Are food-safety costs being shared?
Are food-safety costs being shared?
At last year's Produce Marketing Association convention in San Diego, the spinach recall was top of mind and was the major topic of conversation throughout the convention -- both in organized seminar sessions and on the exposition floor.
With the spinach industry reeling and all fresh-cut items experiencing a drop in sales, everyone was looking for a solution. At the PMA convention, at town hall meetings in Salinas, CA, and at other conventions and meetings, virtually every one up and down the distribution system agreed that something had to be done, and buyers and sellers needed to take responsibility and share the cost. A buyer coalition formed, demanding action and recognizing their responsibility to help pay for that action.
A year later, suppliers and shippers in California and across the country have taken many extra costly steps to minimize contamination problems. Although it is still relatively soon since the enactment of the new food-safety procedures, there is cautious optimism that they have worked.
But has that year-old spirit of sharing the cost been realized?
There doesn't appear to be one answer. A couple of shippers have announced food-safety price increases. At least one company with a fixed-price system claims complete success in sharing these extra costs with their buyers, and it willingly shares its story. Others say it has been a hit-and-miss situation, and that the everyday supply-and-demand price fluctuations do not reflect the increased costs.
"It's virtually impossible to measure," stated United Fresh Produce Association President Tom Stenzel.
He said that antitrust laws make it improper for sellers or buyers to band together on an across-the-board agreement on something such as a food- safety surcharge. Hence, the only way such a cost can be negotiated is on an individual basis.
Ultimately, Mr. Stenzel said, the increased cost of food safety must be paid by the consumer. "We, as an industry, have to pass it on to the consumer."
But he admitted that this is easier said than done. Ultimately, sellers can't stay in business if they continually increase their costs and don't get reimbursed for those costs either in the price of the product or as an add-on line item, he said.
Mike Stuart, president of Florida Fruit & Vegetable Association in Maitland, FL, said that growers in his region literally cannot afford additional costs that are not covered in the price of the product. He said that Florida tomato and vegetable producers are in a rough period where there has not been much profit for the last few years. "They can't afford to cover these costs."
His association does manage a couple of Capper-Volstead cooperatives that do allow producers to come together and discuss such pricing inputs. Mr. Stuart is not aware that discussions of a food-safety surcharge have been held in these co-op meetings, but he said that the potential is there and is worth exploring.
Tom Nassif, president of Western Growers Association in Irvine, CA, agreed with the other association executives that new food-safety procedures have added to the cost basis for growers. Anecdotally, he has heard that some shippers have been successful in passing this cost on and others have not. He said that growers have had to increase their costs and are trying to pass those increased costs on to their shippers.
Mr. Nassif said that at his organization's convention next month there will be a session devoted to the topic of recouping those costs.
He said it is absolutely imperative that retailers step forward and pay these extra costs. "They wanted increased food-safety measures, and [the grower- shipper community] has provided them."
Mr. Stenzel said that one way retailers can participate in sharing the cost of food safety is to refuse to do business with anyone who has not adopted rigorous food-safety standards as the handlers in California and elsewhere have done. He recognizes that there is a local food movement sweeping the nation, "but those producers shouldn't get a food-safety pass just because they are local."
Presumably by doing business only with food safety-conscious growers and shippers, the cost basis should be relatively equal.
One shipper that publicly raised it prices successfully was Salinas-based Taylor Farms. Alec Leach said that as last year's spinach crisis was developing, Taylor Farms immediately responded to the cry from buyers that the shipper community needed to enhance its food-safety efforts. Mr. Leach said that Taylor Farms already believed it was shipping very safe products -- and he argued that point gladly with statistics -- but it also answered the call to add enhancements to its food-safety program.
"We did specific things to enhance the food safety of our products and each of these things cost money," said Mr. Leach.
He said that the company added 20 extra people, adopted the new Good Agricultural Practices, increased testing of its raw product as well as its soil and water, and launched a food-safety education program for its workers. In addition, it made a major contribution for research and development into E. coli.
The company also added costs -- as did the rest of the industry -- by establishing a very extensive crop destruction policy. Any time a field shows any signs of potential contamination, including evidence of animal encroachment, the product in that field is destroyed.
"Every week we destroy product," Mr. Leach said.
For the first six months -- from September 2006 through March 2007 -- Taylor Farms collected data on all of these increased costs. It then analyzed its extra costs, excluding crop destruction, and determined how much of those costs it was willing to absorb and how much it wanted its buyers to shoulder. The company then went to its buyers, shared the information and asked for a 20 cent-per-package, across-the-board increase.
"Every buyer agreed to pay," he said.
Part of the Taylor Farms presentation was the promise that this cost would be passed on to all of its customers. It assured its customers that if it did not get 100 percent participation from all of its customers, it would not institute the price increase. Mr. Leach pointed out that the increase is not a line-item add- on but an increase in the delivered price, which is how Taylor Farms prices its products.
Mr. Leach said it is very easily measured to this date because virtually all of Taylor Farms' product is sold on a fixed price, contract basis. Even its commodity business is sold with a fixed floor and ceiling price.
"If we had a contract price for $8 per carton, starting in April, it became $8.20," he said, adding that the fluctuating-price business was similar. "If the price range was $8 to $15 per carton, it was now $8.20 to $15.20 per carton."
Mr. Leach said that about 75 percent of the firm's business is in foodservice and the other 25 percent in retail.
The Taylor Farm executive admitted that because the company does not operate on the spot market, it has been easier to increase the price on all of its contracts and know that it is covering the percentage of these extra costs that it needs to cover.
On a commodity with a daily fluctuating price, it is much more difficult for a company to know if it is assuming the extra costs or not. "You may be getting the food-safety costs, but getting less for the product itself," he said.
This is one reason why WGA's Mr. Nassif likes the idea of a food-safety surcharge. He said that when it is a line item on the invoice, there is no question the cost is being shared throughout the distribution system and the grower-shippers are being reimbursed for their extra expenses.
Jamie Strachan, president and chief executive officer of Growers Express in Salinas, CA, has done a very careful analysis of the increased cost his firm has taken on with food-safety enhancements. Like Mr. Leach, the Growers Express executive reiterated that the food-safety enhancements were extra steps taken to improve what was already the safest fresh produce food supply in the world.
Growers Express is a vertically integrated firm that grows and ships all its own product. Mr. Strachan has calculated the cost of the food-safety enhancements on a per-acre basis and has determined that the firm's cost per acre has gone up about $100. That equates to about 12-13 cents per carton.
He said that the increased costs include extra staffing, business interruption insurance, crop destruction, less farmable land per acre because of food- safety setback rules, Leafy Green Handler Marketing Agreement assessment, and enhancements in the harvesting, cooling and packing operations.
He said that in the market-driven commodity business, it is basically impossible to recoup these costs. Years ago, the industry started shifting to quoting a delivered price that included the typical add-ons such as cooling and palletization. "There has been no consensus to move away from that model."
Mr. Strachan said that when doing accounting for a particular sale, a firm can allocate a certain amount for food-safety enhancements. But more likely than not, it is just taking money away from what it is getting for the product itself. The sale price has not increased 25 cents.
Mr. Strachan had no ready answers for covering these costs except to refuse to sell when the price dips too low. As a vertically integrated company, that is an option that Growers Express exercises more often than it wants to, and it has internally increased what that floor price is over the last few years.
"We have decided that when the price is too low, we just take product off the market," said Mr. Strachan. "Nobody wants to disc crop under, but we are already going to lose $3 in the field [per carton], and we don't want to compound that by losing more on the shipping end" when the price falls too low.
He said that Growers Express has chosen not to be a low-cost leader. "There are some shippers that play that game. Maybe their cost structure is less than ours," he said, clearly not believing that to be the case.
Mr. Strachan, who serves on the California Leafy Greens Handler Marketing Agreement committee with Mr. Leach, applauded the efforts of Taylor Farms to recoup the food-safety costs on its contract business. "They did a great job of explaining exactly what they were doing and were able to make the case for an increase."
He reiterated that the pricing dynamic in the commodity business isn't the same, and thus it is impossible to share the cost with retailers on a dollar- for-dollar basis.
With the spinach industry reeling and all fresh-cut items experiencing a drop in sales, everyone was looking for a solution. At the PMA convention, at town hall meetings in Salinas, CA, and at other conventions and meetings, virtually every one up and down the distribution system agreed that something had to be done, and buyers and sellers needed to take responsibility and share the cost. A buyer coalition formed, demanding action and recognizing their responsibility to help pay for that action.
A year later, suppliers and shippers in California and across the country have taken many extra costly steps to minimize contamination problems. Although it is still relatively soon since the enactment of the new food-safety procedures, there is cautious optimism that they have worked.
But has that year-old spirit of sharing the cost been realized?
There doesn't appear to be one answer. A couple of shippers have announced food-safety price increases. At least one company with a fixed-price system claims complete success in sharing these extra costs with their buyers, and it willingly shares its story. Others say it has been a hit-and-miss situation, and that the everyday supply-and-demand price fluctuations do not reflect the increased costs.
"It's virtually impossible to measure," stated United Fresh Produce Association President Tom Stenzel.
He said that antitrust laws make it improper for sellers or buyers to band together on an across-the-board agreement on something such as a food- safety surcharge. Hence, the only way such a cost can be negotiated is on an individual basis.
Ultimately, Mr. Stenzel said, the increased cost of food safety must be paid by the consumer. "We, as an industry, have to pass it on to the consumer."
But he admitted that this is easier said than done. Ultimately, sellers can't stay in business if they continually increase their costs and don't get reimbursed for those costs either in the price of the product or as an add-on line item, he said.
Mike Stuart, president of Florida Fruit & Vegetable Association in Maitland, FL, said that growers in his region literally cannot afford additional costs that are not covered in the price of the product. He said that Florida tomato and vegetable producers are in a rough period where there has not been much profit for the last few years. "They can't afford to cover these costs."
His association does manage a couple of Capper-Volstead cooperatives that do allow producers to come together and discuss such pricing inputs. Mr. Stuart is not aware that discussions of a food-safety surcharge have been held in these co-op meetings, but he said that the potential is there and is worth exploring.
Tom Nassif, president of Western Growers Association in Irvine, CA, agreed with the other association executives that new food-safety procedures have added to the cost basis for growers. Anecdotally, he has heard that some shippers have been successful in passing this cost on and others have not. He said that growers have had to increase their costs and are trying to pass those increased costs on to their shippers.
Mr. Nassif said that at his organization's convention next month there will be a session devoted to the topic of recouping those costs.
He said it is absolutely imperative that retailers step forward and pay these extra costs. "They wanted increased food-safety measures, and [the grower- shipper community] has provided them."
Mr. Stenzel said that one way retailers can participate in sharing the cost of food safety is to refuse to do business with anyone who has not adopted rigorous food-safety standards as the handlers in California and elsewhere have done. He recognizes that there is a local food movement sweeping the nation, "but those producers shouldn't get a food-safety pass just because they are local."
Presumably by doing business only with food safety-conscious growers and shippers, the cost basis should be relatively equal.
One shipper that publicly raised it prices successfully was Salinas-based Taylor Farms. Alec Leach said that as last year's spinach crisis was developing, Taylor Farms immediately responded to the cry from buyers that the shipper community needed to enhance its food-safety efforts. Mr. Leach said that Taylor Farms already believed it was shipping very safe products -- and he argued that point gladly with statistics -- but it also answered the call to add enhancements to its food-safety program.
"We did specific things to enhance the food safety of our products and each of these things cost money," said Mr. Leach.
He said that the company added 20 extra people, adopted the new Good Agricultural Practices, increased testing of its raw product as well as its soil and water, and launched a food-safety education program for its workers. In addition, it made a major contribution for research and development into E. coli.
The company also added costs -- as did the rest of the industry -- by establishing a very extensive crop destruction policy. Any time a field shows any signs of potential contamination, including evidence of animal encroachment, the product in that field is destroyed.
"Every week we destroy product," Mr. Leach said.
For the first six months -- from September 2006 through March 2007 -- Taylor Farms collected data on all of these increased costs. It then analyzed its extra costs, excluding crop destruction, and determined how much of those costs it was willing to absorb and how much it wanted its buyers to shoulder. The company then went to its buyers, shared the information and asked for a 20 cent-per-package, across-the-board increase.
"Every buyer agreed to pay," he said.
Part of the Taylor Farms presentation was the promise that this cost would be passed on to all of its customers. It assured its customers that if it did not get 100 percent participation from all of its customers, it would not institute the price increase. Mr. Leach pointed out that the increase is not a line-item add- on but an increase in the delivered price, which is how Taylor Farms prices its products.
Mr. Leach said it is very easily measured to this date because virtually all of Taylor Farms' product is sold on a fixed price, contract basis. Even its commodity business is sold with a fixed floor and ceiling price.
"If we had a contract price for $8 per carton, starting in April, it became $8.20," he said, adding that the fluctuating-price business was similar. "If the price range was $8 to $15 per carton, it was now $8.20 to $15.20 per carton."
Mr. Leach said that about 75 percent of the firm's business is in foodservice and the other 25 percent in retail.
The Taylor Farm executive admitted that because the company does not operate on the spot market, it has been easier to increase the price on all of its contracts and know that it is covering the percentage of these extra costs that it needs to cover.
On a commodity with a daily fluctuating price, it is much more difficult for a company to know if it is assuming the extra costs or not. "You may be getting the food-safety costs, but getting less for the product itself," he said.
This is one reason why WGA's Mr. Nassif likes the idea of a food-safety surcharge. He said that when it is a line item on the invoice, there is no question the cost is being shared throughout the distribution system and the grower-shippers are being reimbursed for their extra expenses.
Jamie Strachan, president and chief executive officer of Growers Express in Salinas, CA, has done a very careful analysis of the increased cost his firm has taken on with food-safety enhancements. Like Mr. Leach, the Growers Express executive reiterated that the food-safety enhancements were extra steps taken to improve what was already the safest fresh produce food supply in the world.
Growers Express is a vertically integrated firm that grows and ships all its own product. Mr. Strachan has calculated the cost of the food-safety enhancements on a per-acre basis and has determined that the firm's cost per acre has gone up about $100. That equates to about 12-13 cents per carton.
He said that the increased costs include extra staffing, business interruption insurance, crop destruction, less farmable land per acre because of food- safety setback rules, Leafy Green Handler Marketing Agreement assessment, and enhancements in the harvesting, cooling and packing operations.
He said that in the market-driven commodity business, it is basically impossible to recoup these costs. Years ago, the industry started shifting to quoting a delivered price that included the typical add-ons such as cooling and palletization. "There has been no consensus to move away from that model."
Mr. Strachan said that when doing accounting for a particular sale, a firm can allocate a certain amount for food-safety enhancements. But more likely than not, it is just taking money away from what it is getting for the product itself. The sale price has not increased 25 cents.
Mr. Strachan had no ready answers for covering these costs except to refuse to sell when the price dips too low. As a vertically integrated company, that is an option that Growers Express exercises more often than it wants to, and it has internally increased what that floor price is over the last few years.
"We have decided that when the price is too low, we just take product off the market," said Mr. Strachan. "Nobody wants to disc crop under, but we are already going to lose $3 in the field [per carton], and we don't want to compound that by losing more on the shipping end" when the price falls too low.
He said that Growers Express has chosen not to be a low-cost leader. "There are some shippers that play that game. Maybe their cost structure is less than ours," he said, clearly not believing that to be the case.
Mr. Strachan, who serves on the California Leafy Greens Handler Marketing Agreement committee with Mr. Leach, applauded the efforts of Taylor Farms to recoup the food-safety costs on its contract business. "They did a great job of explaining exactly what they were doing and were able to make the case for an increase."
He reiterated that the pricing dynamic in the commodity business isn't the same, and thus it is impossible to share the cost with retailers on a dollar- for-dollar basis.
