,Im1_)
(canned demand)

Frozen F.O.B. Price: Eq. #7 PPFC, = f(DFD,,m,)

(frozen demand)

 

Canned Domestic
Movement: Eq. #8 DCD, = f(QSCI,,PPCC,,PPCC,,,,PGPU,)

 

 

Frozen Domestic
I Movement: Eq. #9 DFD, = f(QSFI,,PPFC,,PPFC,,,,PGPU,)

Grower Price: Eq. #10 PGPU, = f(DFD,,DCD,,ID,)
(farm-level demand)

r —

 

 

 

 

 

lUnderlined variables are exogenous.

all key variables were available for the entire time period. Since 1986 was the last year of
the marketing order, a three-year period beyond 1986 (up to 1989) was judged to be
sufficiently long to draw conclusions on the operation of the order. Also, another reason
for not extending the data set beyond 1989 in this model was that the last year for which
canned stock data was available was 1989. Although canning is no longer a major outlet for
processed tart cherries, canning was important in the 19603 and early 19703. Therefore,

including equations related to canning provided the model with additional explanatory

power.

170

6.1.1.1. Bearing Acreage and Production

Tart cherry gower supply response can be conceptualized in terms of acres planted
and removed in response to the profitability of the cherry gowing enterprise. Profitability
can be measured by net returns to cherry gowing, i.e., price minus cost in terms of return
per unit of production or per acre. In the absence of adequate time series data on cost of
production over a sufficiently long period, it was decided to use gower prices as a proxy for
net returns. Since it takes approximately six years for a cherry tree to come into substantial
production, prices must be lagged at least six years. The question then arises as to how
many years prior to planting does the gower take into account in making planting decisions.
Wu found that prices over the prior seven year period appeared to guide gower decision-
making regarding planting."9 In developing the acreage supply response equation for the
marketing order simulation model, it was found that the simple average of price lagged from
(t-6) to (t-12) provided better predictive power than shorter or longer periods, and was thus
incorporated as one of the independent variables (LPGPUAV7). The L prefix in this
equation and in subsequent equations indicates estimation in log form. One would normally
expect more recent prices to be weighted more heavily in gower decision making than
prices in more distant years, and that alternative lag structures could be developed to reflect
gower planting behavior. Although several alternative specification were investigated, no
model was found that predicted better than the simple average of (t-6) to (t-12).

Although it would be preferable to specify separate planting and removal equations,
in the absence of annual planting and removal data, it was decided to make bearing acreage
of tart cherries the dependent variable in a single supply response equation (Eq. #1 shown

in Table 17). Growers are hypothesized to respond to past prices by planting only a portion

 

a"Ming-Wu Wu,"Supply and Demand Relationships for Tart Cherries in Michigan with
Projections to 1990," Unpublished Ph.D. dissertation, Michigan State University, 1976.

171

Table 17. Bearing Acreage Equation Estimated by OLS

m
i Dependent

 

  
     

 

 

. Variable
Independent Variable
Variable Label LAU (Eq. # 1) l
Constant 1.3673 (2.99)
Lagged acreage LAU(T-1) .5758 (4.80)

 

Lagged average LPGPUAV7 .0923 (2.55)
gower price

 

 

 

 

 

 

Dummy variable T7601 -.0699 (-3.40)

#
12.2 = .933
Adj. R2 = .985

1An L prefix indicates estimation
in log form. T-statistics appear in
parentheses beside each
coefficient. OLS estimate was
corrected for serial correlation
with Cochrane-Orcutt
autoregessive procedure.

   
   

 

 
   

of the desired new acreage. Thus a partial adjustment model is specified by including
bearing acres lagged one year as an additional independent variable.

A sigiificant structural change in acreage appears to have occurred around 1976,
when a steady decline in acres over many years bottomed out, resulting in a plateau and an
eventual rise in acreage beginning in the early 19803 (see Figure 1 in Chapter 2). Thus a
time shift variable (T7601) is incorporated that takes a value of zero up through 1976 and
one thereafter. This allows the intercept to shift on the supply response model. Although
the structural change did not take necessarily place precisely in 1976, representing the
change as a one-time shift through this dummy variable is a reasonable approximation of
changes in acreage trends that may have occurred over a period of years prior to, and

subsequent to 1976.

172

Yield per acre is considered exogenous to the model and would have been the same
with or without the marketing order. Actual yields are used in both the base runs of the
entire model and the alternative scenario runs. Production in the full model is identified

as the product of predicted acres and actual yields.

6.1.1.2. Equations for Frozen and Canned Pack, Carryin Stocks, and Seasonal Supply

Eznzen and canned pack. A key aspect of market behavior is how total production
each year is allocated to various processing uses. The three largest uses of cherries in
decreasing order of importance are frozen, pie filling, and canned. However, relatively
complete data on pack, stocks, movement and prices were available only for frozen and
canned cherries. Therefore the model focused on those two uses for cherries. The lack of
sufficient pie filling data precluded developing equations to model pie filling utilization.
Although canning is no longer an important processing outlet for tart cherries, it was
important in the early period over which the equations are estimated and the simulations
are carried out. Therefore equations for canned pack and canned carryin stocks are
included in the model.

Equations #4 and #5 are a pair of equations that estimate how total cherry
production was allocated between frozen pack and canned pack. Since the data are annual,
the decision by processors to allocate tart cherries to frozen and canning uses is modeled
as a simultaneous relationship and the equations are estimated as seemingly unrelated
regessions (SUR). The empirical results appear in Table 18.

Frozen movement, stocks and f.o.b. price are used in the frozen pack equation;
likewise, canned pack, stocks, and f.o.b. price are used in the canned pack equation. The
logic of the estimated relationships is as follows: Decisions by processors to pack cherries
(frozen and canned) are influenced positively by the current year’s level of production,

movement lagged one year (representing last year’s sales), and f.o.b. price lagged one year.

 

 

p a“ a N... e El

 

173

Table 18. Frozen and Canned Pack, Estimated by Seemingly Unrelated Regression

Dependent Variablel

 

Canned Pack I Frozen Pack

 

7
l
l

 

 

 

 

 

 

 

  
   

F.O.B. frozen price LPPFC(T-1) .1223 (3.03)

 

1 Independent Variable .
i, Vable Label LQCU (Eq. # 4) LQFU (Eq. "l
' Constant 4.9503 (-2.97) .1195 (0.12) 1
Production LQGU 1.3912 (10.88) .7118 (10.77) }

1 Canned Movement LDC(T-1) .7396 (5.32)
Frozen Movement LDF(T-1) .0769 (0.48)
, Canned stocks LSC -.0429 (-1.31) l
5 Frozen Stocks LSF .0443 (1.18) I
[ROB canned price LPPCC(T-1) .6371 (4.11) y
l

.4

 

 

 

Processing Cost Index LIPC -.7832 (-5.71)
R2 = .945 .865 '
Adj. R2 = .931 .838 .
D.W. 2.41 1.94 l

 

|
1An L prefix indicates estimation in log form. T-stat- ]
istics appear in parentheses beside each coefficient.

 

 

 

 

This last variable is intended to represent expected processor profitability. The index of
processing costs (IPC) negatively affects processor expectations of profitability. IPC proved
to be a strong explanatory variable for canned pack, but a very weak one for frozen pack,
and with a theoretically unexpected sigr (positive). IPC was thus excluded from the
estimated frozen pack relationship. Finally, existing levels of stocks were expected to
negatively influence quantities that processors will pack. This coefficients were in fact
negative, although the relationship was rather weak for canned stocks and canned pack. The
coefficient for frozen stocks had a theoretically unexpected positive sign, but the coefficient

was not statistically significant different from zero. Since frozen stocks are likely to have

174

an impact on the quantity packed, this variable was retained in the estimated equation,
despite the lack of statisitical significance of the coefficient.

Erozen and canned stocks. Table 19 presents the estimated equations for modeling
private stockholding behavior. Tart cherry industry observers note that most carryover
stocks are not anticipated. Processors generally do not plan to carry stocks into the next
year, except a small minimum needed to keep the marketing channels full until the new
packing season is underway. Processors are often forced to carry stocks into the next year
because of their inability to sell all of the processed supplies in a large crop year. The
estimated relationships described below nevertheless capture in part some key influences
on the levels of stocks.

The quantity of frozen tart cherries held as stocks at the end of a given marketing
year is hypothesized to depend on the previous year’s frozen stocks (SF,_,) and the current
year’s frozen pack (QFU,). The addition of a variable for the square of the quantity packed
frozen (QFUSQ) improved the predictive power of equation #3 in Table 19. The inclusion
of a squared term as an independent variable results in nonlinear variation in the
dependent variable. Since stocks tend to be small relative to production, yet vary
significantly from year to year, the nonlinearity of the equation provides a better estimate
of year-to-year changes in stocks than would be the case without inclusion of the squared
term. Similar reasoning is applied for the inclusion of squared canned pack (QCUSQ) in
equation #2. Frozen cherries are considered to be the "barometer pack"; therefore frozen
pack is hypothesized to affect canned pack and is included as an independent variable in the
canned stock equation, but not vice versa.

A higher level of frozen pack was expected to have a negative impact on the quantity
of frozen cherries stored over the range of pack levels generally observed in the 25-year
period studied in this analysis. Higher levels of pack meant geater quantities sold. With

the coefficients on QFU and QFUSQ in equation #3, the expected negative impact of

175

Table 19. Canned Carryin Stocks and Frozen Carryin Stocks Estimated by OLS

 

 

 

    
  
   
  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

Dependent Variable‘
Canned stocks Frozen stocks
Variable
3__ariable Label SC (Eq. # 2) SF (Eq. # 3)
Constant -2.1021 (-0.88) 44.39 (1.63)
1 Canned stocks SC(T—1) -.2957 (-2.31)
‘ Frozen stocks SF(T-1) .4041 (4.10)
. Canned pack QCU -.0212 (-0.35)
i Canned pack squared QCUSQ .0004 (1.13)
‘ Frozen pack QFU .0309 (1.84) -.8056 (-209)
1 Frozen pack squared QFUSQ .0042 (3.28)
R2 ' .756 .875
Adj. R2 ' .692 .850
lT-statistics appear in parentheses beside each
coefficient.

 

frozen pack on frozen stocks holds true, at least for small and moderate crop years. The
coefficient of QFU in equation #3 (Table 19) is negative and this linear term dominates the
squared term (QFUSQ) in most years, indicating that the relationship between pack levels
and stocks is generally negative. However, in large crop years, processors had both large
quantities packed mm large quantities stored, so with the coefficients on QFU and QFUSQ,
the relationship between frozen pack and frozen stocks is positive in large crop years. Thus,
at higher pack levels (annual quantities approaching 200 million pounds of frozen pack),
the squared term dominates, and the relationship between pack size and stocks becomes
positive.

Erpzen and canned seasonal supply. Seasonal frozen supply (QSF) and canned
supply (QSC) are identified in the model by the sum of pack plus carryin stocks. Domestic

frozen supply (QSFI) is identified as the remainder from subtracting frozen tart cherry

176

exports (EF) from seasonal frozen supply. Domestic canned supply (QSCI) is identified in
an analogous manner.
6.1.1.3. U.S. Domestic Demand and Market Allocation

This section presents a five-equation simultaneous demand system for frozen, canned
and raw tart cherries. Given the values of predetermined variables, the equation system
jointly solved for values of the f.o.b. prices for frozen and canned cherries as well as frozen
and canned movement and gower price. The five equation demand system was estimated
as a simultaneous system by three stage least squares. Reduced form parameters of the
demand system were used for predicting values of the independent variables. Forecasting
in the full dynamic model is described below. This section explains the five equations in the
demand system.

Equations #6 and #7 in Table 20 represent canned and frozen U.S. domestic
demand. The dependent variables are f.o.b. handler prices for tart cherries. Canned price
is hypothesized to depend on frozen and canned consumption (domestic movement) and
income. Income is exogenous, but frozen consumption is an endogenous variable that is
determined simultaneously with frozen price in this demand system. Since frozen cherries
are the ”barometer pack”, frozen movement is hypothesized to affect canned f.o.b. price, but
not vice versa. Thus frozen domestic movement (DFD) appears in the equation for canned
f.o.b. demand.

A structural downward change in canned f.o.b. demand appears to have taken place
around 1976. Short crops and high prices began to appear in the late 19703. Canned
demand was already on a downward slide, but with the relative unavailability of tart cherries,
processors cut back still further on the canned pack. Although supplies subsequently
became more plentiful, canned demand never recovered to previous levels. Inclusion of the
time shift dummy variable T7601 in the canned demand equation represents this shift in

demand.

177

Table 20. Three Stage Least Squares Estimates of the U.S. Demand
and Market Allocation System for Tart Cherries

 

 

 

 

 

 

   

 

   

 

  

 

 
 
 

 

  

 

  

 

  
   
 

 

 

Dependent Variable n
Explana-
tory LPPCC LPPFC LDCD LDF D LPGP
Variables (Eq.#6) (Eq. #7) (Eq.#8) (Eq. #9) Eq.#10
Constant 4.7391 8.3981 -.2670 2.2070 10.5201
(5.22) (7.34) (-0.58) (6.08) (6.42)
Canned LDCD -.1158 -.1100 l
movement (-1.23) (-.74)
1
Frozen LDF D -.9138 -1.7268 -1.9953 ;
movement (-3.64) (-7.97) (-4.50)
Disposable LID .5210 .4923 .3375 :
income (5.74) (7.72) (2.21) l
Dummy T7601 .1414 l
variable (1.59) ;
Domestic LQSCI 1.0446 f
can. supply (15.08) 1
Domestic LQSFI .5806 ;
frz. supply (9.77) 3
Can. price LRPPCC‘ .1586 ‘
change (2.68)
Frz. price LRPPFC2 .0305
change (0.99) i
Grower LPGPU .0002 -.0965 '
price (-0.003) (-3.42) l
R2 = .903 .818 .987 .915 .723
Adj. R2 - .883 .801 .985 .903 .683
D.W. 1.66 1.55 2.10 1.57 2.16 i

it

 

 

 

LRPPCC = LPPCC(T) - LPPCC(T-1)

’LRPPFC = LPPFC(T) - LPPFC(T-1)

 

 

178

Farm level demand (Eq. # 10) is hypothesized to behave in a similar manner to f.o.b.
demand. The independent variables in the farm level demand equation are frozen
movement, canned movement, and income. The reduced form of this equation (not shown)
is used to predict gower price in the dynamic model. Industry observers indicate that
processors tend to pay gowers whatever is left over after receiving f.o.b. prices and
subtracting their margins. This would suggest that the index of processing costs (IPC)
should be included in the gower price equation to represent the processor marketing
margin. However, when the equation was estimated including IPC, the coefficient was not
statistically sigrificant. Therefore the IPC variable was not included.

Thus in reality gower prices are residual prices. However, since all data are annual
in this model, gower price is assumed to be determined simultaneously with frozen and
canned movement and f.o.b. prices.

Completing the five-equation demand system are market allocation equations #8
and #9. In equation #9, frozen domestic movement (DFD) is hypothesized to depend on
(a) domestic seasonal supply (QSFI), (b) current and lagged frozen prices, and (c) raw
product prices, which are the prices paid to gowers. The market allocation equation
included as an independent variable the difference between the current f.o.b. price and f.o.b.
price lagged one year, expressed in log form (LRPPFC), rather than including current and
lagged f.o.b. prices as two or more independent variables. The hypothesis is that frozen
consumption (domestic movement) is determined in part by the price ch_ar_1g§ between the
past year and the current year rather than the absolute levels of prices. Handler decision-
making regarding quantities of frozen and canned cherries are hypothesized to be influenced
by these year-to-year price changes. If the frozen and canned prices increase from one year
to the next, for example, handlers are expected to increase the allocation to frozen and
canned cherries and to reduce the allocation to other cherry products, based in part on the

magnitude of the price change. French and Willett used as a similar approach in their

179

demand model for U.S. asparagus.9o The market allocation equation for determining
canned cherry consumption was specified in an analogous manner.

In the simulation model, operation of the marketing order is represented by adding
and subtracting quantities of cherries from the domestic supply to represent the storage or
diversion of cherries in certain large-crop years, and the release of cherries in subsequent
years. The fact that there were only five observations for reserve pool operation precluded

the possibility of developing an equation to model reserve pool operation explicitly.

6.1.1.4. The Full Model and Solution Process
This section presents the full model, which links all ten econometrically estimated
equations and the identities. The model carries out dynamic sequential predictions of the
endogenous variables. Below is an overview of how the blocks fit together to carry out the
sequential computations.

6.1.1.4.]. Overview of Tart Cherry Econometric Model

BLOCK 1. BEARING ACREAGE AND PRODUCTION
[Supply response in terms of bearing acreage is based on a moving average of lagged
prices, (T-6) through (T-12). Yield is exogenous, and acreage times yield equals
production.]

BLOCK II. CARRYIN, PACK, SEASONAL SUPPLY,
AND RESERVE POOL IMPLEMENTATION
[In those years in which the reserve pool is implemented, less than 100% of seasonal
supply is marketed. The portion of the supply that is declared reserve is stored as
frozen cherries. The reserve cherries are released to the market in subsequent years
or are diverted to outlets that do not compete with the primary market. The
quantity of frozen cherries that is set aside in the reserve pool (RPSA) and the
quantity released in subsequent years (RPR) are exogenous variables.)

BLOCK III. U.S. DOMESTIC DEMAND AND MARKET ALLOCATION
[Allocation of seasonal supply to frozen and canned markets and estimation of
domestic movement (consumption) in both markets. Estimation of gower prices
and handler (f.o.b.) prices for frozen and canned cherries via reduced form
equations from three stage least squares simultaneous solution].

 

”French and Willett, ”An Econometric Model of the U.S. Asparagus Industry," 19-20.

180

BLOCK IV. TOTAL SHIPMENTS BY CANNERS AND FREEZERS
[Estimation of canned and frozen shipments, which are the sum of domestic
movement (consumption) plus exports]

6.1.1.4.2. Model Structure Showing Equations and Solution Process
One loop of the model (Step A through Step R) calculates values for each variable
for one year. A DO LOOP restarts the calculations for each succeeding year. The numbered
equations are the econometrically estimated equations presented above. The coefficients are
represented by the letter a,. The remainder are computations (identities) based on the
estimated variables. Verbal descriptions appear above the variable names for most

equations.

****$*******#****#*********It*************************t*************¥*******t*

DOT = 1965101989

BLOCK I. BEARING ACREAGE AND PRODUCTION

A Compute 7-year moving average of lagged grower prices =

PGPUAV7 = (PGPU(T-6)+PGPU('I'-7)+PGPU(T-8) +PGPU(T-9)+PGPU(T-10) +
(PGPU(T-11)+PGPU(T-12)) + 7

B. Bearing = con- lagged average dummy variable
acreage stant + a, bearing + a2 lagged + a, (0 before 1976,
acreage price 1 thereafter)
(#1) AU = con- + a, AUG-1) + a2 PGPUAV7 + aaT7601
stant
C. Productlon = bearing acreage X yield
QGU = AU X YU
BLOCK II. CARRYIN, PACK, SEASONAL SUPPLY,
AND RESERVE POOL IMPLEMENTATION
D. Canned con- lagged lagged lagged canned lagged
carryin = stant + a, eanned + a2 canned + a: pack squared + a4 frozen
stocks stocks pack pack

(#2) SC = con- + a,SC(T-2) + a2 QCU(T-1) + aaQCUSQO' -1) + a,QFU(T-1)
stant

181

E. Frozen constant + lagged lagged lagged frozen
carryin = a1 frozen + azfrozen + a3 pack squared
stocks stocks pack

(#3) SF = constant + a, SFU-Z) + a,QFU(T-1) + a,QFUSQ(T-1)

F. Canned con- pro~ lagged canned lagged proc.
pack = stant + a, duc-+ a, canned + a3 stocks + a, canned + ascost
tion pack price Index
(#4)LQCU= con- a"’LQGU+ a,LDC(T-1)+ a3 LSC + a,LPPCC + aSUPC
stant + (T -1)
G. Frozen con- pro- Iagged frozen lagged
pack = stant + a, duc-+ a, frozen + a3 stocks + a, frozen price
tion pack
(#4)LQFU= con- a, LQGU+ azLDCCI' -1) + aaLSF + a, LPPFC (T -1)
stant +

H. Canned seasonal supply =
canned pack + canned carryin stocks

QSC = QCU + SC

I. Canned seasonal supply = canned pack + canned carryin stocks

OSC = QCU + $0

J.Frozen frozen frozen reserve reserve secondary quantity
seasonal= pack + carryin- pool '+ pool _ market - non-
supply stocks set aside release diversion harvested
QSF = QFU + SF - RPSA + RPR - SMD - QNHD

K Frozen domestic supply = frozen seasonal supply + frozen exports
QSFI = QSF + EF

BLOCK Ill. U.S. DOMESTIC DEMAND AND MARKET ALLOCATION

, (The following 5 structural equations make up a simultaneous system estimated by
3SLS. The sequential forecasts are made using reduced form equations)

L Canned con- canned frozen disposable dummy
f.o.b. = stant + a, domestic + a2 domestic + a,personal + a, variable
price consump- consump- income

tion tion
(#6)U’PCC = con- a, LDCD + a, LDFD + a3 UD + a, T7601

stant +

182

M. Frozen f.o.b. a, frozen domestic a, disposable
price = constant 4» consumption + personal income
(#7)LPPFC= constant + a, LDFD + a2 LID
N. Canned domestic canned
consumption = constant + a, domestic + azcanned f.o.b. a3 grower
supply price change + price
(#8)LDCD = constant + a, LQSCI + a2 LRPPCC + a? LPGPU
0. Frozen domestic con- frozen
consumption = stant + a, domestic + a, frozen f.o.b. a, grower
supply price change + price
(#9) LDFD = con- a,LOSFI + azLRPPCC + aaLPGPU
stant +
P. Grower price = constant + a, frozen domestic a2 personal
consumption + income
(#10) LPGPU = constant + a,LDFD + aZUD

BLOCK IV. TOTAL SHIPMENTS BY CANNERS AND FREEZERS

Q. Canned shipments = canned domestic consumption + canned exports
DC = DCD + EC
R. Frozen shipments = frozen domestic consumption + frozen exports
DF a: DFD + EF
END DO T
*ttttfifli‘ttttti*****t*****t****tiit.iii**************fi************ti
6.1.1.6. Model Performance

Two key aspects in evaluating the strengths and weaknesses of the results are to
examine (a) the individual equations and estimated coefficients and (b) the predictive ability
of the dynamic model as a whole. The adjusted R-squareds of the equations range from .90
and above to as low as .68. Most coefficients in the ten equations have theoretically expected
signs, and many of them are large relative to their standard errors. However, some
coefficients appear to have weak explanatory power (as evidenced by insigrificant t-

statistics) and a few have theoretically unexpected sig13. Some variables were retained in

183

the model to demonstrate that certain variables were considered during model development.
Even though sig13 and / or levels of significance could in some instances be cause to exclude
specific variables, certain independent variables were retained in those cases where inclusion
of the variables was justified either from economic theory or from knowledge of how the
commodity industry actually works.

A second key aspect of model performance is the predictive ability of the dynamic
model as a whole. A within—sample forecast over the period 1965-1990 yields the results
shown in Table 21. The average prediction error is 5% for total production, and around 7%

for frozen consumption.

Table 21. Goodness-of-fit Measures of Dynamic Sequential Predictions
of Key Endogenous Variables, 1965-1990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

@ =

Mean Root Mean Mean

of Mean Abso- Absolute

vari- Square lute Percent-

able Error Error age Error

(M) (RMSE) (MAE) (MAPE)
Bearing acres, thou. (AU) 50.3 2.8 2.5 4.9
Total production, mill. lbs. (QGU) 243.7 13.4 11.8 4.9
Canned pack, mill. lbs.(QCU) 35.2 7.7 5.7 18.4
Frozen pack, mill. lbs. (QFU) 144.9 18.4 13.4 8.8
Frozen stocks, mill. lbs. (SF) 35.8 13.2 9.0 35.1
Froz. seas. supp., mill. lbs. (QSF) 175.9 18.8 14.3 8.2
Canned movement,mill. lbs. (DCD) 26.6 7.7 5.3 21.5
Frozen movement,mill. lbs. (DFD) 137.9 11.7 9.4 6.9
Canned f.o.b. price (PPCC) 48.7 9.4 7.0 14.7
Frozen f.o.b. price (PPFC) 36.7 9.7 6.9 17.8
Grower price (PGPU) 20.9 8.0 5.7 27.6

 

 

 

 

 

 

 

184

The gower price and frozen cherry price are two of the key results from the
analysis. The mean absolute error of the gower price from the baseline simulation was
nearly six cents, which corresponded to a mean absolute percentage error of 28%. Grower
price point estimates can therefore be considered to fall within a range of prices varying on
either side of the price estimate by six cents (16¢ or 128%). Similarly, the range of
possible error for frozen f.o.b. prices is approximately 27¢ (118%). These are large mean
errors for key variables. Alternative specifications did not improve model performance, so
the equations specified herein were used for the analysis. The model was judged to have
sufficient explanatory power to be useful for historical simulation of marketing order
impacts. However, because of the size of the mean errors, the simulation results should be

viewed with caution.

6.1.2. Simulated Alternative Scenario: Non-implementation of Federal Marketing Order
The model carries out dynamic sequential predictions of handler and gower prices
as well as quantities produced and sold by processors over the period 1965-1989. Price
impacts of the tart cherry marketing order are measured by comparing actual historical
prices to prices estimated in an alternative scenario in which the market order was assumed

not to be implemented.

6.1.2.1. Method of Analysis
Two exogenous variables in the model represented the quantities of frozen cherries
in reserve pool set-aside (RPSA) and reserve pool release (RPR). The latter variable is
included to account for the fact that since a portion of the reserve pool is released within
the same marketing year and the model uses annual data, using the full amount of the
original reserve pool tonnage (RPSA) in estimating the price impact might overstate the

amount actually removed and over-estimate the price impact. Additional variables that

185

represent the quantities involved in marketing order supply management are secondary
market diversion (SMD) and non-harvest diversion (QNHD). In the base run, RPSA and
RPR were set equal to their actual values; see Step J. in Block 11. of the model above in the
section entitled ”Model Structure Showing Equations and Solution Process." In the scenarios
representing marketing order non-implementation, RPSA, RPR, SMD and QNHD were set
equal to zero, resulting in a higher seasonal supply of cherries in the alternative scenario
compared to the base run for those years in which the marketing order was used. The
increased supply of cherries (relative to historical levels) in the "no reserve" scenario was
hypothesized to result in lower simulated gower and handler prices than actually occurred
with the use of the supply management provisions of the marketing order.

The previous chapter explained that the three main supply management provisions
of the tart cherry marketing order were: (1) the reserve pool, (2) secondary market
diversion (market allocation) and (3) non-harvest diversion. The bottom three rows of
Table 22 indicate the tonnage in each of those three categories in each of the five years that
the supply management provisions were used from 1972 to 1985. The sum of the tonnage
in all of the restricted supply management categories appears in the row entitled ”Sum of
Marketing Order Uses." The model simulated the price impact of removing those quantities
from the market in each of the five years that the marketing order supply management
provisions were implemented.

The upper rows of Table 22 present the calculations that show how the total
restricted tonnage figure was determined by the Cherry Administrative Board. The "New
Crop for Processing” quantity was determined by subtracting from Total Production the
quantities of cherries involved in Fresh Utilization and Non-market Order Abandonment
(representing the amount of abandonment that took place that was not accounted for as
part of non-harvest diversion under the marketing order). The next step was to calculate

the percent of total U.S. tonnage that was covered under the marketing order’s geogaphic

186

Table 22. Determination and Uses of Restricted Tonnage

Under Tart Cherry Marketing Order

 

 

 

 

  

 

  

 

  

 

 

 

 

 

 
  

 

   

 

 

 

  
 

 

  

 

  

 

 

 

 

 

k —-=
1972 1975 1980 1984 1985 ll
Total Production 311.7 290.5 218.1 271.6 286.2
- Fresh Utilization 7.0 7.2 6.3 8.0 7.6
- Non-market Order 19.8 39.4 1.9 13.6 6.0
Abandonment
= New Crop for Processing 284.9 243.9 209.9 250.0 272.6
X Restricted Percentage 15% 15% 24% 15% 7%
= Restricted Tonnage Estimate 42.7 36.6 50.4 37.5 19.1
X Percentage of Production in 96.3 94.0 90.8 94.8 89.8
Controlled Area
= Restricted Tonnage in 41.1 34.4 45.8 35.6 17.2
Controlled Area
Sum of Marketing Order Uses = 41.1 32.0 44.4 34.4 16.5
Reserve Pool 19.1 27.0 42.5 31.6 12.5
+ Secondary Market Diversion 0 0 0 1.8 3.4
+ Non-harvest Diversion 22.0 5.0 1.9 1.0 0.6

 

 

 

boundaries. Four states in the Great Lakes region were included in the marketing order
(Michigan, New York, Pennsylvania, and Wisconsin), but several western cherry-producing
western states were excluded from the marketing order. The ratio of production in the
regulated states to unregulated states is the Percentage of Production in the Controlled
Area. These percentages must be multiplied by the New Crop for Processing figure to
determine the regulated portion of the crop.

The Restricted Percentage is the key supply management decision made by the
Cherry Administrative Board, based on their judgnent on how much the estimated crop was
likely to exceed the quantity that could be sold in the main commercial channels at prices

approximating prices obtained in recent years with moderate crop sizes (neither short nor

187

Table 23. Tart Cherry Marketing Order Simulation: Quantities of Cherries Stored and Released

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Reserve Actual M.O. Secondary Non-Harvest Net Change
Pool M.O. Release Market Diversion in Supply
Tonnage Release Figure Used Diversion QNHD due to MD.
RPSA RPR SMD in Simulation
Millions of Pounds II
[19722 -19.1 + 14.3 + 43 0 -22.0 -36.8
19733 +4.8 + 4.8 +4.8
Il974 0
I 1975‘ -27.0 + 27.0 + 13.0 0 -5.0 -19.0
1976- 0
1979
1980’ -42.6 + 16.7 + 5.7 0 -1.9 -38.8
1981‘ +4.3 + 1.8 + 1.8
0
0
+ 8.3 +6.6 -1.8 -1.0 -28.6

 

 

 

 

 

 

 

   

 

’RPE = Raw Product Equivalent

2Spring 1973 release of 14.3 million pounds is considered to have an impact equal to one
third of actual tonnage released (RPR=4.3)

’Fall 1973 release of 4.8 has price impact in 1973-74 crop year.

‘Fall 1975 release of 6.0 reduces price impact of reserve, but spring 1976 release of 21.0 is
considered to have an impact equal to one third of actual tonnage released, 7.0 mil. lbs.
(RPR=6.0+7.0= 13.0). Thus net removals are 19.0 (-27+ 13-5=-19.0)

5Fall 1980 release is 0.1. Spring 1981 release of 16.7 is considered to have an impact equal to
one third of actual tonnage released, 5.6 mil. lbs. Therefore RPR=0.1+5.6=5.7.

“Fall 1981 release equals 0.6 out of a total of 4.3; the remainder to release in Spring 1982
equals 4.3-0.6=3.7 mil. lbs. (the remainder of the reserve was diverted to secondary markets).
The spring 1982 release of 3.7 is judged to have an impact equal to one third of actual
tonnage released (1.2 million pounds). Therefore RPR= 1.8=0.6+ 1.8.

7Fall 1984 release of 5.8 reduces impact of 1984 reserve, but spring 1985 release of 2.5 has an
impact equal to one third of the actual tonnage released (0.8 million pounds; therefore the
release figure equals 5.8+0.8=6.6). Net M.O. removals in 1984 = -27.6 = -31.6 (reserve
pool) + 6.6 (release) - 1.8 (secondary market)-1.0 (nonharvest diversion).

‘Net M.O. removals in 1985 = -l6.5 = -12.5 (reserve pool) - 3.4 (sec. market diversion) - 0.6
(non-harvest diversion).

188

excessively large). The final step is to multiply the Restricted Percentage by the result of
the previous calculation to yield the Restricted Tonnage in the Controlled Area. The
Restricted Tonnage should exactly equal the Sum of Marketing Order Restricted Uses.
However, there are some discrepancies due to some difficulties in estimating the amounts
used for marketing order diversion.

Table 23 takes the figures on marketing order uses (the bottom three rows from
Table 22) and shows how those figures are actually used in the simulation. In each of the
five years of marketing order implementation, the tonnage figures in Table 23 for the
reserve pool (RPSA), secondary market diversion (SMD) and non-harvest diversion
(QNHD) are the same as in Table 22. The second column of Table 23 shows the actual
amount of reserve pool releases, some of which took place later in the same year in which
the reserve pool was established, and some of which took place the following year; these
release decisions were made by the Cherry Administrative Board.

One of the major purposes of the model was to measure the price impact from
removing quantities from the market and subsequently releasing quantities that were stored
in the reserve pool. Thus an important issue was to account correctly for releases from the
reserve pool and to ensure that the impact of a given release was estimated in as realistic
a manner as possible. A key challenge was to account for the phenomenon observed by
CAB members and others in the industry that releases made in the spring following
establishment of a reserve pool had a considerably smaller price impact than a release made
in the fall, shortly after a reserve pool was established. The reason for this can be explained
by comparing buyer attitudes in the fall and in the spring. In the fall of a year with a large

Crop, one of the chief risk-related factors is that manufacturer-buyers want to avoid
purchasing quantities of cherries at higher prices than do their competitors and processor-
Sellers do not want to end up holding large inventories. Large supplies in large-crop years

tIlerefore have generally had a price-depressing effect since buyers observe the large

189

quantities for sale and tend to bid prices downward during the first several months of the
season. In contrast, in the spring of a given year, most of the crop from the previous fall has
generally been sold. Since manufacturers and other buyers have filled most of their needs,
their risk perceptions are different. An equivalent amount of cherries has less of a price-
depressing impact with a spring release than a fall release from the reserve pool. The
impact in economic terms is that cherry prices become less flexible in the spring (demand
becomes more price-elastic).

The question thus arose in the course of this research as to how to model this
phenomenon. The shift in price flexibilities (approximately the inverse of the price elasticity
of demand), suggested that the coefficients in the demand equations should be altered to
reflect the change. However, making such alterations in the coefficients was beyond the
scope of this research. The decision was therefore made to approximate the reduced price
impact of spring reserve pool releases by reducing the quantities of cherries released in the
simulation runs. Since industry observers indicated that price impacts were generally about
a third of what would be expected with fall pool releases, the magnitude of spring releases
in the simulation was set equal to one third of the actual size of the releases. Taking this
into account, the third column of Table 23 shows the figure actually used to represent pool
releases in the simulation and the footnotes at the bottom explain the means by which the
alternate release figures were arrived at. The final column presents the sum of all the
previous columns; the Net Change in Supply is the change in the quantity of cherries used
in the simulation to represent marketing order storage and release decisions.

Following the analytical method applied by French in his analysis of the raisin

marketing order, the estimated disturbances of the econometrically estimated equations

190

enter the equations as exogenous variables in the simulation runs.91 Using this approach
assumes that the unexplained variation in the dependent variables would be the same with

or without supply management through the marketing order.

6.1.2.2. Tart Cherry Model Results
Model results are first presented for the "no marketing order" scenario for the five
large cr0p years in which the marketing order was used, using the figures from the last
column of Table 23. The subsequent section examines estimated impacts in other years in

which the supply management provisions could have been used.

6.1.2.2.1. Estimated Marketing Order Supply Restriction
Impacts for the Five Years of Implementation

Table 24 presents the simulation results that address the question, "What if the
marketing order supply management provisions had not been used in 1972, 1975, 1980, 1984
or 1985?” The first column presents the tonnages from the last column of Table 23 --
quantities that were removed from the market (or subsequently released to the market after
being stored in the reserve pool) through use of the three main supply management
provisions, the reserve pool, market allocation, and non-harvest diversion (e.g., the net
change in supply is 28.6 million pounds in 1984). The other three columns present the
estimated f.o.b. and gower price impacts from those supply management actions. For

example, removing the 28.6 million pounds from the primary market in 1984 had a gower

”To take account of the random fluctuations in supply and demand which motivated
the establishment of the reserve pool progam, the estimated disturbances of the stochastic
equations and actual yield variations are retained as exogenous variables in the various

Simulation runs” (p.582)...."'Ihe estimated disturbances of the stochastic equations are

entered as exogenous variables and remain the same with and without volume control in

et‘fectu .Thus, the sequential solution of the historical model (volume control in effect)

generates exact predictions of the endogenous variables with which to compare predictions

of the no-volume-control scenarios. (p. 587). French and Nuckton, W
aisin Indust 1991.

191

price impact of plus five cents. In other words, results from the simulation indicate that
gower price would have been twenty cents without the marketing order instead of the
actual twenty-five cents.

There are also estimated gower price impacts in years in which there was no storage
or release through the marketing order; zeroes appear opposite those years in column 1 of

Table 24. Price changes in those years are due to estimated changes in private stocks that

Table 24. Simulated Impact of Tart Cherry Marketing Order: Estimated Changes in
Frozen f.o.b. and Grower Prices in Response to Quantities Stored and Released

 

 

Net Change Price Change
in Supply due Frozen f.o.b. Grower as a Percent-
Year to MD. in price impact price age of Actual
Simulation’ (frz. wt.) impact Grower Price

 

 

mill. lbs. cents per lb. %
1972 -36.8 + 2.5 + 1.3 + 15.8

 

 

1973 +4.8 -4.9 -3.0 -15.8

 

1974 0 + 0.4 + 1.2 + 6.6

1975 -19.0 + 2.8 + 1.6 + 15.6 I

 

 

1976 0 +0.7 +0.5 + 1.9
1977 0 +0.3 +0.6 +2.0

 

 

1978 0 +0.7 +0.2 +0.6

 

 

 

 

 

 

 

 

 

 

 

 

192

affect the total amount of supply on the market. For example, the estimated 1¢ decline in
simulated gower price in 1983 relative to actual gower price was due to slightly higher
overall supplies from higher private stocks in the "no marketing order” simulation.

As mentioned previously, these simulation results are indicative of price impacts but
should be viewed with caution. The baseline runs indicated average estimation errors of six
cents (28% of gower price), and the simulated price impacts are mostly small enough to
fall within that range. Only the estimated gower price impact of 6.4 cents (32% change
from actual gower price) is large enough to be outside the confidence interval, if only by
a small amount. The estimates of price changes thus provide a preliminary indication of
marketing order price impacts, but further research is warranted to reduce the size of the
estimation error so that geater confidence can be placed in the estimated price impacts.

These estimated impacts of price and gower net revenue are shown gaphically in
Figure 40 and Figure 41 with the heavy solid lines representing actual prices and returns and
the narrow line with symbols representing simulated prices and returns. Considering the
whole period in which the federal marketing order was in effect (in which the supply
management provisions were used five times), the price impact is moderate, with an
estimated mean increase of less than one cent in terms of price or net return. Simulation
results indicate that overall variability (measured by standard deviation in cents per pound)
was slightly smaller with the marketing order (a standard deviation of 12.7¢ versus 13.80: per
pound in terms of price and 8.3¢ versus 9.1¢ in terms of net revenue. Table 25 also shows
that in each of the five years in which supply management provisions were used, gowers still
did not obtain average net returns higher than zero. The impact of the order was to
improve net returns somewhat, but not to yield prices higher than average total costs.
Figure 7 in Chapter 2 showed that prices were below total cost of production in each of the

five years of marketing order implementation.

Grower Price, cents per pound

Grower Net Revenue (cents per pound)

193

Figure 40. Comparison of Tart Cherry Grower Prices With and Without the
Federal Marketing Order, 1972-1986, Based on Econometric Simulation

50

 

45 §
0 UI
L 1

4”)

35 s

Actual Price
30 - Mean=26.3 50:12.7

/

25 7 ’
2° ‘ /A
15 -
1O 7

Simulated Price Mean=25.6 50:13.8
w/o marketing order
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86
Year

 

 

 

Figure 41. Comparison of Grower Net Return With and Without Tart Cherry
Federal Marketing Order, 1972-1986, Based on Econometric Simulation

25

 

20 r

15 ‘ Actual Net Revenue
Mean=2.6 SD=8.3

1 O ‘

 

Z“ /\
f M

/\
_5 -
Simulated Net Revenue —>
_10 . w/o Marketing Order

Mean=1 .9 30:9 .1

 

 

 

7'2 73 7'4 7'5 76 77 78 7'9 80 8'1 8'2 83 8'4 85 86
Year

However, since the supply management provisions were used just five times in 15

194

years, it is more useful to examine impacts in terms of specific years than for the entire
period. The simulation indicates that the largest price impacts occurred in 1980 and 1984.
The simulation model results suggest that had the marketing order not been implemented
in 1980, the f.o.b. price change for frozen cherries and canned cherries (not shown) would
have been 12¢(frozen weight) and 10¢(expressed in RPE), respectively. These price
differences were 28% and 16% of actual prices in 1980, respectively. Grower prices for raw
processing cherries in 1980 would have been lower without the use of the marketing order
by an estimated 6¢, which represents a 32% decrease from the actual 20¢ gower price.

Change in total gower revenue is another important factor to consider in examining
marketing order impacts. Table 25 shows the estimated net change in revenue from using
the supply management provisions. The second to the last column shows the net change in
gower revenue implied by the changes in prices and quantities sold for frozen and canned
cherries in the ”no marketing order" scenario in the simulation. Since frozen and canned
cherries represented on average about two thirds of all cherries sold (utilized production)
in the period 1972-1986, the revenue figures were adjusted upward to approximate the
changes in total revenue that gowers would have received from the sale of all cherry
products. The figures in the last column were computed by dividing the previous column
(revenue from sales of frozen and canned cherries) by the percentage of total utilized
production each year represented by U.S. sales of frozen and carried cherries.

The estimated total revenue effect from the simulation of removing tart cherries
from the primary market either by reserve pool or secondary market diversion varies from
a low of $700,000 in 1975 to a high of $8.2 million in 1980. Since releasing reserve pools
into the primary market in years following establishment of reserve pools (and changes in
private stocks and sales) generally have an opposite revenue impact from reserve pool

storage, looking at pairs of years in terms of net revenue change is also useful. The

195

Tart Cherry Federal Marketing Order, Based on Simulation Model

 

 

  

 

Without Marketing

Table 25. Grower Revenue and Net Change in Revenue With and Without

 

 

 

 

 

 

 

 

 

 

 

 

   
  
  

 

 

 

 

 

 

 

 

 

With Marketing Order Order Net Change
Net Net
Grower Change in Grower Change
Revenue Supply Revenue in
U.S. from Due to from Net Grower
Sales of Sales of MO. Sales of Change Revenue
Frozen Frozen Opera- Frozen in (adjust-
and Grower and tions in Grower and Grower ed for
Canned Price Canned Simula— Price Canned Re- utilized
Cherries‘ (cents Cherries tion2 (cents Cherries venue produc-
Year (mil.lbs.) per lb.) (mil. S) (mil.lbs.) per lb.) (mil. 3) (mil. 3) tion)3
1972 213.3 8.2 17.5 -36.8 6.9 16.0 + 1.5 +1.8
1973 128.9 18.9 24.4 21.9 26.5 ~2.1 -2.8
1974 163.4 18.5 30.2 17.3 32.3 -2.1 -3.4
1975 159.1 102 16.2 8.6 15.8 +05 +0.7
1976 108.8 25.1 27.3 24.6 27.2 +0.1 +0.2
1977 150.6 29.4 44.3 28.8 44.1 +0.2 +0.3
1978 135.2 43.8 592 43.6 59.3 -0.1 «0.2
1979 118.7 472 56 46.8 55.8 +0.2 +0.3
1980 118.5 20.2 23.9 13.8 19.4 +4.5 +8.2
1981 96.5 44.5 42.9 47.8 44.6 -1.7 -2.3
1982 164 14.1 23.1 13.7 22.7 +0.4 +0.6
119.6 46.6 55.7 47.7 56.4 -0.7 -0.9
119.7 25.0 29.9 20.1 26.6 +3.4 +7.2
164.7 22.4 36.9 NS 35.4 + 1.5 +2.6
181.6 20.3 36.9 20.2 36.7 +0.2 0.2
___ _ _

 

 

 

 

 

 

 

 

 

 

 

’Sales of frozen and canned cherries were chosen as the basis for comparing changes in gower revenue from
marketing order implementation, since changes in total utilized farm production were not estimated in the
model simulation.
2A negative sign indicates the net quantity removed from the primary markets through use of the federal
marketing order. A positive sign indicates quantities released into the primary markets from reserve pool in
the year following the establishment of the reserve pool.
3These figures are an approximation of what total revenue changes based on the value of utilized production.
They were computed by dividing the previous column by the percentage of total utilized production

represented by U.S. sales of frozen and canned cherries. Frozen and canned sales (shown in the first
column) are on average approximately 68% of utilized production, ranging from 47% to 83%.

 

196

estimated marketing order revenue impact of $8.2 million in 1980 is partially offset by an
estimated $2.3 million decrease in total revenue in 1981 compared to the situation that

would have occurred without using supply management provisions of the marketing order.

6.1.2.2.2. Impact of Using the Tart Cherry Marketing Order in Other Large Crop Years

Several other years in the 19803 were potential candidates for supply management
actions to mitigate the price-depressing consequences of large crops. Therefore another
part of the research involved asking what would have been the price impact had the
marketing order been used in those other large crop years of 1982, 1987, and 1989. The
reasons for selecting those three years were described above and are briefly restated here.
A very large crop and very low price in 1982 were followed by a very short crop and very
high prices in 1983. This provided a nearly ideal set of circumstances for using the reserve
pool. Although the order was terminated in 1986, it is also worth investigating the potential
impact of using the marketing order in 1987 and 1989 had it continued to be a supply
management tool available to tart cherry subsector participants. In those two years, supplies
were in surplus and were large enough to have had a substantial price-depressing effect
which use of the marketing order could have alleviated to a certain extent had the marketing
order been available.

Table 26 presents hypothetical quantities in a manner analogous to the actual figures
in Table 22. Total Production and Fresh Utilization in Table 26 are actual figures, and the
Percentage of Production in Controlled Area represents the actual proportion of production
in the states that were regulated by the marketing order prior to 1986. Computation of the
remaining figures in Table 26 required some judgnent as to what might have happened had
the order been in effect. For example, an additional factor in these scenarios is the
likelihood of reduced production abandonment if the marketing order had been used. With

somewhat higher prices, gowers would likely have been induced to harvest a larger

197

proportion of their crops. Also, industry observers have noted that high processed prices
and processor margins have tended to reduce processor perceptions of risk. The reduced
perceived risk has encouraged processors to pack larger quantities of tart cherries.
Adjustments in supply were therefore included inithe simulation to provide a more realistic
picture in terms of actual supply changes.

The likely reduction in production abandonment that would occur if the marketing
order had been used was accounted for by reducing non-marketing order abandonment by
50% (1982--from 23.0 to 11.5; 1989--12.0 to 6.0). This is shown in the third row of Table 26.
The difference between total abandonment and non-harvest diversion is called non-market
order abandonment (or open market abandonment). Estimated non-harvest diversion
figures, based on past experience with crops of comparable size, appear in the bottom row
of Table 26. Concomitantly, estimated total production would have been higher by 11.5 and
6.0 million pounds in 1982 and 1989, respectively, due to less abandonment of the cherry
crop. The estimated changes in production figures appear in column (6) of Table 27. These
adjustments in figures make the simulation somewhat more realistic.

The next step in the computation was Subtracting Non-Marketing Order
Abandonment and Fresh Utilization from Total Production yields New Crop for Processing,
just as was done to compute the comparable figures in Table 22 for the simulation of the
five actual marketing order implementations between 1972 and 1985. Computation of
Restricted Tonnage was done in the same manner as in Table 22, and the Restricted
Percentages used (20%, 25% and 10%) were based on the Recommended Marketing Policy
of the Cherry Administrative Board. In 1986, the CAB ageed on target restricted
percentages for crops of various sizes."2 The estimated restricted tonnage figures for 1982,

1987, and 1989 were 55.7, 68.6 and 21.5 million pounds, respectively.

 

”'Backgound Economic Analysis and 1986 Marketing Policy of Cherry Administrative
Board,” May 1986.

198

Table 26. Determination and Uses of Restricted Tonnage
Under Simulation of Tart Cherry Federal Marketing Order

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1982 1987 1989
Total Production 310.9 358.5 264.1
- Fresh Utilization 7.4 9.0 6.7
- Non-market order abandonment 11.5 41.0 6.0
= New Crop for Processing 292.0 308.5 251.4
X Restricted Percentage 20% 25% 10%
= Restricted Tonnage Estimate 58.4 77.1 25.1
X Percentage of Production in 95.3 89.0 85.6
Controlled Area
= Restricted Tonnage in 55.7 68.6 21.5
Controlled Area
L Sum of Marketing Order Uses = 55.7 68.6 21.5
Reserve Pool 42.7 0 0
+ Secondary Market Diversion 0 37.8 12.4
+ Non-harvest Diversion

 

 

 

 

 

The next step in the process of estimating the figures to use to represent marketing
order supply management for 1982, 1987 and 1989 was to make judgnents about how
gowers would have chosen to use various provisions of the tart cherry marketing order.”3
In the early 19803, secondary market diversion provisions still had not been used, so the uses
of restricted tonnage would likely have been the reserve pool and non-harvest diversion. The
non-harvest diversion tonnage was estimated at 13.0 million pounds based on prior
experience with a crop of that magnitude; the remaining 42.7 million pounds would have
been put into the reserve pool. In 1987 and 1989, on the other hand, all of the tonnage that

was not destined for non-harvest diversion would likely have ended up in secondary market

 

”Estimates were supplied by Dr. Donald J. Ricks, former chair and economic advisor
to the CAB.

199

diversion. Since the late 19803 was a period of general overproduction, the reserve pool
option was no longer viable.
Table 27 shows the estimated quantities that might have been removed from the

market and subsequently released or diverted in the operation of the marketing order. The

Table 27. Simulation of Tart Cherry Federal Marketing Order Implementation
in 1982, 1987, and 1989: Impact on Frozen f.o.b. and Grower Price

 

 

 

 

 

 

 

 

 

’This scenario assumes that 10.7 mill. pounds (25% of the 1982-83 pool) would be

 

 

 

 

 

 

 

 

 

released in spring 1983, but would have an impact on prices equal to one third of the
actual tonnage. The release variable RPR is therefore set equal to 3.6. 1983 reserve
carryin thus equals 39.1. (-42.7+3.6=-39.1)

2 The assumption is made that if the marketing order is used, open market abandonment

would be half of what actually occurred without the marketing order in 1982 and 1989,

but that in 1987 Open market abandonment would have been the same without the order.

Thus Open market abandonment declines in this scenario by the following amounts: (a)
1982, 23.0 to 11.5, (b) 1989, 12.0 to 6.0. In the simulation, total production in 1982 and

1989 increases by 11.5 and 6.0 million pounds, respectively.

Change l

M.O. Sec- Net in l

Re- on- Change Prod. l

Re- lease dary Non- in due to Frozen .

serve Fi- Mar- Har- Supply re- f.o.b. i

Pool gure ket vest due to duced price

Ton- Used Di- Diver- MD. in Aban- impact Grower 1

‘ nage ver- sion Simu- don- (froz. price l
Year RPSA RPR sion QNHD Iation ment’ wt.) impact l
(1) (2) (3) (4) (5) (6) (3) (9) g

1982‘ 42.7 +3.6 -13.0 -55.7 + 115 + 12.7 +6.3 .
19831 +391 +391 -175 -129 1

w 1984 0 + 1.8 + 1.2 I
1985 0 -o.7 .04 .
1986 0 NC NC .

l

1987 -37.8 -30.8 -68.6 0 + 7.2 + 2.7 ,

l

, 1988 0 + 1.8 -1.0 ,
‘ 1989 -124 -9.1 21.5 +6.0 +23 +1.1 1

200

fifth column shows the tonnage used in the simulation to represent the net change in supply
from the operation of the marketing order. As Table 27 indicates, the estimated price
increases per pound from using the marketing order in 1982, 1987, and 1989 are
approximately six cents, three cents and one cent, respectively, representing 40%, 35% and
5% increases over actual gower prices. Another notable result is that had the marketing
order been used in 1982-83, the average gower price would have declined by an estimated
11¢ (25%) from the high 1983 price of 47¢ per pound due to release of the 1982 reserve to
supplement the short supplies. The crop size in 1983 was 83% of average shipments for the
previous four years.

The almond marketing order is examined next. The final section of this chapter
applies various performance criteria to the tart cherry marketing order analysis and

compares these results to almond and raisin marketing order analyses.

6.2. Almond Marketing Order Simulation

An additional goal of this research project was to analyze the impact (especially the
impact on gower prices) of implementing the reserve provision of the federal marketing
order for almonds. The modeling approach is similar to that used for simulating the tart
cherry marketing order. The price impact is estimated by comparing actual season average
prices with prices estimated in an econometric model that simulates prices and quantities
over the period 1973-1989 if the marketing order had not been used. In the ten year period
1980.1989, the almond reserve was implemented seven times.

The main hypothesis of this analysis is that almond prices would have been lower
than actual prices were with the use of the marketing order if the almond supply
management progam had not been implemented in certain high production years. The
mOdel simulates the historical period 1973-1989, assuming in an alternative scenario that the

l'tt‘Bi'rerve. was not implemented in any year during that period. The price difference between

201

Table 28. Variable Identification: Almond Model

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     
  
 

 

 

 

 

 

I Variable Definition ll

A. ENDOGENOUS VARIABLES II

ACRES Bearing acres (trees 4 years or older), thousands) II

DOMSAL U.S. domestic almond sales, millions of pounds

FOBPR Handler f.o.b. price, dollars per pound (opening f.o.b. price of CAGE/Blue
Diamond)

GRPR Grower price, dollars per pound

PROD Total U.S. almond production, millions of pounds
B. COMPUTED VARIABLES

REDMARK Quantity redetermined marketable (subtracting computed losses from total
production), millions of pounds; estimated at fixed rate of 95% of total
production

FREEQ Free tonnage remaining after almond reserve implementation, millions of
pounds (REDMARK - RESERVE)

PGAV3 Three year moving average of gower prices (GRPR) lagged 4, 5, and 6 years,
dollars per pound

TOTSUP Total salable supply, millions of pounds (CI + FREEQ + RELEASE)
C. EXOGENOUS VARIABLES

CI Carryin almond stocks, millions of pounds

CO Carryout almond stocks, millions of pounds

ID Personal disposable income, billions of dollars I

RELEASE Quantity released from almond reserve under federal marketing order,
millions of pounds

RESERVE Quantity set aside in almond reserve under federal marketing order, millions
of pounds

TRND Trend, 1973 = 73, etc.

T81 Dummy variable (equals 0 before 1981, 1 thereafter)

WPRIC Farm price of walnuts, cents per pound

d YIELD Almond yield, pounds per acre

 

 

Note: In the tables showing estimated equations, variables with an L prefix were estimated in log
form.

202

actual prices and the simulated ”no reserve" prices is the estimated impact of using various

supply management provisions of the marketing order.

6.2.1. The Almond Model
The econometric equations and related computations that make up the model are
presented below. There are three equations estimated econometrically as single equations
by OLS. Domestic almond demand is modeled as a simultaneous system and estimated by

three stage least squares. Variables are identified in Table 28.

6.2.1.1. The Estimated Equations
The first step in modeling almond production was to estimate almond gower supply
response. Similar to the approach taken for the tart cherry model, almond acreage supply
response was based on a simple average of several years of lagged gower prices and bearing

acres lagged one year. Since 1973 a bearing tree has been defined as four years or older;

Table 29. Bearing Acreage Equation Estimated by OLS

Variable Dependent Variable fl

 

 

 

 

     

     

 

 

label ACRES (Eq. #1)
Constant 29.0361 (4.29)
PGAV3 38.7000 (5.41)
ACRES(T-1) .8434

 

 

R2=.994
Adj. R2=.983

___________ f _____#n ____+_ _. _._J

 
    

 

T-statistics appear in parentheses to
the right of each coefficient. OLS
estimate was corrected for serial
correlation with Cochrane-Orcutt
autoregessive procedure.

hr

203

the independent variable for gower price (PGAV3) was therefore defined as the average
of gower prices (T-4) through (T-6). The estimated coefficients are presented in Table 29.
Yield was considered exogenous, and acreage times yield equals production.

The next step was to estimate almond demand equations. Similar to the situation
in developing the tart cherry model, the assumption was made that since all data are annual,
domestic demand could be most effectively modeled as a system in which domestic sales and
domestic handler price are simultaneously determined. In the two-equation demand model,
handler price was estimated as function of domestic sales (LDOMSAL), the price of a key

substitute (walnutsuLWPRIC), and personal disposable income (LID). The L prefix

Table 30. Domestic Almond Demand Estimated by Three Stage Least Squares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dependent Variables
Explanatory i
Variables LDOMSAL (Eq. #2) l LFOBPR (Eq. #4)
Constant .4422 (-1.29) -3.6213 (.-2 71) l
LFOBPR .0117 (.09) l
LTOTSUP .4687 (5.28) '
LDOMSAL(T-1) .4993 (3.51) l '
LDOMSAL ,
LWPRIC
LID l
T81 l
7 7 7 — ———————— —-- —— —— +—+
R2= .945 l
, Adj. R2= .910 ,~
|
D.W.= 1.75 l

 

T-statistics appear in parentheses to the right of each estimated
coefficient. An L prefix indicates estimation in log form.

204

indicates estimation in log form. An additional variable was added to capture the shift in
the supply-demand balance in the early 19803. After a period of strong demand expansion
in the 19703 in which no reserves were implemented for eight years, reserves began to be
implemented every year in the early 19803. A time shift dummy variable (T81) was thus
included in the demand equation. Domestic sales were modeled as a function of f.o.b. price,
total supply, and lagged domestic sales. The f.o.b. price variable was not statistically
sigrificant, but was nevertheless retained because of the theoretical justification that price
should influence quantity sold.

Interviews with almond handlers indicated that almond gower prices are a residual
of f.o.b. handler prices after the processor margin has been subtracted. Grower prices were

therefore modeled as a function only of handler prices.

Table 31. Almond Grower Price
Equation Estimated by OLS

V . ll
Explanatory DePendent arrable

Variables GRPR (Eq. #4)

 

 

II Constant -.1519 1 (-3.46)
FOBPR

 

 

. R2=.936
l Adj. R2=.936 D.W. = 2.67

 

T-statistics appear in parentheses to
the right of each coefficient.

The final equation needed to complete the system is an equation to predict export
sales. A demand model incorporating elements of foreig1 demand for California almonds,
and accounting for exchange rates in various foreig1 markets was beyond the scope of this
research. Since this model was for historical simulation purposes only with emphasis on

changes in the domestic market, a simpler export sales equation was developed.

205

Table 32. Export Sales Equation Estimated by OLS

 

 

 

 

 

 

 

 

 

I Explanatory Dependent Variable
Variables LEXPSAL (Eq. #5)
Constant -3.2180 (-3.86)
LPROD .6443 (6.76)
LC] .1076 (1.84)
LFOBPR -.0971 (-.73)
TRND .0550 (3.27)
T81 -.2995 (-3.25)

 

 

 

 

 

R2=.975
Adj. R2=.947 D.W. = 3.21

T-statistics appear in parentheses to
the right of each coefficient. An L
prefix indicates log form estimation.

 

Independent variables included total almond production, carryin stocks, f.o.b. price, a trend
variable, and a dummy variable that represented the shift in the supply-demand balance that

began in the early 19803. Estimated coefficients are presented in Table 32.

6.2.1.2. Full Model and Solution Process

This section presents the full model, which links the five econometrically estimated

equations and the identities. The model carries out dynamic sequential predictions of the

endogenous variables. Below is an overview of how the blocks fit together to carry out the
sequential computations.

6.2.1.2.1. Overview of Almond Econometric Model
BLOCK 1. BEARING ACREAGE, PRODUCTION AND QUANTITY
REDETERMINED MARKETABLE
[Supply response in terms of bearing acreage is based on a three-year moving
average of lagged gower prices, (T-4) through (T-6). Yield is exogenous and

acreage times yield equals production. Quantity Redetermined Marketable is equal
to 95% of production.]

206

BLOCK II. CARRYIN, SEASONAL SUPPLY, AND MARKETING ORDER
IMPLEMENTATION
[Seasonal supply is equal to carryin stocks plus the quantity redetermined
marketable. Total salable supply is less than the seasonal supply by the quantity set
aside in the marketing order reserve. The quantity of almonds set aside in the
reserve (RESERVE) and the quantity released in subsequent years (RELEASE) are
exogenous variables]

BLOCK III. U.S. DOMESTIC ALMOND DEMAND
[Estimates f.o.b. almond prices and domestic consumption (delivered sales). A two-
equation simultaneous system is solved by three stage least squares and reduced
form equations are used for dynamic sequential forecasts]

BLOCK IV. GROWER PRICE
[Grower price is predicted from a regession of f.o.b price. A moving average of
lagged gower prices is used in estimating bearing acreage in Block 1.]

BLOCK V. EXPORT SALES AND CARRYOUT

[Export sales are estimated and carryout is calculated as a residual by subtracting

domestic and export sales from total salable supply].

6.2.1.2.2. Model Structure Showing Equations and Solution Process

One loop of the model (Step A through Step L) calculates values for each variable
for one year. A DO LOOP restarts the calculations for each succeeding year. The numbered
equations are the econometrically estimated equations presented above. The coefficients
are represented by the letter a,. The remainder are computations (identities) based on the

estimated variables. Verbal descriptions appear above the variable names for most

equations.

Ittt$tttittttttttttttttt#883833*****¥¥*#***$#*#¥#t8t¥¥t¥¥¥¥¥Ctt¥¥$¥¥¥$$¥¥¥¥$¥t

DOT =1973T01989

BLOCK l. BEARING ACREAGE, PRODUCTION AND QUANTITY REDETERMINED
MARKETABLE

A. Compute 3-year moving average of lagged grower prices =
PGAV3 a (GRPRCH)+GRPR(T-5)+GRPR(I’-6)) + 3

B. Bearing = con- lagged average
acreage stant + a, bearing + a2 lagged
acreage price

(#1) ACRES = con- + a,ACRES(T-1) + azPGAVS
stant

207

C. PROD = ACRES X YIELD
D. REDMARK = PROD X 0.95
BLOCK II. CARRYIN, SEASONAL SUPPLY, AND MARKETING ORDER IMPLEMENTATION
E. Carryin = Carryout(T-1)
CI -- CO (T -1)
F. Free quantity
tonnage = redetermined - quantity in
marketable reserve
FREEQ = REDMARK - RESERVE
G. Total quantity
salable released
supply = carryin + free + from
tonnage reserve
TOTSUP = CI + FREEQ + RELEASE
BLOCK III. U.S. DOMESTIC ALMOND DEMAND
H. Domestic constant - handler total lagged
sales = a, f.o.b. + a2 salable + a3 domestic
price supply sales
(#2) LDOMSAL = constant - a,LFOBPR + azLTOTSUP + a,LDOMSAL(T-1)
I. Handler dispos-
f.o.b. = con- a, domestic a, walnut a3 able + a4 dummy
price stant - sales - price + income variable
(#3)LFOBPR = con- a,LDOMSAL - a2LWPRIC + a,LID - a,T81
stant -
BLOCK IV. GROWER PRICE
.1. Grower price = handler
constant + a, f.o.b.
price
(#4) GRPR = constant + a,FOBPR
BLOCK V. EXPORT SALES AND CARRYOUT
handler
K. Export con- + a, produc- a2 carry- a,f.o.b. + a,trend - a, dummy
sales = stant tion + In + price variable
(#5)EXPSAL= con- + a,PROD + a2CI - a,FOBPR + a,TRND - a5T81

stant

L carryout = total
salable - domestic -
supply sales
CO = TOTSUP - DOMSAL -
END DO T

208

export
sales

EXPSAL

****************t*tit*ttt*tttttfi*1!t********************t***********

6.2.1.3. Model Performance

Table 33 shows goodness-of-fit measures for dynamic sequential predictions of

variables over the period 1973-1989. The model appears to provide quite good estimates

of the first four variables in that table, all of which have a mean absolute percentage error

Table 33. Goodness-of-f‘it Measures for Dynamic Sequential

Predictions of Almond Model Variables, 1973-1989

r.__.=

 

 
   

 

 

 

 

 

 

 

   

 

 

Mean Root Mean

of Mean Abso- Absolute
Vari- Square lute Percent- .
able Error Error age Error *
(M) (RMSE) (MAE) (MAPE)

l Bearing Acres, thousands (ACRES) 333.1 9.4 7.8 2.3
Total Production, mill. lbs. (PROD) 357.1 10.3 8.3 2.3
Quantity redetermined marketable, 336.9 9.9 8.6 2.3
million lbs. (REDMARK)

Total salable supply, million lbs. 426.7 15.0 18.6 3.5
(TOTSUP)

I Domestic sales, mill. lbs. (DOMSAL) 112.5 . 7.8 6.6 7.8

I Export sales, million lbs. (EXPSAL) 208.5 19.2 7.0
Carryout stocks, mill. lbs. (CO) 105.7 15.0
F.O.B. price, 3 per lb. 1.43 .22

 

Grower price, 3 per lb.

 

 

 

 

 

 

209

of 3.5% or less. Those four variables are all related to the supply of almonds -- (1) acreage,
(2) production, (3) the portion of production that is redetermined marketable after culled
almonds are removed, and (4) total salable supply. Estimates of domestic and export
almond sales are off by an average of 7%, and estimated carryout differs from its actual
value by an average of 17%. Estimated f.o.b. prices and gower prices for almonds differ
from their actual historical values by an average of 19¢ (14%) and 18¢ (17%), respectively.
Those errors in prediction are somewhat high for key variables. The results presented here
were nevertheless superior to various alternative models, so the model specification
presented herein was used for the analysis of almond marketing order price impacts. The

model results were judged to be adequate for historical simulation purposes.

6.2.2. Simulated Alternative Scenario: Non-implementation of Almond Reserve

The model carries out dynamic sequential predictions of gower and handler prices
as well as quantities of almonds produced and consumed over the period 1973-1989. Price
impacts of the almond reserve are measured by comparing actual prices to prices estimated
in an alternative scenario in which reserve pools are not implemented. If the almond order
had not been in effect, reserves could not have been established and all harvested almonds
would have to be sold into domestic or international markets or end up as carryover stocks
at the end of the season. The increased seasonal supply of almonds (relative to historical
levels) in the simulated "no reserve" scenario is hypothesized to result in lower simulated
grower and handler prices than occurred historically. Just as with the tart cherry simulation,
the magritude of the price change is the value in terms of increased gower prices of using

the almond reserve.

210
6.2.2.1. Method of Analysis

The exogenous variable RESERVE in the model represents the quantity of almonds
set aside in the reserve. In most years reserve almonds were diverted to non-competitive
outlets. However, in 1988 and 1989, reserve almonds were released into the primary
market. The quantities released in those two years are represented by the exogenous
variable RELEASE. In the base run, RESERVE and RELEASE are set equal to their
actual values (see steps F. and G. in Block II. of the ”Almond Model Structure Showing
Equations and Solution Process" in Appendix B). In the scenario representing non-
implementation of the reserve, the values of RESERVE and RELEASE are set equal to
zero, resulting in a higher seasonal supply of almonds in the alternative scenario compared
to the base run for those years in which a reserve was declared.

Although the almond federal marketing order has been in effect since 1950, no
reserves were established between 1973 and 1979. Simulation over a ten year period in the
19803 was judged to be sufficient to demonstrate the dynamic price impact of not

implementing the order.

6.2.2.2. Estimated Price Impacts Without Marketing Order Implementation

Reserves were implemented in seven of the ten years between 1980 and 1989. In
five of those seven years, all of the reserve almonds were diverted to non-competitive
outlets. However, in 1988 and 1989 all of the reserve almonds were released onto
commercial markets the following year, as shown in column 4 of Table 34. Columns 1
through 4 of Table 34 show the historical record of reserve percentages and associated
almond quantities placed in reserve.

Columns 5 through 7 present estimates of changes in almond quantities that would
have occurred in the absence of reserves (changes in carryin stocks, total salable supply, and

domestic sales). Columns 8 through 10 show the historical gower prices and the estimated

211

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212

price changes that would have occurred based on the simulation if reserves had not been
established.

Columns 9 and 10 are some of the key results of the analysis. The simulation results
indicate that without the reserve, both f.o.b. and grower prices would have declined relative
to their historical level for each year between 1980 and 1989 (however, only grower price
changes are shown in Table 34). Estimates of price decreases range from 2c in 1980 (a year
in which only a small reserve was declared) to 33¢ in 1987, a heavy production year in which
a large quantity of almonds had been placed in reserve. These estimates of price decreases
in the absence of the order can also be considered as the price impact of using the reserve
as a supply management tool.

Without the ability to set aside in a reserve a portion of almonds produced in a
heavy production year, total salable supply would increase. The "no reserve” simulation
results also indicate that increased almond quantities in the primary market and lower prices
also bring about other changes, including higher domestic sales, export sales, and carryout
stocks. In the simulation, the higher ending stocks in the absence of a reserve in one year
in turn have a price depressing effect in the subsequent year by increasing carryin stocks and
consequently total salable supply for that year.

For example, in 1985 a 10% reserve was established by the Almond Board of
California, resulting in 44 million pounds being placed in reserve. Season average grower
price with the reserve was 80¢ per pound. The "no reserve" simulation suggests that without
a reserve, the average grower price would have been 10¢ lower (a 70¢ price), due largely to
the increase in total salable supply of 71 million pounds. Associated with the lower price
in the simulation results were a domestic sales increase of 10.7 million pounds (column 7)
and increased export sales of 7 million pounds (not shown in Table 34). However, the
increased supply in the simulation resulted in a 53 million pound increase in carryover

stocks (which appears as carryover stocks for 1986 in column 5). This increase in carryover

213

raised total salable supply in 1986, a short crop year in which no reserve was needed. This
additional carryover would have decreased average grower price by an estimated 26¢ in
1986. Note, however, that this large simulated price decrease in 1986 was from a record
high actual price of $1.92 per pound. The estimated percentage price decrease from the
simulation in both 1985 and 1986 was around 13% (column 10). Estimated changes in total
salable supply in 1985 and 1986 were 11.5% and 14.1%, respectively.

The situation is more complicated for 1988 and 1989. Large reserves were
established in both 1987 and 1988 due to unusually heavy production in both years. Almond
Board records indicate that portions of these reserves were released in the same marketing
year (not shown in Table 34). The remainder of the reserve in each case was released into
the primary market in the following year rather than diverting the almonds to non-
competitive outlets as had been done in earlier years. In the ”no reserve” scenario, there
would have been neither an almond reserve nor a release, and the estimates of the
simulated net effect for 1987 and 1988 were grower price decreases of 33¢ and 27¢,
respectively, due to increases in total salable supply in the simulation of 142 million and 122
million pounds.

Actual and simulated almond grower prices are compared graphically in Figure 42.
As Table 34 indicated, "no reserve” prices were lower in each year of the simulation. The
analysis suggests that, considering the whole period, prices would have averaged 8c lower
without the order (mean prices were $1.08 versus $0.96). The graph also illustrates the
simulation result that the marketing order dampened steep price declines in 1987 and 1988.
However, overall variability would have been about the same.

Changes in total grower revenue attributable to the almond reserve is another key
consideration. Table 35 shows estimates of changes in revenue based on the simulated price
changes. Only small reserves (2-3%) were used during the period 1980-1983. The reserves

in those years were created mainly for market development purposes. The ABC policy was

214

Figure 42. Comparison of Actual Almond Grower Price to Simulated Price Without Reserve

 

2
1.3 4 Actual Price
Mean=$1.08 $D=0.34

“a
g 1 6 q Simulated Price without
a. ' Marketing Order
3 Mean=$0.96 $020.32
a

1 .4 -
4A
2'?
'1' 1.2 ‘
a.
b
3 1~
L
O

0.8 r /

0.6 I I T I 7 I T I I I T
80 81 82 83 84 85 86 87 88 89

Year

 

 

 

to set aside specific quantities to sell at reduced prices to food manufacturers that were in
the process of developing new almond-based food products. The model results indicate that
although grower prices were increased through use of the marketing order, the higher
quantities that would have been sold in the absence of the order would have generated
slightly higher total grower revenue than was obtained with the order. Simulation results
indicated that use of the order reduced total grower income in specific years between 1980
and 1983 by amounts ranging from $600,000 to $3.3 million (0.2% and 1% of actual grower
revenue, respectively).

With larger reserves beginning in 1984, however, the revenue impact became strongly
positive, with net gains in grower revenue of between $17 million in 1984 (4% increase) and
$117 million in 1987 (18% increase). The largest estimated decline occurred in 1986, $27

million (6%). This result occurred because in the "no marketing order” scenario simulated

215

Table 35. Estimated Grower Revenue With and Without the Almond Marketing Order

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve
Esti- l
mated
Change Net
in Total Change
Grower Total Salable Grower Total in Total
Total Price Revenue Supply Price Revenue Revenue ;
Sales with with Without without without with i
(mil. MD. MD. Reserve M.O. M.O. M.O. l
Year lbs.) ($/lb.) (mil. $) (mil. lb.) ($/lb.) (mil. $) (mil. S) l
1980 305.1 1.47 448.6 6.1 1.45 451.3 -2.7 ll
1981 383.1 0.78 298.8 5.2 0.77 297.8 1.0
1982 330.8 0.94 310.9 9.3 0.92 311.5 -0.6
1983 221.8 1.04 230.7 13.6 0.99 234.0 -3.3 d
1984 562.7 0.77 433.2 37.2 0.69 416.3 17.0 I
1985 444.0 0.80 355.2 71.4 0.70 358.7 -3.5 l
1986 235.7 1.92 452.5 52.8 1.66 479.5 -26.9 I
1987 634.6 1.00 634.6 142.5 0.67 517.5 117.0
1988 546.5 1.05 573.9 122 0.78 519.4 54.4
1989 457.2 1.02 466.3 —85.6 0.98 365.6 100.7 l

 

 

 

 

 

 

by the model, the private carryover stocks and overall sales would have been higher and the

price substantially lower leading to increased revenue relative to the actual historical record.

As indicated previously, the 1986 experience with shortages and very high prices led

to a shift in Almond Board policy, in which certain quantities could be retained in a reserve

pool to be released in subsequent years in case of a shortage, rather than diverting all of the

reserve to secondary market uses. This policy was applied in 1987-1989. Large crops in

1987 and 1988 led to Almond Board to declare reserves of 18% and 25%, respectively. The

1987 reserve was released in 1988, but since the crop was again large, an even larger reserve

(25%) was declared. When 1989 turned out to be a short crop year relative to prior years,

216

the entire remaining reserve was released, thus providing the stabilizing effect for which it
was intended. The simulation results indicated that without this stabilizing effect, grower
price would have been slightly higher (approximately 4c higher or a 4% increase over the
the actual price). However, the substantial extra supplies led to larger sales in 1989 than
would have occurred in the absence of the order, yielding a net grower revenue increase of
$100 million.

After the following section on the raisin marketing order, the three marketing order

analyses are compared using several performance criteria.

6.3. Raisin Marketing Order Simulation

The purpose of this section is to describe the results of the 1991 French and Nuckton
(FN) study of the economic impact of the federal marketing order for raisins. In the next
section, comparisons are made with the foregoing tart cherry and almond simulation results.
FN used an econometric simulation model to estimate the potential impacts on prices and
revenue if there had been no reserve pool operations under a federal marketing order. The
tart cherry and almond simulation models examined earlier in this chapter were based in
part on the FN approach.

Both the tart cherry and almond simulations involved comparison of a single
alternative ”no reserve" scenario with the historical record of prices, and quantities, and
revenues which were influenced by use of reserves in large-crop years under the respective
marketing orders. FN’s approach involved a number of different scenarios.

FN generated nine different scenarios to analyze a range of possible impacts with
the different economic environment that would exist without a marketing order. Their main
assumption was that risk perceptions on the part of raisin grape growers would alter two
specific behavioral responses. First, the higher risk environment that would exist without

the stabilizing effect of the marketing order would bring forth reduced planting responses.

217

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218

Thus 81 in Figure 43 and Figure 44 represents a scenario in which the planting response is
unchanged from the planting equation which FN determined best represented the actual
historical situation. In the alternative scenarios $2 and $3, the coefficient on the planting
equation in the FN simulation model is reduced to represent planting response reductions
of 20% and 40%, respectively, due to the higher risk perceived by growers. Note that the
bar in Figure 43 representing mean grower price for the SI scenario ($248) corresponds to
Figure 45 below, which compares the SI scenario to actual grower price for the period 1964-
1985. Similarly, the bar representing 83 (mean grower price of $266) in Figure 43
corresponds to Figure 47.

The other behavioral change that FN thought should be accounted for was that in
a higher risk environment without a marketing order, growers would choose to send
somewhat higher proportions of their raisin-type grapes to crush, which before the early
19803 represented a steadier market, and would dry a somewhat smaller proportion to sell
as raisins. In Figure 43 and Figure 44, higher levels of K mean that in the equation that
allocated grapes between the raisin and crush markets, the coefficient is adjusted to
represent a "tilt" toward sending a greater proportion to crush. Thus the three levels of
planting response and three levels of raisin versus crush allocation resulted in nine scenarios.
The scenario most comparable to the tart cherry and almond analyses above is represented
by the bar (81, K=7) showing a price of $248 per ton in Figure 43 and negative net revenue
of $9 in Figure 44.

A key result of the FN analysis is that for every scenario but the first (81, K=7, with
a price of $248 per ton), the lower level of bearing acreage devoted to producing raisins
resulted in higher raisin prices relative to the historical record (an average of $255 per ton)
when the whole period was considered (1964-1985). However, FN also note that another
performance measure, grower net return, accounts for grower sales into both the raisin and

crush markets, since many growers typically sold in both markets prior to the reduced

219

availability of the crush outlet in the 19805. Figure 44 shows that historically the average
net return was near zero for the entire period, but that six out of nine of the alternative
scenarios yielded negative net revenue. Only in the case of a severely reduced planting
response (S=3; 40% lower) was production low enough to yield higher net grower returns,
combining grapes sold for drying and grapes sold for crush. Note that the bar in Figure 44
representing mean grower net revenue for the SI scenario (-$9) corresponds to Figure 46
below, which compares the SI scenario to actual grower net revenue for the period 1964-
1985. Similarly, the bar representing S3 (mean grower net revenue of $3) in Figure 44
corresponds to Figure 48.

To provide further detail on the FN simulation results, prices and returns from two
scenarios are presented graphically (SI and S3, K=7). Figure 45 compares actual grower
prices for grapes for drying with prices estimated in S] (no reduction in planting response).
Figure 46 compares actual and simulated net returns for the same situation. Simulated
prices without a marketing order in 81 are both lower on average and more variable, with
a standard deviation of prices of 3129 versus 398 for the actual prices. Figure 45 shows that
the most significant price stabilizing effects occurred in the 19608 and the 19803. The
marketing order prevented steep price declines in 1965-66 and 1982-85. Recall from
Chapter 2 that the rapid decline in the availability of the crush outlet led to a sharp increase
in raisin production increase during the 19803. The marketing order was used to a
considerably lesser degree in the 1970s since prices and returns were higher due to stronger
demand for raisins.

Comparable results for the S3 scenario are presented in Figure 47 and Figure 48.
Prices and net revenue are higher without a marketing order in this scenario due to the
assumption of a 40% reduction in grower planting response due to the higher risk associated
With a less stable market for raisins. Mean price in S3 rises by $11, and net revenue rises

from an average of zero to an average of 33. Also, the reduced planting response in this

220

 

 

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scenario also reduces production to such a degree that the steep price declines of the 1980s
are not nearly as great, and the marketing order has a correspondingly smaller impact.
Prices and returns are also more variable without a marketing order in this scenario, roughly

to the same degree as in scenario 81.

6.4. Comparison of Three Marketing Order Simulations

A set of performance criteria arising from issues examined in previous chapters serve
as a basis for assessing several policy implications of marketing order implementation based
on the simulations. The criteria are: (1) grower net revenue, (2) grower price variability,
(3) consumer prices, and (4) industry productive capacity (acreage). Another important
performance criteria is the change in supply variability from implementing the order, since
improving reliability of supply as a means of maintaining sales levels is one of the key
reasons for implementing the marketing order. However, this question was not specifically
addressed in the simulations, which were focused on price impacts. The models were not
designed to assess other impacts relating to the variability of supplies.

grower net revenue. A key policy issue is the impact on grower net revenue of
marketing order operation. If the orders dampen price declines in large crop years, thus
reducing grower losses on downside of supply fluctuations, and if net revenues are positive
in other years, the overall result could be above-normal profits to growers for extended
periods. This could be considered an undesirable effect of public policy. A study team
commissioned to study the impacts of federal marketing orders offered performance
guidelines suggesting that marketing orders should neither contribute to above-normal

profits by growers nor cause a decline in grower net revenue compared to the situation that

222

would exist without the order.94 Thus an important question to pose is whether marketing
order operation contributed to above-normal profits for growers or declines in grower net
revenue.

In each of the five years in which the tart cherry marketing order was used, net
revenue (price minus cost) improved by using the supply management provisions, but did
not exceed zero (price was less than average total cost of production per pound in each of
the five years). Considering the entire period of analysis in the simulation (1972—1989), tart

cherry net revenue averaged just seven tenths of a cent higher using various marketing order

 

supply management provisions than would have been the case with no marketing order.
Raisin grower net revenue in the FN study averaged zero under the reserve pool
program."s Both of these results suggest that growers did not make above-normal profits
as a result of the order. Almond grower net revenue was not computed because of a lack
of adequate cost-of-production time series data with which to make comparisons of cost and
price.

It is also clear that average grower net revenue was not reduced because of the raisin
0r tart cherry marketing orders. The FN analysis showed that mean returns were higher
under the marketing order except for the simulations involving a 40% reduction in supply
1’ eSponse. Since tart cherry net revenue was slightly higher on average with supply
management than without, grower net revenue was obviously not reduced because of the

marketing order.

\

1' "Leo C. Polopolus, Hoy F. Carman, Edward V. Jesse and James D. Shaffer, ”Criteria
or Evaluating Federal Marketing Orders: Fruits, Vegetables, Nuts, and Specialty Crops,"

Washington, DC. National Technical Information Service, Identification Section, 1986.

stN offer two caveats to their conclusion, ”...the representative cost series, while
1eating changes in costs over time, may not fully reflect industry-wide averages...net
urns varied considerably over time, and were afiected by many factors besides the volume

Icon“! tl‘ol program." French and Nuckton, e r'c al sis

ind
l‘et

223

MW. Part of the coordination problems in these three subsectors
stems from the year-to-year price variability from the combination of supply fluctuations and
inelastic demand. A key aspect of maintaining demand is providing reliable supplies and
steady raw product prices so that manufacturers are encouraged to create new products or
at least not to cease production of food products from a particular commodity due to
problems of unreliability. Thus marketing order impact on grower price variability is an
important criterion.

The tart cherry simulation demonstrated that in each of the years of tart cherry
marketing order implementation, price declines due to large crops were dampened.
Considering the entire period, the standard deviation of tart cherry prices were also slightly
smaller with the use of supply management provisions than without. Almond price
variability with the marketing order was slightly higher than the no-reserve simulation when
measured by standard deviation, but was the same when measured by the coefficient of
variation. Thus the almond marketing order apparently did not reduce overall price
variability, but it did dampen price declines in large crop years. FN found that raisin prices
were less variable with the marketing order than with any of the no-control scenarios.
These results suggest that marketing orders as implemented for these commodities have

Contributed somewhat to price stability, but that a degree of price and revenue instability
I'emained even with use of the marketing orders.
@nsgmer prices. The FN analysis suggests that use of the marketing order did not
resI-llt in higher average raisin prices to U.S. consumers since the mean of simulated f.o.b.
pacl(er prices for all no-control scenarios was about the same or above the historical mean.
In contrast, the simulations indicated that f.o.b. prices for almonds and frozen tart cherries
were increased by the marketing order. However, the raw product price changes
attributable to supply management under federal marketing orders were generally not of a

Inaguitude that would bring about significant price increases of consumer products on retail

224

market shelves. This is in part due to the common retailer practice of pricing on the nines
and other related SOPs that contribute to the lack of price responsiveness at the retail level
to changes in raw product supply levels. In addition, large proportions of each of these three
commodities are sold as industrial ingredients, and price changes of the magnitudes
considered in these analyses are unlikely to change the price of other manufactured food
products, since commodity ingredient costs generally represent only a relatively small part

of total retail product cost.

lpdustm productive capacig and surplus production. A key issue here is whether

a lower risk economic environment due to the existence of a marketing order combined with
higher prices for a commodity that can result from operation of the marketing order induces
additional planting that contributes to surpluses of a commodity. Evidence of surpluses could
include continual or frequent low-use disposal of a portion of the crop.
The report by the aforementioned marketing order study team (Polopolus, Carman,
Jesse, and Shaffer) and the French and Nuckton analysis provide a useful guideline in this
regard. One of the marketing order study team guidelines is that marketing orders should
not contribute to chronic surpluses. F N state correctly that additional production can be
considered "surplus" only if it results in returns consistently below competitive levels (e.g.,
Prices below cost of production) or continually require low-use disposal of part of the crop.
30 What happened with tart cherries, almonds, and raisins?
Under the tart cherry order, most reserves were carried over and subsequently
r e“Based. Only small quantities were diverted to secondary markets in certain large crop
y e"firth-definitely not continual low-use disposal. Although the tart cherry market did
e‘xpel‘ience persistent overproduction beginning in the mid-1980s, it is not attributable to the
marlCeting order. High prices due to shortages in the late 1970s were the primary reason

1‘ .
or lI‘iereased plantings and subsequent higher production levels.

225

Diversions to noncommercial outlets that could be considered low-use disposal was
even smaller under the almond order, averaging around 4% of total production in the 19805.
A large proportion of the almond reserves from 1980 through 1985 were used for domestic
market development purposes (not low-use disposal) and the 1987 and 1988 reserves were
carried over.

Raisin production was higher on average with the marketing order in the FN analysis
than with any no-control scenarios. Raisin grape grower returns were higher with the

marketing order compared to most no-control scenarios, but nevertheless averaged near

 

zero. Reserve pool quantities were mostly exported or carried over to be sold later. In
large crop years, significant diversions to certain noncommercial outlets did occur which
could be considered low-use disposal. However, it was not continual and averaged about
4% of raisin production, and FN argue that these diversions should probably not be
considered chronic surpluses.
The study team argued that it is reasonable to withhold or divert quantities through
a marketing order that would otherwise drive returns further below costs. Using this
criterion, FN contend that diversions could be viewed as adjustments to unplanned short-run
Ontput variations rather than as wasted resources. The marketing order study team also
Pointed out that most diversions have been in years of low or negative return.
That is certainly applicable in the case of tart cherrieso-marketing order diversions
We:- e undertaken in years of negative returns, and thus the failure to store or divert
quantities in each of the five large crop years would have driven returns even further below
cos“. The non-harvest diversion option was merely a recognition that a certain proportion
of tart cherries are not harvested in large crop years with or without a marketing order.
Thus non-harvest diversion should also not be considered a means by which the marketing

or
der contribute to wasted resources.

226

6.5. Suggestions for Model Improvement
There are several aspects of the model which could be improved upon. First,
alternative specifications of the acreage supply response equation could do a better job of
modeling grower planting and removal decisions. The current equation uses grower price
as a proxy for net revenue, because grower cost of production data over a sufficiently long
time period was not readily available. Additional research could turn up cost data from the
1960s to compute a complete net revenue time series which could be used in place of prices.

The lag structure chosen for tart cherries, the simple average of prices in (t-6) to (t-12),

 

could be replaced with an improved lag structure such as polynomial distributed lag which
does not weight distant years the same as recent years. Various lag structures were
investigated, but a more exhaustive look at lag structures could yield an improved supply
response model. Also, the removal decision was not explicitly considered in the current
specification, but could be modeled by lagging net revenue over a period such as (t-2) to
(t-S).

Second, all prices were entered in the equations as nominal prices, because of
considerably better performance than with deflated prices with the equations as currently
Specified. The prediction errors of key variables were smaller with nominal prices.
Alternative specifications of each equation could be attempted using deflated prices, which
WOuld be more consistent with economic theory which states that firm and consumer
behaVior is guided by real rather than nominal prices. In addition, it would be preferable to
use per capita quantities rather than total quantities in the estimated equations. Total

quantities were used because of better model performance in terms of predicted values in
the base scenarios, given the current specifications of the equations.

Third, simulation of the "no marketing order" scenarios runs afoul of the "Lucas

critiQUef' The case can be made that the economic structure of a market is sufficiently

d 0
[erent without a marketing order than any coefficients estimated with a marketing order

227

cannot be used to model alternative non-order scenarios. However, this criticism is probably
too strong. In their raisin model, French and Nuckton attempt to get around this problem
by adjusting the parameters that would be most affected by a shift to a market without a
marketing order. The key decisions that would be different in the higher risk economic
environment without a marketing order were the grower planting decision and the allocation
of grapes between the raisin market and the wine (crush) market. As discussed earlier,
they adjusted the parameters on these equations and then projected key variables using nine
different scenarios. The tart cherry and almond models represent a reasonable "first cut”
at modeling the markets without marketing orders, but future research could consider
adjusting the planting response downward as was done with the French and N uckton model,
and examining which other economic decisions could be similarly adjusted.

Fourth, marketing order reserve pool releases that had to be accounted for in the
simulation, could be modeled more effectively. One difficulty in modeling the impact of
releases was that spring releases were judged to have less of an impact on prices that an
equivalent amount of tonnage released in the fall. This was largely because of more elastic
demand in the spring due to differing risk perceptions by those buying and selling cherries.
The method for representing CAB decision making regarding reserve storage and release
in the simulations was through increasing or reducing tonnage. Therefore the method

chOsen to approximate the smaller impact of a spring reserve pool release due to changes
in demand elasticities was downward adjustment in the simulation of the actual tonnage.
This is an area that should be further investigated in future research to see if there are ways
to elelicitly model the shifting demand elasticities.

The marketing order simulations in this chapter and the application of several

p er”formance criteria have provided a means to assess marketing order performance. The
final chapter summarizes the roles of marketing orders and cooperatives in responding to

t
he challenges posed by supply volatility.

CHAPTER 7: SUMMARY AND OVERVIEW

The problem addressed in this research was agricultural production instability and
mismatches in supply and demand in three perennial crop subsectors. Imbalances in supply
and demand are a cause for concern, primarily because resources may be wasted by

producing greater quantities of agricultural products than can be sold by growers at

 

remunerative prices, with the result that the raw agricultural commodities are worth less
than it costs to produce them. Unmet potential demand is another possible consequence.

The analysis was limited to three perennial crops. The crop-specific nature of the

assets in perennial crop enterprises gives them a distinct set of problems and circumstances.
Three perennial crops (tart cherries, almonds, and raisins) were selected which had similar
enough marketing institutions that they could meaningftu be compared, yet different
enough that comparison would provide useful insights.

The supply instability and coordination problems in each of the three commodity
80bsectors were described and diagnosed. Some aspects of the behavior of firms at various
sIlbsector levels were analyzed, focusing on certain standard operating procedures (SOPs)
that hinder effective coordination.

Several coordination mechanisms, including cooperatives and marketing orders, were
analyzed and categorized in regard to their actual or potential role in improving subsector
s“Dilly-demand balance. Types of cooperatives and alternative marketing strategies
emPloyed by cooperatives were examined. Supply management programs, with emphasis

on federal marketing orders, were analyzed in regard to their ability to mitigate the

consequences of variable supplies. Econometric models of the tart cherry and almond

228

229

industries were developed to estimate the impact on grower prices of implementing a
federal marketing order in each of those two subsectors.

This chapter reviews key points, accomplishments, and implications of this research.
The evidence presented here suggests that committed marketing cooperatives and federal
marketing orders have useful roles to play in contributing to the balance of supply and

demand in certain perennial crop subsectors.

7.1. Supply Instability, Uncertainty and Coordination Problems
This section highlights research findings related to the nature of the uncertainty
facing subsector participants and the supply-demand balancing problems facing subsector
participants. The use of graphic tools to illustrate the supply-demand balancing problems

is also reviewed.

7.1.1. Nature of the Uncertainty Facing Subsector Participants
Perennial-crop subsector participants face considerable uncertainty, some of which
is substantially different from the uncertainties faced by annual crop subsectors. Part of the
uncertainty relates to the supply variability caused by biological and climatic factors
Combined with the inability to vary bearing acreage quickly and economically from year to
Year. Additional uncertainty relates to the difficulty facing growers of knowing how other
EPOWers’ individual production decisions will affect overall productive capacity of the
Perennial crop commodity. Growers may make collective mistakes in planting and removal
decisions because it is difficult to predict likely aggregate future supply and demand. While
this can be a problem for many commodity subsectors, it commonly has more far-reaching
col"sequences for perennial crops. In addition, when a series of low price years sends a
Signal to growers of excess productive capacity, perennial crop growers tend to adjust slowly,

I
at‘gely because they have made significant investments in crop-specific assets (especially

230

orchards and related equipment) whose salvage value is near zero or negative. A common
result in certain perennial crop subsectors is years of excess capacity, in some cases
alternating with periods of underproduction.

Variable weather conditions and alternate bearing tendencies of perennials, along
with slow adjustment in bearing acreage, commonly contribute to substantial year-to-year
fluctuations in crop sizes. This pattern is especially noteworthy in tart cherries. Although
tart cherries are much more likely to have short crops than are almonds or raisins, they

occur with all three.

7.1.2. Consequences of Supply Variability in the Three Subsectors

An important set of questions addressed in this research related to the nature and
extent of the supply variability facing the three subsectors. All three subsectors have had
problems due to (1) annual fluctuations in supplies and (2) overcapacity in terms of planted
acreage.

Instability in quantities and prices of commodities makes planning for processors and
manufacturers more difficult and products more expensive, reducing” the demand for
commodities. Reliance on individual firm storage in some commodity subsectors has
generally proven inadequate to the task of carrying sufficient supplies from large-crop years
to short-crop years to mitigate the impacts of short supplies. This is largely because the
pattern of short crops is too irregular and the risks of making a mistake can be financially
disastrous to a firm trying to stabilize annual supplies. Carrying substantial inventories when
the following year brings another large crop can be very costly.

Periods of overcapacity in terms of planted acreage is another problem common to
the three subsectors. If growers collectively plant excess acreage of a perennial crop, many
individual growers may endure extended periods of negative net revenue. Furthermore, the

simultaneous occurrence of annual supply fluctuations and periods of overcapacity makes

231

it difficult for commodity industry participants to ascertain what demand expansion and

supply management strategies to pursue.

7.13. Analytical Methods Used to Illustrate Supply-Demand Imbalance

One contribution of this research was the use of graphic tools to illustrate certain
supply-demand balance conditions and related vertical coordination aspects. Comparison
of long-run productive capacity with demand trends for tart cherries was done in Chapter
2. Supply-demand trends over a period of several years were examined. Tart cherry
industry observers stated that the late 19703 were years of underproduction because bearing
acreage was in a low productive capacity phase and prices were consistently and substantially
above grower cost of production during this period. These high prices contributed to a
period of increased planting and thus the late 19805 were years of excess capacity. This was
illustrated by Figure 7 in Chapter 2, which showed prices well above costs for a number of
years in the late 1970s and prices below costs for an extended period in the late 1980s.

To show the shifting supply-demand balance for almonds, another measure was
needed due to the lack of cost data. The method chosen involved constructing time series
that smoothed both annual production and sales by computing moving averages. The
smoothing of production was accomplished by multiplying a moving average of yields by
bearing acres. For the period 1972-1979 shown in Figure 11 in Chapter 2, the bars
representing average production are approximately the same height as the line representing
average sales. This suggests an approximate match of supply and demand, which is
consistent with the fact that no marketing order reserves were established during that time.
Almond yields and acreage continued to increase in the 19808, and various factors
contributed to a slowdown in sales growth. A key factor was that a strong U.S. dollar slowed
export sales, contributing to a period of supply-demand imbalance. This is represented by

the graph which shows that beginning around 1980, height of the bars in the graph

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representing production were generally above the line representing sales. The excess was
disposed of mainly through secondary market diversion via the federal marketing order to
firms experimenting with new almond-based products and to USDA commodity feeding
programs. Similar moving average graphs were also constructed for raisins and tart cherries
to help highlight when periods of excess capacity existed.

This portion of the research, including development of means to present comparisons
of production and sales data trends, illustrated production variability and the mismatch of
agricultural supply (in terms of productive capacity) with demand. It thus helped to set the

stage for the subsequent analysis.

7.2. Problems of Vertical Coordination Between Subsector Stages

Another phase of the research was to analyze aspects of the vertical marketing
system for commodity-based food products that hinder effective vertical coordination.
Chapter 3 presented evidence that certain procurement and merchandising practices of food
manufacturers and retail food distributors can limit the capacity of prices to coordinate
through the vertical stages of a perennial crop subsector. The series of graphs linking four
subsector stages illustrated the fact that changes in raw product supplies and prices under
certain circumstances have little impact on price changes at the retail level. SOPs such as
product line pricing and pricing on the nines can contribute to a lack of retail price
responsiveness to supply changes. Retailers commonly employ SOPs, such as pricing on the
nines, that can result in a degree of price rigidity in part because they observe that
consumers tend to respond very little to price changes within specific ranges (e.g., nine cents
or less per unit), unless the price changes are accompanied by additional promotion and/ or
merchandising. This inelastic nature of consumer demand for certain processed food

products within certain price ranges thus helps bring about the resulting retailer and

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manufacturer behavior. The graphs with stepped demand curves were illustrations of
consumer non-responsiveness to price changes within certain ranges of prices.

Retailer decisions about which food items to put on the shelf can significantly
influence the quantities purchased. Retailers are in the business of "selling" shelf space and
often have little or no incentive to promote a commodity which happens to be in oversupply.
They tend to compare the volume of sales and profitability of a particular food product to
a set of alternative products to decide whether to provide shelf space for that product.

Retailers are likely to use a similar comparative analysis to decide whether to engage
in promotion or merchandising activities on behalf of a particular product. Retailer pricing
strategies also tend to be heavily affected by the pricing and promotional strategies
employed by other retailers within specific markets areas.

Since price changes by themselves may play only a limited role in vertical market
coordination, an important means of moving additional quantities of a commodity through
retail market channels in response to increased supplies is through various non-price
merchandising and promotion methods or a combination of price and non-price retail-level
merchandising and promotion. Since retailers do not generally undertake merchandising
of specific products on their own without specific incentives from suppliers, food
manufacturers try to influence retailers to engage in promotion and merchandising, and to
provide more shelf space for specific food products. Manufacturers also take on other
activities related to promotion and merchandising such as couponing.

A food manufacturer will generally undertake promotional activities for branded
processed food products with significant profit potential, but not necessarily for food
products based on a particular agricultural commodity. Non-grower-owned food
manufacturers have few incentives to undertake such actions for food products made from

a particular commodity.

234

Growers have the most to lose from the consequences of instability and
overproduction. Growers therefore have a greater incentive than other market participants
to collectively undertake supply-demand coordination roles, such as attempting through
merchandising and promotion to move additional quantities of food products based on these
commodities into distribution channels in response to increased production. Thus, another
purpose of the research was the examination of selected institutional means for collective
supply-demand balancing, especially cooperatives and marketing orders.

The three perennial crop subsectors made use of three options to improve vertical
coordination: ( 1) large marketing cooperatives that are strongly committed to the
commodity subsector, (2) actions to balance long-run supply and demand, and (3) marketing
orders for supply management. Summarized below are research results relating to each of

those options.

7.3. The Role of Committed Marketing Cooperatives

Although grower-processors and small processing cooperatives may desire well-
coordinated subsector balancing of supply and demand, they have little ability as individual
firms to play a balancing role due to their small size. However, this research explored how
larger marketing cooperatives can take on such supply-demand balancing roles with greater
likelihood of having a substantial impact on subsector coordination.

The term committed marketing cooperative was used in this research to represent
the type of cooperative with a potentially greater contribution to subsector coordination than
other types of cooperatives. Committed marketing cooperatives have a large share of the
total U.S. production of a commodity and a commitment to using the cooperative’s
resources to benefit growers by expanding demand and other actions.

Committed integrated marketing cooperatives (CIMCs) market a significant portion

of member production through strong national branded consumer products. Blue Diamond

235

and Sun Maid both have large shares of the retail market for their respective commodities,
so in their roles as food manufacturers they work through their brand position to influence
consumer demand and retailer merchandising. They have the ability to significantly
influence the demand side in order to help balance subsector supply and demand.

The type of cooperative that was labeled in this research as a committed commodity
marketing cooperative (CCMC) lacks a strong national brand franchise, but focuses on
selling large volumes of processed products to food manufacturers and the food service
industry along with retaining a commitment to being a reliable supplier of the commodity.
CCMCs have a goal of influencing demand and prices as well as maintaining strong
marketing programs for a particular commodity. CCMC members typically represent a
large proportion of the total production volume of a commodity, and the cooperative is

usually the largest marketing firm in a commodity subsector, or among the largest.

7.3.1. Demand Expansion Roles of Committed Marketing Cooperatives

A major goal of both CIMCs and CCMCs is to maintain and expand demand for
their particular commodities, and the research focused on understanding different types of
demand expansion strategies. Three main aspects of brand marketing strategies examined
in this research were: (1) advertising, promotion, and merchandising, (2) development of
new markets (mainly export markets), and (3) market research and product development.

The approaches followed by CIMCs for advertising, promotion, and marketing of
branded products are similar to those of IOF food manufacturers with strong brands, and
often include couponing and stimulating the use of special displays by retail food
distributors. Examples of new market development strategies include Blue Diamond’s
efforts to open up export markets in a number of foreign countries. Brand strategies have
also included product development through introduction of new food products as well

different sizes and types of packaging. For examples, Blue Diamond increased over time

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their line of flavored almonds products. Sun-Maid raisins were offered in an increasingly
varied array of package sizes and package types. Tart cherry pie filling manufacturers
continued to market their regional brands of pie filling through special promotions and
occasional limited advertising.

Another somewhat unusual approach to expanding the number of branded retail
products was licensing the use of the cooperative brand name, such as Sun Maid’s licensing
of baking companies to sell raisin bread and raisin English muffins under the Sun-Maid
label. These approaches were all intended to maintain or increase grocery store shelf space
for branded products made from the perennial crop commodities, and generally have had
positive demand expansion impacts, thus improving the supply-demand balance when the
subsectors were facing increased production.

Value-added strategies are another important part of demand expansion. The sale
of special cuts of almonds by Blue Diamond to ready-to-eat breakfast cereal companies are
an example of marketing value-added ingredients to a major food manufacturer customer.

The fact that Sun-Maid and Blue Diamond have built up national brand recognition
over many decades gives them a distinct advantage in carrying out these. strategies.
Retailers are much more likely to carry existing and new products because of brand name
recognition. Strong brand marketing is much less predominant in the tart cherry subsector.
Most tart cherry processors emphasize sales for industrial ingredients and food service,
though there are a few exceptions--several firms market branded pie filling.

An element that influences the effectiveness of demand expansion through brand and
value-added strategies is the versatility of the agricultural commodity in terms of potential
for new product development. This is an important lesson for participants in other
commodity industries. Versatility in terms of the number of different processed food
products that can be made from an agricultural commodity is in part due to the commodity’s

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development. Almond demand expansion by Blue Diamond was facilitated both by
exploiting the inherent versatility of almonds and by innovative thinking about ways to
appeal to consumer tastes and preferences. Contributing factors to the success in almond
retail demand expansion included the creation of numerous new products with alternative
methods of salting, roasting, adding flavors, slicing, packaging, and so on. Increased use of
almonds as ingredients in manufactured products was achieved through developing a number
of different ways of processing, including cutting (slicing, dicing), blanching, and making
paste. Demand expansion in other commodity industries depends on taking a broad-based
approach to assessing potential food product uses in terms of either branded product
development by cooperatives or IOFs, or as a focus for generic demand expansion programs,
possibly funded through state or federal marketing orders.

One inducement for new product development is guaranteeing a food manufacturer
reliable supplies at prices below prevailing market prices for a period of several years. This
has been done to some extent by committed marketing cooperatives. This approach is
subject to free rider problems since other firms marketing the same commodity can take
advantage of futures sales opportunities without incurring the product development costs.
Committed marketing cooperatives need to develop strategies that assure their members of
the benefits of product development efforts.

New product development can also be achieved in conjunction with marketing order
supply management. A means to encourage a food manufacturer to develop a new food
product is to undertake secondary market diversion for certain quantities of a commodity
for several successive years to manufacturers willing to experiment with new product uses,
at prices below those prevailing in the primary market.

Another research task focused on identifying specific demand expansion responses
to overproduction. The almond and raisin industries both provided useful examples. One

example of a demand expansion strategy was Blue Diamond’s response to rapidly growing

238

production in the 19805. The cooperative launched a major advertising campaign featuring
scenes of growers chest-high in almonds in an attempt to communicate overproduction
problems to consumers. Evidence based on interviews of almond industry representatives
suggested that this approach helped increase almond sales in response to the overproduction
problem.

An important raisin industry response to large supplies in the 19805 was to
substantially increase generic promotion through the celebrated "dancing raisins" advertising
program. This innovative advertising program was carried out by the raisin industry’s
generic promotion board. The raisin cooperative strongly supported this initiative and
tailored some of its brand promotions to tie into the dancing raisin theme. The results of
interviews with raisin industry participants suggested that the dancing raisins campaign, in
conjunction with other initiatives, helped to reduce the oversupply problem by effectively
expanding demand for raisins.

In summary, cooperatives and generic demand expansion organizations have played
key roles in balancing supply and demand in their respective subsectors by undertaking these
activities in response to annual supply fluctuations and long-term production trends. For
raisins and almonds, the ability to sell a large proportion of total production as branded
retail products has enabled almond and raisin growers to react collectively to changing
supply conditions by initiating various additional measures to increase sales.

Committed marketing cooperatives have led the way in demand expansion for raisins
and almonds through their efforts to apply the several types of brand and value-added
strategies. This represents a key supply-demand coordination function for cooperatives that
have a large share of the consumer market through a strong national brand position and a

large proportion of total U.S. tonnage of that subsector.

239
7.3.2. Changing Roles of Committed Marketing Cooperatives

A key implication of this research is that certain types of cooperatives have a role
in promoting a better match of supply and demand in specific commodity subsectors.
However, the ability to perform this role has declined for some cooperatives. For example,
some evidence of Blue Diamond’s declining role comes from its decision to refocus its
strategies because of a declining share of almond production. The cooperative made a
policy decision to close membership and focus on effective marketing of a smaller
proportion of the total U.S. almond tonnage than the cooperative has had in the recent past.

This points out a general problem that can occur with demand expansion efforts by
committed marketing cooperatives. The cooperative incurs the expenditure of developing
new products and expanding export opportunities. Other firms can frequently take
advantage of the increased sales opportunities created by the cooperatives. Growers
supplying those firms expand production, eroding the cooperative’s share of total production.
Free riding by non-member growers and IOF handlers can act as a disincentive for
cooperative demand expansion efforts, hindering the ability of committed marketing to play
supply-demand balancing roles.

Opportunities for cooperatives to develop new commodity-based retail products in
the future are probably limited for cooperatives that are not currently marketing a portion
of their members’ production through branded retail products. The main reasons are the
substantial financial barriers to entry into national markets for branded grocery products.
New product develOpment is expensive and risky. There are very large financial
requirements for undertaking advertising programs to achieve successful product
differentiation and to establish new products in the market. Cooperatives acting in their
role as food manufacturing firms must engage in large-scale advertising and promotional
activities to influence retailer merchandising and the selection of products carried on

supermarket shelves. Additional requirements for retail demand expansion for branded

240

retail products are substantial sales forces and/or networks of brokers and distributors for
distribution of the food products. Substantial promotional resources are also required to
maintain and increase food service sales such as influencing the selection of food products
on the menus of a national fast food chains. Despite the positive role for cooperative brand
marketing up to the present in balancing supply and demand, such a supply-demand
coordination role for cooperatives may be more limited in the future because of the

financial barriers to entry.

7.33. Future Research on the Role of Committed Marketing Cooperatives

An important accomplishment of this research was categorizing and classifying types
of coordination mechanisms, cooperatives, and marketing strategies. However, the research
did not entail gathering specific figures on the quantities going into various categories. Nor
was there an attempt to quantify the extent to which cooperatives or generic demand
expansion commissions have increased sales successfully in the face of supply increases.
This research focused on making observations and discerning key trends, based on the
interviews conducted and publications reviewed. Future research can attempt to
quantitatively assess the success (or lack of it) of cooperative and generic demand expansion
efforts.

The analysis for this research did not specifically define the threshold level for a
cooperative to be categorized as a committed marketing cooperatives. Refining the concept
to specify more precisely what is a sufficiently large proportion of total production to be a

CIMC or a CCMC is another area for future research.

7.4. Long-Run Supply-Demand Balancing
The long run supply-demand balancing approaches that were investigated included

approaches to reduce acreage when overplanting had occurred and to avoid overplanting.

241

Raisin acreage reduction has been accomplished to some degree through the Raisin
Diversion Program (RDP) as part of the raisin marketing order. Some growers that
participated in the RDP removed their vines entirely, thus reducing industry productive
capacity. However, most participants in the RDP only trimmed their vines to eliminate
production for a single year.

An orchard removal incentive program for tart cherries was proposed but never
implemented. The tart cherry orchard removal program was intended to reduce acreage to
a level at which quantities produced would be closer to quantities typically sold in
commercial markets at prices approximating average grower cost of production, thus
contributing to an improved balance of supply and demand.

Methods of avoiding overplanting examined in this research were: (1) dissemination
on information on production projections and related long-run market analysis, (2) limiting
cooperative membership, (3) stock tonnage contracts, and (4) acreage contracts.

At different periods in the past, Blue Diamond attempted to influence planting levels
by disseminating market analyses and projections of future levels of excess almond supply
and by limiting cooperative membership. Industry participants indicated in interviews that
neither method was effective in bringing long-run supply and demand into balance, and the
efforts were subsequently abandoned. When Blue Diamond attempted through information
dissemination to influence production capacity (bearing acreage), cooperative officials found
that the information was widely ignored by growers. In addition, almond sales increased by
greater proportions than expected, which ironically benefitted most those growers who
increased their plantings, in contradiction of the cooperative’s suggested reductions based
on the long-run market outlook.

When Blue Diamond limited membership, non-member production continued to
increase steadily, eroding the c00perative share. Limiting cooperative membership is only

likely to be effective if a cooperative sells most of its output under strong brands and if the

242

cooperative’s share of total U.S. production of the particular commodity is quite high,
perhaps 70-80% or more of total production. Examples of such cooperatives include Welch’s
for Concord grape products and Ocean Spray for cranberries. Blue Diamond cooperative
membership has accounted for around 50% of production in recent years, and cooperative
officials expect that figure to decline as non-member production expands and is marketed
through IOFs.

Stock tonnage has been used in the tart cherry subsector to coordinate supplies with
expected sales for one of the larger tart cherry cooperatives. This approach is most
appropriate for cooperatives which market most of their product through strong national
brands. The reason for this is that strong brands provide a market segment somewhat
separate from the unbranded commodity portion of the market. The demand for branded
commodity-based food products in more inelastic than the product sold in the
undifferentiated commodity markets. Since supply requirements for a particular brand are
more predictable than for a commodity as a whole, brand marketers may be able to use
stock tonnage to avoid oversupplying the market for their brand. The supply-demand
balancing impact for the subsector may be substantial if cooperatives that use stock tonnage
market a large portion of total crop production. Neither of these aspects has been
characteristic of the tart cherry industry, and the long-run supply-demand coordination
impact of the stock tonnage approach has been correspondingly limited.

Acreage contracts are common in the almond subsector. However, acreage contracts
have not been used for long-run supply-demand balancing in the almond, raisin, or tart
cherry subsectors.

Although several of these long-run supply-influencing approaches have been tried
in the three subsectors that were studied, it is difficult to quantify whether any of them
influenced planting decisions on a large enough scale to have a significant impact on

bringing productive capacity into better balance with demand trends. Presentation of these

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approaches nevertheless provides a starting point for considering how various combinations

of long-run supply-demand balancing measures might be employed in a particular subsector.

7.5. The Role of Supply Management

Implementation of marketing strategies and demand expansion efforts by committed
marketing cooperatives and through generic demand expansion programs is enhanced by
having reliable supplies of a commodity at prices that do not fluctuate sharply from one year
to the next. Firms at various subsector stages, including cooperatives, are negatively affected
by the reduced supplies and high prices in short crop years.

Committed marketing cooperatives in all three subsectors are subject to significant
free-rider problems in dealing with some of the supply problems. When cooperatives carry
large inventories as a result of large crops, or attempt to divert excess supplies to secondary
markets, their members bear the burden of short-run coordination, and non-members do
not. Supply management programs through federal marketing orders have helped to
address this free-rider problem of dealing with surplus supplies in large crop years and lack

of supplies in short crop years.

7.5.1. Supply Management Provisions of Federal Marketing Orders

Chapter 5 presented the three main types of supply management provisions of
federal marketing orders which are commonly implemented to mitigate the consequences
of annual supply fluctuations. Reserve pools address the problem of annual supply
fluctuation through storing a portion of grower deliveries in large-crop years and releasing
some or all of the storage reserve in short-crop years. Market allocation provides another
stabilization approach by removing excess product in large crop years from the designated
major markets. This is more appropriately used in situations of persistent oversupply.

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the primary market, and some secondary market uses involve experimenting with new
product development. The third set of provisions, non-production or non-harvest diversion,
provides additional flexibility in managing excess supplies.

Certain supply management programs through federal marketing orders have
contributed to supply and price stability and have addressed problems related to short-run
aspects of supply-demand balancing. A major contribution has been to alleviate some of the
negative consequences of supply instability by helping to promote increased sales and to
prevent erosion of demand through more stable commodity supplies. The supply
management provisions of the federal marketing orders have also helped dampen price

declines in large crop years, thus mitigating the negative impact on growers.

7.5.2. Modeling Federal Marketing Order Price Impacts

The question of the impact of supply management programs analyzed in this study
focused on the grower price impact of federal marketing order implementation. Chapter
2 pointed out that large tart cherry crops commonly result in grower prices falling below
typical grower total cost of production and sometimes below variable cost of production.
The decline in prices is dampened by removing a portion of the temporary surplus supplies
from the market through secondary market diversion or reserve pool storage. This aspect
of the research was designed to estimate the magnitude of the price change. The question
was: How much lower would grower prices have gone without the marketing order in those
years in which the marketing order supply management provisions were implemented? A
related question was: In certain years when the marketing order was not used, how much
higher would grower prices have been if a marketing order had been used? The answers
were sought through development and use of econometric models of the tart cherry and

almond markets. Comparisons with an econometric study of the raisin market by French

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and Nuckton were also made. The French and Nuckton study provided guidance in
developing the tart cherry and almond models.

The estimated price impacts of the tart cherry marketing orders from the model
varied by subsector stage. The tart cherry simulation indicated that grower prices would
have been lower without the marketing order in each of the five years that the marketing
order was used. The price impact on the grower level of marketing order implementation
appeared to be substantial in some years and moderate in other years. The last two years
of marketing order use, 1984 and 1985, in which reserve percentages of 15% and 7% were
established, were good examples of the impact the simulation was intended to measure. The
simulation results indicated that grower price would have been 5c and 1c lower in 1984 and
1985, respectively, if the marketing order had not been used. This represented price changes
of 20% and 7%, respectively, relative to the actual grower price.

For tart cherry processed prices in 1984 and 1985, the f.o.b. frozen price impacts
were 8c and 3c per pound, respectively. Although the tart cherry model estimated only
grower and processor prices, price impacts at the retailer and manufacturer levels were also
considered. The analysis in Chapter 3 of retailer and manufacturer SOPs, and the rigidity
of retail-level pricing within certain price ranges, indicated that the f.o.b. price changes
estimated in the simulation would likely have had little impact on consumer product pricing.
Retail level price increases would have been unlikely not only because of product line
pricing and pricing on the nines, but also because the tart cherry ingredients represent a
small part of the total cost of the processed food product.

For almonds, evidence from the econometric simulation indicated that substantial
grower price impacts from marketing order use occurred in 1987 and 1988. Grower prices
were an estimated 33¢ and 27¢ per pound higher due to the marketing order. Reserve
percentages in those two years were 18% and 25 %, respectively. The higher f.o.b. almond

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been enough to bring about price changes of almond-based food products of a food
manufacturer. However, the estimated price changes resulting from marketing order supply
management represent dampening of the price declines that would have resulted from large
crops in the absence of the marketing order. F.o.b. almond prices averaged around $1.00
per pound during the late 19805 when the marketing order was used for supply management.
Use of the marketing order mainly prevented the f.o.b. price from declining in large-cop
years substantially below $1.00 per pound, which was the average price level prevailing at
that time.

On the issue of retail prices, a useful area for additional research would be to extend
the simulation analyses for almonds and tart cherries to further assess the price impact of
removing various quantities from the primary market through marketing order supply
management.

The impact of the marketing order on grower net revenue was another aspect
considered. The analysis showed that in each year of tart cherry marketing order
implementation, net grower revenue was higher than it would have been without the
marketing order, but that based on average prices and costs, growers still had negative net
revenue. Similarly, the French and Nuckton study indicated that mean net grower returns
from raisin production were higher as a result of the marketing order, but nevertheless
averaged around zero for the period under study (1964-1985).

There is room for simulation model improvement regarding the estimated price
impacts for tart cherries and almonds. Since the baseline historical simulations indicated
relatively large errors in predicting grower and f.o.b. prices, the estimated price impacts of
supply management should be viewed with caution. Alternative specification of key
behavioral relationships may reduce the margin of error in estimating price impacts.

The stabilizing effect on supplies over several years is another feature of marketing

order supply management. Table 13 in Chapter 5 showed the net stabilizing effect of the tart

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cherry marketing order by storing reserve cherries in 1972, 1975, and 1980, and releasing
stored cherries the following year, which in each case was a short-crop year. The reduction
in supply fluctuations attributable to the order over each two-year period ranged from 5 to
32 million pounds. Reducing the impact of shortages in short crop years helps prevent
erosion of demand caused by unavailability of the raw product. This aspect of the analysis
could be extended in future research by attempting to assess what additional sales took place

because of the additional supply made available through the tart cherry reserve pool.

7.5.3. Differences in Use of Supply Management Among the Three Subsectors

Supply conditions have differed among the three commodity subsectors. The greater
number of short crops of tart cherries when compared with almond and raisin production
patterns was an important measure of variability; between 1967 and 1991, there were ten
short tart cherry crops, compared to three for almonds and four for raisins. The larger
number of short crops in years following large crops was a key reason for making greater
use of the storage reserve pool in the marketing order for tart cherries than was done for
almonds or raisins.

The three commodity industries have emphasized different supply management
approaches depending on their differing supply conditions. Reserve pools have stabilized
supplies through storage of a portion of grower deliveries in large crop years and release
of the reserves either later in the same season or in subsequent short crop years. The tart
cherry industry has tended to make greater use of reserve pool storage due to its greater
frequency of short crops. This was intended to contribute to maintaining demand through
more reliable supplies.

Because almonds and raisins tend to have frequent large crops but few short crops,
use of marketing order provisions has emphasized market allocation which diverts portions

of the crops to secondary markets. The main secondary market outlet for both almonds and

248

raisins for two decades was the export market. This contributed to the growth of expor.
markets to the point where export sales were no longer residual outlets, but had become
primary commercial market channels. In the 19705 and 19803, market allocation provisions
of the marketing orders emphasized using lower-priced raisins and almonds for new product
development and diversion to such uses as USDA feeding programs.

The tart cherry industry is especially interesting in terms of the large number of
programs that have been considered by the industry for dealing with supply volatility and
periods of overcapacity of cherry orchards. A number of different programs were
considered before the federal marketing order was implemented in 1972. After the
termination of the order in 1986, tart cherry industry participants discussed and analyzed
a wide variety of supply management options, including creation of different kinds of special
cooperatives to facilitate group action in reducing acreage and/or for dealing with annual
supply volatility. None of these programs have yet been implemented. The industry has
recently developed a new marketing order program proposal.

Under the previous tart cherry federal marketing order (1972-1986), supply
management provisions were implemented five times. During that time, the relative
emphasis of the different provisions varied. Reserve pool storage was the provision most
emphasized. Secondary market diversion would have been more emphasized during the
19805 had the order continued because short crops were becoming less frequent due to the
increase in acreage leading to a situation of persistent overproduction. Non-harvest diversion
was the option chosen by a number of growers in 1972, but use of that option declined to
near zero in subsequent years when the previous marketing order was implemented.

An additional area for future research would be to examine the differing impacts of
using different marketing order supply management provisions. For example, simulation
analysis could be undertaken to see by how much price impacts would vary if in certain

years market allocation was used instead of reserve pool storage or vice versa. Such

249

analyses could provide decision-making guidelines for people serving on marketing order

administrative bodies that are charged with making supply management decisions.

7.5.4. Supply Management: Applications to Other Commodity Industries

An important question is how might a perennial crop commodity industry choose
among the supply management coordination mechanisms examined herein to address
specific problems. An objective of this research was to highlight some of the conditions
under which specific coordination mechanisms could be most appropriately applied. The
supply management-oriented coordination mechanisms investigated were: 1) reserve pool
storage, 2) market allocation, 3) non-harvest/non-production diversion, and 4) acreage
removal.

An approach for deciding upon the appropriate supply management tools for specific
commodity industries can logically include examination of the circumstances and problems
facing that industry, followed by assessment of which mechanisms might be used to address
those problems. Characteristics of the specific commodity are important: 1) crop
production variability patterns and causes, 2) feasibility of methods for temporary non-
production diversion, 3) storage capability and cost,

1. MW. If the dominant production variation
pattern is chiefly one of frequent short crops in years following large crops, then reserve
pool storage is likely to be the more appropriate tool of the four listed above. This pattern
was characteristic of the tart cherry subsector in the 19703 and early 19805. Release of
stored commodities from reserve pools in short crop years contributed to market stability.

On the other hand, market allocation is especially relevant for a subsector which has
an historic supply pattern of several excessive supply years in succession and for which short
crops are not frequent. The third provision, non-harvest diversion, chiefly serves as an

additional means to give growers credit for diversion when the limited number of secondary

markets opt
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250

markets options are overwhelmed by the extent of the temporary surplus in certain large-
crop years, leaving certain growers without alternative diversion outlets.

The fourth provision, acreage removal (or orchard/vine removal) is appropriate
when perennial crops are in a period of excessive capacity and the industry could benefit
from a reduction in the total number of acres planted to a specific crop.

Recognizing that various factors can contribute to supply variability is also important.
Varying weather conditions is a major factor in the substantial production shifts of a number
of perennial crops. However, changes in market utilization of a crop can also be a factor.
The example cited in this research was that raisin-type grapes have uses in multiple markets.
Therefore, a factor that contributed to raisin production variability was grower decisions to
shift between the crush market and the raisin market. With additional factors contributing
to annual variability, there is a need for greater flexibility and innovativeness in developing
supply management tools.

ethods for tem ora n- odu '0 've io . Ifit is feasible to make
orchard or vines cease production for a single year, this affords a commodity industry
considerable flexibility in dealing with temporary excess production. Non-production
diversion can be used in conjunction with the other federal marketing order supply
management tools to reduce supplies in particular large-crop years. The only crop for which
this method is currently practiced is raisins. The Raisin Diversion Program is made possible
by the fact that preventing grape production on particular vines for a single year is a fairly
simple procedure of cutting off the ”spurs” that produce grapes. Spurs grow back again the
next year so that production resumes. The same effect may be feasible in the future for
other crops by aborting blooms by spraying (or possibly by some other method) so that the
blooms will produce no fruit in a given year. If it can be made technically and economically

feasible, this can be an additional supply management tool for other perennial crops.

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251

3. Storage capability and cost. For any of the storage supply management tools to work,
the commodity must be storable. The cheaper it is store the commodity, the more flexibility
there is. Tart cherries are stored frozen, which is a more expensive than storage methods
for raisins or almonds. This adds to the risk to an individual firm of making mistaken
storage decisions. Almonds can be stored in large bins or piles inside warehouses, and
raisins can be stored outside in large boxes covered with tarpaulins with periodic fumigation
but no refrigeration. Thus, a commodity industry must consider the cost and ease of storage.

However, the cost of storage is only one among many factors to consider, and
reserve pool storage may be an appropriate method for short-run supply demand balancing
even when storage costs are high. Even though tart cherries are the most expensive of the
three commodities to store, reserve pool storage was appropriately emphasized to a greater

degree by the tart cherry industry.

7.6. Implications for Marketing Order Establishment for Other Commodities

Key elements that facilitate establishment of a marketing order by commodity
industry are 1) a widespread sentiment shared by growers of a particular commodity that
they face a serious supply-demand balancing problem, 2) substantial agreement among
growers that the problems can be significantly reduced through establishment of a marketing
order, and 3) a consensus that a marketing order is clearly the best alternative. Establishing
a consensus on subsector problems and a sense of community can be facilitated by the
geographic proximity of growers. A sense of community can be channeled into collective
action when the growers of a particular commodity face an identifiable set of problems and
challenges that can be addressed by the actions of an organized group representing those
growers. This research has examined examples in three subsectors how this sense of
community among growers is sometimes expressed through membership in cooperatives that

represent a significant proportion of all growers in a region or the nation (and also

I-

252

representing a large proportion of total production), and through the establishment of a
marketing order. Committed marketing cooperatives are in some instances influential in
the creation and maintenance of marketing orders.

A recommendation for future marketing order development is that new national
enabling legislation should contain no commodity-specific or geographic restrictions on the
creation of marketing orders. Commodity-specific restrictions are not needed. Any group
of agricultural producers should have the right to organize and establish a federal marketing
order for a particular commodity if growers decide among themselves that there is sufficient
economic justification, sense of collective self-interest, and capacity to organize. The analysis
of the three subsectors tends to support this policy recommendation by showing that the use
of supply management tools has had beneficial impacts for supply-demand balancing.
Shaffer concurs that there is no need to limit the scope of orders, since ”the problems of
organizing a community of interest to support these types of orders is limiting enough.“

Establishing a marketing order can be facilitated by a geographic concentration of
growers, but no geographic restrictions on the right to establish a marketing order are
needed. The physical proximity of growers makes a sense of collective identity among
growers of a specific commodity more likely to develop and continue. Establishment and
continuation of the raisin and almond marketing orders was aided by the fact that all raisin
and almond growers are within fairly close proximity to each other in California.
Establishment of the tart cherry marketing order was helped by the fact that over two thirds
of tart cherry production was within the state of Michigan. However, subsequent organizing

problems since the demise of the tart cherry marketing order in 1986 are in part attributable

 

”James D. Shaffer, ”Designing Marketing Order Programs for the Future,” Presentation
at the Conference of the Food and Agricultural Marketing Consortium, Alexandria, VA,
January 13-14, 1994, Staff Paper No. 94-7, Department of Agricultural Economics, Michigan
State University, February, 1994.

253

to the difficulties of organizing farmers across several states, extending from New York to
Oregon.

Marketing orders could be effective and flexible tools for supply-demand
coordination if new national enabling legislation authorized the creation of federal
marketing orders with each of the provisions examined in this research. Individual
marketing orders could include some or all of the four types of supply management
provisions examined in this research: 1) reserve pool storage, 2) market allocation, 3) non-
harvest/non-production diversion, and 4) acreage removal. It would be up to the industry
marketing order development committee and the supervisory body of each marketing order
to draw up guidelines for determining under what conditions specific provisions should be
invoked. Representatives of the commodity industry sitting on the administrative committee
would assess supply-demand balance conditions and decide which provisions are most
appropriate at a given point in time. The marketing order language should allow the
administrative committees considerable flexibility to make decisions.

As is the case now, periodic grower renewal referenda should be required to ensure
that growers continue to support the order. Where there is substantial agreement among
growers on the performance of a particular marketing order, grower referenda would likely

approve continuance by substantial margins, as has been the case with almonds and raisins.

7.7. The Role of Commodity Promotion and Research Programs
The national marketing order enabling legislation discussed in the previous section
should also contain provisions, similar to provisions in the current legislation, for the
establishment of commodity promotion and research programs as a part of federal
marketing orders. Effective commodity promotion can adjust demand to more nearly match
supply at prices consistent with costs. However, the question of when to engage in

promotional activities for commodity-based products is an important issue. This research

254

indicates that subsector supply-demand balancing can be improved when promotional
programs are designed to undertake actions consistent with supply conditions, yet are
flexible and have a multi-year horizon. Promotion is especially appropriate during periods
with excessive supplies. During periods of short supply, promotional programs should be
reduced somewhat in scope, but there must be some continuity in promotional activities for
a program to remain effective.

Commodity research for new product development is an additional aspect of generic
commodity demand expansion strategy. A useful goal for commodity research organizations
would be to allocate funds for research that focuses on identifying commodity attributes
desired by consumers and by firms that handle the product in various stages of the
marketing chain. Shaffer points out that research on food product attributes desired by
consumers can guide related research focusing on developing economical methods to
produce such attributes.” Efforts should be made where possible to complement new
product development efforts of committed marketing cooperatives, where they exist, and
new product opportunities made possible through marketing order secondary market
diversion to firms willing to experiment with new product development if they can obtain

lower-cost reliable supplies of the commodity.

7.8. Additional Policy Implications
Since committed marketing cooperatives and federal marketing orders serve useful
functions in balancing supply and demand in some perennial crop commodity subsectors, the
U.S. government should continue to promote cooperatives and facilitate the development
and use of federal marketing orders for supply management. In the 19705 and 19805 the

federal government took policy positions hostile to cooperatives with large market shares

 

9“'J. D. Shaffer, "Designing Marketing Order Programs for the Future.

255

of certain commodities, and to the use of supply management provisions of federal
marketing orders for fruits, vegetables and specialty crops. The government expressed
considerable concern over the possible anti-competitive effects of large cooperatives and the
combination of large cooperatives and supply management-oriented federal marketing
orders. The results of this research suggest that cooperatives and marketing orders operating
in conjunction with each other can under certain circumstances serve useful and legitimate
economic purposes in perennial crop subsectors.

However, the issue of possible undue price enhancement through supply
management should not be ignored. The federal marketing order guidelines proposed by
the Marketing Order Study Team discussed in Chapter 6 indicated that marketing order
supply management programs should not contribute to above-normal grower profits. The
evidence from the marketing orders simulation analyses suggests that growers did not make
above-normal profits. Design of future marketing orders should consider whether there are
sufficient safeguards against undue price enhancement. This is another policy area that
merits additional research.

A key point in this regard is that the committed marketing cooperatives and federal
marketing orders working in combination have been able to influence demand and supply
to a certain extent in their efforts to bring about a better balance, but have not attempted
to control agricultural production. The ever-present likelihood of increased agricultural
production in response to profitable agricultural prices from supply management puts a limit
on potential anti-competitive effects of supply management. Low barriers to entry are
typical of many, types of crop production, including most perennial crops. If supply
management is used to maintain grower prices at levels well above grower cost of
production, increased plantings from existing growers and new growers are likely and could

bring about a situation of excess productive capacity. The additional acreage would

(\S

256

undercut the supply-demand balancing role that the supply management program was
intended to ameliorate.

Large market shares held by cooperatives with strong national brands have not led
to anti-competitive pricing effects in the tart cherry, almond and raisin subsectors. On the
contrary, they have led to improved vertical market coordination. Having the ability to
influence retailer merchandising practices in their role as food manufacturers has provided
an important subsector coordination function for cooperatives in their efforts to coordinate
fluctuating supplies with demand.

Some future demand-related efforts to improve subsector coordination for
commodities lacking products with national brand franchises will likely come from grower
collective action through generic commodity promotion organizations. Because of the
advantages of demand expansion as one tool for supply-demand balancing, national
government policy should be to encourage such programs.

Efforts of commodity industry participants—growers and firms in downstream stages
of the subsectors--should be focused on assessing consumer preferences and developing
commodity-based food products that match those preferences, and on influencing
merchandising variables to ensure that consumers are informed about new and existing
products. Growers can achieve this through collective action in the form of committed
marketing cooperatives. Retail branded product marketing is a significant component of
demand expansion that contributes to balancing supply and demand for perennial crops.
The value-added industrial market for commodity ingredients and for food service will
continue to play important roles, as will the undifferentiated commodity markets. Supply
management should continue to play a complementary role to the demand-related efforts

in subsector supply-demand balancing.

257

7.9. Concluding Comment

The value of this kind of research lies in the comprehensiveness of the examination
of supply-demand balancing and vertical coordination roles. A thorough examination of
the nature of the production instability facing particular crop subsectors helps to distinguish
in what respects the causes and consequences are similar or different. In the tart cherry,
almond, and raisin subsectors, some similarities in supply fluctuation patterns led to the
adoption of similar approaches to mitigating the consequences. However, differences in the
supply patterns led to emphasizing to different degrees the use of specific provisions of
federal marketing orders. Understanding the similarities and differences provides some
insights into the potential application of these approaches in other subsectors.

Using the subsector framework as an analytical tool provides a means to examine
the interactions between vertical stages of a subsector. The incentives facing firms at a
particular subsector level can be examined to analyze how the adoption of SOPs such as
product line pricing affects vertical coordination. Because price changes by themselves may
play only a limited role in vertical market coordination, this research examined various
means by which subsector supply-demand balancing can be improved through combinations
of price and non-price merchandising and promotion approaches. A number of examples
were presented to show how committed marketing cooperatives take on such supply-demand
balancing roles. The cooperative role in demand expansion can be better understood by
examining various aspects, including brand strategies and the marketing of value-added
ingredients to food manufacturers, as well as supplying the food service industry.
Understanding the interaction of various marketing-related institutions contributes to our
knowledge of how commodity marketing systems can be improved. Supply management is
likely to continue to play a complementary role to the demand-related efforts in subsector
supply-demand balancing. Comprehensive comparative analysis contributes to our

understanding of the dynamic, evolving nature of perennial crop subsectors.

 

'8

Bl

258

BIBLIOGRAPHY

Almond Board of California, "Almond Statistics,” various years.

”Background Economic Analysis and 1986 Marketing Policy of Cherry
Administrative Board,” May 1986.

Blue Diamond Growers, Inc., Almond Facts Nov/Dec 1984.

 

Blue Diamond Growers, Inc., Almond facts, May/June 1985.

Blue Diamond Growers, Inc., Almond Facts July 1986.

 

Blue Diamond Growers, Inc., Almond Facts Sep/ Oct 1987.

 

Blue Diamond Growers, Inc., Almond Eacts, May/June 1991.

Blue Diamond Growers, Inc., ”Annual Report 1987-1988."

Blue Diamond Growers, Inc., ”Annual Report 1988-89."

California Almond Growers Exchange, Inc., "Annual Report 1979-80."
California Almond Grower’s Exchange, ”Annual Report 1981-82.”
California Almond Growers Exchange, "Annual Report 1983-84."

California Almond Growers Exchange, Statement by CAGE presented to the Study
Team on Performance Criteria for Federal Marketing Orders, 1986.

Cherry Marketing Institute, ”Report on Michigan Tart Cherry Survey,” Okemos,
Michigan, 18 January 1991.

Dalziell, Ian, ”Sources of Agricultural Marketing Instability,” Unpublished Ph.D.
dissertation, Michigan State University, 1985.

Forker, Olan D. and Ronald W. Ward, 0 i e
Mgaspm emgpt pf Generic floggams, New York: Lexington Books, 1993.

French, Ben C. and Carole Franke Nuckton, "An Empirical Analysis of Economic
Performance Under the Marketing Order for Raisins, MW

Agricultural Emnomics (73: 3), August 1991.

259

French, Ben C. and Lois Schertz Willett, "An Econometric Model of the U.S.
Asparagus Industry," Giannini Res. Rpt. No. 340, University of California,
September 1989.

Hamm, Larry G., ”Food Distributor Procurement Practices: Their Implications for
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Hinman, Donald L. and Donald J. Ricks, ”Supply Management Alternatives for the
Tart Cherry Industry,” Journal of Food Distribution Research, v. 23, no.1
(February 1992).

Hirschman, A.O., Exit, Voice and Loyalg, Cambridge: Harvard University Press,
1970.

Kinnucan, H.W. and others, "Research and Marketing Issues Facing Commodity
Promotion Programs," in D.I. Padberg, ed.,Food and Aggicultural Magketing
issues for the 215t Centug, FAMC 93-1, Food and Agricultural Marketing
Consortium, Texas A&M Univ., 1993.

Knutson, Ronald A., "The Impact of Cooperatives on Market Performance,
Subsector Coordination, and the Organization of Agriculture,” in Aggiculturai

Cooperatives and the Public Interest: Proceedings of a North Central

Regional Research Committee Sponsored Wogigshop, St. Lpuis, MO, Jpn;
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Agricultural and Life Sciences, University of Wisconsin, Madison, September
1978.

Marion, Bruce, The Ozgapizatiop and Egfiogpance of the U.S. Eppd Sfitgm,
Lexington: D.C. Heath and Company, 1986.

 

Mighell, Ronald and Lawrence Jones, Ve ' o d' at' ' . icut
USDA, Economic Research Service, Farm Economics Division, Agricultural
Economics Report No. 19, February 1963.

Nuckton, C.F., B.C. French, and G.C. King, Ah flopometgic Analysis of the
Califomia Raisin Industiy, Gianninni Foundation Research Report No. 339,

University of California, December 1988.

Peterson, Christopher J. Cooperative Bg' l_( and Betpm Strategig, Unpublished
Ph.D. dissertation, Cornell University, 1992.

Polopolus, Leo C., Hoy F. Carman, Edward V. Jesse and James D. Shaffer, "Criteria
for Evaluating Federal Marketing Orders: Fruits, Vegetables, Nuts, and
Specialty Crops,” Washington, DC. National Technical Information Service,
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Raisin Administrative Committee, "Marketing Policy," Fresno CA, various years.

260

Bed jifeg Cherries: Crop Statistics and Market Analysis, (Michigan Agricultural
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Ricks, Donald J. Ricks, L.G. Hamm and WC. Chase-Lansdale, fljhe Iijart Chem
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Shaffer, James D., "Thinking About Farmers’ Cooperatives, Contracts, and
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with Projections to 1990,” Unpublished Ph.D. dissertation, Michigan State
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Table 36. Tart Cherry Market Supply With and Without

261

APPENDIX A

Use of the Federal Marketing Order, 1972-1975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1Out of 42.6 million pounds originally placed in the storage reserve pool, 21.0 million
were eventually sold to the USDA for feeding programs. Out of the the 21.6 million
that remained in the reserve pool, 16.6 million were released in spring 1981.

’l‘he remainder was sold to USDA school lunch program.
3Released the following fall and spring.

Sources: 1972 carryin stocks from N n i r

Fri

n N Ann
Reporting Board, SRS, USDA. Other figures from Red Tag Qherries grep Stagisgiee

l January 1975, Crop

Year of Marketing Order Use il
1972 1975 I 1980J 1984 l 1985
: ----Millions of lbs. (raw product equivalent)---
Crop Size 311.7 290.5 218.1 271.6 286.2
- Fresh Utilization 6.2 7.2 6.3 8.0 7.6
; - Non-marketing order abandonment 19.8 39.4 1.9 13.6 6.0 II
= New Crop Supply for Processing 284.9 243.9 209.9 250.0 272.6
L + Frozen Carryin Stocks 44.1 41.1 24.3 12.8 44.4
i + Canned Carryin Stocks 11.2 2.7 3.9 0.3 4.5
. = Market Supply w/o Market Order 340.2 287.7 238.1 263.1 321.5 ll
. - M.O. Storage Pool 19.1 27.0 42.61 31.62 12.5 ll
+ M.O. Storage Pool Release 14.3 27.03 16.7 8.3 0 ll
. - M.O. Secondary Mkt. Diversion 0 0 0 1.8 3.4
l - M.O. Non-harvest diversion 22.0 5.0 1.9 1.0 0.6
g = Market Supply with Market Order 313.4 282.7 2103 237.0 305.0

mm Red Tart Cherry Growers Committee, Michigan Agricultural
C00perative Marketing Association, Inc. (crop data: p.1; stocks data: p.19, Table 10 and

p.24, Table 17; reserve pool data: p.26, Table 19). Additional reserve pool and

secondary market diversion data from B k E ' l i n 1

Makeging Enlig pi Qhem Administrative Beard (Table 3, 'Tart Cherry Marketing
Order Effects on Supplies,” p. 21).

262

Table 37. Tart Cherry Supply in Years Following Marketing Order Use,
With and Without Market Order Use in 1972, 1975, 1980

 

 

 

 

 

 

 

 

 

 

F-__ Year Following 1:
Marketing Order Use
1973 I 1976 I 1981
Mill. lbs.(raw prod.equiv.)
Crop Size 175.2 146.6 134.6
- Production Abandonment 1.2 0 0.4
- Fresh Utilization 5.2 4.4 4.0
= New Crop Supply for Processing 168.8 142.2 130.2
+ Frozen Carryin Stocks 21.71 30.6 9.52
+ Canned Carryin Stocks 0.4 2.2 3.6
’ = Market Supply w/o Market Order 190.9 175.0 143.3
, + M.O. Storage Pool Release 8.4 0 4.3
= Market Supply with Market Order 182.5 175.0 147.6

 

 

 

 

 

 

121.7 million in frozen carryover is calculated from July 1 stocks of 30.1 (Table
17) minus subseqent reserve pool release of 8.4.

29.5 frozen carryover figure calculated from July 1 stocks of 35.4 (Table 17)
minus 21.6 (subsequent USDA sale) minus 4.3 (1981 reserve pool sales).

Source: e a Cherries C o Stat' t' d a et al is 99 Red Tart
Cherry Growers Committee, Michigan Agricultural Marketing Association,
Inc. (crop data: p. 1, stocks data: p. 19, Table 10 and p. 24, Table 19).