August, 1992

Fruits of Thought

Call In The Ump

One of the key trends of the last generation has been the growth of international trade, and one of the key challenges of the next generation will be for American growers to expand their market overseas. What kind of system can be put in place that might make life easier and business robust for those exporting American produce? Are there lessons from the domestic industry that we could apply to expanding U.S. exports?

The produce industry in the U.S. is truly an amazing place to work. I remember when I first started buying fresh fruits and vegetables how amazed I was that with nothing more than a phone call, people were prepared to ship tens of thousands of dollars worth of produce. It seemed to me that the industry was truly based on trust.

With the passing of time, however, I’ve realized that, though trust is important in almost any commercial transaction, the produce industry actually is based on a web of very specific and complex rules, first developed as industry customs codified by the Produce Reporter Company and eventually given the force of law through PACA.

The rules that are followed in the produce trade wouldn’t work without “umpires” agreed to by all parties. In the U.S., there are two important “umpires”; the first is the USDA inspection service. Many grumble that inspectors are often biased toward the people in their own region, sometimes throwing something in or out of grade to the benefit of the local wholesaler or shipper. And, of course, there are problems with payoffs and just plain ignorance. But the amazing thing is that with all these problems, USDA inspectors still are accepted as the arbiters if a product is not making grade, not making good delivery, etc.

The other key umpire is the PACA, of course, and the right of industry members to bring cases before the PACA to be arbitrated in accordance with the PACA rules. This can usually be done inexpensively without personal appearances and attorneys.

The system that operates so well domestically is lacking in international trade. As a result, international trade is risky and so those who engage in it generally have to mark up the product to account for this risk. This riskiness helps to depress sales from the levels that would have been obtained in the absence of risk.

Overseas business is very complicated, in large part because there is no faith among U.S. shippers in the inspection reports done by overseas surveyors. In part, this is because these reports done by overseas surveyors are of uncertain knowledge and training. And in large part it is because the U.S. trade knows that the inspectors are hired by the overseas importers and, knowing on which side their bread is buttered, the surveyors slant the report to the importer’s interest.

Exporters in the U.S. are convinced that importers overseas often use the surveyors of produce as a way of gaining an allowance when the market is bad overseas. In other words, if the real problem is that the market has declined since purchase, the overseas importer “creates” a bad survey to justify not paying the bill. On the other hand many importers feel that U.S. growers ship produce that is not suitable for export or they don’t load and pack it with the care that export requires.

There always are going to be some bad arrivals. So the point is that the industry needs a referee — someone whose opinion both sides could accept, and with a procedure put in for appeal inspections.

Many overseas importers have actually suggested that the USDA put inspectors overseas so that if an importer reports a bad arrival, the exporter could order a USDA inspection. This does not seem like a bad idea to me. It could be self-funding through the inspection fees, and it would at least give the U.S. shippers an inspection they could trust.

Of course, many overseas importers might not be willing to accept the USDA as an authority, accusing it of bias. But couldn’t some U.S. trade association, such as United, PMA or even the Western Growers Association commission one surveying company in each country as the official surveyor? Perhaps they could even act jointly with importers’ associations in the various countries. This way the surveyors would know that their continued employment depends not only on the overseas importers’ satisfaction with their surveys but also upon the U.S. exporters’ satisfaction with their work.

Having legitimate surveys that both parties agree upon is an important start, but other steps have to be implemented to ensure the easy flow of commerce. For example, good delivery standards have to be established for export so that surveyors have a standard to work against. Then mechanisms have to be put in place so that everyone is treated fairly when a problem occurs. Perhaps the importer should have the right to reject product that doesn’t make good delivery. Perhaps the exporter should have the right to consign the produce to a different importer or wholesaler if he doesn’t trust the importer who brought the product over.

But most importantly, we need a legal mechanism to enforce claims without having to resort to courts and lawyers. The Blue Book, for example, has an arbitration service wherein Trading Members agree to let the Blue Book arbitrate disputes. Perhaps exporters and importers could join a similar organization and agree to arbitrate disputes. Perhaps they could post a bond with the association ensuring that failure to perform in accordance with the arbitrator’s decision would be costly.

In any case, the situation as it stands now is not helping U.S. growers expand their market overseas. The truth is that the international trade of produce is, in many ways, at the same stage the domestic industry was before the rules were set up by the Produce Reporter Company and PACA. It is a substantial business, but without the settled procedures that would create maximum efficiency and fairness. But with international trade in every newspaper and on everyone’s lips and with shippers desiring to expand markets worldwide, now may be the moment to set up a new mechanism for efficient trade.  pb