Paper presented at the Immigration and Changing Face of Rural California Conference

University of California Kearney Research Station

September 10-12, 1998

Dr. Roberta Cook

Extension Economist, Department of Agricultural and Resource Economics

University of California Davis

Introduction

The production of fruits and vegetables is generally seasonal while demand is generally year-round. Since fruits and vegetables consumed in fresh form are highly perishable, non-storable and subject to degradation in the marketing system, they pose special production and marketing challenges. California firms have met the challenge of making wide lines of high quality fresh produce available to retailers, foodservice buyers, and the ultimate consumer on a year-round basis or over extended seasons. They rely on advanced postharvest technology and hired farm labor to meet this challenge, shifting production, equipment, and labor around the state seasonally to capture climatic advantages and extend shipping seasons, an approach referred to as econoclimonics (Wilson, Thompson and Cook).

The outlook for farm labor in the California vegetable and citrus industry is dependent not only on the future demand for California production of these commodities, but on the availability and adoption of technologies which enable growers to substitute for labor. This paper discusses the future outlook for California vegetables and citrus, with the resulting implications for labor demand.

California Agriculture and the Horticultural Sector: Putting Things in Perspective

California is the leading agricultural state in the U.S., with $24.5 billion in 1996 farm gate sales, compared to $13.3 in second ranked Texas. Nine of the top 10 agricultural counties in the U.S. are located in California, all of which are billion dollar producers. Fresno County, where this meeting is being held, is the country’s number one agricultural county, with $3.3 billion in farm gate sales.

California’s number one ranking is in part due to climatic advantages which enable it to produce a great variety of agricultural products that are not grown extensively elsewhere in the U.S. The California Department of Food and Agriculture (CDFA) estimates that the State is the leading U.S. producer for 65 crop and livestock commodities. For many commodities California is not only the leading producer, it has market shares upwards of 90 percent, especially for horticultural (fruit, vegetable, nut, cut flower and ornamental) commodities, such as almonds, artichokes, plums, apricots, avocados, olives, pistachios, broccoli, table grapes, kiwifruit, raisins, prunes, nectarines, processing tomatoes, and walnuts. Hence, California producers and marketers have both unique opportunities to exercise some measure of control over the markets for these commodities, as well as being the principal generators of labor demand for the production of these items.

California agriculture also differs from agriculture elsewhere in that its horticultural industry predominates, contributing over half the value of California agriculture's farm gate sales. Just as horticulture plays a major role in California agriculture, California dominates the U.S. horticultural sector. In 1995, it accounted for approximately 48, 52, and 79 percent, respectively, of the farm gate value of the principal fruit, vegetable, and tree nuts produced in the United States. California's dominant position in this $25.5 billion industry is explained not only by climatic factors, but by technological and infrastructure advantages, as well as the market- and consumer-driven orientation of its agribusiness managers.

Factors Influencing Demand

Demand for California production of vegetables and citrus is a function of domestic demand, export demand, and competition, both domestically and internationally. Domestic and export demand are influenced by factors such as price, population growth rates, income levels and elasticities, household size, age distributions, educational levels, availability and prices of substitutes and complements, exchange rates, and changing consumer attitudes and preferences.

Given all the factors that can affect demand, each crop has its own dynamics. The higher the domestic market share held by California and the lower the international trade in a commodity, the simpler the analysis. While crop/industry diversity make it difficult to generalize, it is safe to conclude that demand for most fruits, vegetables and nuts will remain strong and that California will continue to capture a large share of this demand. This ensures the production of large amounts of horticultural crops in California well into the foreseeable future, not supporting the notion that production of most commodities will shift abroad. A description follows of some general trends affecting the market outlook for California horticultural crops, followed by some specifics on key vegetables and citrus, emphasizing those grown in the San Joaquin (Central) Valley.

Fruit and Vegetable Consumption Trends

Two key lifestyle trends that continue to affect food consumption are (1) the on-going entrance of women into the work force, increasing the demand for foods of high and predictable quality that offer convenience and variety, and (2) the growth in public knowledge about how diet and health are linked and the importance of maintaining physical fitness throughout life. These trends have influenced product mix and product form of foods consumed in the United States, as elsewhere.

Per capita consumption of vegetables, fruits, and fruits and vegetables, combined, is shown in Tables 1-3. In part in response to health concerns, per capita consumption of fruits and vegetables, in both fresh and processed form, increased 16% over the past twenty years, reaching 323 kg in 1996. There was a general shift in product form toward the freshlike and "natural." Many marketers incorporated "lite" or "natural" on their labels, along with stronger health claims such as reduction of heart disease or prevention of cancer. These claims benefited both fresh and processed fruits and vegetables, with 56 percent of total fruit and vegetable consumption in processed form in 1996, compared to 59 percent in 1975.

New consumer preferences regarding product form emerged in the 1980s, making this decade the primary growth period for fresh produce consumption. During the 1980s per capita consumption of fresh fruits and vegetables grew at an average annual rate of 1.8%, increasing from 111 kg in 1980 to 129 kg in 1989, while processed fruit and vegetable consumption remained stagnant at 168 kg. However, these growth patterns were almost directly inverted after the decade ended.

Vegetable consumption, in both fresh and processed form, grew more rapidly from 1976-96 than did fruit. Vegetable per capita consumption grew by 22% to 197 kg, while per capita fruit consumption grew by only 8% to 126 kg. Recently released U.S. Department of Agriculture (USDA) data show a significant increase in per capita consumption of fresh vegetables after 1995. Fresh vegetable per capita consumption, including potatoes, was up from 88 kg in 1995 to an estimated 95.3 kg in 1998, growing at an average annual rate of 1 percent over this two-year period (USDA July 1997). These changes may indicate a renewed growth trend for fresh fruits and vegetables in the latter half of the 1990s, more similar to that experienced during the 1980s.

While the U.S. horticultural industry is growing, it is maturing, meaning that growth rates are relatively slow. In high-income countries people are well-fed and can only eat so much, making income elasticities of demand relatively low. Producers compete for share of stomach and increases in demand for some commodities often translate into decreases for others. A case in point is lettuce, where rapid growth in the consumption of leaf and romaine lettuce did not compensate for the decline in iceberg lettuce consumption.

Although food demand in a developed country like the U.S. is relatively mature, even for fruits and vegetables, at least demand is slightly growing, in contrast to declining demand for products such as dairy and eggs. This bodes well for California horticultural production, albeit for vegetables more than for fruit.

International Trade Will Increasingly Influence California Agriculture

The challenge to supply seasonal, perishable products year-round has favored imports and increased integration among shippers, regionally, nationally and internationally. Generally speaking, no country produces all of the fresh fruits and vegetables it demands in every week of the year, creating the opportunity for trade. Other countries are responding to the U.S. market’s growing demand for imports, aggressively developing their horticultural industries, consistent with the implementation of broader export-led economic growth and diversification strategies. Simultaneously, the U.S. is investing in the long-term development of new export markets, in response to maturing demand at home and the growth in year-round demand for produce in other countries. Indeed, the U.S. is the dominant player in the $45 billion worth of international trade of horticultural commodities, ranked number one as both importer and exporter, accounting for about 18% of the expanding trade flows.

California’s strategic position on the Pacific Rim, combined with a tradition of investing in cutting-edge post-harvest handling technology and the strategic marketing acumen of its entrepreneurs, helps it to compete effectively as an exporter. Total U.S. horticultural exports, including fresh and processed fruits, vegetables and nuts, were $10.6 billion in 1997, up from $2.7 billion in 1985. California firms captured a sizable share of this export growth. Happily, California is much less affected by import competition since growing U.S. horticultural imports compete more with production in other states, notably Florida. Although import competition may increase for California products, the natural climatic conditions that determine production seasons in each geographic location are overwhelmingly favorable to California retaining its position as a net exporter. Hence, on balance, expanding international trade in fruits, vegetables, and nuts is favorable to the long-term outlook for California agriculture.

Potential Effects of NAFTA and Mexico on the Competitiveness of California Agriculture

In anticipation of the passage of NAFTA many groups predicted serious erosion in the competitiveness of the U.S. horticultural sector relative to Mexico, our principal foreign supplier. This line of thought emphasized the labor-intensive nature of horticultural production and the 8 to 1 differential in farm labor rates that existed between Mexico and the U.S. at the time. Yet approximately four years after the implementation of NAFTA the mature U.S. horticultural sector is somewhat larger, rather than eroding. For example, vegetable area harvested was 1.869 million hectares in 1993 prior to NAFTA, compared to 2.134 million hectares in 1997, with production increasing from 50.5 to 55.9 million metric tons over the same period.

In reality, fruit and vegetable production is also technology-intensive and U.S. producers substitute technology for labor. Both technology and more intensive labor management frequently make horticultural production more efficient in the U.S. than in Mexico. This means that the labor rate differential translates into a lesser advantage in terms of actual labor costs. In addition, labor costs must be considered on a per unit rather than a per acre basis, and for some crops lower yields in Mexico erode any cost advantage at the farm level. Furthermore, labor costs are only one of many factors affecting competitiveness.

Often overlooked in competitive analyses is geographic proximity to markets and, in turn, transportation costs. Transportation time and costs often offset other cost advantages, affording significant protection to domestic producers. Distance to market and maintenance of product quality during the cold chain via appropriate pre-cooling and in-transit post-harvest handling methods have put foreign competitors at a disadvantage relative to California. While California will increasingly lose some of this advantage as post-harvest handling and transportation infrastructure improves in Mexico, and globally, geographic proximity to the U.S. market will always afford important protection to domestic producers.

The argument that NAFTA would severely impair the competitive position of the U.S. fresh produce industry assumed that pre-NAFTA tariffs gave significant protection. It then followed that their loss would give Mexican producers important new advantages, at the expense of U.S. growers. In reality, the pre-NAFTA trade-weighted average tariff rate for Mexican fruits and vegetables imported into the U.S. market was only 5.4%. Over the 1993-96 period, NAFTA provided for a scant 2.8% average tariff reduction for fruits and vegetables imported from Mexico and it will take until 2009 for all tariffs to be entirely eliminated. Hence, the existence of NAFTA is unlikely to have major adverse competitive impacts on the California horticultural sector. Consequently, demand for farm labor in California is not expected to decline significantly as a direct result of NAFTA.

Much more important to Mexico’s potential impact on the U.S. horticultural sector, is the ability of Mexico to attract foreign and domestic investment, necessary for modernization and expansion. Mexico’s track record for attracting foreign investment to the agricultural sector is less than impressive. According to SECOFI, the Mexican Ministry of Commerce and Industry, during the 1994-96 period cumulative direct foreign investment in the agricultural and livestock sectors totaled only $11.2 million, including under $8 million invested in the horticultural sector.

While these figures exclude investments in joint ventures of the type normally involved in financing fresh produce export deals, they nevertheless highlight the challenge faced by Mexico in modernizing its agriculture. Mexico also still has important legal barriers to large-scale farming, with even greater barriers directed at foreign investors. These generate uncertainty, increase transaction costs, and reduce the attractiveness to foreigners of investing in the long-term future of the Mexican horticultural sector.

According to the Mexican Department of Agriculture and Hydraulic Resources (SAGAR), over the 1993 to 1995 period Mexican area harvested of fruits and vegetables was stagnant at 1.5 million hectares while production grew from 18.6 to 20 million metric tons. To put this in context, the total U.S. horticultural system occupies approximately 3.7 million hectares with production totaling over 85 million metric tons. The Mexican industry services 91 million people while the U.S. industry serves 265 million inhabitants, excluding export demand in both instances.

In other words, the U.S. produces over four times as much as Mexico, supplying the equivalent of just under three times Mexico’s population base, with only 60% more area. Mexico will need to improve yields and expand horticultural production significantly to keep pace with the rate of growth in internal demand, given its almost 2 percent annual population growth rate and the expected long term increase in economic growth and the standard of living. Hence, most of Mexico’s future horticultural production will remain there, just as it does today.

Even if Mexican exports were to expand dramatically and continually, it would take many years to displace the U.S. industry, given the four to one differential in industry size. This aggregrate picture notwithstanding, expanding Mexican exports of certain crops during certain seasons can and will have adverse competitive impacts in the U.S. The Mexican horticultural sector has a bi-modal structure, with a highly innovative, export-oriented sector co-existing alongside a traditional sector oriented towards the national market. The modern export sector, located in Sinaloa, the central Bajio region, Baja California and Sonora continues to improve its technology base and competitive position.

Still, the U.S. horticultural sector has many advantages relative to Mexico that help to retain its competitiveness for most products. Despite the recent growth in Mexican horticultural exports to the U.S., they are still equivalent to under 10% of U.S. horticultural production. U.S. advantages relative to Mexico include: technology; capital; transportation, post-harvest handling facilities and other forms of infrastructure; efficient marketing channels and marketing acumen; marketing institutions, including PACA and mandated-marketing programs; as well as the research and extension support of the land-grant university system.

Potential Effects of Regulatory and Other Issues on the Competitiveness of California Agriculture

U.S.-Mexico and international trade flows in horticultural products, in general, could be affected by other issues, much more so than by NAFTA. The competitiveness of California agriculture is also influenced by numerous regulatory, environmental, urbanization and water issues. If conditions in California become unfavorable to agricultural production, producers will seek to operate off-shore while retaining control over the marketing and distribution of produce by acting as importers. Mexico, Central America and some South American countries are potential sites for increased horticultural production.

In the longer run California production would tend to shift abroad if the state is unable to deal with production constraints, such as water availability and quality, and the displacement of agricultural land by urbanization, rather than due to artificial advantages created by lower safety and environmental standards. The current regulatory climate is such that the playing field is being leveled up globally, with all countries expected to meet similar standards for food safety, environmental protection and product quality. Indeed, exporters in Chile, Mexico and elsewhere have already met many of these standards or are well under way to meeting the remainder.

Incidentally, labor standards in foreign horticultural export sectors also appear to be on the road to long-term improvement. As U.S. producers seek to ensure that their international competitors are competing on the same playing field, they allege lower standards abroad, generating increased scrutiny by the media and policy makers. This acts as a powerful incentive to exporters to upgrade conditions in all aspects of their businesses as a means for avoiding the erection of non-tariff barriers.

The Importance of Marketing in Agriculture and the Food System

Marketing functions account for the largest share of the U.S. food dollar, and the percentage of food costs due to marketing is rising over time. One of USDA’s two general measures of relative food costs is the market basket. This consists of the average quantities of food that mainly originate on U.S. farms and are purchased for consumption at home. The farm share of the value of the market basket remained stable at about 40% from 1960-80 but has declined rapidly since then, to 30% in 1990 and 24% in 1994 (USDA, April 1996) . The farm share for fruits and vegetables does not differ much between fresh and processed fruits and vegetables.

Since the majority of the value-added in the U.S. food system occurs after the farm gate, most food industry jobs pertain to non-farm work. As immigrant farm laborers assimilate into the U.S. labor market and attain language and other skills, they are increasingly attracted to jobs upstream in the food distribution system. Given the fact that a sizable agricultural industry should remain in California indefinitely, acting as a magnet to immigrants, immigrant labor can be expected to become a growing part of the vertical food system as well. The foodservice sector now accounts for almost half of consumer expenditures on food, with over 700,000 commercial and non-commercial establishments providing food directly to consumers. Immigrants are increasingly contributing to this work force.

Citrus Outlook

The San Joaquin Valley dominates the California orange industry, with Tulare County alone responsible for about half of navel orange production and 42% of valencia orange production, followed by Kern and Fresno counties. In contrast, lemon production is concentrated in the Southern coastal region, centered in Ventura County.

In the case of fresh-market citrus, in the 1996-97 crop year California accounted for 57% of U.S. production, including 81% shares, respectively, of U.S. fresh-market orange and lemon production. Only in grapefruit and citrus for processing does California play an unimportant role, with about 10% of national production, respectively. Given the large market share it enjoys in fresh-market oranges and lemons, stagnant production trends in the few competing states, and the lack of import competition, California’s future market share should remain high. In addition, the growing importance of exports to California agriculture, especially to oranges, implies that export demand may continue to increase total demand for California product.

Indeed, in recent years it has been export rather than domestic demand that has driven demand growth for oranges and motivated the supply response which has occurred, up from 3,815 million pounds in 1976/77 to 5,372 million pounds in 1996/97 (USDA, October 1997). While U.S. per capita consumption of fresh oranges exhibited no clear trend over the last twenty years, fluctuating in the 11.5-15 pound range, depending on annual crop size, exports trended upward, from 889 million pounds in 1976/77 to 1,234 million pounds in 1996/97. If export demand remains strong for California oranges, so should production in the San Joaquin Valley, with the consequent implications for labor demand.

In contrast to oranges, domestic demand growth has been the driver helping to maintain the size of the U.S. lemon industry. While exports declined from 533 million pounds in 1976/77 to 278 million in 1996/97, per capita consumption increased to 2.48 pounds in 1996/97 compared to 2.11 in 1976/77 (USDA, October 1997). The growth in U.S. per capita consumption of lemons offset the decline in exports, with total production in the 900 million to 1 billion pound level, the same as twenty years ago. The location of the lemon industry in the Southern coastal region, where real estate and water costs are high, likely limits major future expansion.

Vegetable Outlook

While the San Joaquin Valley dominates the California orange industry, it is somewhat less important in the vegetable industry. Production of lettuce, other leafy greens, and cole crops is centered in the Salinas Valley in the spring through fall, with winter production in the California and Arizona desert. The San Joaquin Valley fills narrow market windows in these crops during one month each in the spring (April) and fall (October) when production transitions between the desert and the coast. Processing tomato, fresh-market tomato, carrot, potato, onion and melon production are major exceptions, in which the Central Valley does predominate.

In 1997 California had a 49% share of fresh-market vegetable production compared to a combined share of 29% for the four states ranked next in importance. However, for commodities such as potatoes, onions, fresh-market tomatoes and watermelons, which are important to the San Joaquin Valley, California is not the dominant U.S. producer. Some comments on the size and trends in a few of the key vegetables grown in the Central Valley follow.

California production of fresh-market and processing tomatoes is divided into two separate, dedicated industries, despite both being concentrated in the Central Valley. The California processing tomato industry is one of the relatively few vegetable commodities to have mechanized the picking function. California processing tomato production levels are determined primarily by domestic demand, with exports, imports and competition from other states much less significant. California has a 93% share of the mature U.S. processing tomato industry. U.S. production volumes have varied from 10,471,000 metric tons in 1994 to 9,047,000 in 1997, with production forecast to rebound to 9,521,000 metric tons in 1998. Despite stagnating production, the San Joaquin Valley is ideally suited to processing tomato production from both a climatic and infrastructure perspective, ensuring that it will remain a major player in future.

In contrast to the processing tomato sector, California fresh-market tomatoes are hand-picked and face sizable domestic competition from up to 30 states during parts of their season. In addition, growth in the hothouse industry is responsible for a new source of competition for (field-grown) California fresh-market tomatoes, both from domestic and imported sources, including Canada, Europe and Mexico. Category management research conducted by the California Tomato Commission shows that in June/July of 1998, hothouse tomatoes accounted for 40 percent of national retail tomato sales, up from negligible amounts just four years ago.

While exports to Canada and Mexico are important to the California fresh-market tomato industry, these markets sometimes fail to materialize due to abundant production there, particularly in Mexico. Given the new challenges confronting the California fresh-market tomato industry, and unless the recently opened Japanese market develops into a sizable one, significant expansion is unlikely. Future labor demand in the California fresh-market tomato sector will depend on the ability of the industry to meet the new challenges, especially that posed by widespread consumer and retailer acceptance of hothouse tomatoes.

In contrast to oranges, fresh-market tomatoes, potatoes, onions and some melons, California production levels for many other vegetables will be determined primarily by the rate of growth in domestic demand, rather than by domestic or import competition. The outlook depends in large part on the consumption habits of the large and aging baby boomer cohort. Currently baby boomers consume less produce than their parents, but since nutritional concerns often increase as people age, the produce industry may be poised for further consumption growth. National programs such as 5-A-Day promoting the nutritional benefits of fresh produce consumption may help stimulate demand.

Some Implications for Labor Demand

In general, the large nature of California’s horticultural industry, and the stable to moderate growth rates exhibited by most commodities, mean that production of these commodities will continue, making labor demand strong. Given the need for high cosmetic quality of fresh-market produce most will continue to be hand-picked until new labor supply conditions or international competition force change.

On the other hand, how labor is used will continue to change. Many California vegetable crops have shifted from shed to field packing over the last twenty years, including lettuce and other leafy greens, celery, broccoli and other cole crops, and more recently San Joaquin Valley melons. Simultaneously, the growth in fresh-cut produce, presented in packages with breathable films, such as ready-to-eat bagged salads and baby, washed carrots is causing labor usage to move in the opposite direction, out of the field. Labor demand at the processing plant level is increasing, albeit in plants producing minimally processed fresh-cut products rather than the traditional canned or frozen products.

The recent development of the fresh-cut produce category into an over $5 billion industry, including retail and foodservice sales, has centered on vegetables. As post-harvest technology improves, more fruits will also be sold in pre-cut form. However, since most tree fruits are shed rather than field packed, the effect of moving labor from the field to the plant will be less pronounced.

Conclusions

California leads the nation in the production of horticultural crops destined for fresh-market consumption. California firms provide food retailers and foodservice users with wide lines of consistently abundant and high quality fresh produce over extended seasons at reasonable prices. This ensures their competitiveness, at home and abroad, with exports becoming more important to many California crops. While the U.S. food market is mature, demand is still increasing for fruits and vegetables. All of these factors imply continued demand for seasonal farm labor well into the future.

However, the long-term outlook for farm labor in the California vegetable and citrus industry is also dependent on the availability and adoption of technologies which enable growers to substitute for labor. If wage rates were to rise substantially technological innovations would be forthcoming to mitigate the impact on total production costs. With alternative sources of foreign supply available, domestic growers would strive to improve labor efficiency to remain competitive. Until then, the incentives to mechanize further are uncompelling, in particular due to the fresh- market emphasis of the California industry, where cosmetic appearance predominates, making hand-picking advantageous. Even if production were eventually to shift out of California, sizable demand would still remain for workers in the food distribution system, since regardless of where food is grown it must be distributed, and this is where most of the value is added.

References

U.S. Department of Agriculture. Vegetables and Specialties Situation and Outlook Report. Econ. Res. Serv., VGS-274, April 1998.

U.S. Department of Agriculture. Vegetables and Specialties Situation and Outlook Report. Econ. Res. Serv., VGS-273, November 1997.

U.S. Department of Agriculture. Fruit and Tree Nuts Situation and Outlook

Report, Yearbook Issue. Econ. Res. Serv., FTS-281, October 1997.

U.S. Department of Agriculture. Vegetables and Specialties Situation and Outlook Yearbook. Econ. Res. Serv., VGS-272, July 1997.

U.S. Department of Agriculture. Food Cost Review. Econ. Res. Serv., Ag Econ Report No. 729, April 1996.

Wilson, Paul, Gary Thompson, and Roberta Cook. "Mother Nature, Business Strategy, and Fresh Produce." Choices, The American Association of Agricultural Economists, First Quarter 1997, pp 18-25.