February, 1992

Fruits of Thought

Death Of A Commission

When industry members are asked to comment on the demise of a long-established industry institution such as the California Iceberg Lettuce Commission, they will always find reasons to mourn its expected death. After all, people work for the commission and so will become unemployed, and that is always sad. Besides, the commission did many useful things and gave money to many organizations every year and so, no doubt, will be missed.

But don’t kid yourself. The problems of the California Iceberg Lettuce Commission are very real. In fact they are inherent in the nature of a lightly funded commission in a highly concentrated industry.

There are really only two justifications for a commission funded by mandatory assessments. The first is that, together, an industry can afford to do things that the individual shippers couldn’t afford to do themselves. The second stems from what economists call the “free rider” problem. This is the idea that even though everyone in a given circumstance might be in favor of a particular move, you often can’t achieve the move through voluntary contributions because some people take advantage of the fact that they can get the benefit of the program without contributing.

In other words, if all the Washington apple shippers agreed that a national TV campaign would be a good idea, and if it would cost each shipper 5 cents per box of apples to fund it, a voluntary appeal would lead some shippers to assume they could get the benefits of the advertising without paying for it. Their refusal to pay anything would lead the remaining growers to have to pay a higher amount, say 7 cents a box. Eventually, the remaining growers would find the campaign too expensive and so, even though everyone thinks the campaign is worth the cost, no campaign ever happens. Mandatory assessments prevent this problem of free riders.

That’s the theory behind commissions. To start with, a lot of growers don’t like them because they feel mandatory commissions are an unconstitutional taxation giving a majority of growers’ power over other growers. Many of us belong to homeowner or condominium associations, and though we may grumble about them sometimes, we can accept them because, usually, we agree in the deed to be a member and pay the dues, etc.

Just think how you would feel, though, if Congress or the state legislature gave your neighborhood the power, by a majority or even 65% vote, to put assessments on you to be spent for the good of the neighborhood. You might get perturbed even if the board spent the money wisely. After all, you might have had your own plans for the money.

The record of commissions is pretty unclear as an effective spender of money. Some of the boards and commissions are heavily into ag research and, generally speaking, growers seem reasonably happy with these boards, although there are plenty of growers who would be content to wait for seed companies and universities to fund ag research.

Retailers tell me that most of the commissions are quite weak. A lot of them spend money on P.O.P. material which many retailers simply refuse to use. The merchandising efforts generally receive low reviews. The basic problem is that commissions all seem to urge retailers to devote larger displays, more ads and more promotion to their particular commodity. Very few of the boards are prepared to go into a store and really help the retailer build his overall produce business.

Max Brunk, one of our PRODUCE BUSINESS columnists and a Professor Emeritus at Cornell’s Ag school likes to tell a story about some research he did decades ago for Roses, Inc., the rose association. Roses, Inc. had commissioned some research regarding the most effective way for food stores to sell more roses. The research found that since food stores tend to have the same clientele week after week, consumers would get bored if the store only carried roses. As such the research found that the best way to sell more roses was to encourage stores to carry a variety of flowers. This kept consumers interested in the floral offerings at the food store and led consumers to purchase more roses than they would have if roses were the only flower offered. Needless to say, the thought of urging stores to buy other flowers did not make the rose growers happy.

This type of thinking really limits the utility of many commissions. It is, in fact, impossible to know how much space should be allocated to Iceberg lettuce without also knowing how much space everything else should get. If a retailer gets recommendations from six boards to increase the display space for their commodities with no suggestions on what to cut, the whole commodity board message seems useless.

Of course the usefulness of the Iceberg Lettuce Commission is being challenged by the growers, and I confess that I question the sense of the program they ran. Out of a budget of around $2.5 million, about a million dollars went to ad allowances. I have always questioned whether they made sense. First of all, it seems that a well managed produce department would not disrupt its merchandising calendar for the small rebate it might get on the ad. And though I know the Iceberg Lettuce Commission has an elaborate methodology to make these funds only available for additional Iceberg lettuce ads, it seems likely that a lot of this money goes for ads that would have been run anyway.

Even if this ad program actually increases the number of times ads are run, I’m still not sure it helps the Iceberg lettuce industry. After all, when people put Iceberg lettuce on ad, they usually want to offer it at a good price. So all these ads lead retailers to go back to the shippers and ask for a lower F.O.B. because they are “on ad” that week. I know the idea is that the more ads, the more consumer demand for lettuce and thus the higher F.O.B.’s. But as the percentage of the crop sold “on ad” increases, F.O.B.’s may have to decrease to accommodate all these ad campaigns.

Regardless of this, the real question is who needs an Iceberg Lettuce Commission to give ads to retailers? Not Dole, not T & A, not Nunes, not Mann Packing, not D’Arrigo. In fact, in a highly concentrated industry such as the Iceberg lettuce field, with only about 75 handlers paying for the commission and only a handful counting for the bulk of production, it’s not clear that the commission was doing anything that these firms couldn’t do themselves.

Remember the question is not whether spending all this money does some good. The question is: does spending the money through a central commission do more good than spending the money through the individual firms? Dole was paying about half a million dollars a year into the commission. If Dole wants to, Dole can spend that money on promoting Dole Iceberg lettuce. This seems to make sense unless the commission does something Dole couldn’t do itself.

In other words the commissions that are likely to be in big danger are those where there are large growers that could promote themselves. I have to suspect that someone at Calavo, for example, must have looked and said, “Gee, we can sell an awful lot of Calavo avocados with that money our growers are paying to support a generic commission.”

There are some persistent difficulties with these boards and the growers. There is often a big cultural gap as the city-born merchandisers, researchers and executives of these groups try to communicate with the farming members.

But I think some boards are being very well received. Take a look at William Watson at the National Watermelon Promotion Board and you see a board that makes sense. First of all, it’s a national board and so doesn’t waste its time tying to establish distinctions without differences between the products of various states. Second it runs on a lean budget. William Watson doesn’t give the impression that he is squandering his growers’ money on employees and lavish headquarters. Third, the growers are mostly very small and so incapable of doing even the most basic promotion.

And maybe that’s the difference. The Iceberg Lettuce Commission puts out a brochure and the biggest lettuce shippers say it’s not as good as they could have done. Most of the watermelon shippers look at the watermelon board brochure and say they’ve never seen anything so nice.  pb