The other shoe is starting to drop.
After the enormous industry-wide effort to increase standards on California leafy greens culminated in the California Leafy Greens Marketing Agreement, now the producers are trying to figure out how to pay for it all.
Taylor Farms was first out of the gate with a 20-cent per carton price increase to pay for enhanced food safety efforts, including the 2 cents per carton assessment from the State of California for the Marketing Agreement.
Dole Fresh Vegetables has sent out a letter, which can you read here, explaining its need for a 22 cents-per-carton price increase to pay for enhanced food safety. It points out that this goes well beyond the minimum requirements of the Marketing Agreement:
“….Dole Fresh Vegetables is making substantial investments on our own in enhancements that go beyond the new GAPs and that we believe may eventually become industry benchmarks in the future. We are increasing research funding, increasing field buffer zones, adding field personnel, implementing raw material testing, and implementing RFID tracking of raw materials, among other efforts. These enhancements are not one-time events, but are a part of doing business — ours and yours — for the future.”
A company the size of Dole will experience total incremental cost increases in excess of $10 million dollars a year from its enhanced food safety efforts. So, of course, it is going to try and pass on this increase in the cost of production.
And for a retailer, if you compare to the cost of outbreaks, pulling things from shelves and being out of stock, it is a bargain.
Twenty-two cents per carton sounds like a lot and, cumulatively, it is — but for a retailer it works out to less than two cents a bag on a typical 12-pack case. That is a price consumers will gladly pay for better quality, safer food.
The problem, of course, and the reason producers pushed hard and then harder still to get buyers such as those included in the Buyer-led Food Safety Initiative to agree to require that their suppliers were signatories to the Marketing Agreement, is that consumers have no way of knowing if the product that costs more is better quality or safer.
This makes it hard for retailers to pass on higher prices for product grown or processed to higher standards. So, the temptation is always to buy less expensive product.
Right now, because the California Leafy Green Marketing Agreement received virtually 100% participation (does anyone know who was among the 2% who didn’t sign??) there is no alternative to buying product that meets those standards.
However there are still problems ahead.
Organizations such as Dole are doing things such as RFID to enhance traceability that are not required by the Marketing Agreement. These things will sometimes cost money, and the industry still has to deal with creating a culture that looks to pay up for food safety.
Of course, announcements such as that by Taylor Farms and Dole Fresh Vegetables are friendlier than a price increase without explanation, but the reality is that prices are really determined not by costs but by the market. After all, if prices were determined by costs, then every business would be profitable.
This is the problem with fresh-cut processing as a business. Building large processing plants is a capital-intensive process; training staff and maintaining a production, food safety and sales infrastructure is expensive.
Most of these expenses don’t fluctuate based on volume, so if a plant is not running at 100% of capacity, the temptation is to sell cheap. As long as one can cover the marginal cost of producing an extra bag of product, selling more product cheaply will reduce losses.
One can’t build a successful business by covering only the marginal cost of production. One must cover total costs including a return on capital employed in the business to have long term success.
This is why airlines get in trouble. It constantly makes sense for any individual airline to sell seats cheap to use unused capacity, but the industry as a whole goes broke because it has to buy, fuel and staff the planes
Which all points to this: It is important for the industry that price increases related to food safety efforts stick. Companies unable to pass on food safety costs will be reluctant to invest in food safety.
Yet prices will ultimately be determined neither by company proclamation nor by the willingness of customers to absorb the increase — prices are determined by supply and demand.
It is in a robust industry where customers clamor for the product that one is likely to find sufficiently profitable vendors looking to do the right thing. And that means we need increased demand if we are to maintain all our rapidly increasing capacity.
So it turns out that the way the buyers who signed the Buyer-led Food Safety Initiative can really help food safety is by doing what they do best: effectively marketing and merchandising product so as to increase demand.
This means that we may have reached a good moment in the history of the spinach crisis. It may actually be time for us to all focus on selling more produce again. Hallelujah!
The Board of Directors of the California Leafy Greens Marketing Agreement extended the time period for handlers to sign up for the agreement until May 18, 2007. This is a power that wasn’t completely evident from the Agreement documents but, apparently, has been given the OK by the lawyers as long as those that sign up late are still assessed retroactively from April 1, 2007.
So far it seems that two companies have become signatories since the initial list was published:
ALBA Organics, Salinas
Field Fresh Farms, Watsonville
Field Fresh Farms produces for companies such as Capurro Pacific International Marketing and Mills so its participation would be expected.
The ALBA Organics decision to join is interesting. The Agriculture and Land-Based Training Association explains its mission as such:
The Agriculture and Land-Based Training Association generates opportunities for farm workers and limited-resource, aspiring farmers to grow and sell crops from two organic farms in Monterey County.
Our mission is to advance economic viability, social equity and ecological land management among limited-resource and aspiring farmers. In pursuing its mission, ALBA aims to contribute to a more just and sustainable food system through the development of: 1) human resources that will be tomorrow’s farmers and sustainable agriculture leaders; 2) growing marketing alternatives for small-scale, limited-resource farmers; and 3) the enhancement of biological diversity and protection of natural resources — all necessary components of such a food system.
Our overall goal is to create greater economic opportunities for small farms while promoting ecological land management and healthy local foods. Objectives accomplished in pursuit of this goal include training in organic farm production, marketing, record-keeping, labor law, pest management and numerous other topics related to operating a small farm business.
It is an interesting organization, and its decision to join shows how deeply the California Leafy Greens Marketing Agreement has reached into California agriculture. Really an unprecedented achievement for a voluntary group.
Looks as if Ready Pac isn’t letting the money raised in its recently announced deal with Bayside Capital burn a hole in its pocket:
READY PAC FOODS, INC. ANNOUNCES
HIRING OF SEVERAL SENIOR SALES PROFESSIONALS
California-based Ready Pac Foods, a premier producer of convenience fresh foods, including fresh-cut produce, announces the hiring of several senior sales professionals and reorganization.
Robert Spence will be joining the company as Division Vice President, Retail Sales and will be responsible for development of Ready Pac’s business in multiple Central and Western U.S. markets. Robert left Ready Pac two years ago to join Pacific Tomato Growers as Vice President Business Development. Robert also serves on the UFPA Marketing Committee, PMA RFID Committee as Chairman and PBH Marketing Committee as Chairman.
Tip Murphy will be joining the company as Division Vice President, Retail Sales and will be responsible for development of Ready Pac’s business in East Central and North East markets. Tip is a long time industry professional who spent 13 years with Chiquita and most recently Paganini Foods. Tip has served on many industry boards and currently is a member of the PMA Board of Directors.
Scott Harrington will be joining Ready Pac as Vice President, Business Development with a focus on new channel development and key customers in the Southwest. Scott also spent several years with Ready Pac from 1991 to 2000, in the Foodservice, Military Sales and Retail segments. Most recently Scott was Western Region Sales Director for Monterey Mushroom. Scott also has a strong history of industry service having been involved with UFPA, ALA/Southern California for DeCa and the Fresh Produce and Floral Council of Southern California.
Alan Ediger, currently Western Sales Vice President and Steve Bonaro, currently Eastern Sales Vice President for Ready Pac, will continue in their roles with a more focused geography.
These new senior sales professionals will report directly to Mike Celani, Senior Vice President Retail Sales and Marketing.
In addition, Tammy Gainey and Brian Orr will be joining the company. Both will hold the position of National Account Director. Gainey will be located in Bentonville, Arkansas and report to Robert Spence. Orr will be located in Pleasanton, California and report to Alan Ediger.
Celani stated, “Ready Pac has a very ambitious growth strategy and I am extremely excited to have talent and experience of this level joining the Ready Pac team. Bringing aboard people with proven track records and a clear dedication to the industry, speaks volumes about Ready Pac’s commitment to being a customer-centric, innovation driven supplier.”
It seems like just yesterday we were announcing that Tip Murphy had joined Paganini. With 13 years at Chiquita, Tip is not the type to move around. So the opportunity at Ready Pac must have been pretty good.
Congratulations to Ready Pac and its new team. Money and talent combined can go a long way. Let us see where it takes these folks and Ready Pac.
With Tesco’s announcement that it would open a chain of small food stores in Japan and its previously announced plans to open a series of small supermarkets in the U.S., while Wal-Mart remains focused on its supercenter format, the battle between Wal-Mart and Tesco seems to resemble that between Boeing and Airbus.
Airbus has been in the news as it prepares for the much delayed launch of its Airbus A380, a superjumbo plane larger than a 747. Depending on configuration, the plane can carry as many as 840 passengers in an all-coach configuration as opposed to 568 in an all coach configuration of the Boeing 747.
Boeing, in contrast, is focusing on its Boeing 787, aka the Boeing Dreamliner. This is the first airliner to be made mostly of light-weight carbon fiber instead of aluminum. Crucially its range will be over 8,000 nautical miles, roughly enough to travel non-stop a third of the way around the world, making possible city pairs that had not been possible before. It is much smaller than the A380.
Obviously each plane has its distinct characteristics, and the ultimate success of any business is heavily influenced by effective implementation. But, at its core, the two planes are expressions of the two companies’ differing visions of the future of aviation.
Airbus looks at the world and notes that it is almost impossible to build a new airport today what with environmental activists and political outcry over noise and development. Even building additional runways can take decades. With the population growing, affluence in nations such as China and India opening air travel to many people, and increased international trade, the demand will surely be there for more air travel.
With restricted supply of take-off and landing slots, plus increased demand, Airbus would say that the only way to meet that demand will be for larger aircraft that can use the limited take-off and landing capacity more fully.
Boeing looks at the world and says that the old hub-and-spoke system is going to be deemphasized. It notes that in the U.S., deregulation led airlines such as Southwest to serve more destinations on a point-to-point basis, without funneling people through hubs.
So instead of two massive hubs, say Los Angeles and Tokyo, between which North American and Asian traffic will be funneled, Boeing sees direct flights of smaller capacity but more fuel efficient and longer range aircraft. So instead of a trip from say Salt Lake City to Bangkok involving a trip from Salt Lake City to Los Angeles then from Los Angeles to Tokyo, then Tokyo to Bangkok — Boeing’s vision is a direct flight from Salt Lake to Tokyo, maybe even a direct flight from Salt Lake to Bangkok.
This means that large capacity planes aren’t desirable because there isn’t the traffic to support large planes on these point-to-point routes.
So far the market says Boeing is winning the battle. The company has already sold enough 787s to be profitable if it can produce the plane it promises. Airbus has had more cancellations than orders lately for the A380. Although technically a marvel, and the plane may yet come into common use, the high cost of delays means that it will be difficult for Airbus to ever earn a reasonable return on its investment.
One wonders if Tesco’s decision in both the U.S. and Japan to launch a small scale concept isn’t influenced by the British real estate situation in which launching large Greenfield stores, such as the typical American Wal-Mart Supercenter, is increasingly difficult.
Perhaps Wal-Mart’s lack of urgency in responding to the Tesco invasion in the Southwest is influenced by its experience in which it is still possible, even if difficult, to build large stores. And Wal-Mart has found it so much more profitable to build the large stores that it neglects smaller opportunities.
Everyone always says that their overseas activities are driven by local management but, in the end, it is the home team that has to approve capital allocations in the hundreds of millions of dollars. It would be surprising if these top executives could always transcend their own experiences.
Our piece, Pundit’s Mailbag — PBH/Imagination Farms Alliance Questioned, which was based on a letter received after we ran our article, Imagination Farms/Disney Garden Score Big With PBH and Pixar, has continued to cause consternation among many who question the propriety… or the prudence… of PBH in deciding to enter a “strategic alliance” with one particular produce company, even while soliciting support from direct competitors.
Among those most concerned are several members of the PBH Board of Directors who tell us they were never even consulted about this “strategic alliance.” Now PBH has an unusual Board structure, in which PBH basically assigns Board seats to companies based on a $10,000 contribution, so the Board is very large and a lot of work gets done in the Executive Committee. Perhaps it was discussed there.
Still, this type of decision, a self-proclaimed “strategic” decision, is what you would expect to come before the Board. Especially because this very large Board would quickly bring to the surface competitive factors that might make PBH think twice about this whole matter.
If the Board is too unwieldy to be used in this way, it may point to a need for structural reform at PBH so that governance can be effective at helping the foundation achieve its goals.
PMA has launched a substantial communications campaign to enlist the produce industry in the battle to pass the AgJOBS bill. In fact, part of the communications effort is the banner ad you see to the right of this article.
If you click on the logo, it will bring you to PMA’s Advocacy Action Center, which is filled with all kinds of resources for people to easily call or e-mail their elected officials.
The whole concept is interesting for the industry. PMA has long struggled with what precise role it should play in government relations for the produce trade. PMA has many members who are not members of United and, consistently, its survey work has indicated that these members look to PMA to handle their representation in D.C. for them.
Though PMA has long interacted with regulators and the media and participated in many coalitions to advance the interests of the trade, it is United that has done actual lobbying on the Hill.
Unlike Western Growers, which has decided to open a Washington office, even if there is a price to pay in industry unity and effectiveness, PMA didn’t want to be seen as stepping on United’s toes or duplicating industry efforts.
So what should PMA do to serve its members and remain relevant in government relations?
Some smart people came up with the idea of using PMA’s greater reach among the buying end of the industry to pull these segments along and turn them, de facto, into advocates for grower interests.
It is really a brilliant strategy. The argument being made to the buying end is this:
How Long Can Your Profits Run On Empty?
Support AgJOBS to Keep Workers in the Fields And Produce on Consumers’ Plates Act Now!
Each year, more than $90 billion in fresh produce is sold to consumers through supermarket and foodservice outlets.
But without enough labor to grow, harvest, and pack fresh fruits and vegetables, there will be shortages that impact the entire supply chain, and your bottom line.
In other words, PMA is saying that although the production end of the industry may be the one directly impacted by a labor shortage, a shortage of product and a reduction in the number of workers (read it as shoppers) hurts the whole supply chain.
It is a good strategy, and by pulling the buy-side in makes our total industry advocacy efforts more effective and provides a great way for PMA to be relevant and do meaningful work.
It is well worth exploring the web site, and this tool can be used in the future on other industry issues, but whether it will be enough to pass AgJOBS is another question entirely.
We’ve dealt with AgJOBS and the broader questions on immigration reform several times, including letters from Jim Allen, President, NY Apple Association here and here and broader pieces here.
The problem is not really any massive opposition to AgJOBS. The problem is that such a narrow point — agriculture needs more workers — tends to be buried under a multiplicity of issues ranging from national security to questions about the cultural preconditions of democracy.
PMA’s communications effort is just one facet of the trade’s effort to pass AgJOBS. United Fresh is hosting, along with USApple and the Agriculture Coalition for Immigration Reform, an Immigration “Fly-In” May 16th in which agricultural organizations across the country will bring in members to lobby on the Hill for immigration reform. It is the third one this year, and anyone who wants to attend can register for free by downloading this form.
The big push is because the only hope of passing the bill is if the saliency of the ag worker shortage is raised in the minds of Senators and Representatives and members of their staffs.
It is not going to be easy and there are many in produce who want to see more focus on things like mechanical harvesting to reduce the need for farm labor. But if there is a shot to pass this bill it is now, before the next election race heats up.
United Fresh has been working on this for a long time and deserves some applause as does PMA for finding a way to further industry interests without duplicating the efforts of others.
Our piece, Justifying WGA’s Washington Office, focused on the fact that most regional associations won’t spend the kind of money involved in opening and staffing an office in the nation’s capital unless they had an agenda distinct from that pushed by the national associations.
One knowledgeable regional executive shared our concern:
Good job on the WGA piece — at least from where I sit. I totally agree with the Pundit. We probably could make a lot of money taking bets on when the public split with United will burst upon us. My guess is, not long.
This is not a minor problem for the industry. The way Washington works is that competing “factions,” as James Madison explained in Federalist Number 10, would vie against each other. In a continental scale republic, these factions would be diverse enough that there would be no permanent majority to oppress a permanent minority.
Of course, if the produce industry starts to war against itself, with WGA articulating a vision different from that of United, what will happen is that legislators will feel more free to dismiss the pleadings of the produce industry all together and pay attention to other, more united, interest groups.
This doesn’t seem like a scenario likely to advance the interests of the produce trade.