Packer cites oversupply and lower prices for prediction After a few profitable years, California's processing tomato industry is mired in oversupply and lower prices for growers, according to Gregg Pruett, managing partner of Ingomar Packing in Los Banos.
Pruett, who is also vice president of Vaquero Farms, Inc. in Stockton, said during the Agribusiness Management Conference in Fresno the 2000 season with an output of 10.3 million tons resembled that of 1996.
Recalling his 1996 report to the conference, he said average yields hit record levels and tomato paste prices plummeted to 20-year lows.
In the 2000 season, significant increases in production capacity meant national canners could buy tomato solids cheaper and at possibly higher quality than they could manufacture themselves.
"So those 1996 comments are still very apropos in today's environment," he said.
Pruett, who envisions a 2001 crop of about 9 million tons, said the current price of tomato paste is 25 to 30 cents per pound.
Processors, who have options of whether to buy tomato paste from other processors or manufacture it themselves, will have to decide which to do. When prices are low, the decision moves toward a "buy" rather than a "make" choice, he said.
Coming off 1999's record crop of 12.2 million tons, processors reduced their estimated requirements to 10.1 million tons for 2000. Observers, meanwhile, considered the reduction substantial but not sufficient to prevent price erosion.
The 2000 crop estimate, he said, took into account additional capacity of Ingomar Packing's plant at Los Banos, Rio Bravo Tomato Co. in Kern County, and Los Gatos Tomato Products at Huron. Also calculated was the closure of the ConAgra tomato processing plant at Davis.
Following a short season in 1998, the industry had an inventory of 2 million tons, and prices were "sky high."
After the 1999 crop, the inventory shot up to 4.6 million tons, the highest ever.
Shorter cycle The industry, he noted, has customarily faced cycles of six to seven years, but now the cyclical base appears to have shrunk to one or two years.
The 2000 crop turned out to be 10.3 million tons, with yields at about 38 tons to the acre. Pruett said the cost of tomatoes was approximately 50 percent of the cost of the delivered paste product. The average price is expected to be about $52 a ton, and quality was improved for the 2000 crop.
Demand in the U.S. for tomato products, he continued, has been flat the past several years and actually is decreasing slightly. "Our population is growing slowly, so there's some pickup there. But the bad news for growers is the industry requires fewer tons to make the same amount of product." That is a result of both better quality tomato varieties and more efficient manufacturing.
On the international scene, Pruett said, imports have been in the range of 200 to 300 raw tons per year. Exports peaked in 1997, fell in 1998, and have moved slowly upward since.
"Three factors contribute to our difficulties in exporting. One is the worldwide glut of tomato paste," he said.
"Secondly, China has become a significant player with its processing capacity in the neighborhood of 2 million tons. It is willing to sell at prices that are almost unbelievable to the rest of the market. Fortunately, Chinese tomato paste has not been entering the U.S. in significant quantities. It has gone instead into the Middle Eastern, European, and Asian markets.
In a barter arrangement between Italy and China via third parties, Italian evaporators were exchanged for tomato paste made in China, at low prices, which disrupted the European market for paste.
"And thirdly - and very importantly - the strong U.S. dollar makes our products uncompetitive in Europe."
Pruett went on to say the crop estimate for 2001 can only be speculative and his best guess is 9 million tons, depending on how much capacity is operated by Tri-Valley Growers.
(The cooperative filed for bankruptcy protection under Chapter 11 in July with debt of some $400 million, and negotiations for its sale were under way in early December. A critical element for Tri-Valley Growers members is sufficient time to contract for 2001 production.)
At any rate, Pruett said, California's tomato producers and processors appear to be on a collision course with "increasing costs at the field level and huge, surplus inventories at the plant level," suggesting very difficult negotiations between the two parties in 200l.
Alternative crops? What's more, he said, alternative crop economics are not that favorable. Prices for sugarbeets, grain, processed vegetables, alfalfa, and cotton all are challenged. "In that environment, the tomato price cannot sit on the sidelines by itself." It has to be reflective of the other crops that are alternatives for tomatoes.
He said the California Tomato Growers Association, which represents about half the state's tomato growers, will have to define its goals in this marketplace.
Among things to consider are mandatory harvest programs and separate pay programs, one for selected growers and another for growers producing for Internet bids by week and variety.
Pruett said it will be up to growers to align with processors, grow high quality fruit, and work for long-term relationships.
He also predicted that certain growers will be unable to compete at anticipated low price levels and said he expects the number of growers to decline by 25 to 50 percent in the next few years.