MARKET REPORT - FEB 8TH, 2017
Grower perspective on the winter season so farGoing to step back and take a look at the last 3 months to give you an idea of grower perspective on the winter season so far.As you know, revenues are way down on vegetable sales across the entire produce industry for the last 3 months. Volume, however is up substantially. Porque?
We work within an un-planned, un-regulated, informal business model, where an additional 1,000 acres of organic production anywhere in the US or Mexico can move a market for anything from lettuce to cucumbers from pricey and under-supplied, to a glut with apparently no basement price.7 years ago, the industry was fairly stable, prices were reasonable and at a profitable level for growers across southern California, Arizona and Mexico. Then in 2011 we had a disastrous freeze – the first major freeze in some of those areas since 1957. Temperatures dropped to -9C in Sinaloa, just an hour up the coast from Mazatlán. Imperial, Yuma, and Mexicali stayed below freezing for far too long. Hundreds of millions of pounds of vegetables were frozen. Prices soared. Some commodities were simply not available for weeks. Conventional eggplant was selling for $70 a box. Then we had another major freeze in 2013, and 2015 and 2016. Every year growers just shook their heads, assuming these were one-off years and didn’t react – besides, despite a 1 or 2 day freeze event that set them back somewhat, they were able to recover some of their crops.The over-all market over the past couple of years has changed substantially, with major big box stores esp. in the U.S. expanding into the organic sector with enormous volume demands. Major corporate style farms ponied-up and expanded their production, with a lot of that moving to Mexico, partly to lessen risks of expanding production in areas with limited irrigation water. The expected up-tick in sales was really aimed at this 2016-2017 season. We have no idea how much more land went into production – the guess would be 5,000 acres or so. Which is a lot. A broccoli field takes 70 days from seed to harvest at 20,000 kg. per acre, and 2 rotations over the winter season. So if all that new organic production I’m speculating about was just broccoli, that extra acreage would have produced 200 million kg. on top of existing production of organic broccoli (2016 levels) between November and May. Of course, all those new acreages this season aren’t all planted in broccoli – although it’s likely that a good chunk is.The players behind this expansion are predominantly U.S. Farm operations leasing more and more land on both sides of the border. I’m going to give you an example of how this works.Barb works for an American farm operation “Sierra Farms.” Barb is looking at grower returns on organic broccoli for the 2015-2016 season and sees that there was good money to be had, returns were excellent, and they could have sold 30% more just to their regular customers, and on top of that, she’s been talking with Walt over at BigBox, a new customer for her, who is asking her to quote on 6 trailer loads of organic broccoli a week for their 34 stores in California for the upcoming season. In other words, Barb sees that her family has to substantially increase production, which not only makes sense from a volume perspective, but also because of the grand profits they made last year, because their fields along the coast of California weren’t affected by the Arctic air that swept through Imperial and Yuma. They don’t have more land to expand into, whether they own it or lease it.Carlos has a 200 ha. ranch near Guadalajara. He got certified organic years ago, and grows whatever his customers want, but 80% of what he grows he sells into the Mexico City market at conventional pricing. He would like to have a better ‘deal’ in place, grow more vegetables under his organic brand, and sees excellent pricing in the U.S. markets.Barb finds Carlos, they talk on the phone, she flies down to Guadalajara, they shake hands, sign on the dotted line, and Carlos agrees to grow 100 ha. of broccoli for her, 2 rotations a year, and he’s estimating 4,000,000 lbs. of production. 100 loads – 4 trailers a week for 24 weeks. His growing costs on broccoli are about .30 cents a pound - $6 a box (US). And he needs another $3 a box for harvest, cardboard, pallets, cooling, icing, palletizing, export inspections etc. Knowing that this is pretty well standard pricing, Barb agrees to a 50/50 deal. Carlos will buy the seed, water, weed, pack and ship, and Barb is responsible for trucking from Mexico, warehousing, marketing and shipping broccoli to her customers, an estimated $6 a box., plus she would like to make a mark-up of $2-3 a box.In a 50/50 deal, and other similar types of arrangements, Carlos adds up his growing cost, Barb adds up her sales and transport costs, and whatever is left (being the profit) at the end of the season, is split between her company (Sierra Farms) and Carlos. Having seen prices range from $18 - $28 (US) a box for several months in spring 2016, Carlos was thinking he would end up getting up to a $12 a box return and make $4 more per box than his growing costs, in other words a very healthy profit.Now it’s November 10, (three months ago,) and he’s ready to go. Barb tells him that markets are really low because “it’s warmer than normal in Yuma and production is still high,” or “…it’s still dry in Salinas and coastal growers are getting better yields,” But, she says,” prices are unpredictable during the transition months and things will get better – remember last year?”And based on what happened from 2011 to 2015, she would have been right. What neither Barb, nor Carlos are aware of is that Big Sur Farms in Bakersfield also contracted 200 acres in Coachella, and Capital Distributing did a 300 acre, 50/50 deal with Jiminez Ranch in Querétaro, and similarly 10 other California based farm operations also expanded across the California desert areas, or central Mexico, expanding organic production by 5,000 acres for this year. And to top it off, as of today, growing conditions across all regions haven’t been perfect, but darn close. No freeze so far. So the trap they’ve found themselves in is that they have crop in the field, and it won’t wait – it has to be harvested within a few days or it will bolt. And, contractually, Barb has to take it. So she is now selling broccoli at ‘market’, which, on full trailer-loads, in late November and early December was dropping fast and furious, with many growers offering broccoli up at $6 a box for full truck loads for a few weeks. Prices did firm up in January, with market pricing going up only to $14 (US). Prices have now stabilized a bit higher than that, at time of writing. But even that $14 price doesn’t cut mustard – in combination, both farmer and marketer need $15 to really make this deal fly.So this is where we’re at – pricing on celery, cauliflower, kale, cabbage (esp. cabbage) and broccoli is at 2008 levels or lower, where it has stayed from early November to today.Based on history, this is what’s going to happen: First, if there is no improvement and prices stay lower than production costs through to April, when Carlos is ready to close up shop for the season, he is screwed. Barb’s costs haven’t changed – truck drivers aren’t sharing in the pain. All her import costs, storage, shipping, are unchanged – still $6 a box to move broccoli from Guadalajara to New York or L.A. And for Carlos, his $3 a box for ice, cardboard etc. haven’t moved either, nor his growing and harvest labour, nor the price of seeds. Actually his costs on everything but labour have soared, because the value of the Peso has dropped 30% or more since he and Barb shook hands, and most of his costs, except labour, he’s paying in USD.So far this year, her selling price to BigBox and others has averaged around $9 a box. Carlos has only averaged 2 loads a week, and Barb wasn’t complaining. Carlos is diverting 80,000 pounds a week into the national market in Mexico at $7 a box, selling it as conventional. After deducting Barb’s actual costs, without mark-up for her sales commission, of $6 a box, and Carlos’ $3 for harvest costs and packaging, there is no money left for Barb to have made any money at all, and Carlos is out his $6 a box for his actual growing costs.That is exactly the situation a lot of growers are facing – they are getting back less $ than their actual production costs, and not just on broccoli – it’s also celery (usually a great market in November and December and again in April and May), which is also in the basement. There was a great shortage of cabbage last year, with growers fetching excellent pricing - $2-3 a head some weeks! Not this year – it’s more like 50 cents or less. And the same story for kale, Brussels, chard, cilantro and parsley.Exactly the same situation also applies to red bell peppers, vine, cherry and slicer tomatoes, and LE cukes and the list goes on. There is so much over-supply of red bells that growers are selling ‘on the open’, which means – ‘take these peppers at whatever price you can give me’, or they are selling on PAS (price after sale), the equivalent of consignment.And when markets are this low, growers want BIG sales, and it’s more likely that BigBox, despite being the new kid on the block in the organic produce category, is able to take advantage of the biggest savings because of their volumes. And BigBox is now seeing excellent sales on organic produce in their first year, because the prices are low and not much higher than conventional.If history repeats itself, a lot of contract growers, esp. in Mexico are going to see extraordinarily low returns this spring – many, after paying for their crews, trucking and cardboard will be hanging on for dear life at the end of this season. And then what? They will all scale back. Barb will apologize and Carlos will tell her he’s never dealing with her again. Other growers may look to other crops, in other markets. Some will be knocked back so bad they will be out of business, and lease their land out for maize or alfalfa production, which have little if any profit, but are reliable. Some may hang on hoping for a better year. But you can be guaranteed that there will be lots of contraction of supply for the 2017-2018 market, in California and more so in Mexico. And maybe next year will be the year that organics really takes off for BigBox and 20 other large grocery chains who invested heavily in expanding into this market. And maybe there will be a freeze just before Christmas next winter. Then the market will be substantially under-supplied. Prices will skyrocket. Growers will be looking at returns of $25 or $30 a box which will make up for their dismal returns this season. And Carlos will just shake his head, because his ranch never freezes and he could have made hundreds of thousands of dollars of profit. Barb’s family farm will freeze in California – for the first time in a decade. They will lose 2 months of production. And maybe she’ll pick up the phone and call Carlos to talk about the 2018-2019 season, because prices “should be excellent…………..”Why is this all important? Well, now that you know the facts, consider this: Let’s just say that 3 weeks ago red bells were selling for $36, and this week for $29, that’s a drop of 20%. Not one thing has changed – it still costs the same $5 to move those from Mexico to Vancouver. It’s not about currency. The cardboard box still costs the same, as do all the other costs. That $7 price drop can only come from one place and that’s directly out of the grower’s pocket – the money used for seed, land rent, water, weeding and all the other costs. And at some point, when prices are in the basement, after deducting all the packing and shipping costs, there isn’t anything left to cover growing costs.Now as for current markets. Little change on fruit – we’re slowly, very slowly, moving to some Washington apples as local supply wanes on some varieties. The balance of fruit markets are stable with the exception of citrus, where rain is reducing harvesting, forcing markets up with lack of supply. Lemons are still pricey. On the veg front, most commodities are generally well-priced, with expected occasional glitches. Right now the biggest issue facing California veg growers is mildew. With all that rain falling, even in the desert, the humidity has been high enough for mildew to take over, and there isn’t an organic way to get rid of it. That is affecting the more sensitive leafy greens – spinach, salad, butter and leaf lettuce, romaine and a few others.Expect a tight onion market this spring. Apparently snow loads from recent storms in E. Washington and Idaho have been so heavy that over a dozen onion storage sheds, representing millions of pounds, collapsed. Those were conventional sheds, but a supply shortage on conventional leads to higher pricing on organic as well.