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j\gricultural
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Report
NO.
517
OCTOBER 1988
THE U.S. CELERY PRODUCTION AND MARKETING
SUBSECTOR: AN EVALUATION OF MARKET
COORDINATION PERFORMANCE
By
Leslie Berger
Tom Hebert
Donald Ricks
James Shaffer
Department of
Agricultural Economi~
L MICHIGAN STATE
UNIVERSITY.
East Lansing
TABLE OF CONTENTS
Introduction
1
The U.S. Celery Subsector: An Overview
History
Production Patterns
Production Practices
Market Channels
Nature of Demand
Seasonality of Production
3
3
3
Coordination Mechanisms and Performance in Michigan, Florida and
California
Michigan
Overview
Price Discovery and Risk
Establishing Relationships Between Producers and Shippers
Access to Processing Markets
Quality Standards
Maintaining the Reliability of Supply and Avoiding Gluts
and Shortages
Other Coordination Issues
Florida
Overview
Market Coordinating Mechanisms in Florida
Florida's Coordination Performance
California
Overview
Coordinating Mechanisms in California
California Coordination Performance
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Major Coordination Performance Problems in the Celery Subsector
Supply Problems
Celery Imports
Supply Management in Different States
Alternatives to Improve Coordination of Suppl y
Market Quota Marketing Orders
Handler Prorates
Equal Countervailing Tariffs with Canada
Possible Changes in Summer Supplies from California
The Problem of Incomplete Market Information
Variable Quality Problem
Possible Revision of USDA Grade Standards
A Federal Quality Improvement Marketing Order
34
34
Summary
49
References
51
37
41
41
41
44
45
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46
47
48
49
Acknowledgements
FUNDING FOR THIS RESEARCH WAS PROVIDED BY THE AGRICULTURAL
MARKETING SERVICE OF USDA UNDER COOPERATIVE AGREEMENT NUMBER
12-25-A-3007 AND BY THE MICHIGAN AGRICULTURAL EXPERIMENT STATION
UNDER PROJECT NUMBER 1502.
Clarence E. Harris, Chief, Marketing Research Branch, was the project coordinator
for AMS. James D. Shaffer, Professor of Agricultural Economics at Michigan State
University, was the project leader, providing direction to the study.
We wish to express our appreciation for both the funding and the assistance
provided.
We especially wish to acknowledge the contribution of the ce lery subsector
participants and observers who helped us to better understand the subse ctor. At the
same time we, of course, accept responsibility for our interpretations and conclusions.
THE U.S. CELERY PRODUCTION AND MARKETING SUBSECTOR:
AN EVALUATION OF MARKET COORDINATION PERFORMANCE
by .
Leslie Berger, Tom Hebert, Donald Ricks and James Shaffer
Introduction
In this report the U.S. celery subsector is analyzed. Emphasis is on some important
•
aspects of the production and marketing system for celery.
The effectiveness of
coordination of production and marketing of celery is also examined.
The celery industry has used a variety of market coordinating approaches
attempting to effectively perform the coordinating functions necessary to market the
product from producer to consumer in an orderly fashion.
Evaluation of marketing
coordination can involve the concept of "orderly marketing". One way to define orderly
marketing is:
"Orderly marketing refers to the process of economic coordination by
transactions among buyers and sellers which consistently matches supply with the
potential demand at prices reflecting the costs of producing and marketing the
commodity (by a typical well-managed firm in the industry)" (21). There is a relationship
between a subsector's marketing performance and the degree of attainment of orderly
marketing.
Market coordinating mechanisms used in the celery subsector can be assessed
according to the following performance criteria:
1.
Is
the
price
formation
process
effective?
Are
the
prices an accurate
representation of supply and demand conditions?
2.
Are grower prices sufficient to cover the costs of production for a typical, wellmanaged producer?
3.
Are the costs associated with the risks incurred in production and marketing of the
commodity borne by those who are making the production and marketing decisions?
2
4.
Are the quality and forms of product being marketed consistent with consumer
demand?
5.
Does information move up and down effectively in the vertical marketing system so
that subsector participants are informed about market changes, needs and
alternatives?
6.
Do the quantities supplied approximately match the quantities demanded of the
various forms of product? Are there periodic gluts and shortages?
Questions posed for this study include:
1.
What are the coordination functions that must be performed in the celery subsector
to match supply with demand?
2.
Are there mechanisms being used to effectively do this coordination job for celery?
3.
How do these coordination mechanisms work?
How much of the production is
affected? How effective are these mechanisms?
4.
Do these mechanisms play a role in helping growers make short and long term
investment decisions?
5.
Are there market coordination functions which the currently used mechanisms do
not perform well?
6.
What alternative market coordinating mechanisms could be employed to help
improve the effectiveness of the marketing system for the celery subsector?
U.S. celery subsector participants such as producers, handlers, processors,
cooperative managers, university extension staff and other key informaM:s were the main
source of information regarding celery market coordination performance.
industry publi<::ations were drawn upon where available.
In addition,
However, because celery is a
relatively minor crop as a percent of total U.S. agricultural production, relatively little
published information is readily available regarding market coordination of celery.
This study takes primarily a Michigan perspective in order to capitalize on first
hand information about coordinating arrangements in Michigan.
A less comprehensive
•
3
analysis of the other major celery producing states is also included to identify some
aspects of the nature of competition and coordination within the subsector as a whole.
The following section is an overview of the U.S. celery subsector. Another section
examines the market coordination systems of the three major celery producing states in
the country: California, Florida and Michigan. Marketing performance in these states is
•
discussed in regard to accomplishing market coordination functions.
Both fresh and
processing markets are considered, with major emphasis on the fresh market due to its
greater relative importance in the celery subsector. The last section identifies some of
the broad and most important coordination problems facing the celery subsector and
some possible solutions are discussed along with some advantages and disadvantages.
The U.S. Celery Subsector: An Overview
History
Celery was first produced commercially in the U.S. in Kalamazoo, Michigan in
1856. The seed was brought to the U.S. by Dutch settlers although it is said to have
originated in Great Britain.
From Michigan, celery production spread to Florida in the late 1800's.
Today
Florida produces approximately 33 percent of the U.S. supplies from November to May.
California, the number one state for celery production, has been producing the crop
commercially since 1905.
grown on organic soil.
It was originally a popular belief that celery could only be
Therefore California growers farming on mineral soils were
discouraged from growing celery prior to 1905.
However, by the mid-1930's, with the
districts of Salinas, Watsonville and Santa Maria, California had become the principal
celery growing state.
Production Patterns
Celery is produced year-round in the U.S. with Florida and southern California
comprising the bulk of the fall to spring production.
California, Michigan, New York,
4
New Jersey and Ohio produce most of the summer supply along with small amounts from
Colorado, Massachusetts, Oregon, Pennsylvania, Utah, Washington, Wisconsin and some
imports from Canada. Figure 1 shows production in the three major producing states and
the total for the U.S.
Production Practices
Celery in the central and eastern states is grown mainly on organic soil, but thrives
just as well in the mineral soils of the west. Celery is one of the most labor intensive of
the major vegetable crops with labor requirements up to 300 hours per acre .
Most celery grown in the U.S. is started in seedbeds and later transplanted to the
field.
Some northern and central states have mechanized planting, transplanting and
harvesting practices thus reducing labor requirements; however, California and most
Florida growers still do most of their harvesting manually. Other inputs necessary for
production include large amounts of fertilizer, pesticides and water.
Irrigation is
important for a reliable crop in most states.
Acreage for individual celery growers varies in the U.S. from less than 10 acres per
farm to 700 acres. The majority of celery is, however, produced on large, commercial
farms. Location of farms in some states such as Michigan and Florida is concentrated in
a few areas of predominately organic soil.
Market Channels
Approximately 80 percent of total U.S. celery production is sold in the fresh
market.
The remainder is processed for use in prepared foods such as soup, juice and
convenience dinners. The major varieties of celery can be sold for either fresh market or
processing which adds to the marketing flexibility of the crop. Some market channel
decisions are made near harvest time, and depend on the quality and size at that time.
Some producers also contract with processors for a certain tonnage before planting.
•
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77
78
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80
81
o
82
MICHIGAN
83
84
6
U.S
Source : CA .. FL.. and Ml. Crop and Livestock Reports. 75-84,
and USDA/ ERS Fruit and Vegetable Situation and Outlook Reports . 75 - 84
Figure 1;
Ce lery Produ c tion, Ca liforn ia, Fl orido , Mi ch igan and th e U.S.
1975- 1984.
6
Fresh market celery is usually packed by producers and then sold by shippers who
act as initial sales agents. Some producers also ship celery and some shippers pack it.
Some celery is temporarily stored by shippers; however, due to the perishability of the
product, the practical period of storage is limited to just a few days.
Chain stores and other retailer-wholesalers, brokers at terminal markets, wholesale
handlers, the military, and food processors are the primary customers for celery from
shippers.
In some states such as Michigan and Florida, most celery marketing
transactions are organized by marketing cooperatives or exchanges.
Nature of Demand
Celery does not have many close substitutes due to its unique characteristics. Per
capita consumption of celery in all forms including fresh and processed has increased
gradually, with an 8 percent increase in the past ten years (Figure 2).
Perhaps more
importantly, the relative demand for the various forms has changed over the years. For
example, an overall increased demand for processed foods during the l 960-l 970's
contributed to an increased demand for celery in its processed forms.
More recently, demand has been increasing for fresh produce and to some degree
for frozen products.
'
Per capita consumption of these forms of vegetables, including
celery, has increased over the past ten years. Increases in demand for fresh products is
apparently due to the consumer perception that fresh produce is high in nutritional
value.
Consumer interest in fresh produce has been spurred by endorsements made by
national organizations such as the Department of Agriculture and the Department of
Health and Human Services.
These organizations have called for an increase in
consumption of fresh vegetables and fruit to reduce health risks (15, p. 152) •. The change
in consumer preferences is illustrated by a statement by Peter A. Magowam, Chairman
of Safeway, Inc., one of the world's largest food distributors . "The market for produce is
undergoing a dramatic change because consumers are changing ••• placing produce at the
top of their list (for choosing a supermarket)" (Magowam as quoted in 15, p. 322).
•
•
8
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64
66
68
70
72
74
76
78
80
82
84
Source : Statistical Bulletin # 736, "Food Consumption, Prices
and Expenditures" : USDA/ERS.
Figure 2 ; U.S. Celery Consumption Pe r Capito,
Fresh and Processed, 1964- 84.
8
Demand for frozen celery has increased since it is used in the production of frozen
convenience dinners, especially the more popular ethnic styles.
Future demand for
frozen convenience foods and for fresh produce is expected to increase, resulting in
possible further gains to the fresh and frozen celery market.
Seasonality of Production
California is the only state that produces and ships celery year round. During the
winter, Florida and Texas compete with California.
The four other major producing
states and Ontario compete with each other and California for markets during the
summer. Figure 3 indicates the particular months when celery is harvested in each area.
J
F
M
A
M
J
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A
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0
N
D
*
*
*
*
*
*
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Michigan
*
*
*
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New York
*
*
*
*
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California
Canada
Florida
*
Texas
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Wisconsin
Ohio
*
*
*
*
*
*
*
Figure 3; The Months of Celery Harvest in the Major Celery Producing States
The Michigan celery marketing season lasts from July through October, with
production peaking in August.
At this tilT!e, Michigan and New York compete with
California in eastern U.S. markets, where supplies of celery are usually seasonally high
and prices at seasonal lows. In some years supplies are excessive and prices are below
growers costs of production during the summer marketing season. During a large part of
9
the Michigan and New York harvest season the U.S. imports significant quantities of
celery from Ontario and Quebec, adding to the downward pressure on U.S. prices in the
summer.
It is a11eged by some U.S. celery industry participants that federal and
provincial governments in Canada subsidize vegetable production directly, permitting
lower prices for Canadian celery. More on this issue will fo11ow in a later section.
Some subsector participants report that the large supply of celery during the
summer months results in prices below costs for California and other growers. California
growers may be compensated for these summertime losses by the higher prices in the
winter months when the other regions are not marketing celery. California apparently
continues to produce celery during the lower priced summer months in order to provide
continuity of supply of celery and other fresh vegetables for their retailer customers.
Michigan and New York producers have a freight advantage over California in
markets east of a line from North Dakota to Texas.
Nevertheless, retailers and
consumers often prefer California celery because California's supply is dependable yearround and the quality of the California product is often perceived to be superior.
Other celery producing states which compete in the market include Texas and
Wisconsin.
The Texas industry is relatively sma11, with only a few growers and about
1500-2000 acres under cultivation. The Texas season starts in the winter and ends at the
start of the summer with approximately 80 percent of production going to the fresh
market. The quality of Texas celery is quite variable.
Wisconsin produces celery, as we11 as many other vegetables, primarily for the
processing market. Their season is similar to, though somewhat shorter than, Michigan's
season.
10
Coordination Mechanisms and Performance
in Michigan, Florida and California
Michigan
Overview -- The marketing of Michigan celery has bee n dominated since the early 1960's
by the Michigan Celery Promotion Cooperative (MCPC). The MCPC has in recent years
mar keted approximately 65 percent of Michigan's celery. Some Michigan celery is also
mar keted by another cooperative which also markets several fresh vegetables, by some
independent growers who are not members of a co-op and by several shippers.
The
MCPC has approximately 40 grower-members most of whom are located on the western
side of the state.
The multi-commodity cooperative (The Eastern Michigan Vegetable
Marketing Company) is supported by one large celer y grower while there are 10 to 15
celery producers with no cooperative affiliation (Figure 4).
Approximately 80 percent of Michigan celery is sold into fresh market with the
remainder used for processing.
Processed market uses include soups, vegetable juices,
and frozen foods with the bulk being used for soups.
Celery farms in Michigan tend to be owner operated and relatively small with an
average of 55 acres per fa rm.
This is much smaller than the average size of farms in
Florida (640 acres) and California (450 acres) . One reason for this is that many of the
Michigan growers are devoted primarily to producing celery. In contrast, both Florida
and California celery operations also produce large acreages of other vegetables which
adds to the overall farm size in these two states. Approximately half of t he Michigan
celery growers do produce some other crops on their farms (onions, bedding plants, etc),
but these farms are still predominately geared for celer y production with the acreage of
other crops being rather minor.
Further expansion of Michigan ce le r y acreage is not expected. There a re often
oversupplies and relatively weak prices in the summer when Michigan celery is
marketed. This reduces the economic incentive for a prospective grower to justify the
Non-Coop
MCPC Grower's
EMVMC Growers
Michigan Celery
Promotion
Cooperative
(MCPC)
l
Eastern Michigan
Vegetable Marketing
Coop (EMVMC)
Processi ng
Facili ty
MCPC Processing
Facility
Broker
Growers
Non-Coop
Shippers
MCPC Contracted
Shippers
Food Servic e
Terminal Markets
Food Manufacturers
Consumers
Figure 4 ; Diagram of Mi ch igan Celery Su bsec tor
.....
.....
12
expense and risk of moving into celery production or for existing growers to substantially
expand production. This is particularly true since successful celery production requires
investments in highly specific, expensive machinery and knowledge of exacting cultural
practices, which, with low prices, tend to discourage new entry.
The MCPC performs a number of important market coordinating functions which
help to match supply and demand for the state.
Some of these functions include
establishing of the cooperative price for celery, standardizing and raising the quality
standards, scheduling of product supply during the harvest season, collecting and
disseminating market information, improving grower access to markets for fresh and
processed products, stabilizing the business relationships between growers and shippers,
and specifying the terms of trade through contracts with processors.
Each of these
functions will be described and analyzed in more detail in the following sections.
Price Discovery and Risk -- MCPC establishes the price for approximately 65 percent of
the celery produced in the state of Michigan and therefore exerts a strong influence over
the entire Michigan industry.
Improving celery pricing performance, particularly from
the cooperative growers' perspective, is the most important coordination function that
the MCPC undertakes.
A weekly price for fresh co-op celery is established by a MCPC committee that
takes into account the availability of supplies in Michigan and other celery producing
areas, the quality of the co-op's celery on hand, consumer income, changing consumer
tastes and preferences and other market factors. The committee is comprised of three
growers and two grower-shippers. The two grower-shippers on the committee represent
the eleven shippers who have contracted with the co-op for marketing MCPC celery.
The grower-shipper presence allows the committee to take advantage of the
grower-shippers' continuous close contact with buyers and their up-to-date information
regarding market conditions. Shipper input helps the co-op price committee establish a
fresh celery price that reflects the current demand conditions, even when these
13
conditions are changing rapidly and require the committee to adjust their price quickly.
The co-op has comprehensive market information because of its activity and the broad
range of markets served by the various shippers who contract with the co-op.
Shippers receive a fixed commission of 8.5 percent of the sales price for the
service of selling the celery in addition to the associated shipper costs for handling and
cooling the product. Shippers, in accordance with their contracts, may not sell at prices
below the price specified by the cooperative. It is possible for shippers to negotiate with
buyers for a higher price than the MCPC price. If this is done, however, the additional
revenue goes back to the co-op, not to the shipper securing the higher price. For this
reason, there is little incentive for shippers to strive to get higher than co-op prices.
The co-op price . committee meets on Wednesdays and Saturdays to evaluate the
latest market information and establish the co-op price. The information used in pricing
decisions includes the aggregate sales from the previous week (supplied by shipper
information) and estimated production from co-op growers for the next two weeks. The
price committee telephones a number of shippers in California as well as shippers in New
York, Ohio and Canada to obtain market information and estimates of how much will be
shipped to various markets each week.
The amount of California supplies in eastern
markets likely has the single greatest influence on the demand for Michigan celery and
hence has a large impact on MCPC's pricing decisions.
Through the co-op's partial price influencing ability, the member-growers have an
indirect influence on Michigan prices. Shippers also influence the price discovery process
through the market information they supply to the co-op's price committee. Thus both
growers and shippers actively participate in decisions on celery prices.
This is in
contrast to most fresh produce marketing in which pricing decisions are made almost
entirely by individual shipping firms, with little or no grower involvement in pricing.
This is true even though growers, as owners of the product, usually bear all or most of
the risk created by fluctuating prices.
The celery co-op in contrast to the typical
14
situation for fresh produce, tries to provide growers as a group more pricing influence to
go along with the price risk which growers must bear.
The MCPC has apparently
achieved improvements in the price discovery process and has reduced some price risks
faced by individual growers compared to the usual consignment transaction system for
most fresh produce.
The co-op's pricing method impacts and likely improves the pricing perfor mance of
the rest of the Michigan celery industry. The shippers not associated with the co-op have
a standard practice of charging the same as or $0.50 per crate less than the co-op price,
depending on the shipper's quality or volume. As a result, the non-co-op shippers' prices
reflect the accuracy and stability present in the co-op prices. Although non-cooperative
shippers undercutting the co-op price is a good example of the free - rider problem for
cooperative growers and shippers, the positive effect of the stability in the cooperative
price remains a benefit for the industry as a whole.
There are some shippers who argue that the pricing procedures of the MCPC do not
allow prices to adjust quickly enough to short-run changes in supply and demand
conditions. The co-op's price committee members believe that decisions to raise prices
are made more conservatively than those to lower prices. The general consensus of coop producers seems to be that price adjustments are made appropriately.
MCPC's use of relatively complete market information tends to prevent wide
swings in prices from week to week and month to month. A comparison of the variability
in historical Michigan celery prices relative to the price variability in other regions over
the same period indicates this stabilizing influence. Monthly celery prices in Michigan,
California and Florida are plotted in Figures 5, 6 and 7. As indicated by comparing these
three graphs, over the period from 1980-1984, Michigan celery prices vary much less than
either California or Florida prices.
This is particularly evident in Table 1, which
compares the average variability of prices in Michigan and California during their
15
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Fig 5 ; Michigan
July
18
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Fig
7 ; Florida
Dec
•
Jan
1980
Feb
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1981
Mar
<>
1982
Apr
May
4
1983
Jun
x
1984
Source: f"ederol Stol e Morket News, 19 80- 84 and Fruit and Vegetable Situation and
Outlook Reports. USOA/ERS. 1950 - 8 4.
Figures 5, 6 and 7; Monthly Cele ry Pri ces. Mic higa n , Ca lifornia and Florida
FOB Shipping Price , 1980 - 1984.
16
overlapping marketing season 1•
As shown in the table, over the summer period when
both Michigan and California are marketing celery, California prices are approximately
3.5 times more variable than Michigan prices (864/247
= 3.49).
TABLE 1
CELERY PRICE VARIABILITY SUMMER/FALL MONTHS• (1977-1984)
Price variability index
Season Average Price ($per crate)
Michigan
247
6.85
*Months covered: July, August, September ~nd October
Source:
Price data from Federal/State Market News
USDA/ERS Statistics, 1977-1984.
California
864
5.59
Reports,
1977-1984
and
Establishing Relationships Between Producers and Shippers -- Shippers function as sales
agents for the co-op's fresh celery and have entered into agreements with the co-op to
ship only co-op celery. Each shipper has particular growers assigned to him by the co-op,
where the shipper and the grower decide on the quantity of celery to be handled by the
shipper. There are no formal contracts between s hippers and growers, although once a
grower is accustomed to se!!ing through a shipper he does not usuaUy shift to another.
Each shipper indicates to his growers how much he can sell in a season; however, each
producer makes individual decisions on how much to produce. The co-op does not and has
never set production levels for its producers.
Growers are generaUy assigned to the shipper they prefer, although the co-op can
reassign growers if a shipper consistently has problems obtaining adequate supplies. If a
1 The variability index reflects the amount of month to month change that has
occurred in these prices. The index, as it is applied in Table 1, was estimated in two
steps: l) for each year in the period examined (1977-1984) the variance of the month to
month per cent change in price was calculated; and 2) these variances were then averaged
together over the 77-84 period. This is a modification of the variability measure used by
Dalziel! (8, p. 49-56).
17
shipper is short one week while another shipper has excess, exchanges of product between
shippers are encouraged. If this situation persists, reallocation of grower supply may be
arranged by the co-op. This arrangement requires cooperation among shippers as well as
loyalty by all participants toward the co-op. Various co-op shippers indicated a general
respect and appreciation for the co-op's services. Little shifting around of growers from
shipper to shipper indicates that the co-op has contributed to stability for buyers and
sellers.
The MCPC has increased the flow of information between producers, handlers and
buyers.
This is especially true of market information to producers and shippers. Each
shipper works closely with the co-op member growers who deliver to that shipper. These
growers usually deliver to the same shipper over the years. Since the shipper has close
contact with the buyers, he has considerable supply-demand and market information,
including up-to-date changes in the market. The shipper has approximate estimates on
how much he can sell. This information is communicated back to the grower to be used
in planting decisions. The shipper is also in a position to monitor the grower's quality of
packed celery, making suggestions when appropriate and working with the co-op to set
grades to use as quality standards.
Shippers have indicated that 75 percent of their buyers are the same each year.
This consistency permits shippers to anticipate these buyers' likely needs during the
marketing season and from year to year.
Information on supply and demand conditions is disseminated through a co-op
newsletter, through involvement of shippers and producers on the various co-op decisionmaking committees and through frequent meetings. Most co-op members participate on
at least one committee, which aids the communication process.
The present system encourages cooperation between co-op members.
One
indication of this is the general lack of price cutting by the contracted shippers.
Cooperation takes other forms as well, as in the case of the shippers, whose continual
18
contact with buyers permits them to inform the cooperative and its growers the likely
quantities of celery the market will absorb at various times of the year, and at var ious
prices.
Access to Processing Markets -- MCPC plays an important role in the contractual
arrangements between the growers and purchasers of celery for processing. The MCPC
is identified in the contracts between the co- op and the grower members as the sole
marketing agent of the growers' celery.
The cooperative has its own initial processing plant for preparing celery for sale to
food manufacturers who use celery as an ingredient in such products as soup.
This
service is of benefit to growers, giving them access to a number of processing markets by
transforming the product into the specialized forms desired by food manufacturers.
Access to the processing market also provides the co- op a means to help stabilize
fresh market prices during periods of excess fresh celery. Drastic declines in price are
sometimes avoided
by temporarily diverting excess celery to processing outlets.
Contracts between the co-op and food manufacturers explicitly provide for processed
celery in times of excess fresh celery, and the manufacturers thus often purchase
portions of a temporary oversupply.
However, neither plant capacity nor the volume of
manufacturer's sales can be expanded indefinitely during the processing season, and these
limits place
an upper
bound on how
much excess celery can be sold to the
manufacturers. Still, a sizable amount of dampening of the swings in the fresh price of
celery results from this diversion alternative. The co-op's access to processing outlets is
of further benefit to growers by providing uses for the celery whose size or quality will
not sell readily on the fresh market.
Contracting is generally used to govern the production and sale of celery for
processing. There are two principal methods of contracting for processed celery:
1.
The MCPC enters into direct contracts.
processor or with a major broker.
The contracts can be with a major
The broker, who has in turn contracted with
19
processors manufacturing various specialty and ethnic foods, supplies them with
celery and other important services year round.
By using this broker, the
cooperative gains access to markets which may otherwise be denied them, or are at
least less regularly available.
2.
Co-op members contract directly with processors. Member-growers independently
enter into contracts for supplying celery for vegetable juice. The cooperative still
exercises its oversight role in these cases, because these contracts require the coop's approval.
The terms of trade established in the contracts with celery processors include: 1)
quantity of celery; 2) product form; 3) price; 4) date of delivery; 5) allowance for
unforeseeable occurrences which
prevent delivery as specified; 6) transportation
responsibility; and 7) liability in the event of damage on route or if quality is not that
which was specified.
The co-op sells most of l ts processed product to only two
processors, which greatly simplifies the contracting process.
Contract negotiations determining price, tonnage and the form of the product begin
between the processor and the co-op well before planting, in February. The contract
generally requires that the co-op does some initial processing of the celery.
As the
harvest approaches, the processor and grower establish the exact date for the delivery of
the celery.
According to one of the processor buyers, this system of contracts works
well and satisfies the processor's need for reliable supplies.
Of the co-op's total needs for celery to be processed, 60 percent is contracted at a
specified price with grower members.
Any additional celery needed to fill processing
orders ls purchased from available uncontracted supplies at a formula price. Price for
the non-contracted celery is based on an accepted formula which uses FOB fresh market
prices for four different sizes of celery.
In this way, there are few pricing
misunderstandings between growers and processors.
20
The co-op has exclusive agency marketing responsibility specified in their contracts
with their grower-members, although some outside contracting is also allowed.
For
example, growers are free to sell bulk celery to one of the major processors for the
manufacture of vegetable juice, without co-op approval of the specific transaction.
Also, under limited circumstances, growers can establish their own sales contracts with
processors if the co-op approves the conditions and terms of the agreement.
Quality Standards -- The MCPC has developed and implemented its own quality standards
which are higher than USDA grade standards.
Careful monitoring of packed celery,
production practices and stringent quality requirements for packed celery have resulted
in Michigan's reputation nationwide amongst grocery buyers for exceJJent quality
celery. According to one co-op shipper, eastern market buyers consider Michigan quality
second only to California's.
The co-op markets a range of pack sizes, each with explicit quality specifications.
Each different pack size category has a corresponding range of prices set by the price
committee. The explicit quality standards facilitate this pricing procedure.
Several shippers and processors who are customers of the co- op agreed that the coop has brought about improvements in the ability of Michigan producers to deliver the
products most demanded by consumers. The improvements include: Providing higher and
more dependable quality; sorting and sizing celery for different buyer's needs; and
packaging co-op celery uniformly in 55 to 60 pound cartons. These changes have helped
Michigan earn a good reputation for its celery and have helped raise celery quality
standards across the nation.
Maintaining the Reliability of Supply and Avoiding Gluts and Shortages -- As discussed
earlier, the MCPC assures that they will have approximately 60 percent of their need for
celery for processing sales thr ough contracts with the grower-members. The remaining
40 percent of their need is obtained from uncontracted celery. The 40 percent of the co-
21
op's processing sales which is not pre-contracted with growers is fi11ed with celery during
temporarily excess supplies for fresh market.
This provides the co-op some grower-
members' celery from fresh mar-ket when supplies are temporarily excessive and would
otherwise depress prices on the fresh market.
This action by the MCPC helps to
maintain and stabilize fresh supplies and prices. All of these consequences are of benefit
to member-growers and lead to better coordination of celery supply and demand.
Celery processors, including MCPC, require a consistent and adequate supply of
product to keep their facilities working at full capacity during the four month harvest
period.
MCPC contracts with growers specify the quantity of celery to be delivered
during each week of the harvest period. Growers, having the most knowledge about their
production process, are generally the ones who determine their schedule of plantings so
as to meet this agreed upon schedule of deliveries. This planning process and staggered
delivery dates benefits growers by spreading the harvesting operations over a longer
period of time.
options:
Growers unable to meet the agreed upon delivery schedule have two
(1) to deliver the product a week ahead of the contract time; or (2) obtain a
waiver from MCPC permitting them to deliver in the weeks following the agreed upon
date. Growers are protected from some of the risk due to unforeseen circumstances by
an Act of God clause in their contrac t.
Continuous and stable supplies during the crop year can also improve grower
returns from the fresh markets. Harvests must generally be spread out if serious gluts,
low prices and wasted celery are to be avoided.
Spreading harvests over an extended
season also helps profitability by giving producers celery to sell at the very early and
very late parts of the crop year, when prices tend to be stronger.
The decision on how much to plant and when to schedule plantings and harvests is
ultimately that of the growers, although most growers work closely with their shipper in
making these production decisions. During the crop year, shippers work with growers on
when to harvest celery for the fresh market at the most appropr iate times.
At
22
intermittent periods of excessive fresh supplies, shippers might tell their growers to slow
harvest somewhat, or trim the product more heavily before packing. MCPC also works
with growers and shippers under these circumstances, seeking to divert as much celery as
possible which would otherwise be sold fresh to processed markets.
If an over-supply
problem is extremely serious in the fresh market, shippers can announce a harvest
holiday, although this measure is used only rarely.
MCPC has the ability to announce a harvest holiday or harvest quotas for co-op
growers in the event of a serious over-supply situation in the fresh market. However,
this action has not been taken by the co-op since 1982. MCPC indicates that growers
prefer to market their celery, even if prices can cover only the costs of harvest and
·packing, rather than leave product in the field. There likely have been times since 1982
when there was enough of an excess of North American celery on eastern markets to
justify holding back product in the field.
But, given their grower sentiments, MCPC
seems to feel that Michigan has done as much as it can justify on its own to reduce the
glut, and can not justifiably ask its growers to slow down or temporarily stop their
harvest while other growers market all that they have produced.
Obviously, there is a limit to the extent which MCPC can limit their supplies and
hence impact the market and maintain prices. Michigan's summer harvest coincides with
that of seven other major producing regions of North America (see Figure 3), where
combined U.S. production is at its highest for the year, and prices are generally at their
seasonal lowest. Still, MCPC grower member's scheduling of production and harvesting
minimizes the degree to which harvest season prices wi11 be depressed by Michigan
production.
Other Coordination Issues -- As recognized by MCPC members and non-members,
successful performance of the coordination functions of the co-op is partially contingent
upon the amount and percent of total acreage the co-op markets. Presently the co-op
markets the celery from approximately 65 percent of Michigan's acreage. This is down
23
from a high of 90 percent of total Michigan acreage in the l 970's. This drop means that
free-riders have the potential to become more of a problem and have limited the co-op's
ability to benefit both members and non-members.
Decreases · in the percent of total
acreage marketed by the co-op leads to more difficulties in achieving pricing goals. If
decreases in membership percentage of production continue, this could eventually
challenge the effectiveness of the co-op in their roles for price discovery, price
establishment and price stabilization.
Independent growers, with no co-op affiliation, market their celery through
independent shippers with informal working relationships on a continuing basis.
In
contrast to the relatively formal and written agreements between co-op growers and
their shippers, the arrangements between the independent growers and shippers rely
essentially on informal relationships developed over time.
It is generally recognized that the prices established by MCPC for the entire
Michigan industry benefit the independent producers and shippers by allowing them to
market much of their crop through their standard practice of selling it at prices slightly
lower than the co-op price.
In situations of oversupply, the independent shippers can
undercut the co-op's price even more than the usual price differential. The opportunities
created for free-riders by co-op pricing make it harder for the co-op to hold onto its
membership, and therefore retain its ability to substantially influence Michigan prices.
Since California supplies a major percent of the U.S. celery market, this
considerably limits MCPC's abilities in pricing.
In some ways California has an even
larger impact than the Michigan free-riders on the pricing process.
Florida
Overview -- Florida's celery is pro.duced by only a few growers. The number of celery
farms in Florida decreased from 320 farms in 1945 to 18 farms in 1978, while the average
number of acres of celery per farm increased from 33 in 1945 to 642 in 1978.
Appro~imately
90 percent of Florida's celery is grown for fresh market, while the
-----~-----------------------------------------
24
remainder goes for processing which is a residual market in Florida.
Approximately
82 percent of the state's supplies are grown in the Everglades area, near Lake
Okeechobee. The remainder of the Florida supply is produced in the North Central and
Sarasota areas (11).
The geographic concentration of relatively few, large producers and shippers in
Florida facilitates the flow of information between them. Most Florida celery growers
have diversified farms, producing also leaf vegetables such as chicory, endive, cabbage
and often other products such as sweet corn, radishes, carrots and sugar cane (28).
Market Coordinating Mechanisms in Florida -- Celery production and marketing is
coordinated in part at the producer-first handler level by two special celery marketing
organizations:
the Florida Celery Exchange and a federal marketing order for celery,
which was established in 1965.
The Exchange is a voluntary sales cooperative whose members a re growers and
shippers. In Florida, all shippers are also growers. Of the seven co-op shippers or sales
agents, one is particularly influential and functions also as a celery processor. These
shippers are linked formally to the exchange by ten-year contracts which are subject to
termination for failure to abide by the co-op's requirements. According to the manager
of the Exchange, all celery growers in Florida, with a few minor exceptions, have joined
the Celery Exchange.
The Exchange was first established in 1961, under cooperative legislation.
The
original objectives of the sales co-op were to improve pricing stability, standardize
marketing operations for the whole Florida market and to generate and disseminate more
accurate market information.
The Exchange has signed handler contracts with celery
shippers who act as sales agents for the Exchange. These contracts require the shippers
to abide by all the standard operating procedures of the Exchange including selling celery
for the grower-members at the prices established by the Exchange. The Exchange is the
sole marketing agent . for grower-members.
This is handled by means of grower
25
contracts.
Contracts between grower-members, sales agents and the Exchange have
penalty clauses written in to assure that participants foUow the contractual agreements.
The Exchange has a Board of Directors, comprised of fifteen members and one
public representative.
AlJ of the members of the celery exchange are on the Board.
There is a general manager who administers the three co-op divisions which include
informational services, compliance, promotion and merchandising.
The Exchange employs fieldmen who evaluate supply and quality conditions while
the crop is in the field. The fieldmen phone in to the Exchange pertinent information
regarding the total amount harvested for the previous day by sizes, the expected amount
to be harvested for that day, as welJ as the amount on hand and the amount to be sold.
The Exchange office consolidates the information and relays it to the Executive
Committee. The committee members contact specific sales agents assigned to them to
discuss market conditions and trends.
The Executive Committee meets daily through a special, private telephone
system.
Prices are determined by careful consideration of celery movements,
competition, weather, supplies on hand_ and supply prospects.
Celery prices are
determined every Monday and Wednesday and passed on to the shipper-agents.
In
addition to the pricing function, the Exchange promotes Florida celery and coUects and
disseminates market information.
The Florida Exchange functions in tandem with the federal marketing order for
fresh celery. This marketing order, established in 1965 has provisions which can be used
to regulate many of the factors important to the celery industry, including quality, size,
pack and container, flow-to-market, research and development, as welJ as advertising
and producer aUotments.
Unlike the Florida Exchange, the marketing order is a
mandatory program, although it was voted in by the producers and handlers in a
referendum . AlJ celery growers and handlers in Florida sit on the Celery Administrative
Committee.
This committee can vote to use any of the above mentioned provisions
which are included in the original marketing order.
26
Although the Florida celery marketing order has provisions to perform many
important coordinating functions, only some of these provisions are used. The Florida
celery marketing order includes a producer allotment program, but it has never actually
been used to limit production. The allotment provision does set a "marketable quantity"
to
be
apportioned
among
producers
according
to
their
celery
sales during a
representative period. Each producer's allotment is considered their "base quantity". In
theory, the producer's base quantity could be limited through use of the "uniform rule"
which applies a percentage to the base quantity to arrive at the producer's marketable
allotment. Since the 197 5-76 season, the uniform percent has been 100 percent, meaning
that producers were free to market all their base quantities with no limitation from the
marketing order (12).
The allotments have always been greater than the amount each
grower can actually sell.
In fact, total fresh market shipments have always been less
than the marketable allotments permitted under the marketing order.
The fact that Florida celery shipments have been less than the marketing
allotments is due to the competitive supplies from California and perhaps due to the
efforts of the marketing order committee not to limit production. Limiting supplies in
the short term through producer allotments could disadvantage Florida producers since
their major competitor, California, does not have an industry-wide mechanism like a
marketing order to limit production.
Beginning with the 1978-79 season, a reserve of six percent of the Florida industry's
total base quantity was set aside for the issuance of base quantities to new and expanding
producers. Fifty percent of this was available for new production and fifty percent for
producers with existing base quantities (10).
According to Florida celery marketing
experts, this system is still functioning. If a producer does not make an effort to produce
and sell celery for two consecutive seasons, his base quantity will be declared invalid
(10).
This provision ensures that the planting base is in the hands of growers who will
actually plant celery. More year to year stability in acres planted is thereby encouraged,
27
maintaining Florida's total production and share of the national market. This provision
also helps shift planting base to growers desiring to actively plant as the dynamics of the
market change over time.
In addition to the allotment program, the advertising and research provisions of the
marketing order are utilized. In the 1984-85 season, a handler assessment of two cents
per crate was charged, resulting in a budget of $125,000 to cover the expenses of
advertising, market expansion, and research.
The quality control provision of the marketing order is not utilized.
It is not
mandatory to use USDA grades for Florida celery for domestic consumption. For celery
to be exported, however, USDA inspection is necessary.
request and finance
Grower-packers individually
Federal/State inspection services if they want their celery
inspected. According to members of the marketing order committee, growers prefer to
have the option of inspecting or not inspecting their celery for domestic use, rather than
having mandatory inspection or quality control.
This is true especially in short-crop
years when buyers may settle for lower grades of celery to avoid shortages.
Florida's Coordination Performance -- The Florida Celery Exchange has· fulfilled three
major coordinating functions that contribute to orderly marketing. These functions are:
1) gathering and disseminating supply and demand information, 2) pricing, and 3) setting
standards through contracts between growers and the Exchange.
Pricing is handled by the Exchange in a similar way to that of the MCPC in
Michigan where the pricing board, composed of grower-members, makes weekly pricing
decisions.
The board gathers and interprets the supply-demand information for the
discovery of market clearing prices.
Comparisons between Michigan and Florida price stability are difficult because
celery from the two states is marketed during very different times of the year.
Meaningful comparisons between Florida and California are easier because their
harvesting and marketing seasons overlap.
Table 2 is a comparison of the average
28
variability of prices in Florida and California during the winter-spring months for
1977-84. Comparing these measures of instability with those for Michigan and California
during the summer months (Table 1) indicates that during the winter, on average, price
instability is considerably higher than in the summer.
Still, Florida prices are
approximately three times more stable than California prices during the winter months.
These figures on price variability indicate that relative to California, the Florida
Exchange has helped to stabilize prices, although in a relatively unstable time of the
year.
TABLE 2
CELERY PRICE VARIABILITY, WINTER/SPRING*
1977-1984
Price variability index
Season average price ($per crate)
Florida
California
999.43
7.11
2713.19
7.39
*Months covered: December, January, February, March, April, May, June.
Source:
Price data from Federal/State Market News Reports, 1977-1984 and
USDA/ERS Statistics, 1977-1984. The variability measure is described in
footnote 1.
The impact on market performance of the allotment provision of the Florida celer y
marketing order is not clear cut.
The opinions of experts on the matter vary.
Nevertheless, it is generally recognized that the allotment provision has not been a
limiting factor for Florida celery production since the total fresh market shipments have
always been less than the marketable allotments permitted. The allotment program does
set an upper bound on production which may limit unneeded expansion of production from
becoming far greater than demand.
production.
Florida has shown only moderate increases in
This may be due to the marketing order existence, weather variability,
cultural practices, or financial obstacles.
29
The marketing order sets aside 6 percent of the total base quantities to be reserved
partly for new entrants and partly for expansion of existing producers. In this way, the
marketing order a11ows entry but at the same t i me guards against unneeded expansion.
The allotment provision may create incentives to keep stable and adequate
supplies. Since under the marketing order producers lose their allotment after two years
if t hey choose not to produce celery, the provision encourages orderly production each
year.
If a producer loses his allotment, this allotment becomes available for a new
producer wishing to enter the market.
California
Overview -- Since 1980, California has produced approximately 70 percent of U.S.
celery. There are approximately 90 growers of celery in California. Roughly 40 of the
growers are also large-scale handlers and marketers of celery. Most growers and growerhandlers have large vegetable producing operations averaging 450 acres, only a part of
which is devoted to celery.
The main portion of the acreage is used to produce other
vegetable crops, including lettuce, cole crops and tomatoes. Celery is only one of the
several vegetables packed and marketed by the handlers.
The California celery industry is both the largest and the most complex portion of
the U.S. celery subsector.
No state-wide organization resembling either MCPC or the
Florida Celery Exchange exists in California.
Within California at nearly any time of the year there are grower-handlers packing
and marketing a large and diverse set of produce. The grower-handlers often provide
complete truckloads of mixed lots of produce, which can be shipped directly to specific
stores. Both of these characteristics tend to make the California shippers the suppliers
of first cho ice for supermarket chains that have year-round needs for fresh vegetables.
The relatively small number of large, diversified handlers permits the chain buyers to
have a set of stable suppliers for much of their produce needs. Other things be ing equal
30
(particularly price and quality) some buyers tend to prefer to do business with these
handlers because of the associated reduction in their information and transactions costs.
Coordinating Mechanisms in California -- The majority of California's celery is produced
by growers who are not members of a cooperative for the marketing of their celery.
Although there are some celery growers cooperatives in California, they have a
relatively small share of the market. There seems to be several reasons for this lack of
group action. Most California growers are large-scale producers of many crops, of which
celery is only one and generally a minor contributor to the growers' revenues. Many of
the growers also are major first-handlers of their and other growers' products, and
perform such functions as the packing, selling and shipping of the vegetables.
The
volume of product handled by these grower-shippers gives them the ability to fulfill for
themselves many of the functions a larger cooperative or industry organization might
provide. These growers and grower-shippers appear to have not experienced or perceived
enough shortcomings in their present situation to justify organizing themselves in the
manner found in Michigan and Florida.
Thete is a state marketing order for California celery which provides for
production and marketing research. This marketing order provides for the collection of
the funds needed to support these activities.
Prices are established in the California celery industry within the set of
transactions between the chain-store buyers and the 40 handlers of fresh produce,
without the influence of a major marketing co-op as in Michigan and Florida. The buyers
for the larger chains generally have field people who provide them with information
about the availability of supplies in the state. The buyers deal with the handlers and
agree on prices based on both parties' knowledge of the current market situation. Sellers
say that the buyers generally have substantial market information. Handlers also have
substantial market information so that they know the going price for produce and the
gener(!.1 condition of the market. Market News supplements the informal communication
31
network.
Experts within the industry indicate that buying and pricing activities of the
buyers for the four or five leading national supermarket chains, who tend to have quite
complete market information, have a large influence on the daily or weekly prices for
celery.
Production decisions are based on individual producer's perceptions of what the
market will absorb and upon expected prices.
There are no attempts to collectively
influence supply in California. Supply management decisions are strictly in the hands of
the individual producers.
California
Coordination
Performance
-- The
evaluation of
market coordination
performance in California is less detailed in this report than that of performance in
Michigan or Florida because information obtained on the California situation was more
limited.
Retail produce buyers indicate that on average, California produces and packs
consistently high quality celery which is available year round. California producers and
handlers have earned a good reputation for marketing top quality celery. As a result of
its consistent quality and reliable year-round supply, California's celery is preferred over
that of other states by many retailers and other buyers.
Since there is a high degree of vertical integration of California producers into the
shipping function, it is difficult to accurately separate the risk borne by produce rs versus
handlers in the production and marketing of California celery. It appears that the large
producer-shippers have some involvement and influence on the formation of California
celery prices.
The graph of California monthly celery prices as compared to Florida and Michigan
prices over the period from 1977-84 shows that California prices seem to vary the most
(Figures 5, 6, and 7). This conclusion is supported by the data on the relative levels of
average price variability in California, Florida and Michigan, presented earlier in Tables
1 and 2.
- - ·· --------·--~----------------------------------------
32
The data indicate that there is significantly greater price instabili t y in California
than i n either Michigan or Florida.
While the causes of these relative differences a re
probably numerous, it seems reasonable to infer than part of the cause is the nature of
the California price discovery system. The implication is that the MCPC and the Florida
Celery
Exchange
price
committees
are
perfor ming
better
in
their
price
discovery/coordination role than the system in California.
California's relatively greater price instability may be of less concern to the
handlers and growers in that state than would be the case for specialized celer y growers
in Michigan. California growers and handlers may be less concerned about celer y price
variability because of their broader mix of fresh produce, and celery is perhaps less
i mportant in terms of quantity and revenue relative to the more important c rops like
lettuce and tomatoes. The uncertainty and risk created by the instability in California
celer y prices must be judged in the context of the broader set of crops and services the
growers and handlers produce.
Celery price risk may not contribute greatly to the
overall risk for an individual firm . For those few growers that grow celer y e xclusively,
celery price instability would be expected to be of more concern. Overall, though, the
structure of the individual operations in the California celery industry would seem to
allow these firms to handle the risk created by c elery price instab ility more easily than
for more specialized growers in Michigan if there were no cooperative in Michigan.
If California were. able to reduce their price instability, significant decreases in
overall market price instability would likely occur throughout the countr y because of
California's large share of the national market.
If California's prices become mo re
stable, Michigan and Florida 's pr ices would likely respond similarly.
Figure 8, a graph of California celer y production from 197 5 to 1984, shows the
large expansion which occur red during that period.
California supply increased
40 percent from 10,542,000 cwt to 14,760,000 cwt i n the period from 1975-84 (6). This
large increase in California's production has contributed to the over-supply problem in
the U.S., a problem that is discussed in the following section.
.....,
14
.t:
O'
Q)
s:
-0
Q)
13
\...
-0
c
::>
I
12
0
1....1
1....1
(/)
"O
c
0
11
(/)
::>
0
.t:
I-
10
75
76
77
78
79
80
81
82
83
84
Sou rce: Ca li forn ia Crop and Lives t ock Reports . 1975-84.
Figure 8 ; California Ce lery Produ c t ion, 197 5 -84.
34
Major Coordination Performance Problems
in the Celery Subsector
In this section, major coordination problems will be discussed with reference to the
relevant structural and behavioral character istics contributing to the problems.
Some
alternative arrangements to improve coordination in the celery subsector will be
outlined.
Supply Problems
The supply of U.S. celery increased in the period from 1975 to 1984 by 30 percent
while total U.S. consumption (per capita consumption multiplied by population) has
increased at a lower rate.
Increases in exports have absorbed some of the resulting
excess supply. Conditions of over-supply in many years have, however, had a depressing
effect on prices.
Most subsector participants in the major producing areas agree that there is a
tendency toward over-supply in celer y production. The common situation in celer y, like
other annual vegetables, is illustrated by the following quote from a Michigan produce
leader, "The potential for overproduction is there every year (even without new
entrants)" (17). One commonly held belief is that producers should let "Mother Nature"
solve
the
overproduction
problem
without
resorting
to
mo re
institutional
or
organizational methods. A somewhat related view was stated by the California Celery
Research Advisory Board when referring to the celery subsector, " ••• the key problem is
over-supply • • • There is just too much celery planted and it takes a disaster in some
area to keep price at a profitable level" (6, p. 19).
Because celery production is a specialized enterprise with specialized production
equipment as well as specialized managerial knowledge, growers do not rapidly shift their
'
resources out of production when prices are low. There seems to be a range of prices,
including some prices that are below growers total cost per crate, within which celer y
producers will continue to produce similar supplies due to their highly specialized and
fixed assets.
35
The problem of annual and seasonal over-supply is recognized by celery industry
participants around the country.
The problem itself stems from the sum total of the
actions of many individual producers in all of the growing regions in North America.
Neither the specialized celery marketing institutions in Michigan and Florida nor the
large grower-shipper firm structure in California can be realisticalJy expected to alter
this condition. Of the major producing areas in North America, California could have the
single greatest impact on the national celery marketing situation by managing their
supply in some overall coordinated manner. Past experience indicates that it is unlikely
that California would uni1atera11y manage their output without some similar actions on
the part of the other celery producing regions.
At the present time there is not a
national arrangement to either achieve this type of agreement or to more effectively
coordinate supply with demand in some other manner.
The over-supply problem is the most disruptive in the summer months when celery
marketings from Canada and California add to the more local supplies in eastern
markets, making it difficult for eastern and midwestern producers because of low prices
and in some cases an inability to find outlets for their celery.
The average U.S. monthly price of celery for 1979-1984 is depicted in Figure 9.
The consequences of the summertime oversupply is evident in the low average prices in
July through October.
These are the months when six of the eight major celery
producing regions are harvesting and se11ing to eastern markets.
Large shipments from California in the summer months are often shipped with no
pre-arranged destination nor price. These loads may be handled in terminal markets or
may be sold directly to chain stores. Eastern and midwestern producers have difficulties
predicting the arrival of this celery.
As a result of large summer supplies, California and other shippers sometimes se11
their celery during the summer period of large supply at prices below grower costs. Even
if this occurs during the summer months, prices may be high enough during other times of
the year when supply is more in balance with demand so that the average annual prices
- - - - - - - ---- --- - --
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_J
/
0
0
3
2
J
F
M
A
M
J
JL
A
s
0
D
N
Sou rce: Fruit and Vegetable Situation and Outlook Reports .
USDA/ERS . 1980-84.
Figure
9 ; U.S . Celery Price, Average Monthly , 1979 - 8 4 .
,
.
37
for California may exceed average annual costs. It appears that California supplies may
view summer celery as a service item for their retailer customers rather than as a
primary profit l tern.
This is more possible for California than Michigan beause of
California's broader product mix. It is unlikely that, year after year, California growers
would continue to grow and ship to eastern markets if average annual returns were
negative. Nevertheless, California shipments to eastern markets in the summer months
are a significant contributor to the large summer supplies of celery and often low
summer prices.
Celery Imports -- Another factor which often contributes to a seasonal glut in the
eastern markets is a typical summertime increase in celery imports from Canada (see
Figure 10). The Canadians produce only during the summer and fall and their shipments
to the eastern markets are highest in August and September. Some in the U.S. industry
believe that Canada's production ls expanded because of the presence of Canadian
federal and provincial production subsidies.
A study done by the International Trade Commission (ITC) has compared the
competitive position of selected Canadian and U.S. vegetables in U.S. markets by
evaluating the different types of federal programs available. The ITC study indicated
that there are no known U.S. federal or state programs (other than marketing orders, of
which there are none for celery in the Great Lakes area) for fresh vegetable growers that
provide any form of financial assistance. In contrast, Canada has federal programs for
financial assistance for storage construction, interest free cash advances, government
purchases of unmarketed products, price supports, long-term loans, crop insurance and
trade promotion programs. Provincial governments also provide support for construction
of storage, processing, and grading facilities, as well as assistance in other areas of the
production process (17). Despite these types of assistance available to Canadian celery
3 -,----- - - - - - - - - - - - - - - - - - - - - -·-- - - - - - - -
2 .4
- 1980
(/)
0
z
::>
0
1.8
- 1978
0..
u...
0
(/)
z
0
1.2
_J
_J
"-"'
00
~
0.6
J
F
M
A
M
JL
A
s
o·
N
D
Source: Bureau o f Census . U.S . Imports for Consump tion. 1979-84
Figure 10
U.S. Monthly Celery Imports. 1978-1980.
I
•
39
industry, it appears that celery as distinct from the other vegetable industries in Canada,
has not taken advantage of this available support.1
It is more likely that the Canadian tariff, rather than the aUeged subsidies, has a
greater impact on the overaU U.S. market.
In 1987, Canadian import tariffs on U.S.
celery in the summer/faU period were approximately two to four times greater
(depending on the FOB price) than the U.S. tariff on imports from Canada. The exchange
rate has also hampered U.S. exports to Canada and has encouraged imports from
Canada. Without the Canadian tariffs, more U.S. celery would be delivered to Canadian
markets.
Such deliveries would reduce Canadian domestic price, make their domestic
production Jess profitable and cause Canadian growers to produce Jess celery.
The
tariffs, by maintaining Canadian production, are therefore contributing both to the
general North American summer/fall oversupply situation and Canada's tendency to
export a part of their crop to the U.S.
Even with the presence of the Canadian tariffs, the contribution of the Canadians
to the oversupply problem can only be marginal, since they have a smaU share of the U.S.
market. As shown in Table 3, imports in the summer /faU period from Canada since 1978
have averaged less than l percent of total U.S. production (ranging from 1.2 percent to .6
percent).
Canadian imports as a percent of Michigan celery production is a better
indication of the degree of Canadian competition in the eastern markets. Their share of
these markets is relatively smaJJ (an average of 5.9 percent over 1978-1987, and 6.7
percent for 1982-1987) (Table 3). StiU, seUers of this much volume can have a significant
short term effect on a market by quoting lower prices, particularly during periods of
1 From conversations with members of the Canadian federal and provincial
agriculture ministries. The storage construction program was the biggest and most
important for the vegetable industries. The Canadian carrot, potato and onion industries,
which rely more on the use of storage than celery, have utilized the storage program to a
greater extent.
TABLE 3
CELERY IMPORTS FROM CANADA TO U.S., MICHIGAN AND U.S. PRODUCTION; JULY-DECEMBER, 1978-1987
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
Average
(1,000 cwt.)
Imports
55
47
48
73
101
104
69
81
70
96
74
936
1,153
1,387
1,440
1,551
1,295
1,560
1,312
1,040
1,147
1,282
8,879
8,244
8,716
8,896
9,772
9,181
9,312
8,642
7,979
8,153
8,777
~
Mich. Production
U.S. Production
(Percent)
Imports as a:
% of Michigan
5.8
4.1
3.5
5.1
6.5
8.0
4.4
6.2
6.8
8.4
5.9
% of U.S.
0.6
0.6
0.6
0.8
1.0
1.1
0.7
0.9
0.9
1.2
0.8
Source: Agricultural Statistics, USDA, 1980-87; Fruit and Vegetable Situation and Outlook Reports, 1988; Bureau of
Census, U.S. Imports for Consumption, 1978-87.
0
41
volatility.
The size of these effects, while potentially substantial in volatile markets,
are significantly limited by Canada's relatively small share of the U.S. market.
Supply Management in Different States -- Cooperative celery marketing organizations in
Florida and Michigan have provided some coordinating functions (including limited supply
management programs and information collection) which are necessary for orderly
marketing. Since these cooperatives function within one state only, and do not cooperate
with one another, they are limited in their ability to match supply with demand.
The
largest
producing
state,
California,
does
not
have
an
industry-wide
organizational supply management system which helps producers to make accurate
production decisions appropriate for the existing level of demand. The lack of a highly
coordinated system of supply management has contributed in a large expansion in
California production, sometimes inappropriate timing of celery shipments from
California to the east and highly variable California monthly celery prices.
These
factors have detracted from high coordination performance in the whole celery
subsector.
Alternatives to Improve Coordination of Supply
There are several alternatives which might be used to help reduce the supply
coordination problems of the celery subsector. Some combinations of alternatives might
be most appropriate.
Market Quota Marketing Order -- Year to year supply management for the national
celery subsector to maintain a well coordinated balance with demand might be achieved
with the use of marketing quotas under a federal marketing order. This approach might
also be used to balance seasonal supply flows with within-season demand during each
week or month.
This approach would need to be industry-wide and forward-looking if it is to be
most successful in balancing industry supplies with demand. Market quotas may help to
stabilize prices and encourage efficient resource allocation by helping to avoid periodic
42
overplanting. Supply management with marketing quotas, if appropriately applied, might
keep producer prices more consistently near grower costs and hence avoid large grower
losses from oversupply without significant impact on consumers. One reason for this is
because relatively small decreases in the producer's price per crate can have a large
impact on the producer's net revenue, but might not significantly change the retail price
or the consumer's price perception.
This is related in part to the tendency for some
f.o.b. price decreases to not be reflected at the retail or to be only partially reflected at
retail, while f.o.b. price increases are more likely to be definitely and quickly reflected
in higher retail prices.
To illustrate this, a starting-point scenario can be used in which celery growers
plant enough acreage so that average prices approximate the total cost per crate for
effectively managed farm operations.
But, as often happens in farm production
industries, growers may in any given year overplant with the resulting unneeded larger
celery production causing lower f.o.b. prices and hence lower farm prices. A 2-3¢ per
pound decrease at the farm level will be a substantial percentage decrease in the average
farm price and can make a very large impact on the farmer net return level resulting in
substantial net losses to growers in the example when there is an excess of supply. By
contrast a 2-3¢ per lb. decrease in f.o.b. and farm price may result in no change in retail
prices. This would be particularly likely if (a) retailers perceive that consumers' demand
in that price range is highly inelastic (a common situation); (b) retailers price the
commodity "on the nines" (which is also very common for fresh produce items); and (c) if
retailers anticipate that the f.o.b. price decrease is somewhat temporary.
Thus if
farmers, such as celery growers, could use a marketing quota program such as under a
marketing order to avoid overplanting, oversupplies and low grower prices, they might
keep grower prices at approximately their total costs per pound and avoid losses from
low prices without a major impact on consumer prices. The result of a marketing quota
program could also include improved vertical co-ordination and more consistently
efficient resource allocation by avoiding periodic unneeded plantings.
43
Further analysis of economic impacts on producers and consumers at different
supply levels may be useful. This could be a topic for future research.
Use of a marketing quota program would need to apply to growers in all regions for
greatest success and in order to be equitable. For growers to accept such an approach,
they would need to be convinced that the economic gains from balancing total U.S.
supplies with demand would be worth the limits that would be placed on them as
individuals to make planting decisions.
Accurate projection of future demand trends would be needed for an effective
marketing quota system.
Because changes in consumer preferences occur slowly,
analysis of demand trends, supplemented with periodic background studies on certain
aspects of demand, should be able to provide adequate demand estimates.
Supply control marketing orders, particularly those with marketing quotas, have ·not
been well received by the present federal government administration. In addition, celery
growers in some of the producing areas seem to have a general mistrust of introducing
group action or government involvement of any kind.
Producers in California and
elsewhere may doubt that an industry-wide supply planning system such as a market
quota program would be of sufficient benefit to be worth trying. Supply management
with marketing quotas may be perceived by some as a risky approach with the possibility
of lower volume of shipments to certain firms leading to lower returns to that firm than
with no quotas.
The issue of potential imports from Canada would also need to be dealt with if
there were to be a marketing quota program. A U.S. supply management program would
be most effective if Canadian supplies were also affected.
Equalizing the tariff on
celery between the two countries could lessen the problem of potentially large increases
in imports.
A well managed marketing quota marketing order could help producers to supply
the amount of celery that will satisfy demand at a price sufficient to cover the cost of
production for
typic~l
well managed firms while avoiding frequent or persistent surpluses
44
of supply.
In this way, a marketing quota marketing order could lead to more orderly
marketing conditions.
Another alternative for industry-wide supply planning and management could be to
handle this through industry marketing organizations in each major celery producing
area.
For example, an arrangement similar to the Michigan Celery Promotion
Cooperative, with additional provisions for acreage contracts with its members could
improve the supply-demand balance throughout the celery subsector.
Handler Prorates -- Handler prorates could be used to improve the distribution of celery
supplies over time and to equate these supplies with demand.
The analysis of price
variability in each producing area indicates that celery prices in California and to a
certain extent, Florida, are quite unstable from month to month (Tables 1 and 2).
Smoothing out the flow of celery to the market may reduce the problem of low summer
prices and instability in Florida and California prices. The flow of celery to the market
could be evened out through use of a marketing order with handler prorates to set the
maximum shipping allotments per week for each region and/or each shipper.
With a handler prorate the shippers would each have a proportionate share or
prorate to the total appropriate supply. The prorate mechanism has potential to improve
the timing of when shipments are marketed. This seems to be a facet of the seasonal
over-supply problem which is not presently being adequately addressed according to a
number of celery industry participants. It might be most desirable to use prorates only
when they are most needed, and not to use them during portions of the year when there
has been a history of well coordinated supply and demand. For example, prorates could
be used during the summer months when large supplies generally pull down prices below
growers' costs but perhaps not during other parts of the year.
Limiting weekly fresh
shipments in the summer months may partly eliminate the summer glut, raise grower
prices in these months somewhat and stabilize producer returns.
45
It is believed by some that prorates may lead to product which is suitable for the
fresh market being sold into processing markets.
Since there is a limited demand for
celery in its processed form, only a limited amount could be diverted to processing.
Celery is only used in relatively small quantities in processed products compa red to total
production and has a limited potential for expansion.
However, plantings could be
adjusted each year with this in mind much as the Michigan celery co-op does now .
Handler prorates would have an important drawback for a perishable crop like
celery since it cannot remain in the field once it is mature for more than a few days. In
addition, once harvested, celery can only be stored for a few days. For these reasons,
prorates might on occasion lead to some celery being left unharvested in the field . In
this case, curtailed plantings would lead to a better use of resources.
However, to
address this, growers could adjust acreage planted in response to the known prorate
amounts for each week. If this were done effectively, a handler prorate program might
be an alternative for improved coordination of celery supplies with demand.
Possible Changes in Summer Supplies from California -- Since the largest expansion in
production, and a large percentage of the summer supplles in eastern markets come from
California, changes in California's shipping patterns could potentially improve the
summer supply situation considerably.
By shipping less celery east in the summer
months, California producers could have a substantial effect on eastern supplles during
the summer.
Supplying a larger proportion of the celery supplies from the east would
also save freight costs. Presently it costs California shippers approximately two dollars
per crate more than Michigan shippers for freight to eastern markets.
One
alternativ~
for California would be to expand their exports to the Pacific Rim
countries which have shown increases in import demand for fresh vegetables. Celery has
been ranked sixth in the fresh vegetables exported to this area for the past two years
(6). There seems to be potential for increasing fresh vegetable exports including celery
to this part of the world and California is in a prime location to conduct this trade.
46
The Problem of Incomplete Market Information
Another
coordination
performance
problem
reported
by
celery
subsector
participants in Michigan, Florida and California is the lack of accurate, timely supply and
demand information to aid producers and handlers if} making production and marketing
decisions.
The market information that producers in the various parts of the country
need includes:
weekly plantings; timing of harvest in each region; daily shipments and
the destination market; estimations of the following week's supply in each area and data
on production and trends in both major and minor states. Since production is dispersed in
concentrated pockets across the nation, with differences in production practices and in
the timing of harvest, communication of extensive market information is important.
Sources of information available to subsector participants include:
publications; electronic
new~
members of the subsector.
Market News
services; trade journals; and conversations with other
Each of these sources has its limitations according to
subsector members interviewed.
Electronic news services such as PRONET which provide industry news, weather
reports, supply, demand and price information, as well as providing the opportunity to
post notices to buy and seU produce, are not widely used. Some of the reasons why this
type of service has not been widely accepted in the celery subsector have been described
by knowledgeable participants to include: 1) weather reports can be obtained easily at a
lower cost from the T. V. or newspaper; 2) commodity information is printed in The
Packer newspaper; 3) trading activity is perceived to tend to pull down prices;
4) membership rates are expensive.
Personal conversations among subsector participants is useful to a degree as a
source of market information to participants. In a competitive environment, however,
market information passed in this way can become distorted.
The judgments of
individual participan ts may be inaccurate. As a result, many in the celer y industry feel
that relying solely on this approach to provide market information is inadequate.
47
A specialized electronic information system for celery might be developed for use
by producers and handlers in all states.
This might have the potential to improve
communication between producing regions and reduce errors in production and marketing
decisions.
,.
A new electronic information system for all vegetables is being planned for
California.
This could be an important tool in improving coordination in the celery
subsector.
This system could help producers better anticipate the amount of supplies
that will hit particular markets on specific days.
programs,
there
are
costs
to
generating,
As with other industry generated
collecting and
disseminating
market
information. These costs would have to be borne by the users.
Variable Quality Problem
Subsector participants in the three major producing states have pointed out a
problem with inconsistent quality standards being used in grading celery. The present
USDA system for celery grading is unclear and not widely followed by producers or
shippers.
Those in the subsector feel that current celery grading and quality control
allows too much variability of quality packed, with some important aspects of quality not
graded.
USDA standards categorize celery into three grades which include U.S. Extra No. 1,
U.S. No. 1 and U.S. No . 2 as well as an unclassified rating for that celery which is not
graded. According to many in the subsector, the grade of U.S. No. 1 is the only federal
standard which is presently considered.
Those in the subsector usually consider U.S.
No. l to be the _lowest acceptable quality, with most buyers requiring higher quality
characteristics. Most packers and handlers attempt to sell celery of higher quality than
U.S. No. 1; however, these higher qua!i ty specifications are not uniformly set across the
nation.
Variable quality standards across the subsector may result in lower quality products
pulling down the whole subsector price. Those growers producing superior quality may
not be adequately rewarded for their efforts and conversely, producers of inferior quality
may be given inappropriate signals to continue to produce lower quality. Variable
q~ality
48
standards confuse pricing procedures and c reate uncertainties as to the quality a buyer
will receive. Variability in quality may contribute to the unstable monthly celery prices
for certain regions.
Possible Revision of USDA Grade Standards -- Some celery industry participants believe
that revisions to the USDA grades and standards would be appropriate.
The celery
industry and the USDA could work together to explore possible changes in those U.S.
celery grades which would be the most relevant in view of the market needs and trading
practices.
Some participants believe that a more specific description of celery grades
would help producers and packers know what to strive for. Some say that more detailed
grades for character is tics other than size are needed to better describe the quality being
traded. Producers and handlers would need to agree that uniformity in quality standards
and revised more specific grades will increase their returns before they would support
this type of change.
Another alternative to changing USDA grades could be for influential shi ppers or a
marketing co-op such as that in Michigan or Florida to establish more specific private
grades and to use these in their market transactions.
Since the celery subsector is
dominated by a few large producer-shippers and marketing co-ops, industry action may
be possible without the involvement of government.
There is no guarantee that a new, more specific set of grade and quality standards
will encourage packers, handlers and buyers to use them.
On the other hand, if the
industry participants are involved in developing revised U.S. grades and standards which
are based on market preferences and current practices, the revised grades are more
likely to be followed by many in the industry.
A Federal Quality Improvement Marketing Order -- Another alternative which could be
used in conjunction with, or perhaps instead of, revisions in grade standards is that of a
federal marketing order with minimum quality provisions. A federal marketing order of
this type could ensure more uniform quality and/or more complete adherence to quality
•
49
standards throughout the industry and over time. This approach could prohibit shipments
of unsatisfactory celery.
More dependable quality could improve the image of celery
among buyers and consumers, and may as a result increase celery demand over time.
Quality standards could be adjusted periodically depending on the size of the crop to
•
,.
prevent drastic price changes.
Well-defined grades across the country could lower
marketing costs since fewer shipments would be rejected at the retail level. This might
mean less waste within the marketing channel.
It may be difficult to institute a federal quality marketing order since grower-
shippers with well known brands might be unwilling to vote for it. These firms have
established their own quality standards and may feel that they have significant enough
market advantages to justify not favoring an industry-wide program.
They may not
appreciate improving the quality of other sellers if it means increased competition from
other firms.
Summary
The focus of this research has been on the marketing organization of the celery
industry and the associated impacts on market coordination performance -- particularly
with respect to performance on quality, over-supply and price instability.
The over-
supply problem is, at !east in part, connected to production mistakes stemming from
price instability and conversely, instability in annual prices would be partly due to
production mistakes.
The analysis reported in this paper indicat-es that the marketing arrangements and
organization in the celery industry affect the system's performance.
.
Improving the
system's performance means that serious consideration must be given to how the
organizational arrangements are currently structured and how the structures might be
changed in order to achieve desired performance goals.
One area which might warrant further investigation is to analyze the possibility of
expanding the role of contracting for fresh celery. One possibi!i ty that might warrant
further analysis is to investigate more closely the costs and benefits that could result
50
from the creation of a national market information network for celery or many produce
items that could carry up-to-date and complete information on plantings, prices and
shipments. An important aspect to include in examining this issue would be to consider
the network's possible impact on the stability of the industry. The significant question
that would need to be answered is could contracting lead to better planning in terms of
capital investments as well as planting and marketing decisions?
Contracting is
currently in use for processed celery in Michigan and for some fresh celery in
California.
Such contracting could take place in the traditional manner or it might take
place in an industry-wide electronic market system such as the computer aided
marketing program under consideration in California.
•
51
References
•
•
•
(1)
Agricultural Marketing Service, A Review of Federal Marketing Orders for Fruits,
Vegetables and Specialty Crops, Economic Efficiency and Welfare
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D.C., 1982.
(2)
Agricultural Marketing Service, "Economic Appraisal of Florida Celery 1984-85,"
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(3)
Agricultural Marketing Service, "Producer Quotas under 608c(6)(B), Florida
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(4)
Agricultural Marketing Service, "United States Standards for Grades of Celery,"
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(5)
Agricultural Marketing Service, "United States Standards for Grades of Celery,"
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(6)
Batkin, Ted, Ray Holt, Merita McMilin, "California Celery Research Advisory
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(7)
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(10)
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(11)
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(12)
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52
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(20)
Shaffer, James D. and Department of Agricultural Economics, Toward More
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E. Lansing, Michigan, 1984.
(21)
Shaffer, James D., "Toward a Workable Definition of Orderly Marketing,"
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(22)
Shonkwiler, J. Scott, "A Weekly Price Determination Model for Florida Celery,
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Talbott, George, and Florida Celery Committee Records, "A Self-Help Program,
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•
Area Firms Work to Satisfy
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•
.
•