NFAPP's Newsletter September 1995

Featured Articles :

"The Chicken or the Egg", by Pieter van Ispelen
Topic: The Florida-Mexico Fresh Tomato Competition

"Legislative Update.....Farm Bill '95 and the Produce Sector", by Timothy Richards
Topic: Flex Acres and the effect on the produce sector

"Market Watch.....U.S. Apple Outlook", by Richard Adu-Asamoah
Topic: The U.S. Apple Market

Competition between Florida and Mexico for a share of the U.S. winter tomato market was again a hot topic of discussion this year. Florida growers filed for provisional relief from the U.S. International Trade Commission, alleging that excessive shipments of Mexican tomatoes were being dumped into the U.S. market, causing serious injury to Florida's tomato industry. However, the International Trade Commission ruled against the Florida petition, and the official allegations were dropped at the beginning of May. This doesn't mean the case is closed. With the next production season just months away, the trade situation has not changed between the two countries. The question is: do Mexican imports reduce the U.S. price, or does a high U.S. price cause imports? Recent research shows the Florida winter tomato and Mexican export market are considered as one. This implies factors affecting either Florida or Mexico production have a direct effect on overall U.S. price levels. Florida and Mexico supply the greatest percentage (more than 90%) of the U.S. market from December to June. Supplies are usually evenly split between the two. In this research, weekly data from December '94 to April '95 was used to analyze last season's events. Mexican import levels exceeded import quotas in both winter periods. Statistical analysis shows that a higher level of Mexican imports one week, negatively effects the next week's Florida f.o.b. price. So far so good — but is it this simple? The average price level hasn't been any lower this season than in other winter seasons. Statistical tests show the level of Mexican imports of this week is in turn affected by last week's f.o.b. prices in the U.S. This system, where Mexican imports and Florida f.o.b. price affect each other, is called a "feedback system."

At the start of the season, Florida production was below normal. This caused high initial f.o.b. prices. These low supplies from Florida left room for Mexican growers to increase their shipments, attracted by the high price they could get for their tomatoes. Sellers of Mexican tomatoes can react quickly to changes in the U.S. market by reallocating their production from the domestic market. Data shows that reallocation is possible within a week. These higher supplies from Mexico kept Florida growers from receiving compensation for their lower production as U.S. prices were forced down, but were still above the price in Mexico. Florida shipments stayed low through March, and a second surge of Mexican imports profited from the relative higher prices. Another influential factor was the devaluation of the peso in December. Our analysis shows a marked rise in shipments to the U.S. with this devaluation. Mexican growers, eager to increase their exports, grabbed the opportunity with both hands. The devaluation of the peso significantly decreased the relative value of domestic sales in Mexico, so the higher return to export sales was very welcome. In addition, devaluation caused Mexican debt payments to be higher and many growers increased exports to raise U.S. dollars. Was it the high initial Florida f.o.b. price (caused by low production levels in Florida) that caused the surge of Mexican imports; or was it the exogenous effect of the peso's devaluation that caused a surge in imports and a subsequent fall of the Florida price? It seems in the end, we are left with the age-old question, "What comes first — the chicken or the egg?"

Though it's only a continuation of the status quo — progress on HR 2195, or the 1995 "Freedom to Farm Act" has been favorable to U.S. produce growers. Grower organizations successfully convinced the House Agricultural Committee to retain language in the bill that precludes farmers from using their set-aside acreage for fruit and vegetable production, including potatoes and dry edible beans. Few will acknowledge this step as a victory for the produce industry — since it's already the law of the land — but the cost of losing this clause to growers does warrant some attention.
It's true that not all set-aside land would be suitable for growing produce crops. In many areas, potatoes and dry edible beans represent the only option that farmers would consider without the prohibition. However, only a modest 5% reallocation of the flex acreage to produce, could have a dramatic effect on prices. Indeed, using the assumptions of the USDA Long-term Agricultural Baseline Projections: 1995-2005, an average of 7 million acres of crops could be moved into fruit and vegetable production without the ban — or 350,000 more acres with our reallocation figure. With close to 6.25 million acres currently in fruits, nuts, and vegetables; this increase represents a potential 5.6% increase in production.

Although foreign markets continue to expand for U.S. produce, we cannot expect that this increase will be absorbed by international markets. In fact, as consumer demand rises over time with population and income growth, USDA projects the growth in U.S. imports and exports to virtually offset each other. If the U.S. market is to absorb an additional 5.6% of production, produce prices must fall for the market to clear.

Standard estimates of produce demand elasticity (the percentage of quantity demanded decreases for each percentage increase in price) average about -0.5 over a broad group of commodities. A 5.6% production increase will cause a 11.2% average price reduction. While this change may not seem very large, considering the total farm value of all U.S. fruit and vegetable production is roughly $17 billion — 11.2% becomes a very large number.

Domestic Production Expected to Fall

This year's U.S. apple crop is expected to be smaller than last year's crop. Industry estimates put the 1995 apple crop at 260.5 million bushels. This is 2.25% less than the U.S. Department of Agriculture (USDA) estimates of August 1995, and 3.4% less than 1994's 269.8 million bushel crop. The decline of the 1995 crop is attributed to hail and unseasonably hot weather in the Northwest. Red Delicious variety appears to be the hardest hit. The Red Delicious crop is estimated to be about 8% below last year's crop. Golden Delicious production is expected to be about 3.4% below last year's production, and Granny Smith variety is expected to decline by 2.7% from last year. New apple varieties production, however, will continue to increase. Fuji production is expected to be up by 18.7%, while Gala is estimated to increase by 9.8% over 1994 production. McIntosh and Jonathan crops will also increase by about 0.8% and 11% respectively, over 1994 production.

Washington state industry estimates suggest a 1995 production of 120.8 million bushels. This is about 11% below the 1994 crop, and 2.4% less than USDA's August estimates. Washington state's fresh market supply will fall by about 7.6% below last year's supply. California expects 22.8 million bushels this year, about 9% below the 1994 crop and 4.2% less than August projections.

Central and Eastern U.S. crops are expected to be larger in 1995 than the 1994 crop. New England growers can expect a larger crop t despite problems with hail and hot weather. Overall, 1995 U.S. apple production estimates are 3% less than the 1994 crop.

Strong Export Market

International Apple Institute (IAI) estimates that 1995 U.S. apple exports will increase by 4.3% over 1994 exports despite the projected decline in production. An estimated 50% reduction in Mexico's crop, and a projected 11% decline of the European crop may help the U.S. export market. Increased Canadian apple production (especially in New Brunswick and Ontario) to about 30 million bushels will offer limited competition for U.S. exports. U.S. apple producers will benefit from both the traditional and emerging export markets in the Far East. Markets in Hong Kong, Indonesia, Malaysia, Singapore and Taiwan will continue to grow. Japan and China are still potential markets for U.S. apples. Exports to Canada and Iceland will also continue to increase. Northwest and Mid Atlantic U.S. apples will enjoy a growing export market in Latin America, especially Columbia, Costa Rica, Dominican Republic and Guatemala.

Improved Grower Prices

Prospects for stronger grower prices appear good in the domestic market for 1995. Some reasons for this optimism are: (1) The smaller crop will cause higher prices in the domestic market for fresh apples in the face of constant or increasing demand; (2) Smaller crop in Mexico and Europe will improve export prices for fresh apples causing the average price of all apples to increase; and (3) Higher processing demand in the face of a smaller U.S. crop could cause higher overall prices.

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