June, 1991

Fruits of Thought

Dumping Kiwi

In December of 1990, a vessel left New Zealand filled with kiwi. The destination was Japan. As the boat steamed north, political pressure from Japanese kiwi growers began to build, and the word went out that bringing the kiwi to Japan could lead to great difficulties for the New Zealand kiwi industry.

Back in New Zealand, the decision was made to divert the boat to the United States, despite the fact that North American representatives of the New Zealand kiwifruit industry had given assurances to the California kiwi industry that no boats would arrive in the U.S. in December. These assurances were verbal, and probably were in violation of U.S. laws on restraint of trade.

The decision of New Zealand authorities to disregard the promises of the local staff has enraged the California kiwi growers. An ad hoc committee formed by the California Kiwifruit Commission filed an anti-dumping petition aimed at the New Zealand kiwifruit industry.

There are many legitimate claims that can be made against the New Zealand kiwifruit industry. From its roots in New Zealand, trade is restrained by an anti-competitive, legally compulsory marketing strategy. Every New Zealand kiwi grower must, under penalty of law, market his crop through an officially mandated single desk sales system. As part of this system, it is illegal for an American citizen to go to New Zealand, buy kiwi, and ship it to America. In the U.S. there is a master agent situation which is, de facto, a monopoly.

Just imagine the outcry that would result if an important industry facet, such as Chilean fruit or Mexican produce, announced it was going to have one master agent in charge of marketing product for the whole U.S.! The outcry would be immediate and enormous, and the time it would take for retaliation by our U.S. authorities would be days, not weeks.

Of course, despite the sins of the New Zealand kiwifruit industry (or to be more specific, the New Zealand government’s willingness to mandate a marketing structure), and the many legitimate grievances that can be made about the structure of New Zealand’s marketing effort in the U.S., the complaint by the California kiwifruit growers is not on any of these subjects. It is an allegation, instead, that New Zealand kiwifruit is being dumped at less than “fair market value” in the United States.

A concept such as “dumping,” though unclear for many items, is positively ridiculous when it comes to fresh fruits and vegetables.

The two most frequently used definitions of dumping are the sale of an item either A) below the sales price in the home market or B) below the cost of production. Neither of these definitions is very useful in analyzing fresh produce. Sale price in the home market can’t be used if less than 10% of sales are in that market. So in the case of New Zealand kiwi, which is grown mainly for export, this measure doesn’t apply.

That leaves cost of production, usually figured utilizing an academic model called “constructed value.” This model factors in all costs of production, land, labor, cost of capital, etc. and adds in an 8% profit margin.

This academic construct may make some sense for some industries. It certainly defies logic in produce. Produce firms don’t set prices. They may try, but in general, they have to take the market price. That is why most imported produce arrives on consignment.

The market is determined by many factors but, since the produce is already grown and often even packed and shipped before the sale price is known, cost of production is not a relevant factor in the short term.

What does it matter to an apple shipper with apples sitting in a C.A. room what the cost of production was on that fruit? Long term, if people can’t make a profit on apples, they may stop growing them. But in terms of the day-to-day operation of the produce industry, what is relevant is only if the sales price will cover the direct costs of packing and shipping those apples in storage.

Produce regularly sells below “fair market value,” as figured by production cost. Prices fluctuate every day based on supply and demand. This is not an evil trade practice; it is normal commodity marketing.

Though kiwi shippers have more margin to hold out for better prices because kiwis have a long storage life, the pressures are still the same. Storage costs money and the vines, unlike a factory, don’t cease production because sales are bad.

The argument behind this petition, if successful, would undermine all U.S. produce exports to the gross detriment of the entire industry. After all, if New Zealand kiwifruit must sell at a minimum “cost of production” in order to be marketed in the U.S., surely other nations will leap to adopt that same logic. How many apple exports would be banned because some board in a foreign country, determines that apples are selling below their “fair market value” – and isn’t this type of determination most likely when the domestic market is weakest and thus prices are at their lowest? (In other words exactly when our domestic growers most desperately need foreign sales?)

The California kiwifruit growers are making arguments that, if universally applied, would spell disaster for U.S. produce exports. The industry would be wise not to let this case go unchallenged. What is best for California kiwi may not be best for the produce industry.  pb