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!
