NFAPP's Newsletter June 1998

Featured Articles :

"Slotting Fees: Where’s the Bargain?", by Timothy J. Richards, Ph. D.
(Topic : Produce retail market - challenges and issues).

"Lettuce Market Watch and Industry Outlook", by Richard Adu-Asamoah, Ph.D.
(Topic : Lettuce Market Watch).

"Legislative Update" , By Amy Ridings.

Slotting Fees: Where's the Bargain?

by Timothy J. Richards, Ph. D.

At the United Fresh Fruit and Vegetable Association conference held in Dallas this spring, there was much talk, and concern, over the rising incidence of retailers charging shelving, or slotting fees, to produce growers. In fact, Chris Hoyt of Hoyt and Company, Stamford, CT eloquently described the root cause of this problem from a retailer perspective: in the face of increasing competition from mass marketers, declining margins, and a shift by packaged goods sellers from trade promotion to consumer advertising, supermarkets are seeking ways to restore revenue from all types of trade promotion. While less visible than advertising, trade promotion, he claims, amounted to fully 10.5% of retail food revenue in 1996 — some $30.8 billion in total. Key to regaining this lost revenue is to tap into the most profitable segment of the perishable departments — produce. Ominously, such pressures are only building with increasing concentration among produce retailers. Although packaged good manufacturers originally came up with the idea of slotting fees, is there something about the economics of produce that makes us immune to this disease, or will it be chronic?

Packaged goods manufacturers tend to be large firms themselves — General Mills, Campbells’ Soup, Phillip-Morris -- and enjoy market shares equal to or greater than the retailers to which they sell. Therefore, if market share is any kind of indicator of bargaining power, which is debatable but a good first-approximation, then negotiating over trade-terms is akin to a prize-heavyweight fight — both bring bargaining advantages to the table and let the best negotiator win. In economic terms, this situation is known as a “bilateral monopoly” wherein both buyer and seller have the ability, albeit limited, to set prices for the goods they buy (or sell) by controlling amounts they buy (or sell) in market. Typically, the outcome of a bilateral monopoly is not neat and tidy, but is indeterminate, so we cannot tell what the price will be just by looking at supply, demand, and cost curves. Ultimately, the price to manufacturers (net of promotion allowances, slotting fees, and other inducements) can be anywhere between the monopoly price, where manufacturers reap all the benefits of market power, to the monopsony price, where retailers get the product for a song and rent for their shelf space to boot. Either way, someone in this transaction is earning some significant profits from selling the good, so they have an incentive to either charge (retailers) or pay (manufacturers) for the right to sell. This just makes sense. Both parties may grumble, but are still relatively happy.

What about produce suppliers? Unlike General Mills, very few produce suppliers command such a presence in the market that they can set prices or negotiate trade terms that differ from others in the industry. In a competitive market like produce, sellers are price takers. Although Hoyt points out that retail buyers cannot “buy forward” several weeks worth of produce when prices are low, nor can they afford to alienate growers if the crop is short, the buyer on the opposite side of the desk still comes from the big retailer, and is increasingly vested with the negotiating skills of the seasoned packaged goods buyer. Many factors explain why produce suppliers have little market power. First, fresh produce is perishable, so retail buyers know that growers or distributors must either “sell it or smell it.” Second, produce production tends to be localized. Subject to protection by PACA, once produce is delivered to a certain point the shipper faces huge costs of moving to another market should the existing deal fall through. Third, the supply of produce is decided by the size of the crop and not by production-line decisions. Whereas a packaged-products manufacturer can slow production to create an artificial shortage, single growers do not have this ability.

The net result of each of these features of growing produce is that growers must take what is offered to them. When that offer includes a demand for slotting fees, growers are in no position to make a counteroffer that doesn’t include fees. However, two potential remedies to this problem are clear. First, growers can become big. By acquiring enough rival growers, perhaps one grower can attain a position of bargaining power. Even the largest growers, however, ship only a relatively small proportion of the total amount of any produce item. Second, small growers can use big associations. Through bodies like commodity boards, bargaining associations, or grower cooperatives, growers may be able to build some market power and level the playing field somewhat.

Lettuce Market Watch and Industry Outlook

By Richard Adu-Asamoah, Ph.D.

Production, Shipment and Price Trends

The annual transition from desert growing regions of California and Arizona to regions in the north and coastal California was delayed this year due to the extended effects of El Nino. The seasonal transition which usually begins in late March was not under way until mid-April. Harvests were light in the north until the first week of April. By the second week of April, fears of extended supply gap and expectations of serious price instability had led to unusually high prices through April for Iceberg lettuce. Romaine and other lettuce prices stayed high through the first week of May. All lettuces experienced a sharp drop in price between the end of May and the 6th of June (iceberg - 88 percent; romaine - 138 percent; other lettuce - 158 percent) even though iceberg and romaine supplies were low during the first week of June.

This year’s total iceberg lettuce shipment through the first week of June was 45.7 million cartons, about 4.5 percent less than last year’s 47.8 million cartons for the same period. Average weekly price increased in April ($13.2 per carton of naked 24s) and was 76 percent higher than the April, 1997 average of $7.5 per carton of naked 24s. Iceberg prices have since fallen and remained low through the second week of June. The expectation is that June-July average weekly price will be about 1 percent lower than that of last year. Last month’s slow trading in iceberg lettuce from California sources will continue through June and, possibly, July with prices for naked 24s of $5.6-10.43 per carton. Movement from western Arizona sources, however, is expected to continue to decrease as most shippers finish the season. June-July average weekly shipment of iceberg lettuce is expected to be around 1.7 million cartons (Figure 1), with an average weekly price of $7.0 per carton (Figure 2).


Source: Data from the Daily Market News Report, USDA-ERS - Weeks 1-21

Romaine prices have been higher than 1997 levels since the first week of April. Average weekly price for the month of April was $24.00 per carton of 24s. Average weekly shipment of Romaine lettuce is estimated at 509,000 cartons for June-July (Figure 1). Average weekly price is expected to be around $8.03 per carton of 24s for these two months (Figure 2).
Other lettuce trading has remained slow since the second week of May. Average weekly prices have been between $4.73 and $45.5 since the first week of February (Figure 2). Shipments of about 502,000 cartons per week are expected during June-July (Figure 1), with an estimated average weekly price of $7.9 per carton for the period (Figure 2).


Source: Data from the Daily Market News Report, USDA-ERS - Weeks 1-21

Industry Outlook in 1998:

Efforts to add value to top-selling non-salad varieties of produce have created products that compete with fresh-cut lettuces. Higher product growth has been observed in non-lettuce items such as baby spinach, cabbage, baby carrots, broccoli, cauliflower, and other hard vegetables. Processors, however, continue to develop new salad lines at a much slower rate than the explosive rates seen three years ago. The slow down in salads production that started last year has allowed processors to better manage the fresh-cut salad category of the market. Extension of some existing salad lines has also taken place. New salad releases provide “Guilt-free” convenience products that allow consumers to “personalize” what to include in a salad. Home-meal replacement alternatives are also doing well. There seems to be some movement away from packaged salads (now 83 percent of the fresh-cut market) and toward salad meal kits (now 17 percent of the market). This may explain why Dole Fresh Vegetables Inc., Ready Pac Produce Inc., Fresh Express Inc., and River Ranch Fresh Foods Inc. have all introduced new varieties of Caesar salad kits this summer. Bulk bin lettuce, romaine cuts, and mixed lettuces for the food service industry also continue to show promise.

Processing firms continue to vertically integrate in order to spread cost over more products and services. As category management becomes increasingly understood as a necessary strategy for many retailers, the demands on processors to deliver specialized products will also increase. Preliminary analysis of the available data suggests that competition among Romaine, other lettuces, and iceberg lettuce has intensified. The available half-year data for 1995 through 1998 suggests that category products may be influencing growers’ production and shipment decisions. Iceberg lettuce shipments seem to be losing grounds to Romaine, and the other lettuces. January-May shipments of iceberg lettuce have declined from 71 percent of all lettuces in 1995 to 64 percent in 1998 (65 percent in 1997). On the other hand, Romaine lettuce shipments increased from 14 percent in 1995 to 19 percent in 1998 (17 percent in 1997). Other lettuces shipments increased from 14 percent in 1996 to 17 percent in 1998.

Legislative Update

by Amy Ridings

In a June 11 hearing, members of the House Subcommittee on Forestry, Resource Conservation, and Research blasted both the EPA and the USDA for their neutral legislative stance on allowing U.S. farmers the same rights as other countries to use methyl bromide. They argued that the phase-out of methyl bromide in the U.S. by the year 2001 will put American producers at a disadvantage. Under the Montreal Protocol of 1991, foreign competitors have more time to complete their phase-outs. For example, Japan has until 2005 and Mexico has until 2015.
Reactions by members were strong, especially by those representing large agricultural communities. Congressman Cal Dooley, who represents California’s 20th Congressional District declared that California farmers would be put at a disadvantage if the U.S. is forced to abide by the Montreal Protocol. The Chairman of the House Committee on Agriculture, Representative Bob Smith of Oregon, stated, “Without viable alternatives, the loss of methyl bromide use will devastate domestic and international trade.” Congressman Combest of Texas voiced his concerns about the hardship this will cause farmers and the higher prices consumers will face at market.
On a different matter, the Subcommittee on Department Operations, Nutrition, and Foreign Agriculture is holding a hearing on June 25 to review implementation of the Food Quality Protection Act (FQPA). Due to the committee’s concerns that FQPA will result in significant and unnecessary pesticide use losses, this hearing will serve to evaluate EPA’s implementation and provide solutions to the perceived problem. Criticisms of EPA’s approach include claims of inconsistency, lack of public review or comment periods, and an unpredictable implementation strategy. Legislators are concerned that EPA’s science policies, procedures and test methodologies used to make decisions about organophosphates and carbamates will set a precedent for future tolerance assessments. Some recommendations that were drafted by a group of agricultural and urban pesticide users, as well as registrants, to improve implementation of FQPA include:

For additional information on this hearing, you may contact the subcommittee at 202-225-0171.

NFAPP has recently completed a policy briefing paper on this matter, titled “Agricultural Chemical Usage on Arizona Fruit and Vegetable Crops.” This study evaluated the potential loss of ten important pesticides used on leading fruit and vegetable crops. If all ten chemicals were no longer available to Arizona fruit and vegetable growers, production costs would increase by approximately $300 million. This compares to 1996 revenues for these crops of $424 million. Thus, the increase in costs is equivalent to an amount equal to 70 percent of normal gross revenues.

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