2

THESIS

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Michigan State

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This is to certify that the

thesis entitled

EVOLVING STRATEGIC DIRECTIONS OF THE
TART CHERRY INDUSTRY

presented by

Curtis B . Rowley

has been accepted towards fulﬁllment
of the requirements for

._M. a_ _s_t____ders egree in Agricultural Economics

W689

Major professor

Date May 11, 2000

 

0-7639 MS U is an Afﬁrmative Action/Equal Opportunity Institution

 

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JAN 1 0 2006
4-7—0—3—0—6

 

 

 

 

 

 

 

 

 

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EVOLVING STRATEGIC DIRECTIONS OF THE TART CHERRY INDUSTRY

By

Curtis B. Rowley

A THESIS
Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of
MASTER OF SCIENCE
Department of Agricultural Economics

2000

ABSTRACT
EVOLVING STRATEGIC DIRECTIONS OF THE TART CHERRY INDUSTRY
By

Curtis B. Rowley

The main purposes of this thesis have been to summarize the evolving economic
situation of the tart cheny industry, analyze the current industry status, and analyze future

industry strategies. In recent years the US. tart cherry industry has been extensively and

 

comprehensively involved in planning for needed strategic directions to improve their
competitive position and economic viability. This coordinated strategic planning eﬂ‘ort by
the industry leaders with considerable university analytical assistance has involved
substantial analysis, Visioning for the ﬁiture, planning for needed industry strategies, and
implementing these developed strategic directions.

In this thesis an analysis and summary of various strategic aspects of tart cherry
industry’s planning eﬂ‘orts are analyzed and discussed. Key aspects of the thesis include:
1) historical evolving strategic planning efforts, 2) a broad based industry situational
analysis, 3) in depth analysis of the industry’s long-run acreage cycle, 4) ﬁiture supply and
demand projections, and 5) industry strategies for future competitiveness. These major
areas of emphasis for future strategic directions and improved competitiveness are demand

expansion, supply management, processed cherry pricing, and grower returns.

ACKNOWLEDGNIENTS

First and foremost, I would like to thanks my wife for helping me get through the
past years. Her continual guidance led me to realize that no matter what happened I
would always have my family. This has been a long road for us to journey together and it
has been very successful and beneﬁcial for us in growing together. She has been so
supportive and willing to help me with all the diﬁ‘erent revisions. She has blessed me with
one of the most precious giﬁs of life, a little girl. Thank you Liz for being the one who I
could lean on most.

Next, I would like to thank Dr. Ricks and his wife Joannie for their constant
support and love for me and my family. We have been so blessed by them and their
continuing support in all that we have done while being here in Michigan. We have
enjoyed their friendship which will continue for a long time into the future.

Many thanks to the dear ﬁiends we have made while being here at Michigan State
University. Four families in particular who have made the journey so much more smooth
were the Korson, Banderob, Robison, and Young families. Knowing that we had friends
like you to help us and provide family-like support at all times was very reassuring that we
were doing what we were supposed to. Thanks for the love, support, and friendship.

I would like to thank Dr. Peterson, Dr. Allen, Dr. Stems, and the graduate
students in room 208 for helping me enjoy my program here at MSU. Thanks for being

there to listen to my complaints and share in my joys. Good luck to all.

 

TABLE OF CONTENTS

LIST OF TABLES
LIST OF FIGURES

Chapter 1: THE US. TART CHERRY INDUSTRY - - PLANNING FOR THE
FUTURE
1.1 Introduction
1.2 Overall perspective of the tart cherry industry’s need for strategic planning
1.3 Overall perspective of thesis objectives
1.4 Methodology and approach for industry strategic planning
1.4.1 Tart Cherry Industry Strategic Planning - a case study of a broad
based industry approach
1.4.2 An Industry Strategic Planning and Coordinating Framework
1.4.3 Main informational sources
1.5 Outline of thesis topics

Chapter 2: HISTORICAL EVOLUTION OF CHERRY INDUSTRY STRATEGIC
PLANNING
2.1 Introduction
2.2 Demand expansion
2.2.1 Organizations involved in demand expansion
2.2.2 Historical role of Cherry Marketing Institute
2.3 Comprehensive cherry industry strategic planning efforts
2.3.1 Tart Cherry Industry Strategic Planning Council (TCISPC)
2.3.2 TCISPC’s purpose and goals
2.3.3 Issues and concerns discussed by the TCISPC
2.4 Supply management
2.4.1 Federal Marketing Order
2.4.2 FMO performance in the ﬁrst three years
2.5 Processor pricing and grower returns
2.5.1 Historical methods for processor pricing
2.5.2 CherrCo’s initiation and accomplishments of the past three years
2.5.3 Historical struggles in establishing grower returns
2.5.4 Grower price inﬂuencing organization
2.6 Overview of the historical evolution of the strategic planning process

Chapter 3: INDUSTRY SITUATIONAL ANALYSIS

3.1 Introduction
3.2 Situational Analysis - SWOT

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3.2.1 Industry Strengths

3.2.2 Industry Weaknesses
3.2.2.1 Imbalances of supplies in relation to demand
3.2.2.2 Generally, low unproﬁtable grower returns
3.2.2.3 Underlying weaknesses of the poor performance areas
3.2.2.4 Additional kinds of industry weaknesses

3.2.3 Industry Opportunities

3.2.4 Industry Threats

3.3 Overview of the industry situational analysis

Chapter 4: THE EVOLVING SUPPLY / DEMAND BALANCE FOR TART
CHERRIES
4.1 Introduction
4.2 Tart cherry supply analysis and future projections
4.2.1 Overview of the long-run acreage cycle
4.2.2 Long-run acreage trends and projections analysis of each state
4.2.3 U.S. tart cherry acreage age distribution
4.2.4 U.S. tart cherry acreage projections
4.2.5 Overview on international competition for US tart cherry markets
4.3 Analysis of evolving demand for tart cherries
4.3.1 Change in demand for tart cherries
4.3.2 Product categories strategic initiatives
4.3.2.1 Demand for dried cherries
4.3.2.2 Demand for frozen cherries
4.3.2.3 Demand for canned water pack cherries
4.3.2.4 Demand for juice concentrate »
4.3.2.5 Demand for pie ﬁll
4.4 Balancing supply and demand in the future
4.5 Overview of the supply and demand balance for tart cherries

Chapter 5: TART CHERRY INDUSTRY IMPROVEMENT STRATEGIES
5.1 Introduction
5.2 Tart cherry industry demand expansion strategies
5.2.1 Demand expansion strategies in domestic markets
5.2.1.1 Consumer retail markets
5.2.1.2 Restaurant/Food Service Promotion Program
5.2.1.3 Food manufacturer markets
5.2.1.4 School food service communications program
5.2.1.5 New product development
5.2.1.6 Other domestic demand expansion strategies
5.2.1.7 Summary of domestic demand expansion strategies
5.2.2 Industry coordination for demand expansion in export markets
5.2.2.1 Refocusing the export expansion program

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5.2.2.2 Export expansion program ﬁrnding
5.2.2.3 Export expansion program implementation
5.2.3 Overview of industry demand expansion strategies
5.3 Supply Management Strategies
5.3.1 Key issues related to the FMO
5.3.1.1 Board policy changes intended for long-term success
5.3.1.2 Needed amendment changes to the FMO
5.3.2 Overview of supply management strategies
5.4 Processor pricing strategies
5.4.1 Potential future focus for CherrCo
5.4.2 Summary of processor pricing strategies
5.5 Grower returns strategies
5.5.1 Summary of grower returns
5.6 Overview of tart cherry industry strategies

Chapter 6: OVERALL THESIS SUMMARY
6.1 Introduction
6.2 Overview and broad perspective of evolving strategic directions of the tart
cherry industry
6.3 Evaluation of the tart cheny industry’s strategic planning process

LIST OF REFERENCES

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LIST OF TABLES

Table l Tart Cherry Industry Strategy Planning Council Goals and Objectives
Table 2 Optimum Supply Formula Summary 1997, 1998, 1999

Table 3 Tart Cherry Industry Supply and Demand Trends

Table 4 US. Tart Cherry Industry Acreage

Table 5 US. Tart Cherry Industry Acreage Age Distribution, 1998

Table 6 Projections of US. Tart Cherry Bearing Acreage

Table 7 US. Tart Cherry Industry Acreage and Production, 2003

Table 8 Tart Cherry Industry Market Sales Volume Projections

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LIST OF FIGURES

Figure 1 Industry Strategic Planning and Coordinating Framework
Figure 2 Tart Cherry Industry Strategy Planning Council
Figure 3 Tart Cherry Industry Total Supply and Grower Returns

Figure 4 Tart Cherry Industry Bearing Acres and Projections

viii

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56

Chapter 1

THE US. TART CHERRY INDUSTRY - - PLANNING FOR THE FUTURE
1.1 Introduction. In recent years, the tart cherry industry has experienced many
challenging circumstances. These challenges have accentuated the need for the industry to
envision, analyze, and strategically plan for its future. Through the use of knowledgeable
industry leaders and university expertise, the industry has been working on future strategic
planning to help improve its performance and market position. This work on industry
diagnostic analysis, problem solving, and planning for needed strategic direction can aid
the industry in rapid adaptation to changing conditions, development of strategies for
improved competitiveness, and hence increased economic returns in the ﬁrture (Ricks
2000)

Because of the challenges faced by the industry and awareness of the need for
planning for the future, industry leaders have been engaged in activities to analyze and
plan for needed strategic directions for the industry. These efforts involve a partnering
approach among several industry organizations and with analysis, research and extension
partnering with the university. The key activities of these organizations working together
are intended to provide the analytical basis for some of the key components that are
important for strategic direction needed by the industry for the future.

1.2 Overall perspective of the tart cherry industry’s need for strategic planning. The
tart cheny industry has experienced uneconomical conditions for the past two decades.
Due to these uneconomical conditions, growers especially, have been unable to cover their
cost of production because of the low returns. Processors have also faced economic

diﬁculties. Thus, the tart cheny industry came to the consensus that some industry

strategic planning was needed to develop future directions. During the last 15 to 20 years,
the industry has undertaken a number of efforts to work together and develop new
programs and strategies for certain problem areas. In addition, industry leaders decided in
1996 to undertake a more comprehensive approach to industry strategic planning and
problem solving involving the entire industry. This was done to progress further in
discussing a number of industry programs and problem areas.

During the later part of 1996, a comprehensive strategic planning process was
initiated by industry leaders. This comprehensive strategic planning effort has been
pursued since that time with considerable eﬁ‘ort and progress on many aspects for the
industry’s needed strategic directions. A number of implemented strategies with some
new programs have been successful in aiding the industry’s movement towards the goal of
a more positive future direction. Some of these accomplishments have been a federal
marketing order (FMO) to help stabilize surplus supplies, a federated cooperative
“CherrCo” to help rationalize and stabilize processor pricing, and an overall strategy
planning council to continue an ongoing development of strategies to help move the
industry in a positive direction in the ﬁrture.

1.3 Overall perspective of thesis objectives. This thesis includes a broad based analysis
of a number of important economic components related to the tart cherry industry. The
result of this analysis will provide input for the important on going industry - university
partnership efforts in developing industry strategic plans for the tart cherry industry.

Within the context of developing industry strategic plans, strategic direction have
been discussed with industry leaders, and have arisen from consideration of a number of

key categories. They include: I) demand expansion, 2) supply management, 3) processor

pricing, and 4) grower returns. Each of these categories is a major focus area or key
component of the future plans and strategic directions that are being pursued by the
industry strategic planning process. Strategies will be analyzed in each of these areas in
this thesis based upon continuing industry - university partnership efforts including the
industry leaders with their Visioning insight for these areas.

As a basis for the development of a needed strategic direction, important analysis of
the industry’s past and current situation is required. The situational analysis will include
analysis of the industry’s strengths, weakness, opportunities, threats (SWOT). The
important demand / supply imbalance situation will be analyzed along with projected
demand / supply levels for the next few years. Then, using the various analysis
components together to understand the overall perspective of the situation, appropriate
strategic directions for the tart cheny industry can be established or modiﬁed. The
situational analysis and projections for future supply and demand summarized in this thesis
are based in part upon the insights and Visioning of industry leaders.

1.4 Methodology and approach for industry strategic planning. The methodology
and approach for industry strategic planning as discussed in this thesis make primary use
of a case study approach and secondary use of a conceptual industry strategic planning
framework. Using the case study approach as the primary method, this thesis will
establish an evolving history of events up through and including projected demand and
supply outcomes in the future. The input of key industry leaders including Visioning on
projecting future supplies and demand will be incorporated. The use of the Industry
Strategic Planning and Coordinating Framework (ISPCF) developed by Lyford (1998) will

also be used as a reference to help guide the organization of certain chapters in this thesis.

1.4.1 Tart Cherry Industry Strategic Planning - a case study of a broad based
industry approach. The case study may be aided by an in depth analysis of key factors
related to the history of the industry. Working closely with the industry and its leadership
to understand what has caused the major driving forces of the past and today will increase
the likelihood of achieving successﬁrl planning for needed strategic directions for the
future. One way of working closely with the industry is by helping to analyze different
issues and aspects pertaining to the overall industry’s success. Another is by attending and
participating in industry meetings which cover broad scope areas of interest and key
aspects related to strategic planning for the industry.

The partnering relationship between the tart cherry industry and the university have
created excellent opportunities for a useﬁrl case study. The tart cherry industry has had an
effective partnership with the university providing continual analysis of the evolving
changes, problem areas, and development of plans for needed strategic directions. The
university serves as a source of expertise for the tart cheny industry in a number of areas.
Some of these include economic analysis, horticultural research, and new product
development.

1.4.2 An Industry Strategic Planning and Coordinating Framework. The analysis in
this thesis will follow as an overall guide the analytical framework for industry strategic
planning and coordination that was developed by Lyford (1998). This framework, as
shown in Figure 1, can be categorized into four main phases: (1) process initiation, (2)
strategic planning, (3) implementation and coordination of strategies, and (4) strategy
review and re-evaluation.

A major part of this thesis will concentrate on what is designated as phase two

Figure 1: Industry Strategic Planning and Coordinating Framework.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

r Industry Strategic Planning and Coordinating N
Framework
Phase 2
Strategic Planning
Industry
Situational Phase 3 Phase 4
Phase 1 Analysis Implementation Strategy
pm, and Review &
Initiation # Coordination of # Re-
Strategies evaluation
Industry Vision (Feedbad‘)
and Guiding
Strategies
Source: Lyford 1998
k )

 

 

 

“strategic planning” in Figure l. The work related to phase two will include analysis of
the industry’s past performance, current situation, and future projections in order that
eﬂ‘ective strategies for each aspect of the industry can be developed. In addition, there
will be ongoing work with industry leaders on certain aspects of phase three, the
“implementation and coordination of strategies” phase.

Some aspects of this thesis can be related to Lyford’s ﬁ‘amework as a general guide
in helping to organize the work. The tart cheny industry’s strategic planning efforts, with
university assistance, have in some ways been following the Lyford framework for
developing industry strategies. Thus, incorporating the ﬁamework as a guide for some

chapters will be useful in this thesis.

1.4.3 Main informational sources. This thesis will make use of informational input from
many different sources. Much of the important information for this thesis is drawn from
thoughts, ideas, input, and Visioning of industry leaders during their ongoing industry
strategic planning eﬂ‘orts during recent years. Also, included as informational sources will
be university experts with their knowledge, analysis, and background.

Some of the methods for obtaining this information included attending many of the
different industry organizations’ meetings and participating in industry discussions with
these leaders. Other methods for obtaining the research information was through reading
university reports and other publications on various aspects related to the cherry industry
and its evolving situation. Another was through the used of USDA data related to
dynamics of many of the key issues discussed in the thesis.

1.5 Outline of thesis topics. The overall outline for this thesis will be broken into ﬁve
chapters. The following sub-sections are summaries of what each of the chapters will
incorporate.

C t 2.

Chapter 2 addresses the historical evolution of the strategic planning process by
emphasizing what has occurred in the tart cherry industry in recent history. The historical
areas include demand and market expansion, the creation of the Tart Cherry Industry
Strategic Planning Council (TCISPC), supply management and the new Federal Marketing
Order program, and the stabilization of processors pricing through a new federated
cooperative, CherrCo.

91mg.

Chapter 3 includes an industry situational analysis including speciﬁcally a strength,

weakness, opportunities, and threats (SWOT) analysis. This in-depth analysis of the
SWOT will help provide the basis for needed background understanding for developing
strategies for the industry’s future direction. Highlighting the major driving forces will
help to put greater emphasis on the areas of greatest concern for the industry in recent
years.

mutt—4..

Chapter 4 will discuss the supply-and-demand imbalances which are issues resulting
from the ﬁrndamental weaknesses of the tart cherry industry. Future projections for
supply and demand will also be included in the analysis. This chapter will include an
analysis of what might happen with supply and demand in the future as indicated by the
recent trends. There will also be a section on a reconciliation of supply and demand and
the potential balance in the future.

C er 5.

Chapters 5 will include strategies for market and demand expansion, supply
management, continued stabilizing of processor pricing, and increased grower returns.
This chapter will draw upon the analysis ﬁ'om Chapters 3 and 4 to help set the stage in
developing these strategies.

Chapter 6.

Chapter 6 is a summary and overview of the thesis. This chapter will pull together
an overall statement of the current direction for the tart cherry industry, the needed ﬁrture
strategic directions, and any additional implications. Also included will be, the overall

implications of industry strategic planning for a commodity fruit industry.

Chapter 2

HISTORICAL EVOLUTION OF CHERRY INDUSTRY STRATEGIC
PLANNING .

2.1 Introduction. Tart cherry industry leaders have worked for a number of years with
different eﬂ'orts for strategic planning. Historically, these have been mostly directed
towards one or a few major industry problems. In addition, during recent years, efforts
have been undertaken to develop a broad-based and relatively comprehensive approach to
planning for strategic directions that are needed by the industry as a whole.

This chapter summarizes both the efforts of the cherry industry in earlier years to
plan strategies to solve certain problems and the more comprehensive approach during
recent years. This more comprehensive approach includes the establishment of a special
organizational arrangement to address and plan for needed industry strategies for the
future. This chapter will explain the highlights and key components of strategic direction
for expanding demand, managing supply, establishing processor prices, and increasing the
returns to growers.

2.2 Demand expansion. Industry demand expansion activities have been very important
for the continued growth in demand for the past two decades. These activities have been
carried out by a combination of several different organizations and various processor and
marketing ﬁrms coordinating and working together to increase the demand for tart cherry
products. Of these organizations, Cherry Marketing Institute (CMI) has represented the
tart cherry industry in a leadership role by coordinating, organizing, and establishing
overall industry strategies for demand expansion activities for the past 11 years.

2.2.1 Organizations involved in demand expansion. Several different organizations

and many industry ﬁrms have contributed to the success of expanding demand over the

8

past two decades. The efforts of these organizations occurs through a number of
diﬂ‘erent venues, some include promotional money, direct marketing, and new product
development. These organizations and industry segments include processors, cherry
marketers, CMI, Cherry Industry Administrative Board (CIAB), CherrCo, and food
manufacturers. Although these organizations and industry ﬁrms all participate in various
activities related to demand expansion, some have contributed more than others. The
following sub-sections emphasize the involvement of each of the different organizations or
types of ﬁrms for tart cherry demand expansion.

Processors:

The tart cherry processors participate in demand expansion in a number of ways.
Depending upon the processors product category mixes, their involvement may vary.
However, the majority of processors are primarily responsible for: 1) processing a high
quality demanded product ready for sale, 2) taking upon themselves the role of a cherry
marketer in many cases by making contacts with and selling to the food manufacturers,
and 3) in some cases participating in new product development or new market
development.

Chm Marketers:

Cherry marketers are either organizations representing many processors (i.e. Cherry
Central Cooperative) or one processor who markets their own. cherries or private sales
agents. One of the cherry marketers’ roles in expanding demand is to sell as many cherry
products as possible through developing long-term relationships for ﬁrture years sales.
This has been accomplished by many diﬁ‘erent practices, some of which have been price

cutting, provide adequate volume orders, and providing high quality products. Another

important and key role of cherry marketers is to coordinate their eﬂ‘orts with processors,
food manufacturer customers, and grocery retailers to know what the consumers are
demanding.

Food Manufacturers:

The food manufacturers have been a key segment for market and demand expansion
for the tart cherry industry for many years. Much of the advertising, promotion, new
product development, market testing, market analysis, and market establishment that has
occurred for tart cherries have been accomplished by food manufacturers. This is because
a number of these ﬁrms have strong brands and the ﬁnancial resources to accomplish these
important functions. By contrast, the tart cherry industry consists of many small processor
ﬁrms with quite limited means and resources to accomplish many of the tasks listed above
which food manufacturers have the ability to provide.

2.2.2 Historical role of Cherry Marketing Institute. The leadership role of CMI and its
similar predecessor organizations in the industry have provided a major focus on industry
demand expansion for the growers and processors for a number of years. The various
demand expansion programs of CMI have been accomplished through eﬁ‘ective staff with
the goal of providing the best programs possible for the industry. The major program
areas of emphasis for CMI have been domestic market expansion, export expansion;
facilitating the development of new products, and other research.

Various industry segments such as processors and cheny marketer work closely
together with CMI including its programs, strategies, and areas of emphasis for the major
industry demand expansion and market growth efforts. Through coordinating and

partnering eﬁ‘orts of CMI, along with other industry segments and organizations, these

10.

major areas of emphasis have helped to expand demand for the industry during some very
economically difﬁcult times of the early to mid 19903. Then, during the late 1990s with
the initiation of the Federal Marketing Order and CherrCo, CMI’s demand expansion and
market growth strategies have also been coordinated with these new related programs.
The following sub-sections describe these areas of emphasis somewhat more for CMI and
the industry during the past 11 years.

Domestic Market Expansion:

The tart cherry industry has relied on the domestic markets for a majority (80 to 95
percent) of its sales each year. Major product categories for domestic markets have been
frozen cherries (5+1 and IQF), pie ﬁll, cheny juice, and dried cherries. CMI has worked
with processors and cherry marketers to promote these products into many different
markets. The major markets’ emphasis has been food manufacturers, consumer grocery
retailers, restaurant / food services, and USDA purchases.

Exmrt Mgkgs:

CMI has devoted considerable amounts of resources to expanding the export
markets. These export marketing programs have been aided by supplementary MAP funds
from USDA-PAS. The two main export markets have been the European countries and
Japan. For more than a decade CMI has participated and funded the development of the
Japanese market for US. cherries using MAP funds primarily for this target market
country. During this time, the past 10 years, less emphasis was given to developing or
expanding the markets in the European countries. Recently, CMI has developed plans to

refocus their efforts in export expansion primarily toward the European markets.

11

New product and market development:

CMI has been a major contributor to certain kinds of research toward developing
new products and markets for tart cherry uses. One of the most recently developed new
products was the use of cherries to make cheny brandy. They have also , stimulated and
contributed to research on cheny paste. Although CMI has put signiﬁcant emphasis in
this area, there have been relatively few new products that have successfully made it to
market in volume over the past decade.

CMI’s coordinated eﬁ‘orts.

CMI has done a signiﬁcant amount of work to build markets with coupons, target
advertizing, and with a consistent presence at trade shows and other venues. Working
together to develop partnerships with food manufacturers, processors, grocery retailers,
restaurant / food services organizations, and USDA, CMI has been able to leverage their
resources for the industry. One way CMI has been able to work with these various food
marketing ﬁrms is by serving as a major informational source and a facilitator between the
different industry segments in developing new products and carrying out promotional and
advertizing campaigns.

2.3 Comprehensive cherry industry strategic planning efforts. Due to the many
challenges and economic difﬁculties ﬁom which the tart cherry industry has suffered,
especially during the late 1980‘s and early 1990's, there was an increasing need, awareness,
and interest by industry leaders to work on a number of industry improvement strategies
to help the industry to effectively address ﬁrture planning and problem solving. A major
reason for the collective urgency to address these challenges by the industry was related to

the irnbalance between supply and demand which has caused many diﬁcult years for

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growers and processors since the mid-19805

It was decided by some industry leaders, with university assistance, that a concerted,
broad based, and comprehensive approach to industry strategic planning could contribute
considerably to improving the industry’s situation. Thus it was decided to undertake a
comprehensive approach to industry Visioning, strategic planning, and problem solving.
An important initial step as a part of this process was the development of a “Summit
Conference” for industry leadership.

Many industry leaders came together at this Summit conference in the fall of 1996 to
participate and discuss in a tart cherry forum for future Visioning, planning, and
coordination regarding industry problem areas and improvement needs. Some of the key
issues which were discussed and agreed upon at this conference were:

1. The need to develop a round table organization of industry leaders to serve as

a broad industry core group for industry strategic planning and problem
solving.

2. Identifying, deﬁning, and prioritizing major industry problems, issues, and

opportunities.

3. Two top priority areas of need that received major attention at the forum were:

a. The new marketing order program for supply management and
facilitating demand expansion.
b. The idea of a federated super co-op.

This industry discussion, analysis, and problem solving conference was a productive
and positive step for industry leaders to share concerns, discuss future changes needed by
the industry, and prioritize for next steps for strategic planning and industry improvement.
Key areas of discussion and overall outcomes from this conference included an agreement
among most (although not all) of the participant leaders regarding:

1. The importance of the new federal marketing order (FMO) program for the
industry - and a priority need to get it organized and making sure it works

effectively to beneﬁt the industry.
2. A priority need for establishing a “super co-op” to help rationalize, strengthen,

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and stabilize processor pricing for tart cherries.
3. A need for a comprehensive industry Visioning and strategic planning process

on an on—going basis.

4. The formation of a national tart cheny industry planning council including

representatives from all segments of the industry.

About the same time as this industry Visioning conference was held, the federal
marketing order was approved in an industry referendum by growers and processors.
Thus, the initial establishment of the FMO occurred and many related issues received
considerable attention by industry leaders as a priority area for attention as a strategic
direction for the industry. This was a signiﬁcant accomplishment for the industry to
continue the development of the new marketing order which included the entire US.
2.3.1 Tart Cherry Industry Strategic Planning Council (TCISPC). After the tart
cherry Visioning forum in 1996, the idea of creating a national tart cherry council to
address future strategic plans and directions was further developed and modiﬁed. During
1997, with the assistance of Michigan State University (MSU) extension staff, industry
organizational staff leaders worked together in development of effective ways to proceed
for industry analysis, Visioning, problem solving, and development of needed strategic
directions for the industry’s future.

The TCISPC included representatives ﬁ'om the following industry organizations:
Cherry Marketing Institute (CMI), Michigan Cherry Committee (MCC), Cherry Industry
Administration Board (CIAB) or FMO', CherrCo, Michigan Food Processors Association,
Michigan Horticultural Society, and Michigan State University. Figure 2 is a diagram
illustration of the TCISPC and the industry organizations represented on this council.

Through the collective Visioning of industry leaders on the council, analyses needed

for development of strategic directions for the industry’s future were worked on

14

Li?

'I l
“J"

8-,.

44

'a

1,.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Figure 2. Tart Cherry Industry Strategy Planning Council 1
Cherry Marketing
Cherry Institute -
Industry ’ ’ Michigan
Administration \ I / Cherry
Board * Committee
Tart Cherry * *
. . Industry Strategy
Michigan . .
Food 4+ Planning COIIIICII HI CherrCo I
Processors
Association
Michigan Michigan State
Horticulture University
Society
\ J

 

 

extensively. The TCISPC continues an on-going analysis of the major driving forces
impacting the industry, major problems, and to develop overall strategies to guide the
industry in the direction it needs to go. The council combines the insight of each of these
major industry organizations to help develop a broad, industry wide scope in their
discussions. These key industry organizations, representing all segments of the industry,
are also very important for facilitating, initiating, and implementing programs and
strategies developed by the council and the industry’s leadership.

2.3.2 TCISPC’s purpose and goals. Within the broad scope of the council, purposes
and goals have been established to help guide the council to improve the industry in its
entirety. These are summarized in Table 1. These include important areas for building
common grounds to establish directions for the overall industry as well as to help the

individual organizations meet their more speciﬁc respective goals.

15

 

(Table l. Tart Cherry Industry Strategy Planning Council Goals and Objectives‘

Purpose:
To analyze current and ﬁrture needs of the tart cherry industry. The council is
also involved in analyzing and discussing various strategic directions which
may help the cherry industry to achieve higher performance levels.

Goals/Objectives: _
1. Strengthen the economic viability of the tart cherry industry.

- Increase grower returns.

- Increase processor proﬁts.

0 Increase industry sales through demand expansion.

- Increase grower information.

Strengthen the industry’s competitiveness.

Strengthen the communications within the industry.

4. Eﬂ‘ectively serve the needs of the industry’s customers to aid in retuming
positive returns to growers and processors.

5. Strengthen the coordination of efforts and programs of various industry
organizations and segments for the greatest effectiveness and beneﬁt to the

\ Industry. j

2.3.3 Issues and concerns discussed by the TCISPC. The actions of the TCISPC have

9’!"

 

 

corresponded to the goals of the council which have been summarized in the above
section. The initial meetings of the TCISPC centered around the prioritizing issues
concerning the industry at that time. Some of the key areas of council discussions were
centered on the importance of collaborating and coordinating strategies to best solve the
immediate challenges. Development and continued progress on the FMO for supply
management and the CherrCo federated cooperative were rated as top priorities to aid in
the neededstrategic directions for the future of the industry.

The TCISPC has been able to analyze a number of key issues and develop strategies
and plans for future direction. The following are some of the issues discussed and some
the council continues to discuss:

. Establish future industry market growth goals for the next few years.
0 Develop an industry situational and SWOT analysis. (Strengths, Weaknesses,

16

Opportunities, and Threats)

- Analyze and update information on the long-run acreage cycle and the best

way to present the information to the industry.

- CMI’s plans for a processor oriented export expansion program with

partnership arrangements with CherrCo and the exporting processors.

- The FMO program strategies and its interrelationships with other industry

programs and amendment plans.

0 Most effective and coordinated approaches for the School lunch programs.

- Increase the communications between processors, growers, and various

industry segments on key problem areas and needed strategies.
2.4 Supply management. Supply management for the US. tart cherry industry has been
a difﬁcult challenge historically for the industry to effectively balance supply with the
quantity demanded. Because of this continuing major problem, the industry discussed
during the late 19805 and early 19903 several alternative strategies and organizational
approaches which might be used for an industry supply management program. The overall
goal of these industry discussions was to ﬁnd a way to reduce the surplus supplies
available on the market and provide a closer balance with the industry’s demand quantity
at break-even prices.

The industry considered several possible programs or approaches to reduce some of
the supply problems. For example, to try and reduce the over supply problem, the
industry worked on plans to have an industry wide tree-pull to somewhat reduce the
excessive acreage. Although this would have helped to reduce the acreage, this would not
have solved the problem in the long-run. This would have been a short-run solution to the
problem which may have returned at some ﬁrture point.

As part of the industry discussions on how to remedy the industry’s supply
management problems, CMI, through its established leadership position, helped the

industry to focus on the development of a new FMO to help manage the surplus supplies.

Processors and growers both encouraged the establishment of such an order. Thus, as a

17

result of many diﬁ‘erent areas of discussion and attempts to start some kind of program to
help the supply management needs, industry leaders with leadership by CM] developed a
new FMO supply management program for the industry.

A major industry goal for this supply management program has been and remains to
reduce excessive supply surpluses, hence, obtaining a closer balance between the quantity
supplied and the quantity demanded. Other goals for the supply management marketing
order include stabilizing somewhat the annual supply ﬂuctuations when these occur and
encouraging long-run market growth. This supply stabilizing aspect of the program is
intended to enable the industry to have somewhat more stable processor prices and grower
returns.

2.4.1 Federal Marketing Order. After several years of work to develop sufﬁcient
industry consensus, the provisions of the program, the hearings, the referendum, etc., the
tart cherry industry succeeded in establishing a federal marketing order program in late
1996. This new, key industry program was established with the goal of helping to provide
an improved balance of supplies with demand. In order to successfully establish a balance
between the supplies and demand, the FMO needed to provide somewhat greater stability
of market supplies by aiding the industry through its supply management provisions.

The new FMO program was an important example of successful industry strategic
planning that focused on a major problem area of supply management. The successful
development of the FMO program provided an important foundation component that
helped to set a positive stage for a more comprehensive industry strategic planning effort.

CMI led the planning processes for the development of the FMO with its leadership

role in the industry. Processors and growers’ input were all important contributions to

18

this program development. Although the discussion and planning stages for the FMO
were long and drawn out, the industry successfully continued to pursue the need for a
FMO to help stabilize the balance between supply and demand.

When the comprehensive industry strategic planning effort was undertaken in 1996,
the FMO had just been passed in an industry referendum. Therefore, one important
priority that was quickly agreed upon as a part of the comprehensive planning eﬁ’orts was
to work further on the needed next phases for the marketing order. This included plans to
do the speciﬁc organization of the board, staff, and needed board policies for the program.
This was a transitional phase from strategic planning focused mainly on initial program
development to program implementation and broader interrelationships of the FMO as
part of the comprehensive industry planning efforts.

In conjunction with the FMO, the Cheny Industry Administrative Board (CIAB)
was organized as the industry governing board of the FMO. The CIAB includes
representatives ﬁ‘om each of the seven major producing states to serve on this Board of
Directors. These board members are elected by the growers and processors in their
speciﬁed districts. The CIAB has discussed, evaluated, and made decisions related to the
policies and rules under which the FMO program operates.

The FMO’s primary purpose and program actions have been to manage the supplies
of the tart cherry industry. This has been accomplished by controlling the supplies which
have been available for the primary markets, speciﬁcally the domestic markets.

When the surplus supplies occurred due to over production in 1997 and 1998, the
marketing order was used to reduce the surplus supplies somewhat by requiring

processors and growers to remove a surplus percentage of supplies from the primary

19

markets. Compliance with the surplus reducing regulations are accomplished through
different alternatives that were available to the processors and growers. These alternatives
include: 1) an inventory reserve, 2) if approved by the board, sale into designated
secondary markets such as for exports and new products, 3) leaving some surplus
unharvested, and 4) charitable donations or gifts.
The marketing order program has served, in an overall view, as an affective program

tool for the tart cherry industry for surplus supply management. Working together in a
coordinated partnership effort with other industry organizations, the FMO successfully
helped to improve the industry’s situation during the 1997 to 1999 seasons. The FMO
was able to stabilize the supplies on the prhary markets somewhat, providing a greater
opportunity for CherrCo to be successful in inﬂuencing processor pricing. The marketing
order has been used to encourage market expansion such as for exports and new products.
This is done by allowing some surplus supplies to be used for these “secondary” markets
as designated by the board. These aspects of the FMO emphasize the relationship of the
FMO to demand expansion eﬁ‘orts of CMI and other industry segments. These
interrelationships for the most effective demand expansion for the industry are some of the
aspects which are being dealt with as part of the industry’s comprehensive strategic
planning process.

2.4.2 FMO performance in the first three years. For the past three years, supply
management has been analyzed, and in 1997 and 1998 inﬂuenced by the FMO. During
1999 there was no surplus restriction and inﬂuence on supplies by the FMO. This section
will compare the progress of the industry for each of the three years and illustrate the

importance of the FMO to the industry for ﬁxture success.

20

The key components of the FMO’s surplus supply calculation’s and program
alternatives for the surpluses will be discussed and explained. These include the following
total available supply, optimum supply, surplus, a market growth supply allowance,
secondary market diversion, reserve pool, and non-harvest. These key components will be
discussed in the following sub-sections.

The information used in each of these six areas has been compiled from the CIAB
ﬁnal summary for each of the three years. Table 2 illustrates the amounts which went into
each of the these FMO allowed categories for the industry supplies and shows a numerical
comparison. Each of the following sub-categories will refer to Table 2 as the source of
the data.

Total Avail able Supply:

The total available supply for 1997, 1998, and 1999 were 355.0, 382.8, and 289.0
million pounds respectively, as shown in Table 2. This was calculated by adding together
the US. crop size for that year to the carry-in supplies. The 1997 supply was really high,
in part, due to a large new crop and, in part, because of the large amount of carry-in ﬁ'om
the previous year. In 1998, the supply was even larger, and this was primarily due to the
large new crop production which occurred that year. In 1999, the carry-in was 38 million
pounds and the production was 251 million pounds. The supply was just a little bit over
the estimate for necessary demand quantity based upon the industry’s sales the three
previous years. The CIAB voted not to have a regulation because the supply was in
approximate balance with demand.

I The optimum supply for the ﬁrst three years of the FMO were 269.9 million pounds

21

 

 

 

 

 

(Table 2. Optimum Supply Formula Summary 1997, 1998, 1999 \
1997 1998 1999
Mil. Mil. Mil.
_L_b_; Percent ﬂ Percent I_._b§._
Total Available Supply 355.0 382.8 289.0
Optimum Supply 269.9 288.6 235.0
Surplus 108.1 45% 125.6 41%
Market Growth 27.0 11% 29.8 10%
MarketDiversion 51.3 21% 40.8 13%
Reserve 19.9 9% 8.5 3%
Non-harvest 9.9 4% 47.3 15%
Source . CIAB
C J

 

for 1997, 288.6 million pounds for 1998, and 285.0 million pounds for 1999, as shown in
Table 2. The three year average optimum supply increased somewhat after the 1997 sales
year due mainly to the unusually large amount of exports sold during that year.
mm

The surplus shown in Table 2 for 1997, 1998, and 1999 are 108.1, 125.6, and 0
million pounds respectively. This is calculated by subtracting the optimum supply from
the total available supply and then adding an economic adjustment. The economic
adjustment is an optional addition which the CIAB opted to use during the 1997 and 1998
crop years. The economic adjustment is used to oﬁlset the estimated tonnage to be sold
into the export market during the marketing year. This makes it so there is a greater
restriction percentage and more tonnage removed from the market.

The initial surplus restriction percentages are shown in Table 2 as 45 and 41 percent
for 1997 and 1998 respectively. During the 1997 and 1998 crop years, there was over
100 million pounds of surplus which needed to be removed from the domestic market.

During 1999, there was no surplus and hence no FMO supply regulation.

22

Market Growth Factor:

This is a provision that USDA inserted into the marketing order to guarantee that
the industry would always have at least 10 percent of the total previous sales averages
available for market growth. This is calculated by multiplying the previous three year
industry sales average by 10 percent. Then, the market growth is subtracted from the
surplus to give an effective restriction percentage. The market growth quantities for 1997
and 1998 were 27 and 29 million pounds respectively.

Market Diversion:

Market diversions are alternative market uses designated by the CIAB which can be
used for surplus cherries. These are options for the industry to help restricted districts to
comply with their surplus percentage other than leaving some surplus cherries
unharvested. Export markets and new products have been two of the most commonly
used market diversions permitted by the CIAB. They are also beneﬁcial and helpful to the
industry because of the opportunities and incentives to expand demand, build new
markets, and develop new products.

The market diversion for 1997 and 1998 were 51.3 and 40.8 million pounds
respectively, as shown in Table 2. The market diversion amount was calculated by adding
the exports and new products’ volumes which received diversion credits. In 1997, there
were considerably larger amounts of exports sold into that market than in 1998. The new
products and new market development volume increased by four million pounds from

1997 to 1998.

23

Reserve Inventogg:

The reserve or “controlled inventory” cherries are deﬁned by the marketing order as
cherries that are kept in reserve to be marketed at a later time when supplies are short and
they are needed for the market. These reserve cherries are for sales in years of shortages
to help in stabilizing supplies. During the ﬁrst two years of operation under the FMO, the
reserve was used to some degree. For the 1997 and 1998 seasons, the reserve cherries
were 19.9 million pounds and 8.8 million pounds respectively, as shown in Table 2.
Non-West cherries:

The non-harvest quantities for 1997 and 1998 were 9.9 and 47 million pounds
respectively, as shown in Table 2. The non-harvest cherries are those surplus cherries that
are left in the orchard or destroyed at the plant in compliance to the surplus regulation
percentage. These are usually lower quality cherries. The reason for more unharvested
cherries during the 1998 crop was because of the overall low quality of the crop that year,
and processors did not want to participate extensively in the reserve.

2.5 Processor pricing and grower returns. Low processor prices, a pattern in some
years of decreasing processed prices within the marketing year, and low grower returns
have caused a considerable amount of concerns within the industry for a number of years.
These low prices and returns have been inﬂuenced by a number of diﬁ‘erent factors. Some
of the factors include: the surplus supplies ﬁ'om excessive production related to the long-
run bearing acreage cycle trends, abnormally large canyover stocks, large food
manufacturers using their substantial buying power to inﬂuence cherry prices down, and

commodity processors using price cutting as their primary marketing strategy.

24

Because of the frequent problems with weak pricing for processed cherries, the
industry made a number of attempts to analyze this problem area and to develop
improvement strategies. Some of the attempts include identifying and considering
alternative improvement strategies and to try to develop action plans to implement certain
strategies to improve the industry’s performance in this regard. These efforts involved a
signiﬁcant amount of industry strategic planning which was directed toward this important
problem area.

One of the signiﬁcant results of the earlier industry efforts directed at this problem
was the formation of the federated sales and marketing co-operative - - Cherry Central.
This large co-operative has had as many as 17 members, each of which is a co-operative
or grow owned processa. Cheny central has served as a major marketing organization
for cherries and certain other fruits since 1973.

During the past two decades, there have also been a number of efforts within the
industry to develop additional strategies, including new organizational arrangements to
improve the industry’s situation in regard to pricing of processed cherries. Some of the
alternatives which have been considered and analyzed in this regard include: 1) a new
federated “super co-op” of cherry processors, 2) a large grower cooperative with a strong
national brand such as Ocean Spray, 3) a substantially expanded Cherry Central, 4) a
grower cooperative associated with the MACMA grower bargaining-pricing association
which would deal with processed cherry pricing, 5) a cooperative similar to the Michigan
Celery Promotion Cooperative, 6) a futures market for processed cherries, 7) a Webb-

Pomirire export association, 8) a return to bargained grower prices by MACMA as was

25

done during the 1960s, 9) the use of target grower prices as inﬂuenced by MACMA, and
10) various other ideas to accomplish improved pricing arrangements.

Although this area of concern and these possible organizational strategies for
improved performance received considerable discussion and analysis by industry leaders
over the years, many of these ideas did not come into actual ﬁ'uition. Three exceptions to
this, which to a degree, dealt with processed prices were the formation of an export
trading company, CherreX, the expansion in volume over 20+ years of the Cherry Central
Cooperative, and the formation by MACMA of a new cooperative for processing and
processed cherries. In addition, MACMA attempted for a number of years to either
bargain for grower prices or to inﬂuence grower returns by establishing target grower
prices. One goal of these approaches on grower returns was to help “set a ﬂoor” for
processed prices as well.

The above developments were logical approaches for improving the industry’s
pricing arrangements, but their limited impacts did not alleviate the problems.
Nevertheless, the many industry discussion on the problem area of processed pricing and
the above steps to improve the situation helped signiﬁcantly to set the stage for later
strategic planning and concrete developments.

Throughout the many discussions of ways to improve the industry’s pricing
arrangements which occurred during the 19703 to early 1990s, there was general
recognition that a major element affecting industry pricing was posed by the surplus
supplies when these occurred. The interrelationships of surplus supplies, processors’
patterns of severe price reductions as a primary means to increase sales volume, and the

induStry’s evolution to the practice of basing grower returns upon processed cherries

26

market prices minus processor costs were particularly evident after the ﬁrst marketing
order was discontinued in 1986. Therefore, a majority of industry leaders evolved to a
consensus by the early 19903 that development of a new supply management marketing
order was an important and necessary step prior to establishing improved pricing
arrangements.

As discussed and stated earlier in this chapter, the FMO was established by late 1996
through signiﬁcant eﬂ‘orts of industry leadership. The devolvement of the FMO had very
important implications for pricing arrangements within the industry. Since the new FMO
program could be used to reduce the large surplus supplies, thus achieving a close balance
with supply and demand, this provided a much improved setting for new approaches for
the pricing of processed cherries.

2.5.1 Historical methods for processor pricing. Most processed cherries are sold as
industrial ingredients to food manufacturers primarily as 5+1 frozen and IQF cherries. This
is a commodity market with processor sellers all competing in the market with a very
similar commodity - - ﬁ'ozen cherries. Therefore, the most common practice by the tart
cherry processor marketers to obtain sales for their company has been to cut prices under
the current market prices. Then competitor processors would further cut the price to
obtain sales for their ﬁrm. To a degree some of this pattern was logical and justiﬁed as a
part of the price discovery process for the market-inﬂuencing supply and demand
conditions. But there was a widespread perception among industry leaders, including
many processors, that there was often considerable undue price cutting which was not

warranted by the industry’s supply and demand conditions.

27

This tendency for undue price cutting was especially pronounced after the industry
evolved to the practices of basing grower returns on processed prices received minus the
processors cost margin. Because of this practice, if a processor cut price below the
market price to increase their sales volume, most if not all of the reduced price could be
passed on to growers as a lower grower return. While the growers would get a lower
return, the processors would maintain their processor’s margin per pound.

2.5.2 CherrCo’s initiation and accomplishments of the past three years. During the
spring of 1997, the industry successﬁrlly implemented a “super co-op” to help strengthen
and stabilize processed cherry prices within the season. This federated cooperative,
CherrCo, has through its cooperative processor members a majority of the industry’s
production. CherrCo has, along with the operation of the FMO’s supply management
program, successﬁrlly helped the tart cherry industry to increase the processed cheny
prices during the past three seasons.

During the ﬁrst year of operation, CherrCo worked to stabilize and strengthen the
processor prices to avoid the common price cutting practices of the past. This was a very
diﬁcult task to accomplish, but because all the member processors were willing to abide
by CherrCo prices, they were successﬁil in making substantial progress. Also, the
signiﬁcant role of the FMO in controlling supplies was beneﬁcial and essential to the
success of CherrCo for pricing of processed cherries.

CherrCo was successful in somewhat inﬂuencing processor prices during the 1997
and 1998 season. Although there were two very large crops in 1997 and 1998 resulting in

large surplus supplies and carry-over stocks, the new FMO substantially reduced the

28

amount of surplus supplies available to the market. This greatly aided CherrCo in their
successful endeavors related to pricing approaches.

The prices are set by CherrCo for their members’ sales at levels which the licenced
sales agents of the organization must return to the cooperative. The results in 1997 and
1998 were signiﬁcant progress for the CherrCo organization and its membership toward
some of CherrCo’s key goals. However, there was still a need for the processor prices to
increase still further to help increase the grower returns to be nearer to their costs per
pound.

The 1999 crop was considerably different from the previous two years. The crop
size was signiﬁcantly smaller and there was no need for the FMO’s supply management
program to be used in 1999. CherrCo increased the processed cheny prices even more
than the previous year to higher opening prices than had been experienced since 1991.
This was very positive for the groWers knowing that processors were working to increase
the processed cherry prices to higher levels.

During the ﬁrst month of the 1999 marketing year, considerable sales volume for the
year were made. The tart cherry industry with leadership by CherrCo has continued to
increase prices for processed cherries since then by six cents per pound. The estimated
sales volume for 1999 is expected to be close to 270 million pounds which is a small
decrease ﬁ'om the previous few years. However, the industry will be much better oﬁ‘
because of the increased prices in the domestic markets, and on average processors will be
able to pay the growers more positive returns than have occurred the past few years.
2.5.3 Historical struggles in establishing grower returns. The need for proﬁtable

grower returns to cover their costs has been a majOr problem for growers for many years.

29

Some of the reasons for needed higher, positive returns to growers include: 1) grower
returns have been substantially below their typical costs per pound for most of the last 15
years, 2) the higher cost of key farm inputs, 3) growers have felt the economic diﬁiculties
from other commodities, such as apples, combined with the economic difﬁculties of the
tart cherry industry, and 4) re-investment into the farm operations have been very low for
a number of years.

2.5.4 Grower price influencing organization. One of the largest tart cherry grower
organizations in the industry was for many years until 1999 the tart cherry division of
Michigan Agricultural Cooperative Marketing Association, Inc. (MACMA). MACMA
was organized to help the growers bargain with the processors for higher returns.
MACMA also served as a voice for the growers in many diﬁ‘erent circumstances over the
years. MACMA was moderately successﬁrl in bargaining during its early years starting in
the late 19603, and became very inﬂuential during the short supply, high-priced period of
the late 19703 and early 19803 when there were often high processor prices.

Then, during the late 19803 when surplus supplies occurred and the grower returns
declined again, MACMA could not be nearly as effective because of the surplus supplies
which burdened the industry in most years. In addition, an increasing percent of the
growers’ tonnage became afﬁliated with cooperatives who did not have to participate in
negotiating or bargaining with MACMA for the grower returns. Although this occurred,
the inﬂuence of MACMA on grower returns was honored in earlier years by some of the
cooperatives helping to some degree to increase the returns to growers. However, during
the late 19803 and early to mid-19903, the large excessive supplies resulted in extremely

low grower return levels. The impact of the supply surpluses on the market resulted in a

30

situation that was beyond the capability of MACMA to inﬂuence returns to a great degree.
The tart cherry division of MACMA was dissolved in the spring of 1999 when the
tart cherry industry’s growers in Michigan voted not to continue to fund the program.
The Red Tart Cherry Information Program (RTCIP) had been established to collect the
funds from the growers to support the cheny division of MACMA. Without the support
of the growers through RTCIP, the MACMA program did not have a source for funding,
thus, ending the cherry division of MACMA.
2.6 Overview of the historical evolution of the strategic planning process. The
industry eﬁ‘orts for strategy development and ﬁrture planning have been strengthened
through the eﬁ‘orts of the industry leaders including their joint eﬁ‘orts through the
TCISPC with its broad, industry-wide scope. The TCISPC has eﬂ‘ectively brought
together leaders ﬁom the industry organizations with insight and Visioning to jointly work
on solving the challenges. Through the coordinated efforts of supply management,
demand and market expansion activities, and price establishing, the historical diﬁiculties in

the past can potentially help to strengthen the industry in the future.

31

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Chapter 3

INDUSTRY SITUATIONAL ANALYSIS
3.1 Introduction. An industry situational analysis is intended to develop a comprehensive
understanding in key areas for strategic planning as discussed later in this thesis. This
chapter relates to the ﬁrst component of the strategic planning phase of the industry
strategic planing and coordinating framework developed by Lyford (1998). The
situational analysis of this chapter will use a common practice taught in business school
ﬁrm management courses of analyzing the strengths, weaknesses, opportunities, and
threats (SWOT). Although, the analysis in this thesis is for a broad industry approach,
some of the same techniques may be used as for a ﬁrm along with appropriate adaptations
for the broader industry setting.

This chapter will be broken into the following four sections: 1) industry strengths, 2)
industry weaknesses, 3) industry opportunities, and 4) industry threats. The SWOT
analysis completed for this thesis has been accomplished with substantial input of industry
leaders working together in the TCISPC.

3.2 Situational Analysis - SWOT. SWOT analysis is commonly a major part of a
situational analysis related to strategic planning. In this case the SWOT analysis is for the
broad U.S. tart cherry industry.

Strengths are, in this case, areas which give the industry positive capabilities in
gaining a competitive advantage over competing industries. Weaknesses are areas where
an industry does not perform as well as it needs to and lacks essential abilities to compete
with other industries. Opportunities are areas which can be improved upon and exploited

to increase performance in competitiveness, market growth, and economic viability.

32

Threats are areas which negatively aﬁ‘ect the industry’s performance or may become major
negative factors in the future. These topics are generally discussed in the context of
needed strategic directions for the tart cherry industry as it strives to improve its
competitiveness and economic viability for the ﬁiture.

3.2.1 Industry Strengths. The strengths of the tart cheny industry are those features that
add to the industry’s ability to be competitive, progressive, and proﬁtable. These provide
a foundation or base to build upon in order for the industry to continue to progress and
strengthen its economic position. The industry needs to take advantage of its strengths in
developing strategies for future improvement.

The following sub-sections include discussion of a number of strengths of the tart
cherry industry with brief explanations of each.

The inherent nature of the tart chm fruit.

Tart cherries have an inherent natural bright red color with a pleasing tart taste. .
These characteristics provide desirable appeal for many consumers in a number of cherry
products. These two characteristics combined help cherries to be well suited as an
ingredient for many food manufacturer product lines. They are also positive attributes for
marketing cherries as dried cherries or cherry pie ﬁlling in retail grocery markets.

The healthful properties of tart cherries are another built in inherent characteristic
that provide a strength of increasing importance as supported by recent research ﬁndings.
Research has indicated that tart cherries contain many desirable and healthﬁrl
characteristics of compounds which come from the bright red color found in the skin of

the hit. The potential of extracting the beneﬁcial compounds from the cherries could

33

have substantial potential for increasing overall demand for cherries along with developing
further research ‘on these healthful properties (Nair et al. 1998).
A low-Qg, pﬁicient cost leader industgg.

The industry has many knowledgeable growers who are effective managers in
putting together all the necessary managerial components to be highly efﬁcient in all
operations. For example, mechanical harvesting, 1PM, and new orchard technologies have
all contributed to this continuing and progressing strength which provides a foundation for
competitiveness in US. and export markets.

Emcient, lpw-cost processors.

Eﬁicient, low-cost processing is a continuing and progressing strength which has an
important foundation for the industry’s competitiveness. Through the use of top-notch
and continually improved technologies in the processing plants, along with effective
management, processors are quite eﬁicient and effective in their processing operations.
They are also continuing to progress on even more advanced techniques, improving their
managing skills, and reducing the overall costs of production. Another aspect which has
helped processors to be eﬁcient and low-cost is through combining the processing of tart
cherries and other hits such as apples to help spread overhead costs over a much larger
volume base and hence reduce overhead costs per pound.

Eﬂ‘ective vertipal; linkages.

Eﬁ‘ective vertical linkages have been developed between growers and processors to
help strengthen their relationships. These stronger relationships have helped to coordinate
the communication between processors and growers. Eﬁ‘ective vertical linkages are

especially vital during the harvesting season for on time delivery of quality fruit. This

34

involves coordination of the harvesting, cooling, delivering, and processing for this highly
perishable fruit which has exacting quality requirements.
Technplogically advanced industg.

The US. tart cherry industry is more technologically advanced compared to other
countries through the use of an up—to-date and integrated set of technologies available to
growers and processors. This is an ongoing and continually progressing strength for the
industry and can continue to help the US. tart cherry industry he more emcient and
effective.

One example of where technological advances have helped the tart cherry growers
to obtain better ﬁ'uit quality is through IPM programs. IPM programs have helped obtain
effective plant protection through the control of insects and diseases.

Technological improvements to increase the hit quality at the processor level has
been emphasized by reducing the number of pits in the processed products. This has been
accomplished through a combination of a number of technologies including the use of
electronic eyes for sorting after the cherries have been pitted.

Universig rmch and extension.

Michigan State University plays a substantial role with informational assistance to
the tart cherry industry through research and extension in technological progress,
economic analysis, market analysis, new product development, and other areas of
research. The integrated set of research and extension for technological and economic
aspects, as well as the close university - industry partnerships, seem to be the best in the

world for tart cherries.

35

Industg Leadership.

The industry has a core of capable, dedicated industry leaders who are willing and
committed to working together for industry improvement and ﬁirther progress. This is an
area which recently has become an increasing strength as shown by effective leadership in
establishing the new FMO program and CherrCo. Also, the industry leadership has been
successful by implementing strategies in recent years to help speciﬁcally address many
controversial issues related to the FMO and to continue to progress and adapt the industry
demand expansion programs to changing conditions.

Indu r ' tio

Within the cherry industry there are a set of industry programs and their related
organizations which are well-developed and appropriately targeted toward critical areas of
need for the industry such as demand expansion, supply management, and processor
pricing. Tart cherry demand expansion programs include those of the Cherry Marking
Institute and related state organizations such as the Michigan Cherry Committee. A
relatively new supply management program which is administered by the Cherry Industry
Administrative Board helps to manage available supplies for domestic markets and hence
reduce surplus supplies on the market through a federal marketing order. Federated co-
operatives have helped with effective sales, marketing, eﬁicient supply chain management,
and stabilizing and rationalizing processed cheny pricing.

Industry Visioning.
Industry Visioning, problem-solving, coordination, and organization of needed
industry strategic directions through the work of the Tart Cherry Industry Strategy

Planning Council have recently aided the industry in developing strategic direction for the

36

future. This Visioning by the council is being undertaken in part to help the various
industry organizations to work together, improve coordination, to analyze the areas of
greatest industry need, and strategically plan for the future.

3.2.2 Industry Weaknesses. The industry faces a set of interrelated weaknesses which
have resulted in some major areas of undesirable performance. The industry leaders
regard to these areas of weak performance as negative driving forces. The weak
performance areas include the persistent imbalance between supply and demand (surplus
supplies) and the low grower returns as a result of the supply and demand imbalance. The
underlying weaknesses which have contributed to the poor performance areas have been
discussed and analyzed considerably within the TCISPC. These weaknesses include the
following: 1) industry’s lack of ability to avoid over-plantings, 2) failure to develop a
number of products which ﬁt the changing consumer preferences, developing and gaining
effective consumer access, and industry must rely to a substantial degree on food
manufacturers. This thesis will put major emphasis on the key poor performance areas
(driving forces), the supply and demand imbalance and low, unproﬁtable returns to
growers.

Driving forces are the forces with the greatest inﬂuence on the most important
changes that have taken place and will take place in the industry’s environment
(Thompson et al. 1995). The major driving force or poor performance areas of greatest
importance facing the tart cheny industry has been and continues to be the imbalances of
supplies in relation to demand, i.e. persistent surplus supplies, and resulting low,

unproﬁtable grower returns.

37

3.2.2.1 Imbalances of supplies in relation to demand. The imbalances between tart
cherry supplies and demand with substantial surplus supplies has been a continual problem
of the tart cherry industry since the mid 19803. These imbalances are caused by a number
of different factors including 1) over planting which causes excessively large production
capacity, 2) large carry-over supplies from a previous year of excessive production, and 3)
slow growing demand for tart cherry products.

Because the supplies of cherries have been so greatly inﬂuenced by the number of
acres planted, the excess supplies occur in notable fashion during the phases of the long
term acreage cycle with excessive bearing acres and large production. When the long-run
acreage cycle is in a phase of excessive over-planting of acres, and more than one large
crop occurs in succession, there is also a greater potential for large carry-over inventories
as well. This is due to' the very large crops which are not completely sold each year and
the unsold inventories are carried over to the next year often adding to excessive or
surplus supplies.

The slow growing demand can be attributed to a number of different challenges
which the industry is facing at this time. Some of these include the following: 1) changing
consumer tastes and preferences away from traditional cherry uses such as in pics and
sweet desserts, 2) large investment requirements for new successful product development
and market establishment, and 3) some substitution of products such as apples slices and
blueberries by food manufacturer customers. These are all weaknesses and threats which
will be discussed later in this chapter.

The relationship between total supply and total demand is important in illustrating

the large surpluses which have occurred. Table 3 illustrates trends in this supply and

38

 

f N

 

 

 

 

Table 3. Tart Cherry Industry Supply and Demand
Trends
Total Total
Supply Demand Surplus
M17]. Lbs.
1 980 - 1983 233 185 48
1984-1987 347 236 111
1988 - 1990 308 242 66
1 992 - 1995 395 276 1 19
\ 1996 - 1999 348 279 69 J

 

demand balance by showing the four year averages for the past 20 years. The total supply
column shows the average supplies for each time period. In several years, since the early
19903, the average total supply exceeded the total quantity demanded by about 100
million pounds on average. These surplus supplies have also resulted in very low grower
prices that in most years are well below typical costs per pound. The overall change in
total supply from the early 19803 to the late 19903 has shown a substantial increase of 115
million pounds on average. The surplus supplies have also increased ﬁ'om the early 19803
to the late 19903 to approximately 71 million pounds extra.

The total demand quantity, as shown in Table 3, has had an upward trend since the
early 19803, but a relatively slow growing trend. This upward trend in demand quantities
began in the early 19803 with an average of 185 million pounds and continued through to
the late 19903 with an average of 279 million pounds demanded. This was a signiﬁcant
growth of 94 million pounds or about 45 percent in approximately 15 years (an average
growth of 3 percent per year).

The surplus column in Table 3 shows the difference between the total supplied and
total demanded. Over the past 20 years, the surplus has exceeded the demand

conSiderably on average. In addition, because the industry has had considerable annual

39

ﬂuctuations in supplies, which are not shown in Table 3, there have been some years when
the surpluses were even larger an exceeded more than 130 million pounds. This
comparison of the supply and demand relationship with its persistent surpluses helps to
emphasize the importance of reducing the surpluses to obtain a closer balance with
demand.

The supply and demand imbalance driving force has had a very large negative impact
on the tart cherry industry for most of the last 15 years. This driving force has impacted
or even caused many of the other weaknesses the tart cherry industry has faced and
continues to face. The industry has taken some action steps through the newly developed
FMO program with a goal of overcoming this industry weakness in the future.
3.2.2.2 Generally, low unproﬁtable grower returns. The continuing situation of
generally, low unproﬁtable grower returns is also considered by the industry as another
major driving force. This poor performance area is also a result of the imbalance between
supply and demand.

Growers have had low returns which were generally less than their typical costs per
pound of production, in almost every year since the mid 19803. Growers have
experienced relatively low returns for most of the past 15 years due to the effect of both
the large surplus supplies and slow growing demand. In the short-run, because the overall
demand for tart cherries is both inelastic and diﬁicult to expand rapidly, the tart cheny
industry has had difﬁculty in maintaining grower returns which are suﬁcient to cover their
typical costs even in years of relatively small surpluses.

This important relationship between the total supply and grower returns is illustrated

graphically in Figure 3. This ﬁgure shows the relationship of total supply and grower

40

 

 

 

 

K.
Figure 3. Tart Cherry Industry Total Supply and Grower Returns N
500 - 1— 60
Total Su 1 '

._ 450 . pp’ 50 ..
3 .3 .1 i "' .e'
c . . . ,. h _
2 ‘°° ’ : : -:= : .. a
E # g. 'a I: I : i I. I -0- ‘0 2
g. 350 : 1 ' I . I. '. a. c
m . . o . . . s O
3 . » .’ ' ’ - ' 30 9'
C 300 d OI s ’ . l T” M
x ’ ‘ ' . s E
‘7 250 . »’ 1: . . a
.3 , ‘ 1: ‘~. .‘ ‘. 4- 20 g
7:. 200 I ‘1 1: " {"r o" i c“ 1‘ ‘ "
.2 .. : I a. Q. 2 c F ‘9. '3 ‘9 I g
E . a . 0: \.; “ ’8. . ‘I l‘ ‘1' 1 o 2
S 150 7' ‘ ‘ Grower Returns ‘3: 0

100 W W I I I I I I I I I I I I I I I I I I I I I I I I I I o

1970 1973 1900 1905 1990 1995
Source: NASS/USDA, Various Years.

 

 

\ J
returns ﬁ'om the early 19703 through to the late 19903. This ﬁgure helps to illustrate the
substantial variations in both supplies and grower returns which occur ﬁom year to year.
Also, this emphasizes how much of a change may occur in grower returns when there are
either large supplies or short supplies in a given year.

The 1991 and 1995 crop years are two examples that illustrate and explain the large
variations in total supply and its impacts on grower returns. In 1991, there was a
signiﬁcant ﬁ'eeze and the total supply for that year was close to 200 million pounds, as
shown in Figure 3. This created a substantial but temporary, shortage of supply on the
market and resulted in quite high prices. This increased the grower returns to an
extremely high level of 48 cents per pound for this one year only. In contrast, the 1995
new crop production and large carry-in created a total supply of close to 400 million

pounds available for sale which was a large surplus of supplies. This decreased the grower

41

returns substantially to one of the lowest returns growers have received for many years of
only 5 cents per pound. This grower return was substantially less than their typical costs
of 20 to 25 cents per pound.

The low grower returns have been and continue to be a driving force for the industry
to over come. The impact of the imbalance between supply and demand upon the low
grower returns has been reduced due to the inﬂuence of the FMO over the past three
years. Even with the inﬂuence of the FMO, the low grower returns on average have not
increased suﬁiciently to levels to cover the typical cost of production in recent years.
3.2.2.3 Underlying weaknesses of the poor performance areas. The following sub-
sections include discussions of those weaknesses which are the major causes of the
industry’s poor performance in regard to imbalances of supply and demand and
persistently low grower returns. The following sub-categories are weaknesses that are
considerably important for the industry to overcome to help improve performance.
Indum’s lack of ability to avoid over-plantings:

The tart cherry industry lacks the ability to inﬂuence growers to avoid over-plantings
in times of high prices which later lead to overcapacity and persistently large surplus
supplies. Tart cherry growers are primarily inﬂuenced to plant or remove acreage
depending on the returns they are receiving. When the returns are high and proﬁtability is
quite positive, growers tend to plant considerably more tart cherries. This leads later to
surplus production and very low prices which can be persistently less than typical grower

COStS.

42

Failure to develop a number of products which ﬁt the changpj' g consumer preferences:

 

The industry needs to develop a number of products which ﬁt the changing
consumer preferences. But relatively few new products have been successﬁilly
introduced. The industry continues to market a substantial portion of their sales as pies
and sweetened desserts which face declining consumer demand. This has been and
continues to be a difﬁcult weakness to overcome because of the large investments required
in developing new products and establishing these in the markets. A contributing factor is
also that the industry has experienced so many consecutive years of poor returns that few
processors have had suﬁicient net returns to be capable of investing the money for new
products. These weaknesses contribute to slow-growing demand that has not grown as
rapidly as the large production capacity.

Developing and gmp’ ' g effective consumer access:

Developing and gaining effective consumer access through grocery stores and food
service retail outlets for new products is very expensive, risky, and difﬁcult. This is a
weakness in part because the cherry industry is one with many small processing ﬁrms with
limited ﬁnancial abilities to push consumer cherry products through the market channels.
Therefore the cherry industry has had to rely on large established food manufacturers with
large ﬁnancial resources and strong customer brands for much of the marketing of ﬁnal
consumer products which use cherries. This is another weakness which contributes to
slow growing demand.

The m ghem indpstry mpst rely to a substantiﬂ deggee on food manpfacturers:
The industry must rely substantially on the food manufacturers with strong consumer

brands to build the demand for cherries in their consumer products. This building of

43

cherry product demand cannot always be assured by large food manufacturers because
these ﬁrms are not always dedicated to cherries on a long-term basis. Thus, many tart
cherry products are promoted, marketed, and sold primarily at the discretion of the food
manufacturers who are not particularly oriented to cherries. This raises substantial risks to
the cherry industry if food manufacturers drop cherries or substantially cut back on their
usage.

3.2.2.4 Additional kinds of industry weaknesses. These weaknesses are also important
for the industry to overcome. The following sub-categories have signiﬁcantly impacted
the economic welfare of the industry.

Lack of proﬁts from apple processing.

Many processors also pack other commodities such as apples along with cherries in
order to minimize overhead costs for both the other commodities and the overhead costs
portion of the processor margin for tart cherries. Some of the these other commodities,
particularly apples, have recently experienced economic difﬁculties for processor returns.
Thus, processors are in some cases trying to spread their losses to all commodities within
the company. For example, apple processing has had some substantial difficulties in being
proﬁtable for the past two years.

Historipally weak pricing at the processor level.

The weak pricing at the processor level has historically been an important weakness
area for the industry because of the tendency for processors to cut prices as a primary
means of obtaining sales of their products. Price cutting practices were especially
prevalent during the years of surplus supplies. Even when these surpluses were relatively

small, processors would cut prices substantially to obtain sales for their cherries. This was

44

done as a primary competitive marketing approach and as a means to avoid accumulating
unsold inventories at the end of the marketing year.

A number of other factors within the industry contribute to the industry’s historically
weak pricing tendencies. Some of these include: 1) an industry structure of many, small
processors, 2) selling ﬁ'uit commodities to food manufacturers who are much larger in size
and buying power, and 3) many processors market the same commodities as each other
such as frozen 5+1 cherries. Progress has been made during the last three years on this
historic weakness in strengthening, rationalizing, and stabilizing processed cheny pricing
with the new CherrCo cooperative.

Inherent m chm gualig weaknesses.

Tart cherries have inherent quality weaknesses which include a hit with pits, soft
cherries, and wind-whip. These challenges in turn make it diﬂicult for processors to
maintain high quality processed products to meet the needs of their customers. Poor
quality from pits is a weakness because of the difficulty of removing every one ﬁ'om the
fruit during the processing.

Soft cherries have often been a problem especially in large production years with a
result that the hit is more difﬁcult to pit effectively. Wind-whip cherries are marked up
with defects that make the appearance of the chenies not as appealing as they should be
for consumer acceptance.

The industry has made substantial progress on improved performance on pit counts
and the sorting for wind whip defects. This area remains, however, as a challenging area

in which the industry needs to make further progress.

45

Potent_ial weaknesses related to the federal marketing order.

The relatively new FMO program has had and continues to involve some
controversial issues. The threat of having the order not renewed by the industry (or by
. USDA) if some of these controversial issues are not adequately resolved is possible.

If certain controversial issues related to the FMO were to lead to a negative industry
vote in the next renewal referendum, this important program would be lost. If this were to
occur, returns to growers in surplus-supply years would return to quite low, unproﬁtable
levels for growers. Uncontrolled surplus supplies with no marketing order program,
would also pose substantially increased diﬁiculties for CherrCo to continue its positive
roles in the industry, thus causing further major weaknesses within the industry.

3.2.3 Industry Opportunities. There are many important opportunities for further tart
cherry industry progress and continuing improvement for the future. These arise from: ( 1)
recent industry progress in a number of key areas, (2) opportunities to build onto and take
advantage of the industry’s strengths, (3) changing markets and demand expansion
opportunities, (4) new industry programs and approaches, and (5) the evolving trends with
the long-run acreage-production cycle (Ricks et al. 2000).

Dried cherries.

Markets for dried cherries seem to have substantial opportunities to expand,
including into retail grocery, food service, food manufacturing, and export markets. The
market growth opportunities for dried cherries are aided by their unique tart-sweet taste
and their common perception as an enjoyable and healthy snack.

Dried cherry markets have been growing signiﬁcantly over the past ﬁve years. These

dried cherry markets increased ﬁ'om approximately 10 million pounds of raw product to

46

40 million pounds of raw product during this time period. With this growth, dried chenies
seem to be at a stage with excellent opportunities to achieve substantial additional grth
during the next few years. Industry leaders estimate that there are sufﬁcient opportunities
so that the dried cherry market could grow to over 60 or 70 million pounds during the
next few years.

Expprt mket expapsion.

Exports have shown a considerable growth trend since the late 19803 with a
potential for continued substantial grth for ﬁrture exports (although the substantial
annual ﬂuctuations in this market segment will likely continue). This potential for growth
in export markets is signiﬁcant in both traditional commodity packs (i.e., canned water
pack) and newer packs such as dried. Further market expansion to help increase growth
needs to be developed in the current export countries as well as new receiving countries.
H t l r ies of cherries.

. The healthﬁil properties found in cherries are becoming even more an opportunity
than perceived earlier because of documentation by some recent research. These recent
research results at MSU indicate substantial potentials from the health beneﬁts ﬁ'om
cherries—including antioxidants and anti-inﬂammatory properties. Pharmaceutical
companies are also doing research to help clarify the healthful properties in hopes to use
these properties to build demand for their products. The industry will be able to use these
ﬁndings as another basis of promotion and in developing new products, along with selling

more of the existing products.

47

Cherries in meat.

There seems to be an increasing potential for market growth of cherries in meat
products such as hamburger and sausage. These are particularly related to the resulting
healthful properties such as less fat which are obtained by adding cherries to meat.
Cherries in meat seem to be especially encouraging if these products are marketed in
partnership with large meat ﬁrms with strong brand names. However, cherries in meat
have been a small, slow growth market segment. One major obstacle has been due to a
patent which has prohibited its apparent potential growth by a number of ﬁrms in the
industry who would like to take advantage of this opportunity but are precluded from
doing so by the key patent.

TE cherries in ready-tp-eat form in single-serve size packages.

Single-serve sizes are a substantial market for a number of other competing ﬁ'uits
such apple sauce, cling peaches, ﬁ'uit cocktail, and puddings. These packs offer
substantial convenience as well as healthful fruit products to consumers in retail grocery
markets and for food service customers such as School Lunch. There seem to be
moderate to substantial opportunities for market growth in the single-serve sizes for tart
cherries.

Chm paste.

If cherry paste can be developed and adapted to the needs of snack bar
manufacturers, this food category and the marketing strengths of the strong brand names
of the snack bar manufacturers could provide large opportunities for market grth for
Cherries. Brealcfast and snack bars are a major market-grth food category in retail

grocery markets. Because of the nature of cheny paste, this type of product has the

48

potential to use large quantities of soft or over-mature cherries that might otherwise be
left unharvested.
Chm brandy.

Research at MSU has, in recent years, been able to distill high quality cherry brandy
for retail markets. Several commercial companies have begun to make and market cherry
brandy based upon the research information provided by MSU. Although the cherry
brandy market is in a small, initial-growth stage, there seem to be opportunities for
moderate demand growth for cherries in brandy in the future. Cherry brandy can use, and
even has preference for, cherries which are over-mature for pitting, as well as soft hit
and those with wind-whip.

Chm juig.

Cherry juice markets have been growing considerably over the past 10 years.
Industry leaders estimate that markets for US. cherries for juice could grow ﬁ'om a recent
30 million pounds to 50 million pounds within the nextfew years. The grth in the juice
markets would be especially important to the industry if there are higher prices for juice
cherries returned to growers than has traditionally been the case. Cherry juice provide
opportunities for sale of marginal quality cherries which would otherwise be left
unharvested.

Trends in the lpng-run grgge-production gcle.

Continuing changes and trends in the long-run acreage-production cycle will provide
substantial opportunities for higher prices and improved net returns to growers in future
Years. Bearing acreage in the US. has been declining signiﬁcantly and can be expected to

decrease even further during the next few years because of the aging of existing orchards.

49

This is expected to cause a more favorable balance of supply and demand resulting in

higher prices in more of the future years and providing improved income opportunities to

growers and processors.

3.2.4 Industry Threats. There are a number of threats that potentially can affect the tart
cherry industry. These originate from a number of different areas: 1) ﬁrture market risks,
2) global markets, 3) competing industries’ product lines, 4) economic difﬁculties of

certain other commodities such as apples, and 5) governmental inﬂuences.

Changm’ g mkets, technologies, and competitive situations.

Changing consumer tastes and preferences could potentially cause further reduction

 

in sales for the traditional tart cherry products such as pies, pie ﬁlling, and other

sweetened desserts. Changes in consumers tastes and preferences are shifting demand for

many consumers to more directed at the low calorie and health conscience aspects. Also,

more emphasis is being put on products that are convenient, meaning less preparation
time, ready to eat on the go, and little to no clean-up required. Ifthe cheny industry does
“Gt respond adequately to these changing consumer needs, the potential loss of demand
could pose a considerable threat to the industry.

Because of the above changes in consumer preferences, the industry needs to
develop new value added products which meet the changing consumers preferences.
However, the industry has not been very successful at developing many new products and
eﬂ‘ectively bring them to market rapidly. Developing new consumer oriented products and

establishing markets for them requires considerable time and a lot of money which pose

diﬂiculties for the cherry industry.

50

Government regplations.
These include the possibility of banning key pesticides through the F QPA which

could be very detrimental to the production of high quality ﬁ'uit. Migrant labor is very
important to the tart cherry industry and governmental regulations could potentially hinder
the supply of needed laborers. Other governmental regulations on speciﬁc activities, such

as processing plant waste disposal, could place unnecessary burdens which could be costly

to processors.

Substitute Products.

The competition provided by competing industries is continually trying to shift
consumers preferences ﬁom tart cherry products to substitute ﬁ'uits. (i.e. blueberries,
amiles, peaches, other berry products, raisins, and cranberries.) These competing
industries compete in a variety of ways, including in some cases by trying to be the lowest
9081 producing industries. They also compete by adopting their products to effectively
meet the changing needs and preferences of consumers and commercial customers at
Various stages in the supply chain. To the extent that competing industries are successful
in capturing larger markets, especially if they make major, rapid gains at the expense of

chﬁfties, this can provide a continuing threat to the cherry industry.

\Threat of expgding world tart chem production whichmight be imported into the US.

China may be one of the greatest future concerns to the US tart cherry industry for
potentially ﬂooding the US. markets because of similar market ﬂooding which recently

took place in the apple industry. China might in the future substantially expand tart cheny

prOduction.

51

IfEuropan production were expanded considerably, these supplies might also enter
into the US. and under cut the domestic prices, lowering grower returns. On the other
hand, this does not seem highly likely to occur in the near future. Yugoslavia was a
former large competitor which has declined because of wars and economic difficulties.
Several Eastern and Western European countries or Southern Hemisphere countries such

as Chile could become major competitors at sometime in the ﬁrture.

Long-run acreage gcle and potential overplantings.

In the future another round of over planting of tart cherries could occur in the US.
due to higher, more proﬁtable prices and returns to growers which seem likely during an
expected low acreage and production phase of the industry’s cycle within a few years. If
overplantings occur, this would eventually cause another imbalance in supply and demand
With another future period of supply surpluses and low prices. The threat of overplantings
in future years might be accentuated by the low returns to apple growers during the last
“”0 years if these were to continue. That is, apple growers in many states might shift

more to tart cherry production if the poor economic conditions and grower returns in the
aDple industry continue.

\Economic diﬁculties for processors.

Tart cherry processors who also process apples and other fruits could continue to
face substantial economic diﬂiculties because of the situation in the apple industry.
Negative economic impacts caused by the apple markets could continue to reduce
Processor returns. This is important for tart cherries because of the overhead costs which
have in the past commonly been partially borne by processing apples along with tart

cherries. This has caused economic difﬁculties for processors recently and could continue

52

' ’3.

to reduce the ability of processors to provide high proﬁtable returns to their cherry
growers. Thus, this situation is a continuing threat to the tart cherry industry.
Wm.

Compared to the rest of the world, many of the technological advancements used in
other countries have been developed by universities, input ﬁrms, growers, and processors
in the US. Continued progress will be needed as well, in part, because other countries
can and do also adopt the US industry’s technologies which helps to increase their
competitive position. Therefore, what has been a strength of the U. S. tart cherry industry
could become a competitive threat if competing industries in other countries are able to
use US. technology to catch up and surpass the US. tart cherry industry.

3.3 Overview of the industry situational analysis. The industry SWOT analysis is an
important analysis phase to help provide a base for industry planning concerning the areas
in which performance has been relatively effective and the areas which are priority for
needed improvements. The analysis of strengths and weaknesses of the tart cherry
industry shows sOme internal analysis for the industry. As well, the opportunities and
threats analysis provides some external analysis for the industry.
As a part of the SWOT analysis to give an important time perspective, a separation
into past, present, and future industry directions may be helpful.
Prior to the 1996 cherry summit conference, the industry’s weaknesses and threats
Were predominant in their overall effect on the economic conditions of the industry. The
illt‘lustry’s weaknesses and threats were eﬁ‘ecting the very low returns to growers and the
e)Ittreme lack of proﬁtability of the industry. The underlying aspects of numerous years of

oVerprl'oduction and slow growing demand inﬂuenced the industry to want changes for the

53

better. An important change in the industry’s strategic directions came when the leaders
of the industry agreed that a more comprehensive strategic planning approach was
desirable. I

Following the cherry industry summit conference in 1996, efforts by industry leaders,

and organizations formed the TCISPC for the purpose of providing a core group to
develop strategies on how to overcome some of underlying weaknesses and threats of the
industry. The TCISPC has continued to address many of the weaknesses and threats and
have successfully helped to position the industry in a much more positive position.
Through the strong working relationship of these industry organizations, some of the
industry’s major weaknesses are being reduced and the opportunities are more positive
and prevalent. In some cases, threats have been reduced in signiﬁcance and do not impact
the industry as much as they have in the past. Therefore, during the last three years, the
industry has evolved to a position of more predominance of opportunities and strengths
With less overriding predominance of surplus supplies, low prices and their causal
Weaknesses.

In the future, the industry will most likely be able to take much more advantage of
their opportunities and strengths. This is because of the position the industry will be in as
a whole. The long-run acreage cycle will be at the a low acreage and production phase of
the cycle causing supplies to be reduced. This will most likely increase processed cherry
prices and grower returns substantially. The industry will hopefully be able to experience
positive proﬁts and help strengthen the industry even more.

However, in the distant future, there is a likelihood that the industry may return to a

Similar position as they have been since 1985 with negative economic impacts. Because of

54

the potentially higher prices and returns expected during the next 5 to 10 years, growers
will be more encouraged to plant cherries and another round of substantial over planting
could take place. If this occurs it could cause overproduction and surplus supplies again
in the more distant future. This could happen, but the visionary industry leaders would
like to ﬁnd way to avoid another round of over-plantings, and hence, avoid a return to

surplus production and low prices at some time in the future.

55

Chapter 4

THE EVOLVING SUPPLY / DEMAND BALANCE FOR TART CHERRIES
4.1 Introduction. The supply and demand imbalance for tart cherries, discussed in the
weakness section of Chapter 3 as a major driving force, is a culmination of several key and
important components. Of these components, the most signiﬁcant ones are the long-run
acreage cycle and its impact on the production and the demand for tart cherry products.
These two components, as discussed in Chapter 3, have contributed in the past and
continue to contribute to the supply and demand imbalance which has emphasized the
nwd for the industry’s strategic planning process. The analysis of the industry’s major
driving force is a component of the second phase of Lyford’s framework discussed in
Chapter 1 (Lyford 1998).

This chapter will analyze the long-run acreage cycle and the demand for tart cherries
in relation to the imbalance between supply and demand. The analysis of these two
important components will be much more detailed and in depth than was discussed in
Chapter 3. Chapter 4 will be broken into three sections: 1) tart cheny supply analysis and
projections, 2) tart cheny demand analysis and projections, and 3) balancing supply and
demand in the future. This chapter will help to set the stage for ﬁiture strategy planning as
discussed in Chapter 5.

Major sources of information for this chapter were the analyses done with the
industry leaders as a part of the coordinated efforts of these industry leaders working
together through the TCISPC. Also, an important source of data is provided by published
material from the Michigan Agricultural Statistic Service on Michigan’s acreage for the

early to late 19903. In addition, the author conducted a survey of processors for all the

56

other (non-Michigan) states included in this chapter’s analysis of the acreage trends and
future projections.

4.2 Tart cherry supply analysis and future projections. The tart cherry supply analysis
and future projections section will discuss the relationship of total US. production to the
long-nm acreage cycle. This relationship will focus on an analysis of each major
producing states’ recent acreage trends with projections to 2003 and the projected total
production for the U. S. by the year 2003.

4.2.1 Overview of the long-run acreage cycle. The tart cherry industry has experienced
a number of positive and negative changes over the past thirty years, many of which are
closely related to the eﬁ'ects of the long-run acreage cycle. During an earlier low-acreage,
short-supply phase of the long-run cycle, the industry experienced supply shortages and
very high grower prices. Then, later the industry experienced a prolonged period of high
production and supply surpluses with the resulting very low grower prices.

Some of the key relationships in analyzing the industry’s excessively large
production capacity which occurred ﬁ'om the mid 19803 to the present are the industry’s
bearing acres and production. Figure 4 shows total bearing acres as the dotted line and
total production as the solid line. During the early 19703, bearing acres were in a
downward phase of the cycle. A low acreage phase of the cycle occurred ﬁ'om the mid
19703 through the early 19803. The bearing acreage then rebounded and increased
through the late 19803 into the early 19903. This occurred because of the large plantings
caused by very high prices in the earlier low acreage phase of the cycle.

The industry’s trends in production tend to move with the changes in the bearing

acreage cycle, but sometimes with a lag in time. Production is also characterized by large

57

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Figure 4. Tart Cherry Industry Bearing Acres and Production 1

65,000 — 400
60,000 A — 350

.. 55,000 “WWW“ n ~ 300 E

0 V e

i- e e

0 \ f:

< - 2

90 50,000 a .-. . v 250 v

.5 ~ . ‘3 E

I... l ‘.as .2

s g e

‘f 45.000 . . . - 200 .g

I | g e

r Bearing Acres 1‘ "'
40,000 4 . r 150
35,000 . . 1 . A - 1 . . . - 1 . . 100

l 969 l 975 l 981 1 987 1 993 l 999
Source: NASS/USDA, Various Years.
\ J

 

annual ﬂuctuations which can make it more diﬁicult to clearly discern the long-run trends
in production related to the cycle.

In the early 19703, the production cycle decreased until the mid 19703. Then, the
production cycle remained in the low supply phase of the cycle until the mid 19803. At
that time the production increased along with the bearing acreage cycle. Both bearing
acres and production were high until the mid 19903. Although the bearing acreage cycle
has since decreased in recent years, the production aspects of the cycle has continued to
remain high, but seem likely to trend downward more similarly to the bearing acreage
during ﬁrture years.

One of the explanations for the continuing relatively high production and hence

relatively low grower returns are increasing yields per acre. The average yields per acre

58

have increased in part because there currently has been an unusually high percentage of
orchards in their peak bearing ages. The peak bearing age for a cherry tree is
approximately from 14 years to 22 years old. Interestingly enough, over 50 percent of the
total US. acres are between these ages.

Many growers in the tart cherry industry have also increased average yields per acre
through a combination of cultural practices, improved technology, and eﬁ‘ective
management. Some of the more particular areas of success for increasing yields per acre
include: 1) gibberellum sprays, 2) improved harvesting machinery that do not damage the
tree, hence prolonging the productive life of the tree, and 3) increased trees per acre.
4.2.2 Long-run acreage trends and projections analysis of each state. An analysis was
made of the long-run acreage trends and its relationship to each of the major producing
states within the industry. The results are summarized in this section.

The major tart cherry producing states include: 1) Michigan, 2) Utah, 3) New York
4) Wisconsin, 5) Washington, 6) Pennsylvania, and 7) Oregon. The information used for
. the analysis has been compiled ﬁ'om Michigan Tree Fruit Surveys, other individual state
orchard surveys, and an extensive survey of processors in certain states by the author
regarding the latest acreage changes in those states.

Table 4 is a summary table illustrating total acreage and bearing acreage changes
from the early 19903 to the late 19903, as well as, projected changes to 2003. Each of the
following states analysis uses data summarized in Table 4 for that state.

Michigan
The 1998 publication of the Michigan ﬁuit orchard survey report from the Michigan

Agricultural Statistics Service shows that Michigan’s tart cherry acreage is continuing to

59

F'

able .

llichig
blah
New Y:
WISCOI
Wash”
Pennsy
Gregor
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(Table 4. U.S. Tart Cherry Industry Acreage N
Change from Early Projected Change from 1998
m 1990's to 1993 Acres to to goos
Early 90's 1998 Acres % 2003 Acres %
Michigan 38,200 33,500 - 4,700 - 12% 29,690 - 3,810 -11%
Utah 4,030 2,910 - 1,120 - 28% 2,470 - 440 -15%
New York 4.230 2,100 - 2,130 - 50% 1,690 - 410 -20%
Maconsin 2,760 2,310 - 450 - 16% 1,900 - 410 -18%
Washington 1,500 1,130 - 370 - 25% 1,100 - 30 -3%
Pennsylvania 1,350 870 - 480 - 36% 650 - 220 -25%
Oregon 1,850 1,350 ﬁpg - 27% ﬁg -_7_SQ ﬂ
Total AcreeL53,920 44,170 - 9,750 - 18% 38,100 - 6,070 -14%
. Change from Early Projected Change from 1998
m 1990's to 1993 Acres to to 3003
Early 90's 1998 Acres % 2003 Acres %
Michigan 34,370 29,230 - 5,140 -15% 25,420 - 3,810 -13%
Utah 3,550 2,470 - 1,080 -30% 2,030 - 440 -18%
New York ~ 3.810 1,840 - 1,970 -52% 1,420 - 420 -23%
Wisconsin 2,560 2,130 - 430 -17% 1,720 - 410 -19%
Washington 1,400 1,060 - 340 -24% 1,000 - 60 -6%
Pennsylvania 1,180 760 - 420 -36% 540 - 220 -29%
Oregon 1 ,730 1 ,300 E 25% .559 £50, -_5§9_6
LBearing Acreq 48,600 38,790 - 9,810 -20% 32,680 - 6,110 -16%J

 

decline. This is not surprising in view of the economic diﬁculties that tart cheny growers
have experienced for a number of years with the frequent surplus supplies that have
occurred since the mid-19803.

Michigan’s total tart cheny acreage for 1998 decreased by 4,700 acres compared to
the orchard survey that came out in the early 19903. Michigan’s bearing acreage declined
by 5,140 acres or 15 percent since the early 19903. This substantial decrease in tart cherry
acreage, which is likely to continue for several years, can be expected to result in a
decreasing production trend and hence a closer balance of the industry’s supplies with the

growing demand during future years.

60

I.”

[‘7‘-

The latest Michigan orchard survey also indicates relatively low levels of non-
bearingl age tart cherries. The latest ﬁgure of 4,270 acres of non-bearing age are equal to
only 13 percent of the total acres. By contrast, in earlier periods when the industry’s
acreage was expanding, as during the late 19703 and early 19803, non-bearing ages were
equal to 30 to 38 percent of total acres. The relatively small amount cf young and non-
bearing acres that are now planted, coupled with the advancing ages of many existing
orchards, are important reasons why Michigan’s bearing acreage is likely to continue to
decline during the next several years.

Projections2 have been made for Michigan’s bearing acres to the year 2003. These
projections indicate that Michigan’s bearing acres can be expected to decrease ﬁrrther
from the current 29,230 acres shown in the 1998 survey down to approximately 25,420
acres by 2003. This would be a decrease of 3,800 acres or another decrease of 13 percent
by that time. These projections are based upon: 1) growers’ ﬁrture removal rates by
orchard age category that are similar to what they have done during recent years, and 2)
an estimate based on the evolving age distribution of the existing cherry orchards.

_U_ta_h_

Utah is the second-largest tart cherry producing state in the United States with an

average production during the last ﬁve years of 25 million pounds. Utah’s record high

production was in 1998 with 33 million pounds of tart cherries. Utah has had large

 

lNon-bearing acres are zero to ﬁve year old.
2Projections are based on growers continuing to remove and plant as they did between the latest two

orchard survey years for Michigan. Some special adjustments have been made to the projections
based on the input from processors and grower leaders in all states other than Michigan.

61

ﬂuctuations in production ﬁ'om year to year because of the unfavorable growing
conditions that sometimes occur during the spring time.

Similar to Michigan acreage, Utah’s tart cherry acreage has been decreasing. Utah’s
total tart cherry acreage has decreased from 4,030 acres in early 19903 to the current
2,910 acres (Table 4). During the same period, bearing acres decreased from 3,550 acres
in the early 19903 to 2,470 acres as indicated for 1998. This was a decrease of
approximately 1,080 acres or a 30 percent decrease in Utah’s bearing acres in
approximately ﬁve years. Utah’s bearing acreage decrease has caused great concern
among that state’s processors due to the needed production quantities to help sustain the
cherry markets which Utah processors have developed.

There are several reasons for the recent decline in Utah’s tart cherry acreage. These
include poor net returns to growers for tart cherries. Also, many growers have continued
to remove tart cheny acreage on marginal sites and ﬁ'om old orchards. The greatest
inﬂuence for declining tart cherry acreage is the urban pressures for more houses to be
buﬂt

Nonbearing acres of tart cherries in Utah have remained fairly constant during the
19903. The nonbearing acreage ﬁgures indicate that certain growers in Utah are
continuing to replant some of their tart cherry acreage. This has been occurring to some
degree despite the relatively poor returns to growers for tart cherries and the pressures
that Utah has to switch considerable amounts of land in the state’s cherry growing regions
into houses and urbanization. Nevertheless, the current nonbearing acres in Utah are now
equal to approximately 15 percent of the total acreage. Although there has been a decline

in the total acreage, some growers are optimistic with the usages of Utah’s cherries and

62

are continuing to replant. The current nonbearing acreage is probably insufﬁcient to
maintain a constant level of bearing acres in the future.

Projections of Utah’s future tart cherry acres have been made using a similar
approach as Michigan’s projections along with information obtained from the author’s
survey of Utah cheny processors. These future projections of Utah’s bearing acres were
made taking into account the current number of bearing acres, the current orchard age
distribution, the urbanization pressures, and other factors which are likely to impact
Utah’s future bearing acres of tart cherries.

The future projections indicate that Utah’s bearing tart cheny acres are likely to
decrease from the current 2,470 acres to approximately 2,030 acres'by the year 2003.
This indicated future projection would be a decrease of 18 percent. The removal of
acreage in Utah will continue to be acreage from poor growing locations. There will not
be many acres removed in the prime cherry growing locations.

Wi n in

Wisconsin’s cherry production has averaged nearly 10 million pounds in recent
years. In 1998, Wisconsin had a recent high production of 14.7 million pounds.
Currently, Wisconsin is the ﬁfth largest cherry producing state in the U.S.

Wisconsin cherry industry leaders estimate that they now have a total tart cherry
acreage of 2,3 10 acres. This can be compared to 2,760 total acres in the early 19903
(Table 4). These ﬁgures indicate that Wisconsin has had a decrease in total tart cherry
acreage of approximately 450 acres or 16 percent since the early 19903.

Wisconsin’s bearing acres are now estimated to be 2,130 acres. This can be-

compared to an estimated 2,560 acres in the early 19903. Thus, a decrease of 430

63

bearing age acres since the early 19903 or 17 percent is shown. One of the reasons for the
decline in acreage during recent years in Wisconsin is the poor net grower returns for tart
cherries. Another reason is the removal of older aged orchards which are not being
replanted to tart cherries because of the poor returns to growers.

Similar to Utah’s non-bearing acreage, Wisconsin’s non-bearing acreage indicates a
small amount of replanting that is occuning. An estimated projection of 180 non-bearing
acres will be planted by the year 2003. However, this is not nearly enough non-bearing
acres planted for Wisconsin to maintain a consistent bearing age acreage level in the
future.

Projections for Wisconsin’s future bearing acres have been estimated by taking into
account the expected removals and the overall acreage age distribution. The projections
indicate that \Vrsconsin’s bearing acres are expected to decrease from the current 2,130
acres down to 1,720 bearing acres by the year 2003. This is a projected decrease in
Wisconsin’s bearing acres of 410 acres or a decrease of 19 percent. These projections for
future bearing acres take into account the age distribution of Wisconsin tart cherry
orchards. Wisconsin now has an estimated substantial percentage of older age orchards.
Also, these projections for future bearing acres are based upon a processor’s survey in
which was indicated that Wisconsin would continue to remove and replant tart cheny
orchards at similar rates to what they have done during recent years.

New Yprk
New York’s tart cherry production has decreased considerably over the past decade.

This declining trend could potentially continue into the ﬁxture given the acreage trends of

64

New York. The 1998 crop in New York was the lowest production year for that state in
more than a decade.

New York industry leaders estimate that the state currently has approximately 2,100
total acres of tart cherries. Therefore, the estimated decrease in total acres from the early
1990's to the present is 2,130 acres (Table 4). This is over a 50 percent decrease in total
acres in less than 10 years. New York’s bearing acres have decreased ﬁom 3,810 to
1,840, for a decrease of 1,970 acres or a 52 percent decline. The decrease in New York’s
bearing acreage can be attributed mainly to poor economic returns to cherry growers.

The non-bearing acreage ﬁgures for New York also show a signiﬁCant decline of 38
percent. This decrease in non-bearing acreage suggests that New York’s ﬁiture bearing
acres will continue to decline. With this decrease continuing, New York will likely
become a small producing state in the overall industry picture.

Projections for New York’s tart cherry bearing acreage indicate continued decreases
in the next ﬁve year. Total acreage is estimated to decrease by another 20 percent to
1,690 acres. The bearing acres are also projected to decrease by 23 percent to 1,420
acres. These projections take into account that a large portion of the bearing acreage in
New York are older than 20 years.

The projected 20 percent decrease in future bearing acres in New York suggests that
if these projections are accurate, then New York could fall below Washington in tart
cheny production and become the fourth largest producing state in the U.S. Michigan,

Utah, and Washington would then produce about 90 percent of the tart cherries in the

U.S.

65

Washin on

The state of Washington has had a signiﬁcant increase in its production over the past
20 years. During these past 20 years starting in the late 19703, Washington’s production
has gone up ﬁ'om just over one million pounds to a recent average of about 14 million
pounds. The largest crop recorded in Washington was in 1993 with a production of 17
million pounds.

Washington tart cherry industry leaders estimate that there are currently about 1,130
total acres of tart cherries in the state (Table 4). The change in total acres from the early
1990's to the late 1990's was a decrease of 370 total acres. Bearing acres in the early
1990's equaled 1,400 and the bearing acres in the late 1990's are 1,060 for a decrease of
340 acres or 24 percent.

Because of the decrease in total acres and bearing acres, it seems that there would be
a decrease in production for the state of Washington. However, due to the relatively
young age in distribution of the acreage, the production will most likely stay nearly the
same or increase somewhat. Washington’s age distribution has a signiﬁcantly large
projection of acres between the 10 to 15 years old category. For this reason there is a
likelihood of an increase in production during the next few years.

Projected acres for the state of Washington are difficult to estimate, in part, due to
the uncertainty of the apple industry. The huge apple industry in Washington is struggling
through some economic difficulties. This could pose a large threat of ﬁrture oversupplies
for the tart cherry industry if a number of Washington apple growers decide to shift
substantially to growing tart cherries. On the other hand, there are several factors which

could deter apple growers from planting many more tart cherries in Washington. Two of

66

these are the state’s hot temperatures and windy conditions which result in many fruit
defects. Another which the apple growers would have to overcome is to develop and
invest in adequate processing capacity for more tart cherries. Thus, it is difﬁcult to
predict the extent to which apple growers might plant more tart cherries in Washington in
the future.

The projected bearing acres for Washington state by 2003 are 1,000 acres. This
would mean that hearing acres are likely to stay about the same during the next ﬁve years.
The estimated projections for total acres are 1,100 which is essentially the same as now.
P lvania

Pennsylvania’s tart cherry production decreased from about 25 million pounds in the
mid 19603 to approximately six to eight million pounds in recent years. This decrease has
”been largely due to the removal of tart cherries to shift to other agriculture crops.

Pennsylvania’s tart cherry bearing and total acres have decreased ﬁ'om the early
1990's to the late 1990's (Table 4). Total acres decreased by 480 acres ﬁom 1,350 to 870
acres. The bearing acres decreased by 420 acres from 1,180 to 760 acres or a decrease of
36 percent. Because of such a large percentage decrease in bearing acres, Pennsylvania
could potentially also have a large percent decrease in future production. This has not
already occurred because of the large number of acres in the prime production age
category of 15 to 20 years old.

The projections for Pennsylvania’s tart cheny acreage are dependent on a few
factors. Some of these factors including grower returns becoming proﬁtable making it
more enticing to grow tart cherries. Another is the potential of other ﬁ'uit commodities ,

88pccially apples, becoming less proﬁtable, and hence growers might shift from those

67

 

commodities to growing more tart cherries than in past years. Both of these factors would
encourage an increase in non-bearing acreage planted, thus making the projections too
small.

Pennsylvania’s projection for total acreage indicates a continued decrease by 220
acres more to 650 acres. The bearing acreage projection will likely continue to decrease
by 220 acres as well to 540 acres by the year 2003. This would be a 29 percent decrease.

The projected decreases in acreage indicates continued lower production estimates
in the ﬁrture. Thus, the state will likely continue to become smaller in the overall
production of tart cherries. However, there are large potentials for replanting that
potentially could take place due to the economic difﬁculties of other commodities,
especially apples and possibly peaches. The state could turn around and become a major
tart cheny producing state.

93.38%

Oregon’s average production in the late 19803 was about nine million pounds. In
the most recent years, this has deceased to only two to four million pounds. This is a large
percent decrease, down to Only about 33 percent of the average during the late 19803,
especially for a state whose already providing such minimal amounts. The prospects of
Oregon continuing to be considered a major producing state seems to be disappearing.

Oregon’s total acres decreased by 500 acres ﬁom 1,850 to 1,350 acres or 27 percent
from the early 19903 to the late 19903 (Table 4). The bearing acres decreased by 430
acres from 1,730 to 1,300 acres or 25 percent item the early 19903 to the late 19903.

The decrease in Oregon’s acreage can be attributed to the low grower returns for

many years in the 19903 and to the unusually large percent of acres which are older than

68

20 years. Currently, almost 50 percent of Oregon’s bearing age acres are over 25 years
old. Consequently, the large decrease in production which has occurred over the past
decade for the state is a result of so many older bearing acres which have difﬁculty
producing high yields per acre.

The estimated projections for the total and bearing acres for Oregon indicate likely
continued decreases at even greater percentages than happened during the 1990's. The
projected acreage decrease is 56 percent from the late 1990's to 2003 for a decrease of
750 total acres by that time. This is because of the very large percent of quite old
orchards that exist now combined with low grower returns in recent years. This bearing
acreage decrease of 750 acres is expected to leave only 550 acres of bearing age for
Oregon by the year 2003.

Oregon’s tart cherry production is likely to decrease in the ﬁiture to even less than it
is at the present time with large expected removals of many of the older acres which are
now being harvested. Also, the decrease in non-bearing acres by 50 percent since the
early 19903 suggests a continual decrease in future bearing acres and the related reduced
production capacity in the future.

4.2.3 U.S. tart cherry acreage age distribution. The U.S. tart cherry industry acreage
age distribution for 1998 is shown in Table 5. The non-bearing years category shows 12
percent of the total acres planted. The 6-10 years category shows a similar 13 percent of
the total acres planted. These two categories are going to be the primary producing age
categories for the tart cherry industry during the next 15 years. The 11-15 age category
has a larger amount of acres than in either of the two younger 5-year age categories.

Although the 11 to 15 age acres will continue to contribute to production somewhat in the

69

 

 

(

 

 

Table 5. U.S. Tart Cherry Industry N
Acreage Age Distribution, 1998

Age Category Acres 96 ofTot_aL
Non-bearing: 1-5 yrs 5,380 12%
6-10 yrs 5,540 13%
11-15 yrs 8,750 20%
16-20 yrs 14,320 32%
21 -25 yrs 6,960 16%
26+ yrs 3,220 7%
Total Bearing Age 38,790 88%

Cotel All Age 44,170 100%)

 

 

ﬁiture, the total production will decrease to some lower level because of the reduction in
the older age acres.

The three age distribution categories between 16 to 26+ have been the major
contributors to the industry’s production for many years. The age distribution categories
16-20 years, 21-25 years, and 26+ years now consist of an unusually high 55 percent of
the total U.S. acreage with the greatest bulge of acreage occurring in the 16 to 20 year
category. These categories will likely have gradually declining production through the
next ﬁve years, and likely will experience increasing amounts of these acres that will be
removed as they near the end of their productive life after ages of 20+ years. After these
age categories have been removed, the U.S. production levels may decrease dramatically
for a number of years.

4.2.4 U.S. tart cheny acreage projections. The tart cherry industry has some very
dynamic changes occurring in relation to the industry’s long-run acreage production cycle,
as has been explained in the previous sections. The U.S. industry’s total amount of tart
cherry acres has been decreasing since the mid 19903 in the U.S. to the present.

Currently, the U.S. total acres are at 44,170 acres which is a decrease, from the early

70

19903, of 9,750 acres ﬁ'om 53,920 acres. This is an 18 percent decrease in total tart
cherry acres in less than 10 years.

The bearing acres had a similar decrease in acres ﬁom 48,600 acres to 38,790 acres.
This is a decrease of 9,810 acres or a 20 percent decline in the total U.S. bearing acres.
Thus, the acreage trends indicate that the industry is in a declining bearing acreage phase
of the long-run cycle.

The future acreage trend appears to be declining as well. With very little non-
bearing acreage planted, there is not enough acreage planted to replace the older aged
acres. The high percent of older age trees that now exist also indicate a continual decline
in bearing acreage in future years. However, the future decreases in acreage projections
may decrease at a slower rate then has been outlined above due to higher prices in recent
years, lower surplus supplies, and other factors.

Recently, the TCISPC has discussed that some growers have increased planting
more new acreage again because they understand the industry acreage cycle and are
preparing for expected higher prices in the future. However, the nurseries do not appear
to be adequately prepared to provide trees fast enough to replace the acreage which has
been and will be removed.

Future acreage projections for the entire U.S. tart cheny industry have been made
based upon the projections for each of the individual states as previouslyhanalyzed and
discussed. Table 6 is a summary for the U.S. tart cherry bearing acreage in the late 1990's
along with the projected acreage and percent changes to the year 2003.

Through the support and cooperation of industry leaders in the different states, the

individual states’ acreage analysis was made possible. The summary of all the states

71

 

 

 

 

Gable 6. Projection of U.S. Tart Cheny Bearing Acreage N
Change from
M923
Projected
1998 to 2003 Acres %
Michigan 29,230 25,420 - 3,810 -13%
Utah 2,470 2.030 - 440 -18%
New York 1,840 1,420 - 420 -23%
Wisconsin 2,130 1,720 - 410 -19%
Washington 1,060 1,000 - 60 -6%
Pennsylvania 760 540 - 220 -29%
Oregon 1 I300 550 £0 -58%
Total Acres 38,790 32,680 - 6,1 10 -16%
\ J

 

combined in Table 6, Projection of U.S. Tart Cherry Bearing Acreage, helps to provide an
overall direction for the individual states and the entire industry. The tart cherry acreage
projections are estimates from historical data and estimations from knowledgeable
processors and growers.

The bearing acres are projected to decline by 6,110 acres for a 16 percent decline
similar to the projected decline in total acres at the current removal rate. These
projections were estimated by adding the individual states current acreage information and
their projected acreage information together to form a summary table.

The projections discussed above are based upon removal rates in Michigan which are
similar to those which occurred during recent years. But because of the higher grower
returns in 1999 and expectations of higher prices in ﬁrture years, reduced acreage removal
rates potentially could change the acreage projections and estimated ﬁrture production

levels to the year 2003. Thus, Table 7 shows three scenarios with different removal rates

comparing current bearing acres and production to possible future levels of bearing acres

and production.

72

 

Gable 7. U.S. Tart Cherry lndust Acregge and Production, 2003 \

 

 

 

 

 

 

 

I’Tojected Acres and Projections with a 10 % Projections with a 257,?
Average Yield Production at Current Decrease in Current Decrease in Current
Per Acre lbs. Removal Rates Removal Rates Removal Rates
Bearing Production Bearing Production Bearing Production
1995-1998 5515 my oflbs. 599. mu oflbs. m m: oflbs.
7,490 32,680 245 33,620 252 35,020 265
\ J

 

The average yield per acre ﬁgure used is 7,124 pounds. This is a total U.S. industry
production yield per acre average ﬁ'om 1995 tol998. The production projections were
calculated by multiplying this average yield per acre by the number of projected bearing
acres.

The ﬁrst scenario’s projected bearing acres with the current Michigan removal rate is
32,680 by the year 2003. With a continuation of recent average yields, these projected
bearing acres can be expected to produce an average of about 245 million pounds within
ﬁve years. This estimation is based on Michigan growers continuing to remove the
acreage at the same rate they have in the past few years.

The second scenario’s projections, with a 10 percent slower removal rate than the
current removal rate, shows future bearing acres that will not reduce as quickly with a
projected bearing acres of 33,620 by 2003. The production with this projected acreage
will be higher than with the faster removal rate with an estimated average production of
252 million pounds. Thus, a 10 percent slower removal rate indicates approximately
another 1,000 acres and an average production of 7 million pounds higher than with
removal rates similar to recent years.

A third scenario’s projections based on a 25 percent decrease from the current

removal rate leads to 35,020 acres by the year 2003. Ifthis is an accurate projection for

73

bearing acres and with average yields per acre similar to recent years, the projected
industry’s production at this acreage level is estimated to be approximately 265 million
pounds. Thus, if removals during the next ﬁve years are 25 percent less than recently, this
would result in approximately 2,300 more bearing acres and an average production that is
20 million pounds higher than if removal rates continue the same.

The possibilities of growers slowing down the removal rates and hence leaving a
greater amount of bearing acreage in the ground longer could occur because of higher
expected prices in ﬁxture years. This is due to the more proﬁtable market and price
conditions likely for the tart cherry industry during the next few years. A slower removal
rate for tart cherries could also be encouraged by the economically difﬁcult times
occurring in the apple industry. If removal rates slow down, tart cheny production
projections are likely to be higher than if removal rates remained the same as they have in
recent year, and more likely to maintain similar levels of production but could decrease
some because of the older trees not being able to sustain high yields per acre.

4.2.5 Overview on international competition for U.S. tart cherry markets. The
international competition for U.S. tart cherry markets could have considerable implications
for the ﬁxture of the U.S. tart cherry industry’s supply and demand balance. However, the
analyses required to provide adequate understanding of this complex issue is beyond the
scope of this thesis research. The industry leaders have not spent a lot of time concerning
themselves with this issue and will need to address it more fully in the near future.

One area of ﬁxture concern could possibly be the potential of imports as production
decreases. The U.S. has had little to no imports of most tart cherry products in recent

years. The limited imports have been in the form of juice concentrate, but the amounts

74

imported have been relatively minor. Any possible future imports would most likely come
from new tart cherry producing countries. The European industry has had enough
production in the past to approximately satisfy the Western European markets. Thus, if
new producing countries, such as, China or Chile, were to start to produce tart cherries,
there could be a threat of imports in the ﬁxture. However, there are no indications that
either of these counties are beginning to produce large amounts of tart cherries.

4.3 Analysis of evolving demand for tart cherries. The evolving demand for tart
cherries in general has increased slowly over the past 20 years. As indicated in Chapter 3,
some of the causes for increased growth have been the dried cherries products, increased
information on the healthful beneﬁts that cherries have in them, and the industry
continuing to provide effective services to their customers. Similarly, Chapter 3 discusses
the slow grth in demand as being caused by changing consumer tastes and preferences,
limited new product development, and large food manufacturers purchasing substitute
products in place of tart cherries. These and other factors have all contributed to the
dimculties the industry have had in expanding demand at a faster rate.

This section will analyze the demand for each of the different major tart cheny
product categories and include each product category’s projected strategic direction.
Strategic directions are speciﬁc indicators for the various product categories future area of
emphasis. These indicators have been determined from analyzing the past movement of
each product categories and making best estimate projections of future market grth
possibilities by the TCISPC. By determining the strategic direction for each of the
product categories, the council has been able to better emphasize where their resources

need to be used in the future.

75

Overall future prospects for market grth have been analyzed by major market
categories. Thus, for each, there has been an analysis of their future prospects in regard to
the expected degree of grth if any, or a stable future, or a likely decline. This
component of a broad perspective or vision for the industry is based, in part, upon the
SWOT analysis which was summarized in Chapter 3.

4.3.1 Change in demand for tart cherries. The tart cherry industry has been successful
over the past 15 years in increasing the sales of tart cherries from an estimated 230 million
pounds during the early 19808 to approximately 280 million pounds during the most
recent years. This has been a 22 percent grth in market sales within the last
approximately 15 years. This has been a difﬁcult and a slow growing process for the

‘ industry to accomplish.

Since the mid 19803, this grth in demand for tart cherries has been less than the
grth in supply. By the late 1980s, the supply surpluses exceeded the demand quantities
considerably. Although the demand for tart cherries continued to increase through the
19903, the available supplies for the market continued to be much larger, as shown in
Table 3 of Chapter 3.

As discussed earlier in this chapter, the long-run acreage cycle decreased as did
production during the early 19703 to a low level for both acreage and production during
the late 19705 and early 19805. When this occurred, the domestic and export markets
were shorted causing substantial increases in prices. This was a proﬁtable time for the
industry, but for long-term demand growth and success, the extremely higher had some
detrimental aspects as well. Many food manufacturer customers were disgruntled and

abandoned the use of tart cherries because of the ﬂuctuation in the prices and the

76

 

unusually high prices over a period of several years. Also, export markets were shorted
during the low supply period of the cycle and the U.S. could not compete with Eastern
Europe with the high U.S. prices.

4.3.2 Product categories strategic initiatives. The tart cherry industry’s product
categories strategic initiatives analysis will help to give greater insight to the industry’s
product categories direction. An in-depth analysis of diﬂ‘erent chen'y product categories
was completed with the help of industry leadership through the TCISPC to develop these
indicated market growth'goals. Also, included in the analysis is a summary of the past and
future movement trends for these product categories.

The tart cherry industry’s six major product categories include frozen cherries,
canned water pack cherries, juice concentrate and juice products, cherry pie ﬁlling, dried
cherries, and various new products. Within some of these categories are numerous
variations of product types and forms which have been developed to meet the needs of the
consumers.

Some of the product categories that industry leaders project to have future growth
include dried cherries, cheny juice and juice products, cherries in meat, and an array of
unspeciﬁed new products which ﬁt changing consumer preferences. The product category
of pie ﬁlling is expected to have limited growth potential, but may be able to at least be
maintained at its current subStantial sales volume. Canned water pack cherries for exports
have been designated as a grth initiative segment for the future. On the other hand, the
canned water pack market for domestic sales has been identiﬁed as one with essentially no

potential for growth and is more likely to be an exit market segment.

77

The ﬁ'ozen (5+1 and IQF) categories have been the largest volume market categories
in the past. The industry goal for these product categories is to try and maintain its overall
current level but most likely there will be some decrease. It is expected that IQF will grow
while 5+1 will decline.

The tart cherry industry’s sales averages by major product category during the most
recent years, and projected potential sales averages to 2003 (if sumcient supplies are

available) are compared in Table 8. The recent years average sales column has been

 

 

 

 

 

 

 

(Table 8. Tart Cherry Industry Market Sales \
Volume Projections
Recent 2003
Years Target Range
WM
Frozen
5+1 1 30 100 60-125
IQF 48 70 65-75
Pie Filling 60 60 48-65
Canned Cherries 25 25 25-35
Cherry Juice 2; §9_ 40-55
Total 288 305 238-355
Dried Cherries 22 60 40-85
kOther New Products 1 34 J

 

estimated by the most accurate historical sales data and industry leaders’ estimates. The
projections to the year 2003 were estimated by industry leaders as a part of the Visioning
insight process of the TCISPC.

The TCISPC estimated the potential volumes which they felt each of the industry’s
product categories might be able to be expanded to by the year 2003. These sales
volumes will occur only if there are sufﬁcient supplies available to accomplish these

potentials for demand quantities at moderate prices. These projections were done by

78

analyzing the most recent trends in sales volumes and taking into account some of the
ﬂuctuation that has occurred in recent years. These projections also took into account to
some degree the past price levels. These consensus projections were made to establish
target goals for each of the major categories as a potential market growth vision with
target goals for the future. Also included in Table 8 is a range column over which these
category volumes will most likely ﬂuctuate.

4.3.2.1 Demand for dried cherries. The dried cherries product category is one of the
newest major types of product in the industry. Dried cherries were developed starting
about 15 years ago and have been increasing in sales and movement since then, especially
in recent years.

Part of the growth in sales has been aided by the coordinated efforts of processors,
sales agencies, and CM] working together to develop many different promotions and other
market expansion strategies. Also, advertizing campaigns with retail grocers have also
been used to help increase the sales. Processors have also tried to improve and provide a
higher quality product to help capture consumers’ conﬁdence in dried cherries which has
helped to expand demand in recent years.

The strategic direction for dried cherries has the potential for large grth in the
future. This is because of the many strengths in dried cherries. The bright red color,
unique taste, and the ability to use dried cherries in many different forms contributes to
this substantial grth projection. The growth in the ﬁxture is not necessarily going to
come ﬁ’om variations of the product, but through gaining greater product familiarity and

recognition by more consumers. This expected growth will likely continue with a

79

combination of the retail grocery markets and with food manufacturers using dried
cherries as an ingredient to other products.

Dried cherries have been introduced mainly in two diﬂ'erent forms - - these are
consumer snack food items and food ingredients into breakfast cereals, bakery items, and
others. The retail snack items come in several different package sizes from as small as a
four ounce bag to as large as a 25 pound box. These retail snack items have become a
great substitute for consumer impulse purchases such as instead of hard candy, M&M’s,
candy bars, and other similar candy items. Many consumers like the idea that they are able
to purchase a healthy snack treat for themselves and their children.

Dried cherries used as an ingredient by food manufacturers has recently started to
develop into an area with a lot of potential. One example of this is the use of dried
cherries in breakfast cereal by Kellogg’s. During 1999, Kellogg’s developed a product
category with a mixture of different dried fruit in their cereals with dried cherries as a part
of the mixture. Although this product line has had a slow start, there is optimism in the
industry that this is a move in the right direction for the tart cherry industry. Entering the
cereal market with dried cherries is another way to get great exposure in a new market
with ﬁrture growth potential.

Some of the dimculties and challenges for ﬁxture market grth associated with
dried cherries are the unavoidable potential for consumers to ﬁnd some pits. This is not
without concern for many of the large food manufacturers who would like to use dried
cherries in their products, but who have concerns because of possible pits and the
problems they potentially can cause to teeth. Thus, increasing the usage of dried cherries

sales to food manufacturers will most like continue to progress slowly.

80

Dried cherries as an overall category has a substantial potential projected increase by
the year 2003, as shown in Table 8. The average movement of raw product in recent
years has been approximately 40 million pounds. A projection of 60 million pounds by the
year 2003 is thought to be possible by some industry leaders. Well developed and
effectively implemented strategies to achieve this growth goal will be needed for dried
cherries to grow to 60 million pounds. If this occurs, it will be a signiﬁcant boost to the F
industry as a whole in expanding the needed overall demand for cherries by developing

new markets for dried cherries.

 

4.3.2.2 Demand for frozen cherries. The frozen category has the greatest amount of
volume packed as well as the greatest amount of sales for the tart cherry industry. The
frozen category products are used in a wide array of re-manufactured food products
mainly stemming from the purchases of ﬁ'ozen cherries by large food manufacturers. This
frozen cherry category is broken into two main segments: they are 5+1 and Individual
Quick Freeze (IQF).

The ﬁ'ozen 5+1 cherries are used as industrial and food service ingredient items and
generally are not sold directly to retail grocers. Food manufacturers purchase this product
and usually use it in sweetened desserts such as pies which are then sold in grocery retail,
food service establishments, and other outlets.

The movement of 5+1 cherries in recent years has been around 130 million pounds.
The projected movement by the year 2003 is projected to decrease to approximately 100
million pounds. A projected decrease in the movement of 5+1 is an indication of the

challenges the industry has been facing in trying ﬁnd new ways to use the 5+1 pack in

81

meeting the changing consumer preferences which give less preference to highly
sweetened products.

The IQF cherries are also used by food manufacturers as an ingredient item to be re-
manufactured. However, unlike the 5+1 pack, IQF cherries are individually quick frozen

and not packed in sugar. These differences seem to be characteristics that food

r“
manufacturers prefer and hence are increasingly switching more to IQF. Many food
manufacturers have made the switch from 5+1 to IQF cherries and the expectations are
that this will continue into the future.
The IQF cherries have had an average estimated movement of 48 million pounds in ‘

 

recent years. The estimated projection of potential movement, by 2003, is 70 million
pounds. Ifthis were to occur it could be an increase of 22 million pounds over the next
few years, as seen in Table 8. If this projected increase in sales volume occurs, this
increase will partially compensate for the projected decrease in the 5+1 category. Thus,
the strategic direction for the ﬁ'ozen tart cherry category will remain about the same with a
possible slight decrease by 2003.
4.3.2.3 Demand for canned water pack cherries. The canned water packed product
category can be separated into two different major market segments: 1) the export market
and 2) the domestic market. This segmentation is useﬁrl for analysis purposes because of
the very different needs and demands of these markets.

The canned water pack product in the domestic market has been a declining market
for a number of years. Water pack products are not preferred products by U.S. customers
because they are cooked cherries in water which lack some of the bright color of pie ﬁlling

and have less overall quality than frozen cherries. Many of the traditional water pack

82

customers including, consumers and food service customers, have switched to other
product forms such as frozen and pie ﬁlling which are more preferred to meet their needs.
Thus, the domestic segment for canned water pack will likely continue to decline nearly to
a level of discontinuance in the domestic market.

The export market, however, is signiﬁcantly different with substantial potential for
growth in this market. Especially in European markets, such as in Germany, water pack
cherries are used to make their kinds of traditional pastries and baked goods. Some
European customers prefer the water pack cherries over the other packs because they are
able to create the pastries and desserts which adequately meet the needs of their
consumers. Canned water pack cherries, when compared to ﬁozen cherries, are also
relatively easy to distribute to small bakeries and for them to store until needed.

The water pack export market has the potential to grow if the tastes and preferences
in the exporting countries continue to demand the products made ﬁom this pack. The
strategic direction for the export market is to grow, but the grth could be inﬂuenced by
the availability of the ﬂuctuating annual supplies.

The canned or water pack category has a recent average industry sales of
approximately 25 million pounds in recent years. A majority of that has been into the
export markets. As shown in Table 10, the ﬁrture estimated potential movement is
projected to be 25 million pounds with a range between 20 to 30 million pounds by 2003.
As has been explained, the export markets for this category will be a major focus area for
the movement.
4.3.2.4 Demand for juice concentrate. The juice concentrate product category has

increased over the past few years due to an increasing demand by consumers for healthy

83

fruit drinks and less imported supplies of cherry juice concentrate. This has been a beneﬁt
to processors and growers because they have been able to use more of the poorer quality
cherries which are not suited for pitting but may be made into high quality juice. This is
another example of where the industry has been able to add value for more product
volume which had often been left unharvested because of marginal quality for pitting
especially when surplus supplies occurred. i
The sales movement of cherry juice concentrate category in recent years is estimated

to have increased some over the previous years. As seen in Table 8, there has been an

 

average movement in recent years of 30 million pounds of raw product equivalent (RPE). I
By 2003, the movement is projected to potentially be 50 million pounds with a range of
annual sales ﬂuctuating between 40 to 55 million pounds. The overall industry strategy
for this product category is to strive for continued substantial growth.

Cherry juice and juice products may especially beneﬁt from the more recently
documented healthﬁrl beneﬁts that come ﬁom tart cherries. This is one reason why a
growth strategy is appropriate for cherry juice. The anticipated grth from cherry juice
and juice products is positive and could potentially be a considerably large market segment
for the industry in the ﬁrture.
4.3.2.5 Demand for pie fill. The pie ﬁll product category continues to be a major market
segment for the tart cherry industry to market a considerable amount of ﬁ'uit for
processing. The recent sales volume in this category have averaged approximately 60
million pounds. The category’s average sales have continued to maintain about the same
level for some time. On the other hand, the threat of changing consumer tastes and

preferences away from pie ﬁlling could potentially hurt this product category in the ﬁrture.

84

The pie ﬁlling category has been able to market a fairly stable average of 60 million
pounds of fruit during the past few years. The projected target for 2003's movement is to
continue to move about the same 60 million pounds with a range of 48 to 65 million
pounds. This means the industry’s guiding strategy for this product category is to
maintain or try to grow the category if possible with the expectation that large market
growth is unlikely.

4.4 Balancing supply and demand in the future. The possibility of supply shortages in
the tart cherry industry and hence what that might mean for demand quantities in the
future is an issue that has been discussed somewhat, but deserves more speciﬁc
consideration by most industry leaders. Although the surplus imbalance has been a major
driving force for such a long time, industry leaders need to give more consideration to the
issues of what might happen in the ﬁrture as the long-run acreage cycle approaches its low
point and considerably shorter supplies are more likely.

Because the industry has been so focused on eliminating the excessive surpluses in
order to help increase the grower returns, the ﬁrture supply and demand shortage
imbalance possibilities have not been discussed thoroughly. The following analysis
addresses the potential possibility of supplies decreasing below quantity demanded.

The possibilities of supply decreasing considerably below the current demand levels
is most likely going to happen. As discussed previously in this chapter, during the late
19705 the quantities supplied fell below the potential quantities demanded. The market
reaction in the tart cherry industry resulted in increases in prices high enough to reach a
general equilibrium in the markets with the smaller supply quantities. The reduction of

quantity was good for the short-term prices and proﬁts, but caused some signiﬁcant

85

problems by contributing to decreased long-run demand and later diﬂiculties in regaining
customers in the long-run aﬁer supplies increased again.

As the tart cherry industry now is approaching another more recent low point of the
long-run acreage and production cycle, a number of considerations need to be addressed
by the industry leadership. Some of considerations by the industry may include: 1) how .2
best to use the FMO’s reserve to provide more stability of product availability in short

supply years, 2) analysis of implications for previously outlined demand expansion

III—lit!“ .‘l.-""A). .r'h "

strategies with the possibilities of lower quantities of product available for sale, and 3)

 

consider the implication of higher prices including key threshold levels which might cause
major losses of markets similar to that which occurred in the previous short supply phase
of the earlier cycle.

Earlier in this chapter industry supply projections and quantity demand projections
were estimated to the year 2003. The average estimated supply projection, as shown in
Table 7, is 265 million pounds of cherries. The average projection for demand quantities,
as shown in Table 8, indicates a potential of 305 million pounds. These two projections
indicate a discrepancy of a 40 million pound shortage of supply compared to the potential
quantity demanded. This could potentially be a signiﬁcant issue for the industry to address
in the near ﬁrture.

Ifthe potential shortages of supply occur, the industry would not be able to expand
markets to as much as the potential projected demand quantities. Some market customers
or segments could potentially be lost due to the reaction of the buyers if adequate supplies
are not available or prices are too high for their needs. This might especially aﬂ‘ect

processors who supply the markets that are particularly price sensitive, and hence have the

86

potential of declining signiﬁcantly in volume with the expected higher prices in ﬁxture
years.

One of the most likely results from the problem of supply shortages in ﬁxture years is
that prices for tart chenies will likely increase signiﬁcantly causing some reduction in the

quantities demanded. The expected increases in prices will also likely cause some shifts in

 

the diﬂ‘erent market categories. Higher demands for those products which better ﬁll the F
needs of the customers, for example, IQF, dried cherries, and cherry juice will likely cause
a higher percent of the pack to be sold into these market use categories. Other products, L
such as, 5+1 and pie ﬁll, may also be impacted with reduced quantities demanded from the E

expected higher prices in ﬁxture years because of the likely decrease in demand for those
products.

In the future the use of the FMO reserve to supplement supply shortages in short-
crop years many help to lessen the potentially negative reduction in markets because of
shortages. Due to the annual ﬂuctuations in production, the FMO reserve could
potentially provide a partial buﬂ‘er, from year to year, for the industry to maintain more
stable supplies for some of the markets. This would not totally resolve the major concerns
and issues related to the potential shortages in the ﬁxture, but provide some greater
stability in the markets.

Another potential result in the ﬁxture may be the possibilities of imports ﬁlling the
expected gap between the quantities supplied and quantities demanded in the U.S.
markets. As discussed earlier in this chapter, there have been few if any imports in recent

year. The likelihood of imports in the ﬁxture has considerable potential if prices of U.S.

87

cherries are too high, and if there are new producing counties who begin to grow tart
cherries, perhaps like China or Chile.

4.5 Overview of the supply and demand balance for tart cherries. Although the tart
cherry industry has experienced some extremely diﬂicult times the past two decades with
respects to large surplus supplies, the ﬁxture has the potential for a much different outlook.
The long-run acreage cycle has been a key inﬂuence in the quantity of total supply. The
ﬁxture outlook for the long-run acreage cycle indicates that there is likely to be a
continued decrease in acres for the next few years. Ifthis occurs as expected, the
industry’s total supply will likely be reduced to lower levels as well.

The overall demand for tart cherries has slowly increased over the past two decades
to approximately 285 million pounds. Estimates of potential demand quantities during the
next few years indicate a potential similar quantities demanded to continue to increase.
However, as the potential supplies become less than these demand quantities, the quantity
demanded will reduce somewhat to a price sensitive equilibrium.

The ﬁxture balance between demand and supply will continue to be a major driving
force the industry will need to plan and prepare for. The industry leadership, through the
TCISPC, needs to address this issue more fully and prepare the necessary strategies to

best help the industry when this situation develops.

88

 

Chapter 5
TART CHERRY INDUSTRY IMPROVEMENT STRATEGIES
5.1 Introduction. Strategy planning is an important aspect the tart cherry industry has
been able to accomplish to some degree. Strategy planning by the TCISPC in several
major areas of emphasis has helped the industry to prepare somewhat for needed ﬁxture
industry directions. Major areas of strategic planning emphasis have included demand
expansion, supply management, processor pricing, and grower returns.

Through the coordinated efforts of all the different organizations involved with the
TCISPC, directed and focused strategies have helped the industry to position itself during
the past three years for a positive ﬁxture outlook. A few of the signiﬁcant
accomplishments emphasized in Chapter 2 from the more comprehensive strategic plan
which began in late 1996 include the following: 1) successﬁxl management of some surplus
supplies through the use of the FMO, 2) development of 5-year strategic plans for demand
expansion including promotions, advertising, and a number of other strategies for existing
and new products, 3) increasingly higher processor prices for the past three years, and 4)
higher grower returns during extremely diﬁcult surplus supply circumstances.

The council has discussed ﬁxture planning and addressed many of the major issues
during many planning sessions. Industry leaders have concluded that there is an ongoing
nwd for strategy planning as the dynamic industry situation evolves overtime. Thus, the
council works continuously on the current as well as long-run issues that are important for
the industry.

This chapter is also related as past chapters to the second phase of the industry

strategic planning and coordinating framework discussed in Chapter 1 (Lyford 1998).

89

 

 

Within this second phase, this chapter is focused on the speciﬁc industry strategies
component.

5.2 Tart cherry industry demand expansion strategies. Demand expansion for the tart
cherry industry is a key necessity for the ﬁxture growth of the industry. The primary goals
or objectives of the industry include expanding market volumes for existing and new
markets to continue adequate demand for tart chenies. Additional goals for expanding the
industry’s demand are to help increase processor prices and increase the returns to
growers through market expansion.

This section of the ﬁxture strategic planning process summarizes a number of
diﬂ‘erent strategies including many from a recently developed 5-year strategic plan
developed by CM] (1999), and a number of other industry strategies to aid in demand
expansion through coordinated eﬁ’orts by various industry segments. CMI through its
leadership position has recently developed a comprehensive strategic plan for its programs
which has been supported by the industry as a whole. Along with CMI’s strategic
planning process, other industry organizations have contributed to both CMI’s plan and to
broader industry plans by accepting the responsibilities and roles which apply to their
organizations. Much of the coordination between CM] and other industry organizations in
carrying out some of the strategies for the industry’s demand expansion occurs as part of
the discussion with the TCISPC.

The leadership role of CMI in the industry has provided a major focus on industry
demand expansion for the growers and processors for a number of years. The various
demand expansion programs of CMI have been accomplished through devoted and willing

staﬂ‘ with the goal of expanding the demand for tart cherries. The major programs or

90

areas of emphasis for CM] are domestic market expansion, export expansion, facilitating
the development of new products, and other research.

5.2.1 Demand expansion strategies in domestic markets. The tart cherry industry has
relied on the domestic markets for a majority of the sales each year. The largest volume
product categories included in the domestic markets are frozen cherries (5+1 and IQF),
pie ﬁll, cherry juice, and dried cherries. The potential market directions for these product
categories were discussed in Chapter 4.

CM] has been and continues to be committed to building long-term domestic
demand through an effective and eﬂicient marketing program. With the greatest emphasis
of CMI’s focus directed to the domestic markets, positive changes have and will continue
to occur. Over 80 percent of the sales from tart cherry production each year are sold in
the domestic markets, thus, emphasizing the importance for a key program like CMI to
continue to direct a majority of its time and resources to those markets.

The following sub-categories emphasize the domestic market areas of most
importance. They include the following: 1) consumer retail grocery markets, 2) restaurant
/ food service promotional programs, 3) food manufacturer markets, 4) school food
service communications program, and 5) new product development.
5.2.1.1 Consumer retail markets. CMI’s overall goal for consumer retail promotions is
to encourage consumers to continue to purchase cherry products. CMI has outlined four
major focus areas in accomplishing this goal. They are: 1) to develop consumer
promotional programs that pull retail cherry products through the distribution system to
help build consumer demand for cherry products at the retail grocer level, 2) to develop

trade promotion programs that will push distribution of cherry products, 3) to develop

91

retail programs that encourage supermarkets to advertise cheny products (i.e. cheny ad
contest, cherry theme ads with bakeries, and delis), and 4) to work closer with processors
to establish stronger retail promotion partnerships to meet the needs of the cherry
industry.

The industry has supported CMI’s strategies for the retail markets. Some of the
cherry processors and marketing agencies have taken advantage of these retail market
strategies by partnering with CMI to do coupon drops, newspaper advertisements, and
magazine advertisements in the past and hope to continue to continue to work with CMI
in the ﬁxture. Food manufacturers could also effectively work with CMI by partnering
with CMI to do similar advertising and promoting of cherry products in the ﬁxture.
5.2.1.2 Restaurant/Food Service Promotion Program. The goal for CMI is to develop
this program based on what cherries can do for the restaurant or food service business.
Three areas of strategy have been outlined by CMI in this section. They are: 1) to develop
restaurant/food service programs that showcase cherries as a preferred dessert, using point
of purchase material and other incentives, 2) to focus on the take-out trend to increase the
number of cherry items available, and 3) to develop a stronger relationships with food
service distributors and brokers.

This strategy is targeted to help encourage new buyers as well as return buyers to
use POS material developed by CM] to help promote existing products. The POS
material prepared by CM] is available to all the different processors, marketers, and sales
agencies within the industry to use with their products. Also, this material is made

available by CM] to restaurant and food service businesses.

92

5.2.1.3 Food manufacturer markets. CMI’s main goal is to emphasize working closely
with food manufacturers to be a source of information to encourage the manufacturers to
use more cherries in their current product lines, and to develop new products using
cherries. The strategies to maintain and develop contacts with food manufacturers have
been outlined in three areas of emphasis. CMI’s strategies are as follows: 1) to contact
food companies to develop working relationships with key personnel, 2) to develop co-op
marketing programs with food manufacturers, and 3) maintain a consistent communication
program with food manufacturers and share information obtained with cherry processors.

As discussed in Chapter 2, food manufacturers are one of the most important

 

customer segments in demand expansion for tart cherries. They usually have substantial
abilities to do advertizing and promotion of products that are developed by them.
Processors and marketers can undertake joint efforts with CMI and to partner with a food
manufacturer in offering specialized advertisements or promotional campaigns.

5.2.1.4 School food service communications program. The major goal for CM] in this
area is to offer a total package of educational and promotional materials to school food
service directors and staﬂ‘. Thus, CMI provides the promotional materials to the school
food service buyers for their use at no costs. CMI’s strategies are as follows: 1) to
continue with the established program of relaying innovative, practical information about
cherries to school food service directors and others affiliated with school food service that
pull cherries through the school lunch system, 2) to communicate with food companies
who make products with cherries for schools; encourage other companies to provide
cherry products for the school market, 3) to work with USDA and other federal or state

agencies involved in school food service to showcase cherries in a positive light, 4) to

93

develop a communications format that brings together school food service directors,
cherry processors, other cherry vendors, and government ofﬁcials to educate all of these
people about the school food service market and cherries, and 5) to exhibit at national
school lunch food shows and attend other meetings to maximize interaction with all
participants in the school food service market.

Some of the other industry organizations involved in School Lunch purchases are
CIAB, CherrCo, processors, and sales agencies. These organizations all play an important
role in supporting and developing with CMI the best methods to approach USDA in
obtaining purchases. Some of the support may be through providing historical
information, current surplus supply holdings, and the product categories which are not
likely to be sold that year. Other support may be given by contacting government oﬁcials
to help inﬂuence USDA to push for a purchase.
5.2.1.5 New product development. Another area of emphasis for demand expansion by
CM] and various other industry organizations and segments is in the development of new
products. New products category is an area where continual investment needs to occur to
effectively meet the changing preferences of the consumers at retail. However, many of
the individual processor and marketing ﬁrms in the industry ﬁnd it difficult to invest
enough money into new products because of the large costs involved. CMI has made it
part of their emphasis to help stimulate and facilitate such programs.

The following CMI strategies are to help encourage processors and food
manufacturers to continue to research and try to develop new uses for tart chenies. CMI
has worked very hard in this area in the past and is committed to continue in the ﬁxture.

Their strategies are as follows: 1) to establish a closer working relationship with the

94

technical staﬂ‘ of food manufacturers and cherry processors to develop more “we”
partnerships, 2) working with industry and other outside sources to establish ﬁxnding for
new product ideas that use cherries, and 3) to develop partnerships with food scientists at
several major universities to do initial research aimed at developing viable value-added
products.

These strategies are centered around the ability for CM] to coordinate with industry
ﬁrms in developing partnerships with food manufacturers, or other cherry customers who
might be interested in developing and marketing new cherry products. This strategy is
another way for processors who are willing to work on new products to obtain assistance
from the broader industry to support their new product development eﬂ'orts. Although,
proﬁts may not be made for several years down the road, this strategy provides some
means for the processors and food manufacturers to reduce some of the investment costs.
5.2.1.6 Other domestic demand expansion strategies. The FMO has also provided
signiﬁcant incentives and opportunities for processors to expand demand through
diversion credits for new products. The diversion credits for new products, as discussed
in Chapter 2, helps those processors who work on new products to gain diversion credits

towards their regulation percentage during the over supply years. This has been a very
positive strategy supported by the majority of the industry for encouraging long-run new
product development and growth.

5.2.1.7 Summary of domestic demand expansion strategies. These ﬁve areas of
emphasis (consumer retail promotions, restaurant/food service promotion programs, food
manufacturing contacts, school food service communications program, and new product

development) are all areas of considerable importance to CMI as well as many other

95

industry segments. Through the development of the above outlined strategies, CM] can
signiﬁcantly help the industry expand the demand of tart cherries. Whether the expansion
is through the use of existing products or new products, the goal is to increase demand for
cherries.

5.2.2 Industry coordination for demand expansion in export markets. CMI has
devoted considerable amounts of resources to expanding the export markets. The tart
cherry industry is generally quite supportive of CMI’s export expansion strategies for the
industry as a whole.

The two main export markets are to European countries and Japan. For more than a
decade CMI has participated and ﬁxnded the development of the Japanese market.
Recently, CM] has refocused their efforts in export expansion more toward the European
markets.

CMI has anticipated that the expansion of export markets is important to the long-
terrn success of the cherry industry. Through the following strategies, CM] is planning to
redirect the focus of the export expansion programs and to use its resources in markets
which will beneﬁt a majority of the industry. The CM] export strategies are as follows: 1)
maintain sources of ﬁxnding to continue promotion in the Japan and Korean markets, 2) to
develop a strategic plan, short-term and long-temr, to market and promote cherries in
Europe, and 3) to research potential market opportunities of cherries in South America
and other parts of the world.

The goal of the industry’s redirected and reorganized export expansion program is to
develop a strong, integrated program for the cherry industry with leadership by CM] and

with Close involvement of the processor exporters, marketers, and CherrCo. In order to

96

 

in: .HH. ‘1: I“ 'A'1 ' '
l

do this there needs to be involvement in the planning by all major industry segments who
are involved. Market research needs to be done to better understand the changing export
markets, the customers’ needs and preferences, and where the markets are that the U.S.
should be targeting, etc.

5.2.2.1 Refocusing the export expansion program. A refocusing of the overall export
expansion program involves CMI processors, marketers, and CherrCo. These export
participants of the industry have been jointly developing the revamped export expansion
plan through the use of the newly formed U.S. Cherry Export Council. In order to
address the needs of the export customers, the industry needs to become more
knowledgable about the diﬁ‘erent uses of cherry products, market niches, and potentials
for market growth in current and possible new export countries.

5.2.2.2 Export expansion program funding. There are several sources of ﬁxnding for
export expansion programs by the tart cherry industry. These include the state and federal
governments, cherry processors, cherry marketers, and CM] funds. MAP ﬁxnds may be
obtained from USDA-PAS to help promote generic brand products by the industry.
MIATCO ﬁxnds also can come from USDA-PAS, but are handled through Michigan
Department of Agriculture (MDA) only to be used on branded Michigan products.

To obtain MAP ﬁxnds an industry promotional organization such as CMI needs to
apply to USDA-F AS each year with a speciﬁc program plan as to how the ﬁxnds will be
used. Also included in the application, CMI needs to commit to matching the ﬁxnds with a
speciﬁed amount of the industry’s ﬁxnds. These combined ﬁxnds are then used by CMI to
carry out the export expansion program for the industry emphasizing generic brand

ﬁxnding.

97

 

To obtain MIATCO ﬁxnds, CM] needs to apply to MBA each year with a similar
plan of how the ﬁxnds are going to be used. These ﬁxnds are targeted to be used for
products which are branded with a Michigan label on the product. These ﬁxnds are
matched as well by the processors who use them to help develop and expand export
markets by promoting Michigan products.
5.2.2.3 Export expansion program implementation. CMI will be the facilitator who
helps the exporters to develop, serve and strengthen trade contacts, and establish business
relationships in export market countries. In order to do this, there needs to be
coordination and cooperation from those involved in the U.S. and those from the
importing countries.

Speciﬁcally, CMI is going to try and implement an export expansion program that
helps to accomplish the goals they have set out in their strategic plan. In order to do that
these are the activities which need to take place. CMI will focus on identiﬁcation of new
international markets with appropriate cherry products that are demanded and increase the
export opportunities. Michigan State University will work closely with CMI, processors,
and sales agencies to provide some analytical assistance in obtaining and summarizing
certain kinds of needed information.

CMI, in partnership with the processors and marketers in the industry, through the
U.S. Cherry Export Council, will develop and implement action plans to expand exports of
cherry products to established and new export markets. Some of the action plans will use
MAP ﬁxnds combined with industry ﬁxnds to be used for generic promotions for Michigan
tart cherry products. Also, MIATCO ﬁxnds will be made available to all processors who

want to be part of using branded funds to promote Michigan tart cherry products.

98

This refocusing of the export demand expansion program of the tart cherry industry
which is currently underway is an excellent example of the coordinated efforts of the many
diﬂ‘erent organizations and industry segments. Thus, this is an example of one
ﬁxndamental concepts of CMI and other to involve many organizations in working
together to attempt to increase the sales of tart cherries. The export expansion strategies
have the potential to successﬁxlly help the industry to increase more exports over time. E7
Also, it could be a good model for eﬂ‘ectively coordinated efforts involving markets in the

domestic markets.

 

H

5.2.3 Overview of industry demand expansion strategies. Future growth and
economic returns for the tart cherry industry will be inﬂuenced substantially by the ability
of the industry to develop effective strategies which maintain demand in many product
categories as well as expand demand in new value added product categories.

CMI has played a major role in the past for developing programs to help the industry
to go forward in demand expansion. CMI has continued to be a leader for the tart cherry
industry and has established many demand expansion programs to continue to lead the
industry in the ﬁxture. Many of the strategies developed by CMI include a number of
aspects which relate to and are integrated with the contributions of other organizations to
successfully implement the strategies.

Although CMI has outlined goals or objectives to accomplish the strategies in each
of the major areas of emphasis, other industry organizations such as CIAB and CherrCo
can also contribute considerably to the success of these expansion programs. The demand
expansion goals established by CM] help to provide the initial and necessary steps for

achieving the strategies. By working together in a coordinated fashion, the goals for the

99

industry to continue to be competitive in the domestic markets and export markets in the
ﬁxture may be accomplished.

5.3 Supply Management Strategies. Supply management for the U.S. tart cherry
industry, as discussed in the previous chapters, has been the major need for a number of
years. Through the use of the FMO, supply management for the past three years has been
somewhat successﬁxl in reducing the surplus supplies and bringing demand and supply
closer to an approximate balance.

A number of amendment changes and board policy changes are being discussed and
analyzed by the board and the TCISPC to help facilitate effective policies related to the
FMO. The following strategy areas for the FMO have been developed by the CIAB board
with analysis help from MSU extension.

5.3.1 Key issues related to the FMO. During the ﬁrst three years of operation, the
CIAB has faced, analyzed, and re-examined a number of important policies and related
strategies for the FMO. Some of these complex issues included equity within the industry
and to clarify the permitted parameters of the FMO through amending the language used
in the order. Many of these issues involve diﬂ‘erent views by industry participants
regarding the best approaches to use the FMO to most effectively beneﬁt the industry.
Some also arose because of legalistic interpretations by the USDA in their overall
“watchdog” role.

The CIAB has continued to discuss alternative ways to improve the marketing order
to meet the needs of the entire industry and industry participants with varying
circumstances. This discussion and program improvement process has helped resolve

some issues and help to increase the effectiveness and efﬁciency in how the order operates

100

 

on a number of aspects. Nevertheless, a number of important issues continue to be
discussed and debated, sometimes with considerable ﬁxror.

There are two main categories of action the board can use to make particular
changes with the order after their discussion process. These are: 1) through board policy
changes and 2) through amendments to the marketing order. The board policy changes
must be accomplished through a super majority vote by 2/3 of the board. More substantial
changes to the way the order can be operated may need to be accomplished through
amendment changes and a referendum process.
5.3.1.1 Board policy changes intended for long-term success. The CIAB board
representatives have the responsibility to represent their speciﬁc districts in making policy
changes when necessary. However, the board also has the important responsibility to
address various policy changes with the interest of the entire industry. This is difﬁcult at
times because what is the best for the industry as a whole may or may not be perceived to
be the best for a particular district.

The various policy changes are generally discussed at great length by the board
members before coming to a decision. Some of the major long-run board policy issues
recently discussed by the CIAB include the following: 1) should diversion credits for
exports be continued? 2) should the allowance of diversion credits for new products be
continued? 3) methods of in-orchard diversion, and 4) different methods for using the
optimum formula during years of regulation. The issue concerning whether diversion
credits for exports should be continued will be ﬁxrther discussed in this section followed

with a strategy plan developed by the CIAB.

101

Shguld diversion credits for exports be continued?

As discussed in Chapter 2, diversion credits for exports were used as an option of
surplus cherries and a method to try and help expand sales in to the export markets. Many
in the industry and on the CIAB believe that it is important to expand various markets
including the export markets and the use of diversion credits is an appropriate method for
serving that purpose with the FMO. This can be accomplished by allowing a secondary
market use for exports for surplus cherries and thus reducing the amount of surplus which
might otherwise be left unharvested. These diversion credits are applied to the surplus
regulation requirements during the regulation years helping to meet those participants
regulation percentage.

There are a number of controversial aspects discussed by the CIAB related to
diversion credit for exports. One of these is that some growers and processors perceive
that there is an equity problem with export diversion credits and they perceive that their
neighbor growers with exports have been getting the upper hand. The perceived inequity
by some is that some growers and processors are leaving more cherries unharvested so
they are doing more to help reduce the amount of cherries available to the market. The
following example helps to illustrate the controversy between growers and processors.

Processor A sells their entire crop into the export market, perhaps for a much lower
price than can be obtained from the domestic market. In doing so, the growers of this
Processor A do not have to leave any of their hit unharvested during the surplus
regulation years. However, Processor B, who does not export any of their fruit, sells all
of their sales into the domestic market, perhaps for a much higher price. Their growers,

during surplus regulation years, have to leave some of their surplus fruit unharvested

102

 

because this processor may have no other alternative diversion activities to offer the
growers. Thus, the controversy of which processor and growers has the greatest burden
placed upon them because of the diﬂ‘erent markets the processors have entered into during
the surplus regulation years. Processor A and that processor’s afﬁliated growers, on the
other hand, often take the position that Processor B could also participate in the export
market.

The CIAB purposed a change in the board policy from diversion credit for exports
as were allowed in 1997 and 1998 to the use of exemptions for exports during the 1999
year. The proposed change by the CIAB was in response to the allegations by some
processors and growers about equity issues discussed earlier. This change to exemptions
was argued by some that it would provide some but less encouragement for processors to
export. The CIAB discussed various options and decided in June of 1999 that exemptions
for exports was an acceptable alternative in considering various aspects of the issue.

After considerable discussion and analysis, the industry was informed by USDA that
the exemption approach would not be permitted because of insufficient justiﬁcation for
this approach in the original marketing order hearing testimony. The CIAB and other
industry leaders have recently decided to reinstate diversion credits for exports. This
long-run strategy for developing export markets through diversion credits is important to
the industry and potentially could open markets that have not been ﬁlled with U. S.
cherries.
5.3.1.2 Needed amendment changes to the FMO. The tart cherry industry has been
able to effectively use the FMO to make progress toward some of the goals for supply

management. In addition, there are a number of key amendment changes needed to help

103

 

make the FMO even more effective and efﬁcient. Some of the reasons for the needed
amendment changes are to develop more equality and equity between all the producing
states, to better meet changing industry conditions, and to help clarify what actions or
strategies are permitted with the order.
Amendment changes to modiﬂ the marketing order:

The marketing order provides that states or districts which have a three year average r—
production of more than 15 million pounds are the only districts which must participate in

the all important surplus management actions. These districts include North West

 

[is .. ., .

Michigan, West Central Michigan, South West Michigan, and Utah. New York has also
been a regulated state, although their three year average production dropped slightly
below 15 million pounds which allows them to be unregulated. All of the other states,
including Washington, Wisconsin, Pennsylvania, and Oregon are not regulated for surplus
management because the average production in each of these states is less than the 15
million pound threshold as stipulated in the marketing order. Hence, they are able to
harvest and process their entire crop even when the industry has surplus supplies and
Michigan and Utah must reduce their production to mange the surplus. It is not surprising
that Michigan and Utah view this important free rider situation as unfair and inequitable.
Because of this situation, the CIAB has proposed an amendment to provide that all
tart cherry producing states must participate in the surplus supply regulation when this is
needed by the industry. This amendment is somewhat controversial because of the
diﬁculties in satisfying all the industry participants. The currently regulated states,
Michigan and Utah, advocate that all states should be required to participate in the surplus

management actions. By contrast, many in the states which are currently not regulated

104

would prefer to remain in that status and let Michigan and Utah reduce the industry’s
surplus supplies.

This amendment idea has been the subject of considerable debate, and has the
potential, if not passed when voted upon, to inﬂuence some growers and processors in the
currently regulated states to favor terminating the order. This proposed amendment
change, to move the regulation production threshold for a state to zero has the potential of
helping to unify the industry so that all growers and processors feel the impacts of
regulation equally.

Some of the reasons why the CIAB is proposing the amendment to include all
producing states for supply management regulations include the following: 1) the
perceived inequity by the processors and growers in the current supply management
regulated districts, 2) representatives of districts which are not regulated may nevertheless
vote on the CIAB issues that impact primarily the regulated states, and 3) the currently
unregulated districts have a substantial economic advantage over the regulated districts
ﬁom the FMO program. This is because the unregulated districts are able in a year of
surpluses and hence supply regulation to harvest their entire crop without any surplus
restrictions while the regulated districts must modify or reduce their volumes marketed to
reduce the industry’s surplus supplies. The current situation is a good example of a free-
rider problem by the currently non-regulated states.

Amendment oli chan es to cl ' the authori f the CIAB:

A number of additional proposed amendments have been developed by the CIAB

- and presented to the USDA during the past two years. , A majority of these proposed

amendment changes pertain to clarifying what is permitted to be done with the marketing

105

order and by the CIAB. Many of these are related to what the CIAB contends are mis-
interpretations with USDA about the original intended authority of the marketing order.
These “administrative” amendments are relatively uncontroversial within the industry and
are needed to clarify the CIAB’s authority and to help the order operate more effectively.
The following is one example of an amendment change to help clarify some of the mis-
interpretations.

USDA Estimate - to give the CIAB the ﬂexibility of either using the USDA-NASS

 

pre-harvest production estimate in June, or to use another crop size estimate for the

 

pre-season industry production for the FMO’s calculations regarding the optimum

supply formula.

5.3.2 Overview of supply management strategies. The supply management program
under the FMO needs to develop more comprehensive long-run strategic plans. By
establishing future directions for supply management, the industry can prepare for
changing circumstances that are likely in ﬁxture years.

There has been some long-run planning concerning the FMO and how it can operate
most effectively. The CIAB has continued to discuss methods on how to improve the
effectiveness of the FMO for the ﬁxture. These discussions have included board policy
changes on a number of key issues and also a number of very complex issues which are
still being discussed at length. The CIAB has also made proposals to change amendments
such as which will create more equality of FMO treatment within the industry. These
proposed amendment changes are still being discussed and considered by the industry and

USDA.

106

5.4 Processor pricing strategies. Future processor pricing strategies is another area to
which the industry has given considerable attention. As discussed in Chapter 2, CherrCo
was an important accomplishment of the initial phases of the comprehensive strategic
planning process. This new organizational strategy was developed to strengthen and
rationalize processor pricing and to stabilize within season prices for processed cherries.
Also summarized in Chapter 2, the success of the ﬁrst three years of CherrCo has
encouraged the industry to continue to coordinate and develop strategies to strengthen
processor pricing for the ﬁxture.

A majority of the industry are supportive of CherrCo’s position and strategies for
processor pricing. Because CherrCo is a cooperative, the strategic plans developed within
the coop are not public information and some are not shared outside the organization.
CherrCo does coordinate and work together with CMI, CIAB, and other organizations in
attempting to develop and implement needed broad industry strategies.

This section will consist of suggested strategies for the ﬁxture that CherrCo might
consider. The suggestions are based upon considerable analysis by the author of the thesis
and discussion with industry leaders in gathering their insights.

5.4.] Potential future focus for CherrCo. After the moderate but important successes
of their ﬁrst three years by CherrCo, a number of potential ﬁxture strategies which
CherrCo could explore include: 1) expanding their membership to overcome the free-rider
problem, 2) long-term contracts with food manufacturers and processors, 3) establishing a
two tier pricing mechanism for the diﬂ‘erent product category pricing needs, and 4)

working with CMI on the revamping and refocusing of the industry’s export demand

107

 

expansion program. The following example is one strategy which CherrCo might use to
help to ﬁxrther its success in the ﬁxture.

Long-term contracts between food manufacturers and tart cherry processors have
been considered for a number of years. However, due to a number of problems including
1) the inability of small processors to guarantee delivery of large volumes over a number
of years and 2) the unwillingness of food manufacturers to commit to long-run prices and
volumes, the tart cherry industry has not been able to successﬁxlly implement such a
strategy to any substantial degree. Now, with the help of CherrCo, the industry is more
likely to be able to use such contracts with large food manufacturers.

CherrCo’s role in the use of long-term contracts might be to help facilitate the
combining of members cherries into large saleable quantities or pools. This may be
accomplished by combining different members tonnage together to ﬁll the needs of certain
food manufacturer customers. Depending on the contract, CherrCo could be the key
facilitator for ﬁxlﬁlling the requirements laid out in the contracts.

Some of the potential problems which CherrCo might have to overcome in
developing multi-year contracts could be related to processor involvement, possible short
supplies, and the impact of rising prices with supply shortages. Of these three problems,
rising prices could be a key reason for not wanting to develop a long-run contract in the
near ﬁxture. The problem might occur if a contract were developed at this time while
grower returns are still low and later there is a signiﬁcant increase in prices over the next
few years. The processors and growers tied into a contract at lower prices would likely
not want to deliver on the contract to when higher prices outside the contract may be

poSsible within a few years. Thus, CherrCo will need to develop ways to account for

108

 

rising prices (and possibly lowering of prices) so that the contracts can be beneﬁcial to all
the participants.

5.4.2 Summary of processor pricing strategies. CherrCo has been successﬁxl in
strengthening and stabilizing within the season processor prices for the past three years.
Although there is little public information concerning CherrCo’s long-run strategies, there
continues to be strategic planning in this areas. CherrCo’s ﬁxture possibilities include
growing in processor membership to include more of the entire industry and multi- year
contracts.

5.5 Grower returns strategies. The need for proﬁtable grower returns to cover their
costs is increasing in importance due to the struggles that growers have been faced with
for so many years. Some of the reasons for the needed stronger, proﬁtable returns to
growers include: 1) grower returns have been substantially below their typical cost per
pound for most of the last 15 years, 2) growers have felt the economic difﬁculties ﬁ'om
other commodities such as apples recently, combined with the economic difﬁculties of the
tart cherry industry, and 3) reinvestment into the farm operations have been very low for
a number of years. For example many growers are operating entirely with older machinery
and with aging orchards.

The interrelationship between expanding demand, supply management, and
strengthening of processed cherry prices are related to the potential of increased returns to
the growers. Without these aspects combining to help the industry become more
economically viable, many growers would not be in a position to continue. The strategies

outlined earlier in this chapter to expand demand, combined with the essential supply

109

management program to reduce surplus supplies when necessary, help to make it possible
for processors to strengthen the prices and return more to growers.

The TCISPC has discussed the low grower returns issue considerably. Grower
returns have increased substantially from a recent low of 5 cent in 1995 to an estimated 20
cents in 1999. Nevertheless most growers and industry leaders rate the area of low
grower returns as a problem area of continuing priority. Developing strategies which will
alleviate the problems of low grower returns is difﬁcult and clear-cut answers are not
evident. The TCISPC has suggested that one step which is needed is for processors to
work more closely with their growers to increase their communications and inform the
growers of the many diﬁ‘erent aspects involved in the processor pricing and grower
returns. By providing more information to growers and working together, the growers
and processors can make some additional progress on this issue instead of continually
pointing the ﬁnger.

The TCISPC has suggested a strategy to help improve communications to growers
about some of the major variables that inﬂuence their returns. These variables include the
following: 1) raw to ﬁnished product yields, 2) raw grades, 3) sale prices of processed
cherries (as inﬂuenced by ﬁnished product grades), 4) type of pack, 5) processing costs,
and 6) FMO options that are used for surplus cherries and their costs and returns. The
TCISPC encourages processors to communicate to growers complete information on
these variables and how the variables impact each grower individually.

5.5.1 Summary of grower returns. Grower returns have been a major concern of the
tart cherry industry for a number of years. The low grower returns and difﬁcult economic

cenditions of the industry have made it so many growers have exited from the production

110

of tart cherries. Also, many of the growers who have continued to grow tart cherries have
received lower than cost of production returns.

The major strategies to help alleviate the problems dealing with low processor prices
are centered what happens with tart cherry supplies. The strategies developed throughout
the other sections of this chapter will all have some impact on grower returns. The
suggested strategy for better communication between growers and processors about the
major variables that inﬂuence returns is one method for growers to understand better some
of the reasons their returns may be lower or higher in certain years.

5.6 Overview of tart cherry industry strategies. The tart cheny industry has, through
the coordinated work of industry leadership, developed a comprehensive strategic
planning effort to give more ﬁxture direction to the industry. This strategic planning has
been a signiﬁcant accomplishment over the past three years and continues today. Demand
expansion, supply management, processor prices, and grower returns have all been some
of the focus of attention throughout this planning process. The process has an ultimate
goal of helping to increase grower returns compared to the unproﬁtable levels which have
prevailed since the mid-19805.

The FMO has played a very important role in providing a closer supply and demand
balance and hence providing a solid basis for CMI and CherrCo with strengthened
opportunities to develop effective overall strategies for the industry’s ﬁxture. The
industry, including CM], has devoted considerable resources for promoting existing
products, markets, and developing new products and markets. CherrCo has successﬁxlly
increased processed cherry prices over the past three years and has the goal of maintaining

their positive inﬂuence in strengthening processed cheny prices in the ﬁxture. CherrCo’s

111

success will not be possible without the help of the supply management FMO which can
manage supplies to reduce surplus supplies of cherries on the market when these occur so
that prices can be strengthened.

Through the coordinated efforts of industry leaders a number of new program
strategies and other developments have occurred. The ﬁxture strategic directions for the
industry appears to be overall quite positive due to the evolving acreage production cycle.
Many of the strategies and plans by diﬂ’erent industry organizations are centered on

working together in partnerships and building stronger relationships to jointly help the

 

industry progress and take advantage of the many strengthened opportunities available. 5
Throughout the past three years, the coordinated efforts of the industry have helped to

stimulate a progressive movement from a very negative and difficult economic position in

which the industry was situated during the late 19805 and early to mid 19905 to a more

positive environment at the present time. The strategies discussed in this chapter are

intended to continue to help guide the industry in a positive direction in the ﬁxture.

112

Chapter 6

OVERALL THESIS SUMMARY
6.1 Introduction. In a number of respects, the direction of the tart cherry industry’s
ﬁxture will likely be substantially diﬂ‘erent than what has occurred during the last 15 years.
The economic diﬁculties of the past caused by excessive surplus supplies have led to
persistently low grower returns and processor prices. The recent implementations of the
FMO and CherrCo the continued leadership of CM] for demand expansion, and the
prospects for signiﬁcant improvement in the demand supply balance have dramatically
improved the possibility of a much more positive economic ﬁxture of the tart cheny
industry than during the late 19805 and the 19905.

The main purposes of this thesis have been to summarize the evolving economic
situation of the tart cherry industry, analyze the current industry status, and analyze future
industry strategies that are being developed and implemented through coordinated
industry efforts. The Tart Cherry Industry Strategic Planning Council (TCISPC) has been
a primary organization for industry Visioning analysis and insights in helping to develop
this thesis. Through the efforts of industry leaders and the TCISPC, over the past three
years a comprehensive strategic planning eﬁ‘ort has helped to stimulate plans and
implementation of various strategic directions. This has helped to position the industry to
be more competitive and to obtain more positive economic returns. These strategic
planning efforts have provided the industry with a coordinated and positive ﬁxture planning
direction to help accomplish these areas of need.

6.2 Overview and broad perspective of evolving strategic directions of the tart

cherry industry. The comprehensive strategic planning efforts by the tart cherry industry

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during recent years have evolved from and built upon earlier strategic planning efforts.
These earlier efforts were directed toward certain more focused problem areas, such as
management of the surplus supplies. The recent strategy planning efforts of the TCISPC
to develop more comprehensive strategic plans is a more coordinated approach. This has
helped industry organizations to strengthen their partnering and working together to solve
a number of major industry problems.

As discussed in Chapter 2, prior to an industry summit conference in 1996, many

efforts to develop strategies to overcome some of the industry’s major negative driving 1

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forces, such as, excess supplies, were pursued. In doing so, the industry attempted to 11
address certain speciﬁc and targeted issues. These early attempts to coordinate strategies
to overcome the excess supply problem helped in the long-run to pull the industry closer
together for the recent more comprehensive strategy planning eﬂ‘orts.

The industry summit conference which focused on needed ﬁxture strategic direction
was held during the fall of 1996. At that time, the new supply management FMO, which
the industry had worked on for years, had just been passed in an industry referendum.
This provided an important new base on which to build additional strategies for industry
improvement in the ﬁxture. At this summit conference, the industry decided to give
priority in their strategy development efforts on 1) the ﬁxture development and
implementation of strategies and policies of the new FMO, 2) formation of a new “super
co-op”, 3) well-coordinated demand expansion program efforts, and 4) formation of a
broad based industry strategic planning group or council.

During the next few months following the conference, the industry succeeded in

developing CherrCo as a new federated cooperative to help rationalize and strengthen

114

processor pricing. The new marketing order program was also ﬁxrther and more
speciﬁcally organized and implemented with many key policy decisions and development
of strategies on speciﬁc issues. The TCISPC was also formed and has become quite
active for broad-based industry leadership and coordination of ongoing strategic planning
within the industry.

The TCISPC was formed to help the industry by providing an organization for
facilitating and stimulating more comprehensive strategic planning. Through insightﬁxl
and Visioning leaders who represent the major cherry industry organizations participating
on the council, overall plans for ﬁxture strategic direction have been developed. The
council meets together regularly to discuss major issues that pertain to such key issues as
supply management, demand expansion, processor pricing, and grower returns. By
analyzing these key and important areas, strategies for ﬁxture direction for the industry
have been and will continue to be developed.

The industry has experience some signiﬁcant progress during the past three years in
reducing surplus supplies, higher processed prices, and somewhat improved grower
returns. These signiﬁcant indicators of the industry’s progress are related to the industry’s
new programs such as the FMO and CherrCo and to the overall efforts of the TCISPC.

The industry’s ﬁxture strategy planning efforts will need to be oriented toward the
evolving industry situation and new challenges. One area which will deserve considerable
attention will be the possibility of supply shortages. The council will need to ﬁxrther
develop strategies on how the industry might handle this and other evolving circumstances
in the ﬁxture. Although some planning has been done related to supply shortages, the

council will need to ﬁxrther consider all the related issues. Otherwise, the possibilities of

115

 

having a reoccurrence of substantial long-run surplus supply problems may continue to
occur in the ﬁxture.

6.3 Evaluation of the tart cheny industry’s strategic planning process. The tart
cherry industry’s strategic planning process with its evolving evidence of some
effectiveness, may provide a model for other commodity industry strategic planning to
improve industry performance. The strategic planning process for the tart cherry industry
has evolved into a coordinated and effective working partnership between many different

industry organizations and the university. These cherry industry organizations with the

 

“F'-

help of MSU extension, provide Visioning, direction, and a broad perspective of what
potentially could happen in the ﬁxture and hence what strategic directions are needed by
the industry. This partnering and coordinated planning effort brings many different
aspects of the industry into one broad based organization to work together in developing
needed future direction.

Other commodity industries have become interested in exploring and initiating
similar councils within their respective industries to do similar industry strategic planning
as is being done within the tart cherry industry. By using a broad based council to help
industry strategic planning, the whole process of doing research, analyzing, discussing
diﬁ‘erent alternatives, and strategy implementation has a much greater impact and success
on the industry because of the number of different organizations involved. These
organizations add greatly to the needed analysis. A “model” for industry planning
methods needs to include organizational representatives ﬁ'om all aspects of the industry.
Without a organization with a broad total industry perspective], some aspects or interests

of the industry may not be given adequate consideration.

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Strategic planning in different ways by the tart cheny industry has been occurring for
a long time. The TCISPC is a continuation of the efforts of many others who have
worked for years to bring together a industry planning and progress. The TCISPC and its
especially broad based, comprehensive perspective on the industry’s issues is also
somewhat unique.

The council has been successﬁxl in developing strategies over the past three years to
deal with improved industry coordination and a number of key problem areas. Although
the speciﬁc strategies for the industry’s ﬁxture circumstances may be different, the council,
working with the industry and its various segments, will continue to develop appropriate
strategies. Continuing to coordinate efforts between demand expansion, supply
management, and processor prices, the council will continue to address many different
issues which may arise.

In doing this thesis, the positive experience of working with the industry leaders to
obtain information has provided an opportunity for much greater understanding regarding
the industry strategic planning approach. Pulling togther all the many different aspects
from the various organizations is extremely complicated at times and only through a
coordinated eﬁ‘ort can this be accomplished effectively. The TCISPC works together as a
group of uniﬁed leaders to ﬁnd the best possible solution to the most prominent issues the
industry faces.

The council was organized to represent all the different interests and segments of the
industry. These include major industry organizations, processors, growers, marketers,
cooperative, and buyers. By including all of the different segments of the industry, the

c0uncil has been able to successﬁxlly help the industry as a whole. Although the TCISPC

117

has been successﬁxl and supported by the industry, there are some who feel that this
council needs additional representatives ﬁ'om certain industry segments.

The council has successﬁxlly developed strategies which have been both short-run
and long-run in nature. Some of these strategies have been successﬁxl and positive in
helping to attain their speciﬁc objectives. Others have not yet been successﬁxl and are
being re-analyzed, modiﬁed, and new strategies are being developed.

In the ﬁxture, the council will need to continue to address various immediate issues
as well as to continue to work to develop appropriate long-run strategies. Substantial
long-run planning has occurred and this provides an excellent overall direction for the
ﬁxture. However, if there is an area which needs ﬁxrther attention by this council, it may
be in the area of more long-run planning on certain issues.

The tart cherry industry strategic planning approach has helped to broaden the
understanding of many key problem areas and has strengthened working together as an
organized industry to achieve many different goals. The broad perspective of working
together as one organization to develop needed ﬁxture direction for the tart cherry industry
is being accomplished to a substantial degree. By uniting the university expertise with
industry leaders, continuous structured strategic planning will continue in the ﬁxture.
Continued eﬁ‘ort and progress is needed to help the industry cope with its dynamic and

constantly evolving circumstances.

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LIST OF REFERENCES

Cherry Marketing Institute Strategic Plan, A View of the Future. 1998

Lyford, Conrad Pewer. 1998. An Analytical Framework for Industry Strategic Planning
and Coordination. Ph. D. Dissertation, Michigan State University.

Nair, Muraleedharan G., Haibo Wang, Gale M. Strasburg, Alden M. Booren, and J. Ian
Gray. 1998. “Antioxidant Polyphenols ﬁom Tart Cherries (Prunus cerasus).” and
“Novel Antioxidant Compounds ﬁ'om Tart Cherries (Prunus cerasus).”

Ricks, Donald. September 16-17, 1996. Summary, Tart Cherry Forum: Planning
Together for the Future. Michigan Farm Bureau, Michigan Department of

Agriculture, Michigan State University College of Agriculture & Natural Resources.

Ricks, Donald. March 2000. The Tart Cherry Industry Strategic Directions for Future
Success. Tart Cherry Industry Strategic Planning Council and Michigan State
University.

Ricks, Donald, Curtis Rowley. February 2000. Opportunities For the Tart Cherry
Industry.

Thompson, Arthur A Jr., and A]. Strickland III. Crafting and Implementing Strategy,
Sixth Edition. Richard D. Irwin. INC. 1995.

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