We’ve had several occasions to mention Billy Heller, CEO of Sunripe Produce. For example, it was a great exchange between Tom Holbert of Wal-Mart and Billy that led us to write a piece entitled, Wal-Mart Continues To Change Its Buying Practices, which kicked off a major discussion regarding Wal-Mart and its place in the produce trade.
Then Billy participated in a panel discussion at United that led us to write ‘Take-Aways’ From United’s Short Course On Organics, a piece that included Billy’s frank assessment of the issues regarding organics.
Now, our article, As Immigration Bill Comes To A Vote, Questions Surface On Farm Wages, led Billy to send this missive:
I am generally not inclined to engage in discussions that amount, in my opinion, to speculation on what the immigration package in Congress will look like when it is finally born. In fact, I doubt we can accurately predict how any such animal will be given regulatory teeth, since that is really what we have to live with.
To the point, I would like to suggest to you that ‘farm worker’ is not a term, used by those of us vertically integrated companies, restricted to those who labor in growing and harvesting our crops. According to the Fair Labor Standards Act, the term ‘farm worker’ applies to those who labor in the field and in the packinghouse. That is how we think of the farming labor pool and our cost structure.
That said, I am sure you know that with rare exception the farmer is a price taker, regardless of the labor cost. In fact what generally determines the price bottom, again for the vertically integrated firm, has no bearing on farm cost but the covering of the variable costs associated with harvesting, hauling to the packing shed and packing (including the cost of cartons).
Since farm cost is a sunk cost that we hope to recover (from the gross revenue less pick, haul and pack) to generate a competitive rate of return (remember we are price takers), the concept of passing on our labor cost increases is novel at best. The cost increases are another factor to be applied to our decision tree.
What will happen, I believe, is that farm acreage will continue to contract, reducing supply, and therefore commensurately increasing the bid play in the market, increasing the returns to those few who have deep enough pockets to be survivors. Consumers will pay more, until overseas markets, who do not have to abide by the same rules (social, environmental, labor to name a few) under which we operate, find a way to fill the supply void and drive down the returns of the few survivors.
I personally appreciate the time and thought you put into your commentaries. Will Rogers would respect your work as a social observer, I think?
Thank you for the opportunity to provide additional input for your consideration.
— Billy Heller
We appreciate the comparison to Will Rogers, who among much else advised something apropos to the issue of immigration and farm labor: “The more that I learn to read the less I learn how to make a living. That’s one thing about a little education. It spoils you for actual work. The more you know, the more you think somebody owes you a living.”
Which pretty much sums up the great dilemma of the produce industry: We can’t want to block immigration because the affluent — if not always well educated — Americans are unwilling to do the work at a price that would keep us competitive in the world market, if they are willing to do it at all.
Yet we can’t simply urge increased immigration because there are loads of people with PhDs, engineering degrees and medical degrees who want to come to the U.S. Most are as unlikely to pick the fruit as Americans. In fact, even people without education will typically prefer other jobs.
So we wind up looking for special guest worker programs whose primary purpose is to bring people to the United States who are blocked from doing any work other than these special categories we have selected.
One of the big issues in the immigration debate is that high-tech and pharmaceutical companies cannot fulfill their needs for highly educated and specially trained employees. There simply are not enough U.S. citizens with specialized degrees, especially in math and science, to meet the need.
In addition, brilliance is not solely a matter of education. So it is not clear that any amount of education will solve this problem. Yet High-tech titans strike out on immigration bill was the title of an article in the New York Times about how the Senate has rejected their entreaties to allow them to bring in more of the “best and the brightest.” In fact, after a phase-out period the law as currently drafted eliminates the ability of companies to bring in any employer-sponsored immigrants.
So we wind up arguing that it is more important for the country to bring in a worker to harvest produce than to let a pharmaceutical company bring in a PhD/MD doing fantastic cutting edge research on drugs to cure cancer. There are arguments that can be made: security of food supply in war time, the environmental advantages of keeping farms active, expanding the stock of civic virtue by maintaining a class of yeoman farmers. These are all arguments, but they are not an easy sell — particularly with produce. After all, are kiwifruits really essential to the national security?
It stands as testimony to the hard work and shrewdness of United Fresh and other produce organizations that working along with the plant and nursery people, our industry leaders have miraculously kept produce industry interests in the forefront of this compromise immigration bill.
Yet, long term, we still don’t know the actual effect of the total compromise. The problem is that it is believed a large percentage, probably a majority, of the existing produce industry workforce is illegal. The compromise bill would provide a path to legalize the status of these people. Once legalized, how many will continue to work in produce?
Will this be more or fewer people than are brought in through a Guest Worker program? Nobody knows.
Billy makes two points that are crucial to remember as we discuss this issue.
- That until the law passes the Senate, in what will probably be a highly amended state, and gets through the House, which doubtless will have its own amendments and go through a joint committee to reconcile differences in the Senate and House bills. is approved in its revised state by both houses of Congress and finally signed by the President, we don’t know what the law will actually say.
- Even if we did know, the devil is often in the regulations drafted to enforce the bill and that won’t be clear for months, sometimes years.
So it is, of course, hypothetical, at best to know the actual impact of this immigration law since we neither know how it will ultimately be drafted nor how it will ultimately be enforced.
Billy also makes a trenchant commentary regarding a quote we gave from a U.C. Davis study:
In order to determine how much raising farm worker wages would affect food prices, we have to know: (1) the farmer’s share of retail food prices, as well as; (2) what share farm worker wages and benefits are of farmer revenue or costs. For most fruits and vegetables, wages and benefits paid to farm workers are about one-third of a farmer’s costs. Thus, farmers who get about $0.16 for a $1 pound of apples, and $0.19 for a $1 head of lettuce, have farm-worker costs of 5-6 cents on a typical $1 retail item of produce.
How much would farm worker wages increase if some of these immigrant workers were not available? In 1966, one year after the end of the bracero program, the fledgling United Farm Workers union won a 40 percent wage increase for table grape harvesters. Average hourly farm-worker earnings were about $7.56 for US field and livestock workers in 2000, according to a USDA survey of farm employers, and another 40 percent increase would raise them to $10.58.
If a 40 percent farm-worker wage increase were fully passed on to consumers, and if there were no farm productivity improvements in response to higher farm wages, the 5-6 cent farm labor cost of a pound of apples or a head of lettuce would rise to 7-8 cents, and the retail price would rise from $1 to $1.02-$1.03.
A large increase in farm wages translates into a small retail cost increase because: (1) farm labor is a third of farmers’ costs; and (2) farmers receive only a fraction of the retail price of food. For a typical 2.5-person consumer unit, a 40 percent increase in farm worker wages that led to a three percent increase in retail fresh fruit and vegetable costs would increase the spending of a typical consumer unit by $9 a year, raising expenditures from $301 to $310.
But Billy points out:
“…I am sure you know that with rare exception the farmer is a price taker, regardless of the labor cost. In fact what generally determines the price bottom, again for the vertically integrated firm, has no bearing on farm cost but the covering of the variable costs associated with harvesting, hauling to the packing shed, and packing (including the cost of cartons). Since farm cost is a sunk cost which we hope to recover (from the gross revenue less pick, haul and pack) to generate a competitive rate of return (remember we are price takers), the concept of passing on our labor cost increases is novel at best. The cost increases are another factor to be applied to our decision tree.”
And he is, of course, correct. Farmers have the same problem as airlines. Airlines have enormous sunk costs in buying airplanes, gates, staff, etc. Because the marginal cost of filling an empty seat on a plane is so low, the airlines sell cheap seats, which maximizes profit short-term. Long-term, however, all the airlines’ cheap seats means no airline can earn enough to cover its fixed costs.
So a farmer, having grown a crop, picks and packs it as long as he can cover his marginal cost of doing so — though the farmer often fails to cover his fixed costs.
Yet, obviously, though true, this is not the whole truth or farmers would all be bankrupt.
It brings to mind Warren Buffet’s comment about the stock market that in the short term it is a voting machine, but in the long term it is a weighing machine.
So the vagaries of supply and demand mean farmers can lose money any day, any week, any season — but long term, if farming is not profitable, farmers will go out of business. This will reduce supply and thus re-sort supply and demand so that farmers can be profitable again.
Billy lays out one possible scenario:
“What will happen, I believe is that farm acreage will continue to contract, reducing supply, therefore commensurately increase the bid play in the market, increasing the returns to those few who have deep enough pockets to be survivors. Consumers will pay more, until overseas markets, who do not have to abide by the same rules (social, environmental, labor to name a few) under which we operate, find a way to fill the supply void and drive down the returns of the few survivors.”
In fact, Billy is hitting upon the key objection of the left to foreign trade. The political left in the U.S. would like to impose all kinds of standards — working hours, working conditions, environmental rules, etc. Many have already been imposed and many more proposals are in the works.
Inevitably, this leads to protectionism and, in fact, explains that popular opposition to “Globalization” and the political opposition to giving the President authorization to negotiate free trade agreements. After all, as Billy points out, if we have all these regulations, we won’t be able to compete with places where life and labor are cheap.
Which is why Democrats are demanding so-called “side agreements” on things like labor and the environment before they will allow any free trade agreements.
Aye, but there’s the rub. On the one hand, the political left would like to see our employment and environmental standards enforced everywhere. On the other hand they want to help underdeveloped countries to advance. Yet the comparative edge these countries have often is low wages. So to prevent them from using that advantage is to condemn them to perpetual poverty.
So all our efforts are always half-hearted to universalize standards and thus Billy’s scenario has a high likelihood of coming to pass.
Unless… The point of our piece on farm wages was to point out what a small percentage of the retail price of produce involves payments to pickers and packers. Perhaps thinking in this way could open an opportunity, particularly as there are many costs of immigrant labor — emergency rooms, jail cells, crime, etc. — that are not captured in the produce price but socialized among the general public.
The obvious opportunity is to mechanize more with efforts such as we discussed here. Investing federal and state dollars in this research might well be profitable if it reduces expenditures on health care, police, prison, etc.
We could also invest more in GMO research, as producing advanced proprietary products may be more important than having the cheapest price.
In the end, we suspect that though there may be delaying actions the industry can take, prosperity in the U.S. will not come from being the cheapest. It will come from being the best.
That is what Professor Tom Reardon of Michigan State was implying in his letter, and it is probably the only way to go.
Shrinking agricultural acreage may not mean much. More and more product is being grown in greenhouses or quasi greenhouses with yields multiplying. We can imagine a future in which Controlled Environment Agriculture combines with genetically modified produce and production expands on far less acreage than we use today.
Already massive bounty is produced in greenhouses. It is not far-fetched to imagine additional greenhouses near New York, Boston, Chicago and other major cities. When you consider that in many cases transportation costs more than the produce, and with global concern over carbon emissions, and the food safety risks of field grown produce, the future of produce may be a world apart from what we know.
It is our job in this industry to write the plan for the future that is going to happen and, inevitably, the prospect of change in the future will scare a lot of people but there is no choice. We can’t just keep doing things the way we were taught, because the world is changing. As Will Rogers said: You’ve got to go out on a limb sometimes because that is where the fruit is.
Many thanks to Billy Heller for guiding us in such a fruitful discussion.