NFAPP's Newsletter November 1997
Featured Articles :
"Learning by Experience or from Promotion :
What Works Best for Produce?",
By Timothy J. Richards, Ph.D. and Paul M. Patterson, Ph.D.
Topic : The purpose of this paper is to assess the impact of advertising & consumer learning on demand for goods.
"Market Watch.....U.S. Potato Market", by Pieter van Ispelen
Topic : The 1997 U.S. Potato Market - Production & Prices.
"Legislative Update...
NFAPP's Annual Policy Conference", by Pamela Mischen
Topic : Notes from NFAPP's Annual Policy Conference 1997.
Learning by Experience or from Promotion :
What Works Best for Produce?
By Timothy J. Richards, Ph.D. and Paul M. Patterson, Ph.D.
If you had never seen or heard of a kiwi fruit before, would you pick it up and eat it? Consumers learn about the characteristics of produce, especially new varieties or new products, in a number of ways. This learning is also affected by the nature of the product itself. In general, consumer goods can be defined as either "search" or "experience" goods. Search goods tend to be durable and have features that are well defined and their benefits and costs easily communicated. Experience goods, on the other hand, may have traits that are hard to define, have unique appeal to individual consumers, and tend to be purchased frequently and habitually - all features common to fresh produce. Advertising, therefore, has an important role in initiating trial purchases of produce items and in reinforcing existing habits, but personal experience and learning may be equally as important. As all produce marketers know, if a consumer is left with one bad impression of an item, that consumer is lost forever.
Whether experience is a substitute for advertising or a complement will have a significant impact on the effectiveness and profitability of a promotion program. Clearly, the role of advertising is not likely to be as sharply defined as this in reality - whether a substitute or a complement will rather be a matter of degree. Further, it is also likely to depend upon the product's life-cycle stage, with advertising needed to establish product-loyalty, and experience needed to give it legs. Recently, NFAPP had an opportunity to explore these issues in evaluating the returns to promoting Washington Fuji apples.
With weekly shipment, price, and promotion expenditure data from late 1995 to early 1997 provided by the Washington Apple Commission, NFAPP researchers estimated a model of apple variety demand incorporating both advertising and cumulative consumption - intended as a proxy measure for consumer experience. Our model shows that both advertising and learning are more important in explaining the demand for specialty varieties - Galas, Jonagolds, Braeburns, and Fujis - than they are for mature varieties such as Red or Golden Delicious. Moreover, this model also shows that advertising and experience are more likely complements in increasing Fuji apple demand than substitutes. The results from this model were then linked to a model of grower prices and profitability in order to measure the returns to advertising at the grower level. Calculating these returns under a "most likely" combination of demand and market-channel parameters provides a measure of the returns to Fuji promotion of over $39 dollars for the next dollar invested.
Although these returns appear to be very high, it must be remembered that if advertising is indeed effective, then today's specialty variety becomes tomorrow's market staple. Another implication of this result is not readily apparent. All specialty varieties exhibit traits that are conducive to highly effective promotion - price-inelastic demand, high income elasticity, high persistence of promotion expenditure - and are relatively new to the market. With the trend towards differentiating and branding produce items in order to exploit the profitability of intensive marketing programs, innovative new varieties within traditional produce categories appear to be the best vehicles for these new techniques. Witness the success of New Zealand's fruit marketing efforts - a steady stream of new products, responsive to consumer demands for taste, texture, and consistency is a vital part of an overall production-and-marketing strategy.
Market Watch......U.S. Potato Market
by Pieter van Ispelen
Potato Growers hope for less than perfect growing conditions
This seemingly contrasting statement might be valid during the most important potato growing season. Last year's near to perfect growing conditions across the board and increases in acreage combined for a season with the lowest grower prices in recent years. You don't hear growers complain often about good growing conditions, but when this happens in all growing areas in the country a glut is likely to come into existence.
Looking at history, a high production (and consequently a low price) year in the potato industry is often followed by a lower production year as growers tend to react to events that took place the year before. And indeed 1997 fall production is expected to be lower than in 1996.
Fall planted acreage is estimated at 1,200 thousand acres, down 6% from last year and the lowest acreage since 1993. Yields are expected to be down from last year's high of 364 cwt per acre. With common conditions in place, NFAPP models project an average U.S. yield of 344 cwt per acre for the fall crop. This would project to total fall production of around 410 million cwt (compared to 453 million in 1996 and 402 million cwt in 1995). Lower production will cause prices to be higher than last year. Assuming above production numbers, average fall grower price will be around $5.25 per cwt, an almost 20% rise compared to 1996 but 19% lower than the high price year of 1995 (Fig 1.).
These national trends are also visible in the major potato producing state, Idaho. Industry observers expect Idaho yield to be around the 5 year average of 325 cwt per acre due to some late blight conditions. According to USDA, fall acreage in Idaho is down 6% from last year with 390,000 acres compared to 415,000 in 1996. In mid-September of this year, prices for early varieties were higher than 1996's opening prices. For example, Russet Norkotahs were trading at $16-17 per cwt for carton 60-90s compared to $14 per cwt last year.
Declines in acreage could also be seen in two of the three other potato growing seasons. Only the winter season showed a modest increase in acreage (Fig. 2). Both in spring (-6.5%) and summer (-11.5%) growers grew less potatoes and this resulted in generally higher prices. Except in the beginning of the year when record high stocks put downward pressure on the market prices.
All this is projecting to an annual potato production of about 452 million cwt., a 9.2% fall from last year's level and slightly (+2%) above total production in 1995. This will result in an average annual grower price for all potatoes of about $5.35 per hundredweight compared to $4.93 last year. With these more moderate numbers potato growers will probably be more satisfied this year and end of year stocks will be decreased for next season.
Legislative Update...NFAPP's Annual Policy Conference
by Pamela Mischen
NFAPP's Annual Policy Conference
NFAPP held its Annual Policy Conference in Anaheim, CA on October 20, 1997. The objective of the afternoon meeting was to gather members of industry, government and academia together to discuss policy issues important to the fruit and vegetable industry and to establish priorities for research for the upcoming year.
Michael Stuart, Executive Director of the Florida Fruit and Vegetable Association, identified five broad categories of concern to the industry.
• Labor availability. With increased border patrol activity there has been an increased pressure on the supply of agricultural workers. Stuart relayed that for some growers the pre-certification rejection rate on social security numbers is as high as 70%.
• Access to critical production tools. Stuart claims that legislation such as the Food Quality Protection Act (FQPA) and the Clean Air Act are likely to have more of an adverse impact on the fruit and vegetable sector than other agricultural industries. The concept of the "risk cup" puts minor crop growers at a disadvantage as other crops may fill up the risk cup and leave no room for crop protection chemicals on fruit and vegetable commodities. The Clean Air Act and its phase-out of methyl bromide continues to be troublesome for the produce industry as fruit and vegetable growers claim that the rapid phase-out of methyl bromide with respect to other nations leaves the U.S. at a competitive disadvantage.
• International competitiveness issues. Fast track legislation, Chilean inclusion trade agreements and ongoing surveillance of NAFTA actions will occupy a prominent place in policy debates.
• Food safety concerns including the President's Initiative on food safety and the impacts of media coverage of food borne illness on various commodities will be of great concern to commodity organizations in the upcoming year.
• Environmental issues. Stuart gave examples of water regulation problems, rural/urban water competition, and problems with non-point source pollution in Florida. He points out that although the examples refer specifically to Florida, environmental concerns are not unique to Florida. Many of these issues must be addressed on a state by state basis as regulations and population pressures differ.
Tom Stenzel shared the policy priorities of United Fresh Fruit and Vegetable Association.
• Food Safety. Stenzel referenced a report by United entitled "Industrywide Guidance to Minimize Microbiological Food Safety Risks for Produce." One of the main conclusions reached in the report is that one size fits all programs will not work to control risks for food borne illness. Stenzel would like to see an economic analysis of practices to control food borne illness. Contact United at (703) 836-3410 to obtain a copy of the report.
• Five a Day Promotion. United is interested in seeking federal funding for fruit and vegetable promotion. In order to make this claim, the produce industry needs to make the link between increasing consumption of fruits and vegetables and health care costs. Stenzel notes that the anti-tobacco campaign was very successful using the same logic.
• Environmental Issues. In addition to and because of the rapid phase out of methyl bromide, United is concerned the a global climate change treaty will also have more rapid phase-outs for U.S. than other countries. Once again, such time tables put U.S. fruit and vegetable growers and at a disadvantage with respect to other nations. Stenzel is concerned that the produce industry will be overlooked because it is a minor part of the agricultural sector as a whole but relies more heavily on energy intensive agricultural practices.
• Business trade practices. Slotting fees and allowances are cross-overs from the dry goods section of retail stores to the produce section. United is concerned about the impact that such practices will have on the fruit and vegetable marketing structure. Stenzel posed two research questions concerning fruit and vegetable marketing : First, how do consumer prices for fresh fruits and vegetables compare with other foods? Second, what is the price elasticity on individual commodities?
Others to share information from their organizations included :
• Bill Jones, USDA Risk Management Agency: Provided a handout outlining program expansion for crop insurance products, many of which are for the fruit and vegetable industry. Please contact Bill at (816) 926-6386 for more information.
• Frank Piason, USDA Foreign Agricultural Service : Shared slides from a recent FAS presentation entitled. Copies of the slides can be found at the FAS Web Site, http://www. fas. usda.gov/
• John Wake, Arizona Department of Agriculture: Spoke about the Arizona Grown program. Since people living in Arizona know very little about agriculture, the program aim is to increase consumer awareness. The program does no advertising but works with media relations and retail promotion. The program is expanding to cover beef and dairy as well as fruits and vegetables.
• Doug Slothower, National Potato Promotion Board: By law promotion boards are prohibited from engaging in legislative affairs. Emphasis of the Board is promotion of primarily frozen potatoes. Because of language in the FAIR Act promotion boards are now required to evaluate the return to the grower of promotion programs.
• Gary Lucier, USDA Economic Research Service : ERS will have a shift in emphasis from previous years. They sill continue to do the Situation and Outlook reports and to write articles for Agriculture Outlook Magazine. However, more emphasis will be placed on economic research and doing reports on request.
• Lee Frankel, Fresh Produce Association of the Americas : Would like to see a cost/benefit analysis of the Food Safety Initiative as it implies to imported produce. Also interested in exploring what is meant by free and fair trade.
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