WASHINGTON STATE APPLE TRENDS FOR 2000
Presented by Jack Pheasant
Utah Horticulture Convention
Provo, Utah - January 25 - 26, 2000
Washington State is suffering through an economic downturn that is more severe than it is accustomed to experiencing. There are a number of conflicting events contributing to this economic chaos.
1. Washington States fruit industry is an expanding business.New investments are being made in orchards. These investments are not in the traditional areas, but in the Columbia Basin, the lower Yakima valley, and in the Tri-Cities area.
2. The old traditional areas, such as the heights above Yakima and the areas north of Wenatchee to the Canadian border, are losing acreage. The numbers of growers are declining. Jobs, payroll, businesses, support services, schools and churches are impacted. Communities are feeling the econmic stagnation resulting from loss of orchard jobs, poor market returns and loss of warehouses.
3. Over capacity of remaining warehouses to pack and store all fruit produced. Many warehouses have expanded in CA storage capacity and have made big investments in pre-sizing and semi-automated packing lines. This capacity is designed for the big crop with all the debt load imaginable in bins, CA storage, pre-sizers and commit-to-pack lines. Unfortunately, much of this is set up for Red Delicious -- a declining variety in the minds of many.
This decline is not only in yield or bins to pack. The decline is in packable, saleable boxes that our customer -- the chain store buyer -- claims he wants for the housewife. This means that to get tonnage or packs across the line, many houses are forced to run all apples even if those boxes will only sell for packing charges. This is the reality of debt servicing for the warehouse which is the manufacturing plant versus the raw product supplier, which is the grower.
During good years all elements including the good grower, the poor grower, and the out-of-date grower can survive. In poor years, such as the last three we have experienced, only the good grower marginally survives.
Several major lending institutions in NCW confirmed that a number of theiir Red / Golden growers lost in the neighborhood of $2,500 / acre. Let me emphasize this with a slide prepared by Tim Smith, our County Extension agent.
It looks at just Red Delicious. The red line represents the approximate breakeven point for Red Delicious FOB prices. Only in 1995 did Reds on average make money. Note, that as of Dec. 1, 1999 we were not yet breaking even on the current crop. It is now the end of January and average Red prices are still below breakeven. That means there are a lot of lower grade Reds still losing money. Growers with the high colored sports had good pack-outs and made money most of these years. The older strains which include the new ones of the 1950s, 60s, and 70s dont give the yields nor pack-outs of 90% colored premium fruit necessary for the top dollar to stay in this business. These are the growers who are suffering most dramatically.
The grower, as most of you know, is very limited in his ability to reduce costs and maintain a level of quality production. His only choice is to stay current with his variety choices and continuously pressure his warehouse and its sales staff to hold firm on prices.
With this background, let me discuss with you the changes taking place in Washington under the following four headings: 1. Marketing consolidations 2. Club growing 3. Variety and sport changes 4. Survivors
Marketing - dramatic changes are taking place on both the buying and selling sides of the equation. Retailers are buying each other or merging efforts, or in a few cases going out of business because they arent structured to compete. Most of these consolidations are being financed with stock and debt. Debt must be serviced. Ag producers of all commodities are major contributors to the margins needed to service this debt. Roger Kropf, of Michigan, stated at Grand Rapids this last month that 22-30% of supermarket gross profits come from just produce.
The six largest of these market conglomerates control about 50% of the U.S. food market. It is a scary negative to put that much buying power in so few hands. The positive is these six chains dont yet control the other 50% which is in various forms of fragmentation and still represent opportunities for aggressive sellers.
On the warehouse side, in Washington, we are rapidly reducing the number of packing houses and selling agencies to better compete with the buying strength of the big chains. These chains have been wanting to have one phone call buying, ship 12 months of theyear, with consistent quality and grade. This can only be met by the larger warehouses which currently control 6 to 10 million boxes each. Their plan is to grow to 12 million boxes or more through expanded orchard management contracts, ownership, or alliances with others for marketing.
In a survey by Paul Tvergyak, there were 84 apple warehouses in NCW in 1984. By 1994, this was down to 41, and today I can only count 31 apple packers in North-central Washington.
In 1984, these 84 warehouses handled 23.5 million boxes of apples, while in 1998 the surviving 31 houses are handling 41 million boxes, almost double the volume. As mentioned earlier, this concentration of marketing power has come at the expense of intense capitalization which can only be paid for by the volume of boxes packed regardless of selling price.
This concentration of warehouses is most noticeable north of Wenatchee as the better growers leave the local warehouse in search of the strongest, best run units with in-house sales staff. These stronger, larger houses demand the new plantings of Reds and varietals that give the highest pack-outs and do give the strongest returns. This leaves the small communities with small warehouses made up of growers who have made feeble attempts at updating. These growers who have not updated over time or who started too late have not just hurt themselves. They have crippled their warehouses ability to compete, lowered the value of their neighbors fruit by their own poor packouts, and jeopardized the vitality of their community.
For many of the small communities, the center of its economic basis is the grower, his workers and those of the warehouse. Again, using Tim Smiths figures, for each acre of orchard removed, there is a loss of $1,800 in farm wages and $1,600 in warehouse wages that no longer circulates through the community.
In NCW there is no new land available to plant, to replace old worn out varieties, or developed land. All suitable land that has irrigation water allocated is already in use. Renewal is the only source of economic rejuvenation. For the large warehouses in Wenatchee, their inventory can be rebuilt by trucking in new production from the Columbia Basin, lower Yakima, or the Tn-Cities growing areas. The Basin has large acreages suitable for fruit production and represent the expanding supplies needed to grow warehouse profitability.
Growing Clubs: A second change occurring is the beginning of growing clubs or marketing clubs. This is a concept that is taking hold in various forms. The variety Honeycrisp has a marketing company that is signing up growers and warehouses to contract and manage the marketing. It is being done to define quality, to manage supply to the marketplace, and thereby establish stability to the pricing structure all in the name of improved grower returns.
The Cameo Corporation is exploring the club concept by proposing to limit future tree sales and therefore production to the existing growers. The purpose is to manage growth of the volume of fruit available to market, the quality of that fruit, and hopefully keep the demand strong, thereby extending the time of profitability for the grower.
New Zealand is using this concept for some of their "Elite" varieties where orchards are being established in the Northwest. New Zealand is assigning the right to grow and pack certain of their varieties that they have introduced to the marketplace. They retain full management of the sales of this fruit. The grower is basically leasing his land and skills to their sales management in return for the prospect of superior returns. This production is to augment New Zealands own crops on an off-season basis. The basic concept behind all of these plans is to create the appeal of the potential for superior returns through the management of production, establishment of quality standards, and controlled marketing for longer term price stability. If you are one of the lucky members of a club your future may be considerably brighter depending on its successful introduction. If you are not a member, you are relegated to new strains of existing sports in an effort to better yourself. This is an example of one direction occurring in Washington and Michigan.
Varieties: Lets next move to varieties and examine both the planting trends that affect future production and the yield trends of the past four-five years. Yield trends shows Reds at 61% in 1995, and dropping 10% in 1999 to 51% of the total crop. In 1975, Reds peaked at 69% of total production in Washington, and Goldens were 24%. At that time we were truly a two apple state. Goldens have had a slight percentage decline over time, but notice the growth in production of Grannys, and especially the Fuji and Gala as a percentage of the total crop. Washington is well on its way to diversifying its product mix.
Nothing illustrates the changing variety picture more quickly than looking at data put together by Tree Top giving a 25 year history of production. Note the high dominance of Reds all the way through 1995. Suddenly in 1996, production of other varieties becomes increasingly significant as the volume and percentage of the total for both Reds and Goldens begins to drop.
This has given a summary of where Washington has been. More important to you is where we are going. The next illustration gives a complete summary of all six nursery production surveys conducted by Tree Top. Note the general downtrend of the percentage of trees that are Reds. Only 1992 is smaller and that was a nursery response to the loss of Alar in 1988 & 89. The estimated columns are the number of trees budded and available for sale. Other years have been corrected to represent actual sales. It is safe to say in 1999, not all available Red trees were sold, and probably this will be true for year 2000 as well. Even though the percentage is declining, one out of seven trees is still a Red Delicious. Note the shifting over time in the peak volume of Granny, Gala, and Fuji trees. These three varieties in particular are picking up the slack as Reds have dropped from 35% to 14% of trees. Note the volume of trees has increased over the same time frame.
This overlay shows variety trends but doesnt show what is really occurring in the shift of trees. Only the top four selections of Reds are being planted in any volume. The reddist sports of Gala dominate the Gala plantings, and so do the red sports of Braeburn. Recently discovered Red sports of Fuji, I believe, will revive Fuji plantings. Whether one agrees or not with this trend is not important. The ill-informed chain store buyer wants red and with the aid of mutations discovered by growers in their orchards, the nurseries are prepared to help fuel the demand for eye appealing red apples. We have looked at marketing consolidations, club growing, and variety shifts and, in the begining, covered some of the economic crisis facing our industry. This is going on everywhere, not just in the Northwest.
Survivors: Of much discussion, the question is who is going to survive as we move forward and what is the Washington industry going to look like? Let me put aside any thoughts that we are going to disappear and go away. Fruit growing in Washington is a growing industry. We are the leader in sweet cherries by far and, barring a tree killing freeze, we will double our volume again within the next ten years. From 1985 to 1997 we doubled our winter pear production and we are still planting. Bartlett pears have remained relatively stable over this time period.
From 1986 to 1998, we have nearly doubled the States apple production - 54 million to 100 million boxes. Again with the qualifications of weather, we will expand by another 30 million packed boxes in the forseeable future.
The cries of pain are not coming from the large ownerships or the vertically integrated warehouses, although they are tightening their belts, too, by cutting out unprofitable blocks, laying off excessive people and not buying new equipment. Neither is the cry of pain coming from the small grower who has developed direct sales outlets either on his own place or by hauling fruit to outlets in western Washington. A third group that is expanding rapidly but quietly is the organic grower. Its three years of transition from conventional to certified organic and a much more expensive program, but at this time the returns are good for the good grower. Much of this fruit goes through special sales outlets -- a kind of a club growing concept. How long will this premium be there before supply outgrows demand is an unknown.
So who is hurt and what are the changing demographics of the Washington State grower? The grower in the traditional areas is most at risk. He is more likely to be older, is farming 30 to 60 acres, and is primarily with out of date strains of Reds and Goldens. This grower has been slow to get started with an orchard renewal program. He has watched his more aggressive neighbor pull out of the local warehouse and haul fruit to one of the big warehouses in Brewster, Chelan, or Wenatchee. He has watched the value of the label of the local warehouse deterioriate, his returns shrink, and the feeling of his way of life disappearing.
Another group that is hurting are the growers who, three to six years ago, suddenly realized they needed to start an expansion or renewal program to survive and to catch up went overboard. They are now over-capitalized relative to current low prices and are having trouble getting financed or making ends meet. There will be a growing number falling into the above categories who will be pushing out blocks, abandoning orchards entirely, or try one more time by financing orchard expenses on a credit card.
Looking at demographics developed by Dr. Tom Schotzko of WSU, two dramatic shifts are apparent. The number of acres in units smaller than 5 acres and smaller than 25 acres has dropped considerably. However, the operation of acres over 100 has grown immensely. This is reinforced if we look at the table for the number of orchards in each of the acreage classes. Of the 437 growers over 100 acres in 1997, 54 of them were over 500 acres. These 54 are the operations most likely to be vertically integrated, have a strong percentage of Reds including older strains. Some of these warehouse operations are among the most aggressive now at tree removal. Several are removing 500-700 acres of reds in the last two winters to stop the financial bleeding.
Summary: So lets come to the question posed by William McMullin when he asked me to speak to you. Whats in the store that we can draw on for 2000 and beyond which translates to how we are going to survive and with what varieties.
I believe for Utah to survive, three events need to occur or be considered. First, increased emphasis needs to be placed on packing and marketing only extra fancy fruit. I say this by looking at my clearing house weekly report and assume that you are experiencing the same price relationships. Over the past several weeks, our bulletin shows that except for Fuji, all varieties graded USXF or WF were selling below breakeven prices and several combinations were below peeler prices. Nobody benefiits from this except the retailer who is consistently picking us apart.
For a warehouse to take this position is cuthroatish and almost antisocial, but in the market changes that are taking place this may be the road to survival or all go down together.
Second, it is the growers responsibility to bring premium fruit to the warehouse. The first step is to cut out blocks that arent paying their own way and let the rest of your operation make some money. You cannot survive just by growing volume. A firm building program should already be in place and be continuously updated to take advantage of new varieties and sports. One can not become emotionally attached to a variety or a block regardless of its age. Two of my three oldest blocks are less than ten years old, and I have them slated for removal or top working within 2-3 years. Changing grade standards are rendering them obsolete even though they are making money today.
The third item is aiding your warehouse or its marketer in strengthening the personal relationship with the chain store or your buyers. Make your services indispensible to your buyers success. Nothing does this better than growers doing in-store sampling: The stores sales go up, the consumer likes the attention, you see the consumers reaction to your fruit, and you may buy enough time to get around the corner with your replanting. Dont think that the extra boost in sales means the old varieties can be saved, or that one trip at store sampling is enough. Consumers need constant attention.
I may be more aggressive in my forecast than some, but I believe in the near future, Reds will have continued to decline to 30-35% of Washingtons crop, Goldens are 12-15%, and more than half of our production will be with what we call varietals. These currently are Gala, Fuji, Granny, and braeburn, with Jonagold slipping, Cameo building, and new varieties will being developed like Ambrosia, Honeycrisp and Pink Lady. A most important note, NOT all varieties will grow on all rootstocks on all sites and be profitable. You must choose the best combinations for your site and cultural aptitude, and blend this with warehouse marketing plans.
The hugh shift in plantings of Gala since 1996 concerns me for a short season apples, but the older Gala planting are now out-dated and need replacing. Older Braeburn blocks face similar rejuvenation needs and with new color sports of Fuji come on, a redirection will take place here as well.
ConclusIon: As ownerships change, operations condensed into fewer stronger hands, some acreage replanted and new lands developed,. Washington growers will re-emerge financially stronger. There will be fewer warehouses then currently available. There will also be less marketers more able to compete with buyers. All of this will be accomplished with a greater balance of varieties on more acreage than currently planted. This is what Washington is doing to survive. Utah must consider a similar path utilizing its long history of close marketing relationships to its advantage.