Institutional Aspects of Fresh Fruit and Vegetable Marketing Systems
by Dr. Roberta Cook, Marketing Economist
Department of Agricultural Economics, University of California Davis
The U.S. system for marketing fresh fruits and vegetables (fresh produce) is a complex, fragmented and dynamic system that is evolving towards more concentrated structures at the grower, shipper, wholesaler and retailer levels. A myriad of institutions, both private and public, have played vital roles in the development of the system since World War II (WW II). As we move toward the twenty first century many of these institutions are being re-evaluated and modified in light of current economic and competitive realities.
While the U.S. fresh produce system is founded on the principles of free enterprise, over the years numerous laws and standard operating procedures (SOPs) have evolved to establish common operational ground rules that facilitate commerce and trade and reduce losses in the distribution system. In general, the appropriate role of the government has been interpreted to be that of facilitating rather than intervening in the production and marketing of fresh fruit and vegetables.
Unlike the basic grain and oilseeds sectors, the U.S. fruit and vegetable sector can be described as void of direct subsidies. For example, direct intervention in the form of producer price supports or acreage allotments for fresh fruits and vegetables does not occur.
However, the government provides important services to the fresh produce industry in the form of market information; export development; varietal, agronomic and post-harvest research; and the establishment of clear guidelines on a broad range of fair trading practices and standards of various types, including quality and packs.
Expressed more generally, there are six commonly recognized facilitating marketing functions that act in a supportive role and greatly contribute to the performance of any food marketing system. These are: market research; product research and development; development of demand; exchange services; finance and risk bearing; and market information.
In the United States, there is important institutional support for all these functions originating from both the public and private sectors. This paper describes some of the key types of institutional support for the fruit and vegetable industry emanating from both sectors, with a special emphasis on mandated marketing programs. Examples from the state of California are highlighted since almost half of U.S. production of fruits and vegetables originates there. A description of fresh produce marketing channels is also provided.
Description of the Institutional Setting for the U.S. Fresh Fruit and Vegetable Marketing System: Definitions and Rules
The Land-Grant University concept has played a major role in the development of the U.S. agricultural and food marketing system. The Land-Grant concept evolved from the Morrill Act, passed in 1862 in the midst of the Civil War. Later passage of the Hatch Act and the Smith-Lever Act combined to develop a system of state universities (one Land-Grant University per state) with a tripartite mission: to carry out teaching, research and extension programs designed to advance the field of agriculture and improve the U.S. food supply for the benefit of consumers.
This system involves: teaching about agricultural and food-related technology and issues on-campus, at the undergraduate and graduate levels; basic and applied research; and diffusion of research-based knowledge to the agri-food industry and the public.
The diffusion of information occurs through Cooperative Extension. Each Land-Grant University has Cooperative Extension specialists/faculty based in the academic departments in the College of Agriculture, as well as Cooperative Extension employees based in the counties, but employed by the state University in question, working directly with farmers, food industry firms and consumers.
The Land-Grant University system works in close concert with the U.S. Department of Agriculture (USDA) and private industry on problems recognized to be of critical importance to the agri-food industry. The importance of this collaboration for the advancement of the system as a whole should not be underestimated. In addition to collaboration between Land-Grant Universities, USDA and agribusiness, there is close contact between all of these entities and private sector trade associations, such as those described in a later section.
Marketing Orders, Check-Offs and Commissions (Mandated Programs)
One of the most important sources of institutional support for the fruit and vegetable industry involves the broad and often misunderstood topic of mandated marketing programs. The term mandated marketing program includes: federal marketing orders, state marketing orders, state marketing commissions, and promotional check-offs. The most frequent use of mandated marketing programs is made by fruit and vegetable producers.
In general, the stated purposes of mandated marketing programs include the development of more efficient and equitable marketing, demand expansion, and/or to aid producers in maintaining their purchasing power, for example, through yield-enhancing production research.
The reason there are several types of mandated marketing programs is because of different legal and jurisdictional/geographic scopes as well as variations in their potential uses and provisions. Federal marketing orders have the most potential uses and the broadest jurisdictions to choose from. The particular type of mandated program selected by a commodity group will depend on the geographic production areas they wish to encompass and the purposes they seek to achieve.
In other words, it is up to growers to choose from a "menu" of legal organizational options, designing the program that will best meet their needs. In addition, it should be understood that growers are in no way compelled to come together and form a mandated marketing program for their commodity. Growers may choose to have no program whatsoever, and, indeed, of the over two hundred fresh fruit and vegetable crops grown in the United States, well under 80 have mandated marketing programs, and the vast majority of these are not national in scope.
Commonalities Among Mandated Programs
Producers and/or handlers are allowed to come together to form marketing programs that operate under either federal or state legislation. These programs are commodity specific and are voluntary in that they are initiated and approved by the commodity group itself, they are self-governed within established rules, and they are self-financed by the commodity group in question. However, once approved by the growers and/or handlers of a given commodity and region, they then become government-mandated.
All of the firms producing, and in some cases handling, the commodity in the region encompassed by a mandated program are required to pay an assessment levied on each unit sold. The funds are then pooled and administered according to the purposes agreed upon by the commodity group. The interests of growers and/or handlers are represented by their elected grower and/or handler boards of directors. The boards, in turn, hire professional management and staff to actually implement the mandated program based on board-established policies.
It should be clarified that any entity created with assessment funds to carry out a mandated marketing program (e.g., the California Strawberry Commission) never sells the commodity itself. Growers and/or handlers continue to sell/market their products independently per usual, merely contributing assessments on each unit sold. Promotional programs are always conducted on a generic basis--promoting the product rather than any particular brands or shippers.
The assessment rate is determined each production season by the elected board of directors. Hence, the industry itself determines the rate of contribution to the marketing program, not the government. However, once an assessment rate is established, those growers and/or handlers not paying the assessment become subject to legal action and penalties enforced through the judicial process. By backing the assessment collection process with the force of law, a free rider problem is avoided wherein some growers might refuse to pay and benefit from the program without contributing financially.
Mandated programs are subject to periodic review and grower/handler referendums are held to give the commodity group an opportunity to reassess the program's effectiveness. At this point the commodity group may choose to modify or terminate a mandated program if it is deemed unsatisfactory by a majority of growers and/or handlers.
Oversight for federal programs is provided by USDA and oversight for state mandated programs comes from the respective state departments of agriculture.
Legislative Background: Federal and State Marketing Orders
The Agricultural Marketing Agreement Act of 1937 (AMAA) provides the enabling legislation for federal marketing orders. Many states enacted parallel legislation that year, modeled after the AMAA, to provide for state marketing orders. For example, the California Agricultural Agreement Act of 1937 was passed by the legislature in that state. These acts, with amendments, continue to serve as the enabling legislation for federal and state marketing orders and agreements.
The jurisdiction of federal marketing orders can be limited to an industry defined within the boundaries of one state or a sub-region within a state, or it may extend to a production region encompassing more than one state. In contrast, state orders are restricted to individual states or sub-regions within them.
The potential legal provisions of federal marketing orders can be classified into three broad types: quality control, quantity control, and market-facilitating.
Quality control provisions include: specifying standardized packs or containers; and establishing uniform, mandatory quality standards, such as size, color or minimum maturity.
Quantity control methods include: smoothing the flow of the product to market (e.g., prorate or shipping holidays); and volume management provisions, such as, permitting only a certain portion of the crop to move into specified outlets (e.g., reserve pools or market allocation), and producer allotments.
Market-facilitating provisions include: production research; market research and development; market information; and market promotion and advertising.
The AMAA enabling legislation potentially permits growers to form marketing orders comprising elements from all three of the above types of provisions. However, in practice, commodity groups generally elect to include only some of these provisions when designing a marketing order for their product.
Most commodity groups electing to form federal marketing orders have tended to focus on quality regulations (such as grade, size and pack or container regulations), secondly research and advertising, and sometimes quantity controls. In contrast, state marketing programs have been utilized almost exclusively for research and/or promotion and advertising. While in some instances state marketing orders have been used for quality regulations, they have not been used for quantity control.
In 1995 Neff and Plato reported a total of 35 active federal marketing orders for all types of crops, but the California Tokay grape order has since been terminated. As of 1996 there are 23 active federal marketing orders for fresh fruit and vegetable crops (Table 1).
Other federal orders for California crops were terminated in the 1990s. These were the California-Arizona orders for lemons, Valencia oranges, and Navel oranges and the California plum marketing order. The Tokay grape and the California-Arizona citrus orders all had flow to market provisions and none carried out advertising and promotion.
The most controversial aspect of fruit and vegetable marketing orders has been the enforcement of quantity control provisions, while research and market promotion and advertising have generally been broadly supported by growers and policy makers. Over time, marketing orders with quantity control provisions have gradually either been terminated or they have ceased using their quantity control provisions.
For example, today there are no fresh fruit and vegetable orders utilizing market allocation programs, reserve pools or producer allotments. The remaining fresh fruit and vegetable orders with flow to market provisions "on the books" are: Florida citrus, Florida limes, Florida avocados, Idaho-Oregon onions and South Texas onions, all approved prior to 1961 (Neff and Plato, 1995). It has been many years since a new marketing order with quantity control provisions was approved and it is viewed as highly unlikely that any will come into being in the future.
Reasons Behind the Controversial Nature of Quantity Controls
The quantity control provisions of marketing orders originally authorized in the AMAA in 1937 were designed as a means to help growers increase and/or stabilize their returns in light of the low farm prices prevailing during the Great Depression of the 1930s. During this era farmers were considered to be economically disadvantaged relative to urban workers. Today, when farm incomes compare favorably to urban incomes, this argument is less persuasive.
Over the last decade, the quantity control provisions of marketing orders have become controversial both due to a potential loss in consumer welfare from their implementation, but more importantly due to lack of support among a vocal minority of industry participants.
For example, the primary reason for USDA's termination of the federal marketing orders for California and Arizona navel oranges, Valencia oranges and lemons, effective August 26, 1994, was the failure of the industry to arrive at a consensus on proposed changes to the program. Numerous violations of the navel marketing order had occurred in recent years, and growers had become deeply divided over the efficacy of the program and the future direction it should take. Violations took the form of certain handlers shipping above their weekly allocations provided for under prorate.
Specifically, the citrus marketing orders authorized the use of weekly volume restrictions, called prorates, on the amount of fresh fruit that handlers could ship in the United States and Canada. Other export markets were excluded from prorate. Incidentally, while prorates were extensively used for navel oranges and lemons, they were infrequently used for Valencia oranges. Some navel orange and lemon shippers did not want to be compelled to limit weekly shipments. Their argument was that if they had a market for the product they should be allowed to sell it; despite the fact that if overall industry returns were higher under prorate than without, the industry as a whole would be worse off if individual firms sold more than the allotted amount.
Dropping weekly prorate restrictions will likely increase navel and lemon shipments earlier in the marketing season, thereby reducing early season prices and increasing late season prices relative to what would exist without regulation. The elimination of shipping restrictions likely will not cause major shifts in production, but season-average prices may be somewhat lower (Economic Research Service, September 1994).
In any case, the citrus prorates were terminated not because there was any evidence that they served to unduely enhance producer prices, to the disadvantage of consumers, but rather due to internal industry controversy among handlers. This controversy centered around not only philosophical issues regarding the concept of mandatory quantity controls, but also over how fairly they were implemented between handlers.
Legislative Background: State Marketing Commissions
State marketing commissions do not rely on general enabling legislation as do federal and state marketing orders, rather producers/handlers seeking to form a commission must go to their state legislature and introduce specific legislation for that purpose. Commissions have greater administrative flexibility and autonomy than do marketing orders. They are used exclusively for research and promotion and advertising and cannot include volume or quality controls.
The greater flexibility of marketing commissions is being viewed by growers as increasingly desirable. For example, they are able to lobby for their members' interests, and they have more flexibility in who they contract with to conduct production research. State marketing orders are required to fund production research through the corresponding state (Land-Grant) universities while commissions may use private firms or other universities.
In addition, it is deemed acceptable for commissions to work with the Environmental Protection Agency (EPA) to obtain Section 18's (exemptions) allowing the use of urgently needed pesticides not yet registered for their crop in their state. While state marketing orders have also represented grower interests on Section 18 issues, it is unclear whether state departments of agriculture will continue to view this activity as within the purview of state orders in the future.
Several state marketing orders in California have recently changed, or are in the process of changing, to commission status. This merely requires the same growers/handlers encompassed by the state marketing order to introduce a bill into the legislature establishing a commission. A grower/handler referendum is then held seeking approval. If passed, the same management and staff operating the marketing order may continue in place and manage the commission.
Legislative Background: Check-offs
While technically check-off programs may be voluntary or legislative, the voluntary check-offs have usually not succeeded. Both involve assessing industry members for a common purpose, generally promotion, advertising and research. Hence, the legislative check-offs operate very much like marketing commissions, and, as already indicated, these same promotion and research purposes are also allowed by both federal and state marketing orders. Like marketing orders, legislative check-offs may be passed at either the state or federal levels, and again, require producers and/or handlers to pay assessments on the marketing of a particular product.
At the state level there are two types of check-off statutes in use: 1) statutes that authorize a program for a specific commodity; and 2) statutes, general in form, that permit any commodity or agricultural products group to set up a program. For example, states with specific commodity statutes include Florida for citrus fruit and Idaho for prunes. States with general authorizing statutes include Michigan, Minnesota, New Jersey, Ohio, Pennsylvania and Texas.
National Check-offs vs. Federal Marketing Orders
To clarify, the similarities between check-offs and marketing orders are great. At the federal level producers desiring to join together to conduct market promotion and research have the option of using either the general provisions provided for this purpose in the federal marketing order enabling legislation of 1937 (AMAA) or, alternatively, they may seek approval from Congress for legislation authorizing a federal commodity research and market promotion check-off statute that is specifically tailored to their needs.
As shown in Table 1, there are four fruit and vegetable commodities covered with national check-off programs: mushrooms, potatoes, limes, and watermelons (Watkinson, et al). Ten federal marketing orders for fruits and vegetables include provisions for research and development and advertising: Vidalia onions; Idaho-Oregon onions; Florida tomatoes; Texas oranges and grapefruit; Florida limes; Florida avocados; California nectarines; California peaches; Pacific Coast winter pears; and Hawaii papayas (Neff and Plato, 1995).
Of these ten federal orders, only one (Vidalia onions) is restricted to conducting production research and market promotion. The remainder were designed prior to 1990 and also include grade, standards and pack provisions. The desire on the part of each of these commodity groups to include grade and pack provisions, as well as research and advertising/promotion, was the motivating factor for designing a federal marketing order, since a check-off is restricted to funding research and advertising/promotion only.
Today, if a national commodity group merely seeks to jointly promote and/or conduct research on its crop, it is more likely to design a check-off program than a federal marketing order. Although either approach is legal, in the 1990s check-offs have proven to be less controversial, facilitating the approval process. They are less controversial because many people erroneously associate marketing orders only with quantity controls, despite the fact that, as previously noted, most no longer include those provisions.
To reiterate, marketing orders and check-offs are financed in the same fashion, through grower assessments on each unit sold. However, since check-offs are limited to funding research and advertising and promotion, which are uncontroversial, they are becoming more popular.
Research and promotion funds for fruits and vegetables collected under federal marketing order and check-off programs are estimated to have totaled about $45 million annually in recent years (Love, October 1995). The total farm value of the U.S. fruit, vegetable and nut industry was $23,179 million in 1994 (ERS, March 20, 1996). Hence, in relative terms, the industry investment in research and promotion through federally authorized programs amounted to only about .2 percent of total cash receipts.
Mandated Marketing Programs: The Case of California
California makes the most extensive use of mandated programs of all types, in part because of its leading position as both the country's number one agricultural and horticultural state.
For fresh fruits and vegetables, California currently has 5 federal marketing orders in effect, seven state marketing commissions and 13 state marketing orders. The federal orders include: California peaches, California nectarines, California kiwifruit, California dessert grapes, and Oregon-California potatoes. If processed fruits and vegetables are included, there are a total of 9 federal marketing orders operative in California.
The state marketing programs for fresh fruits and vegetables are shown in Table 2. Note that five of the state marketing orders are only authorized to conduct production research. Only three of the California state marketing orders for fresh fruit and vegetable commodities operate quality inspection programs. These commodities are: pears, plums and cantaloupes.
The role of the California mandated programs in generating promotional funds and research is impressive. Since 1988, budgets for state marketing programs for all types of commodities (not just fruits and vegetables) have totaled over $100 million annually. From about .2 percent of production value two decades ago, the total marketing program budget is now close to 1 percent of production value (Lee, et al, 1995).
In 1992, of the total budget for marketing programs of $117 million, $86 million (74%) was spent on promotion, $9 million (8%) on research, and the remainder $22 million (19%) on administration and miscellaneous activities. According to Lee, et al, promotion budgets grew as fast as the total marketing program budget while research budgets have remained at less than .1 percent of production value.
If we consider just the amount spent on the promotion of California fresh fruits and vegetables, the amount totaled $26,828,800 in 1992 (Lee, et al, 1995). Direct research expenditures for California fresh fruits and vegetables with mandated programs topped $3,397,700 in 1992.
California mandated program groups are able to leverage their research expenditures by funding research at the University of California (UC), a state Land-Grant university. Many UC researchers carry out research projects funded by mandated commodity groups and there is no charge for the time of faculty and extension researchers (as opposed to support staff) spent working on these research projects, nor does the University of California charge overhead on contracts and grants with mandated commodity groups.
This close relationship between mandated program groups and the corresponding Land-Grant universities in other states is also true. Mandated program groups are important beneficiaries of agricultural research conducted at publicly supported state Land-Grant universities.
The Capper-Volstead Act of 1922 provided the enabling legislation for the creation of agricultural cooperatives. Cooperatives allow growers to come together and pool their input volumes to source supplies more economically (via supply cooperatives) or to market jointly. In either case they avoid the double taxation to which corporations and their stockholders are subject. Furthermore, agricultural marketing cooperatives enable growers to avoid anti-trust constraints on price-fixing.
While producers marketing through the same cooperative entity are allowed to jointly set prices, they may not monopolize or restrain trade to such an extent that it would unduly enhance the price of an agricultural commodity (Breimyer, 1978).
Despite the apparent expected appeal of cooperatives, they are no longer a major part of the institutional setting in the fresh fruit and vegetable industry. Marketing cooperatives, in general, have been more important to processed than fresh market crops, and to the citrus and nut sectors than to the non-citrus fruit and vegetable sectors.
The incentives to form cooperatives are higher for perennial crops than for annuals, and higher for processing crops than for fresh. Growers of perennials have a long-term investment in orchards and must be concerned about a long-term "home" for their product. Similarly, growers producing processing crops must be concerned about the continued availability of a processing facility to provide an outlet for their production. This gives an incentive for growers to forward-integrate into processing on a cooperative basis, thereby taking advantage of economies of size in processing. Consequently, historically we have observed a lower formation rate for cooperatives marketing fresh vegetables. Asparagus is an exception because it is one of the few perennial vegetable crops.
Probably the most well known fresh produce cooperative in the U.S. is Sunkist Grower's, Inc., based in California, marketing California and Arizona oranges and lemons. Seald-Sweet in Florida is another well known citrus cooperative. The California avocado industry has the second most important fresh produce marketing cooperative in the state, Calavo Growers of California. Cooperatives have also played a significant but declining role in the California strawberry industry.
In general, the declining significance of cooperatives is probably partly related to the increase in average grower size since WW II as larger growers are more able to market their crops independently. In addition, the changing nature of the buying industry has made it especially critical for marketing firms to make quick selling decisions. This is complicated in cooperatives by the more consensus-based approach, often putting cooperatives at a disadvantage relative to independent handlers.
The U.S. Department of Agriculture (USDA) and State Departments of Agriculture
USDA provides major support services to the fruit and vegetable industry. Many of these services are of a facilitating rather than a regulatory enforcement nature. Each state also has a department of agriculture that provides services to the agricultural industries of that state. Frequently these state department of agriculture services mirror those provided at the federal level and are often implemented on a state-federal cooperative basis.
USDA has several divisions relevant to fruits and vegetables. These include the: 1) National Agricultural Statistics Service (NASS); 2) Foreign Agricultural Service (FAS); 3) Agricultural Marketing Service (AMS); 4) Economic Research Service (ERS); 5) Agricultural Research Service (ARS); and 6) Animal and Plant Health and Inspection Service (APHIS). The main functions of each are summarized below.
The National Agricultural Statistics Service is responsible for producing seasonal and annual statistics on the acreage, production, yield and value of all agricultural commodities, including fruits and vegetables. Data are collected at the state level by counterpart agencies to NASS. For example, CASS is the California Agricultural Statistics Service located within the California Department of Food and Agriculture.
Each state has a similar structure, whereby the state departments of agriculture have divisions responsible for collecting data on the production of agricultural commodities and reporting to NASS. NASS then consolidates the information received from each state for publication of national statistics.
In the case of California, county Agricultural Commissioner offices collect acreage, yield and production data which is channeled to CASS.
The Foreign Agricultural Service of USDA is responsible for a broad array of issues related to the international trade of food and agricultural products. The FAS division with responsibility for horticultural products is the Horticultural and Tropical Products Division (HTP). FAS services facilitate the export of U.S. agricultural products.
FAS compiles and publishes the trade data generated by U.S. Customs for agricultural products and provides information on world-wide marketing trends and supply and demand conditions for a broad array of commodities. This information is generated, in part, by a network of Agricultural Attaches, Agricultural Counselors and Agricultural Trade Officers based in countries around the world. These individuals provide information about the production of agricultural and food products in the countries they are assigned to, including seasonal crop estimates for important crops.
In addition, they report on the respective food marketing systems in each country, including providing importer lists by type of commodity and information on marketing channels and tariff and non-tariff trade barriers, such as licenses and phytosanitary and packaging and labeling requirements and restrictions. Agricultural Trade Officers help promote U.S. products in the countries they are assigned to, such as through organizing participation in trade shows and events with importers. They also assist U.S. exporters in identifying the appropriate public sector authorities responsible for facilitating market access to the country in question.
A high profile program operated by FAS is the Market Promotion Program (MPP), used to promote the exports of U.S. agricultural commodities. The official goal of MPP is to encourage the development, maintenance, and expansion of commercial markets for U.S. agricultural exports. MPP was authorized in the 1990 Food, Agriculture, Conservation, and Trade Act. The program uses funds from USDA's Commodity Credit Corporation. The total annual MPP budget authorized for all crops has recently been around $100 million.
Export market development is accomplished through advertising, nutritional information, in-store promotions, trade servicing, technical assistance, and other non-price activities (Ackerman, et al, June 1995). MPP is not an export subsidy as it does not affect the sale or prices of the products exported, nor does it involve any credit support activities. Rather, it merely funds market development for specific procucts in selected countries/markets. Commodity groups with mandated market promotion programs, marketing cooperatives and corporations are all eligible to apply for MPP funding. If approved, recipients of MPP funding must match their allocation with their own contributions, which may be in-kind.
Numerous fruit and vegetable crops have been the beneficiaries of MPP funding, especially fruits and vegetables with mandated programs. For example, California and Washington commodity marketing commissions have used these funds as the keystone of successful export development programs in Mexico, Canada and Asia. Fruit and vegetable marketing cooperatives have also received MPP funding.
In 1995 FAS reported that about 35 percent of total MPP expenditures went to support export market development for horticultural crops, including nuts and wine. MPP allocations for fruits alone amounted to $23 million while vegetable crops were allocated $2.6 million. U.S. fruit and vegetable exports have grown from $4.7 billion in 1992 to $5.8 billion in 1995. It is argued that the existence of the MPP program has facilitated this growth.
MPP market development programs are market research-based. Commodity groups/firms approved for funding to explore the market potential of their product in a given country must carry out market research to determine whether further investment is justified. If so, baseline consumer research is conducted to measure the existing consumer awareness level and consumption level for the product/source (e.g., Washington apples). The design of market promotion programs must then be approved by FAS and the effectiveness of these projects is evaluated partly by comparing the initial consumption and consumer awareness indicator levels to those measured after the promotional programs are implemented.
Hence, beneficiaries of MPP programs are held accountable for their expenditures of federal dollars. The existence of MPP funding for agricultural commodities is justified by the high cost of conducting overseas market research and promotion programs. Since the structure of agriculture is atomized and most products are relatively homogeneous, most individual firms cannot afford to invest in market development, especially when others can later step in and "take the market." In other words, foreign market development for homogeneous agricultural commodities has public good characteristics.
The Agricultural Marketing Service has several program responsibilities important to the fruit and vegetable industry. Within AMS the Market News Division generates data on FOB and wholesale prices, as well as shipments and arrivals (commodity unloads in specific market areas). Local data are collected on a state-federal partnership basis, called State-Federal Market News, similar to the NASS and state level department of agriculture partnerships. Each state department of agriculture has a Market News division and the local data collected are channeled into Market News in Washington, D.C. where the information is consolidated for specific crops and regions. Market News also receives and compiles data on fruit and vegetable prices from markets in other countries.
Other AMS responsibiities include: overseeing federal marketing orders and research and promotion programs authorized under check-offs; operating quality/grades and pack inspection services; oversight for the National Organic Standards Board established to standardize permitted practices for producing organically grown foods and organic certification; and PACA, described below.
Trade practices for the U.S. fresh produce industry are regulated by the Perishable Agricultural Commodity Act of 1930 (PACA), administered by AMS/USDA. PACA was recently restructured and strengthened with the passage of Public Law 104-48, entitled "The Perishable Agricultural Commodities Act Amendments of 1995."
Under the new legislation the fee structure has changed significantly. The requirement for retailers and full-line grocery wholesalers to pay an annual fee will gradually be phased out. However, both groups will still be subject to the PACA law. Costs will shift to other licensees, and license fees will increase from $400 to $550 annually.
Most firms buying and selling fresh produce in the U.S. must be licensed with PACA. Failure to pay produce creditors means that firms risk suspension or revocation of their licenses. Since most fresh fruits and vegetables are sold on an FOB basis with quick turnaround, payment is rarely received until after product delivery. Hence, there is a need to offer some payment protection to produce sellers.
PACA also protects buyers by requiring shippers to deliver the product volume and quality originally negotiated. The mere existence of these regulations means that the vast majority of daily produce transactions take place without government involvement or trade disputes. In other words, the potential threat of legal action is sufficient to ensure that most firms comply without the need for government intervention and penalties.
Incidentally, each state may have its own set of laws governing fair trading practices for agricultural commodities, administered at the state level. For example, the California Department of Food and Agriculture has a Market Enforcement Branch to govern the practices of commission merchants, wholesalers and other types of marketers.
The Economic Research Service of USDA assimilates data from all of the above USDA divisions, NASS, AMS and FAS, as well as from other sources. Its function is to carry out economic analysis on a vast array of agricultural commodities and issues. This analysis provides invaluable information to both policy makers, academic researchers, and private sector decision-makers.
Economists specializing in fruits, nuts and vegetables are located within the Commercial Agriculture Division of USDA in the Field and Specialty Crops Branch. The three other main divisions of ERS are: Natural Resources and the Environment, Rural Economy, and Food and Consumer Economics.
The Agricultural Research Service of USDA conducts research on the production and postharvest management of numerous agricultural commodities, including fruits and vegetables. ARS has field staff located in some key fruit and vegetable production regions to carry out applied research relevant to specific commodities in their local weather and growing conditions. ARS employees often collaborate with researchers at Land-Grant universities.
The Animal and Plant Health and Inspection Service (APHIS) has a dual role. It must protect U.S. borders and regions of the country/states from potentially injurious animal and plant diseases and pests. It also assists U.S. producers in meeting the phytosanitary and sanitary requirements of other countries representing potential export markets.
For example, APHIS can help develop viable quarantine and other treatments to safeguard against pest and disease transmission. International trade (both import and export) of fresh fruit and vegetable commodities is not only regulated, but can be facilitated by APHIS.
Under the rules of the WTO and NAFTA, all phytosanitary and sanitary regulations must be science-based and non-discriminatory to foreign producers.
Grades and Standards--Federal (AMS) and State Inspection Services
Many crops have federal and/or state grades and standards. Federal standards are administered by AMS whereas a state standard is administered by the respective state department of agriculture.
Quality and pack standards are only mandatory when they are included as provisions of a mandated marketing program. The majority of grades and standards in the U.S. are not mandatory and the government is never involved in inspecting the quality of the product in the overwhelming majority of fresh produce transactions occurring every day.
Rather, for non-mandatory grades and standards the system functions as follows. A buyer in a destination market negotiates a sale with a shipper in a production region. The quality of the product may be represented as say a U.S. #1 grade, 48 count per box. Both shipper and buyer have on file the USDA requirements for the product to be represented as this grade and size. The shipper has employees trained to use this information when packing the product, without the need for any federal inspectors on site. When the buyer receives the product, if he/she is satisfied that the product is of the quality level represented by this grade, the product is accepted and marketed without any government inspection or involvement. Non-mandatory grades and standards greatly facilitate trade without any direct cost to the firms involved.
If, on the other hand, the receiver is dissatisfied with the quality of the product on arrival, then he may elect to call for a federal inspection. A USDA inspector will inspect the load for a fee and determine if the product meets the standards for the grade it was sold as. If not, the buyer has the right to reject the load or to call for an adjustment in the terms of sale.
The role of USDA inspectors as independent, unbiased arbiters of quality has been vital to the advancement of the U.S. fresh produce marketing system. With well-defined grades, products can be sold over the telephone without the need for physical inspection by buyers. This has enabled the U.S. fresh produce distribution system to rely less and less on wholesale markets, avoiding a level of intermediation that adds both physical handling and marketing costs. Wholesale markets also involve breaking the cold chain, which deteriorates product quality. Today, most products are sold on an FOB basis and move directly from the production region to the distribution center of the final buyer in the destination market area.
The same principles apply for state quality and pack standards, where they exist. However, in those cases the inspectors work for the corresponding state departments of agriculture.
It should be clarified that for the majority of products (those without mandatory federal or state quality standards), buyers and sellers are free to choose whether or not they even want to refer to the government grade standards that may be "on the books" for a particular product. In other words, some products may be sold at a quality level superior to the highest USDA standard. Just as commodity groups are allowed to come together and create a mandated marketing program, but are not compelled to do so, buyers and sellers may or may not choose to refer to government quality standards in their transactions.
However, if a buyer represents a product as meeting the standards of a federal or state grade, then indeed it must do so, under penalty of being found out of grade if the buyer requests an inspection.
Grade, size and pack standards (mandatory or not) are established with the input of the commodity groups they are created for. The industry is permitted to request their modification through established procedures that require a period of public comment. For federal standards USDA will make a final ruling and for state standards the respective state department of agriculture makes the final determination. Incidentally, both federal and state standards may exist for the same product and the state standard may be higher than the top federal grade.
For example, the quality standards for Washington Fancy apples are higher than for the U.S. Extra Fancy grade. Apple growers in the state of Washington may choose to use either state or federal grades, whereas producers in other states cannot use the Washington state grades.
Section 608e of the AMAA, with Amendments
For federal marketing orders that do have mandatory grades and standards, the commodity group may request that imports be required to meet the same standards. This is commonly referred to as receiving "Section 8e" treatment under the AMAA. The AMAA has been periodically amended to specify the commodities receiving this treatment. Imports of commodities with Section 8e treatment are prohibited unless they meet the same federal grade, size, quality and maturity provisions applying to the domestic production region encompassed by the federal order for the season when the federal order is in effect.
While Section 8e treatment has been labeled by some as a non-tariff trade barrier, in practice, fresh produce imports have not had difficulty meeting federal standards. Fresh tomato imports from the Sinaloa production region of Mexico represent a case in point.
Sinaloa tomato exporters have self-imposed even higher export quality standards on their products than the import standards they are required to meet under the Florida federal tomato marketing order in effect during the Sinaloa production season. While Florida growers can market U.S.#1, #2 and #3 quality levels (and so could Sinaloa), Sinaloa has chosen to export only 85% U.S. #1 or better.
Private Sector Organizations Also Provide Facilitating Marketing Services
Trade associations have played a critical role in facilitating the advancement of the U.S. fresh fruit and vegetable industry, from the production to the consumer level. Trade associations exist that are specific to individual commodities, geographic areas, and types of firms. In addition, there are two national associations that encompass firms at all levels of the fresh produce distribution system. These are the Produce Marketing Association (PMA) and the United Fresh Fruit and Vegetable Association (UFFVA). The former has more of a retailer orientation while the latter has more of a grower-shipper orientation.
All in all, there are over 80 trade associations organized by and for various sectors of the U.S. fruit and vegetable industry. This count excludes mandated programs, in other words, it excludes commodity commissions, check-offs, and marketing order boards. In contrast to mandated programs, membership and participation in trade associations is completely voluntary. A list of associations is attached in Appendix 1.
Trade associations provide organized communication forums for industry participants to come together to explore solutions to common problems and to advance the diffusion of information and technology within the industry. National trade association task forces have led the move to standardize pallets and packs and to move toward a standardized system of retail Price-Look-Up (PLU) codes for fresh fruits and vegetables. Efforts to standardize PLUs globally are being led by U.S. trade associations.
PMA and UFFVA hold annual trade shows and conventions to foster buyer-seller contact and to offer educational programs. The PMA convention, in particular, has increasingly become global in scope, attracting approximately 10,000 attendees in 1995.
Organized forums for industry communication have proven to be of major benefit to the modernization of the food system in the United States. They both protect industry interests before public policy makers and educate their members about the latest technology and management practices, contributing to a high level of progressiveness in the system.
5 A Day--PBH
The Produce for Better Health Foundation (PBH) is an example of a voluntary industry association that brings together the private and the public sectors in a joint effort to generically promote increased consumption of fresh fruits and vegetables. The goal is to increase per capita fresh produce servings from the current level of approximately 2.5 per day to five servings per day by the year 2000.
The 1996 budget of PBH is expected to be between $1.2-$1.4 million, generated from voluntary private contributions and license fees for using the 5 A Day logo. An additional $1 million is contributed by the National Cancer Institute. Indirect industry promotional support is sizable, estimated at an additional $50 million generated through usage and promotion of the 5 A Day logo and message by individual companies.
The Federal government has budgeted approximately $41 million over the next five years to fund research at the National Cancer Institute that would document scientifically the link between increasing fruit and vegetable consumption and reducing cancer risk (Love, October 1995). If these findings are realized the appropriate health message will be incorporated into the 5 A Day national promotion program.
Advantages and Disadvantages of the U.S. Institutional Setting for Fresh Fruits and Vegetables
Any evaluation of the advantages and disadvantages of the U.S. institutional setting for fresh fruits and vegetables clearly must yield a positive benefit-cost ratio. Performance standards for food marketing systems include: food costs, availability, product diversity, quality and consistency, and progressiveness.
By all of these measures the system performs well. The average share of disposable personal income spent on food in the U.S. in 1994 was 10.7 percent, the lowest in the world (Anthony Gallo, August 1995). The quality of fresh produce has improved significantly since WW II and availability has increased to become year-round, either through domestic supply or imports. Each year, more products are made available to consumers, as we continue to import more specialty produce. New product introductions such as fresh-cut produce items and transgenic tomatoes indicate a high level of progressiveness of industry firms.
Assessment of Mandated Programs
There would never have been mandated programs if producers had not proposed them. Fruit and vegetable mandated programs can help ensure consistent quality to consumers, support market and product research, and standardize packs and containers. AMAA provisions prevent the use of marketing orders to increase farm revenues through active use of quantity provisions or frequent changes of quality standards with intent to raise prices above parity.
On the other hand, the declining number of federal fruit and vegetable marketing orders and the infrequent use of the most intrusive marketing order provisions in these orders are evidence that significant costs can be attendant on compliance with some federal marketing orders. While many marketing orders have proven stable, others have been unable to maintain a solid coalition of producer support. The major challenges to mandated programs have come internally, from a minority of disgruntled growers, rather than from consumer or other advocacy groups.
One could argue that mandated programs have contributed greatly to the strength of California agriculture. California is the number one agricultural state in the country and its emphasis on horticultural crop production has greatly lent itself to the use of mandated programs.
Comparisons of yield trends relative to other states (for crops with mandated programs in California but not in competing regions) generally show that California yields are significantly above the average for other states that don't invest in production research via mandated programs. While climatic and other factors also contribute to yield differences, nevertheless, investment in seed variety development, pest and weed control and other cultural practices clearly have produced a high rate of return for the California industry.
California promotional programs have also proven to be an effective tool for capturing retail shelf-space away from competitors in other regions that don't invest in generic promotion. In general, rates of return to generic commodity promotion programs are impressive.
General Economic Rationale for Mandated Programs
The initial public policy rationale for marketing orders dates back to the 1930s and was clearly income maintenance. Subsequent amendments and changes in the types of provisions most commonly employed in newer orders suggest that economic efficiency became a more applicable rationale (Armbruster, et al). Today, supporters of mandated programs tend to focus on their public good characteristics. These public goods include market information, research, and generic promotion. Individual producers generally lack incentives and/or capabilities to produce socially optimal amounts of these goods.
Marketing orders, in particular, by allowing for mandatory grades and standards may reduce the problem of immature produce being marketed by a minority of growers that then may "spoil the well" as it were for other producers. If consumers are disappointed about the quality of the produce they buy, then they may not make repeat purchases and demand is depressed for the remainder of the crop.
While the argument for mandatory grades and standards is technically still valid today, the need may be somewhat less compared to earlier times. This is because technological and transportation advances have contributed to a dramatic rise in the overall quality levels deemed acceptable for marketable fresh produce since WW II. Consequently, both the variation in quality levels for fresh produce commodities has declined, and the minimum quality being marketed has improved markedly.
As a result, many commodity groups have elected to request federal or state quality standards only as a reference guide to facilitate marketing, without these grades being implemented on a mandatory basis. This is an important distinction that is often unappreciated about the functioning of the U.S. fresh fruit and vegetable marketing system.
While marketing orders originally focused on quality and quantity control, over time they have gradually come to be used primarily for the market-facilitating provisions. Hence, marketing orders have lost their advantages relative to marketing commissions and check-offs.
Effects of Mandated Promotion and Advertising Programs on Consumers
Consumer interests can be well served or adversely affected by marketing orders. In addition to more consistent product quality, some studies (for example, Glasson, 1981, and Breimyer, 1965) have concluded that market support activities may stabilize markets by reducing uncertainty, resulting in greater price and quantity stability to producers and consumers. Higher consumer prices may also result, as other studies have concluded (Booker, 1976, Federal Trade Commission, 1975).
Mandatory quality standards imposed by marketing orders have been criticized by some as an infringement of both consumer and producer sovereignty. A high quality standard may lead to a higher price than would prevail without the standard. Consumers are denied the opportunity to choose to buy smaller or less cosmetically appealing produce that would sell at a lower price. Conversely, grower-shippers are prohibited from selling produce that they may have a market for. Proponents of this view argue that produce not meeting minimum quality standards mandated by a marketing order is unfairly excluded from the market. Their argument is that the market will determine the quality levels that can be marketed profitably.
On the other hand, from a practical perspective, commercial produce buyers are purchasing large quantities of items on a daily basis. In 1994, the average U.S. supermarket handled 312 items in the produce department. Given the high turnover and perishability of produce, buyers can benefit from quality standards that reduce the uncertainty in procurement, and help to ensure consistent, high quality produce. Consumers also may benefit from maturity standards since internal eating quality for many items can not be predicted merely through visual inspection.
Generic promotion and advertising for a commodity that successfully expands consumer demand and results in larger sales may also result in a higher price. The larger sales, even at a higher price, are based on individual consumer choices that in total reflect an increased willingness to pay.
The source of the increased willingness to pay, or increased value to consumers, may come from quality improvements or from better nutritional information about an existing product. The higher willingness to pay means that consumers in total are getting more satisfaction from the product used.
However, some consumers are not influenced by the consumer demand expansion activities of a check-off program. As a result, these consumers are worse off if they have to pay a higher price, because their willingness to pay is unchanged. This outcome might be considered a public policy issue if low-income consumers are hurt by the higher prices caused by the expanded demand. However, if there are sufficient substitutes available at lower prices then any potential harm is mitigated.
Land-Grant Universities: Effects of Research and Development and Cooperative Extension on Growers, Consumers and Markets
The Land-Grant University system is widely cited as a major contributor to the long-term development of the U.S. agricultural and food system into one of the most efficient in the world.
Research done at the University of California Davis shows that public investment in California agricultural research and extension has been a good investment for society, benefiting growers, consumers and commercial buyers.
The average annual internal rate of return for public investment in California agricultural research and extension for 1949-85 is around 20 percent (Alston, et al, March 1994). Research done in other states on the return to public investment in agricultural research and extension through their respective Land-Grant Universities indicates even higher rates of return.
Consumers are the largest beneficiaries through lower food prices. Commercial buyers also benefit from low prices, as well as stability and consistency of supply, and improvements in product quality and reduction in postharvest losses through postharvest technology generated by Land-Grant Universities.
An Assessment of Programs of USDA and State Departments of Agriculture
The role of USDA, working in collaboration with state departments of agriculture, in providing information about the production, shipments, arrivals, prices and availability of fresh fruits and vegetables, has greatly contributed to the transparency of the fresh produce marketing system. Greater price transparency benefits growers, buyers and ultimately consumers, by improving market efficiency.
All levels of the system have benefited by improvements in postharvest technology and production efficiency generated by ARS research. A major reduction in postharvest losses since WW II has reduced food prices significantly.
U.S. growers of many fruit and vegetable commodities have benefited from export development programs, such as MPP, that have enabled them to carry out expensive foreign market and consumer research and advertising programs that most individual firms could not afford.
Regulation of trade practices, such as through PACA, enable firms to sell large amounts of produce daily without the need for cash sales. PACA insures that both buyers and sellers receive some protection from the failure of a firm to pay or comply with the terms of sale.
Well-established grades and standards mean that fresh produce transactions can take place over the phone, without the need for physical inspection of the product. A well-established, cheap and timely inspection service is available when disputes arise, via state and federal inspection services.
All of these facilitating services serve to reduce risk, increase the speed of transactions and decrease losses in the fresh produce marketing system. This, in turn, lowers marketing margins and food prices to consumers.
U.S. Fresh Produce Marketing Channels and Procurement Practices
U.S. retail fresh fruit and vegetable sales were $54,942,058,000 in 1994 (Supermarket Business, September 1995). Sales through foodservice channels have grown markedly in the last 15 years but are not precisely accounted for in official statistics. Nevertheless, we estimate that combined retail and foodservice fresh produce sales are approximately $90 billion.
The principal marketing channels in the U.S. fresh fruit and vegetable marketing system are shown in figure 1. The three primary sales outlets to consumers are: (1) retail food stores; (2) food service establishments, hotels, restaurants, and institutions (schools, the military, hospitals, nursing homes, shelters, and prisons); and (3) direct farmer-to-consumer sales via u-pick operations, farmers' markets, and roadside stands. Although the majority of produce still moves through retail channels, food service may now account for around 40 percent of total volume, and direct sales may account for 1 percent.
Produce sold in retail or food service outlets may be procured directly from shippers or wholesalers operating in terminal (wholesale) markets or in independent warehouses in local communities. Brokers may be used by either buyers or sellers at any level of the distribution system and their role has grown in importance since WW II. As buyers acquire broader product lines of both domestic and imported produce, many brokers have become global in their sourcing abilities and increasingly service oriented to meet specialized buyer needs.
Since the 1950s, terminal markets have steadily declined in importance; today there are major terminal markets serving only 22 cities, and the volume of produce sales they handle is an estimated 25 to 30 percent of the national total. Product formerly moving through terminal markets now goes directly from shippers to final buyers. Brokers may or may not assist in arranging these transactions. In either case, the product moves directly from the shipper to the final buyer, such as the distribution center of a chain, avoiding any secondary handling.
The decline in terminal market share is largely a result of the increased buying power of integrated wholesale-retail buying entities. Integrated wholesale-retailers operate large volume centralized buying operations, making it more efficient to buy directly from the source, bypassing the wholesaler and thereby avoiding intermediary margins and handling costs. Direct production source-to-buyer shipments also avoid breaking the cold chain, better preserving product quality.
While the U.S. system is dominated by the corporate chain, defined as a retailer operating 11 or more stores, there are also voluntary wholesalers/chains and member-owned wholesalers, often called retailer cooperatives. Together these three types of buying entities are referred to as integrated wholesale-retailers.
Voluntary and member-owned wholesalers, referred to as affiliated groups, are composed of independent retailers (retailers operating less than 11 stores) which join together and affiliate with a central wholesale supply organization.
In the case of voluntary wholesalers, retailers affiliate with the established supply organization of an existing wholesaler, with no financial involvement necessary by either. While the retailers remain independent, affiliation with a central wholesale organization brings them the benefits of joint buying, advertising, and merchandising programs, enabling them to compete with corporate chains. The voluntary wholesaler may choose to forward-integrate and own some of the stores that it supplies as well. Well known examples of voluntary chains are Fleming, Super Valu Stores, and I.G.A. in the United States, and Spar in Europe.
In the case of member-owned wholesalers or retailer cooperatives, retailers backward-integrate into wholesaling and own the central buying and warehousing facility. Again, this enables them to obtain the advantages of group buying, merchandising and advertising to better compete with corporate chains. Certified Grocers of California is a well known example of a retailer cooperative, similar to Migro in Switzerland.
In general, retailer cooperatives have declined in relative importance compared to voluntary chains and both have declined relative to corporate chains. However, they remain very important at the wholesale level of the system and many affiliated groups are the primary fresh produce suppliers to smaller corporate chains.
Relative Importance of Chain Stores and Supermarkets
In 1994, chains accounted for 74 percent of supermarket sales vs. 62 percent in 1974 and 58 percent in 1954 (Progressive Grocer, 1996). In each of these years the remainder was accounted for by sales through independents, both affiliated and unaffiliated. While at the turn of the century virtually 100 percent of retail food sales were made by unaffiliated independents, today they contribute under 3 percent of the total.
The dominance of chain stores is even greater if we include all grocery stores as opposed to just supermarkets. Grocery stores include not only supermarkets (stores with over $2 million in annual sales) but also stores with under $2 million in annual sales, such as superettes ($1-2 million in sales) and grocery stores with under $1 million in annual sales such as convenience stores and other small grocery stores. Chain grocery stores now represent 81 percent of total food store sales in the United States (Supermarket Business, September 1995).
However, convenience stores represent 6.9 percent of total chain grocery store sales and sales of fresh produce through these stores are neglible. Consequently, for our purposes it is better to focus on supermarkets. There are 18,035 chain supermarkets and 11,665 independent supermarkets for a total of 29,700 supermarkets in the United States in 1996 (Progressive Grocer, 1996). In 1995, total sales through chain supermarkets were $240.3 billion compared to $71.4 billion through independent supermarkets.
Concentration in the System
As the U.S. market has matured, competition has increased. The industry has undergone consolidation and larger operators have acquired smaller firms; thus, the number of integrated wholesale-retailer centralized buying operations has declined and sales per firm have increased. About 400 integrated wholesale-retail headquarters buying offices exist in 1996, according to combined lists from the Progressive Grocer Marketing Guidebook and the Red Book. About 86 integrated wholesale-retailers contribute 60 percent of total U.S. retail sales.
Larger volume purchases are more efficiently handled by direct sales and distribution from the shipping point, rather than through terminal markets. Many chains put field personnel in the production regions to ensure product quality and availability. Therefore, integrated wholesale-retail buyers use terminal markets primarily to balance short orders and to procure small-volume exotic or specialty items, including highly perishable products.
At the supermarket level, 35 percent of supermarkets (both chains and independents) contribute 62 percent of total supermarket sales (The Food Institute Report, April 22, 1996). Still, while the term "national chain" is used, technically the United States doesn't have any truely national supermarket chains. Only 5 chains have over 1000 stores and only one of these has over 2000 outlets. Given the large geographic size of the United States, chains tend to be regional in focus. Hence, despite increasing consolidation, intense local retail competition still remains in most markets.
Wholesalers and Brokers
Today, terminal markets and other wholesalers focus on independent, unaffiliated retailers and foodservice accounts. Terminal market operators and local produce wholesalers do a substantial amount of inter-wholesaler buying. Primary market handlers (receivers, merchant wholesalers, and commission merchants) procure more than half of their product from the shipping point. Receivers and merchant wholesalers buy and resell products, and commission merchants operate on a consignment basis. Secondary market handlers (jobbers and purveyors) procure more than half of their product from other wholesalers, principally primary handlers. They service small-volume accounts such as independent retailers and restaurants, which require frequent deliveries of small lots. Purveyors focus almost exclusively on food service accounts.
While terminal markets in the Midwest and East are primarily destination markets, those located near the production regions on the West Coast and in Florida ship significant volumes to terminal market and other wholesalers in the destination markets. Wholesalers in all regions have expanded customer services to include such functions as ripening, sizing, repacking, consumer packaging, and suggested advertising for retail accounts.
Brokers are noteworthy players in fresh produce distribution. Brokers help negotiate sales on behalf of buyers or sellers for a percentage sales commission or a flat fee per unit. They do not physically handle or take title of the merchandise; thus, their fees are substantially lower than those charged by commission merchants. Usage of brokers varies greatly by type of buyer and commodity.
Supermarkets and Supercenters: Profiles and Trends
Supermarkets offer a full-line of groceries and have sales volumes above $2 million per year. Median store size in 1995 was 35,100 square feet (3159 square meters) and the typical produce department averaged 5,125 square feet (461.25 square meters) and handled approximately 300 items. In 1994, on average, the produce department accounted for 10.4 percent of store sales while the contribution of the produce department to store profits averaged 16.9 percent. The average gross margin was 41.3 percent and average weekly sales per square foot ranged from $4.17 in 1990 to $3.67 in 1994 (Supermarket Business).
Supercenters combine a full-line supermarket with a full-line discount department store. Total store size ranges from 130,000 to 200,000 square feet (11,700 to 18,000 square meters). Produce departments tend to carry 250 to 300 items and occupy about 10 percent of food selling space. Average food selling space is generally between 40,000 to 57,000 square feet in most supercenters. Average sales per unit in 1994 were $35.8 million (The Food Institute Information and Research Center, 1995).
In 1993 supercenters accounted for 1.4 percent of U.S. retail food industry sales and they are projected to contribute 6.9 percent by the year 2000 (The Food Institute, 1995). While wholesale clubs (such as Price Club/Costco) are currently more important than supercenters, contributing 4.2 percent of U.S. retail food sales, supercenters are expected to grow at a more rapid rate as we approach the next century. Wholesale clubs are projected to account for 5.6 percent of food sales in 2000.
Wal-mart has quickly become the largest supercenter chain in the country, eclipsing Meijer, Inc. of Grand Rapids, Michigan. As of 1996 Wal-mart operated 170 supercenters with $7 billion in annual sales (Progressive Grocer, 1996), making it the 9th largest food store chain. Within the next year Wal-mart is expected to be operating over 360 supercenters.
The growth in supercenters is expected to impact mainly independents rather than chains. The market share of independents is projected to decline from 20.4 percent in 1993 to 16.4 percent in 2000. Non-supermarket outlets are also predicted to decline from a 19.6 percent market share in 1993 to 16.4 percent in 2000 (The Food Institute Information and Research Center, 1995).
As supercenters gain market share they become a formidable force affecting procurement practices. For example, Wal-mart is experimenting with new arrangements for sourcing produce such as contracting with shippers for a portion of their needs on high volume items, rather than buying only on the spot-market. If successful, more retailers are expected to follow suit.
The change to fewer, larger integrated wholesale-retailer buyers and the rise in consolidated buying in food service channels have furthered the development of large-scale shippers based in production regions. Retailers and food service users demand more services today, including (1) information on product attributes, recipes, and merchandising, (2) ripening and other special handling and packaging, and (3) year-round availability of a wide line of consistent quality fruits and vegetables. Shippers have responded with improved communication programs and by becoming multiregional and multicommodity.
Many California and Florida shippers obtain products from other countries during the off-season, sometimes via joint ventures. This enables shippers to extend shipping seasons and sell products produced in several locations via one marketing organization, maintaining a year-round presence in the marketplace. For example, shippers based in Salinas, California, also commonly ship out of the San Joaquin Valley, Imperial Valley, southwestern Arizona, and Mexico.
The rapid growth in multilocation firms has contributed to the integration of the Mexico-California-Arizona vegetable industries, in particular. Because most vegetable crops are not perennials, the location of production can shift readily, based on relative production and marketing costs and growing season.
In the U.S. fresh fruit and vegetable marketing system the main role of the government is to facilitate commerce through market information and by defining the rules of the game through trade practices regulations. In most instances the government is not called upon to actually enforce market regulations, since firms perform according to legal standards without the need for government inspection and intervention.
An important exception to this is mandatory grades and standards established by federal or state marketing orders for certain crops in certain regions and seasons. Most government grades and standards are not mandatory but rather used voluntarily by industry.
The government plays an important facilitating role by providing the legal framework for growers to come together for common purposes through cooperatives or mandated marketing programs. These programs are self-help programs, enabling growers to take advantage of the public good characteristics of market promotion and development, research and quality standards.
It is important to understand that while, once approved, mandated marketing programs carry the enforcement power of the government, they are industry-financed and industry-initiated rather than government imposed. In other words, producers and/or handlers of a commodity sponsor the development of a mandated program, and design it according to their needs. Only after a program is approved by a majority vote does it become mandatory for the commodity and industry involved. Indeed, many commodity groups do not choose to develop mandated programs.
These mandated programs are not in any way involved with the actual sale of produce. Programs established to promote the sales of a given product do so on a generic basis, non-specific to the individual growers or handlers in an industry who are actually producing and selling the crop.
In conclusion, in the U.S. system, the public and private sectors work in concert with the University system to further the advancement of the fresh produce production and marketing system to the benefit of all concerned--consumers, producers and marketing firms.
New entrants to the produce industry are challenging independent shippers and grower cooperatives. Multinational food processors entered the fresh produce market during the 1980s as consumption of canned produce declined. These firms are applying their branded marketing strategies to produce and are contracting with producers here and in foreign regions to ensure a year-round market presence for their brands. They are acquiring produce wholesalers and shippers to broaden their base of commodities and distribution channels.
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Appendix I: U.S. Horticultural Trade Associations
Almond Board of California 209-649-8262
Arkansas State Horticultural Society 501-575-2603
California Avocado Commission 714-558-6761
California Certified Organic Farmers 408-423-2263
California Citrus Mutual 209-592-3790
California Grocers Association 916-448-3545
California Kiwifruit Commission 916-929-5314
California State Floral Association 916-448-5266
California Tomato Board 209-251-0628
California Tomato Growers Association Inc. 705-444-0923
Carolina Farm Stewardship Association 919-968-1030
Colorado Potato Administrative Committee 970-352-5231
Empire State Potato Club 716-526-5356
Florida Citrus Mutual 813-682-1111
Florida Fruit & Vegetable Association 407-894-1351
Florida Nurseymen & Growers Association 407-345-8137
Florida Tomato Exchange 407-894-3071
Food Marketing Institute 202-452-8444
Fresh Produce Association of the Americas 520-287-2707
Fresh Produce & Floral Council 213-629-4171
Georgia Watermelon Association Inc. 912-273-4548
Gulf Citrus Growers Association 941-675-2180
Idaho Grower Shippers Association Inc. 208-529-4400
Idaho State Horticulture Society 208-722-6701
Illinois Specialty Growers Association 309-557-2107
Illinois State Horticultural Society 209-828-8929
Imperial Sweet Onion Commission 619-353-1900
Import-Export Produce Association 210-787-2100
Indiana Vegetable Growers Association 219-989-2013
International Fresh-Cut Produce Association 703-522-1345
Iowa Fruit & Vegetable Growers Association 515-282-8192
Kentucky Vegetable Growers Association 606-257-5685
Leafy Greens Council 612-484-3321
Louisiana Vegetable Growers Association 504-388-2222
Maine Organic Farmers & Gardeners Association 207-622-3118
Maine Potato Board 207-769-5061
Michigan Agricultural Cooperative
Marketing Association Inc. 517-323-7000
Michigan Blueberry Growers Association 616-434-6791
Michigan State Horticultural Society 517-355-5194
Michigan Vegetable Council Inc. 616-842-8211
Minnesota Fruit & Vegetable Growers Association 612-434-5929
National Association of Perishable Agricultural
Receivers (NAPAR) 410-532-7060
National Association of Produce Market Managers 314-621-4383
National Council of Agricultural Employers 202-728-0300
National Exporters Association 57-1-3420788
National Grocers Association 703-437-5300
National Onion Association 970-353-5895
National Potato Council 303-790-1141
National Watermelon Association Inc. 912-775-2130
Nebraska Vegetable Growers Association 402-472-8616
New England Sprout Growers Association 800-453-3098
New England Vegetable & Berry Growers Assoc. 508-378-2546
New Hampshire Vegetable Growers Association 603-862-3208
New Jersey Vegetable Growers Association 609-985-4382
New York Apple Association Inc. 716-924-2171
New York State Food Processors Associated 716-424-1803
New York State Vegetable Growers Association 607-539-7548
North American Blueberry Council 916-985-6644
North Carolina Apple Growers Association 704-685-7768
North Carolina Grape Growers Association 919-733-7136
North Carolina Peach Growers Society 910-974-4501
North Carolina Potato Association Inc. 919-331-4773
North Carolina Sweet Potato Commission 919-571-8370
North Carolina Tomato Growers Association 704-253-1691
North Carolina Wine Growers Association 919-733-7136
Northeast Organic Farming Association 603-679-5718
Northwest Cherry Growers 509-453-4837
Ohio Florists' Association 614-487-1117
Ohio Fruit & Vegetable Growers 614-249-2424
Oregon Blueberry Commission 503-758-4043
Oregon Horticultural Society 503-472-7910
Oregon Raspberry & Blackberry Commission 503-758-4043
Oregon Potato Commission 503-731-3300
Oregon Strawberry Commission 503-758-4043
Organic Crop Improvement Association Inc. 519-794-3159
Pennsylvania Cooperative Potato Growers 717-232-5300
Pennsylvania Nurserymen's Association Inc. 717-238-1673
Pennsylvania Vegetable Growers Association 717-473-8468
The Potato Board 303-758-7783
Produce Marketing Association 302-738-7100
Red River Valley Potato Growers Association 218-773-3633
Refrigerated Foods Association 404-452-0660
San Diego County Flower & Plant Association 619-431-2572
South Carolina Apple Growers Association 704-685-7768
South Carolina Watermelon Association 803-734-2200
Sweet Potato Council of the United States Inc. 334-626-1579
Texas Produce Association 210-581-8632
Texas Fruit Growers Association 409-846-3285
Texas & Oklahoma Watermelon Association 817-596-0927
Texas Vegetable Association 210-584-1772
Transportation Intermediaries Association 703-329-1894
Tulelake Growers Association 916-667-5214
United Fresh Fruit & Vegetable Association 703-836-3410
Virginia Apple Growers Association Inc. 804-929-1910
Virginia Potato & Vegetable Growers Association 804-787-5867
Washington Growers League 509-575-6315
Washington Potato & Onion Association 509-765-8845
Washington State Apple Commission 509-663-9600
Washington Tilth/Tilth Producers 800-731-1143
Western Growers Association 714-863-1000
Western Oregon Onion Commission 503-378-7349
Wholesale Florists & Florist Suppliers
of America (WFFSA) 703-242-7000
Wisconsin Apple Growers Association 608-835-8349
Wisconsin Fresh Market Vegetable Growers Assoc. 608-798-2286
Wisconsin Potato & Vegetable Growers Association 715-623-7683
Contact Us2116 Social Sciences and Humanities
University of California, Davis
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