California Agriculture Marketing

California's advantageous climate allows it to produce a wide variety of agricultural products, making it the leading US producer for approximately 65 crops and livestock commodities. In 2002, the state's farm gate sales totaled $26.1 billion, with fruits ($6.0 billion), vegetables ($6.6 billion), and nuts ($1.8 billion) representing 55% of the total value. This dominance extends to the US horticultural sector, where California accounts for a substantial percentage of the farm gate value of key vegetables (37%), fruits (55%), and tree nuts (85%). The California Department of Food and Agriculture plays a crucial role in tracking and estimating these figures. This significant economic contribution underlines California's vital role in the national and international food supply chains.

A primary challenge for California's agricultural marketers is the perishable nature and seasonal production of many fruits and vegetables. Maintaining high product quality and year-round availability to consumers requires sophisticated logistics and supply chain management. The maturity of the US food market poses another significant hurdle. Slow population growth and low income elasticity of demand lead to slow market expansion, resulting in intense competition for market share. This is further intensified by increased product introductions and year-round availability of previously seasonal items, often due to imports, which creates a wider array of substitute products, potentially dampening demand for staples like oranges and apples. Strategies to overcome these challenges are crucial to maintaining California's competitive edge.

California's diverse agricultural production offers significant marketing opportunities. The ability to provide food retailers with complete lines of fruits, vegetables, and nuts creates a competitive advantage. Traditionally, California's large share of the US supply for key commodities (almonds, lemons, olives, lettuce, prunes, strawberries, table grapes, processing tomatoes, walnuts) allowed for substantial market control. However, increased global competition has eroded this control, necessitating new marketing strategies to maintain competitiveness. The need to adapt to this changing global landscape is essential for continued success in the agricultural market. This highlights the importance of diversification and innovation in maintaining market share.

The US food-marketing sector prioritizes large market share, leading to substantial consolidation throughout the food chain, from farm to retail. The difficulty of gaining market share from competitors has spurred mergers and acquisitions, a trend particularly prominent in the 1980s and 1990s. Merger activity, while fluctuating, has significantly altered the competitive landscape. Data from The Food Institute indicates a peak of 813 mergers in 1998, illustrating the scale of this consolidation. This concentration of power has significant implications for competition and the relationships between different stages of the food supply chain. The consolidation process has reshaped the structure of the industry, impacting both large and small players.

Consolidation is particularly evident in food manufacturing. Although there are approximately 16,000 food and tobacco processing companies, the top 100 firms control 75% of sales (1997 data). The largest 20 firms account for around 50% of value added in food manufacturing. Data from the US Census of Manufacturing reveals increasing concentration over time, with the average market share of the four largest firms rising from 43.9% in 1967 to 53.3% in 1992. The emergence of the supercenter retail format further concentrates buying power. Supercenters, combining supermarkets and discount stores, represent a major industry force with substantial sales. Wal-Mart, the leading example, had an estimated $29.3 billion in US grocery-equivalent food sales in 2002 and a 75% share of national supercenter sales, highlighting their significant influence on the market.

The increased buying power of large retailers, particularly supercenters, strongly influences supplier strategies. Shippers are forming marketing alliances and joint ventures to achieve economies of scale and match the size of their buyers. This allows them to maintain their individual growing, packing, and cooling operations, which is especially important for many family-owned fresh produce shippers. These larger-scale operations facilitate greater investments in marketing systems and services. Shippers are also increasingly offering category management services, broadening product lines, and securing year-round availability through domestic or international sourcing, improving vertical coordination and competitiveness. This response to retail consolidation shows how industry players are adapting to changes in the buying landscape.

Food marketing firms face intense competition for limited shelf space in supermarkets, leading to the widespread practice of charging slotting allowances. These fees are paid by companies to secure shelf space for new products. While traditionally fresh produce was exempt, the introduction of branded fresh-cut produce in the late 1990s changed this, and slotting allowances, along with other fees, have increased marketing costs for growers and shippers. The average supermarket carries around 30,000 product codes, and the introduction of 11,574 new food products in 2003 (according to The Food Institute) illustrates the fierce competition for space. This competition for prime retail space is a significant expense for California agricultural firms trying to gain and maintain visibility in the market.

Retail pricing strategies significantly impact producer welfare. Retailers utilize diverse approaches, including everyday low pricing (EDLP) and hi-lo pricing, where prices fluctuate substantially. Neither strategy is necessarily beneficial to producers. Research by Sexton, Zhang, and Chalfant indicates that retailers maintaining stable prices despite farm-level fluctuations negatively affect producer income. The analysis of four Los Angeles retail chains reveals a wide variability in pricing for iceberg lettuce and bagged salads. While head lettuce prices showed some correlation with farm gate prices, this correlation was weak or non-existent for bagged salads. The lack of direct price responsiveness from retail to farm level suggests pricing is being influenced by factors other than simple cost-plus markup.

The concentration of buying power in the hands of a few large retailers raises concerns about oligopsony exploitation of producers. Perishable crops, with their short harvest-to-market windows, offer growers limited bargaining power against buyers. Studies by Sexton, Zhang, and Chalfant (2003) and Richards and Patterson (2003) suggest retailers often reduce grower prices below competitive levels due to their market power. The increasing use of contracts by buyers for high-volume perishable items aims to stabilize prices, quality, and volumes. While common in foodservice, these contracts are newer to retail and are largely driven by cost-cutting efforts from mass merchandisers like supercenters. This shift towards contracting will likely impact the grower-shipper level, demanding consistent year-round high volumes to meet buyers' requirements.

Agricultural cooperatives in California face challenges in the current market environment. Retailers often prefer suppliers offering complete product categories year-round, a challenge for cooperatives traditionally focused on single commodities and seasonal production. To address this, cooperatives may pursue marketing joint ventures or source products from non-members, including international sources. However, legal restrictions, such as the requirement that at least 50% of business volume be with members (a common stipulation in cooperative laws), and the lack of legal protection under the Capper-Volstead Act for joint ventures with non-cooperative firms, create impediments. The failure of prominent California cooperatives, such as the Rice Growers Association and Blue Anchor, highlights the difficulties faced by this organizational model in a rapidly consolidating market. The case of TVG, which reorganized into a New Generation Cooperative (NGC) structure but still ultimately failed, further illustrates the challenges. These examples emphasize the need for cooperatives to innovate and adapt to remain competitive.

The document describes different types of cooperatives. Bargaining cooperatives, such as the California Tomato Growers and the Raisin Bargaining Association, focus on collective bargaining with processors, improving growers' negotiating power. These associations are especially relevant in industries lacking active spot markets and where products are primarily grown under contract. They minimize transaction costs by allowing processors to negotiate with a single entity rather than numerous individual growers. Another type, the marketing cooperative, handles the actual marketing of the product. However, even successful marketing cooperatives like Blue Diamond (almonds) face challenges maintaining market control once new markets are established. The text also mentions 'new generation cooperatives' (NGCs), characterized by grower contracts with transferable delivery rights that function like capital stock, aiming for stable supply and market regulation. However, the NGC model has not been widely adopted in California, potentially due to the perceived failure of TVG, which adopted this model.

Mandated marketing programs, authorized by federal and state legislation (Agricultural Marketing Agreement Act of 1937 and California Marketing Act of 1937, respectively), allow producers and marketers to collectively manage aspects of their products' marketing. Federal marketing orders may cover multi-state regions and focus on quality and volume controls, while California state programs emphasize research and promotion. These programs operate via commodity commissions and councils (over 20 in California). Each program sets maximum assessment rates, typically collected at the first handler level (packing houses, processors). Examples include the California Avocado Commission's 4.25% assessment and a $30 per ton assessment for dried plum growers. The programs authorize activities including quantity control (producer allotments, reserve pools), quality control (minimum standards), and market support (advertising, research). These programs, while aimed at improving producer returns, have faced legal challenges regarding free speech and are the subject of ongoing litigation.

Precisely measuring the economic impact of mandated marketing programs on producer returns is challenging. This difficulty leads to ongoing discussions among producers regarding the return on investment for advertising, promotion, and quality control programs. The effectiveness of industry supply control efforts is also questioned. Furthermore, the potential impacts on consumers and trading partners, along with the effects on producers themselves, frequently create controversy surrounding these programs. Recent litigation involving California marketing orders and commissions underscores this contentiousness, as some producers and handlers challenge the benefits derived from their contributions. The complexity of these programs makes it difficult to isolate and quantify specific impacts.

Mandated marketing programs authorize quantity control (producer allotments, market allocation, reserve pools), quality control (minimum standards), and market support (advertising, research). Quantity controls can be effective when a commodity group controls most production and serves markets with differing price elasticities of demand, allowing for price discrimination. However, the inability to control entry negates any long-term price enhancements due to increased supply. The experience with lemons and Navel oranges illustrates this: short-term price increases spurred increased acreage, leading to eventual price decreases as new plantings matured. The raisin industry utilized reserve pools for price discrimination between domestic and export markets before changes in 1977, after which exports were treated as free tonnage. The California almond industry shows how market conditions can affect volume control effectiveness. Minimum quality standards can increase retail demand, reduce marketing margins (benefiting producers and consumers), and reduce supply (potentially increasing revenue with inelastic demand). However, quality standards primarily focus on quality rather than supply control and extend to imports as well.

Commodity group expenditures on generic advertising and promotion aim to increase demand. Mandatory participation addresses free-rider problems. Studies show significant increases in demand due to these programs, with benefits often exceeding costs. For example, Alston et al. (1997) estimated a high benefit-cost ratio for California table grape promotion. However, these ratios decrease when considering producer supply response. The US government provides matching funds for export market promotion through programs like the Market Access Program, allocating significant funds (e.g., $18.67 million in 2002 for California fruits, nuts, and vegetables). Research funded by commodity groups also demonstrates high rates of return. A study showed a 20% internal rate of return for public investment in California agricultural research and extension from 1949-1985. California's success in strawberry production illustrates the impact of sustained research efforts. However, the distribution of research benefits among consumers, processors, and producers is uneven, influenced by market power. Legal challenges to mandatory support for advertising, based on First Amendment concerns, remain unresolved.