The primary crops for which sizable production has moved off-shore, in this case to neighboring Mexico, are those requiring bunching at harvest, such as green onions, asparagus and radishes. Still, over the next decade it is likely that many California commodity sectors will face greater import competition and more competition in export markets. While competition in third country markets will be strong, total international trade should expand as trade liberalization continues under the WTO.The principal marketing channels in the U.S. fresh fruit and vegetable marketing system are shown in Figure 1. Final value in 2002 is estimated to be at least $81 billion with roughly equal amounts distributed through food service and retail channels and around 2 percent comprised of direct farm to consumer sales. In California, there are about 400 Certified Public Markets and many fresh produce growers participate in these markets for at least a part of their sales. Produce sold in retail or food service outlets may be procured directly from shippers or from wholesalers operating in terminal markets or in independent warehouses in local communities. Terminal markets have steadily declined in importance since the 1950s. Today there are major terminal markets serving only 15 cities, and these markets primarily handle the residual fresh market domestic production that cannot be marketed directly to retail or food service buyers. The largest terminal markets tend to be located near port areas since many imports are still handled by importers/intermediaries physically receiving the product upon arrival to the U.S. Terminal markets are no longer a factor in the distribution of processed food.

The decline in terminal market share is largely a result of the increased buying power of integrated wholesale-retail buying entities,dutch bucket for tomatoes which operate large-volume centralized buying operations, and enhance efficiency by purchasing directly from the source, bypassing the wholesaler and thereby avoiding intermediary margins and handling costs. Also, the retailer- or food service-buyers are able to communicate directly with suppliers concerning important issues such as desired product quality, safety/traceability, packaging characteristics and shipment timing, improving their management of the supply chain. For fresh products, direct production-source-to buyer shipments have the additional advantage of not breaking the cold chain, better preserving product quality. Brokers may be used by either buyers or sellers at any level of the distribution system. Most brokers do not take title to or physically handle the goods, and, rather, assist in making the sale and possibly arrange transportation and other logistics. Their role had grown in importance since World War II. However, retail consolidation has been reducing the role of brokers as buyers seek closer relationships with preferred suppliers with strong category management skills. Today successful brokers tend to be those with global sourcing capabilities and account-specific service-orientations, including category management, designed to meet specialized buyer needs.Turning now to the opposite end of the marketing system, farm production of most commodities in California remains atomized in the sense that producer volumes, although often large in absolute terms, are small relative to the size of the market. It is estimated that there are about 16,500 fruit, vegetable and nut growers in California producing about half of the total volume of these crops grown in the U.S. However, most fresh produce growers don’t market their own produce, marketing instead via shippers acting as agents. Most shippers are large growers that have integrated their operations downstream into the marketing of their own production and the production of other growers—hence their designation as forward-integrated “grower-shippers.” These grower-shippers generally control harvesting, packing, and cooling, and arrange for domestic and export sales, transportation, and promotion of production.

They are the dominant type of marketer of California fresh produce. According to the Red Book Credit Services there are around 5,000 fresh produce shippers in the U.S. as a whole, with about 900 located in California. These shippers are selling to an estimated total of 1,079 principal buyers, including 267 retail chains, 188 produce wholesalers, with the difference accounted for by independent retailers and other types of buyers. The bulk of retail chain purchases are being made by 161 retail chains each selling at least $64 million in 2001 . Consolidation at the buying end of the food marketing system has driven consolidation at the production level. Today’s large, integrated wholesale-retailer and food service buyers demand more services from their suppliers, tailored to their specific needs, including: category management, ripening and other special handling and packaging, including private labels, and year-round availability of a wide line of consistent-quality fruits and vegetables. Grower-shippers have responded with improved communication and information management programs and by becoming multi-regional and multi-commodity in focus. The ability to provide account-specific products and services represents a major change from the days of uniform product offerings. While these services can be costly, many shippers are finding that they enable them to become preferred suppliers to large buyers, potentially stabilizing demand and somewhat lowering market risk. Many California grower-shippers obtain products from other countries during the off-season, sometimes via joint ventures. This enables shippers to extend shipping seasons and sell products produced in several locations via one marketing organization, maintaining a year-round presence in the marketplace.1 For example, shippers based in Salinas, California, also commonly ship out of the San Joaquin Valley, Imperial Valley, southwestern Arizona, and Mexico. The rapid growth in multi-location firms has contributed to the integration of the Mexico-California-Arizona vegetable industries, in particular.Because most vegetable crops are not perennials, the location of production can shift readily, based on relative production and marketing costs and growing season. Increasingly, buyers are contracting with grower-shippers for high-volume perishable items to stabilize prices, qualities, and volumes. While contracts were relatively common in the food service sector, they are new to retail.

The entrance of super centers to food retailing has led this change as these mass-merchandisers focus on driving costs out of the distribution system. The introduction of contracting is likely to have structural implications at the grower-shipper level, since shippers need to offer large, consistent, year-round volumes to meet buyers’ contracting requisites.The evolution of the California produce industry has enhanced its efficiency by cutting marketing costs and improved communication of consumer demand back to growers. However, the consolidation of purchasing within the hands of a few large buyers raises concerns about oligopsony exploitation of producers. Perishable crops, which must be harvested, sold, and marketed within a very short time frame, tend to give growers relatively little bargaining power in dealings with buyers. Sexton, Zhang, and Chalfant and Richards and Patterson analyzed this issue recently for several fresh fruits and vegetables. Although the results differed among the commodities studied, in general the authors concluded that retailers were often able to reduce prices to growers below competitive levels as a consequence of their market power. In addition to apparently exerting buyer market power for at least some commodities,stackable planters the manner in which retailers set prices to consumers for those commodities can also have an important effect on producer welfare. To the extent retailers exercise oligopoly power to consumers by marking up the price of a commodity above full marginal costs, they reduce sales of the commodity, an outcome detrimental to producers. Further, evidence from scanner data shows that retailers set prices for produce commodities with little regard for the underlying trends in the farm commodity market. For example, among 20 retail chains studied by Sexton, Zhang, and Chalfant, nine maintained the same weekly price for iceberg lettuce over the two year period from 1999-2000, despite wide fluctuations in the FOB price received by producers.Table 3 illustrates the wide variability among four Los Angeles retail chains in setting prices for iceberg head lettuce and iceberg-based bagged salads. The table contains the correlations in the weekly retail prices charged by the various chains for iceberg head lettuce and the various brands of iceberg-based bagged salads .Correlation coefficients fall in the range of –1.0 to 1.0 , with values near zero indicating very little correlation between the movements over time for the particular price pair. Each chain’s head lettuce price is positively correlated with the FOB price , but the correlations are much lower than if the retailers were merely adding a cost-based mark up to the FOB price. Correlation between retail and farm pricing essentially disappears for the bagged salads, however. In all cases, the correlations are nearly zero, and in some cases are negative, meaning the retail price moved on average in the opposite direction of the farm price. To understand retailer pricing for fresh produce commodities, one needs to appreciate that the modern retailer sets prices for 30,000 or more product codes.Pricing decisions are not made with an eye towards profitability of any single product, but, rather, are oriented toward the profitability of the entire store. The produce section is traditionally a source of high profits for retailers, and, because of the importance consumers attach to produce, retailers can use their produce aisle as a way to differentiate themselves and attract consumers to the store. Accordingly, stores’ pricing policies for produce vary widely. Some stores prefer to offer consumers stable prices week in and week out . Other stores regularly feature produce as a sale item, so prices vary dramatically from week to week . Neither pricing strategy is likely to be beneficial to producers. Sexton, Zhang, and Chalfant demonstrated that retailers who maintain stable prices over time despite fluctuations in sales and price at the farm level cause lower producer income on average because price must fluctuate even more in those sectors, such as food service, which do not artificially stabilize price, in order for the market to clear.

Marketing arrangements are different for processed foods, including fruits and vegetables, nuts, grains, meats, and dairy. Growers in these industries sell to processing firms rather than to food retailers. Like the food-retailing sector, the food processing sector has also become increasingly concentrated, and effects of high processor concentration can be especially severe in terms of their impacts on grower processor relations. Most raw farm products are generally bulky and perishable, making shipment costly and limiting growers’ access to only those processors located within a limited radius of the farm. For example, broilers are generally shipped 20 or fewer miles, and processing tomatoes are hauled 150 or fewer miles. Thus, even if many processors operate in an industry nationally, typically only one or a few firms buy from a given geographic region California food processors are themselves a diverse lot. A key distinction is whether or not the processor has successfully developed its own brand identification. Processors with successful brands are able to capture a price premium in the market. Examples of California processors with leading brands include Blue Diamond , Sun sweet , Heinz , Del Monte , Sun Maid , Diamond , Lindsay , and Sunkist . Processors who lack dominant brands sell primarily to food service buyers and to the private label market. Private labels refer to retailers’ house brands. These brands generally sell at a discount compared to major brands, resulting in a lower return for the processor. Great variety also exists in the form of business arrangements among growers and processors. Grower-processor relationships can be thought of as comprising a continuum with pure “arm’s length” exchange or spot markets at one extreme, and grower-processor vertical integration at the other extreme.In between the extremes are various forms of contractual relationships between growers and processors. Pure arm’s length exchange or spot markets are increasingly rare. Two key factors have contributed to the decline. First, as the number of firms buying in a given geographic area has declined, the efficiency of price discovery in spot markets diminishes, and concerns over buyer market power escalate. Second, arm’s length transacting is a poor way to coordinate activity and transmit market information between buyers and sellers, and this type of coordination has become increasingly important in meeting consumers’ demands in the marketplace. The processing tomato industry illustrates some advantages of vertical coordination and problems of conducting transactions through spot markets. Unlike tomato sectors in many other countries, tomato production in California consists of two completely separate, dedicated industries rather than a single, dual-usage industry; tomatoes are grown either for processing or for fresh usage.