NFAPP's Newsletter November 1995

Featured Articles :

" Generic vs. Branded Commodity Promotion: An Evaluation Model", by Timothy Richards
Topic: Generic vs. Branded Promotion, Wileman Bros Case

"Legislative Update.....Flex Acre Provisions", by Pamela Mischen
Topic: Flex Acres and the effect on the produce sector

"Market Watch.....U.S. Green Pepper Outlook", by Pieter van Ispelen
Topic: The U.S. Green Pepper Market

The decision in the Wileman Bros. case (NFAPP Newsletter, Aug. 1995) continues to haunt commodity associations throughout the produce industry. In that decision, the Ninth Circuit Court found that the California Tree Fruit Agreement (CFTA) did not prove their producer-funded generic promotion programs are more effective in generating sales for producers than their own, branded, promotions. As a result, the CFTA faces the prospect of returning millions of dollars in assessments to a group of 20 growers. Currently, the California Apple Commission and the California Kiwifruit Commission among others, face similar challenges from grower groups who believe mandatory assessments for generic promotion are unconstitutional appropriations of their rightful income. Commission lawyers face a daunting task - how do you prove the superiority of generic programs when there is little or no experience with alternative programs? Some commissions have asked economists for help.

At a recent conference in Sacramento of the NEC-63, a group of economists organized to study commodity promotion program effectiveness, the issues in the Wileman Bros. case were front and center. Unlike most meetings among economists, the debate was not over which of their competing conclusions is most likely to be true, but rather how to reach any conclusion in the absence of data. The usual method of evaluating many years of promotional and sales data nd using statistical techniques to decide if there is any hint of a correlation is not available in this case. A new approach is needed.

Of what will this new approach consist? Discussion with both economists and industry representatives points to some guidelines that future research should follow. First, any effort to model the effectiveness of branded versus generic programs must be on an ex ante, or hypothetical basis. Rather than relying on statistical analysis of past results, the models will show that under realistic scenarios, certain conditions will be required before one method is superior to another. By simulating probable market conditions, the relative effectiveness of each type of promotion can be measured. Second, the definition of "promotion" must be expanded beyond the typical economist definition equating it with advertising. In fact, most of the promotion expenditure at the commission level does not go to direct retail programs. Promotion incentives, help with in-store displays, and coupon programs all serve to reduce the cost to the retailer of selling the commodity, rather seeking to increase retail demand directly. Third, any assumption that the model makes about the relationship between branded promotion and the ability of individual growers to differentiate their product is the key variable in the model. If the market share of one grower does not respond to his or her own efforts, then the model will produce de facto case against branding. Fourth, the model must recognize the ability of not just single growers, but groups of growers to form "promotion coalition" outside of the commission to jointly differentiate their product. Generic promotion can only be superior to branded when there are no grower coalitions that believe they will be better off outside of the group effort.

While the NEC-63 group, among others, regard this issue as an interesting exercise that tests the limits of applied economics, to growers and their commissions, it is a matter of survival. Although the Wileman Bros. decision left many functions of the existing marketing orders intact, their inability to jointly promote a common product will undoubtedly reduce their perceived importance among both growers and the public. On the other hand, if the commissions are able to demonstrate that their programs are truly effective, then they will not only be able to fend off future challenges, but they will also be able to use this information to allocate their promotional budgets more efficiently. Hopefully, this case may once again show that every threat is an opportunity misunderstood.

Although negotiations are far from over, this year's Budget Reconciliation should result in big changes for U.S. agriculture. Flex acre provisions are of chief importance to fruit and vegetable growers. While the House "Freedom to Farm" provisions prohibited program participants from growing fruits and vegetables on flex acres, the Senate bill increased flex acres to 30% of base acreage and allowed farmers to grow fruits and vegetables while maintaining participation in the program.The conference committee accepted the senate provision allowing fruit & vegetable production on flex acres but reduced flex acres to 15% of base acreage.

In a briefing sent to Congress on November 2, NFAPP analyzed the potential impact of the Senate flex acres provisions. Although vegetable production occurs throughout the U.S., those areas most likely to reallocate program crop flex acres to vegetables will be those which: 1) share a land base with vegetable acreage, 2) have a significant number of program crop acreage, and 3) are located near population centers. The shift into vegetable production will tend toward those commodities which are destined for the fresh market and already grown in the region. An increase in vegetable production may also have a significant effect on regional vegetable prices. Using a demand elasticity value of -0.43 (USDA, 1989), an approximate effect on prices can be determined. This elasticity value, estimated for an aggregate of all fresh vegetables, implies that a 10% increase in production will result in a 23.25% reduction in the corresponding price. The estimated price impact assumes that the expansion of production occurs in proportion to the current "market basket" of vegetables, therefore no vegetable will experience a greater increase in production than any other. However, this assumption may not be realistic due to the existence of the processed vegetable market, making the price impact more pronounced in fresh vegetable markets.

Three scenarios describe the impact of a 1%, 5% and 10% shift of available flex acres (based on the Senate's original 30% flex acre proposal) within vegetable-growing counties to vegetable production. For example, a 1% shift in flex acres from the 32 vegetable growing counties would result in an increase of 4,578 acres in vegetable production. This represents a 1.32% increase in vegetable acreage for the state which would result in a 3.07% decrease in the grower price for vegetables. Currently, sweet corn, snap beans, potatoes, green peas, cabbage, carrots, onions and strawberries are produced in Wisconsin, and acreage would most likely switch into these commodities. Supporting maps and tables identify vegetable growing counties with significant potential flex acres. Those states which show the most dramatic acreage reallocations are, in order of impact: Maryland, Wisconsin, Minnesota, Washington, New York, Oregon, Virginia, and Maine. These states under the 10% scenario, could experience a 20% or greater decrease in the price of vegetables at the grower level due to increased production.

In addition to the regional impacts on price due to regional increases in production, these eight states have many vegetable commodities in common. Sweet corn, snap bean, green pea, cabbage, and cucumber acreage increases in these regions could have not only an impact on the regional price of these commodities, but the national price as well. Growers in Illinois, Pennsylvania and New Jersey, who may not see much of an increase in acreage within their own states, may be faced with lower prices for their commodities due to overproduction in other regions.

In summary, a total of 20,242 of the available flex acres in the vegetable growing counties are expected to move into vegetable production under the 1% scenario; 101,210 acres in the 5% scenario; and 202,420 in the 10% scenario. Under the Senate's original 30% flex provision, total flex acres nationwide were expected to be 63 million acres.

Total bell pepper acres for the fall harvest is expected to amount to 10,300 acres... an increase of 2 percent from last year, but off 13 percent from 1993. The two producing states this Fall, (Florida and Texas) are showing similar trends. Over the year, California and Florida dominated bell pepper production with approximately 75-80% of total U.S. production. Other states had fairly small production levels, those being led by Texas, North Carolina and New Jersey.

Looking at shipping trends, Florida volumes will steadily increase as the harvest gears up in southern parts of the state. The usual harvest begins around October 20, with the most active harvest period between November 15 and June 15. High temperatures and frequent hard rains will cause a low supply of the extra large pepper sizes. Prices remain unstable however, as demand is fairly light. Average prices for bell peppers range from $7.80 to $8.00 per case. The normal f.ob. price range for bell peppers at this time of year is $7-8 a case. However, last year's fall prices averaged $9.44 in October, $10.70 in November and $10.42 in December.

Georgia is also dealing with a tight supply of extra large peppers and growers expect prices to be strong. Overall increased competition with rising Florida supplies will pressure prices for all sizes to decrease.

California's shipments to the East Coast are expected to slow which, combined with the moderate demand, pressures down the prices. Both Georgia and California supply are seasonally slowing.

Total shipments this season are 8% lower than at the same time last year.

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