INDUSTRY
STRUCTURE AND THE MARKETING OF CALIFORNIA AVOCADOS
Avi Crane
Chiquita Frupac, Inc.
Mission Viejo, California 92691
Abstract
Avocado Production in every
growing area around the globe has its own cultural challenges based factors
such as soil types, weather conditions and production costs. The marketing of
the crop is also influenced by the local industry structure and prevailing
political, economic and social environment. This paper focuses on the basic
structure of the California avocado industry and how it influences grower
returns.
1. Introduction
The California avocado
industry is a mature industry and a study of this industry might help newer
avocado industries make their choices as they grow and mature. Total acreage
and total number of producers, number of packing houses and number of marketers
all influence the level of success that a commodity industry will have in the
market place.
Avocado Production is every
growing area around the globe has its own cultural challenges based on factors
such as soil types, weather conditions and production costs. The marketing of
the crop is also influenced by the local industry structure and prevailing
political, economic and social conditions. This paper focuses on the basic
structure of the California avocado industry and how it influences grower
returns.
The scope of this paper does not cover the
development of the avocado industry in California from its early roots in the
previous century. This would certainly be an interesting examination that might
help us understand the current situation. This paper will discuss the
California avocado industry of 1995 and how grower returns are impacted by that
structure.
2.
Methods
In this paper, three key
elements that make up the California avocado industry are considered prime
factors in the direction of its future:
2.1 Growers
The California avocado industry
of 1995 is a result of growth that took place in the in 1970's and 1980's.
Producing acreage increased from 20,000 in 1970 to and estimated 78,000 by
1980. Current Acreage is now 63,000. The growing
community is almost as diverse as the society in general.
The following are the key divisions of the grower community:
2.1.1. Location: South and North
Approximately 68% of the
acreage is located south of Los Angeles. The remainder is north of Los Angeles
and in the San Joaquin Valley. The southern districts have a high percent of 1)
small groves; 2) absentee growers; 3) large farm management companies; 4)
business professionals new to farming; 5) retired professionals; 6) high
production costs/lower yields; 7) Harvest is during the peak weeks of the season.
North of Los Angeles lies
approximately 35% of the avocado trees. While some of the growers fit into the
southern description, this area has mainly first or more generation farm
families. Most of the largest groves are located in this area. Production costs
are lower than the south and yield are higher. Harvest can be stretched out to
the end of the season.
2.1.2. Grove Size
The average avocado grove
size in California is just 10 acres- and the majority are less than 5 acres.
Groves can be identified as follows:
Level One Groves: Over
40 Acres 4,355 6.7%
Level Two Groves: 20
to 39 Acres 3,250 5.0%
Level Three Groves: 10 to 19 Acres 6,760 10.4%
Level Four Groves: 5 to 9 Acres 8,775 13.5%
Level Five Groves: Less than 4 Acres 41,925 64.5%
2.1.3. Production Costs
Low Cost Producers: Less
than $2,000/Acre
Med Cost Producers: $2,000
to $2,999/Acre
High Cost Producers: $3,000
or more/Acre
2.1.4.
Affiliation
Approximately 40% of the
growers and volume are members of cooperative organizations. These are
basically share holders who are under contract to provide the cooperative with
100% of their fruit. The remainder of the fruit is in the hand of independent
growers who, typically, do not have a contract with their marketer and have the
option to choose one or more marketers for their product.
2.2. The Market
2.2. 1. Packing House/Marketing Organizations
There are currently 13
marketing organizations in California. Except for Chiquita, all are California
based companies that have been in business for up to 75 years. Two of these
organizations are cooperatives, the remainder are private companies.
I
have estimated the following market share comparison:
Medium Market Share: 6%
to 11.9% 4 31.0%
Minor Market Share: 1%
to 5.9% 7 18.0%
Limited Market Share: Less
than 1% 50 6.0%
Grower
Ownership 2
Private Ownership 10
Stockholder Ownership 1
In addition, there are approximately
50 other marketers of minimal volume. Almost all of these marketers supplement
their California volume with imports
from Chile either directly or through brokers.
2.2.2 The Buyers
The era of down-sizing in
the United States has been tremendous consolidation of the retail supermarket
chains. Margins have decreased and the need to make a profit from every sale
has intensified. In the Southern California market, the place that 46% of the
domestic avocado volume is sold, this situation has been intense. The major
retail chains are in battle for their existence daily. From the end of World
War II until the late 1980's, these chains benefited from the great growth in
the
State of California. If you were able to monitor
your cash flow, it was easy to make money in this growing market. New consumers
were entering California daily. However, huge club stores and other retailers
have reduced their ability to grow in the 90's. With fewer buyers competing for
fruit, the leverage has transferred from the grower and the marketer to the
buyer.
2.3.
Outside Factors
There are a number of
factors that influence the present and future viability of individual growers
and the industry in general.
2.3.1 Production Cost
The largest factors impacting growers is the increasing cost of irrigation water. It has become over 50% of all cultural inputs, including man hours, in avocado production in many of the southern groves. In addition, federal and state regulations in regard to pesticides, workers compensation, tax reporting and many other regulatory requirements have resulted in a huge increase in the cost of doing business in California, in general, and in agriculture in particular. Growers’ margins are being limited with every new demand.
2.3.2. Imports
Currently imports are a
factor in the United States domestic market. The major player is Chile.
However, due to production, packing and freight cost, imports from Chile will
only arrive when the domestic market is short on California fruit. The main
concern is imports from Mexico. Current USDA proposals, if approved,
would
provide Mexico with limited market access for a period from November to
February. While, this should not have a major impact on the domestic annual
price, the highest cost producers will be impacted. In addition, the fear of
Mexican imports, real or supposed, has greatly impacted the entire California
avocado industry.
2.3.4. Urbanization
Most of California’s avocado
acreage is located in the climate that is also the one that attracts people.
Unlike other agriculture crops, most of the avocados in California a grown with
120 miles of downtown Los Angeles. Indeed, the growth of the industry in the
1980's was due to, in part, the potential for land inflation. The current
situation for California real estate is not good and it is unlikely we will see
new plantings based on potential land value inflation. We will see, however,
increase urbanization of groves closest to the cities of Vista, Escondido,
Fallbrook and Valley Center.
2.4.
Summary of Elements
The net impact of these
elements are summarized below:
1. A fragmented grower
community that is unable to organize for their own benefit.
2. A fragmented marketing
community that is trying to maintain its share of the margins during a period
of decreased grower margins.and increased retail margins.
3. Decreased acreage due to
1)Increased input costs- especially irrigation- that will impact the economic
viability of growers in the southern districts first; 2) increased imports;
3)urbanization and 4)increased regulatory costs.
3. Results
The economic pressures on
the California avocado grower in increasing daily. This high margin industry is
going through a stage of retraction. There is not enough total revenue to
support the 6,000 growers, producing yields from 65,000 acres and the 13
packing houses marketing the crop.
3.1 Market Developments Market development
has been at a standstill for a number of years. Due to their severe cash flow
problems, growers have no allegiance to their marketer and the industry norm is
to send fruit to the highest bidder at any given time. Even the largest
cooperative has recently lost its largest member. The marketers with the large
volume are the ones that have the ability to increase demand and distribution.
However, uneven supply limits the marketer's capability of expanding markets
for their product. The small players, for the most part, are able to pay higher
returns on spot markets. The result is that very little market expansion is
taking place- current users are using more avocados, but few new users are
becoming primary users. The short term gains growers are receiving are actually
limiting their ability to see higher and consistent returns in the future from
an expanding market. The current market must expand or growers’ returns will
decease.
3.2 Acreage Attrition: In the pursuit of
short term gains, growers will see their margins decrease over the next several
years. High cost producers will be unable to compete in this environment.
Increased imports will accelerate this attrition. Medium to low cost producers
will survive be able to survive this period.
3.3 Marketer Attrition: Consolidation
is not an option for most of the packing houses/marketing organizations. It is
projected that marketers with medium to minor market share might be forced out
of business. This will be the result of a decrease grower/acreage base and
decreased ability to maintain the high profit margin avocado packing/marketing
has be able to return over the past three
decades.
References
-
California
Avocado Commission, various publication including annual reports.
-
University
of California, "Economics of the California Avocado Industry" 1990