Look Beyond The Industry

By Jim Prevor, Editor-in-Chief, Produce Business

When FDA used its authority to institute a de facto ban on the sale of spinach, tomatoes, and jalapeños, those were all examples of market disruption. When the prices of agricultural inputs rise, as fertilizer has, for example, that is just an example of markets.

As Bryan points out, everything has to be considered in context. Consumer research is vital but, as is always the case, the answers you get depend on the questions you ask. If you ask consumers what they will do in the event bus fare will go up — they will say ride the bus less frequently. But if you mention that train fare and gas prices are also going up, they may say they have no alternative but to pay it as they have to commute to work.

If chicken prices alone go up, beef sales probably will rise as consumers substitute. If both go up proportionately, there may or may not be a change in consumption. Possibly consumers will try to keep their “meat and poultry budget” to a fixed dollar amount and thus switch to the cheaper item, but maybe not. And much depends on whether that price switch is isolated or part of a general inflation. If it is a broad-based inflation, then wage earners may be getting raises and it will not impact their consumption very much. Some segments of the population — say pensioners on fixed incomes — may have to reduce consumption substantially.

Equally with fresh produce, if prices rise, we have seen no indications in the consumer surveys that indicate consumers will be reducing consumption of food except in the most extreme of economic situations. If consumers are going to eat just as much as ever, then they are unlikely to significantly reduce fresh produce consumption unless fresh produce prices rise disproportionately.

Right now that is not happening, and the reasons it could happen are mostly public policy questions. If immigration is severely restricted, for example, then harvesting labor may go way up in price. If we can’t automate economically, the cost of domestically grown fresh produce may go up disproportionately. This could lead to the substitution of foreign-grown produce for domestically grown.

If food-safety rules are imposed on the growing of produce for sale as fresh, and such rules are expensive to implement, but such rules are not applied to produce that is canned or frozen since all of this product is cooked or blanched, one might see a consumer shift to less expensive frozen or canned product.

Of course, none of this has happened. What has happened is a more generalized inflation, especially of costs such as transportation and fertilizer tied to fuel prices. This has left in the lurch those producers who agreed to fixed-price contracts for a year or two.

Inflation is resurging now, and this means producers need to be cautious about signing fixed-price agreements. They either have to use adjustment clauses or learn to use sophisticated hedging strategies involving petroleum futures and other proxies for their costs.

On the broader issue of sustainability, the core of the matter is actually outside what any company in the industry can actually do. Companies have to operate within the economic environment developed by government policy. Otherwise, their competitors will drive them out of business, so company-directed sustainability efforts can only be effective on the margins — better use of energy, etc.

The big questions are social. If immigrants, for example, pose a social cost, say for free medical care, but immigration is not restricted nor costs imposed on their employers, it will be difficult for a competitor to unilaterally spend the money for expensive mechanization. The promoters of sustainability are fundamentally expressing a belief that things we do in society — including food production — impose costs on society that are not being accounted for in the product itself. The most obvious claim is that by expelling carbon into the environment in the course of producing food, we are promoting global warming and that global warming will impose great costs on society.

There are other claims. The industry uses a lot of water and the allocation of that water may have been more influenced by politics than social good. Pesticides may have impacts on people or workers that have not been fully accounted for.

There are many specific issues. The key question is how these issues are resolved by society. If the government decides to trump the market by instituting bans and mandating performance — say by mandating the use of ethanol or electric cars — we will indeed have market disruption and will, as a society, be much poorer than we could have been. If the government decides to use market forces to correct what economists call externalities by, say, imposing taxes on carbon output proportionate to the expense such output imposes on society, we will not have market disruption but instead, the market itself will act as it always does to move our consumption from resources that are scarce to those that are plentiful.

Whatever the government does, there is no question that change is a constant. As to whether, as Bryan suggests, such change shall be an opportunity or challenge, we are reminded of the Chinese symbols for crisis pronounced wei ji.

Wei means danger or peril, and ji means opportunity or crucial point — so the Chinese remind us in their very language that a crisis is always a situation combining both danger and opportunity. Sound advice from an ancient civilization.