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The efficiency of the B.C. apple marketing system : a structure, conduct and performance evaluation Stuible, Shirley L. 1988

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THE EFFICIENCY OF THE B.C. APPLE MARKETING SYSTEM: A STRUCTURE, CONDUCT AND PERFORMANCE EVALUATION by SHIRLEY L. STUIBLE A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE i n THE FACULTY OF GRADUATE STUDIES (Dept. o f A g r i c u l t u r a l Economics) We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA © M a y , 1988 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department The University of British Columbia Vancouver, Canada DE-6 (2/88) i i ABSTRACT The c o o p e r a t i v e s t r u c t u r e of the B.C. apple marketing system has been i n danger of c o l l a p s e s e v e r a l times over i t s 70 year h i s t o r y . The most r e c e n t upheaval occurred i n the e a r l y 1980s, when accusations of cost i n e f f i c i e n c i e s l e d to s e v e r a l changes i n t h e s y s t e m . The o b j e c t i v e of t h i s s t u d y i s t o p r o v i d e a s t r u c t u r e , conduct and performance e v a l u a t i o n of e f f i c i e n c y of t h e a p p l e m a r k e t i n g system. T h i s w i l l e n t a i l an h i s t o r i c a l review, a d e s c r i p t i o n of the apple i n d u s t r y and an e v a l u a t i o n of i t s performance w i t h r e s p e c t t o c o s t e f f i c i e n c y and revenue m a x i m i z a t i o n u s i n g the Washington S t a t e apple i n d u s t r y as the benchmark. A p p l e p r o d u c t i o n i n Washington S t a t e i s about t e n ti m e s p r o d u c t i o n i n B.C., and t h e i r t y p i c a l orchard i s about 40 acres versus about 14 acres i n B.C. The average Washington packinghouse o r g a n i z a t i o n serves about 30 growers t o B.C.'s 300, y e t t h e i r a v e r a g e volume i s about 40% l a r g e r t h a n t h e a v e r a g e B.C. p a c k i n g h o u s e . A p p r o x i m a t e l y one h a l f of a l l the Washington pa c k i n g h o u s e s are c o o p e r a t i v e s , whereas n e a r l y a l l t h e B.C. p a c k i n g h o u s e s a r e c o o p e r a t i v e s . A l s o , t h e B.C. g r o w e r s c o l l e c t i v e l y own t h e c e n t r a l m a r k e t i n g agency and a major p r o c e s s o r . The Washington S t a t e packinghouses tend t o market t h e i r own f r u i t . The performance of the apple marketing i n d u s t r y i s evaluated i n terms of revenues, c o s t s and r e t u r n t o growers. The d a t a a v a i l a b l e from Washington State precludes d i r e c t comparisons of p r i c e s (and hence revenues). T o t a l and average c o s t s curves are d e r i v e d f o r both the packing and marketing functions i n the B.C. i n d u s t r y , and these a l l e x h i b i t the expected shapes. V a r i a b l e and i i i f i x e d c o s t s are a l s o broken out and examined, although i t appears th e f i x e d c o s t d a t a i n c l u d e s some v a r i a b l e c o s t s . But the most i n t e r e s t i n g f i n d i n g o c c u r s when B.C. and Washington S t a t e per u n i t c o s t s a r e compared - i t a p p e a r s t h e p o s t u l a t e d s i z e advantages f o r Washington S t a t e do not e x i s t on average, s i n c e B.C. c o s t s are lower. Roughly speaking, i t c o s t s about $5/box to pack a box i n B.C. v e r s u s about $6/box i n Washington. M a r k e t i n g c o s t s i n both regions are under $l/box. R e t u r n s t o t h e grower, however, a r e about $3/box i n B.C. versus about $5/box i n Washington S t a t e . T h i s suggests t h a t p r i c e or revenue o b t a i n e d i n B.C. i s much lower. T h i s c o u l d be due to two d i f e r e n t f a c t o r s . F i r s t , the m arketers i n B.C. may be t o o volume o r i e n t e d a t the expense of o b t a i n i n g the maximum p r i c e p o s s i b l e . T h i s study makes no attempt to t e s t t h i s p o s s i b i l i t y . The second reason f o r B.C.'s lower p r i c e s i s t h a t the average B.C. p r o d u c t i s deemed i n f e r i o r t o W a s h i n g t o n S t a t e a p p l e s . S e n s i t i v i t y t e s t s are performed to evaluate the e f f e c t on grower r e t u r n s of improving the average apple. When Washington S t a t e ' s a v e r a g e a p p l e q u a l i t y i s imposed on t h e B.C. c o s t and p r i c e s t r u c t u r e , grower r e t u r n s i n c r e a s e by 63% and 9% f o r t h e two y e a r s t e s t e d . T h i s s u g g e s t s t h a t i f B.C. c o u l d m a t c h t h e W a s h i n g t o n S t a t e p e r f o r m a n c e , i t s g r o w e r s w o u l d b e n e f i t s i g n i f i c a n t l y . When the B.C. product mix i s v a r i e d to i n c l u d e ten percent more long storage f r u i t , l e s s small s i z e d f r u i t , and more h i g h grade f r u i t , the grower r e t u r n s i n c r e a s e by under 1%, 5 to 12%, and 2 t o 3%, r e s p e c t i v e l y . In o t h e r words, i m p r o v i n g the f r u i t s i z e of B.C. apples appears t o b e t h e most e f f e c t i v e means of improving grower r e t u r n s i n B.C. i v TABLE OF CONTENTS Page ABSTRACT i i LIST OF TABLES v i LIST OF FIGURES v i i ACKNOWLEDGEMENT x CHAPTER 1 INTRODUCTION 1 1.1 Problem S e t t i n g 1 1.2 Problem Statement 1 1.3 Ob j e c t i v e s 8 1.4 Procedure 8 1.5 Thesis Guide 8 CHAPTER 2 STRUCTURE AND CONDUCT OF THE APPLE INDUSTRY . . . . 11 2.1 HISTORY OF THE B.C. APPLE INDUSTRY 11 2.2 RECENT DEVELOPMENTS IN THE B.C. APPLE INDUSTRY . . . 21 2.3 STRUCTURAL DIFFERENCES BETWEEN B.C. AND WASHINGTON STATE 2 7 2.3.1 F r u i t Q u a l i t y Comparisons . 28 2.3.2 S i z e Comparisons 31 2.3.3 O r g a n i z a t i o n a l S t r u c t u r e 40 2.4 CONDUCT OF THE B.C. APPLE INDUSTRY . . . . . . .. . . . 4 3 2.4.1 Packinghouse Conduct 43 2.4.2 Marketing Agency Conduct 47 2.5 INDUSTRY CONCERNS 55 2.6 SUMMARY 56 CHAPTER 3 THEORETICAL ASPECTS OF INDUSTRY STRUCTURE 59 3.1 OLIGOPOLY . 60 3.1.1 T h e o r e t i c a l Considerations 60 3.2.2 Q u a l i t a t i v e Evidence of O l i g o p o l y 62 3.1.3 Welfare Im p l i c a t i o n s 65 3.1.4 Methodology Employed 68 3.2 PRICE 69 3.2.1 P r i c e as a Measure of Market Power 6 9 3.2.2 Factors A f f e c t i n g P r i c e V a r i a t i o n . . . . . . 74 3.3 SUMMARY 82 CHAPTER 4 PERFORMANCE OF THE B.C. APPLE MARKETING SYSTEM . . . 83 4.1 COOPERATIVE STRUCTURE CAVEAT 8 3 4.2 MARGINS OR REVENUE ALLOCATION 85 4.2.1 T h e o r e t i c a l C o n s i d e r a t i o n s 85 4.2.2 Results 87 .4.3 REVENUE 89 4.3.1 T h e o r e t i c a l C o n s i d e r a t i o n s 89 4.3.2 Results 93 4.4 COSTS 9 6 4.4.1 T h e o r e t i c a l Considerations 96 4.4.2 Packing Cost A n a l y s i s 99 4.4.3 Marketing Costs 115 V . Page 4.5 GROWER RETURNS 130 4.5.1 Results 130 4.5.2 Comparison with Washington State 138 4.6 SUMMARY 14 0 CHAPTER 5 SENSITIVITY ANALYSES OF B . C . PERFORMANCE : 14 2 5.1 WASHINGTON STATE PRODUCT MIX 144 5.1.1 Method 14 4 5.1.2 Results 147 5.2 INCREASED CONTROLLED ATMOSPHERE STORAGE PRODUCT MIX 150 5.2.1 Method 150 5.2.2 Results 151 5.3 INCREASED SIZE PRODUCT MIX 154 5.3.1 Method 154 5.3.2 Results 154 5.4 QUALITY 156 5.4.1 Method 157 5.4.2 Results 157 5.5 SUMMARY 161 CHAPTER 6 SUMMARY AND RECOMMENDATIONS 164 6.1 SUMMARY 164 6.2 IMPLICATIONS 169 6.3 RECOMMENDATIONS 172 BIBLIOGRAPHY 175 v i LIST OF TABLES Page 1.1 Apple P r o d u c t i o n i n B.C., Washington State and the U.S.A. ( 1970-86 ) ...3 2.1 B.C. Tree F r u i t Farm S i z e D i s t r i b u t i o n ( 1986 ) 35 2.2 B.C. Tree F r u i t s L t d . Sales D i s t r i b u t i o n to D i f f e r e n t Markets ( 1984-85) 49 2.3 Apple Exports From B.C. and Washington i n Boxes and Percent of T o t a l ( 1984-86) 51 2.4 Value of B.C. Apple Shipments to D i f f e r e n t Markets on a per Box Ba s i s ( 1984-85) 54 5.1 Washington and B.C. Packout Comparisons f o r Red and Golden D e l i c i o u s ( 1984) 145 5.2 Washington and B.C. Packout Comparisons f o r Red and Golden D e l i c i o u s ( 1985) 146 5.3 Percentage Change i n B.C. Grower Returns under S e n s i t i v i t y Tests ( 1984-85) 161 v i i LIST OF FIGURES Page 1.1 B.C. Apple P r o d u c t i o n R e l a t i v e t o Canadian, Washington, and U.S.A. P r o d u c t i o n ( 1970-86 ) 4 1.2 Comparison of Average Grower Returns between B.C. and Washington S t a t e ( 1976-84). 6 3.1 O l i g o p o l y p l u s F r i n g e Model 61 3.2 W e l f a r e I m p l i c a t i o n s of the C a r t e l F r i n g e Model 66 3.3 R e l a t i o n s h i p between P r i c e i n 1981 d o l l a r s and Q u a n t i t y of B.C. Apples S o l d ( 1976-85)... 70 3.4 R e l a t i o n s h i p between P r i c e of B.C. Apples and P r o d u c t i o n L e v e l s f o r the P a c i f i c Northwest and N o r t h America ( 1976-85) 73 3.5 R e l a t i o n s h i p between P r i c e and S i z e f o r B.C. Red and Golden D e l i c i o u s ( 1984-85) 75 3.6 E f f e c t o f Grade on P r i c e f o r B.C. Red D e l i c i o u s XFCY over D i f f e r e n t S i z e s (1985) 77 3.7 E f f e c t of Storage Regime on P r i c e f o r B.C. Red D e l i c i o u s XFCY over D i f f e r e n t S i z e s (1984-85) 79 3.8 E f f e c t of Storage Regime on P r i c e f o r B.C. Golden D e l i c i o u s XFCY Over D i f f e r e n t S i z e s (1984-85)... 81 4.1 D e t e r m i n a t i o n of Revenue A l l o c a t i o n Among M a r k e t i n g , P a c k i n g , and Prod u c i n g A c t i v i t i e s 86 4.2 Revenue A l l o c a t i o n Among M a r k e t i n g , P a c k i n g , and P r o d u c i n g A c t i v i t i e s on per Box B a s i s (1976-85) 88 4.3 Revenue from S a l e s i n 1981 D o l l a r s f o r B.C. Tree F r u i t s L t d . ( 1976-85) 94 4.4 R e l a t i o n s h i p between Revenue from S a l e s (1981 d o l l a r s ) and Q u a n t i t y of B.C. Apples S o l d ( 1976-85) 95 4.5 R e l a t i o n s h i p between Short Run and Long Run Cost Curves 98 4.6 T o t a l P a c k i n g Costs i n 1981 D o l l a r s f o r O.F.S.A. Packinghouses ( 1976-85) 100 4.7 R e l a t i o n s h i p between T o t a l P a c k i n g Cost (1981 d o l l a r s ) and Q u a n t i t y of B.C. Apples S o l d ( 1976-85) 101 4.8 R e l a t i o n s h i p between Average P a c k i n g Cost (1981 d o l l a r s ) and Q u a n t i t y S o l d f o r B.C. Apples ( 1976-85) 103 v i i i Page 4 . 9 M a j o r P a c k i n g C o s t s b y P a c k T y p e f o r B . C . R e d D e l i c i o u s ( 1 9 8 6 ) 105 4 . 1 0 O v e r h e a d C o s t s i n 1981 d o l l a r s f o r O . F . S . A . P a c k i n g h o u s e s ( S e l e c t e d y e a r s 1 9 7 9 - 8 5 ) 107 4 . 1 1 R e l a t i o n s h i p b e t w e e n O . F . S . A . O v e r h e a d C o s t s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y S o l d ( S e l e c t e d y e a r s 1 9 7 9 - 8 5 ) . . . . 1 0 9 4 . 1 2 O . F . S . A . H o u r l y N o m i n a l Wage C o m p a r e d w i t h A v e r a g e Wages i n B . C . M a n u f a c t u r i n g a n d I n d u s t r i a l S e c t o r s ( 1 9 7 7 - 8 6 ) . . I l l 4 . 1 3 T r e n d i n R e a l L a b o u r C o s t s b y P a c k T y p e f o r B . C . A p p l e s ( S e l e c t e d y e a r s 1 9 7 9 - 8 6 ) 112 4 . 1 4 T r e n d i n C o s t o f M a t e r i a l s b y P a c k T y p e f o r B . C . A p p l e s ( 1 9 8 4 - 8 6 ) 114 4 . 1 5 S t r u c t u r e o f T o t a l C o s t s f o r B . C . T r e e F r u i t s L t d . b y C r o p Y e a r ( 1 9 7 6 - 8 5 ) 116 4 . 1 6 R e l a t i o n s h i p b e t w e e n T o t a l M a r k e t i n g C o s t ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) . . . . 1 1 7 4 . 1 7 R e l a t i o n s h i p b e t w e e n A v e r a g e M a r k e t i n g C o s t ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) . . . . 118 4 . 1 8 R e l a t i o n s h i p b e t w e e n P r o m o t i o n C o s t s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) 120 4 . 1 9 R e l a t i o n s h i p b e t w e e n A d m i n i s t r a t i o n C o s t s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) 121 4 . 2 0 R e l a t i o n s h i p b e t w e e n P r o d u c t i o n a n d A s s e m b l y C o s t s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) . . . . 122 4 . 2 1 R e l a t i o n s h i p b e t w e e n S a l e s O f f i c e a n d B r o k e r a g e F e e s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) 124 4 . 2 2 R e l a t i o n s h i p b e t w e e n CA S t o r a g e C o s t s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) 125 4 . 2 3 C o m p a r i s o n o f N o m i n a l U n i t P a c k i n g C o s t s b e t w e e n B . C . a n d W a s h i n g t o n S t a t e ( 1 9 7 9 - 8 5 ) 127 4 . 2 4 C o m p a r i s o n o f N o m i n a l U n i t M a r k e t i n g C o s t s b e t w e e n B . C . a n d W a s h i n g t o n S t a t e ( 1 9 7 9 - 8 5 ) 129 4 . 2 5 B . C . G r o w e r R e t u r n s i n 1981 D o l l a r s b y Y e a r ( 1 9 7 6 - 8 5 ) ' . . - 1 3 1 4 . 2 6 R e l a t i o n s h i p b e t w e e n G r o w e r R e t u r n s ( 1 9 8 1 d o l l a r s ) a n d Q u a n t i t y o f B . C . A p p l e s S o l d ( 1 9 7 6 - 8 5 ) 132 i x Page 4.27 E f f e c t of Variety and Size on B.C. Grower Returns (per unit basis) i n 1984 134 4.28 Eff e c t of Grade and Size on B.C. Grower Returns (per unit basis) i n 1984 136 4.29 E f f e c t of Storage Regime and Size on B.C. Grower Returns (per unit basis) i n 1984 137 4.30 Comparison of Nominal Unit Grower Returns between B.C., Average Washington State and Trout Cooperative ( 1976-84) 139 5.1 Change i n Revenue, Packing Costs, and Grower Returns for B.C. assuming Washington's Product Mix (1984-85)...148 5.2 Change i n Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% More CA Storage ( 1984-85) 152 5.3 Change i n Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% Decrease i n Small Sized Apples (1984-85) 155 5.4 Change i n Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% Increase i n XFCY Grade Apples ( 1984-85) 158 5.5 Percentage Change i n Grower Returns for B.C. for Different S e n s i t i v i t y Tests (1984-85) 160 X ACKNOWLEDGEMENT T h i s work was the r e s u l t of s e v e r a l months o f i n t e r v i e w s and c o r r e s p o n d e n c e . I would l i k e to express my thanks to my committee members f o r t h e i r uncustomary i n t e r e s t and i n p u t i n t o my p r o j e c t . I 'm e s p e c i a l l y g r a t e f u l to my major s u p e r v i s o r , George Kennedy, f o r a l l o w i n g me f r e e r e i n to pursue t h i s work w h i l e k e e p i n g me f i r m l y grounded i n my e f f o r t s . I am a l s o g r a t e f u l t o a l l t h e a p p l e i n d u s t r y p e o p l e who o f f e r e d t h e i r a s s i s t a n c e t h r o u g h o u t t h i s work. M r . A r t G a r r i s h was o f p a r t i c u l a r h e l p when I had q u e s t i o n s as to the h i s t o r y and p o l i t i c a l i s s u e s o f the i n d u s t r y . M r . M a r t i n L i n d e r o f B . C . T r e e F r u i t s L t d . was v e r y generous w i t h h i s t ime and h i s d a t a . And M r . B i l l D e l l was most h e l p f u l throughout the work and saved, me from p u b l i s h i n g many a mis taken n o t i o n . F i n a l l y , I g i v e s p e c i a l thanks to C h r i s Webber, whose envy of my t o p i c s u s t a i n e d my own i n t e r e s t , and t o my f a m i l y whose i n v o l v e m e n t i n the B . C . f r u i t i n d u s t r y prompted my endeavors i n t h i s a r e a . 1 CHAPTER 1 INTRODUCTION 1.1 Problem Setting The B.C. a p p l e i n d u s t r y has undergone e x t e n s i v e s t r u c t u r a l and economic change i n the pas t 15 y e a r s . These upheavals have a c c e l e r a t e d of l a t e , due i n p a r t to severe f i n a n c i a l d i f f i c u l t i e s among many o r c h a r d i s t s . C o n t r o l l e d m a r k e t i n g , s i n c e the 1974 agreement t o h a l t e n f o r c e m e n t , has g i v e n way t o a v o l u n t a r y m a r k e t i n g g r o u p p l u s an i n d e p e n d e n t f r i n g e w i t h i n c r e a s e d c o m p e t i t i o n . T h i s c o m p e t i t i o n may become i n c r e a s i n g l y i n t e n s e i f the v o l u n t a r y system i s f u r t h e r segmented such t h a t i n d i v i d u a l packinghouses market t h e i r own product u s i n g the former c e n t r a l s e l l i n g agency, B.C. T r e e F r u i t s L t d , m e r e l y as a b r o k e r a g e . W h i l e d i s p u t e s o v e r e q u i t y o f t e n r e s u l t i n t h e b r e a k u p o f c o o p e r a t i v e systems, t h e s e d i f f i c u l t i e s s h o u l d be d i s t i n g u i s h e d from e f f i c i e n c y f a c t o r s . The r e l a t i v e e f f i c i e n c y o f the B.C. a p p l e m a r k e t i n g s y s t e m * h a s r e c e i v e d l i t t l e r i g o r o u s i n v e s t i g a t i o n and hence t h i s s t u d y w i l l attempt t o f i l l t h i s v o i d . 1.2 Problem Statement The e f f i c i e n c y o f t h e p r e s e n t a p p l e i n d u s t r y has been q u e s t i o n e d f r o m m a n y s i d e s - b y m e d i a ^ , g r o w e r s , 1 " M a r k e t i n g s y s t e m " w i l l b e used a s a g e n e r a l t e r m t o i n c l u d e b o t h t h e packing and m a r k e t i n g f u n c t i o n s . 2 Eg., T u r n b u l l , M. " F r u i t Growers Gamble". The P r o v i n c e . January 23 1987. 2 industry-commissioned s t u d i e s 3 and i n d u s t r y e x p e r t s 4 . While such q u e s t i o n i n g has been present throughout the h i s t o r y of the apple i n d u s t r y i n B.C. (no matter what the marketing s t r u c t u r e ) i t has been most i n t e n s e of l a t e . While charges of i n e f f i c i e n c y tend to be s u b j e c t i v e , there may w e l l be a case f o r c l a i m i n g the r e l a t i v e e f f i c i e n c y of the i n d u s t r y has decreased. Apples are the most important t r e e f r u i t crop i n the B.C. i n d u s t r y , comprising 83% of f r u i t volume and 67% of cash r e c e i p t s over the p e r i o d 1980-1984 ( S t a t i s t i c s Canada). This study w i l l t h e r e f o r e p r i m a r i l y r e s t r i c t i t s e l f to an a n a l y s i s of the apple i n d u s t r y and i t s e f f i c i e n c y . As d i s c u s s e d i n Kennedy and Lee, trends i n apple production and producer returns may give credence t o the p e r c e p t i o n of d e c l i n i n g e f f i c i e n c y r e l a t i v e t o major competitors such as Washington State. Trends i n p r o d u c t i o n i n a competitive i n d u s t r y provide clues to the r e l a t i v e p r o f i t a b i l i t y of that i n d u s t r y . Apple production f i g u r e s are r e p o r t e d i n Table 1.1 f o r B.C., Canada, Washington S t a t e , and the United States over the period 1970 to 1985. While apple p r o d u c t i o n has i n c r e a s e d i n a l l areas (given some y e a r l y v a r i a t i o n ) , t h e s e f i g u r e s show how p r o d u c t i o n i n B.C. has a c t u a l l y d e c l i n e d r e l a t i v e t o i t s major c o m p e t i t o r s . T h i s i s b e t t e r i l l u s t r a t e d i n Figure 1.1, where r e l a t i v e percentages are graphed. Based on 5-year averages (1972-1976 and 1982-1986), B.C.'s t o t a l apple production has r i s e n 11% (not an i n s i g n i f i c a n t 3 Eg., Goldberg, R. A Study of the B.C. F r u i t I n d u s t r y  f o r the B r i t i s h Columbia F r u i t Growers A s s o c i a t i o n . J u l y 1982 . 4 Eg., G a r r i s h , A., Former B.C.F.G.A. President. Personal communication. J u l y 1986. 3 amount but low r e l a t i v e to W a s h i n g t o n S t a t e ) w h i l e W a s h i n g t o n p r o d u c t i o n has i n c r e a s e d 38%. The p e r c e n t a g e of average B . C . to Washington p r o d u c t i o n has f a l l e n over the same p e r i o d from 16% to 13%. The p e r c e n t a g e o f C a n a d i a n a p p l e s p r o d u c e d i n B . C . has changed l i t t l e , a l t h o u g h i t d i d i n c r e a s e somewhat i n the e a r l y 1980s . T h i s s u g g e s t s B . C . g r o w e r s do no t e n v i s a g e i n c r e a s e d p r o f i t s t h r o u g h e x p a n s i o n to the e x t e n t growers e l s e w h e r e d o , ( w h e t h e r due t o f a c i n g d i f f e r e n t c o s t s , p r i c e s o r o u t s i d e i n c e n t i v e s ) and t h e r e f o r e i m p l i e s s m a l l e r e f f i c i e n c y g a i n s i n B . C . T h i s assumes l e v e l s o f government i n c e n t i v e s are e q u i v a l e n t i n both r e g i o n s . T a b l e 1.1 Apple P r o d u c t i o n i n B . C . , Washington S t a t e , Canada and the U . S . A . , 1970 - 1986. Apple P r o d u c t i o n ( m i l l i o n pounds) Year BC WA Canada USA 1970 291.2 1320.0 877 . 6 6396.8 1971 190.2 1201.0 833.5 6371.1 1972 242.9 1390.0 868.8 5881.3 1973 321.0 1860.0 826.9 6238.6 1974 240.3 1775.0 890.8 6533.5 1975 366.4 2200.0 985.6 7530.0 1976 380.8 2308.0 901.8 7479.3 1977 314.6 2083.0 921.7 6672 . 6 1978 331.7 2170.0 998.9 7596.9 1979 333.4 2619.0 959.0 8143.0 1980 463.5 3005.0 1218.5 8828.4 1981 445.5 2760 .0 920.3 7753.6 1982 386.7 2615.0 1053.0 8115.0 1983 429.8 3000.0 1068.9 8314 . 5 1984 320.9 2895.0 957.3 8343.6 1985 305.0 2059.0 1055.1 7949.0 1986 286.0 3087 .0 839.4 7845.0 Sources : S t a t i s t i c s Canada, 1976-1987, #22-003 Washington S t a t e A g r i c u l t u r a l S t a t i s t i c s , 1986 Relative Apple Production Percentages 50% i Q % - | — i — i — i — i — • — i — i — | — ' — j — • — j — > — i — < — I 1970 1972 1974 1976 1978 1960 1982 1984 1966* Year D BC\tf A Prod'n + BC\CAN Prod'n 0 BC\USA Prod'n A WA\USA Prod'n Figure 1.1 B.C. Apple Production Relative to Canadian, Washington, and U.S.A. Production (1970-86) T r e n d s i n p r o d u c e r r e t u r n s i n B.C. r e l a t i v e t o o t h e r p r o d u c i n g a r e a s a r e a n o t h e r i n d i c a t o r of changes i n r e l a t i v e e f f i c i e n c i e s . Average producer r e t u r n s ( i n Canadian d o l l a r s per 42 pound box) f o r both f r e s h and p r o c e s s e d a p p l e s i n B.C. and Washington S t a t e are r e p o r t e d i n Table 1.2. f o r the p e r i o d 1976 t o 1984. Returns i n Washington S t a t e have r i s e n s l i g h t l y each year, although t h i s c o u l d simply r e f l e c t i n f l a t i o n . However, B.C. r e t u r n s have f a l l e n d u r i n g t h i s p e r i o d from a pre-1980 average of about $3.50/box (roughly on par with Washington State) to a p o s t -1980 a v e r a g e o f a b o u t $2.50/box ( a b o u t $2/box l e s s t h a n Washington). T h i s revenue d e c l i n e i n B.C. r e l a t i v e t o Washington S t a t e a g a i n suggests a d e c l i n e i n r e l a t i v e e f f i c i e n c y . However, t h e d a t a n e t t e d o u t d i r e c t s u b s i d i e s , which o c c u r i n B.C., whereas i n d i r e c t s u b s i d i e s were not accounted f o r ; t h e r e f o r e the r e l a t i v e e f f i c i e n c y d e c l i n e of B.C. may be overestimated by t h i s method i f i n d i r e c t s u b s i d i e s occur and change to a g r e a t e r extent i n Washington S t a t e . Comparison of BC and WA Grower Returns Average Nominal Return Per 4-2 Pound Box $5.50 -i : : — $2.00 - f 1 , 1 : 1 — i 1 f 1 1976 1977 1978 1979 1980 1981 1982 1983 1984 Crop Year • B.C.T.F. + W.GAC.H. Figure 1.2 Comparison of Average Grower Returns between B . C . and Washington State (1976-84) 7 T o t a l p r o d u c t i o n and grower r e t u r n s a r e n o t as c l o s e l y r e l a t e d as are per u n i t p r o d u c t i o n and grower r e t u r n s . In t h e B.C. i n d u s t r y grower r e t u r n s are the r e s i d u a l a f t e r marketing and packinghouse c o s t s are deducted from the wholesale r e c e i p t s . T h i s r e s i d u a l i n t u r n a f f e c t s the p r o d u c t i o n d e c i s i o n s of the grower. T h e r e f o r e any g i v e n d e c l i n e i n r e l a t i v e economic e f f i c i e n c y i n t h e B.C. a p p l e i n d u s t r y , as p o s t u l a t e d above, may be due t o d e c l i n e s i n p r o d u c t i o n e f f i c i e n c y and/or m a r k e t i n g ( i n c l u d i n g packinghouse) e f f i c i e n c y . R e l a t i v e e f f i c i e n c y at the p r o d u c t i o n l e v e l has a l r e a d y been examined by Kennedy and L e e . U s i n g a r e p r e s e n t a t i v e farm approach they found lower p r o d u c t i o n c o s t s p e r a c r e but h i g h e r p r o d u c t i o n c o s t s per pound i n B.C. than i n W a s h i n g t o n S t a t e . They c o n c l u d e d y i e l d d i f f e r e n c e s were a s u b s t a n t i a l f a c t o r . B.C. i n d u s t r y o f f i c i a l s a l s o f e e l t h a t p r o d u c t q u a l i t y and c o n s i s t e n c y a r e m a j o r f a r m - l e v e l l i m i t a t i o n s ( B e l l ) . T h i s emphasis on q u a l i t y c o n t r o l suggests marketing c o n s i d e r a t i o n s are becoming i n c r e a s i n g l y important as the c o m p e t i t i o n i n c r e a s e s . But w h i l e the B.C. marketing system has been blamed f o r much of the d i f f i c u l t y o f t h e t r e e f r u i t i n d u s t r y , t h e a c t u a l l e v e l o f e f f i c i e n c y of the m a r k e t i n g system i s not known. E f f i c i e n c y i s o f t e n d e f i n e d as revenue minus c o s t s , or p r o f i t . However, i n the p r e d o m i n a t e l y c o o p e r a t i v e B.C. t r e e f r u i t i n d u s t r y where the marketing system i s meant to operate a t c o s t , i t i s the marketing margin per u n i t handled which i s the most a c c e s s i b l e measure of e f f i c i e n c y . The problem t h i s study w i l l address i s the l a c k of knowledge c o n c e r n i n g the e f f i c i e n c y of the B.C. apple m a r k e t i n g system. 8 1.3 Objectives The o b j e c t i v e o f t h i s s t u d y i s t o e x a m i n e t h e r e l a t i v e e f f i c i e n c y of t h e B.C. a p p l e m a r k e t i n g system. T h i s w i l l i n c l u d e : 1) an h i s t o r i c a l r e v i e w of t h e B.C. a p p l e i n d u s t r y i l l u s t r a t i n g t h e c y c l i c a l n a t u r e of t h e m a r k e t i n g system; 2) a d i s c u s s i o n o f r e c e n t changes i n t h e i n d u s t r y and t h e i r p o s s i b l e i m p l i c a t i o n s ; 3) a d e t e r m i n a t i o n o f t h e t o t a l p a c k i n g and m a r k e t i n g c o s t s and t h e i r c o m p o n e n t s ; 4) an i d e n t i f i c a t i o n o f f a c t o r s a f f e c t i n g e f f i c i e n c y ; 5) t h e d e t e r m i n a t i o n o f r e l e v a n t measurements o f t h e s e i n e f f i c i e n c i e s ; 6) a c o m p a r i s o n o f t h e s e e f f i c i e n c y measures w i t h t h o s e of Washington S t a t e ; and 7) recommendations as t o how t h e e f f i c i e n c y l e v e l o f t h e m a r k e t i n g s y s t e m may be improved. 1.4 Procedure The above o b j e c t i v e s w i l l be met by u s i n g t h e s t r u c t u r e , c o n d u c t and p e r f o r m a n c e t e c h n i q u e s o f i n d u s t r i a l o r g a n i z a t i o n t h e o r y . The s t r u c t u r e and conduct s e c t i o n s w i l l d i s c u s s t h e B.C. i n d u s t r y u s i n g t h e W a s h i n g t o n S t a t e i n d u s t r y as a c o m p a r i s o n wherever p o s s i b l e . The performance s e c t i o n w i l l a n a l y z e r e v e n u e s , c o s t s and grower r e t u r n s , as w e l l as t h e i r s e n s i t i v i t y t o v a r i o u s f a c t o r s . A g a i n Washington S t a t e comparisons w i l l be made whenever d a t a p e r m i t s . T h e o r e t i c a l a s p e c t s w i l l be d i s c u s s e d t h r o u g h o u t t h e a n a l y s i s , s i n c e t h e y a r e many a n d a r e b e t t e r e x p l a i n e d i n s i t u . 1.5 Thesis Guide T h i s study w i l l attempt to present the B.C. apple i n d u s t r y i n a s t r u c t u r e , conduct, performance format. Chapter 2 c o n s i d e r s the s t r u c t u r e and c o n d u c t a s p e c t s o f t h e B.C. i n d u s t r y w i t h r e f e r e n c e t o the Washington i n d u s t r y where a p p l i c a b l e . S e c t i o n 2.1 d e l v e s i n t o t h e h i s t o r y o f t h e i n d u s t r y , w i t h s p e c i a l emphasis on t h e c y c l i c a l n a t u r e of i t s problems. S e c t i o n 2.2 d i s c u s s e s r e c e n t d e v e l o p m e n t s and e x p l a i n s some o f t h e t e r m i n o l o g y employed h e r e i n . S e c t i o n 2.3 d e t a i l s s t r u c t u r a l components of B.C. and Wa s h i n g t o n i n terms of f r u i t q u a l i t y f a c t o r s , s i z e f a c t o r s at the orchard, packing and i n d u s t r y l e v e l , and the o r g a n i z a t i o n a l s t r u c t u r e s . S e c t i o n 2.4 d i s c u s s e s i n d u s t r y c o n d u c t c o m p a r i s o n s between B.C. and W a s h i n g t o n a t b o t h t h e p a c k i n g h o u s e and m a r k e t i n g a g e n c y l e v e l . And S e c t i o n 2.4 summarizes the c u r r e n t i n d u s t r y concerns i n B.C.. C h a p t e r 3 u t i l i z e s some of t h e i n f o r m a t i o n d e s c r i b e d i n Chapter 2 t o develop an i n d u s t r i a l model of the apple i n d u s t r y . S e c t i o n 3.1 presents t h i s model i n t h e o r e t i c a l terms and supports i t w i t h q u a l i t a t i v e e v i d e n c e . The p r i c e a n a l y s i s of S e c t i o n 3.2 p r o v i d e s more q u a n t i t a t i v e evidence, and i t a l s o i l l u s t r a t e s the h e t e r o g e n e i t y of the apple product mix. Chapters 4 and 5 concern themselves w i t h the performance of t h e B.C. p a c k i n g and m a r k e t i n g f u n c t i o n s . C h a p t e r 4 f i r s t d i s c u s s e s a p p r o p r i a t e m e a s u r e s o f e f f i c i e n c y i n terms o f t h e g o a l s o f a c o o p e r a t i v e s t r u c t u r e i n S e c t i o n 4.1. S e c t i o n 4.2 pr o v i d e s an o v e r a l l p i c t u r e o f t h e d i s b u r s e m e n t o f s a l e s r e v e n u e s which i s then d i s c u s s e d i n d e p t h i n S e c t i o n 4 . 3 - C o s t s , a t t h e packing and marketing l e v e l i n t u r n , a r e analyzed i n S e c t i o n 4.4. The r e s u l t a n t grower r e t u r n s are d e s c r i b e d i n S e c t i o n 4.5. 10 Chapter 5 performs s e n s i t i v i t y t e s t s on revenues, c o s t s and grower r e t u r n s i n c o m b i n a t i o n . In an attempt t o i d e n t i f y why revenues d i f f e r between B.C. and Washington S t a t e , S e c t i o n 5.1 m i m i c s t h e p r o d u c t q u a l i t y o f t h e a v e r a g e W a s h i n g t o n packinghouse. Some of the i n d i v i d u a l f a c t o r s which might account f o r t h i s d i f f e r e n c e f o l l o w , where S e c t i o n 5.2 t e s t s i n c r e a s e d s t o r a g e c a p a c i t y , S e c t i o n 5.3 t e s t s improved f r u i t s i z e , and S e c t i o n 5.4 t e s t s improved grade. F i n a l l y , C h a p t e r 6 summarizes t h e p r e v i o u s c h a p t e r s i n S e c t i o n 6.1 and d i s c u s s e s t h e r e l e v a n c y of t h e i r f i n d i n g s i n S e c t i o n 6.2. Recommendations p e r t a i n i n g to p o s s i b l e improvements to the B.C. apple i n d u s t r y are suggested i n S e c t i o n 6.3. 11 CHAPTER 2 STRUCTURE AND CONDUCT OF THE APPLE INDUSTRY 2.1 HISTORY OF THE B . C . APPLE INDUSTRY 5  Pre 1950 T r e e f r u i t p r o d u c t i o n i n B . C . b e g a n i n t h e m i d 1 8 0 0 s , c e n t e r e d a t f i r s t a r o u n d t h e Hudson Bay p o s t s and g r a d u a l l y s p r e a d i n g t o i s o l a t e d p o c k e t s t h r o u g h o u t the s o u t h e r n t h i r d o f the p r o v i n c e . At the t ime of the f i r s t meet ing of the B . C . F r u i t Growers A s s o c i a t i o n ( B . C . F . G . A . ) i n 1889, the Okanagan v a l l e y was d e d i c a t e d p r i m a r i l y to c a t t l e , but by 1910 i t e x p e r i e n c e d a major l a n d boom as p i o n e e r s f o l l o w e d i n the f o o t s t e p s o f the w e a l t h y and r e s p e c t e d G o v e r n o r G e n e r a l L o r d Aberdeen who had e s t a b l i s h e d two l a r g e o r c h a r d s i n the N o r t h Okanagan. Okanagan l a n d v a l u e s s o a r e d f r o m $1 t o $1000 p e r a c r e and p l a n t i n g s o c c u r r e d a t a b r e a k n e c k pace w i t h l i t t l e r e g a r d f o r m a r k e t a b i l i t y - as many as 60 d i f f e r e n t v a r i e t i e s of apple were p l a n t e d , p r i m a r i l y n o r t h of P e n t i c t o n . I n o r g a n i z a t i o n a l t e r m s , 1895 saw t h e B . C . F r u i t Growers A s s o c i a t i o n ( i n i t i a l l y F r a s e r V a l l e y d o m i n a t e d ) s e t up t h e c o o p e r a t i v e F r u i t Exchange to s t a n d a r d i z e g r a d i n g , p r o c e s s i n g , t r a n s p o r t a t i o n and m a r k e t i n g o f f r u i t - i n e s s e n c e t h e same o b j e c t i v e s o f t o d a y ' s c o o p e r a t i v e s t r u c t u r e . But the m a j o r i t y o f growers were i n d i v i d u a l i s t s and w h i l e Aberdeen's C o l d s t r e a m Ranch was s h i p p i n g to the P r a i r i e s and Great B r i t a i n a s e a r l y a s 1903, The b u l k o f t h i s s e c t i o n b o r r o w s f r o m : M a c P h e e , E . The Report of the Roya l Commission on the Tree F r u i t  I n d u s t r y of B r i t i s h Co lumbia . 1958. 12 most growers p r e f e r r e d c a s h t r a n s a c t i o n s t o COD shipments f u r t h e r a f i e l d . I n 1908 a c o o p e r a t i v e p a c k i n g / s e l l i n g agency was formed i n V e r n o n , t h e Okanagan F r u i t U nion (O.F.U.). The l o c a l houses s e t c h a r g e s t o c o v e r c o s t s , and a 10% commission was deducted t o c o v e r s e l l i n g c o s t s . Some p o o l i n g of r e t u r n s ( t o be e x p l a i n e d below) was p r a c t i c e d . The s t o r y o f t h e O.F.U. i s one w h i c h s u b s e q u e n t l y r e p e a t e d i t s e l f many t i m e s i n t h e Okanagan v a l l e y . The b e s t o r c h a r d s and b e s t f r u i t b y p a s s e d t h e O.F.U. , a n d m a r k e t p r e f e r e n c e s , p e r t a i n i n g t o p a r t i c u l a r s o f v a r i e t y and g r a d i n g , were l a r g e l y i g n o r e d . O r c h a r d i s t s used t h e c o o p e r a t i v e when i t s u i t e d them, and when t h e p r i c e f e l l d r a m a t i c a l l y due t o Washington's bumper c r o p o f 1912, t h e O.F.U. went i n t o l i q u i d a t i o n . The f o l l o w i n g s e a s o n a n o t h e r l a r g e c r o p prompted an attempt t o r e o r g a n i z e i n t o t h e Okanagan U n i t e d Growers (O.U.G.), a c o o p e r a t i v e w i t h more houses and members, and hence g r e a t e r tonnage. I t a l s o d i v e r g e d from t h e O.F.U. i n i t s attempt t o c a p t u r e t h e P r a i r i e market. I t succeeded i n t h i s r e g a r d , a t l e a s t i n p a r t due t o a d u t y i n c r e a s e on U.S.A. a p p l e s i n 1916. Growers p r o s p e r e d u n t i l a 1921 g e n e r a l economic slump. P r i v a t e f r u i t p a c k e r s had a l s o expanded d u r i n g t h e good y e a r s , and i n t h e 1922/23 s e a s o n b o t h t h e p r i v a t e and c o o p e r a t i v e house d e c i d e d t o d e a l w i t h t h e heavy c o m p e t i t i o n by s e l l i n g f r u i t on a c o n s i g n m e n t b a s i s . Growers t h r o u g h o u t t h e v a l l e y met and d e c i d e d t o form a new company, A s s o c i a t e d Growers o f B.C. L t d ( A . G . ) , t o buy up O - U - G - and most o f t h e p r i v a t e houses. So, w h i l e t h e f i r s t e x p e r i m e n t i n c o o p e r a t i o n , t h e O.U.G., f a i l e d , i t was by no means the end of the c o o p e r a t i v e movement i n 13 the B.C. apple industry. Pooling of returns over the season became entrenched, and a new sales agency was formed. This agency was influenced by two things: a visit by an American proponent of the cooperative movement, Aaron Sapiro, who suggested that growers could band together to eventually determine price; and Commissioner Lewis Duncan's findings that brokers and wholesalers were cooperating to keep the prices low. I n response, A.G. replaced their Canadian brokers with their own subsidiary, and used existing brokers for export fruit. By 1927 the situation had again deteriorated. Independents and a lack of cold storage resulted in market gluts and low prices. The provincial government created a "Committee of Direction" empowered to set minimum prices for sale within Canada, although in practice it could only instigate a pro rata distribution of orders among shippers. The Depression, followed by the 1931 Supreme Court decision that the B.C. government had acted unconstitutionally, spelt the end of the committee. A shippers council was formed, and during the bumper crop of 1932 an attempt by 90% of the shippers to fix a minimum price and sale dates failed as it lacked power to enforce the agreement. An even larger crop the following year, combined with very low prices, spawned tremendous grower agitation. Southern locals of the A.G. questioned the selling e f f i c i e n c y of the A.G. and talked of local pools a n d a separate s a l e s d e s k for t h e s o u t h . In 1934 Canada and B.C. p a s s e d c o m p l e m e n t i n g " N a t u r a l P r o d u c t s Marketing Act"s enabling t h e f o r m a t i o n of t h e B.C. T r e e F r u i t Board. This board had no power t o affect prices except by controlling volume, which did not prove efficacious. In the same 14 year another record crop, increased freight rates and an unfavourable exchange rate combined to thwart the intentions of the scheme, but 90% of the growers remained on side. While the federal act was struck down in 1937, the provincial act had, in anticipation, been amended and hence was ruled valid. A s t i l l larger 1938 crop prompted the A.G. and independents to experiment with one-desk selling, and in 1939 the B.C.F.G.A. resolved that the experiment continue. B.C. Tree Fruits Ltd. handled only the domestic sales in 1939, but soon houses were subverting the intent of the experiment by saving their premium fruit for export. With the imposition of the War Measures Act in 1940, the federal government gave the B.C. Fruit Board complete control of marketing (including pooling, pricing, and subsidies) and delegated sales to the U.S.A. and overseas, respectively, to B.C. Tree Fruits Ltd. in 1940 and 1941 The locals lost rights to quote prices as well as dates and direction of shipments of their f r u i t . Growers prospered under this new arrangement, and tripartite contracts (between growers, shippers and B.C. Tree Fruits Ltd.) were established to maintain the system once the powers of the B.C. Fruit Board wound down at the end of the war. Given the history of failure of such voluntary schemes in the past, however, a compulsory scheme was s t i l l much sought after. In 1949 the federal government enacted the "Agricultural Products Marketing Act" giving the B.C. Fruit Board control over marketing, but not over pooling or equalization of returns. Pooling was therefore conducted on the legal basis provided by the tripartite contracts. While B.C. Tree Fruits Ltd. conducted the pooling in their role as data processors, the actual pooling 15 decisions were made by a separate pooling committee made up of industry representatives. Pooling At this point, an explanation of the evolution of pooling and its problems is necessary. Pooling was initially instigated to compensate late harvest areas and to smooth out the vagaries of seasonal price fluctuations. It began as direct pooling, whereby the season's returns from each grade and size of apple are apportioned on a per unit basis throughout the industry. As there were many varieties and few grade and size categories this was a relatively quick and simple procedure. However, the pooling committee had the latitude to make adjustments for varietal differences or for aberrant prices (due to unusual shortages). They also experimented with separate early pools or premiums when, in the days of primitive storage and therefore much better early versus mid-season prices, the southern houses resented sharing the returns from their climatic advantage with northern houses. When WWII broke out price ceilings were set and the traditional U.K. market was lost. Therefore, high quality fruit lost much of its premium over lower quality fruit. As the situation was considered short-term, the pooling committee set up a schedule of price differentials for the various varieties, grades and sizes using a five year average of the pre-war prices. After the war the currency restrictions in foreign markets prevented the market from stabilizing, and so this 'yardstick' method was retained. The five year average became a moving average which eventually reduced to a one year 'average'. For 16 i n s t a n c e , i n 1958 t h e y a r d s t i c k was d e t e r m i n e d u s i n g p r i c e s f r o m t h e p r e v i o u s c r o p y e a r , a n d was t h e n a d j u s t e d t o p a r t i a l l y r e f l e c t c u r r e n t p r i c e c h a n g e s . P r i c e c h a n g es between g r a d e s and s i z e s w e r e m o r e c o m p l e t e l y r e f l e c t e d t h a n c h a n g e s b e t w e e n v a r i e t i e s , a l t h o u g h a v a r i e t y was no l o n g e r p e r m i t t e d t o " s u b s i d i z e ' a n o t h e r b y more t h a n 5%. The y a r d s t i c k m e t h o d became i n c r e a s i n g l y c o m p l e x as i t a t t e m p t e d t o a p p r o a c h d i r e c t p o o l r e s u l t s . P o o l c l o s i n g d a t e s , when t h e f i n a l r e t u r n s were a n n o u n c e d , came l a t e r and l a t e r , a l t h o u g h t h i s was a l s o due t o a d v a n c e s i n c o l d s t o r a g e . W h i l e i n d u s t r y p o o l i n g o b v i a t e d t h e c o m p l e x i t y o f p r o r a t i n g s h i p m e n t s f r o m t h e h o u s e s , t h e r e r e m a i n e d a c o n s i d e r a b l e amount o f d i s s a t i s f a c t i o n w i t h t h e s y s t e m . Due i n p a r t t o h i g h e r q u a l i t y r e q u i r e m e n t s ( h e n c e f i n e r g r a d e a n d s i z e b r e a k d o w n s ) , p o o l i n g b e c a m e i n c r e a s i n g l y h a r d e r t o u n d e r s t a n d . I n d u s t r y p o o l i n g a l s o c r e a t e d r e g i o n a l d i s p a r i t i e s . I f a l l h o u s e s p a c k e d t h e same p r o p o r t i o n s o f d i f f e r e n t v a r i e t i e s ( g r a d e s , s i z e s ) t h e r e w o u l d be no i n e q u i t i e s . B u t s i n c e h o u s e s s p e c i a l i z e , t o some e x t e n t , i n d i f f e r e n t v a r i e t i e s ( g r a d e s , s i z e s ) and s i n c e many o f t h e s e v a r i e t i e s ( g r a d e s , s i z e s ) compete amongst t h e m s e l v e s , some h o u s e s w i l l do b e t t e r t h a n o t h e r s as l o n g as t h e s a l e s a g e n c y c o n c e n t r a t e s o n m a x i m i z i n g t o t a l a p p l e r e t u r n s and n o t v a r i e t y r e t u r n s . F o r i n s t a n c e , i n m a r k e t s where t h e p r e s e n c e o f S p a r t a n s l o w e r s M c i n t o s h p r i c e s t h e S p a r t a n s may be h e l d b a c k , t o t h e l i k e l y b e n e f i t o f t h e n o r t h e r n h o u s e s w h i c h s p e c i a l i z e i n M c i n t o s h . 17 Post 1950 Resuming the history, the early 1950s was another predominantly bleak period for the apple industry. A large 1950 crop coupled with the removal of government protection policies resulted in much lower prices. Freight rates to the east were doubled, and the season climaxed with serious winter damage. Frosts continued to plague the area until several house bankruptcies and grower unrest instigated a Royal Commission in 1 9 5 6 . In Dean MacPhee's report of 1958 (from which much of this section is sourced), he was la r g e l y favourable to B.C. Tree Fruits Ltd. and the houses, although he suggested house amalgamation, better communication, and standardization of varieties. This was followed by ten years of relative prosperity, until another serious freeze resulted in low returns, especially among those who replanted according to the commissioner's advice. In 1969-70 two factors combined to bring an end to this period of contentment (Garrish). First, Washington produced its largest crop since 1930, which, at 1695 million pounds was 65% higher than the previous year's crop. Second, a recession occurred in Canada. Prices fell dramatically and once again grower agitation threatened to disband the industry. Growers received early advances, but by the beginning of 1970 the money dried up. Growers began to go under, and with the opening of the Trans Canada the fruit inspector was no longer able to police shipment of fruit, hence peddlers defied the B.C. Fruit Board. This peddling increased in the following years until a caravan of peddlers dispatched to Vancouver after alerting the media. The 18 peddlers gained public support, and the newly elected NDP Attorney General declined to enforce the Board's regulations (which required vehicles to be searched). S.C. Hudson, in his 1973 report, denounced the peddlers for using the B.C. Tree Fruits Ltd. price umbrella. He suggested a strengthening of the central authority, in part via packinghouse amalgamation. Modernization of packing, storing and growing was also recommended. Government assistance, which was being proposed to insure producer costs, should rather be directed at assisting this renovation process, according to Hudson. But in 19 74 the government attempted to resolve the control issued by establishing the Agricultural Land Reserve (A.L.R.) and then Farm Income Assurance (F.I.A.).6 The F.I.A. would only be available to those growers belonging to the B.C.F.G.A. and who "supported' the affiliated houses, and in return the Board would have no enforcement power. Support for the affiliated houses, however, was not defined and as such growers could s t i l l sell to peddlers on the side (and break their contracts with the house) (Garrish). The renovation process advocated by Hudson first appeared in the Oliver-Osoyoos Cooperative in 1975 when the labour saving pregrade/presize (PG/PS) technology was imported from Washington state. Apples could then be quickly sorted after arrival at the house (or removal from storage) using computerized colour and size sensors. The fruit i s t h e n s t o r e d a n d further sorted and 6 F.I.A. was established to appease growers who stood to lose capital gains when their land was frozen in the A.L.R. 19 packed, i n one o p e r a t i o n , to meet the needs of the customer at a much more measured pace. But the industry-wide p o o l i n g system c o u l d not a d e q u a t e l y cope w i t h t h i s uneven adoption of the new t e c h n o l o g y , and grower d i s s a t i s f a c t i o n , and hence p e d d l i n g , i n c r e a s e d . The Washington crop c o n t i n u e d t o grow, and houses c o n t i n u e d t o amalgamate i n an attempt to reduce t h e i r per u n i t overhead and compete with the independents. In the e a r l y 1980s the impact of the independents was most keenly f e l t , e s p e c i a l l y i n the s o f t f r u i t s . Independent houses c o n c e n t r a t e d on s c a r c e l y graded f r u i t q u i c k l y moved, and d e a l t not o n l y w i t h i n d e p e n d e n t growers but a l s o w i t h c o n t r a c t e d growers who played both s i d e s . The a f f i l i a t e d houses, whose per u n i t overhead c o s t s are h i g h l y dependent on f r u i t volume, faced i n c r e a s e d c o m p e t i t i o n amongst themselves and so l o b b i e d f o r a change i n the p o o l i n g system ( G a r r i s h ) . I n J u l y , 1982, Roy G o l d b e r g c o m p l e t e d an i n d u s t r y commissioned study which again denounced peddling and recommended f u r t h e r c e n t r a l i z a t i o n by way of amalgamating packing and s e l l i n g f u n c t i o n s i n t o one agency to prevent competition among the houses f o r growers. F a i l i n g t h i s , he recommended house p o o l i n g and s e l l i n g , using B.C. Tree F r u i t s L t d . as a broker only. In 1983 a newly independent house, RH MacDonald and Sons, was d e n i e d an e x p o r t l i c e n s e by t h e B.C. F r u i t B o a r d . In response to an appeal, the "superboard', or B.C. Marketing Board, ordered the B.C. F r u i t Board to grant export l i c e n s e s to t h i s and o t h e r independent houses f o r a l l markets except the U.K. and Taiwan (B.C. Tree F r u i t s L t d . strongholds) on a two year t r i a l b a s i s . Before t h i s d e c i s i o n came down the B.C.F.G.A. had already 20 voted to move to house pooling, and a rival association of independent houses, Okanagan Fruit Producers and Shippers Association (O.F.P.S.A), was formed (Oliver Chronical, 1986). The following winter the second largest house created a storm when i t failed to renew the contracts of 29 growers, at least some of whom were disregarding their contracts by shipping to independents (Stariha). Poor returns from the 1984 crop led up to the most tumultuous year in the recent history of the B.C. apple industry. House pooling came into effect for all fruit, and so two more of the privately owned houses, MacLean & FitzPatrick and Westbank Packers, became independents. B.C. Fruit Packers of Kelowna, the largest house, had wanted the total industry amalgamation as proposed by Roy Goldberg, and their board recommended going independent once the near opposite, house pooling, became a fait  accompli. If the general membership hadn't rejected the proposal then the entire industry would likely have disbanded, given the importance of the Kelowna house in spreading the costs of B.C. Tree Fruits Ltd (Dell). At about the same time as the vote was taking place, a trial was being held. Industry officials and packinghouses were charged under the Combines Act of conspiring to limit or deal in fruit storage facilities (in effect, to control prices). While the t r i a l i n B.C. Supreme Court resulted in a n acquittal, the federal Crown prosecutors d i d n ' t drop their appeal until much later in the year ( K i n g , 1985). That winter, as well, saw the B.C. Fruit Board hearings into the possible extension of the temporary export licenses granted two years earlier to 21 independents. As a result of these hearings, the B.C. Fruit Board decided to deregulate exports in all markets, even the previously untouchable U.K. and Taiwan markets (Oliver Chronical). In the meantime, independents were given another boost when members of the O.F.P.S.A houses were let into the F.I.I, (previously F.I.A.) program. By May of 1986 the B.C.F.G.A. executive demanded the resignation of the three member B.C. Fruit Board, in response to both the export issue and the board's failure to include independent growers in their representation (Garrish). While the crisis at the packinghouse level was somewhat less intense than the previous year, the growers were s t i l l restless at the time this study was initiated. 2 . 2 RECENT DEVELOPMENTS IN THE B . C . APPLE INDUSTRY While the above historical summary demonstrated the cyclical nature of the organizational problems in the B.C. apple industry, i t is vital to emphasize the significance of the most recent developments if industry performance is to be evaluated. This section will describe the industry structure at the end of central pooling, its problems, and how house pooling has attempted to remedy these problems. Prior to 1984 B.C. Tree Fruits Ltd. dictated grading, packing and storage methods to their affiliated houses, and then sold the f r u i t . The proceeds from these sales, after B.C. Tree Fruits Ltd. deducted their costs and storage charges, were pooled by variety, grade and size. The packinghouses were sent the remainder in two cheques - one for the growers and the 22 o t h e r t o c o v e r t h e p a c k i n g h o u s e c o s t s o r d i f f e r e n t i a l . The d i f f e r e n t i a l i s a method of a v e r a g i n g packinghouse c o s t s over the i n d u s t r y f o r t h e v a r i o u s types o f packs and s e r v i c e s p r o v i d e d , and w i l l be f u r t h e r d i s c u s s e d b e l o w . When t h e a c t u a l c o s t s d i v e r g e d from the d i f f e r e n t i a l , the grower r e t u r n s were a d j u s t e d a c c o r d i n g l y . The B . C . Tree F r u i t s L t d . m a r k e t i n g s t r a t e g y was to s e l l a l l t h e f r u i t a t maximum p r i c e s . They f i r s t c o n s i d e r e d the volume t h a t had to be s o l d o v e r the y e a r , and then a d j u s t e d t h e i r p r i c e t o s e l l a t a s t e a d y p a c e . I t must be e m p h a s i z e d t h a t t h i s c o n t r o l l e d r a t e o f s a l e was of p r i m a r y importance to p r e c l u d e the p o l i t i c a l l y unpopular d i s p o s a l o f excess f r u i t . When t h i s s t eady r a t e f a l t e r e d t h e B . C . T r e e F r u i t s L t d . r e p u t a t i o n f o r p r i c e - g o u g i n g ( to c l e a r t h e i r m a n i f e s t a t the end o f a s t o r a g e p e r i o d ) was r e i n f o r c e d amongst t h e i r Washington c o m p e t i t o r s (Van W e c h a l ) . M a n y p r o b l e m s w i t h t h i s s t r u c t u r e w e r e p e r c e i v e d b y p a r t i c i p a n t s i n the i n d u s t r y . Communicat ion between houses and B . C . T r e e F r u i t s L t d . s a l e s p e o p l e was n e g l i g i b l e . T h e o r g a n i z a t i o n a l s t r u c t u r e s o f the v a r i o u s boards and commit tees o f t e n p e r m i t t e d o n l y o n e p e r s o n ( s u c h a s t h e GM o f B . C . T r e e F r u i t s L t d . ) t o a t t e n d b o t h t h e B . C . F . G . A . a n d B . C . T r e e F r u i t s L t d . e x e c u t i v e meet ings . A n o t h e r p r o b l e m was w i t h the uneven a d o p t i o n o f the PG/PS ( p r e g r a d e / p r e s i z e ) t echno logy (which a l lows f r u i t to be packed to o r d e r t h r o u g h t h e s e a s o n ) . B . C . T r e e F r u i t s L t d . s a l e s p e o p l e f e l t p a c k e d f r u i t s h o u l d be s o l d f i r s t , l e a v i n g the PG/PS f r u i t as a r e s e r v o i r which would go to SunRype i f i t c o u l d n ' t be s o l d . 23 While this fruit received the pooled price for its grade and size, the PG/PS packinghouses would not receive the same differential (only the labour costs) as the houses which had not invested in the labour saving technology. Hence the PG/PS houses felt they were not only NOT being rewarded for their investment, but were also being penalized. Their growers were getting lower returns due to both making payments for the new technology and lower differential payments. At least two other factors combined with the above problems to cause the move to house pooling. The first was the increased threat of the independents. As mentioned in the previous section, the three privately owned houses left the B.C. Tree Fruits Ltd. organization, lobbied for export licenses and formed the rival O.F.P.S.A. The second other factor was the record Washington crops of the early 1980s, which peaked in 1983. The massive Columbia Basin plantings of the 1970s came into full bearing, and B.C. apple grower returns fell from and average of about $.10/lb in the late 1970s to about $.065/lb in the early 1980s. Hence the industry underwent a dramatic upheaval in 1984, and house pooling was instigated first for Golden Delicious in 1984, and then for all fruit in 1985. The process has been one of evolution, and has yet to be stabilized. But i t can be summarized as a shift in power from B.C. Tree Fruits Ltd. to the individual packing organizations. While B.C. Tree Fruits Ltd. consults with the houses about grading, packing and storage decisions, the final decisions rest with the packinghouses. They 24 can now decide whether the pr i c e o f f e r e d through B.C. Tree Fruits Ltd. is sufficient. Some of the changes are essentially accounting transfers. B.C. Tree Fruits Ltd. now sends the packinghouse only one cheque from which the packinghouse must apportion costs and grower returns. SunRype now pays the packinghouses directly for their fruit, not via B.C. Tree Fruits Ltd.. And storage costs are now paid directly by the houses, and not through B.C. Tree Fruits Ltd. (a change which could have some implications on interest charges if B.C. Tree Fruits Ltd. received a preferred rate) . Now the three major packing organizations have PG/PS capacity, and the smaller houses have a "set aside" practice which f i l l s a similar role, albeit on a smaller scale. Most houses pack to order - B.C. Tree Fruits Ltd. knows how much of each grade and size are in inventory, and when packed quantities are dwindling or when a special order has been received they contact the houses on a "prorate" basis. The prorate is an attempt to keep sales volumes proportional among houses as the season progresses. The house then decides whether to f i l l the order by evaluating the price and anticipating future price movements. The B.C. Tree Fruits Ltd. marketing strategy has necessarily changed. Movement targets are much more flexible, and the sales people are more familiar with the concerns of the packinghouses. The GM of B.C. Tree Fruits Ltd. is now from the management and not the volume-oriented sales stream (thus well equipped to deal with industry politics), and the accounting function (which 25 concerns itself with the bottom line) is more central to the organization. Communication among the various organizational boards has been expanded such that all sides of the story can now be heard at industry meetings. For instance, now both a B.C. Tree Fruits Ltd. and an O.F.S.A. (packinghouse organization) representative are present at B.C.F.G.A. meetings so all sides of the issues can be discussed. Problems s t i l l exist under the new situation. One problem is with the prorate - every packinghouse now has a staff member who oversees the allotment of orders to different houses. The prorate is based on sales volumes, not values, as the decision of which house to place the order with goes to a dispatcher who is not informed about the price. Other houses may become jealous when one seems to consistently sell to better markets - that is to buyers who are willing pay more or who are less likely to cause subsequent problems (such as late payment or unreasonable damage claims). Houses are s t i l l finding i t di f f i c u l t to establish their individual reputations (and hence increase their sales) and are lobbying to use house end labels on their boxes to facilitate this. While the packinghouses have always competed with each other for growers, the conversion to house pooling has intensified this. Its important to emphasize the ways in which these houses can differ in order to understand how this competition occurs. Climate, soil, average orchard size and. farm management ability vary up the Okanagan Valley, and so the different packinghouses can have quite dissimilar members. These same factors are also responsible for different fruit quality at the houses. Some 26 organizations are small, and can therefore afford to be choosier about the type of grower they take on as members, whereas it is less political for the larger houses to be as selective. Some organizations choose to increase their costs (and lower short term returns) by hiring additional field staff in hopes of improving orchard management (and possibly reducing production costs 7) and improving fruit quality (and possibly increasing value) over the long run. In the packinghouse one must be aware of different techniques houses can use to give the impression of higher grower returns. When fruit is delivered to the packinghouse it can either be weighed in or have an assigned average bin weight. When using the latter method it is possible to hide cull fruit in "shrinkage", that is, bins which actually weigh more than the assigned weight can appear to have a better packout percentage and hence a higher value (and grower return) on a per unit basis, although total return would be the same with both methods. Some houses charge their foreman to variable labour to reduce overhead charges. Some houses depreciate investments as quickly as possible, others prefer a slower, less painful rate. Some houses use cull charges (sliding or fixed point) to offset overhead and hence increase apparent returns per unit (although total returns would only be increased if these charges have a deterrent effect over the long term). Other houses feel it is cheaper and quicker One house estimated fieldwork costs of $200,000 and a subsequent grower savings in spray costs of $300,000 over one growing season. However, these costs would be spread amongst all members while the benefits may have accrued only to specific growers. 27 t o s o r t o u t c u l l s o n t h e g r a d e r l i n e t h a n i n t h e o r c h a r d a n d s o f e e l c u l l c h a r g e s a r e n ' t n e c e s s a r y . F i n a l l y , h o u s e s c a n d i f f e r due t o management a b i l i t i e s , a n d e v e n p u r e c h a n c e . T h e a s t u t e n e s s o f t h e m a r k e t i n g m a n a g e r a t o v e r s e e i n g t h e s a l e s p e o p l e a t B . C . T r e e F r u i t s L t d . c a n c o n t r i b u t e t o t h e o v e r a l l r e t u r n t o t h e m e m b e r s o f t h e p a c k i n g o r g a n i z a t i o n . T h e y a l s o h e l p d e t e r m i n e when t o o p e n CA r o o m s t o m a k e t h e i r f r u i t a v a i l a b l e f o r p a c k i n g a n d s a l e , a s w e l l a s t h e i n i t i a l d i s t r i b u t i o n o f t h e f r u i t t o t h e s e r o o m s m o n t h s b e f o r e , a n d t h e s e d e c i s i o n s c a n h a v e a l a r g e i m p a c t o n f i n a l r e t u r n s . A n d t h e r e c a n e v e n b e u n i n t e n t i o n a l b e n e f i t s t o f a u l t y p r o r a t i n g . F o r i n s t a n c e , o n e h o u s e t h a t i s c o m p l a i n i n g l o u d l y a b o u t n o t s h i p p i n g u p t o p r o r a t e i n a c e r t a i n g r a d e a n d s i z e may s u d d e n l y r e c e i v e a w i n d f a l l w h e n t h e p r i c e o f t h a t f r u i t u n e x p e c t e d l y i n c r e a s e s e n a b l i n g t h a t h o u s e t o p r o f i t m o r e t h a n h o u s e s w h i c h h a v e l e s s i n v e n t o r y . W h i l e i n d u s t r y p o o l i n g p r o t e c t e d i n d i v i d u a l h o u s e s f r o m l o s s e s d u e t o f a l l i n g p r i c e s , i t a l s o p r e v e n t e d t h e m f r o m a n t i c i p a t i n g a n d p r o f i t i n g f r o m p r i c e m o v e m e n t s . 2 . 3 STRUCTURAL D I F F E R E N C E S BETWEEN B . C . AND WASHINGTON S T A T E S i n c e t h e p u r p o s e o f t h i s t h e s i s i s t o c o n s i d e r t h e r e l a t i v e e f f i c i e n c y o f t h e p a c k i n g a n d m a r k e t i n g s e c t o r s o f t h e B . C . a p p l e i n d u s t r y t h e y a r d s t i c k a g a i n s t w h i c h t o m e a s u r e t h i s i s t h e W a s h i n g t o n s t a t e s y s t e m . A s m e n t i o n e d i n S e c t i o n 1 . 1 , t h e W a s h i n g t o n i n d u s t r y ha s g r o w n a t a much f a s t e r r a t e t h a n t h e B . C . f r u i t i n d u s t r y . I t s p r o d u c t i o n i s t e n t i m e s t h a t o f t h e B . C . i n d u s t r y , a n d h e n c e h a s a much l a r g e r i n f l u e n c e o n p r i c e . S i n c e t h e m a j o r W a s h i n g t o n S t a t e r e g i o n s a r e q u i t e c l o s e t o B . C . ' s 28 Okanagan v a l l e y the c l i m a t e , dominant v a r i e t i e s and major markets a r e f a i r l y s i m i l a r . Both r e g i o n s produce f a r more than they can consume and are some d i s t a n c e from major m a r k e t s . T h e r e a r e no t a r i f f b a r r i e r s on a p p l e t r a d e between the U . S . A . and C a n a d a . A l l t h e s e f a c t o r s , p l u s t h e f a i r l y c l o s e , i f i n f o r m a l , t i e s between members o f the two i n d u s t r i e s , q u a l i f y Washington as the b e s t r e g i o n f o r compar i son . As w i l l be e x p l a i n e d i n C h a p t e r 4, t h e b a s i s f o r t h i s p e r f o r m a n c e e v a l u a t i o n w i l l be c o s t s i n c u r r e d a n d r e v e n u e s o b t a i n e d . But l o o k i n g a t these measures i n i s o l a t i o n c o u l d be m i s l e a d i n g . S t r u c t u r a l d i f f e r e n c e s , whe ther due t o p h y s i c a l , i n t r a n s i e n t f a c t o r s o r to o r g a n i z a t i o n a l f a c t o r s may a t l e a s t e x p l a i n , i f not j u s t i f y , per formance d i f f e r e n c e s . And c o n d u c t d i f f e r e n c e s c a n not o n l y a f f e c t r e l a t i v e p e r f o r m a n c e , b u t may a l s o b i a s t h i s c o m p a r i s o n u n l e s s c a r e f u l c o n s i d e r a t i o n i s g i v e n t o f a c t o r s such as a c c o u n t i n g p r a c t i c e s . T h e r e f o r e , w h i l e d a t a f r o m W a s h i n g t o n S t a t e i s s k e t c h y , some a t t e m p t t o u n d e r s t a n d t h e s e d i f f e r e n c e s must be made b e f o r e performance e v a l u a t i o n can p r o c e e d . 2.3.1 F r u i t Quality Comparisons A p p l e g r a d i n g i n both B . C . and Washington has e v o l v e d from a h o r t i c u l t u r a l l y b a s e d ( f r e e d o m from f l a w s , k e e p i n g q u a l i t y ) s y s t e m t o one i n c o r p o r a t i n g market p r e f e r e n c e s o r t h e g r o w i n g i m p o r t a n c e of a e s t h e t i c q u a l i t i e s such as c o l o u r and shape. The v a r i o u s F a n c y (FCY) and E x t r a Fancy ( X F C Y ) grades i n B . C . (and t h e i r e q u i v a l e n t s i n W a s h i n g t o n S t a t e ) a r e p r i m a r i l y d i s t i n g u i s h e d by the amount and p a t t e r n of c o l o u r as measured by e l e c t r o n i c s e n s o r s a n d , a t l e a s t f o r the Red D e l i c i o u s v a r i e t y , the l e n g t h to w i d t h r a t i o and prominence of the p o i n t s on the end o f the a p p l e . F o r i n s t a n c e , i n 1984 a B . C . Red D e l i c i o u s XFCY1 was 90% r e d o r b e t t e r w i t h a minimum 1:1 l e n g t h to w i d t h r a t i o w h e r e a s a FCY2 c o u l d r a n g e f r o m 45 t o 74% c o l o u r . One must d i s t i n g u i s h , however, between j u d g i n g f r u i t q u a l i t y by the l e v e l a c h i e v e d , as a b o v e , and by the c o n s i s t e n c y o f the f r u i t w i t h i n each l e v e l . T h i s d i s t i n c t i o n w i l l be d i s c u s s e d f u r t h e r below but no te i t i s t h i s c o n s i s t e n c y f a c t o r which i s most o f t e n bemoaned i n the B . C . i n d u s t r y ( D e l l ) . To c o m p a r e f r u i t q u a l i t y b e t w e e n t h e r e g i o n s one m u s t u n d e r s t a n d t h e v a r i o u s f a c t o r s t h a t can a f f e c t t h e s e q u a l i t y c r i t e r i a . C o n d i t i o n o r k e e p i n g q u a l i t y i s p r i m a r i l y d e t e r m i n e d by m a t u r i t y a t p i c k i n g t i m e . Shape i s most o f t e n g e n e t i c a l l y d e t e r m i n e d , a l t h o u g h management p r a c t i c e s and c l i m a t e have i n f l u e n c e . C o l o u r , wh ich seems to be the most i m p o r t a n t f a c t o r i n t h e m a r k e t p l a c e , i s a f f e c t e d by n u t r i t i o n , s t r a i n , s u n l i g h t p e n e t r a t i o n and d i u r n a l t e m p e r a t u r e f l u c t u a t i o n s . T h u s , t h e r e are f o u r major f a c t o r s i n f l u e n c i n g f r u i t q u a l i t y - s o i l , c l i m a t e , s t r a i n and management p r a c t i c e s . These f a c t o r s , w h i l e comparable i n t h e s e two r e g i o n s i n r e l a t i o n to the r e s t o f the w o r l d , a r e s u f f i c i e n t l y d i f f e r e n t to account f o r q u a l i t y l e v e l d i f f e r e n c e s . The c l i m a t e i n the two r e g i o n s d i f f e r s not o n l y because o f t h e l a t i t u d i n a l d i f f e r e n c e (up to 4.5 d e g r e e s ) , but a l s o because o f t o p o g r a p h i c a l d i f f e r e n c e s . The Okanagan i s i n the n o r t h e r n f r i n g e o f the apple growing r e g i o n , and so the r i s k o f w i n t e r o r s p r i n g damage i s g r e a t e r (100-180 f r o s t f r e e days versus 200-220) a l t h o u g h t h e m o d e r a t i n g e f f e c t s o f the l a k e s and r i v e r s a f f o r d some p r o t e c t i o n i n some a r e a s . The B . C . Okanagan i s a l s o a much 30 narrower valley and more subject to frost pocketing than the Washington Okanogan, and certainly the Columbia Basin is flat in comparison. There is also considerable variation within each area. But while the Columbia Basin receives more heat units than either the B.C. or the Washington State Okanagan valley, this heat may actually be excessive and hurt the condition and colouring of the fruit. Apples will grow on a variety of soils provided there is adequate drainage (Swales). Acidic soils, which reduce nutrient availability, are a problem in areas with a long history of irrigation and fertilizer use. In addition, problems with apple replant disease occur in soil formerly planted to apples and is therefore more likely in B.C. where the suitable land is more restricted. Both the B.C. and Washington State fruit growing areas are characterized by brown chernozenic soils but within this classification the Okanagan valley soils are more variable than either Washington fruit region (Okanogan Valley or Columbia Basin), again in part due to topographical differences. A major consideration in apple quality is the apple strain. For instance, within the variety Red Delicious there are more than 40 strains. To further complicate the issue, the rootstock chosen will also affect the fruit attributes. While many of these strains and rootstocks can be grown interchangeably in either Washington State or B.C., Washington growers seem to have been much less catholic in their choice, perhaps at the insistence of their packinghouses. For instance, in Washington State 48% of the Red Delicious trees are of only 3 strains, 31 whereas in B.C. the top three strains comprise an estimated 25% of the Red Delicious trees (Washington Fruit Survey, 1986). Farm management differences are even more difficult to quantify. The Okanagan tends to attract retirees and hobby farmers to a greater extent than Washington (perhaps because there are much milder climates than Washington State to retire to i n the U.S.A.) (Heinicke). In Washington a l i t t l e Spanish is probably the only foreign language needed whereas in B.C. there is a large Portuguese community and a growing number of novice growers from the Punjab. The language difficulties complicate extension attempts, as do the varying educational and horticultural backgrounds. Extension in Washington State is carried out by both the packinghouses and the land grant university (and its agricultural experimental station), whereas the packinghouses and the provincial government conduct extension activities in B.C.. In terms of the ratio of growers per packinghouse fieldman, the Washington system supports 40:1 as a rule of thumb, whereas in B.C. 250:1 is more the norm (where the 40 Washington State growers produce as much as the 250 B.C. growers). So management techniques may well be different, at least in the short term, between the two regions. 2.3.2 Size Comparisons Before embarking on industry size comparisons a reminder of the importance of the economies of size or scale concept would be helpful. Economies of size exist where the operation is on the downward-sloping section of the long run average cost curve (LAC). Expansion would result in reduced average costs via a f a l l in input per unit of output. According to Green, these 32 economies can be 'real', as just described, or 'pecuniary' when obtained by way of monopsony powers. Determining a business entity's exact position on its LAC is difficult, but the presence of the following factors may indicate size or scale economies. As delineated in Scherer, these factors can be grouped into product-, plant- or multiplant- specific factors. Another way to group them that may be more relevant to the broader functions in the apple industry divides these factors into four categories of concern: specialization, setup costs, engineering relationships and massed reserves. Potential examples of these from the various levels of the industry will best illustrate these concepts. Economies of size due to specialization is fairly intuitive. Orchardists may benefit from concentrating on the requirements of one crop, both in terms of knowledge and equipment requirements. Specializing labour, whether in term of the task at the production or packinghouse level, or the market region at the sales level, may improve efficiency. Examples of savings due to reduced setup costs per unit processed are most evident at the production level. For instance, spray treatments in orchards require a considerable amount of start-up time to mix, calibrate and service the machinery, therefore this 'fixed cost' can be spread more thinly as orchard size increases. In the packinghouse similar start-up costs accrue when switching package types. 'Engineering' relationships refer to the surface area to volume ratio, where area of a cylinder varies as the 2/3 power of volume. The best examples of this factor would occur in a 33 packinghouse. For instance, the cost of constructing a cold storage room depends directly on the materials cost of the surface area, and so for a unit increase in volume there is a proportionally smaller increase in construction costs. Similar relationships exist for energy usage and maintenance requirements for the facility. Economies of massed reserves is a somewhat less obvious concept. It refers to risk spreading when there is a lumpiness in back-up input. For instance, the probability of a l l electronic colour sensors failing at once declines exponentially with the number used in the sorting lines. Therefore, the cost of keeping a sensor in reserve to replace a failed one also declines with the capacity of the line. This principle can be extended to cash reserves needed to cover exigencies - the amount of this reserve may not need to increase proportionately with the size of the operation. The above list of possible economies of scale or size in the apple industry is hardly exhaustive. Most of these factors are subject to the law of diminishing returns - economies gained per unit of cost associated with expansion decline as the LAC approaches its minimum. Most industries then exhibit a region of constant returns to size before diseconomies set in. Diseconomies of size are most often attributed to managerial capacity. Eventually the operation becomes too large for the manager/executive to cope, and techniques such as decentralization must be employed. Economies of size in production may also be restricted by market geography concerns where transportation costs play a role. 34 Problems in both management and transportation costs have been ascribed to the B.C. apple industry by its c r i t i c s . Although factor prices differ somewhat between the B.C. and Washington regions, the unimpeded flow of technology and the similarity of the product suggest both regions are influenced by the same factors of size efficiency. Assuming both face similar LAC curves a very important distinction between the regions, then, is their relative position along the LAC. The following discussion will itemize some of the size differences, as well as the factors behind these differences, at the orchard, packinghouse and industry levels. Orchard Level According to the 1986 Census of Agriculture, as summarized in Table 2.1, there were 3,188 farms reporting 27,798 acres of tree fruit in B.C., or an average of about 9 acres per farm. This was distributed such that 63% of the orchardists farmed only 17% of the land, or about two acres each. The majority of the acreage, 54%, was farmed by 32% of the growers, for an average of about 15 acres each. The 1986 B.C.F.G.A. registry recorded an average farm size of about 14 acres, suggesting that many of the Census orchardists are not included in the B.C.F.G.A.. The 1,914 Okanagan apple orchardists reported in the Census data grow 17,450 acres in apples, for an average apple orchard size of bout 9 acres. 35 Table 2.1 B.C. Tree Fruit Farm Size Distribution, 1986. Farms Acres 1 -- 7 acres 2027 4702 8 -- 32 " 1025 15074 33 -- 12 7 " 131 6788 128 acres and over 5 1234 Total 3188 27798 Source: 1986 Census of Agriculture While exact figures are not available, Washington State sources estimate the average Washington orchard size to be approximately 40 acres, compared with 15 acres (9 of apples) in B.C. reported above. This suggests there exists considerable scope in B.C. to capture economies of size, as supported by Lee's representative orchard cost comparison. Beyond those mentioned above, there are several obvious areas where size economies may exist. Spreading the fixed costs of orchard machinery, record keeping and permanent help are examples of this. As well, the quality consistency aspects mentioned in Section 2.3.1 could also justify expansion. So what prevents B.C. farmers from reaching the same size as those in Washington State? The first factor preventing industry expansion is B.C.'s lack of land available for expansion relative to the Columbia Basin region. However, amalgamation o f f a r m s could s t i l l achieve the same effect, although not without incurring transactions costs, either through t r a n s p o r t a t i o n c o s t s w h e n b l o c k s are separated or through complicated p r o c e d u r e s t o amalgamate adjacent blocks. Higher land prices in B.C. have traditionally been blamed for its smaller sized farms, but when rental rates 36 a r e compared between the two r e g i o n s t h i s f a c t o r l o s e s c r e d i b i l i t y (Lee). Even i f land p r i c e s are higher i n B.C., economies of s i z e should encourage higher density plantings to compensate. But densities are lower i n B.C., averaging 155 trees compared with 190 trees per acre i n Washington (Washington F r u i t Survey, 1986). This, and the larger acreage i n Washington State, may be p a r t l y explained by the tax structure i n Washington where the c a p i t a l cost allowance rates are higher than i n B.C. and where investors can depreciate trees, as well (Lee). Packinghouse Level There are two factors to consider when evaluating scale or s i z e at the packinghouse l e v e l and these are d i r e c t l y related to the previous d i s c u s s i o n of farm s i z e . Packinghouse s i z e can e i t h e r be measured i n terms of volume or i n terms of grower number. The former i s i m p o r t a n t i n the s t a n d a r d case of spreading the f i x e d costs of overhead over a larger volume. The l a t t e r measure i s only relevant i f i t has a bearing on packing c o s t s . In a cooperative t h i s i s c e r t a i n l y the case, as grower services, e s p e c i a l l y extension, and paperwork costs increase with the number of members. There c o u l d a l s o be p o s s i b l e c o s t s a s s o c i a t e d with stopping and s t a r t i n g a packinghouse run, but most industry sources discount t h i s since orchard blocks can be pooled before the run (and hence incur only minimal paperwork c o s t s ) . There may a l s o be costs associated with waiting f o r enough l i k e f r u i t to come through the system to f i l l and close a CA room, which should be done as r a p i d l y as p o s s i b l e maintain f r u i t q u a l i t y . This i s also r e l a t e d to the q u a l i t y v a r i a b i l i t y 37 aspect discussed above, where returns, if not costs, could suffer from a large number of small growers. Plant size comparisons between B.C. and Washington State are quite difficult, given the different ways of reporting plant capacities, different bin weights, and the different packing season lengths. In his 1983 survey of Washington plants, Schotzko determined daily packing capacities, storage capacities and expansion plans of the 94 respondents (out of an estimated 180 packinghouses) (Schotzko, September 1983). His results showed the average measurements would be downward biased by the relatively large proportion of small packinghouses. While the average capacity was about 330 bins per day (230 for conventional and 400 for PG/PS systems), 60% of the firms accounted for only 1/3 of the production while the top 20% (with 500 or more bin capacities) accounted for 45% of production. An informal survey of the seven major B.C. packinghouses was conducted (for the 1987 crop year) to obtain similar capacity measurements. Three of the eleven plants where packing operations take place have PG/PS, with an average daily capacity of 325 bins (at about 800 pounds/bin) or about 300 average Washington State bins (at an average 866 pounds/bin) per shift. Among the B.C. Tree Fruits Ltd. houses the average conventional plant packed 258 bins (or 238 Washington State b i n s ) per shift, but among the seven organizations surveyed the average plant packed 224 bins (or 207 Washington b i n s ) per s h i f t . The average plant (conventional or PG/PS) i s about 252 bins (233 Washington State bins). While the PG/PS plant capacities varied by only 50 bins, the conventional plants ranged in size from over 300 bins (277 38 Washington bins) down to 85 bins (78 Washington State bins) per s h i f t . Thus, i n comparing B.C. and Washington S t a t e ( u s i n g Washington b i n s ) , i t appears that while the average conventional systems are of comparable size, the PG/PS systems are much larger i n Washington, 400 bins to 300. The bulk of the B.C. production i s packed i n the PG/PS houses (with a maximum si z e of less than 325 b i n s ) , and r e c a l l that 45% of the Washington production i s packed i n houses with c a p a c i t i e s of over 500 bin s . The major Washington packinghouses are t h e r e f o r e 55% l a r g e r than the l a r g e s t packinghouse i n B.C., and averaged over both types, a W a s h i n g t o n p l a n t i s 42% l a r g e r t h a n the a v e r a g e B.C. packinghouse. And since the Washington State f i g u r e s may w e l l have r i s e n i n the f o u r y e a r s s i n c e Schotzko's s t u d y was conducted, t h i s size advantage i s probably understated. While t h i s data i s n ' t perfect, i t does appear that the bulk of the Washington production occurs i n much larger plants than are dominant i n B.C.. In terms of growers per house the data seems much more cl e a r c u t . In 1986 there were an estimated 4500 growers i n Washington State and 175 houses, or about 26 growers per house on average (St John). In the same year there were 1602 f u l l fledged B.C.F.G.A. members (plus 54 a f f i l i a t e d members) and f i v e packing organizations (plus one a f f i l i a t e d ) and 10 plants (plus one a f f i l i a t e d ) . The infor m a l survey of packinghouse organizations mentioned above found an average of 364 members per B.C. Tree Fruit s Ltd. a f f i l i a t e d organization, or among the three m a j o r o r g a n i z a t i o n s an average of 271 members. W h i l e a considerable amount of amalgamation has occurred even over the 39 last five years, it tends to be more in terms of bringing plants under the same management than in terms of combining plants. There is considerable reluctance on the part of the members to create an even larger organization (in terms of grower numbers), which is understandable given the existing numbers of members per plant or organization. The process of capturing plant economies of size may necessarily entail amalgamation at the farm level first. Industry Level Economies of size on an industry basis are less obvious than those involving production activities. Yet these economies are probably the most important distinction between B.C. and Washington. A larger industry could support a better infrastructure whereby transportation, materials and machinery costs could face potential reductions. Fixed costs, such as research, extension and promotion can be higher when there is a larger industry to share them. While there is evidence that Washington State has a better infrastructure (such as more rail links and the Columbia Basin irrigation project), it is difficult to ascribe this to the size of the tree fruit industry when there are several other crops and industries in the same area. But in areas such as research and promotion Washington clearly has an advantage due to the size of the tree fruit industry. Assessments of $US 0.15/box and $US 0.32/Ton fund promotion and research, respectively. This translated into a 1984-85 budget of over $US 7 m for the promotional agency, of which $US 3-8 m funded the advertising budget (GoodFruit Grower, September 1984). The apple-related 40 research budget approaches $US 500,000, most of which goes into jointly funded horticultural and pest management research (Shelton). A further $US 100,000 is available as an annual emergency fund to deal with exigencies which don't fall under the guidelines of either the promotion or research commissions (GoodFruit Grower, May 1984). These effort dwarf B.C.'s attempts at research and promotion. The B.C.F.G.A. jointly funds research at a 49 acre test orchard and B.C. Tree Fruits Ltd. funds advertising and promotion at a rate of about $CAN lm per year or about $0.11/box (in Canadian currency) (B.C. Tree Fruits Annual Reports). This comparison does not include the sizeable research budgets at the government level of either region. Another aspect of size benefits is the lobbying force which improves with size. The Washington State Fruit Commission hires two professional lobbyists, one in each of the state and the federal capitals (Stover). As an example of their realm of concern, the federal lobbyist was recently involved in amendments to the immigration b i l l which would permit Washington growers to hire "guest' (read alien) migrant labour and hence keep labour costs down. This is not to say that B.C. orchardists have no political power, since professional lobbying is rare in Canada yet farm groups have achieved considerable government support. 2 . 3 . 3 Organizational Structure While the previous discussions have alluded to the structures of the tree fruit industry in both B . C . and Washington State, this section will present these in a more systematic manner. Little attempt will be made to present the interactions between the various components of the industry, as the 4 1 c o m p o s i t i o n of the v a r i o u s B.C. boards and committees has been very dynamic over the l a s t few years, and such a d i s c u s s i o n w i l l be more r e l e v a n t i n the f o l l o w i n g conduct s e c t i o n . A c c o r d i n g t o the 1 9 8 6 Census of A g r i c u l t u r e mentioned above t h e r e were about 3 0 0 0 growers, 2 2 0 0 of whom S t a t i s t i c s Canada c o n s i d e r s commercial w i t h net s a l e s over $ 2 5 0 0 , but on l y 1 4 5 0 w i t h farm incomes over $ 1 0 , 0 0 0 . In B.C. there are about 1 6 0 0 growers who belonged t o the B.C.F.G.A. as of 1 9 8 6 (B.C. F r u i t Growers R e g i s t r y ) . The B.C.F.G.A. i s organized i n t o an executive as w e l l as s e v e r a l d i f f e r e n t committees, such as the P o o l i n g Committee which has h i s t o r i c a l l y made pool i n g d e c i s i o n s . The B.C.F.G.A. owns B.C. Tree F r u i t s L t d . and SunRype, the marketing and processing arms, r e s p e c t i v e l y . The boards of these two i n d u s t r y - o w n e d c o m p a n i e s a r e i n t e r l o c k i n g , w i t h r e p r e s e n t a t i o n from the B.C.F.G.A. and the h i r e d management teams. B.C. Tree F r u i t s L t d . has 67 personnel l o c a t e d p r i m a r i l y i n the main o f f i c e i n Kelowna, but w i t h s a l e s s t a f f i n Cal g a r y , Edmonton, Saskatchewan, Winnipeg, Toronto and Montreal as w e l l as an e x p o r t s a l e s o f f i c e i n Vancouver. The Toronto o f f i c e has a c t u a l l y become t h e h e a d q u a r t e r s o f t h e r e i n c a r n a t e d industry-owned brokerage, Canadian F r u i t D i s t r i b u t o r s L t d , which has r e c e n t l y become involved i n importing other types of f r u i t i n o r d e r t o t u r n a p r o f i t on t h e b r a n c h o f f i c e s i d e of t h e opera t i o n . B esides the s a l e s s t a f f o f 18 ( p l u s s e c r e t a r i a l s u p p o r t ) , t h e r e are 5 marketing s e r v i c e s t a f f who handle t r a f f i c , s a l e s s t a t i s t i c s , f o r e c a s t s and claims. There are a l s o three people i n t h e a d v e r t i s i n g and PR a r e a , e i g h t i n a c c o u n t i n g and 42 administration and 17 in data processing. Within the latter group, B.C. Tree Fruits Ltd. provides about 20% of its function for SunRype and 40% for the packinghouses (Linder). The members are also organized into packinghouses, which are in turn organized into the O.F.S.A.. The full-fledged B.C.F.G.A. members are all members of cooperative houses, of which there are 5 organizations and 10 plants. The O.F.S.A. represents these houses in labour union negotiations, industry meetings and lobbying attempts. They are responsible for making the differential manual which determines the costs of packing used in income insurance calculations. Outside this "official' stream the information regarding the independents is much more sketchy. The independents have only recently organized into the O.F.P.S.A. and have not developed a system of data collection yet. The exact number of independent growers is not known, in part because many growers are s t i l l dealing with both streams. But most of these growers are shipping soft fruits, as only about 6% of the apples bypass the B.C. Tree Fruits Ltd. system. There remain two relatively large independent houses (after the recent bankruptcy of MacLean and Fitzpatrick), RH MacDonald and Westbank Packers (the latter's growers are Associate B.C.F.G.A. members) (King, 1987). These two organizations can either market their own fruit or pay a commission to a private agent, ProFresh, to sell their fruit. The remaining independents are relatively small and less concerned with the fresh apple market than they are with soft fruit and cider fruit producers. 43 Finally, there is a three member (at last count) marketing board (B.C. Fruit Board) elected by the B.C.F.G.A. membership. While they originally regulated domestic and export sales licenses, in recent years decisions by the superboard have greatly reduced the powers of the B.C. Fruit Board to the point where their role is primarily an advisory one. As mentioned in the previous section, the Washington industry currently consists of approximately 4500 growers and 175 houses. In the original apple-growing region, around Wenatchee and Chelan, the majority of houses are cooperatives while in the newer Columbia Basin region there is a more even split between cooperatives and private houses. As mentioned previously, the growers have funded two commissions, the Fruit Commission and the Research Commission, to promote and research tree fruits. In conjunction with the Fruit Commission, the Wenatchee Growers Apple Clearinghouse Association (W.G.A.C.H.) collects price and movement data which i t disseminates biweekly to its grower members. There also exist some brokers, both private and associated with houses, who market some of the house's products. Many of the packinghouses have their own sales force, often only one or two personnel (although this data is not readily available). 2.4 CONDUCT OF THE B.C. APPLE INDUSTRY 2.4.1 Packinghouse Conduct While the B.C. Tree Fruits Ltd. affiliated houses are now all cooperatives, there is s t i l l quite some variation in their conduct. Areas of difference include variety specialization, emphasis on extension, type of member, storage regime and timing 44 choices, and "accounting' methods. Within the accounting area one can include the preferred method of financing operating and capital expenses, member equity arrangements, depreciation rates and the use of cull charges. A brief description of these accounting practices and their implications is necessary to understand the complexities of inter house comparisons. When organized as a non-stock cooperative, a revolving fund of member contributions must be set up. This most often entails a per unit patronage assessment, called capital retains, which is credited to the members account as equity. The "revolving' aspect refers to the sequential nature (often over eight years) in which the members are allowed to cash in their certificates of equity. In this way members who are currently using the cooperative will support its investment plans, which is often called the "currency rule'. A second method, retained patronage refunds, involves retaining a portion of the net savings or net margin that would otherwise be directed to the members. This is a less reliable form of cooperative financing than the capital retains method, as the presence of a substantially positive net margin is less predictable. But this fund provides an operating cushion to facilitate cash flow, and is again credited to the member's equity position (McBride). Cooperatives can vary greatly in how they implement these methods, and how they permit the members to cash in equity. In the short run these differences c a n c l o u d efficiency measures as they can be manipulated to some e x t e n t b y t h e board of directors. The same can also be said of the method of depreciation, since a high depreciation rate can increase short run costs (making the 45 c o o p e r a t i v e seem l e s s a t t r a c t i v e t o members) b u t s h o r t e n t h e p a y b a c k p e r i o d . T h i s l e a v e s r o o m f o r members t o a v o i d h i g h a s s e s s m e n t s b y s w i t c h i n g c o o p e r a t i v e s d u r i n g p a y b a c k p e r i o d s , a l t h o u g h t h e houses have t r i e d t o d i s c o u r a g e t h i s . The u s e o f c u l l o r i n - c h a r g e s c a n a l s o a f f e c t t h e a p p e a r a n c e o f e f f i c i e n c y . T h e s e p e n a l i z e a grower f o r s h i p p i n g a r e l a t i v e l y h i g h p r o p o r t i o n o f c u l l f r u i t and j u s t i f y t h i s on t h e b a s i s o f h i g h e r i n c u r r e d h a n d l i n g and b i n c o s t s . I n W a s h i n g t o n S t a t e , a t l e a s t , t h e s e c u l l c h a r g e s a r e d e b i t e d t o t h e member's a c c o u n t i m m e d i a t e l y , w i t h i n t e r e s t c h a r g e d , and t h e s u b s e q u e n t p r o c e s s i n g r e t u r n s a r e n o t c h a r g e d o v e r h e a d . I n e f f e c t , g r o w e r s a r e c r e d i t e d t h e f u l l p r i c e p a i d b y t h e p r o c e s s o r s and f o r g e t t h a t t h e y have a l r e a d y p a i d " o v e r h e a d ' i n t h e form o f t h e c u l l c h a r g e . S i m i l a r m e t h o d s a r e u s e d i n some B.C. h o u s e s , a l t h o u g h o t h e r s s i m p l y s h a r e o v e r h e a d o v e r a l l t h e f r u i t s i n c e t h e y d o n ' t b e l i e v e g r a d i n g h i g h c u l l p e r c e n t a g e r u n s c o s t s much more t h a n g r a d i n g n o r m a l r u n s . I n f a c t , t h e y f e e l t h e c o s t s t o t h e g r o w e r i n s o r t i n g o u t c u l l s i n t h e o r c h a r d , b o t h i n t i m e a n d money, a r e h i g h e r t h a n t h e c o s t s o f d o i n g t h e same o v e r t h e p a c k i n g h o u s e g r a d e r s ( D e l l ) . I n f o r m a t i o n r e g a r d i n g t h e c o n d u c t o f W a s h i n g t o n h o u s e s i s p r i m a r i l y a n e c d o t a l , as t h e y have no r e p r e s e n t a t i v e a s s o c i a t i o n and c o n s i d e r a b l y more v a r i a t i o n t h a n i s f o u n d i n B.C.. The h o u s e s c a n s p e c i a l i z e i n d i f f e r e n t v a r i e t i e s , i n f r e s h o r p r o c e s s e d f r u i t , i n e x p o r t o r l o c a l m a r k e t s , i n c h a i n s t o r e s o r t e r m i n a l m a r k e t s , o r t h e y c a n be g e n e r a l i s t s i n some o r a l l o f t h e above. B e c a u s e most h o u s e s s p e c i a l i z e somewhat, b u y e r s may have t o d e a l w i t h s e v e r a l h o u s e s t o g e t t h e d e s i r e d p r o d u c t mix. T h i s a s p e c t provides B.C. Tree Fruits Ltd. with one of its claimed marketing advantages, namely one-stop shopping. In Washington State smaller houses often have specific niches or outlets, which simplifies their sales function. They can also have their fruit sold through brokers, as can some of the larger houses. Some of the houses with the best reputations can have some fairly heavy-handed methods to guard that reputation. They can require new members to have a five year packout record at a certain level, and can strongly suggest varieties, cultural practices and harvest dates. To separate fruit by condition or keeping ability the Washington houses often use two or three different pools - one or two early pools (for best condition) and a regular pool. This corresponds to Schotzko's study on the effects of the pooling system on different shipping patterns of growers (Schotzko, 1983). He found that with a single pool there is incentive to leave the fruit on the tree as long as possible in order to get a better grade (but poorer condition and hence reduced late season returns). Schotzko felt three pools would reduce this incentive, although there is s t i l l room to play these pools. B.C. houses are emulating those in Washington State more and more. For instance, the move to house pooling and greater house independence (evidenced by their storage opening and pack design decisions) have made them much more comparable to Washington houses. They have fieldmen and make considerable efforts to advise their growers. They have similar storage determination methods (in fact Washington State has taken their lead from B.C. in this area). B.C. houses grade their fruit to the same 47 standard and sizes and use the same types of packs. Again some houses specialize in certain types of fruit and some have a better reputation amongst the buyers than do others. And some of the smaller houses can be choosier in their membership requirements than the larger houses, who feel they can't afford to appear the bully. B.C. houses now have at least one employee to watch over the prorate distribution of orders by the B.C. Tree Fruits Ltd. marketers (possibly wasting any economies of size realized by centralized marketing). They are much more concerned about the timing of CA room opening and price fluctuations than before house pooling. They do not have seasonal pools but do separate the fruit into blocks or storage regimes. They feel there is less incentive for growers to leave fruit on the trees and harm the condition than in Washington, possibly since the B.C. climate creates a natural advantage in fruit condition. 2.4 .2 Marketing Agency Conduct Before discussing the conduct of B.C. Tree Fruits Ltd. in terms of its marketing functions, note should again be taken of the non-marketing functions it performs. These functions may or may not be needed to improve the functioning of the industry, but they are often required in a political sense by the houses. Data collection and processing for both SunRype and the packinghouses is centralized in B.C. Tree Fruits Ltd.. They are also relied upon quite heavily to assist with government stabilization and insurance programs and to act on industry committees. Finally, B.C. Tree Fruits Ltd. personnel act as liaison agents between 48 houses, handle assembly of shipments and deal with buyer's claims. The market s i t u a t i o n faced by B.C. Tree F r u i t s Ltd. i s a rather d i f f i c u l t one. B.C. produces 1/3 of Canada's crop but has only 12% of the country's population. And the B.C. market i s also where the main competition from the independents occurs. The E a s t e r n markets are more c h e a p l y s e r v i c e d by t h e i r l o c a l producers, and hence B.C. Tree F r u i t s Ltd. can only compete by d i f f e r e n t i a t i n g i t s product. Small amounts of the crop go into the A t l a n t i c p r o v i n c e s , as w e l l , through p r i v a t e b r o k e r s . B.C. Tree F r u i t s L t d . a l s o competes wi t h the independents, Washington and Eastern producers for the P r a i r i e market, although B.C. s t i l l has a s i z e a b l e market s h a r e (67% e x c l u d i n g independents) (Agriculture Canada, March 1986). But the domestic market cannot absorb a l l of B.C.'s production at a reasonable return, and so export markets are expected to carry the remaining crop, or about 33% and 35% i n 1984 and 1985 crop years. The export market most preferred by B.C. Tree F r u i t s Ltd. i s the U. S . A-. . There are no t r a d e b a r r i e r s between the two c o u n t r i e s f o r apples, and there i s considerable trade i n both d i r e c t i o n s , as w i l l be detailed shortly. There are considerable b a r r i e r s to contend with i n other c o u n t r i e s , be they a c t u a l t a r i f f , phytosanitary, p o l i t i c a l or currency r e s t r i c t i o n s . While B.C. Tree Frui t s Ltd. concentrates on i t s own branch o f f i c e sales s t a f f for most of the domestic market, t h e y prefer to work with brokers in export markets i n order to have someone on hand at a l l times. They t r y to b u i l d up a rapport with s p e c i f i c brokers, basing t h e i r commission on the r e l i a b i l i t y , q u a l i t y and going 49 r a t e i n any s p e c i f i c market- They work a l m o s t e x c l u s i v e l y w i t h l e t t e r s o f c r e d i t , and the EDC u n d e r w r i t e s up t o 90% of the s a l e i n a l l o v e r s e a s markets ( M e s s e n t ) . W h i l e i n f o r m a t i o n i s s c a r c e on t h e e x p o r t s e l l i n g methods o f W a s h i n g t o n S t a t e h o u s e s , i t a p p e a r s t h e y have l e s s a l l e g i a n c e t o t h e use o f b r o k e r s , o r a t l e a s t t o s p e c i f i c b r o k e r s , t h a n does B.C. Tree F r u i t s L t d . . I n r e c e n t y e a r s a number o f Washington houses l o s t a g r e a t d e a l o f money when t h e y banded t o g e t h e r t o d e a l t h r o u g h an o f f s h o r e b r o k e r (Van Wechal). The s a l e s d i s t r i b u t i o n o f B.C. Tr e e F r u i t s L t d . 's c r o p i s o u t l i n e d i n T a b l e 2.2. A l b e r t a , B.C. and t h e U.S.A. a b s o r b e d between 17% and 21% each o f t h e s a l e s o f B.C. Tree F r u i t s L t d . (by volume) i n 1984 and 1985. The r e m a i n i n g P r a i r i e p r o v i n c e s ( s ummed), E a s t e r n C a n a d a and o f f s h o r e m a r k e t s made up t h e remainder of the s a l e s i n about e q u a l p r o p o r t i o n s r a n g i n g from 12 t o 15%. Ta b l e 2.2 BCTF S a l e s D i s t r i b u t i o n t o D i f f e r e n t Markets P e r c e n t o f S a l e s Market: 1984 1985 BC A l b e r t a Saskatchewan Manitoba E a s t e r n Canada U n i t e d S t a t e s O f f s h o r e 17 .8 20.4 8.1 6.6 14 . 3 17 . 6 15.2 19 . 2 18.9 6.8 7.6 12.3 21.0 14 .2 50 In exporting to the U.S.A., the bulk of the fruit goes to 6 major markets - Los Angeles, San Francisco, Dallas, New York, Atlanta and Chicago. Unlike other export markets, the U.S.A. will buy a wide range of varieties, grades and sizes. Most of the fruit is sold to retail chains, which are more regionalized than in Canada. Terminal markets are also fairly important when attempting to crack the institutional business (Messent). Offshore exports are encapsulated in Table 2.3, where both B.C. and Washington State exports are given, although the B.C. figures are by calendar year while the Washington figures are by crop year. Even so, the data gives a strong indication of the relative importance of various markets to the B.C. and Washington State marketers. This table also shows the cross border trade conducted by B.C. and Washington, where B.C. exports to the U.S.A. were 55% and 87% (ignoring the difference in accounting period) of the amounts exported from Washington State into Canada in 1985 and 1986, respectively. Table 2.3 Apple E x p o r t s F r o i BC and Washington l n Boxes and P e r c e n t of T o t a l P r o i B r i t i s h C o l i i b l a P r o i V a s h i n g t o n C o u n t r y To: DIS 19(( 1983-84 1984-85 1985-16 Boxes \ Boxes X Boxes \ Boxes \ Boxes \ Europe: 237751 K.O 337081 21.3 87(4(1 8.7 540889 5.7 443395 8.3 01 21(172 14.5 211555 17.8 239305 2.4 122183 1.3 84(50 1.6 Prance 134$ 1.1 3401 1.2 ( t e i i a n y 3(57 9.3 F i n l a n d 598 0.1 79 ( ( 0.5 21(1(9 2.2 183543 1.9 186856 3.5 Dorvay 5 0 ( ( 0.3 17243 1.0 191472 1.9 114714 1.1 18(590 2.0 Sveden 4327 0.3 19858 1.2 72727 8.7 988(4 1.8 34928 0.7 D e t h e r l a n d s 109920 1.1 10939 0.1 2(587 0.5 I c e l a n d 4)91 0.3 7038 0.4 Other 998 0.1 4(8(8 0.5 20646 0.2 (7(4 0.1 R i d d l e E a s t : 1111! 0.7 (109 0.4 2333584 23.3 20(5850 21.7 572440 10.7 Sand! A r a b i a 10118 0.7 (109 1.4 1903587 19.0 1599419 16.8 399721 7.4 Oabal 352409 3.5 34(931 3.6 140678 2.6 Other 77588 0.8 119500 1.3 32941 0.6 P a c i f i c R i i : 37(112 25.2 425089 25.6 48885(3 41.8 4990182 52.5 31(8332 59.0 l o n g Kong 77980 $.2 30583 1.8 1257587 12.6 1514203 15.9 81(271 15.2 M a l a y s i a 297(2 2.0 33636 2.4 541154 5.5 638526 (.7 307049 5.7 S i i g a p o r e 38452 2.( 78729 4.7 571335 5.7 (30403 (.( 455231 (.5 Japan 881 0.1 Taiwan 185989 12.5 2(2708 15.8 2128494 20.2 1852150 19.5 1317755 24.5 T h a i l a n d 33(3 0.2 7136 0.4 21(154 2.2 156637 1.6 13(0(2 2.6 l e v Zealand 32(83 2.2 5297 0.3 217705 2.2 1490(7 1.6 1(5514 2.1 Other 7882 0.5 49134 0.5 43136 0.5 2(45( 0.5 Cent, t S. A i e r i c a : 3736 1.3 1(527 1.0 453872 4.5 330948 3.5 188436 3.4 B r a z i l 17(5 0.1 2(34 0.2 150 0.001 2700 0.03 C o l u b l a 39(7 0.2 201711 2.0 151774 1.6 59138 1.1 C o s t a R i c a 311(3 0.3 39999 0.4 28037 0.5 Mexico 15003 0.1 41943 0.4 2(394 0.5 Pa n a i a 998 0.1 9925 0.6 51(9 1.1 7489 0.1 T r i n i d a d 973 1.1 8 ( 2 ( 5 0.9 12942 0.3 13571 0.3 T e n e z n e l a 33135 0.3 1(02 0.02 Other 11286 0.8 52499 0.6 53296 l . ( Canada 1468800 14. ( 15810(0 16.6 100(0(1 18.7 US 8(2884 57.9 874(92 52.7 TOTAL 1491(08 1(59497 1002(480 950(8(9 5370(03 52 As mentioned above, the best export market f o r B.C.'s apples i s the U.S.A., which absorbed 58% and 53% of the t o t a l exports i n 1985 and 1986, r e s p e c t i v e l y . As a group, P a c i f i c Rim c o u n t r i e s were next i n importance at around 25% both y e a r s . But i n terms of i n d i v i d u a l c o u n t r i e s , the United Kingdom i s B.C.'s second best market, at 14% and 17% of t o t a l e x p o r t s . T h i s c o u l d perhaps be due t o t h e good t r a d i t i o n a l t i e s m a i n t a i n e d by B.C. T r e e F r u i t s L t d . , a l t h o u g h t h e p r o m o t i o n a l e m p h a s i s on B r i t i s h Columbia a p p l e s i s claimed to be of help (Messent). T h i s i s the o n l y market where B.C. o u t s h i n e s Washington, i n p a r t because of t h e s p e c i a l consignment arrangement B.C. T r e e F r u i t s L t d . has w i t h a l a r g e b r o k e r , G l a s s G l o v e r . T h i s t y p e o f f i n a n c i a l a r r a n g e m e n t i s a n a e t h e m i c t o Washington S t a t e houses, but i t r e f l e c t s the s p e c i a l marketing requirements of the UK. The t h i r d h i g h e s t e x p o r t s are to Taiwan, at 12% and 16% over the same two year p e r i o d . Taiwan has an unusual preference f o r what i s c a l l e d a " s t r i p e d ' Red D e l i c i o u s which i s q u i t e u n p o p u l a r i n o t h e r markets where i n t e n s e red c o l o u r i s r e q u i r e d . Hong Kong has a l s o b e e n a good m a r k e t i n t h e p a s t ( 5 % and 2 % ) , a l t h o u g h t h e c o m p e t i t i o n has i n c r e a s e d i n r e c e n t y e a r s . I t i s a more d i f f i c u l t market t o p e n e t r a t e , as t h e y don't want t o pay f o r r e f r i g e r a t e d shipments and the supermarket has y e t t o s u c c e e d t h e r e . Singapore has market p o t e n t i a l as i t p r e f e r s v e r y s m a l l f r u i t (unwanted elsewhere), has the only supermarkets i n the Far E a s t , and has a l a r g e i n s t i t u t i o n a l market (from f r e i g h t e r s ) . Singapore absorbed 3% and 5% i n 1985 and 1986, r e s p e c t i v e l y . Washington seems to have a much more v a r i e d export p a t t e r n , p o s s i b l y n e c e s s i t a t e d by the l a c k of one l a r g e t r a d i n g p a r t n e r 53 such as B.C. has i n the United States. Their biggest market i s Taiwan, where about 20% of t h e i r exports are absorbed. T h e i r second l a r g e s t market i s i n the Middle East, p r i m a r i l y Saudi Arabia, which bought 20%, 17% and 7% of exports i n the 1983, 1984 and 1985 crop years. Saudi Arabia i s an i n t e r e s t i n g market i n that the consumer buys apples by the box and so the packinghouse must c o o r d i n a t e with the l o c a l agent to provide a box top i n Ar a b i c . Both Taiwan and Saudi Arabia are strong a l l i e s of the U.S.A., and so t h i s may explain t h e i r strong preference toward Washington apples i n the same way the U.K. favours B.C. apples. And Canada i s the next largest market for Washington State f r u i t , purchasing 15%, 17% and 19% of the t o t a l exported crop i n 1983, 1984 and 1985 r e s p e c t i v e l y . In those same years Washington exported 19%, 20% and 15% of t h e i r t o t a l fresh crop. The 1985 crop year was aberrant i n many of these figures because i t was a s h o r t c r o p year ( w i t h about 73% of the p r e v i o u s season's harvest). None of the above data mentions the revenues from these markets . While t h i s i s not av a i l a b l e for the Washington State e x p o r t s , the B.C. data can be manipulated to r e p o r t on the average p r i c e received per box from the d i f f e r e n t markets. This information i s presented i n Table 2.4, although one must note that currency f l u c t u a t i o n s and d i f f e r e n t marketing seasons may bias comparisons. The highest prices i n 1984 were received i n France, F i n l a n d and Iceland at $31, $24 and $17, r e s p e c t i v e l y . In 1985 the be s t p r i c e s were from I c e l a n d , Japan (a t e s t shipment) and the U.S.A. at $22, $21 and $19, r e s p e c t i v e l y . In Europe and the U.S.A., where there i s l o c a l apple production, T a b l e 2.4 V a l u e of BC A p p l e Shipments to D i f f e r e n t Markets on per Box B a s i s (1984-85) C o u n t r y : 1984 1985 US $15.27 $18.56 UK $15.62 $14 .24 I r e l a n d $14 .21 F i n l a n d $23.60 $12.21 F r a n c e $31.26 $17.51 Germany $11.08 I c e l a n d $17.17 $22.02 Norway $10.69 $15.19 Sweden $8.78 $12.51 S a u d i A r a b i a $11.21 $14.38 Hong Kong $10.88 $12.72 M a l a y s i a $10.34 $13.42 S ingapore $10.91 $14.13 Japan $21.21 Taiwan $12.69 $13.41 T h a i l a n d $16.64 $16.05 F i j i $10.34 New Z e a l a n d $0.00 $17.61 B r a z i l $13.50 $15.08 T r i n i d a d $11.08 Columbia $0.00 Panama $6 . 96 55 these p r i c e s are h i g h l y dependent on the s i z e the l o c a l crop. This data suggests that while the U.K. and Taiwan may be B.C.'s best markets i n terms of volume, they are not where the best p r i c e s have been achieved by B.C. Tree Fruit s Ltd. i n the recent past. Price determination i s an important aspect of the marketing s t r a t e g i e s of both B.C. and Washington. As evidenced i n the biweekly W.A.G.C.H. reports, there can be a considerable p r i c e range within Washington prices for the same grade and size f r u i t . But even so, i n most markets Washington State tends to be the p r i c e leader, although B.C. Tree F r u i t s Ltd. may sometimes go higher i f they have a small amount of a p a r t i c u l a r product of good keeping quality. B.C. Tree Fruits Ltd. primarily works on a quota system, whereby they attempt to move the crop at a c o n t r o l l e d pace to c l e a r t h e i r manifest. In B.C. there i s c o n s i d e r a b l e pressure to s e l l a l l the f r u i t , p o s s i b l y at the expense of obtaining the best price, because i t i s not p o l i t i c a l to have a large proportion of crop sent to the processor (unless of l i m i t e d q u a l i t y ) (Messent). B.C. Tree F r u i t s Ltd. has been accused of p r e d a t o r y p r i c i n g i n past attempts to keep t h i s monthly quota, although such complaints from Washington have decreased s i n c e house p o o l i n g (and greater house i n t e r e s t i n sales) was instigated (Van Wechal). 2 . 5 INDUSTRY CONCERNS This section w i l l summarize and perhaps add to the concerns expressed i n the preceding sections of t h i s chapter. Probably the most often c i t e d cause for concern i s the high cost of the B.C. industry, whether at the grower, packer or marketer l e v e l . 56 Costs are considered much higher i n B.C. than i n Washington S t a t e . These costs i n c l u d e land c o s t s , the cost of orchard r e n o v a t i o n and f i n a n c i n g , l a b o u r and o v e r h e a d a t t h e packinghouse, and extensive data processing and i n e f f i c i e n t sales s t a f f at B.C. Tree Fruits Ltd.. Government support and the strategies employed have also been c a l l e d into question. Many feel the government can not afford to support the industry at the current rates, and are a f r a i d that growers have become too dependent on t h i s . Support programs are als o blamed f o r allowing growers to place too much emphasis on q u a n t i t y and not q u a l i t y , thereby s h i e l d i n g them from market signals. And the c o m p l e x i t i e s of the co o p e r a t i v e system and the r e g u l a t i o n s surrounding i t have been blamed f o r much of the grower d i s s a t i s f a c t i o n . The new house pooling system enhances the competition among houses for the best growers and the most volume (to spread overhead). This can lead to misleading, or at l e a s t s h o r t - s i g h t e d , a c c o u n t i n g procedures and investment d e c i s i o n s . The pr o r a t e system has created the i n c e n t i v e f o r houses t o d e v o t e p e r s o n n e l to w a t c h i n g o v e r B.C. T r e e F r u i t s Ltd.'s d i s t r i b u t i o n of orders, d i s s i p a t i n g at l e a s t some of the economies of siz e derived from c e n t r a l i z i n g the marketing function. 2 .6 SUMMARY This chapter dealt with several aspects of the structure and conduct of the B.C. apple industry. Its history i s characterized by c y c l e s of coop e r a t i o n against a common problem which was mostly continued into periods of r e l a t i v e prosperity but f a l t e r e d 57 as soon as the " p i e " began t o s h r i n k . The r e c e n t move to house p o o l i n g was an a t t e m p t t o c o m b i n e some m e a s u r e o f h o u s e i n d e p e n d e n c e and market r e s p o n s i v e n e s s w i t h o u t f o r e g o i n g any economies of s i z e at the marketing l e v e l . The r o l e of B.C. Tree F r u i t s L t d . has subsequently been reduced. The p e r f o r m a n c e o f t h e B.C. a p p l e i n d u s t r y c a n n o t be ev a l u a t e d without at l e a s t some benchmark. Washington S t a t e , w i t h i t s s i m i l a r ( a l b e i t somewhat s u p e r i o r ) growing and m a r k e t i n g c o n d i t i o n s , i s the most l i k e l y benchmark. In o r d e r t o make any c o m p a r i s o n s , though, s t r u c t u r a l and conduct comparisons must f i r s t be c o n s i d e r e d . S t r u c t u r a l d i f f e r e n c e s between B.C. and Washington S t a t e can be c a t e g o r i z e d i n t o t h r e e a r e a s : f r u i t q u a l i t y ? s c a l e ; and o r g a n i z a t i o n a l f a c t o r s . F r u i t q u a l i t y i s g e n e r a l l y h i g h e r i n Washington, e s p e c i a l l y i n terms of f r u i t s i z e and c o n s i s t e n c y . B.C. i s s a i d t o have an advantage i n terms of c o l o u r and keeping q u a l i t y , b u t t h e grade p r o p o r t i o n s and p r i c e s do not seem t o r e f l e c t t h i s . W a s h i n g t o n , w i t h i t s t e n - f o l d a d v a n t a g e i n p r o d u c t i o n , has c o n s i d e r a b l e s i z e e c o n o m i e s . The t y p i c a l Washington o r c h a r d i s at l e a s t twice the s i z e of B.C.'s, and the t y p i c a l packinghouse s e r v i c e s fewer growers (30 v e r s u s 300) y e t i s 40% l a r g e r , w h i l e t h e i n d u s t r y as a whole s u p p o r t s l a r g e p r o m o t i o n a l , r e s e a r c h and l o b b y i n g budgets. Perhaps r e f l e c t i n g some i d e o l o g i c a l d i f f e r e n c e s i n t h e two c o u n t r i e s , B.C.'s o r g a n i z a t i o n e v o l v e d as a more c o o p e r a t i v e o n e . w h i l e about 1/2 o f W a s h i n g t o n S t a t e h o u s e s a r e c o o p e r a t i v e s , t h e h o u s e s t h e m s e l v e s p r a c t i c e l i t t l e o v e r t c o o p e r a t i o n e x c e p t i n t h e p u b l i c a t i o n o f p r i c e and s a l e s f i g u r e s . Most B.C. houses a r e 58 c o o p e r a t i v e s , and t h e i r members c o l l e c t i v e l y own the c e n t r a l m a r k e t i n g agency and p r o c e s s o r , B.C. Tree F r u i t s L t d . and SunRype, r e s p e c t i v e l y . There i s also a marketing board i n B.C., although i t has l o s t nearly a l l of i t s power. In terms of conduct, the two r e g i o n s are a g a i n q u i t e d i f f e r e n t . Even among the cooperatives, t h e i r behaviour v a r i e s considerably both between and within regions. Areas of difference i n c l u d e v a r i e t y s p e c i a l i z a t i o n , e x t e n s i o n , type of member, storage regimes and accounting methods. At the marketing l e v e l , B.C. Tree F r u i t s Ltd. provides more services than the Washington marketers (who are p r i m a r i l y in-house). I t a l s o r e l i e s more h e a v i l y on export markets 35% of p r o d u c t i o n versus 20% f o r Washington (whose exports are more broadly based, i f not more evenly d i s t r i b u t e d among countries than B.C. exports). There are several d i f f e r e n t areas of concern for participants i n the B.C. industry. Purportedly excessive costs are most often c i t e d , f o l lowed by the r e l i a n c e on c o s t l y government support programs. The cooperative nature of the industry, when combined with competition within for good growers and revenues, has led to grower confusion, p o s s i b l y shortsighted investment decisions and dissipated some economies of size at the marketing l e v e l . 59 CHAPTER 3 THEORETICAL ASPECTS OF INDUSTRY STRUCTURE The prev ious chapter looked at some s t r u c t u r a l and conduct components without d i scuss ing a l l t h e i r impl i ca t ions . Reca l l the Washington State industry i s composed of an estimated 180 packing f i r m s , o f w h i c h about 95 r e s p o n d e d to S c h o t z k o ' s s u r v e y (Schotzko, September 1983). This study estimated about 60% of the p l a n t s account for only 1/3 of the s tate produc t ion , while t h e t o p 20 f i r m s a c c o u n t f o r 45% of t h e p r o d u c t i o n . In discuss ions with Washington State industry sources, there appears to be about s i x to e ight very large firms and among those, the two indus try "leaders" are Trout and Blue Chelan, i n Wenatchee. The production of any one of these leading firms i s equivalent to about 1/3 of the t o t a l B . C . production. Within the B . C . industry , there are perhaps two dominant packing organizat ions , B . C . F r u i t P a c k e r s o f K e l o w n a and t h e O 1 i v e r - 0 s o y o o s S i m i l k a m e e n pack inghouses . These two l a r g e f irms are s t i l l s i g n i f i c a n t l y s m a l l e r than the major Washington State f i r m s . The major B . C . houses do, however, combine t h e i r marketing function i n the guise of B . C . Tree F r u i t s L t d . W h i l e , i n the c o l l o q u i a l sense i t i s c o m p e t i t i v e at the p a c k i n g and market ing l e v e l , the f r u i t i n d u s t r y of B . C . and Washington State doesn't seem to qua l i fy as per fec t ly competitive i n economic terms. This chapter w i l l present evidence suggesting the indus try i s o l i g o p o l i s t i c . This w i l l be preceded, i n Sect ion 3.1, by a d i s t i l l a t i o n of appl icable o l igopoly theory. Because an 60 o l i g o p o l i s t i c i n d u s t r y i n v o l v e s p r i c e d e t e r m i n a t i o n , B.C. apple p r i c e s w i l l be discussed i n Section 3.2.1, f i r s t as a f u n c t i o n of B.C.'s own apple production and then as a f u n c t i o n of production i n o t h e r r e g i o n s . Then, g i v e n B.C. " a p p l e s " a r e r e a l l y a heterogeneous p r o d u c t , p r i c e r e l a t i o n s between the d i f f e r e n t types w i l l be emphasized i n Section 3.2.2. 3.1 OLIGOPOLY 3.1.1 Theoretical Considerations Under p e r f e c t competition, the p r o f i t maximization r u l e i s to p r o d u c e a t t h e o u t p u t where m a r g i n a l c o s t e q u a l s m a r g i n a l revenue. In an o l i g o p o l y , the p r o f i t maximization r u l e i s much l e s s c l e a r . An o l i g o p o l y may attempt to form a c a r t e l to act as a monopoly, but by d e f i n i t i o n an o l i g o p o l y has too many members to keep the c a r t e l f u n c t i o n i n g . Aspects of game theory, whereby each p a r t i c i p a n t t r i e s t o a n t i c i p a t e t h e r e s p o n s e o f o t h e r p a r t i c i p a n t s t o any p r i c e / q u a n t i t y a c t i o n , have c r e a t e d l a r g e o b s t a c l e s t o the development of a s i n g l e theory of o l i g o p o l i s t i c behaviour. This s e c t i o n w i l l attempt to o u t l i n e the b a s i c s of one such model w h i c h appears t o have the most r e l e v a n c e t o t h e northwestern U.S. and Canada apple i n d u s t r y . I f the apple packing/marketing i n d u s t r y i s an o l i g o p o l y , i t i s l i k e l y one where t h e r e a r e a h a n d f u l o f l a r g e , key p a r t i c i p a n t s and a l a r g e number of s m a l l e r , f r i n g e p l a y e r s . I f t h e r e were o n l y one l a r g e f i r m , i t would attempt to s e t p r i c e a f t e r o b s e r v i n g the s u p p l y response of the f r i n g e f i r m s . The f r i n g e firms would operate at the point where t h e i r marginal cost e q u a l l e d the p r i c e set by the leading f i r m , l e a v i n g the r e s i d u a l t o the p r i c e l e a d e r . In the case where t h e r e i s more than one l a r g e f i r m , t h e r e may be an i m p l i c i t c a r t e l . P r i c e w o u l d be s e t s o m e w h e r e b e t w e e n t h e p e r f e c t l y c o m p e t i t i v e p r i c e a n d t h e monopoly p r i c e . Such a s i t u a t i o n i s i l l u s t r a t e d i n F i g u r e 3 . 1 . P r i c e Quantity Figure 3.1 Oligopoly plus Fringe Model T h i s r a t h e r c o m p l i c a t e d d i a g r a m d e p i c t s t h e s i t u a t i o n w h e re t h e " c a r t e l " o f l a r g e , l o w - c o s t f i r m s a r e t h e p r i c e l e a d e r s f a c i n g a r e s i d u a l demand c u r v e , D L , and a m a r g i n a l c o s t c u r v e (summed o v e r t h e c u r v e s f o r t h e c a r t e l members) o f M C L . U n d e r a s i t u a t i o n where t h e c a r t e l c o u l d f o r c e a l l p l a y e r s t o c o o p e r a t e , t h e m o n o p o l y p r i c e , Pj^ , would p r e v a i l . As i n any monopoly, t h i s w o u l d be s e t by r e a d i n g t h e p r i c e o f f t h e demand c u r v e , D T , a t t h e q u a n t i t y where t h e i r m a r g i n a l c o s t , M C L , e q u a l l e d t h e t o t a l m a r g i n a l r e v e n u e , M R T . But w i t h t h e i n c l u s i o n o f f r i n g e f i r m s who won't c o o p e r a t e , t h e c a r t e l must i n s t e a d s e t i t s own q u a n t i t y 62 where m a r g i n a l c o s t s , M C L , equa l s the m a r g i n a l revenue f a c i n g the c a r t e l , M R L • P r i c e , P F , would then be determined by r e a d i n g t h a t q u a n t i t y o f f the r e s i d u a l demand curve o f the c a r t e l members, D L . T h u s , the market i s s h a r e d such t h a t the c a r t e l s u p p l i e s from 0 t o Q L and t h e f r i n g e s u p p l i e s from Q L t o Q T . The s i t u a t i o n i s d i f f e r e n t from p e r f e c t c o m p e t i t i o n i n t h a t Q T i s l e s s than Q C and P F i s g r e a t e r than P Q . T h i s m o d e l i s o b v i o u s l y a s i m p l i f i c a t i o n . I t d o e s n ' t r e p r e s e n t how t h e c a r t e l members s h a r e t h e i r p o r t i o n o f t h e m a r k e t , who w o u l d w a n t t o be t h e p r i c e l e a d e r , o r how a h e t e r o g e n e o u s p r o d u c t c o u l d be accommodated. I t d o e s , however , p r o v i d e a framework w i t h which one can s u r m i s e the e x i s t e n c e of an o l i g o p o l y i n t h e p a c k i n g / m a r k e t i n g f u n c t i o n o f t h e a p p l e i n d u s t r y . W h i l e no work has been done t o v e r i f y t h i s i s t h e c o r r e c t m o d e l , t h e f o l l o w i n g s e c t i o n w i l l p r e s e n t a n e c d o t a l e v i d e n c e which c o u l d q u a l i t a t i v e l y support t h i s a s s e r t i o n . 3.2.2 Qualitative Evidence of Oligopoly P r i c e There are s e v e r a l p r i c e " i n d i c a t o r s " which c o u l d be u s e f u l i n d e t e r m i n i n g t h e e x i s t e n c e o f an o l i g o p o l y . A n i n d u s t r y p u b l i c a t i o n o f c u r r e n t p r i c e s would enable f i rms to m o n i t o r each o t h e r ' s a c t i o n s . I f the l e a d e r s ' p r i c e s t e n d to move t o g e t h e r more t h a n the f r i n g e members' p r i c e s , one might assume some s o r t o f t a c i t c o l l u s i o n e x i s t s . 8 F i n a l l y , i f the p r i c e l e a d e r s ' can E x p l o i t a t i o n o f d i f f e r e n t m a r k e t s e g m e n t s c a n e x p l a i n some of t h e v a r i a t i o n i n p r i c e a t any s p e c i f i c p o i n t i n t i m e , b u t d i f f e r i n g ( b e t w e e n l e a d e r s a n d f r i n g e ) p r i c e f l u c t u a t i o n o v e r t ime i s l e s s amenable t o such e x p l a n a t i o n s . 63 m a i n t a i n some s o r t of "premium" f o r t h e i r product based on int a n g i b l e factors such as reputation or brand, then one can at least claim perfect competition i s not the correct model. The Washington State industry publishes a weekly p r i c e and shipment report which, while i t doesn't l i s t o r g a n i z a t i o n s by name, has become quite transparent to industry i n s i d e r s . While the p r i c e s quoted by the firms are s a i d to be i n f l a t e d i n an a t t e m p t t o s t e a l market s h a r e , the v e r y f a c t t h a t t h i s gamesmanship occurs suggests imperfect competition. The data i n these publications suggest the leaders' prices do move together and vary much les s than the p r i c e s of the f r i n g e members. And p r i c e wars f o r market share i n s p e c i f i c r e g i o n a l markets have occurred, as discussed i n Chapter Two, when B.C. Tree F r u i t s Ltd. t r i e d to drop i t s p r i c e to meet i t s sales quotas. F i n a l l y , the data from the p r i c e publications also confirm the existence of a p r i c e premium for a few of the largest Washington State houses, and while q u a l i t y and consistency can account for some of t h i s , reputation i s also a large factor. P r o f i t The e x i s t e n c e of p r o f i t beyond "normal" p r o f i t i n d i c a t e s imperfect competition (or e l s e a t r a n s i t i o n stage i n a young i n d u s t r y ) . But p r o f i t may be due to other reasons such as economies of s i z e . These could lead to reduced costs without any increase i n p r i c e from perfect competition. Moreover, a lack of p r o f i t need not mean a pe r f e c t l y competitive industry, since so-c a l l e d " X - i n e f f i c i e n c i e s " , whereby costs are allowed to d r i f t upward wit h o u t the p r e s s u r e of p e r f e c t c o m p e t i t i o n , c o u l d di s s i p a t e any p r o f i t s r e a l i z e d from a higher price. 64 The e x i s t e n c e o f p r o f i t i n t h e a p p l e i n d u s t r y i s v e r y d i f f i c u l t t o d e t e c t . F i r s t , the p r i v a t e l y owned f i r m s don't r e l e a s e p r o f i t i nformation. Second, the cooperatives are supposed t o t r a n s f e r any p r o f i t t o the growers, hence s e p a r a t i n g t r u e i n p u t ( f o r f r u i t ) c o s t s from the a c t u a l payment to the growers would be necessary t o detect p r o f i t . T h i r d , X - i n e f f i c i e n c i e s may e x i s t to hide any p r o f i t s - unionized labour^ and competition f o r g r o w e r s (and t h e r e f o r e i n c r e a s e d c o s t s of s e r v i c e s t o t h e growers) could be considered examples of these i n e f f i c i e n c i e s . B a r r i e r s to Entry There can be two main types of b a r r i e r s to e n t r y - n a t u r a l and a r t i f i c i a l . N a t u r a l b a r r i e r s e x i s t when the market i s s m a l l r e l a t i v e t o the most e f f i c i e n t s c a l e of p l a n t . W h i l e r e c e n t d i f f i c u l t y i n market expansion might support t h i s , the f a c t t h a t Washington S t a t e growers have been expanding so r a p i d l y ( u n t i l r e c e n t l y ) s u g g e sts t h a t e i t h e r t h e r e e x i s t s some d i s t o r t i o n c a u s i n g e x c e s s i v e r e s o u r c e a l l o c a t i o n i n the apple i n d u s t r y or the i n d u s t r y was not constrained by market s i z e during s t r u c t u r a l e v o l u t i o n . A r t i f i c i a l b a r r i e r s to entry might include a d v e r t i s i n g and product d i f f e r e n t i a t i o n . While some i n d i v i d u a l Washington houses conduct a d v e r t i s i n g and promotion campaigns ( d i r e c t e d at t h e consumer o r the r e t a i l e r ) , t h i s seems f a i r l y l i m i t e d , e s p e c i a l l y when compared w i t h the i n d u s t r y - w i d e campaigns of Washington S t a t e (or B.C. Tree F r u i t s L t d . to a l e s s e r e x t e n t ) . While the i n c e p t i o n of unions i n the packinghouses may w e l l have been due t o e x t e r n a l , l a b o u r m a r k e t i n f l u e n c e s , i t i s p o s s i b l e a p r i v a t e l y owned and l e s s organized i n d u s t r y might have b e t t e r w i t h s t o o d the move toward higher wages and u n i o n i z a t i o n . 65 Even so, p r o d u c t d i f f e r e n t i a t i o n i s v e r y i m p o r t a n t , a l t h o u g h d i s t i n g u i s h i n g q u a l i t y from r e p u t a t i o n i s n e a r l y i m p o s s i b l e . C o l l u s i v e Behaviour C o l l u s i v e b e h a v i o u r , i n terms of m o n i t o r i n g v i a p u b l i s h e d p r i c e s , has a l r e a d y been d i s c u s s e d . Other forms of c o l l u s i v e b e h a v i o u r c o u l d i n v o l v e market " s h a r i n g " , whereby th e c a r t e l p a r c e l s out d i f f e r e n t markets to d i f f e r e n t members, and s u p p l y r e s t r i c t i o n . In d i s c u s s i o n s w i t h W a s h i n g t o n S t a t e f i r m s , i t appears some of the l a r g e firms have " p h i l o s o p h i c a l " d i f f e r e n c e s which cause them to concentrate on d i f f e r e n t markets i e . domestic v e r s u s o f f s h o r e , c h a i n s t o r e s versus t e r m i n a l markets. R e l a t e d l y , t h e s e f i r m s have d i f f e r e n t methods i n d e a l i n g w i t h t h e i r growers and hence can reduce obvious competition f o r growers (and thereby a v o i d b i d d i n g up f r u i t c o s t s ) . L a r g e f i r m s can t a c i t l y r e s t r i c t s u p p l y i n s e v e r a l ways. F i r s t , they can s e l e c t o n l y the "best" growers, t h a t i s those who t r a d e o f f q u a n t i t y f o r q u a l i t y . Second, they can grade to h i g h e r s t a n d a r d s i f t h e r e i s a r e a d y p r o c e s s i n g m a r k e t f o r t h e r e m a i n d e r . T h i r d , t h e y can s t o r e a h i g h e r p r o p o r t i o n of f r u i t than the f r i n g e firms would be w i l l i n g to s t o r e . Fourth, they can r e s t r i c t supply i n d i f f e r e n t regions by r e s t r i c t i n g the number of f i r m s s e l l i n g i n each r e g i o n . Again, w h i l e hard data t o support these claims are not easy t o come by, i t appears from d i s c u s s i o n s w i t h v a r i o u s Washington f i r m s t h a t the l a r g e ones do engage i n these p r a c t i c e s , at l e a s t t o some e x t e n t . 3 . 1 . 3 Welfare I m p l i c a t i o n s The c a r t e l p l u s f r i n g e model can be a n a l y z e d g r a p h i c a l l y t o determine the w e l f a r e i m p l i c a t i o n s . F i g u r e 3.2 i s a s i m p l i f i e d 66 v e r s i o n o f F i g u r e 3.1, w i t h t h e a d d i t i o n o f s h a d e d a r e a s d e p i c t i n g w e l f a r e g a i n s and l o s s e s . Consumers would l o s e a r e a s 1 and 2 and 4 and 5. Most of t h i s l o s s would be a t r a n s f e r t o t h e p r o d u c e r s : Price Figure 3.2 Welfare Implications of the Cartel Fringe Model areas 2 and 4 would be g a i n e d by t h e f r i n g e f i r m s ; and t h e c a r t e l members would s h a r e a r e a 1 l e s s a r e a 3 ( l o s t p r o d u c e r s u r p l u s ) . The net l o s s t o s o c i e t y would be areas 3 and 5. W h i l e t h e d e a d w e i g h t l o s s i s d e t e c t a b l e i n t h e d i a g r a m , e m p i r i c a l l y i t i s v e r y s m a l l r e l a t i v e t o t h e v a l u e o f t h e p u r c h a s e ( P a r k e r and C o n n o r ) . F u r t h e r m o r e , i n t e r f e r i n g w i t h an o l i g o p o l i s t i c i n d u s t r y t o f o r c e t h e c o m p e t i t i v e r e s u l t c o u l d f o r c e d o w n s i z i n g and subsequent l o s s o f economies of s i z e e n j o y e d 67 by t h e l a r g e c a r t e l members. These economies o f s i z e c o u l d w e l l o u t w e i g h t h e l o s s i n consumer s u r p l u s , a l t h o u g h i t has b e e n a r g u e d t h a t t h e e x i s t e n c e of X - i n e f f i c i e n c i e s would wipe out t h e s i z e b e n e f i t s . Thus, t h e j u r y i s s t i l l o u t , e s p e c i a l l y s i n c e t h e v e r d i c t i s so dependent on t h e s p e c i f i c i n d u s t r y . I n t h e B.C. t r e e f r u i t i n d u s t r y one c o u l d c l a i m p a y i n g u n i o n i z e d wages i n the packinghouse amounts t o an X - i n e f f i c i e n c y , t h a t i s c o s t s h a v e b e e n a l l o w e d t o s o a r g i v e n l i m i t e d c o m p e t i t i o n . The l a b o u r c o s t s w i l l be d i s c u s s e d i n d e p t h i n S e c t i o n 4.5.2, b u t s u f f i c e i t t o say t h a t wages a r e c o n s i d e r a b l y h i g h e r i n t h e B.C. t h a n t h e Washington i n d u s t r y . However, t h e r e a r e s e v e r a l f a c t o r s w h i c h c o u l d h y p o t h e t i c a l l y d e t r a c t from t h e c l a i m t h a t t h i s c o u n t s as an i n e f f i c i e n c y . F i r s t , t h e amount W a s h i n g t o n " o v e r p a y s " f o r i t s f r u i t may w e l l c o u n t e r a c t t h e amount B.C. "over pays" f o r i t s l a b o u r , i f one c o n s i d e r s f r u i t as s i m p l y a n o t h e r i n p u t . Second, when t h e B.C. i n d u s t r y began most p a c k i n g h o u s e l a b o u r was s e a s o n a l , and o f t e n c o n s i s t e d o f o r c h a r d i s t s ' f a m i l y members. Thus, t h e h i g h e r wages were more a t r a n s f e r f r o m t h e o r c h a r d i s t t o t h e spouse o r o f f s p r i n g . The i n c e n t i v e f o r spouses t o work i n t h e packinghouse was compounded by Unemployment I n s u r a n c e which p r o v i d e d a t r a n s f e r from s o c i e t y t o t h e farm f a m i l y ad improved the o r c h a r d i s t s ' c a s h f l o w d u r i n g t h e p r e h a r v e s t s e a s o n . The f a c t t h a t t h i s h i r i n g p r a c t i c e has changed w i t h t h e advent o f PG/PS, where s m a l l e r , n e a r permanent l a b o u r r e q u i r e m e n t s r e s u l t i n fewer f a m i l i e s b e n e f i t t i n g , c o u l d p o s s i b l y c o n t r i b u t e t o r e c e n t o r c h a r d i s t c o m p l a i n t s about l a b o u r r a t e s . T h i r d l y , B.C. may be a b l e t o reduce any X - i n e f f i c i e n c y due 68 to labour rates by substituting more c a p i t a l for labour than does the average Washington State packinghouse. 3.1.4 Methodology Employed The above d i s c u s s i o n of o l i g o p o l y i n the western North American apple industry asserts that there exists a loosely-bound c a r t e l c o n s i s t i n g of perhaps f i v e or s i x large Washington firms and B.C. Tree F r u i t s Ltd. Among the Washington firms perhaps only two are p r i c e leaders (Trout and Blue Chelan) whereas the others, l i k e B.C. Tree F r u i t s Ltd., are t a c i t l y expected to play the game. The skirmishes observed, i n the form of p r i c e wars, occur when c a r t e l members attempt to act as a f r i n g e member. B.C. Tree F r u i t s Ltd. i s i n a s l i g h t l y d i f f e r e n t position, as i t i s large, r e l a t i v e to any single Washington firm, but high cost ( r e l a t i v e to other c a r t e l members) and i t doesn't p a r t i c i p a t e i n any price reporting. Quantitative evidence of this assertion i s , however, la r g e l y beyond the scope of t h i s study. It would require unprecedented cooperation with and between the various packinghouses. It would also require the a b i l i t y to index the companies according to type of product, s i n c e heterogeneity confuses the issue to such a large extent. A p e r f e c t l y competitive price would be needed as a basis for comparison with the "pr e v a i l i n g " o l i g o p o l i s t i c p r i c e . Otherwise, p r o f i t data (even more d i f f i c u l t to obtain) would be req u i r e d . While these problems may not be insurmountable, they w i l l have to be the object of future study. The f o l l o w i n g s e c t i o n w i l l , however, attempt to q u a n t i f y B.C.'s influence over i t s own price. It w i l l compare th i s e f f e c t 69 w i t h t h a t o f p r o d u c t i o n f r o m o t h e r r e g i o n s i n an a t t e m p t t o de t e r m i n e t h e most i m p o r t a n t i n f l u e n c e on B.C. p r i c e . 3.2 PRICE 3.2.1 P r i c e as a Measure o f Market Power An a t t e m p t a t i l l u s t r a t i n g t h e demand c u r v e f o r B.C. a p p l e s i s shown i n F i g u r e 3.3, where t e n d i f f e r e n t p r i c e / q u a n t i t y p a i r s a r e g r a p h e d u s i n g a n n u a l B.C. T r e e F r u i t s L t d . d a t a . I t i s p o s s i b l e t o d e t e c t some r e s e m b l a n c e t o t h e t y p i c a l downward s l o p i n g demand c u r v e , but i n some y e a r s t h e s t a n d a r d r e l a t i o n s h i p d o e s n ' t h o l d . E l a s t i c i t i e s a r e i m p o s s i b l e t o e s t i m a t e w i t h o u t r e g r e s s i o n a n a l y s i s ( r e q u i r i n g more d a t a p o i n t s ) , b u t D e s t o r e l e s t i m a t e d t h e Canadian own p r i c e e l a s t i c i t y t o be -0.30. However, h e , t o o , e x p e r i e n c e d some d i f f i c u l t i e s e s t i m a t i n g t h i s e l a s t i c i t y , s i n c e he had t o use t h e i m p o r t p r i c e as a p r o x y f o r own ( C a n a d i a n ) p r i c e i n t h i s e s t i m a t i o n . T h e r e a r e s e v e r a l r e a s o n s f o r s u c h d i f f i c u l t i e s i n e s t i m a t i n g t h e demand c u r v e f o r a p p l e s , most a r i s i n g f r om p o s s i b l e s h i f t s i n demand c a u s e d by t a s t e changes, income changes and s u b s t i t u t e p r i c e changes. 70 c 0. to 0) $11.50 $11.00 $10.50 -$10.00 -$9.50 -$9.00 -$8.50 -$8.00 -$7.50 $7.00 Demand for B.C. Apples per box 1 — I — r 7.5 8.5 (Millions) Boxes of Apples Sold Figure 3.3 Re la t ionsh ip between P r i c e i n 1981 d o l l a r s and Quantity of B . C . Apples Sold (1976-85) 71 Taste changes seem a very l i k e l y cause of s h i f t s i n the demand f o r B.C. apples. These changes can a f f e c t the type of apple demanded and the t o t a l amount demanded. There has been a very noticeable s h i f t toward green, crunchy apples and away from good keeping-quality or cooking-quality apples. Most recently the trend toward the importance of aesthetics has been augmented by a keener desire for higher flavour, as. well. The quantity of apples demanded would also be negatively affected by a reduced demand for cooked apple products while i t may be p o s i t i v e l y affected by the heavy a d v e r t i s i n g campaigns of Washington State and New Zealand. Changes i n income could a f f e c t demand for apples, although the income e l a s t i c i t y of apples i n Canada (and presumably the U.S.) i s quite low (0.095 according to Destorel). However, income f l u c t u a t i o n s i n the rest of the world, e s p e c i a l l y the developing countries with a higher income e l a s t i c i t y , could well r e s u l t i n demand s h i f t s given the 20% offshore export position of the B.C. industry. F i n a l l y , the p r i c e of substitutes could cause s h i f t s i n the demand curve. This could a r i s e from increased competition from o t h e r f r u i t s , i n c r e a s e d p r o d u c t i o n i n o t h e r areas and/or, r e l a t e d l y , an i n c r e a s e d demand for v a r i e t i e s B.C. can't grow economically. These factors a l l a p p e a r t o e x i s t t o some extent, although q u a n t i f i c a t i o n i s d i f f i c u l t . However, c o n f i n i n g the market to North America ( w h e r e t h e b u l k o f B.C.'s production i s consumed) one can i l l u s t r a t e t h e e f f e c t o f North American production on B.C. price (and hence the degree to which B.C. i s a price taker). The graphs i n Figure 3.4 depict B.C. price against North American and Northwestern (B.C. and Washington) quantity-s o l d . The best " f i t " e x i s t s between B.C. p r i c e s and Northwest production, suggesting the average B.C. pri c e i s determined by Washington production as well as B.C. production. That t h i s f i t i s b e t t e r than the B.C. "demand" curve of Figure 3.3 suggests Washington i s a s t r o n g i n f l u e n c e , and t h i s i s confirmed by graphing B.C. pr i c e against Washington volume (not shown), where the o u t l i e r s i n the B.C. demand curve are e x p l a i n e d by the Washington volume. Of course, Washington production would be expected to have a strong influence, given i t s larger s i z e , and si m i l a r transport costs, variety, and weather conditions. The simple demand curve attempted above cannot capture a l l the i n f o r m a t i o n r e g a r d i n g apple p r i c e s i n c e the apple i s an extremely heterogeneous product. The following discussion w i l l serve to disaggregate the average price somewhat by i l l u s t r a t i n g the various factors which can cause the "within" apple p r i c e to vary. BC Price on NW Production 73 8 PQ Pi w oo 811.00 $11.00 -$10.00 $10.00 $9.50 -$9.00 -$8.50 -$8.00 -$7.60 $7.00 2,300 2.B00 1 2.700 — i 1 1 r 1 1 2.900 3.100 3,300 3,000 APPLE PRODUCTION (MLB) BC Price on NA Production 8 PQ oo O N $11 .SO $11.00 -$10.80 -$10.00 -$9.50 -$9.00 $8.60 $B.OO $7.50 -$7.00 — I 1 1 1 1 1 1 1 1 — 1 — l 1 1 l 7.400 7,800 8.200 8.600 9.000 9.400 9.800 10.200 APPLE PRODUCTION (MLB) Figure 3.A Relationship between P r i c e of B.C. Apples and Production Levels f o r the P a c i f i c Northwest and North America (1976-85) 74 3.2.2 F a c t o r s A f f e c t i n g P r i c e V a r i a t i o n As mentioned previously, several factors can a f f e c t p r i c e , e i t h e r s i n g l y or i n combination. The following discussion w i l l attempt to describe the effects of variety, s i z e , grade, storage type and pack type. Variety The e f f e c t of variety on price i s shown i n figure 3.5(a) and (b) comparing Red and Golden Delicious (XFCY, CA stored f r u i t ) over the crop years 1984 and 1985, respectively. In 1984 there e x i s t e d a considerable gap between Red and Golden D e l i c i o u s among the large sizes with a maximum of about $14.50/box more for Red Delicious (more than double the Golden p r i c e ) . This gap decreases as size decreases, but Red prices were higher than Goldens for each size. This was not the case i n 1985 when Golden p r i c e s were greater than or equal to Red p r i c e s i n a l l but two s i z e s (both l a r g e s i z e s ) . Note how these graphs i l l u s t r a t e the price v a r i a t i o n between crop years, where 1984 Red p r i c e s peaked higher than 1985 prices by about $5/box. Goldens moved i n the opposite d i r e c t i o n , increasing from a high of about $17/box i n 1984 to about $21/box the following year. (a) 1984 75 198 175 163 ISO 138 125 113 100 8 8 8 0 72 64- 5 6 SIZE (b) 1985 198 175 163 150 138 125 113 100 8 8 8 0 7 2 64- 5 6 SIZE a RED DELICIOUS + GOLDEN DELICIOUS Figure 3.5 Relationship between Price and Size for B .C. Red and Golden Delicious (1984-85) 76 Size P r i c e v a r i a t i o n o v e r s i z e i s a l s o i l l u s t r a t e d i n F i g u r e 3.5(a) and (b). These graphs show how, i n most cases, l a r g e f r u i t commands a h i g h e r p r i c e than small f r u i t . T h i s r e l a t i o n s h i p seems to be most pronounced i n 1984 Reds, when price f e l l from $27/box to $7/box as size decreased. In 1985, when most Red p r i c e s f e l l , t h i s decline was less s i g n i f i c a n t (from $22 to $ l l / b o x ) . The r e l a t i o n s h i p i s not always smooth, however, as the 1984 s i z e 150 was p r i c e d much higher and the 1985 s i z e 56 was priced much lower than would be expected. Grade While the r e l a t i o n s h i p between price and size (and variety) changed with crop year, the e f f e c t s of grade on p r i c e are much more predictable. A t y p i c a l comparison between FCY and XFCY grade p r i c e s i s d e p i c t e d i n F i g u r e 3.6, u s i n g 1985 CA s t o r e d Red D e l i c i o u s as the example. As can be seen, the premium for XFCY ranges between about $5/box (or close to 30% of the FCY price) to about $0.50/box. Once again, the larger sized f r u i t i s l i k e l y to r e a l i z e a l a r g e r premium f o r q u a l i t y than the s m a l l e r s i z e d f r u i t . 1985 Prices XFCY vs FCY RedDdicioiB CA $10 H i r 1—I 1 I 1—l 1 l 1 1 198 175 163 150 138 125 113 100 88 80 72 64 5 6 SIZE • XFCY + FCY Figure 3.6 E f f e c t of Grade on P r i c e for B . C . Red D e l i c i o u s XFCY over D i f f erent Sizes (1985) 78 Storage The type of f r u i t storage employed doesn't aff e c t the price obtained by a f f e c t i n g the quality of the f r u i t (to a s i g n i f i c a n t e x t e n t ) . Instead, the p r i c e obtained by the d i f f e r e n t storage regimes r e f l e c t s the timing of f r u i t sale. Controlled atmosphere f r u i t , since i t i s sold offseason, usually obtains a higher price than regular cold stored f r u i t , which must, be sold within a few months of harvest. The long storage season reduces any p r i c e premium f o r e a r l i n e s s to market. While there may s t i l l be some p r i c e advantage fo r the e a r l i e s t apples, t h i s i s d i s s i p a t e d by the time B.C. apples are a v a i l a b l e , and even e a r l y Washington apple prices are hurt by southern hemisphere production. The relationship between CA and regular storage f r u i t prices i s not always c l e a r c u t . F i g u r e s 3.7 and 3.8 d e p i c t these r e l a t i o n s h i p s f o r two crop years of Red XFCY and Golden XFCY D e l i c i o u s , r e s p e c t i v e l y . Among the 1984 Red D e l i c i o u s , the premium for CA apples ranged between $1 to $4/box, except for a few of the small s i z e categories where the CA p r i c e was higher than would be expected. In 1985 the premium for CA f r u i t was much less p r e d i c t a b l e . S l i g h t changes in size (from a size 72 to size 64) r e s u l t e d i n an i n c r e a s e i n the premium from about $3 to $12/box. A s i m i l a r jump i n premium occurred i n the 88 (medium) size category. (a) 1984 79 $5 -) , 1 1 , , , , 1 1 , , 198 175 163 150 138 125 113 100 88 80 72 64 56 SIZE (b) 1985 w 198 170 163 150 138 120 113 100 88 80 72 6+ 06 D CA + REGULAR SIZE Figure 3.7 Effect of Storage Regime on Price for B .C. Red Delicious XFCY over Different Sizes (1984-85) 80 Among the Golden Delicious prices(Figure 3.8), the 1985 crop year also exhibited a large dip i n regular storage prices for one size category (72). Otherwise the CA premium ranged from about $2 to $4/box. The 1984 Golden crop showed l i t t l e discernable premium f o r CA f r u i t , as the r e g u l a r stored f r u i t a c t u a l l y fetched a higher p r i c e i n some of the size categories. Golden Delicious i s l e s s amenable to CA s t o r a g e ( a l t h o u g h the t e c h n o l o g y i s improving) since i t can undergo serious q u a l i t y d e t e r i o r a t i o n ; thus the p r i c e b e n e f i t s from l a t e season sales were o f f s e t by reduced quality. (a) 1984 81 $18 W U M pi 163 1 SO 138 125 113 100 88 80 72 64 52 SIZE (b) 1985 150 138 125 113 100 88 80 72 6+ 56 SIZE a CA + REGULAR Figure 3.8 Effect of Storage Regime on Price for B.C. Golden Delicious XFCY over Different Sizes (1984-85) 82 3 . 3 SUMMARY T h i s c h a p t e r p r e s e n t e d the h y p o t h e s i s t h a t the apple i n d u s t r y i s a c t u a l l y o l i g o p o l i s t i c i n nature, with an i m p l i c i t c a r t e l of about ten members (including B.C. Tree F r u i t s Ltd.) and a large number of small fringe firms. In a oligopoly plus fringe model, the p r i c e leaders set t h e i r supply (and therefore price) at the p o i n t where t h e i r marginal costs equal t h e i r r e s i d u a l marginal curve. The p r i c e obtained i s between that of p e r f e c t competition and monopoly, and hence results i n a welfare transfer from consumers to producers (shared amongst f r i n g e and c a r t e l members). Price, p r o f i t and c o l l u s i v e behaviour are a l l evidence which might support t h i s hypothesis, but p r i m a r i l y , t h i s study can only present q u a l i t a t i v e evidence. This evidence does, for the most part, support the conclusion that an o l i g o p o l y e x i s t s . A l s o , q u a n t i t a t i v e p r i c e evidence does suggest that Washington Sta t e p r o d u c t i o n has the greatest impact on B.C. p r i c e . This average p r i c e , though, may not accurately r e f l e c t the s i t u a t i o n , since apples are such a heterogeneous product. This heterogeneity i s r e f l e c t e d i n p r i c e increases e x h i b i t e d with v a r i e t y , with increased size, grade and market date. This "within" v a r i a t i o n i s c o n s i d e r a b l y g r e a t e r than the v a r i a t i o n "between" B.C. and Washington State p r i c e s ( which aren't reported here given the general consensus that the a v a i l a b l e Washington State data i s highly suspect). The s t r u c t u r e and conduct d i s c u s s i o n s of t h i s and the p r e c e d i n g chapter have p r o v i d e d enough background f o r the performance e v a l u a t i o n of the next two c h a p t e r s . Any such performance discussion must be viewed with this i n mind. 83 CHAPTER 4 PERFORMANCE OF THE B.C. APPLE MARKETING SYSTEM Performance of the packing/marketing function of the B.C. a p p l e i n d u s t r y w i l l be p r e s e n t e d i n t h i s c h a p t e r . While performance i s often measured i n e f f i c i e n c y terms, as i n the bulk of t h i s chapter, Section 4.1 discusses other measures which could be used when e v a l u a t i n g the performance of a c o o p e r a t i v e structure. Section 4.2 w i l l introduce the analysis by looking at an o v e r a l l measurement - the margins a t t r i b u t e d to the packing f u n c t i o n , the marketing f u n c t i o n and the growers' r e s i d u a l . Section 4.3 w i l l discuss sales revenues, although p r i m a r i l y i n t h e o r e t i c a l terms as the factors a f f e c t i n g p r i c e (as discussed i n S e c t i o n 3.2.2) are v i r t u a l l y the same as those a f f e c t i n g revenue. Section 4.4 w i l l present relevant cost theory as well as both packing and marketing costs and t h e i r r e l a t i o n to those i n Washington State. F i n a l l y , a b r i e f discussion of grower returns i n B.C. and Washington State w i l l be included i n Section 4.5. 4.1 COOPERATIVE STRUCTURE CAVEAT Before performance can be measured one must define the goals t h a t are being sought. That i s , performance e v a l u a t i o n of an in d u s t r y or an organization depends on what they are t r y i n g to perform. These goals are somewhat d i f f e r e n t for p r i v a t e , p r o f i t maximizing organizations than for cooperative organizations, a l t h o u g h they may share some of the same i n t e r m e d i a t e or s e c o n d a r y g o a l s . The g o a l s of a c o o p e r a t i v e may i n c l u d e (McBride): 1. To provide services to growers they can't get (or at l e a s t get as e f f i c i e n t l y ) on t h e i r own. For example, a c o o p e r a t i v e can help capture economies of s i z e i n packing or marketing, f a c i l i t a t e lobbying e f f o r t s , p r o v i d e e x t e n s i o n or advice to growers, and h e l p provide countervailing powers against monopsony powers. While the cooperative nature of the B.C. industry seems to perform these functions, the question remains do they out perform private enterprise at these functions? 2. To c o n t r o l supply and therefore r a i s e p r i c e s and capture monopoly rents. While t h i s may have been the hoped f o r outcome when cooperation f i r s t began, the B.C. industry proved too small r e l a t i v e to the rest of the world in apple production, and import r e s t r i c t i o n s were so unpalatable that B.C. has never been able to determine i t s own price. 3. To be progressive and innovative i n packing and marketing. It i s d i f f i c u l t to say i f t h i s was ever a goal of the B.C. industry. Certainly they have at least had to f o l l o w Washington S t a t e ' s lead i n terms of packing technology, while i n several areas Washington S t a t e has c o p i e d B.C.. At the marketing l e v e l the Washington State industry has proven i t s e l f to be a formidable contender, although B . C . l i k e l y surpasses Washington State i n packaging research. 4 . To provide a basic economic return to i t s members on an e q u i t a b l e b a s i s . Member equity can be defined by 85 several measures, which t y p i c a l l y include the following considerations: (a) whether member refunds and per unit r e t a i n s are based on patronage which would tend to reward more l o y a l , serious members; and (b) whether c a p i t a l investments are financed as much as p o s s i b l e by those c u r r e n t l y u s i n g the c o o p e r a t i v e (accomplished by adjusting redemption p o l i c i e s ) . While these are important questions, the p o l i c i e s governing these issues vary both among B.C. and Washington State houses and within each industry. 5. To increase the economic well-being of i t s members. This could be evaluated by comparing income figures i n the B.C. cooperative and private enterprise houses, the various income support programs and equity p o s i t i o n s (in the cooperatives) would cloud the issue. That would also not permit the reason for any i n e f f i c i e n c i e s to be pinpointed. So t h i s study w i l l concentrate on grower returns which can be a f f e c t e d by e i t h e r the costs of packing or marketing, or the price obtained. 4.2 MARGINS OR REVENUE ALLOCATION 4.2.1 T h e o r e t i c a l C o n s i d e r a t i o n s Growers' returns are determined by subtracting marketing and packing costs from t h e gross s a l e s r e v e n u e , a s shown i n Figure 4.1. The share of r e v e n u e a l l o c a t e d t o t h e m a r k e t e r s and packers w i l l be referred t o as t h e i r m a r g i n s . 86 Revenue Packinghouse Allowance Growers Return Marketing Cost •Packing Cost Figure 4.1 Determination of Revenue Allocat i o n The a c t u a l costs i n c u r r e d by the marketing and packing functions w i l l be examined i n depth i n Section 4.5, but i t i s f i r s t necessary to understand how these costs are a l l o c a t e d . B.C. Tree F r u i t s Ltd. allocates i t s costs to the type of f r u i t wherever p o s s i b l e , but many of i t s overhead costs are shared p r o p o r t i o n a l l y (by volume) amongst the d i f f e r e n t f r u i t s . No attempt i s made to further subdivide B.C. Tree Fruits Ltd. costs amongst the d i f f e r e n t apple v a r i e t i e s . This i s i n contrast to variable packing costs, which are allocated amongst the v a r i e t i e s where they are incurred. Since these costs are l i t t l e affected by grade and size, there i s no attempt to d i f f e r e n t i a t e costs within these categories. Also, while costs do vary with storage and pack t y p e , t h e s e are d e c i s i o n s made by the p a c k i n g h o u s e and B.C. Tree F r u i t s Ltd., and hence growers are not penalized (nor rewarded) by charging these costs d i f f e r e n t i a l l y amongst them. Overhead packing costs are charged p r o p o r t i o n a l l y to a l l f r u i t types . And while c o s t s aren't a l l o c a t e d d i f f e r e n t l y within a 87 variety, growers do receive any price d i f f e r e n t i a l s when they are based upon factors under t h e i r control (such as grade and s i z e ) . 4 . 2 . 2 Results The two margins and the grower ret u r n s per box i n 1981 d o l l a r s are reported i n Figure 4.2 for the period 1976 to 1985. The marketing margin has been f a i r l y steady at just under $l/box. Packinghouse margins were much more variable over t h i s period. At about $4/box, they were lowest i n the 1983 crop year, but i n the l a t e 1970s, 1982 and 1985 crop years they were close to $5/box. F i n a l l y , grower r e t u r n s , as the r e s i d u a l , e x h i b i t e d the most va r i a t i o n with revenue. They varied from about $2/box i n 1982 and 1984 to about $5/box i n the l a t e 1970s. Thus i t appears the d e c l i n e i n grower returns i s due more to a decline i n revenues than to an increase i n the cost of the marketing system. This w i l l be further discussed i n the next chapter. Ten Year .Apple Margins 88 X 0 hi tl J 0 0 to 0) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1965 { \ } Marketing Margii in CROP YEAR XZ) Packing Margin Grower Residual Figure 4.2 Revenue A l l o c a t i o n Among Marketing, Packing and Producing A c t i v i t i e s on per Box Basis (1976-85) 89 4.3 REVENUE This section w i l l only b r i e f l y touch on the actual revenue earned by the apple industry since much of the p r i c e d iscussion of S e c t i o n 3.2 would simply be repeated. S e c t i o n 4.3.1 w i l l present t h e o r e t i c a l aspects which need to be considered when evaluating the performance of B.C. Tree Frui t s Ltd. i n maximizing sales revenue. Section 4.3.2 w i l l b r i e f l y present the trend i n apple sales revenue and how i t responds to the quantity sold. 4.3.1 Theoretical Considerations Under perfect competition, revenue maximization i s the same as p r o f i t maximization; that i s , quantity must be set such that marginal cost equals marginal revenues. There are at least three d i f f e r e n t areas wherein this simple strategy becomes i n s u f f i c i e n t when c o n s i d e r i n g the apple i n d u s t r y . The f i r s t , the case of o l i g o p o l y , has a l r e a d y been d i s c u s s e d at some l e n g t h i n Section 3.1 and need not be r e i t e r a t e d here. The second area of confusion i s posed by i n t r a - r e g i o n a l trade. The t h i r d aspect of the apple i n d u s t r y i s the element of storage and the r o l e of dynamic o p t i m i z a t i o n . The l a t t e r two aspects w i l l be explained below. Simple economic theory suggests that B.C. should not grow apples i f i t doesn't have the physical and economic comparative advantages of Washington State, and indeed, Washington State apples do enter the B.C. and P r a i r i e markets to compete with B.C. apples. Even so, B.C. apples are s t i l l s o l d t o the U.S. i n large q u a n t i t i e s . The t r a d i t i o n a l t r a d e t h e o r y m i g h t accommodate th i s f a c t i f B.C. had the advantage i n transport costs to s p e c i f i c U.S. markets, but t h i s i s not the case. Trade models to explain 90 such intra-regional trade have been developed using heterogeneous products or game theory, but these models have yet to be tested econometrically. Hence, revenue maximization involving trade (as required by the small l o c a l market for B.C. apples) does not lend i t s e l f to any simple economic truth. B.C. Tree F r u i t s Ltd. has been c r i t i c i z e d for i t s use of monthly s a l e s quotas. These quotas have been a s s e r t e d to be ar b i t r a r y and with no regard for maximizing t o t a l revenue. How do these quotas c o i n c i d e with dynamic o p t i m i z a t i o n theory? The f o l l o w i n g w i l l give a b r i e f overview of t h i s theory and the additional facets implicated i n the apple industry. If there were perfect competition and perfect information, B.C. Tree F r u i t s L t d . would have a schedule d e p i c t i n g p r i c e v a r i a t i o n over the course of the marketing season (about 42 weeks). They would also have a schedule of the costs incurred to store the f r u i t i n each time period. They would then maximize 42 42 max ] * E I l I t = max^ T ( P t - C t ) * q t q t t=l q t t=l (1) (where q t i s q u a n t i t y , I I t i s p r o f i t , P t i s p r i c e and Ct i s cost, a l l i n period t) by s o l v i n g simultaneously f o r a l l time p e r i o d s . But i n t h e a p p l e i n d u s t r y t h e r e a r e s e v e r a l complications . F i r s t , i m p e r f e c t i n f o r m a t i o n i s m o r e t h e n o r m . B.C. Tree F r u i t s Ltd. d o e s n o t know P t a t t h e b e g i n n i n g o f t h e year when i t must make i t s s t o r a g e / s a l e s q u o t a p r o j e c t i o n s . I t must therefore work with expected price, E ( P t ) . This brings r i s k theory into the function i n equation (1). Also, quantity produced 91 w i l l vary with weather, e t c , and hence the a b i l i t y to spread fixed costs w i l l vary from year to year, as well. Therefore, r i s k enters into both the price and cost information needed. The s e c o n d c o m p l i c a t i o n o c c u r s when t h e r e i s some o l i g o p o l i s t i c behaviour. This implies the decision maker could a f f e c t p r i c e i n any given period by i t s actions i n that period. That i s , i f E(P t) = f ( q t ) (2) then the d e c i s i o n maker would need to know not only how i t s act i o n s a f f e c t p r i c e (own price f l e x i b i l i t y ) , but also how i t s competitors (and therefore price) would respond. Thirdly, t o t a l costs are usually a function of quantity, as wel l . For instance, i f costs i n any one period are dependent on the quantity of f r u i t remaining, then Ct = g(Q/qi/q2/<J3 q t - i ) (3) where Q i s the t o t a l quantity. If costs i n the present p e r i o d also vary with the quantity sold i n the present period (for such quantity dependent costs as transportation, order assembly costs, etc.) then q-j- would also be an argument of the cost function i n equation (3) . 92 P u t t i n g a l l t h e s e f a c t o r s t o g e t h e r , t h e dynamic optimization problem becomes 42 42 max ^ ( E ( P t { q t o w n , q trow } ) - ^ T c t { Q , q i q t} * q t q t t=l t=l (4) (where own s i g n i f i e s own quantity and row s i g n i f i e s quantity of the r e s t of world). With q t as the decision v a r i a b l e and as an argument i n most ( i f not a l l ) of the terms of the maximand, a problem with simultaneity exists. What can be concluded about B.C. Tree F r u i t s L td. sales quotas from the above discussion? It i s impossible to make any d e f i n i t i v e inferences without some attempt to solve the above e q u a t i o n s , hence f u t u r e s t u d y i s r e q u i r e d . W h i l e t h e weekly/monthly sales quota may seem inadequate ex poste, i t may be the best p o l i c y a v a i l a b l e ex ante. B.C. Tree F r u i t s L t d . s h o u l d have deve l o p e d some i n s t i n c t , at l e a s t , f o r p r i c e f l u c t u a t i o n s over time and i n response to t h e i r own behaviour, and f o r storage c o s t s . Their sales quota system i s most l i k e l y t h e i r best synthesis of t h i s knowledge, tempered by a c e r t a i n amount of r i s k aversion. I t i s perhaps i n the r i s k area where they should be examined most c l o s e l y , since r i s k aversion could be innate to B.C. Tree F r u i t s Ltd. or else i t could be imposed upon them by other p a r t i c i p a n t s i n the B.C. industry ( v i a i t s cooperative nature). Thus, revenue maximization i s a problematic f u n c t i o n to perform i n the apple industry, while this study can not determine i f B.C. Tree F r u i t s L t d . has succeeded i n o b t a i n i n g maximum revenue, given t h e i r lack of c o n t r o l over the product mix, i t 93 w i l l report B.C. Tree F r u i t s Ltd. performance i n r e l a t i v e terms. This w i l l be accomplished by f i r s t examining revenue trends and quantity response, and l a t e r by making some general comparisons with Washington State. 4.3.2 Results B.C. Tree F r u i t s L t d . s a l e s revenues f o r apples are e x p r e s s e d i n c o n s t a n t d o l l a r s as a f u n c t i o n of time i n Figure 4.3. They range from about $45m i n 1984 to $83m i n 1981. This graph helps to explain the unrest among growers i n the early 1980s, since revenues seemed to f a l l quite s u b s t a n t i a l l y from an average of about $75m before 1982 to an average of about $55m from 1982 to 1985. In S e c t i o n 3.2.1 the r e l a t i o n s h i p between p r i c e and quantity was investigated. In Figure 4.4 the relat i o n s h i p between sales revenue and quantity i s i l l u s t r a t e d . This seems to be quite a p o s i t i v e r e l a t i o n s h i p , s i n c e the lowest revenues o c c u r r e d during low quantity years and the highest revenues occurred i n h i g h volume y e a r s . Thus, w h i l e q u a l i t y i s an i m p o r t a n t determinant of p r i c e (as discussed i n Section 3.2.2), q u a l i t y without quantity does l i t t l e to guarantee high revenues. Ten Year Real Apple Revenues Total 1976 1 977 1 978 1 979 1 980 1 981 1982 1 983 1 984 1 985 CROP YEAR Figure 4.3 Revenue from Sales in 1981 dollars for B.C. Tree Fruits Ltd . (1976-85) 95 10 0> Ten Year Real Apple Revenues by Volume Total 90,000,000 80,000,000 i 70,000,000 H 60,000,000 50,000,000 H 40,000,000 VOLUME (BOXES) Figure 4.4 Relationship between Revenue from Sales (1981 dollars) and Quantity of B.C. Apples Sold (1976-85) 96 4.4 COSTS 4.4.1 Theoretical Considerations There are two aspects of cost a n a l y s i s which are very important to the B.C. apple industry (primarily to the packing fun c t i o n ) . The f i r s t aspect involves determination of the lea s t c o s t combination of resources or f a c t o r s of p r o d u c t i o n . The second aspect involves determining the optimum s i z e of p l a n t . New, labour-saving technology and subsequent plant amalgamation make an understanding of both these aspects important i n the apple industry. The l e a s t c o s t r e s o u r c e c o m b i n a t i o n r u l e i n v o l v e s d e t e r m i n a t i o n of a s e r i e s of isoquant curves (convex to the or i g i n ) paired with t h e i r tangent isocost curves (at a constant input p r i c e r a t i o ) . Ridge l i n e s bound the "stage two" resource combinations, that i s the region i n which a firm should operate to achieve technological e f f i c i e n c y . x 0 By operating at the point of tangency between the isocost and relevant isoquant curves, the firm achieves economic e f f i c i e n c y . H The expansion path contains a l l the tangency p o i n t s ( f o r a given p r i c e r a t i o ) and hence d e p i c t s how the f i r m should a l l o c a t e i t s resources among the various factors given a choice to change output. This generalized 10 T e c h n o l o g i c a l e f f i c i e n c y must be wit h i n the region where the marginal p h y s i c a l product of both ( a l l ) inputs i s p o s i t i v e . Otherwise, a d d i t i o n of one extra u n i t of input w i l l impact output not at a l l or negatively. Thus, marginal rate of t e c h n i c a l s u b s t i t u t i o n must be greater than or equal to zero i f the firm i s to operate e f f i c i e n t l y . H Economic e f f i c i e n c y i n v o l v e s moving along a given isoquant curve to the po i n t where the given q u a n t i t y can be produced most cheaply. This is accomplished by h i t t i n g the lowest isocost curve possible, which occurs at the point of tangency. 97 approach enables one to model increasing, constant and decreasing returns to scale conditions. After technological and economic efficiency have been achieved in terms of the optimal resource combination, the firm must then determine its most efficient output. In the short run, the firm can produce most cost effectively at the output where average cost equals marginal cost, given plant size. Note, imperfect competition in the factor markets would change the slope of the average variable cost curve (and therefore the average cost curve). The firm should produce as long as price is above the average variable cost at the optimal output, and it will earn economic profit when price is above average cost at that output. The long run average cost curve can be thought of as an envelope curve of the series of short run average cost curves over all outputs. This is shown in Figure 4.5. Initially, the firm is operating on SAC^  and produces at Xi_. Note, this is not the most efficient point on this curve, and so the firm chooses to produce at output • It can accomplish this in two ways. First, it can move along SACi to its most efficient point. Or, it can build a larger plant and move to SAC2• It is now operating at less than optimal output, again, but it has captured additional economies of size to reduce its costs even further, from to C2 • The plant is operating at its most efficient output at the point where its short run marginal cost equals the long run marginal cost, as shown below for the second plant size. 98 Costs LAC X l "2 Quantity Figure 4.5 Relationship between Short Run and Long Run Cost Curves There are several reasons why i t i s d i f f i c u l t to t e s t i f the B.C. apple marketing system i s operating at the point of least cost plant scale and resource combination. F i r s t , i t i s not ope r a t i n g i n a p e r f e c t l y competitive environment (eg. labour unions) nor does i t operate as a perfect competitor (as per the oligo p o l y discussion above). Second, there i s no access to B.C. p a c k i n g - h ouse a c c o u n t s and o n l y l i m i t e d a c c e s s t o B.C. Tree F r u i t s Ltd. accounts, therefore quantifying the cost curves i s very d i f f i c u l t . Third, the data that i s av a i l a b l e has i t s own problems. Total packinghouse allowances (as determined by the O.F.S.A. guidelines) and to t a l quantity sold i s available for a ten year p e r i o d , but these figures do not break down costs between types of costs or by f r u i t type (fresh versus processed). There have been technological advances during t h i s period which have r e s u l t e d i n d i f f e r e n t resource combinations, hence one i s 99 faced with d i s t i n g u i s h i n g between d i f f e r e n t curves. For s i x (discontinuous) years detailed per unit cost data are available, however the quantities within these categories are not available and so t o t a l costs cannot be computed. Given these data constraints, t h i s study w i l l attempt the following cost a n a l y s i s . Total cost and average cost curves w i l l be proposed, and average costs w i l l be trended. The costs w i l l then be broken down into fixed and variable over time. The fixed c o s t s w i l l be examined to determine the degree to which they r e a l l y are fixed. These e f f o r t s w i l l be made for both packing and marketing costs, data permitting. They w i l l then be compared with Washington State costs. 4.4.2 Packing Cost Analysis Total and Average Costs Total packing costs (for B.C. Tree F r u i t s Ltd. a f f i l i a t e d houses i n constant dollars) are trended over a ten year period i n Figure 4.6. This graph depicts a substantial jump i n t o t a l cost of about $10m i n 1980 (or about 40%) before costs f e l l again. This 1980 jump was very large, and so i t i s necessary to examine how quantity affects cost to account for t h i s . A t o t a l cost curve i s postulated i n Figure 4.7, and i t conforms f a i r l y well to the upward s l o p i n g curve expected. One would have to ex t r a p o l a t e below h i s t o r i c a l q u a n t i t i e s to f i n d the cost i n t e r c e p t , and therefore fixed costs, using t h i s approach. Ten Year Apple Packing Costs Total Cost 45 i = 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 CROP YEAR Figure 4.6 T o t a l Packing Costs i n 1981 d o l l a r s for O . F . S . A . Packing-houses (1976-85) 101 * 5 Ten Year Apple Packing Costs Total Cost versus Quantity I I i I r 7.5 8.5 9.5 10.5 (Millions) BOXES Figure 4.7 Re la t ionsh ip between T o t a l Packing Cost (1981 d o l l a r s ) and Quantity of B . C . Apples Sold (1976-85) 102 This t o t a l cost curve permits the average cost curve to estimated, as i n Figure 4.8. The most serious o u t l i e r of t h i s curve occurred i n 1984, the f i r s t year of house po o l i n g . This c o u l d be due to strong i n c e n t i v e s to t r i m c o s t s , even to the point of operating at a loss i n the short term, i n an attempt to appease growers during a most contentious time. Ignoring t h i s one o u t l i e r and assuming this depicts only one short run average cost curve, then the graph pictures the downward sloping s e c t i o n of the SAC curve d e p i c t e d i n Figure 4.5. Since only part of the c u r v e i s shown, i t i s i m p o s s i b l e to say where i t would be m i n i m i z e d (and hence begin to c l i m b ) , but one can say the i n d u s t r y i s not o p e r a t i n g at i t s most t e c h n i c a l l y e f f i c i e n t output given i t s plant scale. But, r e c a l l from Section 4.5.1 that the most t e c h n i c a l l y e f f i c i e n t point does not equal the most e c o n o m i c a l l y e f f i c i e n t p o i n t u n l e s s i t i s o p e r a t i n g at the minimum of the long run cost curve. Thus, economies of s i z e d i c t a t e t h a t i t i s cheaper to operate at l e s s than optimal capacity. T o t a l costs can be broken down i n t o f i x e d and v a r i a b l e costs using information from the O.F.S.A. guidelines. The f i x e d c o s t s , o r o v e r h e a d , a r e d e t e r m i n e d on t h e b a s i s of a r e p r e s e n t a t i v e house model of g i v e n s i z e , t e c h n o l o g y and s t a f f i n g , and hence i t i s l i k e l y the l e a s t robust of the cost f i g u r e s . I t i s determined b e f o r e the p a c k i n g y e a r and i s a p p o r t i o n e d on a per ton b a s i s by u s i n g t o t a l f r u i t crop predictions. 103 Average Packing Cost r 0 01 r # Constant Dollars T 7.5 8.5 (Millions) VOLUME (BOXES) Figure 4.8 Relationship between Average Packing Cost (1981 dollars) and Quantity Sold for B.C. Apples (1976-85) 104 V a r i a b l e costs a t t r i b u t e d to d i f f e r e n t products include labour and materials. Since labour wages are set industry-wide, labour costs would only vary much between houses i f they d i f f e r e d i n labour productivity. Any productivity differences would l i k e l y be due to differences i n c a p i t a l i z a t i o n (namely PG/PS), but t h i s d i s t i n c t i o n i s beyond the scope of t h i s study. Materials costs include packaging, waxes and special spray treatments. The l a t t e r two c o s t s are very s m a l l and standard to most products and houses, and hence are not shown or discussed below. The packaging costs are standard amongst the houses, but vary considerably with product type. The r e l a t i o n between fixed and variable costs per apple box i s i l l u s t r a t e d i n F i g u r e 4.9, using 1986 Red D e l i c i o u s as an example.12 The tray pack^^^ with by far the lar g e s t production, i s almost as cheap to produce as the Econopak, at $3.19 and $2.97 (when overhead costs are excluded), r e s p e c t i v e l y . While labour costs remain f a i r l y standard (for a l l except the quart basket) at between $1.60 and $2.30 per box, i t i s the materials cost which accounts for most of the range i n t o t a l cost. Overhead costs per box w i l l , of course, vary with the s i z e of the crop, and so w i l l r e q u i r e more careful treatment below. W h i l e the pack t y p e s i n f a c t c o n t a i n d i f f e r e n t f r u i t weights, f o r the sake of t h i s a n a l y s i s a l l p a c k s have been s c a l e d t o 42 pounds. 105 0 Major Packing Costs by Pack Type ID J w X 0 ID K hi W W H J 0 0 $11.00 Troy Red Delicious 1986 IV1 Labour i r Handipak Family Econopak Qt.Basket 8/5lb Bags12/3lb Bags PACK TYPE \7I Materials |§3 Overhead Figure 4.9 Major Packing Costs by Pack Type for B.C. Red Delicious (1986) 106 Fixed Costs To analyze overhead costs, the per unit figures from the O.F.S.A. guidelines (available from 1979-1981 and 1984-1986) must be combined with apple production figures i n order to c a l c u l a t e the t o t a l overhead s e t - a s i d e s . These f i g u r e s , converted to c o n s t a n t d o l l a r s , are trended i n F i g u r e 4.10. While not a continuous sample, t h i s graph does show how two crop years, 1980 and 1981, cost about $5m more than the other three years, where overhead was charged approximately $llm. As these were heavy crop years i t appears the overhead costs are not completely fixed (or the heavy crops were very poorly predicted when the overhead cost guidelines were established). 107 Packing Overhead Costs over Time Total Apple Overhead 1979 1960 1961 1984 1 985 YEAR Figure 4.10 Overhead Costs i n 1981 d o l l a r s for O . F . S . A . Packinghouses (Selected years 1979-85) 108 P l o t t i n g the same overhead f i g u r e s a g a i n s t q u a n t i t y i n Figure 4.11 confirms t h i s . While overhead costs were r e l a t i v e l y f i x e d between 5.5 and 7.5 m i l l i o n boxes, the jump to over 9.5 m i l l i o n boxes seems to account for the large (45%) increase i n the overhead f i g u r e s . However, the overhead figures could also have been allowed to b a l l o o n i f the packinghouses suspected increased revenues would permit them to increase costs (in t o t a l but not per unit) i n order to make c a p i t a l investments without alarming the growers. If the grower returns could be kept at the h i s t o r i c a l l e v e l the growers may be l e s s adverse to f i n a n c i n g c a p i t a l i z a t i o n . The r a p i d depreciation methods favoured by the h o u s e s ^ could w e l l accommodate t h i s scenario. To determine i f t h i s was the case, or i f the higher overheads were simply the r e s u l t of poor crop p r e d i c t i o n s , one would need to see a c t u a l cost data or grower rebate data (to see the d i f f e r e n c e between actual costs per packinghouse and O.F.S.A. established costs). Rapid d e p r e c i a t i o n o f c a p i t a l e x p e n d i t u r e s i s i n accordance w i t h t h e c o o p e r a t i v e financing theory of ensuring " t h e u s e r s a r e t h e payers", as per Section 4.1. Packing Overhead Costs by Volume 5-5 6.5 7.5 8.5 9.5 10.5 (Millions) BOXES PACKED Figure 4.11 Relationship between O.F.S.A. Overhead Costs (1981 dollars) and Quantity Sold (Selected years 1979-85) 110 Variable Costs - Labour Wage rates have r i s e n i n the packinghouses at a pace with other i n d u s t r i a l wages i n B.C., as shown i n Figure 4.12. 1 5 The 1985 r a t e of n e a r l y $ l l / h o u r i s considerably higher than the packinghouse wage rate of about $7.35/hour ($CAN) i n Washington State (Schotzko and O'Rourke). However, t h i s may or may not be r e f l e c t e d i n t o t a l c o s t s , since there have been considerable technological (labour-saving) advances, as well. A more informative discussion of labour costs would involve per u n i t c o s t s , as c a l c u l a t e d i n the O.F.S.A. g u i d e l i n e s and i l l u s t r a t e d i n Figure 4.13. This graph shows the trend i n labour cost per 42 l b . box, and also shows how labour costs vary with pack type. In constant d o l l a r s , labour costs have a c t u a l l y f a l l e n for a l l pack types from 1979 to 1985. Most of t h i s f a l l seems to have occurred between 1981 and 1984, where, unfortunately, the data i s lacking. This also coincides with the adoption of PG/PS. But, between 1984 and 1985 labour costs rose i n r e a l terms, suggesting no more t e c h n o l o g i c a l gains were being made (or at l e a s t the gains did not keep up with wage gains), and hence the average cost curve experienced no further s h i f t s . Manufacturing and i n d u s t r i a l average data derived from B r i t i s h Columbia. I n d u s t r i a l Review 1986, and assumes a 40-hour work week. OFSA "heavy" wage rates are from the OFSA D i f f e r e n t i a l Guide, 1986. I l l # 0 0 Nominal BC Wage Comparisons Hourly Rate 1 , r ~ — | j 1 | r 1977 1978 1979 1980 1981 1982 1983 1964 1985 1986 1\ 1 Manufacturing Year \\A Industrial Average OFSA "Heavy Wage Figure 4.12 O.F.S.A. Hourly Nominal Wage Compared with Average Wages i n B.C. Manufacturing and I n d u s t r i a l Sectors (1977-86) 112 J N i X 0 I id a w it 5 J 0 0 r-z < z 0 0 14.00 13.80 $3.60 $3.40 $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 /xv Real Labour Costs Trend by Pack Type Red Delicious Tray Handipak Family Econopak QtBasket 8/5lb Bags12/3lb Bags [~7|1979 ESJ1984 PACK TYPE X3 1980 £• 1981 23 1985 [ffll986 Figure 4.13 Trend i n Real Labour Costs by Pack Type for B.C. Apples (Selected years 1979-86) 113 It i s also i n t e r e s t i n g to compare the labour costs over pack types. The box-type packs, namely tra y , Handipak, Family pack and Econopak, have the lowest labour component. The quart basket, at a labour cost of over $3, requires more than twice the labour input than the standard tray pack. While higher i n actual terms, between 1980 and 1984 the labour input f o r the bagged packs improved i n r e l a t i v e terms by d e c l i n i n g by a l a r g e r proportion (42%) than did the standard tray pack (23%). Variable Costs - Materials Packaging c o s t s (the bulk of m a t e r i a l s costs) are only a v a i l a b l e f o r the crop years 1984 to 1986. They w i l l vary with v a r i e t y to some extent (as w i l l labour c o s t s ) , but pack type causes much more v a r i a t i o n . The constant d o l l a r packaging costs f o r the seven pack types over three years are i l l u s t r a t e d i n Figure 4.14. They vary l i t t l e over time, except f o r the three pound bags which increased i n cost by nearly three times between 1984 and 1985. In a standard box, the Econopak i s the least cost packaging choice at about $1.30. The f i v e pound bags and the tray pack are the next lowest, at about $1.50 and $1.60, r e s p e c t i v e l y . The Family pack and the quart basket are the most expensive packages, at about $3.15 and $3.75, respectively. 114 Materials Costs over Time by Pack Type Red Delicious ID J a V/ X 0 ID It U D. (9 I J 0 Q Tray Handipak Family Econopak Qt.Basket 8/5lb Bagsl 2/3lb Bags PACK TYPE &SJ1964 E 3 1965 E H 1986 Figure 4.14 Trend in Cost of Materials by Pack Type for B.C. Apples (1984-86) 115 4.4.3 Marketing Costs B.C. Tree F r u i t s Ltd. deducts i t s marketing costs, as well as the costs for non-marketing services provided, from the sales r e v e n u e . There appears to be a t r e n d i n t o t a l c o s t , as i l l u s t r a t e d i n Figure 4.15. Marketing cost, i n constant d o l l a r s , rose s t e a d i l y , f o r the most part, from 1976 to 1981 where i t peaked at just under $9m before beginning to s l i d e down to around $4m i n 1985. P a r t of the d e c l i n e i n marketing c o s t s can be accounted f o r by the t r a n s f e r of some of the non-marketing c h a r g e s , CA s t o r a g e and "Production and Assembly', to the packinghouses. These w i l l be discussed in more depth below. Perhaps some of the trend observed above could be explained by the importance of variable costs. To capture these, marketing costs are p l o t t e d against production in Figure 4.16, which shows a highly p o s i t i v e r e l a t i o n s h i p between cost and volume. As with packing c o s t s , t h i s graph alone does not permit an estimate of f i x e d c o s t s , since that would e n t a i l a large e x t r a p o l a t i o n to detect the cost intercept. The average cost relationship as depicted i n Figure 4.17 i s l e s s i n f o r m a t i v e than t h a t f o r packing c o s t s . A f u n c t i o n a l rel a t i o n s h i p i s very d i f f i c u l t to discern from the point scatter. If the function i s n ' t a constant (not a f l a t average cost curve) then the graph could possibly depict more than one curve (or a s h i f t i n costs during the ten year period). 116 to 01-$9,000,000 $8,000,000 -$7,000,000 -$6,000,000 BCTF Expenditures Total Amounts ($1981) $1,000,000 -76-7777-7878-7979-8080-8181-8282-8383-8484-8585-86 Year f\~j Administration ^ Broker k Sales Off. Promotion KA Prod'n k Assembly ES] CA Storage Figure 4.15 Structure of Total Costs f o r B.C. Tree F r u i t s Ltd. by Crop Year (1976-85) 117 ?! Ten Year Real Apple Marketing Costs Ma i Cost versus Quantity "1 1 r 7.5 8.5 (Millions) BOXES Figure 4.16 Relationship between Total Marketing Cost (1981 dollars) and Quantity of B.C. Apples Sold (1976-85) 118 Average Marketing Cast Constant Dollars to 0) r 1.00 0.95 1 0.90 0.85 H 0.75 i 0.70 i 0.65 0.60 5.5 6.5 7.5 8.5 9.5 10.5 (Millions) VOLUME (BOXES) Figure 4.17 Re la t ionsh ip between Average Marketing Cost (1981 d o l l a r s ) and Quantity of B . C . Apples Sold (1976-85) 119 T o t a l marketing cost can be broken down i n t o f i v e major c a t e g o r i e s - s A d m i n i s t r a t i o n ' , v S a l e s O f f i c e s and Brokerage Fees', xPromotion', sProduction and Assembly' and SCA Storage'. The l a t t e r two have been d e v o l v e d to some e x t e n t to the packinghouses i n recent years. These costs, as shown i n constant d o l l a r s i n Figure 4.15, were f a i r l y constant u n t i l the 1984 and 1985 crop years. Administrative costs, which make up the largest p o r t i o n , vary between $2m and $3m. Brokerage fees and s a l e s o f f i c e costs range from $0.75m to $1.2m and promotion ranges from $0.6m to $1.3m. Some of the va r i a t i o n i n these costs can again be explained by t h e i r r e l a t i o n s h i p to quantity. Figures 4.18 to 4.22 p l o t these f i v e marketing c o s t s a g a i n s t q u a n t i t y s o l d . The most obvious f u n c t i o n a l r e l a t i o n s h i p with q u a n t i t y e x i s t s f o r CA storage (Figure 4.22), production and assembly (Figure 4.20), and sales o f f i c e and brokerage fees (Figure 4.21). The former two would be expected to depend f a i r l y heavily on quantity, but the sales o f f i c e and brokerage fee r e l a t i o n s h i p suggests brokerage fees could play a larger part than previously expected (although the cost i s s t i l l quite low). 120 BCTF Expenditures by Volume Promotion $1,300,000 i $1,200,000 -$1,100,000 -$1,000,000 -$900,000 -$800,000 -$700,000 -$600,000 H | \ | 1 , , 1 1 , 1 5.5 6.5 7.5 8.5 9.5 10.5 (Millions) Boxes of Apples Sold O Promotion Figure 4.18 Relationship between Promotion Costs (1981 dollars) and Quantity of B.C. Apples Sold (1976-85) 121 01 $2,900,000 $2,800,000 -$2,700,000 -$2,600,000 -$2,500,000 $2,400,000 $2,000,000 5.5 BCTF Expenditures by Volume Administration 6.5 i 1 1 r 7.5 8.5 9.5 10.5 (Millions) Boxes of Apples Sold D Administration Figure 4.19 Relation between Administration Costs (1981 dollars) and Quantity of B.C. Apples Sold (1976-85) 122 BCTF Expenditures by Volume Production & Assembly 2,200,000 i 1,500,000 i 1 1 1 1 1 1 1 r 6 7 8 9 10 (Millions) Boxes of Apples Sold A Prod'n k Assembly Figure 4.20 Re la t ion between Product ion and Assembly Costs (1981 d o l l a r s ) and Quantity of B . C . Apples Sold (1976-85) 123 Another a r e a where one might expect a hi g h v a r i a b l e component i s promotion, which i s depicted i n Figure 4.18. This also seems quite dependent on volume, although the existence of several o u t l i e r s suggests some other factor i n the re l a t i o n s h i p . Perhaps promotion expenses are l e s s necessary when B.C. has a l a r g e crop at the same time Washington has a small crop (and hence price i s high). F i n a l l y , a d m i n i s t r a t i o n c o s t s appear to be somewhat dependent on quantity (Figure 4.19), although t h i s may be more of a discontinuous r e l a t i o n s h i p (as was packinghouse overhead) than a smooth f u n c t i o n . O v e r a l l , while fixed costs are d e f i n i t e l y a major contributor to B.C. Tree Fruits Ltd. costs, they appear to have c o n s i d e r a b l e f l e x i b i l i t y to respond to changing crop conditions. 124 BCTF Expenditures by Volume Sales Office and Brokerage Fees 5.5 6.5 7.5 8.5 9.5 10.5 (Millions) Boxes of Apples Sold + Broker & Sales Off. Figure 4.21 Relat ion between Sales O f f i c e and Brokerage Fees (1981 d o l l a r s ) and Quantity of B . C . Apples Sold (1976-85) 125 10 01 $2,203,000 $2,100,000 i $2,000,000 i $1,900,000 H $1,800,000 $1,700,000 H $1,600,000 i BCTF Expenditures by Volume CA Storage $1,500,000 i 1 1 1 i i i I r 5.5 6.5 7.5 8.5 9.5 10.5 (Millions) Boxes of Apples Sold X CA Storage Figure 4.22 R e l a t i o n between CA Storage Costs (1981 d o l l a r s ) and Quantity of B . C . Apples Sold (1976-85) 126 4.4.4 Comparison with Washington State In Figures 4.23 and 4.24 the actual B.C. nominal packing and m a r k e t i n g c o s t s (per box) are compared w i t h those i n Washington State over a six year period. The B.C. costs are from the B.C. Tree F r u i t s Ltd. Annual Reports and hence are averaged over a l l v a r i e t i e s and grades of f r u i t . The c o s t s of data processing, inventory insurance and CA storage have been deducted from B.C. Tree F r u i t s Ltd. and added, where app l i c a b l e , to the packinghouse c o s t s . The Washington State costs come from two sources: Trout Cooperative and the W.G.A.C.H. (for the Washington S t a t e a v e r a g e ) . These c o s t s have been separated as much as p o s s i b l e i n t o packing and marketing costs and then adjusted by the exchange rate (which was averaged from harvest to harvest instead of on a calendar year basis). B r i t i s h Columbia packing costs are c o n s i s t e n t l y below the Washington S t a t e i n d u s t r y average and those of a l e a d i n g Washington State firm (Trout), as shown i n Figure 4.23. But the Trout costs a f t e r f i n a n c i n g assessments are removed (not shown since there the data only covers two years) are lower than the B.C. c o s t s , and hence i t i s d i f f i c u l t to say i f B.C. costs are lower than the costs of the largest Washington State houses. $8.00 $7.00 -$6.00 -$5.00 -$4.00 -$3.00 Packing Costs - B.C. versus Washington Canadian Dollars per Box I /I Trout Cooperative 1979 1980 1981 1982 1983 1984 1985 M BC (0FSA) Year £ 3 WAGCH Average Lgure 4.23 Comparison of Nominal Unit Packing Costs between B.C. and Washington State (1979-85) 128 The marketing cost comparisons, i n Figure 4.24, suggest that while the adjusted B.C. Tree F r u i t s Ltd. costs are lower than the Washington State industry average, they are higher than the per box costs incurred by Trout. For instance, i n 1984 B.C. Tree F r u i t s Ltd. costs were about 70 cents (nominal) per box, whereas they were about 82 cents f o r the Washington S t a t e industry as a whole and 54 cents for Trout. The above comparison was covered rather quickly because of the r e l i a b i l i t y of the data used. The adjustment process whereby the costs covered i n the above analyses were forced to be s i m i l a r was hampered by the v a r y i n g degrees of data r e p o r t i n g . In a d d i t i o n , there was no attempt to c o r r e c t f o r d i f f e r e n c e s i n v a r i e t y , s i z e , grade or storage regime, a l l of which could bias the costs (and p r i c e s ) . However, the comparisons do point out several i n t r e s t i n g features of the marketing system. F i r s t , the marketing costs are r e l a t i v e l y small i n both regions, and i t appears that B.C.Tree F r u i t s Ltd. s i z e gives i t only a s l i g h t advantage i n cost, over the Washington average and a disadvantage i n cost when compared with Trout. Thus, i t does not appear that there ex i s t s i g n i f i c a n t cost economies of size i n marketing. Similarly, while the average Washington house i s over f o r t y percent l a r g e r than the B.C. average house, t h i s does not seem to have r e s u l t e d i n a cost advantage for Washington State. $0.90 Marketing Costs -B.C. versus Washington Canadian Dollars per Box 10.80 -$0.70 -$0.60 $0.50 -$0.40 -$0.30 1979 1980 1981 1982 1983 1984 1985 1 /I Trout Cooperative Year 3 WAGCH Average 3 BCF Figure 4.24 Comparison of Nominal Unit Marketing Costs between B.C. and Washington State (1979-85) 130 4.5 GROWER RETURNS Since grower returns are r e s i d u a l i n nature, that i s they are s o l e l y a function of the packing/marketing revenue and costs, the t h e o r e t i c a l discussions on the various aspects of these need not be repeated here. Hence, any t h e o r e t i c a l c o n s i d e r a t i o n of grower returns would not be very illuminating. This section w i l l focus instead on a b r i e f description of grower returns, how they vary, and how they compare with Washington State. 4.5.1 Results Total grower returns ( i n constant dollars) i s graphed over time i n Figure 4.25. Apple returns ranged from a high of over $41m down to around $12m i n 1984. This v a r i a t i o n i s not e a s i l y explained by quantity as i l l u s t r a t e d i n Figure 4.26, where there appears to be no functional r e l a t i o n s h i p between grower returns and production. This i s despite the strong relationships between revenues and quantity and between costs and quantity, but i t i s not s u r p r i s i n g given the r e s i d u a l nature of the grower returns payment. 131 Ten Year Apple Grower Returns Totd 42 -i 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 CROP YEAR Figure 4.25 B . C . Grower Returns i n 1981 d o l l a r s by Year (1976-85) C So #1 Ten Year Apple Grower Returns Total Return versus Quantity BOXES Figure 4.26 Relation between Grower Returns (1981 dollars) and Quantity of B.C. Apples Sold (1976-85) 133 Grower returns not only d i f f e r on a t o t a l basis, but also on a per u n i t b a s i s . As do p r i c e s , they can vary with v a r i e t y , grade, size and storage type. Variation with va r i e t y of apple can be seen i n Figure 4.27 for 1984 Red and Golden Delicious, XFCY CA f r u i t . In 1984, Red D e l i c i o u s r e t u r n e d more than Golden-considerably more i n the large sizes (up to $15/box more) but as l i t t l e as $l/box more i n the small s i z e s . In 1985 (not shown) Golden Delicious returned more than Red i n most size categories, although the d i f f e r e n c e was s l i g h t . In both years the s i z e of f r u i t was important, as already discussed i n Section 3.2.2 on pri c e . 134 Figure 4.27 Ef fec t of V a r i e t y and Size on B . C . Grower Returns (per u n i t bas is ) i n 1984 135 Grade i s also an important determinant of grower returns, as shown i n Figure 4.28. In 1984 Red Delicious, the XFCY premium ranged from $3 to $9/box, with a negative r e t u r n i n the small s i z e s . Golden D e l i c i o u s i n the. same year e x h i b i t e d a curious r e v e r s a l i n the large s i z e s , where FCY returned more than XFCY, but from s i z e 72 and smaller XFCY again commanded a premium of between $1 and $5/box. In 1985 (not shown) Red Delicious the XFCY premium ranged from $0.50 to $5/box, while the Golden premium ranged from $0.50 to $4/box. F i n a l l y , grower returns can vary somewhat with the storage regime, and hence the keeping a b i l i t y of the f r u i t can a f f e c t grower r e t u r n s . This i s depicted i n Figure 4.29 f o r 1984 Red D e l i c i o u s XFCY where, except for the two smallest s i z e d f r u i t c a t e g o r i e s , the CA f r u i t returned between zero and $5.50/box more. (a) Red Delicious 136 $19 (*3) H 1 1 1 1 1 1 1 — ; — i 1 1 1 198 175 163 150 138 125 113 100 88 80 72 6+ 56 SIZE (b) Golden Delicious *io ) I i i i i i i i i i 163 150 138 125 113 100 88 80 72 64- 56 SIZE O XFCY + FCY Figure 4.28 E f f e c t of Grade and Size on B.C. Grower Returns (per unit basis) i n 1984 CA F r u i t Figure 4.29 E f f e c t of Storage Regime and Size on B . C . Grower Returns (per uni t bas i s ) for 1984 Red D e l i c i o u s XFCY 138 4.5.2 Comparison with Washington State The above discussion described grower returns disaggregated within each v a r i e t y to the grade, size and storage l e v e l s . Since the Washington State data only reports one such data point per year, the B.C. data was s i m i l a r l y aggregated over a l l apple types. These values are converted to nominal Canadian currency and reported i n Figure 4.30 over nine years. The Washington data i s from two sources - the W.G.A.C.H. industry average and the average from one of t h e i r leading firms, Trout, for s i x of the nine years. As F i g u r e 4.30 i l l u s t r a t e s , the B.C. grower r e c e i v e d approximately the same per unit return as the Washington industry average grower through 1979. But from 1980 the average Washington grower earned s u b s t a n t i a l l y more (on average about double) than the B.C. grower. The returns of Trout growers were w e l l above either the B.C. or the Washington State average. Considering just the l a s t two years reported, the B.C. grower earned under $3/box, the average Washington grower earned about $CAN 5/box and the average Trout grower earned over $CAN 9/box. This i s a most s i g n i f i c a n t f i n d i n g , and i t i s u n l i k e l y that data problems could account for a l l of t h i s difference. The previous cost comparison suggested the discrepancy between the Washington average and B.C. average grower returns cannot be explained by higher costs i n B.C.'s marketing system; thus revenues must be s i g n i f i c a n t l y d i f f e r e n t i n the two regions. The following chapter w i l l attempt to explain this difference in revenues. Grower Returns per Box 139 $10.00 c 0 0 c 0 0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1 A Trout Cooperative Crop Year [3 W.GAC.H. B.C.T.FUtd Figure 4.30 Comparison of Nominal Unit Grower Returns between B.C., Average Washington State and Trout Cooperative (1976-84) 140 4.6 SUMMARY This chapter has discussed several different measures of industry performance, focussing on efficiency measures. In margin terms, packing margins and marketing margins have varied litt l e compared with the variation in grower returns. But these returns do vary significantly with revenue, suggesting i t is more important than costs in determining grower returns. The components of the margins were then discussed individually, beginning with total sales revenue. The theoretical simultaneity problem of revenue maximization in the apple industry is caused by its oligopolistic nature and the dynamic optimization required with such a long storage product. Actual B.C. revenues have fallen from a pre-1982 average of about $75m to about $55m from 1982 to 1985 (in 1981 dollars). Given the minimal effect B.C. has on prices, it is not surprising to find that real revenues also increased with production. Two aspects of cost theory are most relevant to the B.C. industry - the determination of the least cost combination of resources and of the least cost plant size. The packing costs curves were fairly well behaved and suggested the industry can s t i l l benefit from increased plant scale. The packing costs were also analyzed as fixed and variable costs. The overhead costs varied from $llm to $16m, and since this variation was due in part to quantity, it is uncertain as to the size of the fixed component of overhead. Variable costs, both labour and materials, vary with pack type, although the labour component has actually fallen over time, reflecting technology changes. The marketing 141 costs did not conform to the usual average cost curve, suggesting the costs can vary somewhat with quantity. The comparisons with Washington State suggest that both the B.C. packing and marketing costs are lower than the Washington State industry average but are u s u a l l y higher than the leading Washington State firm costs (after conversion to Canadian d o l l a r s ) . F i n a l l y , grower r e t u r n s have undergone s i g n i f i c a n t fluctuations during the period 1976 to 1985 - from a high of $41m i n 1978 down to $12m i n 1984. The return per box versus quantity r e l a t i o n s h i p does not hold well, possibly because grower returns are a r e s i d u a l (and hence incorporates more residual v a r i a t i o n ) . Instead, the v a r i a t i o n that occurs i s p a r t l y due to v a r i e t y , q u a l i t y , s i z e and storage regime. Comparisons with Washington State show the average B.C. grower received about the same as the average Washington State grower u n t i l 1980, when B.C. returns f e l l . This suggests Washington apples received a b e t t e r p r i c e than B.C. apples, and thi s w i l l be examined as far as possible i n the next chapter. The average ret u r n from one of the lea d i n g Washington State houses was considerably b e t t e r than both the B.C. and Washington State average. This analysis looked at each measure i n i s o l a t i o n . In the next chapter the e f f e c t s of di f f e r e n t product mixes on revenues, c o s t s and grower r e t u r n s w i l l be analyzed i n combination, assuming no change i n the per unit prices and costs. CHAPTER 5 SENSITIVITY ANALYSES OF B.C. PERFORMANCE 142 The p r e v i o u s chapter suggested t h a t , on average, B.C. packing and marketing costs do not exp l a i n the d i f f e r e n c e i n grower returns between B.C. and Washington State. Grower returns averaged roughly $3/box i n B.C. and $5/box i n Washington from 1980 to 1984. Since grower returns are a residual, adding packing and marketing costs w i l l give the average s e l l i n g price obtained by the marketers. When roughly $5/box of packing costs and $l/box of s e l l i n g c o sts (from Chapter 4) are added to B.C.'s grower r e t u r n s , the average p r i c e becomes about $9/box. This i s i n contrast to $6/box of packing costs and $l/box of s e l l i n g costs i n Washington, which, when added to the i r grower returns, suggest an average p r i c e of $12/box. Thus, i t appears that the B.C. marketing system costs do not cause lower grower re t u r n s , but instead a c t u a l l y improve them. The lower grower returns i n B.C. seem to be p r i m a r i l y due to lower prices obtained and not due to higher costs. There are two possible reasons for t h i s reduced p r i c e for B.C. apples. F i r s t , i t i s possible that the average B.C. apple i s considered i n f e r i o r to the average Washington apple by those who buy apples. Second, i t i s possible that the B.C. marketers are less successful at obtaining the best possible price for a given product. The l a t t e r p o s s i b i l i t y i s empirically d i f f i c u l t to test and beyond the scope of this study, but the former w i l l be tested using various s e n s i t i v i t y analyses below. The f i r s t s e n s i t i v i t y t e s t w i l l o v e r l a y the Washington 143 State product mix!6 on to the B.C. system, while retaining B.C.'s t o t a l q u a n t i t y 1 7 , per unit prices and per unit costs for the two years i n question. This w i l l i l l u s t r a t e the t o t a l impact of the product mix on grower returns. Once t h i s i s known, i t would be ide a l i f i t were possible to overlay each of the Washington State p roduct mix parameters i n t u r n i n an attempt to show t h e i r r e l a t i v e i m p o r t a n c e . However, the aggregate form of the Washington State data precludes such analyses. Since t h i s s i n g l e f a c t o r overlay cannot be performed i n t h i s study, Sections 5.2 to 5.4 w i l l attempt to approximate the analysis by conducting i n d i v i d u a l s e n s i t i v i t y t e s t s only on the B.C. product mix. This w i l l enable an i n d i r e c t estimate of the r e l a t i v e importance of the parameters a f f e c t i n g Washington State's product mix. This w i l l also suggest which fa c t o r would have the greatest impact on B.C.'s grower returns. The r e s u l t s are presented i n graphic form, but i n order to reduce the complexity and the scale problems the actual revenues ( c o s t s , r e t u r n s ) and the new s e n s i t i v i t y revenues ( c o s t s , returns) are not reported. Instead, the differences between the scenarios and actual case are shown. A l l the analyses assume that each f r u i t type w i l l only f e t c h i t s o r i g i n a l B.C. per u n i t p r i c e , and the per u n i t B.C. costs w i l l also be held constant. These may not be v a l i d i f the 16 Product mix r e f e r s to the d i s t r i b u t i o n of apples w i t h i n t h e v a r i o u s s i z e , g r ade and s t o r a g e categories while assuming constant variety and pack type t o t a l s . 17 There may,in fact, be a reduction i n quantity when quality i s improved. 144 B.C. quantity within each category can affect i t s own price ( i e . i f B.C. i s not a price taker) or i f the per unit costs determined i n the O.F.S.A. guid e l i n e s are dependent on volume within each category. The discussions i n the previous two chapters suggest otherwise, and so the assumptions of constant price and costs are considered v a l i d . In fact, the revenue results may be understated i f i t i s p o s s i b l e that improved " r e p u t a t i o n " due to q u a l i t y improvements could actually increase the per unit prices received by B.C. apples. 5.1 WASHINGTON STATE PRODUCT MIX S i m u l a t i n g the Washington St a t e product mix i n v o l v e s imposing Washington's q u a l i t y , s i z e and storage regimes i n one step. Thus, pinpointing the most important factor i n the res u l t s i s d i f f i c u l t . 5.1.1 Method T h i s s c e n a r i o was c o n s t r u c t e d by t a l l y i n g data from W.G.A.C.H. summary reports which were then used to determine the pro p o r t i o n of sales a t t r i b u t e d to each product category. These p r o p o r t i o n s were then imposed on the B.C. crop, keeping a c o n s t a n t t o t a l Red and Golden D e l i c i o u s volume. T h i s was c a l c u l a t e d f o r both 1984 and 1985 crops. The actual B.C. costs and p r i c e s were then a p p l i e d to the new volumes w i t h i n each category, and the t o t a l revenues, costs and grower returns were summed. The sums f o r the a c t u a l and the s c e n a r i o were then compared, and the differences were plotted. There are two things t o note about t h i s a n a l y s i s . F i r s t , the B.C. data had to be r e c l a s s i f i e d t o conform with the sizes from the Washington State data. Second, the grades i n the two 145 producing areas may not be perfectly interchangeable, e s p e c i a l l y i f they contain d i f f e r e n t proportions of sub-grades. B e f o r e p r e s e n t i n g the r e s u l t s , i t w i l l be u s e f u l to delineate the changes i n product mix composition imposed upon the B.C. crop. The 1984 and 1985 crop comparisons are depicted i n Table 5.1 and 5.2, respectively. Table 5.1 Washington and B.C. Packout Comparisons for Red and Golden Delicious, 1984. 1984 Red Delicious Golden Delicious B.C WA. B.C. WA. Size: Large 9% 28% 21% 28% Medium 56% 56% 60% 62% Small 35% 16% 19% 10% Grade: XFCY 35% 65% 45% 83% FCY 65% 35% 55% 17% Storage: CA 45% 48% 48% 53% Regular 55% 52% 52% 47% For 1984 Red Del i c i o u s , Washington State produced a larger proportion of large and fewer small f r u i t than B.C., as shown i n Table 5.1. Twenty-eight percent of the Washington crop was large, versus 9% i n B.C., and 16% were small, versus 35% i n B.C. Grade was also s u b s t a n t i a l l y better i n Washington, where 65% o f the crop was XFCY versus 35% i n B.C- B o t h regions stored more f r u i t i n r e g u l a r than C A s t o r a g e , a t ^5% i n B . C . a n d 5 2 % i n Washington State. For 1984 Golden D e l i c i o u s , Washington again outperformed B.C. i n s i z e . The Washington State packout was 28% l a r g e , 62% 146 medium and 10% small versus the B.C. packout of 21% large, 60% medium and 19% small f r u i t . In terms of grade, B.C. produced only 45% XFCY versus 83% i n Washington State. Again, there was only a small difference i n storage type i n B.C. and Washington, with 52% of B.C. Golden D e l i c i o u s i n r e g u l a r s t o r a g e versus 47% i n Washington State. Table 5.2 Washington and B.C. Packout Comparisons for Red and Golden Delicious, 1985. 1985 Red Delicious Golden Delicious B.C. WA. B.C. WA. Size: Large Medium Small Grade: XFCY FCY Storage: CA Regular 20% 57% 23% 58% 42% 48% 52% 29% 47% 24% 75% 25% 59% 41% 21% 57% 22% 52% 48% 53% 47% 23% 54% 23% 93% 7% 57% 43% In 1985, there was a l e s s pronounced d i f f e r e n c e i n Red Delicious s i z e between the two areas. In Washington the packout was 29% large, 47% medium and 24% small while i n B.C. the packout was 20% large, 57% medium and 23% small. Both regions produced a higher q u a l i t y of f r u i t than in the previous year, with 75% XFCY i n Washington versus 58% i n B.C. I n terms of storage decisions, B.C. placed 52% in regular storage versus 4 1 % i n Washington State ( r e p r e s e n t i n g a la r g e s h i f t toward CA storage i n Washington State). 147 Among 1985 Golden Delicious, B.C. again produced less large f r u i t , but d i d manage to c l o s e the gap with Washington State. B.C. produced 21% large, 57% medium and 22% small versus 23%, 54% and 23% i n Washington State. Again, B.C. improved i t s grade over the previous year, but i t s t i l l lagged f a r behind Washington State. They produced 52% XFCY versus 93% i n Washington State. And CA storage was a l s o increased i n both areas, with 53% of the Goldens CA stored i n B.C. versus 57% in Washington State. 5.1.2 Results The effects on grower returns of imposing the 1984 and 1985 Washington State product mix are i l l u s t r a t e d i n Figure 5.1. The e f f e c t s were very pronounced i n 1984, where t o t a l grower returns increased by c l o s e to $4m, but less s i g n i f i c a n t i n 1985, where t o t a l grower returns increased by $lm. The 1984 Red D e l i c i o u s grower r e t u r n s i n c r e a s e d by $3.4m, or about $2.50/box (a 77% i n c r e a s e ) . This was p r i m a r i l y due to increased revenues, since cost changes were r e l a t i v e l y minor. The 1984 Golden D e l i c i o u s grower returns were also increased, t h i s time by about $lm, or about $1.10/box (a 28% i n c r e a s e ) . T h i s was due to both an increase i n revenues and a decrease i n costs. The 1985 r e s u l t s were less s i g n i f i c a n t . The Red Delicious grower returns improved by $0.5m, or $0.41/box (a 6% increase). Once again, a d d i t i o n a l costs incurred were minor (about $0.1m). The Golden Delicious grower returns rose by $0.45m, or $1.13/box (a 17% increase). 148 0 Z kJ &r\ hi 0 IL C I L O 6=. J o 0 3.5 7 3 -2.5 -/ 1.5 1 -v 0.5 0 - 0 . 5 / A Washington Product Mix Sensitivity Test Difference in Total 7 / 1984 RED 1984 GOLD 1984 TOTAL T 1985 RED 1985 GOLD 1985 TOTAL APPLE CROP |~71 REVENUE CHANGE £\3 COST CHANGE Wk GROWER RET. CHANGE Figure 5.1 Change in Revenue, Packing Costs, and Grower Returns for B.C. assuming Washington's Product Mix (1984-85) 149 In comparing the r e s u l t s over the two crop years, the 1985 Red D e l i c i o u s were much l e s s improved by u s i n g the Washington State product mix than i n 1984, at $0.5m versus $3.4m i n grower r e t u r n s . T h i s might imply d i m i n i s h i n g r e t u r n s to improvements i n s i z e and grade. The 1985 crop had l e s s of a disadvantage i n s i z e when compared to Washington State than i t had i n 1984. In addition, the B.C. grade improved by more between 19 84 and 19 85 than the Washington crop did (over 2 0% improvement i n B.C. versus 10% i n Washington State). At the same time, the gap between CA storage u t i l i z a t i o n increased (from 3% to 11%), which might suggest that increasing CA alone would not outweigh the d e f i c i e n c i e s i n grade and s i z e i n B.C. Amongst the Golden D e l i c i o u s the improvement i n performance varied l i t t l e between crop years. This scenario t e s t suggests that roughly $l/box!8 of the $3/box s h o r t f a l l i n B.C.'s average p r i c e (as described i n the i n t r o d u c t i o n to t h i s chapter) can be explained by a product mix i n f e r i o r to Washington's. If B.C. growers had attained the same product mix, the s h o r t f a l l i n t h e i r grower returns could have been halved (since costs are roughly $l/box lower i n B.C.). Thus, a s i g n i f i c a n t problem i n the B.C. industry i s the average q u a l i t y of i t s apples. This i s i n marked contrast to boasts of higher q u a l i t y apples grown i n B.C. While some growers may be able to back up t h i s claim, i t seems possible that the average grower's 18 The $l/box figure i s a rough average of the 1984 and 1985 Red and Golden D e l i c i o u s increases i n grower returns calculated above. 150 a b i l i t y t o produce a c o n s i s t e n t l y h i g h q u a l i t y apple has contributed to much of his/her reduced returns. 5.2 INCREASED CONTROLLED ATMOSPHERE STORAGE PRODUCT MIX This s e n s i t i v i t y t e s t i s the f i r s t i n a series of s i n g l e f a c t o r t e s t s conducted to estimate the importance of the various parameters of Washington's product mix. As e x p l a i n e d above, Washington's data was aggregated such that the factors could not be separated for i n d i v i d u a l s e n s i t i v i t y analyses. Therefore, the focus s h i f t s to examining the r e l a t i v e importance of these factors on the average B.C. grower return. The f i r s t of these s i n g l e f a c t o r analyses w i l l focus on i n c r e a s i n g the proportion of both the Red and Golden D e l i c i o u s f r u i t i n Controlled Atmosphere storage by ten percent. This w i l l be conducted over two years, 1984 and 1985. Increasing the CA proportion w i l l r e f l e c t a change in the timing of sales, since CA f r u i t i s sold up u n t i l May or June (following the f a l l harvest), when prices are generally higher. Thus, one might expect a higher p r o p o r t i o n of CA f r u i t would r e s u l t i n a higher average p r i c e and, possibly, a higher average grower return. 5.2.1 Method This s e n s i t i v i t y t e s t i s accomplished by i n c r e a s i n g the volume of apples ( f r e s h sales) stored i n c o n t r o l l e d atmosphere storage (CA). Within each v a r i e t y a n d grade category the t o t a l f r u i t i n CA was increased by ten percent a n d the t o t a l f r u i t i n regular storage was decreased b y t h e same amoun t . Thus t h e t o t a l f r u i t i n each v a r i e t y a n d g r a d e i s c o n s t a n t . The c o s t s assigned to CA storage are simply the per u n i t costs assigned i n the appl i c a b l e year, and do not include a n y c a p i t a l costs associated 151 w i t h b u i l d i n g e x t r a CA s t o r a g e (thus assuming excess CA capacity). Since the medium sized f r u i t make up the largest proportion i n a l l cases, t h i s i s the category which i s most changed i n the new s c e n a r i o . Among the 1984 Red D e l i c i o u s XFCY, the a c t u a l product mix already contained more CA than regular storage f r u i t , and so the new scenario exaggerated this tendency. Within the FCY grade f r u i t the opposite was the case - the e x i s t i n g d i s p a r i t y between CA and regular storage f r u i t was reduced. The 1984 Golden Delicious were affected i n a similar pattern. In 1985 the XFCY Red Delicious o r i g i n a l l y had more regular than CA storage f r u i t , and the new product mix reversed t h i s . The FCY grade was l i t t l e affected. The o r i g i n a l 1985 Golden XFCY crop was CA s t o r e d to a much l a r g e r p r o p o r t i o n than i n 1984. The scenario exaggerated t h i s separation among XFCY and reduced the separation i n FCY. 5.2.2 Results The e f f e c t s of the scenario are summarized i n Figure 5.2. In 1984 the t o t a l e f f e c t was about a $40,000 d e c l i n e (about $0.02/box or 0.5%) i n grower r e t u r n s , caused by a g r e a t e r increase i n costs than i n revenues when CA f r u i t was increased. In 1985, the grower returns increased by about $100,000 (about $0.06/box or c l o s e to 1%), since increased revenues exceeded increased costs. 152 CA Storage Sensitivity Test Difference in Total u 0 z -« O 3 J 0 a 200 180 -160 -140 120 -100 -80 .60 -40 -20 0 -20 --40 --60 i 1 1 1 1 1 r 1984 RED 1984 GOLD 1984 TOTAL 1985 RED 1985 GOLD 1985 TOTAL APPLE CROP G3 REVENUE CHANGE M COST CHANGE W GROWER RET. CHANGE Figure 5.2 Change in Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% More CA Storage (1984-85) 153 When considered by v a r i e t y , the e f f e c t s are s l i g h t l y more i l l u m i n a t i n g . For 1984 Red D e l i c i o u s , grower returns rose by only about $10,000 f o r l e s s than 0.25% d i f f e r e n c e . Golden D e l i c i o u s l o s t revenues and i n c r e a s e d c o s t s f o r a net d e c l i n e i n grower r e t u r n o f c l o s e t o $40,000 ( j u s t o v e r 2%). F o r 1985 Red D e l i c i o u s , revenues, c o s t s and grower r e t u r n s a l l i n c r e a s e d by j u s t over 0.5% f o r a n e a r l y $60,000 i n c r e a s e i n grower r e t u r n s . The Golden D e l i c i o u s , while achieving a smaller absolute increase i n grower returns of about $40,000, underwent a r e l a t i v e increase of 1.5%. T h e r e f o r e , the i n c r e a s e d CA s c e n a r i o had n e a r l y o p p o s i t e e f f e c t s i n the two crop years. B l i n d l y i n c r e a s i n g CA (regardless of grade) reduced grower r e t u r n s i n 1984 by l e s s than 0.5% but b e n e f i t e d growers i n 1985 by nearly $100,000 (or about 1%). This d i v e r g e n c e p o i n t s out the need to d i f f e r e n t i a t e between f r u i t grades before committing the f r u i t to storage. I t a l s o p o i n t s out the v a r i a b i l i t y from year t o y e a r , and thus the importance of e a r l y p r i c e s i g n a l s . Any e f f o r t s to determine q u a n t i t i e s and grades of f r u i t , p a r t i c u l a r l y of Washington State f r u i t , and the subsequent e f f e c t s on p r i c e would be most u s e f u l i n choosing the s t o r a g e d i s t r i b u t i o n . F i n a l l y , the o v e r a l l b e n e f i t was s t i l l q u i t e s m a l l , at most $0.09/box. Thus, i t appears i n c r e a s i n g the p r o p o r t i o n of f r u i t i n CA by 10% would have done l i t t l e to improve grower returns over the two crop years t e s t e d . However, the m o d e l d i d n o t permit per u n i t p r i c e s t o change and s o i t w o u l d n o t r e f l e c t a n y i n c r e a s e i n r e g u l a r stored f r u i t p r i c e which might occur i f i t s p r o p o r t i o n i s d e c r e a s e d . In a d d i t i o n , the r e s u l t s may r e f l e c t a lower than 154 average p r i c e d i f f e r e n t i a l between CA and regular storage f r u i t . Nonetheless, the a n a l y s i s does imply that there i s some r i s k involved i n delaying sales by increasing CA storage. 5.3 INCREASED SIZE PRODUCT MIX The purpose of t h i s scenario i s to approximate the e f f e c t s on grower returns of increasing the size of f r u i t i n the product mix. Of cour s e , t h i s a n a l y s i s does not c o n s i d e r any e x t r a c u l t u r a l costs incurred i n achieving this increased s i z e . 5.3.1 Method In order to increase the size of f r u i t i n the product mix, the f r u i t (within each variety, grade and storage type) was f i r s t d i v i d e d i n t o three s i z e c a t e g o r i e s , small, medium and l a r g e . Then, the small category was reduced by ten percent, and t h i s amount was added to the medium and large categories. The added f r u i t was d i s t r i b u t e d p r o p o r t i o n a l l y amongst the various s i z e categories within the medium and large designations. The r e s u l t s are classed not only by grade, as per the CA storage r e s u l t s , but are a l s o d i f f e r e n t i a t e d by storage type ( s i n c e the storage results are no longer as transparent). 5.3.2 Results The e f f e c t s of decreasing the prop o r t i o n of small s i z e d f r u i t are i l l u s t r a t e d i n Figure 5-3. O n e o f the most notable r e s u l t s i s the near i d e n t i c a l response i n the two years tested. In both 1984 and 1985, the t o t a l c r o p g r o w e r returns increased by nearly $600,000 (close to $0.35/box), and r e v e n u e s a n d costs w e r e v i r t u a l l y i d e n t i c a l . I n r e l a t i v e terms, t h o u g h , t h e 1984 c r o p scenario increased grower returns by m o r e , at nearly 10%, than the 1985 scenario increase of only 5%. 155 111 0 Z 1L C t o - Cl J 0 0 Size Sensitivity Test Difference in Total 600 500 -400 -300 -200 -100 - / / f L -100 \A T 1984 RED 1984 GOLD 1984 TOTAL 1 . 2 . 1985 RED 1985 GOLD 1985 TOTAL APPLE CROP 1~71 REVENUE CHANGE M COST CHANGE W GROWER RET. CHANGE Figure 5.3 Change in Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% Decrease in Small Sized Apples (1984-85) 156 When considered by v a r i e t y , the absolute r e s u l t s are once aga i n very comparable. In 1984 and 1985, the Red D e l i c i o u s revenues i n c r e a s e d and the costs decreased such that grower r e t u r n s rose by over $500,000, or c l o s e to $0.40/box (which t r a n s l a t e s to a 12% and a 6% i n c r e a s e i n 1984 and 1985, re s p e c t i v e l y ) . The Golden Delicious underwent v i r t u a l l y no change i n c o s t s i n e i t h e r year, and the grower returns increased by about $70,000 i n 1984 (about $0.15/box or n e a r l y 10%) and by about $100,000 i n 1985 (over $0.25/box or 4%). Thus, a 10% improvement i n size resulted i n grower returns increasing by a 9.5% i n 1984 and b y 5% i n 1985. In fact, growers of Red Delicious would have f e l t t h e i r average return increase by n e a r l y 12% i n 1984. Size, therefore, i s a much more important determinant of product price than sales timing, c e t e r i s parabis. This should not be too s u r p r i s i n g when one r e c a l l s the p r i c e d i s c u s s i o n of Section 3.2.2, where the v a r i a b i l i t y i n p r i c e was shown to be much greater over s i z e than over storage type. In addition, increased s i z e decreases packing costs while increased CA storage increases costs, so the price or revenue e f f e c t would be magnified. 5.4 QUALITY The f i n a l s e n s i t i v i t y a n a l y s i s c o n d u c t e d i n v o l v e d i n c r e a s i n g the p r o p o r t i o n o f X F C Y g r a d e f r u i t b y 10%, at t h e expense of the FCY grade f r u i t . G r a d e i s t h e p a r a m e t e r w h i c h i s most d i s p a r a t e between W a s h i n g t o n a n d B . C . , a n d i t i s a l s o a factor which i s often c i t e d a s p r o b l e m a t i c f o r B.C. g r o w e r s . T h i s a n a l y s i s , by necessity, c a n o n l y t e s t t h e average q u a l i t y l e v e l 157 and not the consistency within that l e v e l which accounts for most of B.C.'s qua l i t y complaints (as discussed i n Section 2.3.1). 5.4.1 Method The methodology of t h i s t e s t i s much l i k e the previous s i n g l e f a c t o r t e s t s . The f r u i t within each v a r i e t y and storage regime are reproportioned such that the XFCY proportion increases by ten percent. The new product mix i s then used to determine the new t o t a l revenues, costs and grower returns. 5.4.2 Results The r e s u l t s of increasing the XFCY grade by 10% are shown i n Figure 5.4. They were again quite similar, i n absolute terms, f o r the two years t e s t e d , since grower returns rose by about $200,000 each year. When considered on a per unit basis, the 1984 and 1985 c r o p grower r e t u r n s i n c r e a s e d by $0.12/box and $0.11/box, r e s p e c t i v e l y . But i n r e l a t i v e terms the 1984 grower returns increased by close to 3.5% versus only just over 1.5% i n 1985. In 1984, the Red Delicious were most a f f e c t e d by improved q u a l i t y , s i n c e grower returns rose by about $170,000 (about $0.13/box or nearly 4%) while Golden Delicious rose by less than $50,000 (about $0.09/box or 2.25%). In 1985, the a b s o l u t e i n c r e a s e i n Red D e l i c i o u s r e t u r n s was over $130,000 versus $50,000 for Golden Delicious, but on a per box basis the returns for Golden Delicious rose by more, at $0.12/box versus $0.10/box. Th i s was f u r t h e r evidenced by a s l i g h t advantage f o r Golden D e l i c i o u s grower returns i n r e l a t i v e terms, although n e i t h e r v a r i e t y had improved r e t u r n s of more than 2%. Costs were v i r t u a l l y unchanged throughout. 158 Quality Sensitivity Test Difference in Total U z U/-\ r • -« r i 0 0 220 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 7 1 . 2 . 1 . 1 1984 RED 1984 GOLD 1984 TOTAL 1985 RED 1985 GOLD 1985 TOTAL APPLE CROP |~7) REVENUE CHANGE M COST CHANGE GROWER RET. CHANGE Figure 5.4 Change in Revenue, Packing Costs, and Grower Returns for B.C. assuming 10% Increase i n XFCY Grade Apples (1984-85) 159 Thus, the l a r g e s t improvement i n grower returns due to grade was s t i l l less than 4%. Grade, i t seems, i s not necessarily the important determinant of price that i t has been purported to be. Perhaps t h i s helps to explain the i n e r t i a faced by extension workers i n t h e i r attempts to encourage improved q u a l i t y . Of course, i t may also be a function of the crop years tested i f the p r i c e range between XFCY and FCY was abnormally small. It could also be a function of B.C. Tree Fruits Ltd.'s supposed i n a b i l i t y to o b t a i n high p r i c e s . That i s , i f B.C. Tree F r u i t s Ltd.'s p r i c i n g success with higher quality f r u i t i s less than with lower q u a l i t y f r u i t (perhaps a f u n c t i o n of r e p u t a t i o n or of market segmentation), t h i s small improvement i n grower returns with increased XFCY grade might be explained. To conclude these s i n g l e f a c t o r a n a l y s e s , F i g u r e 5.5 depicts the e f f e c t s of each of the scenarios on grower returns. A ten percent change i n storage has the l e a s t e f f e c t over both v a r i e t i e s and years, with a negative e f f e c t i n 1984. The s i z e improvement scenario r e s u l t e d i n the l a r g e s t e f f e c t over both v a r i e t i e s and years, with a t o t a l e f f e c t of nearly $600,000 or a 12% improvement i n 1984. The q u a l i t y e f f e c t was the most s u r p r i s i n g , since i t s e f f e c t on grower returns was less than a t h i r d the e f f e c t of size for the t o t a l crop i n both years. 160 Sensitivity Test Comparisons Percent Difference in Grower Returns id 0 z Id 111 II L 0 z 111 0 K 111 a 1984 RED 1984 G0LD984 AVERAGE 1985 RED 1985 GOLD 985 AVERAGE f~7l STORAGE APPLE CROP S3 SIZE g$ QUALITY Figure 5.5 Percentage Change i n Grower Returns for B . C for D i f f e r e n t S e n s i t i v i t y Tests (1984-85) 161 5 . 5 SUMMARY This chapter performed s e n s i t i v i t y tests on the revenues, c o s t s and grower r e t u r n s of the B.C. apple i n d u s t r y . The Washington State product mix was f i r s t assumed. Then the B.C. product mix was v a r i e d to r e f l e c t a ten percent increase i n CA s t o r a g e , i n f r u i t s i z e , and i n q u a l i t y . The r e s u l t s are presented i n terms of percentage change i n grower returns i n Table 5.3. Table 5.3 Summary of Percentage Change i n Grower Returns under Different S e n s i t i v i t y Analyses Washington 10% 10% 10% Product More Less More Mix CA Smalls XFCY 1984 Total +62.7% -0.6% +9.4% +3.4% Red +77.1% +0.2% +11.8% +3.9% Gold +27.7% -2.3% +3.8% +2.2% 1985 Total +8.7% +0.8% +5.2% +1.6% Red +6.1% +0.6% +5.6% +1.5% Gold +17.3% +1.5% +4.0% +1.8% A most dramatic r e s u l t was obtained from the Washington State product mix scenario, where the 1984 grower returns were increased by more than 77% for Red Delicious and 28% for Golden D e l i c i o u s . Not a l l of these gains were repeated i n 1985, since Red Delicious grower returns only rose by 6% and Golden Delicious by 17%. Thus, even i f B.C. f r u i t cannot command the same prices as Washington State f r u i t , a dramatic improvement i n q u a l i t y , 162 grade and s i z e p r o p o r t i o n s would r e s u l t i n a v e r y l a r g e improvement i n grower returns. With a 10% increase i n CA f r u i t , grower returns would not have b e n e f i t e d s i g n i f i c a n t l y , and i n fact would have f a l l e n i n 1984 by about 0.5%. In 1985 the grower r e t u r n s would have increased by $100,000 (or 1%). The e f f e c t s did, however, vary c o n s i d e r a b l y w i t h f r u i t grade (not shown) and suggest some improvement i s possible i f more better q u a l i t y f r u i t were to be stored at the expense of lower q u a l i t y f r u i t . Thus, higher CA u t i l i z a t i o n does not seem to be a very important f a c t o r i n increasing grower returns, especially since the analysis did not include any fixed costs which might be associated with increasing CA. Decreasing the amount of f r u i t in the smaller sizes by 10% (and t h e r e f o r e i n c r e a s i n g medium and large f r u i t ) had a l a r g e r e f f e c t . In both crop years t e s t e d , the Red D e l i c i o u s grower returns would have been increased by at least $500,000, or about 4%. The Golden Delicious would have benefitted by between $70,000 (or 9.5%) and $100,000 (or 5.2%) in 1984 and 1985. Thus, the siz e e f f e c t c o u l d account f o r a c o n s i d e r a b l e p r o p o r t i o n of the increased returns obtained i n the Washington State scenario. F i n a l l y , increasing the proportion of higher grade f r u i t , XFCY, by 10% only r e s u l t e d i n l e s s than 3-5% improvement i n grower r e t u r n s i n 1984 and 1.5% improvement i n 1985. This i s l i k e l y the most s u r p r i s i n g r e s u l t of the s i n g l e f a c t o r s e n s i t i v i t y t e s t s , since grade is the major d i f f e r e n c e between B.C. and Washington and was therefore expected to account for a much larger change i n grower returns. 163 In summary, the d i f f e r e n c e i n grower r e t u r n s between Washington S t a t e and B.C. can be p a r t l y a t t r i b u t e d to the difference i n product mix. The exact proportion of the difference a t t r i b u t a b l e to product mix cannot be c a l c u l a t e d from t h i s analysis, but i t appears s i g n i f i c a n t . Of the approximately $2/box d i f f e r e n c e i n B.C. and Washington grower returns, maybe $l/box can be accounted f o r by the product mix. The most important f a c t o r of the B.C. product mix, i n terms of i t s a b i l i t y to improve grower returns, i s surprisingly not q u a l i t y (grade level) but si z e . A ten percent improvement in size resulted i n a f i v e to ten percent increase i n grower returns. However, t h i s study does not attempt to d i s c o v e r the added costs i n c u r r e d to improve either grade or size i n the orchard. 164 CHAPTER 6 SUMMARY AND RECOMMENDATIONS 6.1 SUMMARY The h i s t o r y of the B.C. apple industry i s characterized by c y c l e s , beginning with cooperation against a common problem followed by periods of r e l a t i v e prosperity and the breakdown of cooperation as soon as the "pie" began to shr~R ink. The recent move to house pooling was an attempt to combine some measure of house independence and market responsiveness without foregoing any economies of size at the marketing l e v e l . The role of B.C. Tree Fruits Ltd. has subsequently been reduced. The performance of the B.C. apple industry i s evaluated w i t h Washington S t a t e as a benchmark. Washington State has s i m i l a r ( a l b e i t somewhat s u p e r i o r ) growing and mar k e t i n g c o n d i t i o n s , i s the most l i k e l y benchmark. In order to make any comparisons, though, s t r u c t u r a l and conduct comparisons must f i r s t be considered. S t r u c t u r a l differences between B.C. and Washington State can be d i v i d e d i n t o t h r e e a r e a s : f r u i t q u a l i t y , s c a l e , and organ i z a t i o n a l f a c t o r s . F r u i t s i z e and consistency i s generally higher i n Washington . B.C. i s said to have an advantage i n terms of c o l o u r and keeping q u a l i t y , but the grade proportions and prices do not seem to r e f l e c t t h i s . Washington, with i t s ten-fold advantage i n production, has some s i z e economies. The t y p i c a l Washington orchard i s at least twice the size of B.C.'s, and the t y p i c a l packinghouse services fewer growers (30 versus 300) yet i s 40% l a r g e r , while the i n d u s t r y as a whole supports l a r g e promotional, research and lobbying budgets. Unlike Washington 165 State, B.C.'s o r g a n i z a t i o n evolved as a p r i m a r i l y cooperative one. While about 1/2 of Washington State houses are cooperatives, the houses themselves practice l i t t l e overt cooperation except i n the p u b l i c a t i o n of p r i c e and sales figures. Most B.C. houses are c o o p e r a t i v e s , and t h e i r members c o l l e c t i v e l y own the c e n t r a l m a r k e t i n g agency and p r o c e s s o r , B.C. Tree F r u i t s L t d . and SunRype, r e s p e c t i v e l y . There i s also a marketing board i n B.C., although i t has l o s t nearly a l l of i t s power. In terms of conduct, the two regions are again q u i t e d i f f e r e n t . Even among the cooperatives, t h e i r behaviour v a r i e s considerably both between and within regions. Areas of difference i n c l u d e v a r i e t y s p e c i a l i z a t i o n , e x t e n s i o n , type of member, storage regimes and accounting methods. At the marketing l e v e l , B.C. Tree F r u i t s Ltd. provides more services than the Washington marketers (who are p r i m a r i l y in-house). I t a l s o r e l i e s more h e a v i l y on export markets, at 35% of production versus 20% for Washington (whose exports are much more evenly d i s t r i b u t e d among countries than B.C. exports). T h e r e a r e s e v e r a l d i f f e r e n t a r e a s of c o n c e r n f o r p a r t i c i p a n t s i n the B.C. industry. Purportedly excessive costs are most o f t e n c i t e d , f o l l o w e d by the r e l i a n c e on c o s t l y government support programs. The c o o p e r a t i v e nature of the industry, when combined with competition within for good growers and revenues, has led to grower confusion, possibly shortsighted investment decisions and d i s s i p a t e d some e c o n o m i e s o f size at the marketing l e v e l . T h i s s t u d y h y p o t h e s i z e d t h a t the a p p l e i n d u s t r y i s a c t u a l l y o l i g o p o l i s t i c i n nature, with an i m p l i c i t c a r t e l of 166 about ten members (including B.C. Tree F r u i t s Ltd.) and a large number of s m a l l f r i n g e f i r m s . P r i c e , p r o f i t and c o l l u s i v e behaviour are a l l evidence which might support t h i s hypothesis, but p r i m a r i l y , t h i s study has o n l y p r e s e n t e d q u a l i t a t i v e evidence. However, quantitative price evidence does suggest that Washington State p r o d u c t i o n has the g r e a t e s t impact on B.C. price. This average price, though, may not accurately r e f l e c t the s i t u a t i o n , since apples are such a heterogeneous product. This h e t e r o g e n e i t y i s r e f l e c t e d i n p r i c e increases e x h i b i t e d with v a r i e t y , with i n c r e a s e d s i z e , grade and market date. T h i s "within" v a r i a t i o n i s considerably greater than the v a r i a t i o n "between" B.C. and Washington State prices (although they aren't r e p o r t e d here given the general consensus that the a v a i l a b l e Washington State price data are highly suspect). T h e r e a r e s e v e r a l d i f f e r e n t measures of i n d u s t r y performance but t h i s study focused on e f f i c i e n c y measures. In margin terms, packing margins and marketing margins have varie d l i t t l e compared with the v a r i a t i o n i n grower returns. But these returns do vary s i g n i f i c a n t l y with revenue, suggesting sales are more important than costs i n determining grower returns. The t h e o r e t i c a l s i m u l t a n e i t y p r o b l e m of r e v e n u e maximization i n the apple industry i s caused by i t s o l i g o p o l i s t i c nature and the dynamic optimization required with such a long storage product. The actual B.C. revenues have f a l l e n from a pre-1982 average of about $75m to about $35m since (in 1981 d o l l a r s ) . Given the minimal e f f e c t B.C- has on prices, i t i s not surp r i s i n g to find that r e a l revenues also increased with production. 167 This study derived cost curves at both the packing and marketing l e v e l s . The packing costs curves were f a i r l y w e l l behaved and suggested the i n d u s t r y can s t i l l b e n e f i t from increased plant s c a l e . The packing costs were also analyzed as f i x e d and v a r i a b l e costs. The overhead costs varied from $llm to $16m, and since t h i s v a r i a t i o n was due i n part to quantity, i t i s u n c e r t a i n as to the s i z e of the f i x e d component of overhead. Variable costs, both labour and materials, vary with pack type, although the labour component has a c t u a l l y f a l l e n over time, r e f l e c t i n g t echnology changes. The marketing costs d i d not conform to the usual average cost curve, suggesting the costs can vary somewhat with quantity. But the most inter e s t i n g finding was demonstrated i n the comparisons with Washington State, which suggested that both the B.C. packing and marketing costs are lower than the Washington S t a t e i n d u s t r y average (although p o s s i b l y higher than the costs of a leading Washington State firm). F i n a l l y , grower r e t u r n s have undergone s i g n i f i c a n t f l u c t u a t i o n s during the ten year period - from a high of $41m down to $12m. The v a r i a t i o n that occurred was p a r t l y due to v a r i e t y , q u a l i t y , s i z e and storage regime. Comparisons with Washington State showed the average B.C. grower received about the same as the average Washington State grower u n t i l 19 80, when B.C. returns f e l l . But since costs were (mostly) exonerated, as above, the reason for this decline must lay with the revenues. In order to pinpoint the reason for the revenue decline, a series of s e n s i t i v i t y tests were performed. 168 S e n s i t i v i t y t e s t s were performed on the revenues, costs and grower r e t u r n s of the B.C. apple industry. The scenarios t e s t e d the Washington State product mix as well some of as i t s components of increased CA storage (and hence more l a t e season m a r k e t i n g ) , i n c r e a s e d f r u i t s i z e (which Washington S t a t e researchers consider the most important f a c t o r ) , and increased grade. In the Washington State product mix s c e n a r i o the 1984 grower returns were increased by more than 77% for Red Delicious and 28% f o r Golden D e l i c i o u s . Not a l l of these gains were repeated i n 1985, since Red Delicious grower returns only rose by 6% and Golden Delicious by 17%. Thus, even i f B.C. f r u i t cannot command the same p r i c e s as Washington State f r u i t , a dramatic improvement i n q u a l i t y , grade and size proportions could make up some of the gap i n grower returns in the two areas. For instance, in 1984 the average Washington grower return was 126% higher than the B.C. average; thus, the 63% average gain afforded by a l t e r i n g the packout of Red and Golden Delicious i s very s i g n i f i c a n t . With a 10% increase i n CA f r u i t , grower returns would not have b e n e f i t e d s i g n i f i c a n t l y , and i n fact would have f a l l e n i n 1984 by about 0.5%. In 1985 the grower r e t u r n s would have increased by $100,000 (or 1%). Thus, higher CA u t i l i z a t i o n does not seem to be a very important f a c t o r i n i n c r e a s i n g grower returns, e s p e c i a l l y since the analysis did not include any fixed costs which might be associated with increasing CA. Decreasing the amount of f r u i t in the smaller sizes by 10% (and t h e r e f o r e i n c r e a s i n g medium and large f r u i t ) had a l a r g e r e f f e c t . In both crop years t e s t e d , the Red D e l i c i o u s grower 169 r e t u r n s would have been increased by at l e a s t $500,000, or about 4%. The Golden D e l i c i o u s would have b e n e f i t t e d by between $70,000 (or 9.5%) and $100,000 (or 5.2%) i n 1984 and 1985. Thus, the s i z e e f f e c t c o u l d a c c o u n t f o r a c o n s i d e r a b l e p r o p o r t i o n of t h e increased returns obtained i n the Washington State scenario. F i n a l l y , i n c r e a s i n g the p r o p o r t i o n of higher grade f r u i t , XFCY, by 10% o n l y r e s u l t e d i n l e s s than 3.5% improvement i n grower r e t u r n s i n 1984 and 1.5% improvement i n 1985. T h i s i s l i k e l y t h e most s u r p r i s i n g r e s u l t o f t h e s i n g l e f a c t o r s e n s i t i v i t y t e s t s , s i n c e grade i s the major d i f f e r e n c e between B.C. and Washington and was t h e r e f o r e expected to account f o r a much l a r g e r change i n grower ret u r n s . 6 . 2 IMPLICATIONS The average c o s t s of pac k i n g and marketing appear t o be lower i n B.C. than i n the average Washington house, but s t i l l a l e a d i n g Washington f i r m c o u l d pack and market i t s f r u i t f o r somewhat l e s s than the B.C. f i r m s . At the packing l e v e l f u r t h e r amalgamation would l i k e l y r e s u l t i n c o n s i d e r a b l e c o s t s a v i n g s , e s p e c i a l l y i f grower numbers co u l d be reduced (through orchard amalgamation) and i f crop c o n s i s t e n c y c o u l d be improved. At the marketing l e v e l , where B.C. Tree F r u i t s L t d . has a s i z e advantage o v e r a l l t h e Washington houses, t h e r e appears t o be a c o s t d i s a d v a n t a g e when compared to on of the best Washington f i r m s . T h i s i n c r e a s e d c o s t i s most l i k e l y due to e x t r a s e r v i c e s which may or may not be co s t e f f e c t i v e , as w e l l as t h e i r l a r g e r export m a r k e t r e l i a n c e . However, i t i s u n c e r t a i n a s t o w h e t h e r di s b a n d i n g B.C. Tree F r u i t s L t d . would reduce c o s t s , since t h e i r 170 marketing c o s t s are s t i l l lower than the average Washington house. Thus, costs do not appear to explain the smaller grower returns i n B.C. than i n Washington. This difference must be due to d i f f e r e n c e s i n sales revenue, as exhibited i n the Washington product mix s e n s i t i v i t y t e s t where B.C. grower r e t u r n s were improved s i g n i f i c a n t l y with a l t e r e d packout. It i s u n l i k e l y , however, that these crudely defined "quality" improvements can account for a l l of the difference i n revenue. As mentioned i n the background (Chapter 2), consistency of q u a l i t y i s often claimed to be of equal importance to l e v e l of q u a l i t y , at l e a s t i n the opinion of the marketers. Since marketing i s not a single period venture, long run sales rest l a r g e l y on reputation factors (of which c o n s i s t e n c y i s very important) which defy measurement. F i n a l l y , there may be some d i f f e r i n g degrees of monopsony powers between the major markets of B.C. Tree Fruits Ltd. and Washington S t a t e . C o n c e n t r a t i o n i n Western Canada's (which accounts f o r about 40% of B.C. Tree Fruit s Ltd. sales, by volume) r e t a i l food o u t l e t s has increased considerably during the 1980s, at the same time grower returns have been l o s i n g ground to those earned i n Washington S t a t e . If t h i s c o n c e n t r a t i o n t r e n d has been l e s s pronounced i n Washington's markets, there may be some e x t r a downward pressure on B.C. prices. Even i f q u a l i t y i s the major component of B.C.'s problem, p h y s i c a l conditions seem to d i c t a t e that the Washington product mix c o u l d n ' t be e q u a l l e d i n B . C . without i n c u r r i n g increased h o r t i c u l t u r a l c o s t s . Thus, while improvements i n s i z e , q u a l i t y and c o n s i s t e n c y would improve r e t u r n s , perhaps more r e f i n e d 1 7 1 marketing techniques are required i n B.C. than i n Washington (to further segment the market and d i f f e r e n t i a t e the B.C. product). Can the c o o p e r a t i v e s t r u c t u r e of the B.C. industry-accommodate these improvements? The cooperative s t r u c t u r e , i n i t s e l f , does not seem to exclude e f f i c i e n c y , since the leading Washington f i r m used i n t h i s study i s a l s o a c o o p e r a t i v e . However, Washington growers have more viable alternatives to t h i s s t r u c t u r e , and so growers who choose to be cooperative members may be more committed to the concept and therefore more w i l l i n g to take orders from the marketers. In B.C., with i t s smaller industry, the cooperatives are more vulnerable to increased costs due to l o s t volume; thus, they are more d i f f i d e n t i n t h e i r dealings with growers. At the marketing l e v e l , B.C. Tree F r u i t s L t d . has a disadvantage due to t h i s lack of clout over the product mix they must s e l l . They also have less access to some of Washington's best markets. But the major complaint about B.C. Tree F r u i t s Lt d . , i n terms of the cooperative nature of the B.C. industry, seems to be the lack of incentive to focus on value instead of volume. B.C.Tree F r u i t s L t d . has a strong i n c e n t i v e to s e l l everything and to spread the sales f a i r l y amongst the houses, but t h i s may be at the expense of maximizing s a l e s revenues (by achieving the best price possible). In a c o o p e r a t i v e i n d u s t r y there o f t e n i s a c o n f l i c t between equity and e f f i c i e n c y considerations. On the costs and grower returns side, i t appears there is l i t t l e c o n f l i c t - costs are assigned to growers as they are incurred (for the most part) and returns are based on the p r i c e received. But on the revenue 172 s i d e , equity considerations may well handicap B.C. Tree F r u i t L t d . ' s a b i l i t y to maximize revenues and a c h i e v e economic e f f i c i e n c y . Given B.C. Tree F r u i t Ltd.'s i n a b i l i t y to determine i t s own p r i c e , the presence of a near monopoly i n B.C. does not a f f e c t s o c i a l welfare i n terms of consumer s u r p l u s , but the co o p e r a t i v e nature of the sales monopoly may we l l reduce the subsequent producer surplus obtained by the growers. 6 . 3 RECOMMENDATIONS Since costs were not found to be the major component i n the d e c l i n e of grower returns i n B.C. r e l a t i v e to Washington S t a t e , the t r i e d and t r u e recommendation to amalgamate packinghouses w i l l o n l y be mentioned i n pas s i n g . Given the average s i z e d i f f e r e n c e i n the two regions, B.C. could p o s s i b l y become the lower c o s t r e g i o n i f i t co u l d capture some more economies of s i z e . However, t h i s should only be attempted i f grower numbers are concurrently reduced, since any cost savings could be l o s t i n servicing more members. This study concluded that a r e l a t i v e decline i n revenue i s the main reason for the decline i n grower returns. The revenue problem i s l i k e l y a combination of average f r u i t " q u a l i t y " , or p a c k o u t , and of m a r k e t i n g d i f f i c u l t i e s . The f o l l o w i n g recommendations w i l l answer each in turn. At the orchard l e v e l , "quality" l e v e l and consistency must both be improved. While studies of the benefits to the growers of improving q u a l i t y have frequently been conducted, research into the costs involved i n improving h o r t i c u l t u r a l standards might help motivate farmers to implement the suggested techniques. 173 F u r t h e r i n c e n t i v e s , to i n c r e a s e d e n s i t y and to s t a n d a r d i z e s t r a i n s , would serve to improve the consistency of quality. Some of these measures have been attempted i n the past, b u t i t seems t o be v e r y d i f f i c u l t to e n c o u r a g e grower cooperation. The industry i s heavily weighted down by the small, non-commercial o r c h a r d i s t s whose land i s overpriced (given i t s productivity) to account for i t s non-farm use value. Some attempt should be made to remedy t h i s s i t u a t i o n . Perhaps i f the lower l i m i t for F.I.I, payments and B.C.F.G.A. membership were ra i s e d to exclude more of these growers, t h e i r land might either devalue to the point where amalgamation with commercial operations i s more v i a b l e or i t might be removed from the land reserve. While preservation of farmland i s considered important by many, i f t h i s land i s inaccessible to commercial farmers i t may just as well be used f o r non-farm purposes. At l e a s t the industry would become more e f f i c i e n t i f those who cooperate i n i t are less d i s s i m i l a r . At the marketing l e v e l , i t would be very u s e f u l i f the m a r k e t i n g s t a f f of b o t h B.C. T r e e F r u i t s L t d . and the independents had access to up-to-date r e t a i l p r i c e information. If r e l a t i v e F.O.B. prices are not being translated accurately at the r e t a i l l e v e l , the consumers are l e s s l i k e l y to respond to surpluses. This information would be p a r t i c u l a r l y useful where the r e t a i l industry i s highly concentrated, since the r e t a i l e r s currently have the information advantage. I t would a l s o b e i n t h e b e s t i n t e r e s t s of b o t h t h e marketing and packing l e v e l s t o o p t i m i z e t h e i r s t o r a g e / s a l e s timing d e c i s i o n s . If B.C. T r e e F r u i t s Ltd. were to report i t s s a l e s information on a weekly, noncumulative basis i t would be 174 much e a s i e r f o r the packinghouses to a l l o c a t e storage u s i n g previous sales f i g u r e s . But to get the optimal pattern, further research into developing a model of dynamic optimization would be most b e n e f i c i a l . In c o n s i d e r i n g the i n d u s t r y as a whole, f u r t h e r o r g a n i z a t i o n a l changes would l i k e l y enhance i t s e f f i c i e n c y . If the v o t i n g s t r u c t u r e of the B.C.F.G.A. were changed such that value of sales determines the weight behind the orchardists vote, t h e d e c i s i o n p r o c e s s would be more i n tune w i t h revenue m a x i m i z a t i o n and l e s s concerned with e q u i t y . F u r t h e r , a l l growers, both independent and a f f i l i a t e d , should be represented such that the industry can cooperate i n promotional campaigns, lobbying e f f o r t s and information gathering programs. The prorate system i s also problematic, since i t hampers marketers and requires a watchdog at each packinghouse to ensure equity. If the B.C.Tree F r u i t s Ltd. dispatchers were to balance value as well as volume among houses, there could at l e a s t be a savings i n packinghouse personnel. House pooling i s good i f i t gets market signals c l o s e r to the growers, but further research into streamlining the prorate system should s t i l l be undertaken. In conclusion, e f f o r t s should be taken to both improve the q u a l i t y and consistency of B.C. apples and the marketing success of B.C. Tree F r u i t s L t d . Various e q u i t y f a c t o r s have worked against the e f f i c i e n t operation of the apple industry, and these factors should now be examined in l i g h t of the increased supply forecasted for the foreseeable future-175 BIBLIOGRAPHY Anonymous. B r i t i s h Columbia F r u i t Growers R e g i s t r y . 1986. Anonymous. B r i t i s h Columbia Tree F r u i t s Annual R e p o r t s . 1980-1985. Anonymous. Development of the Agri-Food S e c t o r i n B r i t i s h  Columbia. Commodity P r o f i l e : Tree F r u i t . A g r i c u l t u r e Canada. March 1986. Anonymous. "Export R e g u l a t i o n s Eased", O l i v e r C h r o n i c l e . May 7, 1986. Anonymous. " I n d u s t r y S e r v i c e Fund Set at 7 Cents Per Ton on Fresh and Pr o c e s s i n g F r u i t " . GoodFruit Grower. May 1 1984. Anonymous. "Washington A p p l e Commission A p p r o v e s $7.7 M i l l i o n Budget". GoodFruit Grower. September 15 1984. Anonymous. Washington F r u i t Survey 1986. Washington S t a t e Department of A g r i c u l t u r e . 1986. B e l l , J . G e n e r a l Manager of B.C. Tree F r u i t s L t d . P e r s o n a l communication. J u l y 1986. D e l l , W. Manager of Oliver-Osoyoos Similkameen C o o p e r a t i v e Growers A s s o c i a t i o n . P e r s o n a l communication. J u l y 1986. D e s t o r e l , J . J . A p p l e F o r e c a s t i n g M o d e l . A g r i c u l t u r e Canada, working Paper No. 5/86. August 1985. G a r r i s h , A., F o r m e r B.C.F.G.A. P r e s i d e n t . P e r s o n a l communication. J u l y 1986. G o l d b e r g , R. A Study of the B.C. F r u i t I n d u s t r y f o r the  B r i t i s h C o l u mbia F r u i t Growers A s s o c i a t i o n . J u l y 1982 . Green, C. Canadian I n d u s t r i a l O r g a n i z a t i o n and P o l i c y . McGraw-Hill Ryerson, 1980. H e i n i c k e , D. , F o r m e r A g r | r n i t n r o C a n a d a r e s e a r c h e r (Summerland S t a t i o n ) a n d c u r r e n t o r c h a r d i s t i n Washington State. Personal communication. March 1987. Hudson, S.C. An Economic Study of the Tree F r u i t I n d u s t r y  i n B r i t i s h Columbia. B.CM.A.F. September 1973. 176 Kennedy,G. and Lee,M. "Costs of Producing Apples i n B.C. versus Washington State." Discussion Paper No.85-04. Dept. of Agr. Econ. Univ e r s i t y of B r i t i s h Columbia. August 1985. K i n g , M. "BC F r u i t Group o f f L e g a l Hook". Western  Producer. November 2 8 19 85. K i n g , M. " P a c k e r i n R e c e i v e r s h i p " . We s t e r n  Producer. A p r i l 2 1987. Lee,M. "Cost Competitiveness of Apple P r o d u c t i o n i n B r i t i s h Columbia versus Washington S t a t e . " M.Sc. t h e s i s , Dept. of Agr. Econ., U n i v e r s i t y of B r i t i s h Columbia. 1985. L i n d e r , M. , Accounting Manager of B.C.Tree F r u i t s L td. Personal communication. July 1987. MacPhee,E. The Report of the Royal Commission on the Tree  F r u i t Industry of B r i t i s h Columbia. 1958. McBride, G. A g r i c u l t u r a l Cooperatives. AVI P u b l i s h i n g Company, Connecticut. 1986. Messent, B., Export Sales Manager of B.C.Tree Fr u i t s Ltd. Personal communication. October 1987. Parker,R. and Connor,J., "Estimates of Consumer Loss Due t o M o n o p o l y i n t h e U.S. Food M a n u f a c t u r i n g Industries", AJAE, November, 1979. Scherer, F.M. I n d u s t r i a l Market Structure and Economic  Performance. Houghton M i f f l i n Company 1980. Schotzko, R.T. A Preliminary Analysis of Pooling E f f e c t s  on Grower Returns. Mimeographed draft. 1983. Schotzko, R.T. Washington Apple Packing Industry; A Survey  of Current Capacity and Expansion Plans i n Storage  and Fresh Handling. Washington State U n i v e r s i t y . September 1983. Schotzko, R.T. and O'Rourke, A. D. The Economic F e a s i b i l i t y  of a F r u i t Packing and Storage F a c i l i t y i n Port of  Pasco N o r t h D i s t r i c t , B a s i n C i t y . Mimeograph, Washington State University. November 1985. Shelton, P. "Research Commission A l l o c a t e s $620,277 i n Funding" GoodFruit Grower. May 15 1986. St John, C , Public Information O f f i c e r of the Washington Apple Commission. Personal communication. March 1987. 177 S t a r i h a , F. "Packinghouse Cuts 29 Growers". O l i v e r  Chronicle December 19 1984. S t a t i s t i c s Canada Publication 22-003. Stover, E. "Industry Maneuvering on P o l i t i c a l Issues". GoodFruit Grower. May 15 1986. Swales, J.E. Commercial Apple Growing i n B r i t i s h Columbia. B.CM.A.F. 1982 Turnbull, M. "Fruit Growers Gamble". The Province. January 23 1987. Van Wechal, D., Fieldman for Blue Chelan L t d . Personal communication. March 1987. 

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