Embattled tree fruit industry facing hard decision for 2009

The embattled California tree fruit industry went into 2008 with high hopes, only to see its optimism nosedive mid-season like an overripe peach plummeting to the orchard floor.

And those hopes rotted away like that peach until the season mercifully ended.

“While the season started out well, it turned into a year the industry couldn't wait to finish,” according to Gary Van Sickle, director of research and regulatory compliance, and Gordon Smith, manager of international programs for the California Tree Fruit Agreement, Reedley, Calif.

In a report for the 27th Annual Agribusiness Management Conference, Van Sickle and Smith said for the third dismal year in a row, surviving California tree fruit growers and packers are left to ponder their fate.

The one realization is that volume still needs to drop by 10 percent to 15 percent annually to ensure industry marketplace stability. The tight financial restraints growers faced going into this season remain. Many could not get bank loans after two bad years and turned to financing from larger packers.

Consolidation continued by growers and packers with more vertical integration of growing, packing and marketing sectors.

After 2008, this picture is not likely to change, as reports circulated in the offseason that packers have closed and orchards have been sold.

According to Van Sickle and Smith, the general consensus is that orchard removal of poor varieties needs to be stepped up to reduce volume.

The orchards taken out should not be planted back to fruit, but to other commodities. Growers have been doing that for several years, opting for almonds, citrus and grapes rather than tree fruit. That is likely to be stepped up in the wake of 2008.

The maximum potential tree fruit crop is most likely in the 57-58 million box range compared to the more than 60 million boxes in the 1990s. The 2008 crop was approximately 57 million packages.

The negative factors facing the industry include sharply higher input costs, ongoing financial and regulatory constraints and a variety of what Van Sickle and Smith call “societal-economic” pressures.

Costs like the following also killed the 2008 crop:

  • Minimum wage increased from $7.50 to $8, adding up to $1 to the cost of each package.

  • As an example of across the board production cost increases, one crop care company raised its prices for agricultural chemicals by 25 percent June 1. They went up another 20 percent on July 1.

  • The increased cost of diesel ran the rate for trucking a load of fruit to the East Coast to as high as $10,000 to $11,000 per load last summer. That is roughly double what it was just a few years ago.

Overall, the cost of growing and packing fruit went up $3 per package in 2008.

Nevertheless, the year started out well with moderate prices and good quality. However, in late June when the industry was preparing to provide ample fruit for the July 4 holiday, many retailers did not take the supply the industry had available; inventory soared in cold storage and the FOB market dropped below the cost of production for the remainder of the season.

Part of the problem was the regional effect where retailers pushed locally grown products over California fruit.

The “buy local” movement is hurting the California tree fruit industry.

“Consumers have grown accustomed to paying premium prices for fresh produce at the local markets, provided their expectations for quality are met,” the pair notes.

The downturn in the economy only added to the problem, since produce items are often perceived by consumers as luxury items.

“The reality faced today is that tree fruit can and will be replaced, if quality and price does not work for the retailers' analysts,” according to Van Sickle and Smith.

“It is not difficult for a retailer to source good fruit, but it is difficult for a retailer to meet profit expectations of their corporate offices” with a product that is now considered a “mature category” by retailers and not what it once was for retailers.

“What this means for the tree fruit industry as suppliers is it must provide high quality fruit consistently and develop marketing tools that can drive sales at the retail level.

“For those in the tree fruit industry that can meet these challenges, there's light at the end of the tunnel.”

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