June, 1997

Fruits of Thought

Governmental Road Blocking

If you want a quick reminder as to why you should be hesitant to get the government involved in your business, take a look at the latest “clarification” issued by the Department of Commerce regarding the “Suspension Agreement on Fresh Tomatoes From Mexico.” This is the agreement, signed just before the last election, in which Mexican growers/exporters agreed to fix a minimum price of $0.2068 per pound. The Mexicans, under severe duress, agreed to this in order to head off an anti-dumping lawsuit by Florida growers, which could have shut down the Mexican tomato industry.

Predictably, people have been looking for ways around the floor price, and many found some ripe opportunities in the procedures for handling rejected loads and quality problems. To prevent circumvention of the agreement, the Department of Commerce has decided to intervene extensively, and bureaucratically, in the market system. All of a sudden, buyers and sellers of tomatoes are not free to negotiate allowances but are obligated to spend money on USDA inspections. Then, the Dept. of Commerce has decided that, for example, tomatoes having seven percent soft/decay condition are not eligible for a price adjustment; instead, those tomato experts in the Dept. of Commerce have decided that it must be over eight percent soft/decay condition.

The Dept. of Commerce also has decided that tomatoes which are deemed “defective” may not be sold, although a willing buyer, such as a processor, may exist. And the new regulations aren’t exactly even-handed; they prohibit, for example, pricing adjustments on tomatoes that are not delivered to receivers within two weeks. One exception though: mature-green tomatoes — the type, not all coincidentally, that happens to ship from Florida.

I could go on about the Dept. of Commerce’s document containing loads of restrictions incompatible with the free conduct of business. The truth is, however, that this kind of stuff is inevitable and will get worse as long as the Department is trying to enforce an agreement to maintain a minimum price, which by itself circumvents free market functioning.

The whole idea of dumping really makes no sense in the fresh produce industry. There are two classic definitions of dumping: Selling below the price in the home market and selling below cost. Many countries that export produce to the U.S. raise crops for the specific purpose of export to the U.S. What El Salvadorans may pay for melons in their own country really has no bearing on the overwhelming majority of the crop, which is dedicated for export.

Selling below cost also is not a relevant criteria. Commonly imported items have no ready market except the U.S., so the shippers stand prepared to accept U.S. market prices, whether high or low. In fact, most imported produce arrives in the U.S, on a consignment basis for the exact reason that the non-U.S. shippers depend on the U.S. market and simply can’t decide not to ship here. Growers all over the world, including the U.S., regularly sell below cost because that is the market clearing price at the moment. Over time, of course, everyone must sell above cost or they go out of business — but this fact is irrelevant to day-to-day trading.

Using legal and political means to keep a competitor out of the market is not unusual today. Indeed it is standard procedure in many big companies. In this sense, the Florida tomato industry’s efforts have been tactically brilliant. Strategically, however, they are likely to backfire, because, by using legal means to restrict market competition, the Florida growers are saved from the necessity of competing effectively. Perhaps, theoretically, one could justify restricting competition if Florida growers were to use this as a temporary window of opportunity as a kind of “calm before the storm” in which the growers and the industry transformed themselves into effective competitors. A few producers, notably Garguilo, seem to be trying new things: Developing new varieties, developing branded product, etc., and they will succeed in the long run. But most producers — and the industry as a whole — seem to be milking what profit they can from the old ways of doing business until the jig is up.

And in the end it will be up. For when I travel around the country talking to retailers, the key point is that they don’t, generally speaking, consider Mexican tomatoes inferior to the Florida product — they consider the Mexican product superior. Retailers praise the varieties, and they say consumers don’t want gassed-green product. Certainly, as an industry, Florida hasn’t begun to approach consumer marketing in the way that, say, the Washington Apple Commission has done. In fact, Florida has done little to make its case to the trade or consumers.

Ultimately, a product deemed superior that can be sold more economically is bound to win market share. The legal battle thus serves as a distraction from the real job at hand: Growing better tomatoes more economically, and promoting them more wisely. This can be done, but it will be painful, and as long as producers can stay alive using conventional practices, they probably won’t have the stomach to make the gut-wrenching changes required to succeed. In this sense the protection government offers is crippling. It is only by facing competitors head on that any industry really becomes strong enough to compete in the long term.  pb