December, 1998

Fruits of Thought

Lessons From A Disaster

If you want to know how different today’s produce world is from that of just a few years ago, just look at banana prices this year. In the face of almost unimaginable damage in Central America, literally wiping major producing countries off the produce industry map, prices were surprisingly moderate.

Perhaps the word “surprisingly” indicates a produce industry education in an earlier day. I remember when my family was involved in a growing operation in Puerto Rico. The focus was on Honeydew melons, but we also grew tomatoes and peppers. Many of these tomatoes and peppers would be sold in Puerto Rico, others were shipped to the States, but the economics were so marginal that it was often impossible to recover packing and shipping costs.

One year a disease befell the Honeydew crop, and we produced only a fraction of the expected production. However, Fate was kind to us, though awful to others, as we woke up one morning to news of a horrible freeze in Florida. Instantly the peppers and tomatoes became like gold. Even with the loss of almost the whole Honeydew crop, the freeze in Florida raised the prices on other items so high that it was a season of record profitability.

Until very recently, this was the story of a produce grower’s life. Sure, there were always tough times when production costs exceeded returns, but there were also moments of extraordinary profitability, moments when competitive growing areas suffered bad weather or disease.

The banana situation is instructive because the elements are likely to gradually play out throughout the produce trade. If so, we may need to rethink our attitudes toward grower profitability and much else.

In part, the relative stability of banana prices in light of the terrible losses in Central America is a function of worldwide production. Bananas are one of the more geographically concentrated crops, yet, as we saw, there was no problem in getting production from other countries.

This is, of course, a function of worldwide supply. It is relatively simple to shift bananas from Europe or local markets to North America. What boggles the mind is that one can completely remove the production of bananas from two major countries and still have no shortage of bananas.

These factors – overproduction and the geographic diversity of production – have been noted before, and growers have for several years been complaining that the old shortages just don’t occur with the frequency they once did. This time, however, a new ingredient was added to the mix with interesting results. This was the first time for a substantial loss on a crop with substantial contract buying.

Whereas most produce items are purchased on the daily spot market, most supermarket chains enter into contractual arrangements with banana companies to insure steady supply at fixed price.

The first notable point is that banana companies, to their everlasting credit, honored the contracts. All these contracts contain a force majeure clause; this allows an “out” for acts of God. Had these clauses been used, however, it might well have killed interest in contract pricing. When the history of the industry is written, this will be the moment when a contract became a real way to buy produce.

The second notable point is that most retailers did not try to profiteer, but, rather, maintained retail prices based on what they were actually paying. So 69-cent retail banana deals remained common.

In the marketplace, the existence of so many chains on contract had intriguing ramifications. Many brokers and wholesalers that speculated on bananas wound up losing their shirts. Why? With the big chains on contract, and selling at moderate retails, there was no desire to add high-priced bananas to their procurement mix. Chains not on contract knew they had to compete with contract-based retail prices, and so they bought the absolute minimum of bananas they needed, reducing banana display space.

In effect, the non-contracted retailers were between a rock and a hard place: If they sold bananas competitively, they would have to price below cost and lose money. If they charged a fair price based on their spot market cost, the retailers would look like crooks when the customer could see other chains selling at normal retail.

This all meant that there was simply no demand for these high-priced bananas, and some of the wholesalers and brokers were selling bananas at huge losses.

The world turns, and we turn with it, like it or not. The industry is profoundly different than it once was. Growers may need to make small but consistent profits because worldwide production steals the opportunity to make a killing. Traders and speculators may find that in the New World of contract pricing, the opportunities to take advantage of the “bounce” are fewer. Retailers may find that living without contracts means running the risk of not being able to compete.

Yes, we have plenty of bananas and a whole new way to think about them … and think about the produce industry.  pb