Study shows contract pricing best for Salinas Valley's Iceberg lettuce
Study shows contract pricing best for Salinas Valley's Iceberg lettuce
SALINAS, CA -- A yearlong profitability study of Salinas Valley's Iceberg lettuce quantifies what most Salinas Valley shippers have come to recognize: Forward contracts provide the best chance for profitability with their Iceberg lettuce programs.
Roland Fumasi, a graduate assistant at California Polytechnic State University, unveiled the results of his yearlong study May 24 to a contingent of about 25 Salinas Valley-based shippers, salespeople and growers.
The study was conducted under Cal Poly's California Institute for the Study of Specialty Crops, and was the winning research project in the business and economics category in a recent contest among all 26 schools in the California State University system.
"For three decades, Salinas Valley has moved toward more contracts," Mr. Fumasi said, "but no one really looked at the costs and benefits of doing it. Some growers believe Salinas Valley wouldn't survive if it had to rely on the spot market.
While Mr. Fumasi often referred to "growers, his study is geared toward shippers' dealings in the marketplace. The Salinas Valley has many sizable companies that are grower-shipper operations.
Mr. Fumasi's research model compared and contrasted three market types: free market, 100 percent forward contracting and a direct payment price support mechanism that Mr. Fumasi created for the purposes of the study. He calculated and compared the net income per acre for each year of the three payment types -- assuming that 100 percent of sales are one of the three ways -- for the years 2003-2012. He used wrapped lettuce as his basis for the study and took into account random shifts in supply and demand.
"The average grower in the Salinas Valley is expected to lose money on the spot market, Mr. Fumasi said. "The average grower in the Salinas Valley is expected to make money on contracts.
The spot market offers the maximum potential always for profit, but the potential for loss is always greater, Mr. Fumasi said.
Mr. Fumasi's study showed a probability of losing money in 2012 under price supports was 73 percent, followed closely by a 71 percent probability of losing money under the free (spot) market. With forward contracting, the probability of losing money dropped to 33 percent.
Bill Munger, sales manger of foodservice and fresh processed product for A. Duda & Sons Inc. in Salinas, said that about 60 percent of Salinas Valley's total Iceberg lettuce is contracted for processing and another 20 percent or so is contracted for carton lettuce. He said that shippers such as Duda can go to their grower base "and tell them we need to go out and contract. Not only is it good for the shipper, but the grower benefits as well, he said.
Shippers face yield risk and price risk. Mr. Fumasi's calculations show that while Salinas Valley's Iceberg lettuce prices typically stay in a relatively narrow range, shippers' costs keep going up. Mr. Fumasi calculated that the cost to produce an average acre of Iceberg lettuce in the Salinas Valley is $8,400 in 2005. He estimates the average cost to be $10,000 per acre by 2012.
Of course, the vagaries of the marketplace include the effects of weather and pests. Mr. Fumasi mapped out the fluctuation in yields per acre for the years 2005 through 2012. "Even if you contract above expected costs, there's still a 30 percent chance of loss because of yield risk, he said.
Basil Mills, patriarch of Salinas-based grower-shipper Mills Family Farms, said that Mr. Fumasi's study didn't include the times that shippers are forced to buy on the spot market to fill a contract -- sometimes at a considerable cost -- and pointed out that California's Imperial Valley and Huron and Yuma, AZ, all have different cycles.
Mr. Mills was quick to point out that the chance of receiving government supports "is 1 percent or less, and added, "Most of us are happy about that.
Mr. Munger said that the "fear is there would be a huge oversupply if the Salinas Valley operated under government subsidies.
Chris Bunn, president of Salinas-based Crown Packing Co., said that Mr. Fumasi's study refutes the notions "of all the government people who think farming is a cash cow.
That misperception has consequences on both the local and national levels, he said.
Roland Fumasi, a graduate assistant at California Polytechnic State University, unveiled the results of his yearlong study May 24 to a contingent of about 25 Salinas Valley-based shippers, salespeople and growers.
The study was conducted under Cal Poly's California Institute for the Study of Specialty Crops, and was the winning research project in the business and economics category in a recent contest among all 26 schools in the California State University system.
"For three decades, Salinas Valley has moved toward more contracts," Mr. Fumasi said, "but no one really looked at the costs and benefits of doing it. Some growers believe Salinas Valley wouldn't survive if it had to rely on the spot market.
While Mr. Fumasi often referred to "growers, his study is geared toward shippers' dealings in the marketplace. The Salinas Valley has many sizable companies that are grower-shipper operations.
Mr. Fumasi's research model compared and contrasted three market types: free market, 100 percent forward contracting and a direct payment price support mechanism that Mr. Fumasi created for the purposes of the study. He calculated and compared the net income per acre for each year of the three payment types -- assuming that 100 percent of sales are one of the three ways -- for the years 2003-2012. He used wrapped lettuce as his basis for the study and took into account random shifts in supply and demand.
"The average grower in the Salinas Valley is expected to lose money on the spot market, Mr. Fumasi said. "The average grower in the Salinas Valley is expected to make money on contracts.
The spot market offers the maximum potential always for profit, but the potential for loss is always greater, Mr. Fumasi said.
Mr. Fumasi's study showed a probability of losing money in 2012 under price supports was 73 percent, followed closely by a 71 percent probability of losing money under the free (spot) market. With forward contracting, the probability of losing money dropped to 33 percent.
Bill Munger, sales manger of foodservice and fresh processed product for A. Duda & Sons Inc. in Salinas, said that about 60 percent of Salinas Valley's total Iceberg lettuce is contracted for processing and another 20 percent or so is contracted for carton lettuce. He said that shippers such as Duda can go to their grower base "and tell them we need to go out and contract. Not only is it good for the shipper, but the grower benefits as well, he said.
Shippers face yield risk and price risk. Mr. Fumasi's calculations show that while Salinas Valley's Iceberg lettuce prices typically stay in a relatively narrow range, shippers' costs keep going up. Mr. Fumasi calculated that the cost to produce an average acre of Iceberg lettuce in the Salinas Valley is $8,400 in 2005. He estimates the average cost to be $10,000 per acre by 2012.
Of course, the vagaries of the marketplace include the effects of weather and pests. Mr. Fumasi mapped out the fluctuation in yields per acre for the years 2005 through 2012. "Even if you contract above expected costs, there's still a 30 percent chance of loss because of yield risk, he said.
Basil Mills, patriarch of Salinas-based grower-shipper Mills Family Farms, said that Mr. Fumasi's study didn't include the times that shippers are forced to buy on the spot market to fill a contract -- sometimes at a considerable cost -- and pointed out that California's Imperial Valley and Huron and Yuma, AZ, all have different cycles.
Mr. Mills was quick to point out that the chance of receiving government supports "is 1 percent or less, and added, "Most of us are happy about that.
Mr. Munger said that the "fear is there would be a huge oversupply if the Salinas Valley operated under government subsidies.
Chris Bunn, president of Salinas-based Crown Packing Co., said that Mr. Fumasi's study refutes the notions "of all the government people who think farming is a cash cow.
That misperception has consequences on both the local and national levels, he said.
