Home News Ag Economics Grower-Shippers Asked to Bear Burden of Unsustainable Dilemma of Under-Compensation

Grower-Shippers Asked to Bear Burden of Unsustainable Dilemma of Under-Compensation

In the past two years, West Coast vegetables growers have been asked to absorb stratospheric aggregate inflationary input costs while at the same time trying to find a way to pass on 20%-30% inflationary costs, presenting them with an unsustainable dilemma. Without a long-term solution to this dilemma, we could all see fewer vegetables finding their way to grocers’ shelves.

The recently published Bureau of Labor statistics Consumer Price Index (CPI) for August reported food prices increased 11.4% from 2020 to 2021, continuing a now-prolonged trend of the largest 12-month increase since May of 1979. The statistics also highlighted a 1.1% increase over June 2022 and was the seventh consecutive monthly increase of 0.9% or more.

Moreover, since January 2022, the price of food consumed at home outpaced that of food consumed away from home, up 13.1% in July 2022 versus July 2021. In reviewing of the CPI-U data from the past 16 months when inflation began to rise to their current 40-year high, the CPI “Food” category has either been in alignment with or slightly higher than the “overall” monthly CPI category. And, as anyone who has purchased food staples such a poultry or beef or eggs can attest, they’re record prices over the past 18-plus months. In fact, the CPI’s food-at-home category continues to steadily increase, driving the CPI’s overall increases in the food category.

As if circumstances in inability of cost pass-through was challenging enough, the growers in the “Salad Bowl of the World” have endured below break-even pricing on many commodities for the past two-plus years. Iceberg lettuce’s open market FOB pricing is a prime example. Against the backdrop of 20% to 30% production cost increases, the iceberg markets over the same timeline have been a losing enterprise.

In reviewing the USDA agriculture marketing service dating back to calendar year 2020, open market carton iceberg lettuce pricing only experienced six months of pricing reflecting above break-even levels. The data for 2021 reflected far worse market pricing conditions as only three months out of the calendar year showed profitability in iceberg lettuce pricing.

The 2022 iceberg lettuce open market conditions to-date are reflecting only three of the eight expired months at profitable levels, although it is widely accepted that over 60% of day-to-day iceberg lettuce is sold via contract pricing. However, the commodity portion of daily production represents a significant investment for both growers and shippers.

Providing further context on how poor commodity lettuce open-pricing conditions have been the past two years in relation to the Bureau’s CPI, from January through June of this year, the monthly year-over-year lettuce CPI category reflected increases ranging from a low of 7.9% to a high of 12.7%. Five of the six months reported accounting for an aggregated approximately per-case price of $3.60, “below break-even!” Keep in mind that many commodity iceberg deals are structured where both grower and shipper have joint equity.

However, there are some positive developments that should benefit growers. Earlier this summer, the shipper/processor community successfully renegotiated favorable finished-goods price increases in contracts with many big box retailers. Within all finished-goods pricing resides the cost of raw materials used in the production of the finished offering. This being the case, the year-over incremental input costs which have not been met, theoretically have been accounted for and the input cost pass-through negotiations should reflect the finished-goods contract price increases. Stay posted.

On the surface, it might seems that these types of CPI increases would be a boon for growers. However, from the West Coast vegetable grower’s perspective, this data represents a disconnect from the reality of profitability. In analyzing the CPI data, the relevance of what the statistics bares is proof of what this blog has been highlighting for months.

Beginning in January 2020 and continuing through today, the aggregate inflationary input costs which West Coast vegetables growers continue to primarily absorb has been in the stratospheric range of 20 to 30%. This data reinforces the unsustainable dilemma of under-compensation making its way “back to the ranch.” And, until there is a long-term solution that enables growers’ margins that will enable them to be sustainable, the likelihood grocery shelves stocked with fewer vegetables can be a reality. — By United Vegetable Growers Cooperative

Leave a Reply

Your email address will not be published. Required fields are marked *