NFAPP's Newsletter February 1998

Featured Articles :

"The Economic Value of Spin Control: Food Safety and the Strawberry Case", By Paul M. Patterson, Ph.D.
Topic : Food Safey and the Strawberry Case.

"Market Watch : U.S. Fresh Oranges", By Richard Adu-Asamoah, Ph.D.
Topic : US Orange Industry.

"Legislative Update" , By Albert Kagan, Ph.D.

The Economic Value of Spin Control:
Food Safety and the Strawberry Case

Paul M. Patterson, Ph.D.

Executive Summary

Food safety has risen to the forefront as an important policy matter affecting both public health and grower profits.
Outbreaks of food borne illnesses are typically accompanied by numerous press accounts of the incident, a decrease in demand, and a falling market price. A single outbreak can also have a lasting impact on the market, as the reputation of the industry or product may be damaged in the mind of the consumer.
A recent NFAPP analysis evaluated the impact of adverse and positive information delivered through print media on California strawberry grower profits over for the period 1994 through 1997. During this time, two food borne illness incidents were experienced in this industry-the cyclospora scare of 1996 and the hepatitis incident of 1997. The observed positive articles may have been the result of the ongoing promotional or defensive efforts of the California Strawberry Commission (CSC)-spin control.
It was found that adverse information substantially reduces grower profits, but that positive information can partially offset their negative effects. The bad news stories released between 1994 and 1997 caused grower returns to fall by between 37 and 53 million dollars. However, positive news stories allowed growers to recoup between 24 and 32 million dollars. Combined, the net losses to growers over this period ranged between 12 and 21 million dollars.
Measures to prevent food contamination are costly. Currently these costs are incurred by individuals on a voluntary basis. However, the benefits accrue to many when they help to protect the image of the industry. Thus, individuals have an incentive to under invest in these systems.
Grower associations, like the CSC, may be well served to redirect funds used traditionally for promotion towards effective industry directed food safety initiatives.

Food-Borne Illness and Industry Losses

Growers and their commodity associations are fully aware of the nature of the damage that a food borne-illness incident can cause to their industry. However, little is known of the exact cost to producers of such incidents. For example, California strawberry growers, who experienced two such incidents in 1996 and again in 1997, estimated the cost of the latter at some $40.0 million, but this was admittedly only a rough estimate. Beyond the loss of product that is actually found to be contaminated, the true cost lies in the damage done to a product’s reputation with consumers as part of a safe, healthy diet. Such changes in consumers’ perceptions may be long lasting, widespread, and very difficult to reverse. Moreover, the damage is often caused by one grower or packer, while all growers are made to suffer.

As growers evaluate the costs and benefits of adopting new production methods and techniques, accurate measures of these costs must be developed in order to be able to quantify the benefit to increased attention to food safety. This information can also be used to quantify the benefits of any defensive action taken by a commodity board, such as the California Strawberry Commission (CSC), in the aftermath of a disease outbreak. To the extent that a product’s “clean reputation” is a public good, an analysis of the costs and benefits of trying to fix the damage once it is inflicted provides a measure of the amount that a group of growers, through their association, should be willing to spend on an industry-wide system of contamination control irrespective of any new government regulation.

Procedures for Estimating Grower Losses

The experience of California strawberry growers was analyzed over the period 1994 through 1997. In each incident affecting this industry (the cyclospora scare of 1996 and hepatitis scare of 1997), the potential health hazards associated with consumption of the fruit were chronicled in numerous news articles. The publicity linked to these incidents were observed to cause a decline in market prices, as consumers reduced their consumption of the product (see figure 1). This pattern has been observed in other commodity markets and is consistent with economic theory.

To evaluate the economic impact of these food borne illnesses incidences on growers, the number of negative articles related to strawberries which were indexed in the Dow Jones News Retrieval Service was counted. The impact of positive information was also taken into account and these articles were counted, as well. These information indicators were then introduced into a model of consumer behavior. Other studies have used a similar approach to measure the relationship between egg consumption and information on health and blood cholesterol levels. Parameter estimates from the consumer model were then used to evaluate the independent impact of good and bad news on grower profits, under varying assumptions on the responsiveness of growers in adjusting supplies to prevailing market conditions. In some instances, such as in the short run, growers have little

Negative News Stories and Strawberry Prices.

opportunity to adjust supplies delivered to the market. Over time, grower supply responsiveness (measured by the elasticity of supply) may increase. Their ability to respond, though, can have a substantial impact on grower profits. With few prior estimates on the supply responsiveness of strawberry growers available, the impacts of information on grower returns were evaluated under several plausible supply response scenarios. The change in grower returns were calculated for each month during the sample and expressed in November 1997 dollars through a future value calculation.

Findings

The consumer response model showed that bad news has a larger impact on market prices than good news. Over the long run, one additional bad news article causes market prices to decline by $0.60 per carton, while one additional good news article causes price to only increase by $0.36. These parameter estimates were next used to evaluate the impact of market information on grower returns.

Assuming that growers are not very responsive in adjusting market supply, the long run grower losses attributable to bad news over the sample period, is estimated at $53 million (see table 1). However, if they are indeed very responsive (particularly over the long term), then the losses sum to only $37 million. Under these same supply assumption, if the effects of good news (defensive actions or spin control) are also accounted for, then grower losses are limited to $21 million and $12 million, respectively. Thus, the estimated value of the spin control varies between $32 million and $24 million. Provided that the CSC spent less than $24 million in attempting to offset misinformation or to change consumer perceptions, that money was well invested. However, could it have been better invested?

Although it sounds cliche, in this case an ounce of prevention may indeed be worth more than a pound of cure. Preventing a loss this large not just in revenue, but in profit provides ample justification for investing in an industry-wide safety-control program. The problem is that a disease-free reputation is a classic example of a public good. Because all growers benefit from this product-image, but none can be compelled to pay their individual benefit, the private market will fail to provide any protection at all. If it is rational for one grower to be a “free-rider,” then it is rational for all to become free-riders. However, commodity organizations were initially established to provide another type of public good--generic commodity promotion. It seems natural, therefore, that commodity groups could treat contamination prevention as an equal and companion objective to promoting their products. Mandatory grower check-off fees would fund inspectors and industry-designed standards that would obviate the need for more government regulation of growers. In the strawberry industry, some of the largest, vertically-integrated grower-marketers have recognized the fundamental truth in this logic by investing in their own Hazard Analysis and Critical Control Point (HACCP) programs. To the extent that their strawberries are seen as close substitutes for all others, however, they are still subject to the risk that one culprit will again damage the buying public’s image of strawberries as a safe and healthy food.

Recommendation

If a product’s image among consumers as a safe and healthy alternative is considered a public good, then grower associations have an incentive to broaden their missions to include not only generic commodity promotion, but also to consider industry-wide efforts at preventing future disease outbreaks. Individual firms’ efforts to develop HACCP programs or to adopt new production practices can be undermined by one individual that takes one risk too many.

Market Watch : U.S. Fresh Oranges

By Richard Adu-Asamoah, Ph.D.

Introduction:

This season’s U.S. orange production has been a record through February 1998. The January forecast of 1997-98 season production remains on track through the third week of February. A record production of 14.3 million tons (12 percent increase from last season) is expected. Both California and Florida will experience increased production of dominant varieties. El Nino-caused weather problems may negatively impact the final tonnage of domestic orange production. Imported navel oranges may take market share from California Valencia during summer months.

Official California Forecast Suggests a Good 1997-98 Crop:

September 12, 1997 official estimates of the California navel orange crop for 1997-98 season (California Agricultural Statistics Service - CASS) suggest a 10 percent increase in volume. The 1997-98 crop forecast is 44 million (75-pound) boxes, compared to 40 million boxes in 1996-97. This represents two continuous years of record navel orange production in California. Though Florida leads in overall orange production, California dominates the domestic fresh market, shipping about 10 times more navel oranges than Florida. Arizona and Texas cover a very small percentage of the domestic fresh market. Fruit size in California is expected to be larger than normal, but similar to the 1996-97 crop.

Florida Expects a Record Crop:

Florida’s 1997-98 orange production is expected to be a record crop, and about 12 percent larger than last year. February 11, 1998 production estimate by the National Agricultural Statistics Service (NASS) for Florida was 254 million boxes (11.4 million tons). By February 26, Florida’s early-midseason and Valencia forecasts remained on track. Early and midseason varieties are expected to be about 146 million boxes (6.57 million tons), a 9 percent increase over last year. Florida’s Valencia crop is expected to be about 17 percent larger than last year. NASS forecasts about 108 million boxes (4.86 million tons) of Florida Valencia for the 1997-98 season. This increased production is likely to depress f.o.b. prices for Florida oranges if demand is not better than last year. On February 8, the average price was $5.60 per 4/5 bushel box compared to $6.34 for the same period in 1996-97.

El Nino May Impact Final Production of U.S. Fresh Oranges:

The true impact of El Nino, if any, on domestic orange production for the 1997-98 season will not be known until season’s end. It is important to point out, however, that continuous rainfall and flooding have prevented the timely execution of some essential agronomic and harvesting operations. Fruits have also fallen off trees before they could be harvested. Rains have limited quantity harvested. As of February 22, most citrus groves in Florida were wet as a result of two or more days of hard rains. Field work has been stopped in several fields during rain-filled days, and new growth has already started to form on trees of all ages. Harvesting crews were trying to wind up early and midseason orange harvest between rain showers, and complete harvesting has been difficult in many cases. Severe storms caused flooding, strong winds and heavy rainfall in California. Several field activities were curtailed during February in many areas, especially in the Sacramento and San Joaquin Valleys. Navel orange harvests are active only where weather permits, and high winds and rain have resulted in heavy fruit drop in some areas. As of February 22, several navel orange growers were behind schedule in picking. Problems with recently picked fruit included wind damage, crease and puff. The desert area Valencia orange harvest started in less than desirable weather. All these suggest that the final estimates of the season’s production may fall short of earlier estimates. There are also implications for next (1998-99) season’s production. In both California and Florida cool weather may slow new growth and bloom bud in citrus areas. If El Nino causes a reduction in usable production, prices will be higher in March through May (Figure 1). May 1998 prices may average $7.30 per 4/5 bushel box (3.4 percent higher than last year) for all oranges.

Domestic Growers Expect Tough Competition From Imports:

California’s near monopoly of year-round fresh oranges is being challenged by imports. Major U.S. shippers, including Sunkist Growers Inc. and Dole Citrus, are concerned about imports taking away market share , especially during the summer months. California Valencia oranges are expected to face the stiffest competition. California navel’s production window has extended from October to June, squeezing Valencia which traditionally covers this period. Argentina, Australia, and South Africa are positioning themselves to be major players in the U.S. summer fresh orange, and other citrus markets. Australian navel oranges now compete with California Valencia oranges during the summer. South Africa is expected to increase volumes of navel oranges exported to the U.S. during the summer. This suggests that California Valencia may lose acreage to navel oranges, a situation that has already confronted Arizona Valencia shippers.

Legislative Update

by Albert Kagan, Ph.D.

As the 105th Congress moves into its second session, several bills have been proposed that have an impact on the fruit and vegetable industry. These bills range from agricultural worker issues, to labeling requirements to methyl bromide alternatives. The following paragraphs outline some specific proposed legislation.

The Temporary Agricultural Worker Act of 1997, H. R. 2377, sponsored by Rep. Smith (OR), would create a new non-immigrant category as a pilot program for temporary and seasonal agricultural workers. The intent of the legislation is to allow for a 24 month pilot period for temporary agricultural workers. This period would be effective 6 months after enactment and workers admitted under this program would be paid the prevailing wage rate, in addition to a trust fund being established in the Treasury to ensure the return of workers to their country of origin. The number of individuals admitted in the US under this program will be capped at 25,000 workers per fiscal year. These workers will be allocated equally among employers in 5 designated states. A companion Senate bill is being prepared.

H.R. 1232, the “Imported Produce Labeling Act of 1997,” was proposed by Mr. Bono (CA) prior to his death and currently has 90 co-sponsors. This bill would require country of origin labeling of perishable agricultural commodities imported into the United States and to establish penalties for violations of such labeling requirements. The intent of the legislation is that retailers of a perishable agricultural commodity imported into the United States shall inform consumers, at the final point of sale, of the country of origin of the commodity. Methods of notification may vary and a provision for violations of the Act have been proposed as well. The companion Senate resolution, S. 1042, was introduced by Senators Craig (ID), Graham (FL) and Johnson (SD).

Senator Abraham (MI) has introduced legislation, S. 1119, to address the problem of misrepresentation of country of origin or other characteristics of perishable agricultural commodities by commission merchants, dealers, or food brokers. This legislation is contingent on country of origin labeling legislation being adopted.

The bill, H. R. 2609, has been proposed by Congressman Miller (FL) and numerous co-sponsors to make a regulatory correction concerning methyl bromide to meet the obligations of the Montreal Protocol without placing the farmers of the United States at a competitive disadvantage versus foreign growers. Principle arguments made for this legislation are that American farmers depend on methyl bromide to grow, store, ship, process, and trade over 100 different crops and that the agricultural community has no safe, effective, commercially available alternative to methyl bromide. The cost of the ban was estimated at $1.5 billion (USDA figures) in the five primary using states (Florida, Georgia, California, North Carolina and South Carolina). The intent of the bill is to insure that the methyl bromide ban is not more stringent or restrictive than specifically required by the Montreal Protocol, and that the ban shall be equally required of all parties to the Montreal Protocol.

NFAPP will continue to monitor the legislative process and report any information that may impact the fruit and vegetable community.

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