Fruit in excess of a handler’s fresh market prorate could be exported or processed without limits

Several California marketing order and commission commodity promotion and research programs have recently been involved in litigation as a small minority of unhappy producers and handlers have turned to the courts with requests to modify or terminate the programs. Recent court cases involving constitutional challenges include actions against the marketing orders for peaches and nectarines, kiwifruit, plums, apples, grape root stocks, cut flowers, almonds, milk, cling peaches, and table grapes.Marketing order quantity controls can be a powerful economic tool when the commodity group controls most of the production of the commodity and when there are different markets with different price elasticities of demand. Under these conditions, the commodity group can gain a measure of monopoly power and enhance returns through price discrimination. However, since they are unable to control entry, any short-run price enhancement will lead to a longer-run supply response. It is not surprising that quantity controls have been controversial—monopoly pricing practices reduce the welfare of some consumers and may distort resource allocation decisions, while producers face all of the problems of maintaining a cartel. Marketing orders for several California commodities include quantity control provisions , although the use of quantity controls has decreased over time as a result of problems noted above. The federal marketing orders for citrus, with their prorate provisions, were terminated at the end of the 1993-94 crop year after more than 50 years of almost continuous use. The citrus prorates set the amount of lemons and oranges that could be shipped to the domestic fresh market on a weekly basis.The demand facing packers in the fresh market is very inelastic relative to the demands in the processing and export market. Thus,stacking pots price discrimination against the fresh market, by restricting the flow of product to it, is both possible and profitable. Short-run producer price enhancement without any controls on entry led to an acreage response for both lemons and Navel oranges.

As new plantings reached bearing age, the Administrative Committees were forced to divert increasing proportions of the annual crop to exports and processing to maintain fresh market prices. Producer returns from all markets decreased over time, until new plantings were no longer profitable. However, when compared to a competitive solution, prorate resulted in increased acreage and production of citrus, as well as increased exports and processed products . Opponents of the citrus volume regulations, who had been sued in 1983 by the United States for violations of prorate, discovered evidence of over shipments by a large number of competing orange and lemon packing houses.Because of allegations of limitations violations of shipments under the order, a series of lawsuits, investigations, and proposals for penalties under AMAA forfeiture rules threatened to keep the industry in court for years and create economic hardships for many industry participants. To minimize long-term damage to the industry and “to end the divisiveness in the citrus industry caused by over ten years of acrimonious litigation,” the Secretary of Agriculture terminated the California-Arizona citrus marketing orders, effective July 31, 1994, and dismissed all litigation brought pursuant to the AMAA.Raisins provide another good illustration of volume controls in California. California is the largest volume raisin producer in the world, and this industry has operated under a federal marketing order program with volume controls since 1949. Under the raisin marketing order, annual production is divided between free tonnage and a reserve pool, and the Raisin Administrative Committee controls the reserve tonnage. Only free tonnage can be sold on the domestic market, but the RAC can allow packers to buy additional tonnage for free use from the reserve when the RAC determines that such actions are justified by supply and demand conditions. Until 1977, the majority of raisins in the reserve pool were exported at prices that were much lower than for raisins sold on the domestic market. Raisins from the reserve were also used for the school lunch program, government subsidized exports, other government programs, sales to wineries for distilling into alcohol, donations to charity, and cattle feed. Thus, the raisin industry working through the RAC successfully used the reserve pool to practice price discrimination in separate domestic and export markets.

Conditions and markets changed, however, and beginning in 1977, exports were considered free tonnage shipments, and the initial free tonnage was increased to serve favorable export markets. Since 1977, the RAC has often exported reserve pool raisins at prices competitive with world prices but below prices on the domestic market. Finally, the experience of the California almond industry illustrates how changing market conditions can alter the effectiveness of volume controls.The federal marketing order for California almonds includes provisions for market allocation and a reserve pool. At the beginning of each marketing season, the Almond Board of California recommends to the Secretary of Agriculture a maximum annual quantity to be sold in domestic and export markets and the quantity that cannot be sold . The reserve may be designated as either unallocated or allocated reserve. The unallocated reserve is essentially forced storage; nuts can be released from the unallocated reserve as the season progresses or carried over to the following season. The allocated reserve must be utilized in noncompetitive outlets such as almond butter, almond oil, airline samples, or cattle feed. The reserve provision of the almond marketing order was used to encourage export sales through 1972, while maintaining higher prices in the domestic market than in the export market. This price discrimination ended when export markets became an important outlet for California almonds , with price elasticities tending to equalize between domestic and export markets. Recent work indicates that the price elasticity of demand for almonds is now more elastic in the domestic market than in major export markets, leading to the result that short-run revenue maximization through price discrimination could involve restricting sales to export markets . Recent models of acreage response to changing returns indicate that U.S. and Spanish producers each increase production when returns appear favorable . Thus, if the Almond Board were to use the reserve to practice price discrimination and raise world almond prices, increased prices would stimulate production in Spain as well as the United States. As a consequence of these various considerations the almond industry has not implemented volume controls for the past several years. All existing federal marketing orders for California fruits, vegetables, and nuts include provisions for grades and minimum quality standards. However, only ten of the California State marketing programs include quality standards and inspection provisions, and just seven actively use the provisions. Given typical seasonal price relationships for fresh fruit, with high early-season prices, there are strong incentives to ship fruit as early as possible, even though it may not be fully matured. Most consumers are unable to judge the maturity of fruit from appearance and may find that fruit that “looks good” does not “taste good.” The result is an adverse selection problem.

Sellers are aware of the product’s characteristics, but buyers are unaware. In these settings, low-quality products can drive high-quality products from the marketplace. Indeed,fodder growing system representatives of many commodity groups believe that shipments of immature fruit have a negative impact on total sales, because consumers may delay repeat purchases after being dissatisfied with their original purchases. Maturity standards based on sugar content, firmness, and color are used by several marketing orders to determine when fruit is mature enough to be shipped. Minimum quality standards may: increase the retail demand for a product, resulting in higher prices and/or increased sales; reduce marketing margins, with benefits accruing to both producers and consumers; and reduce supply, which with inelastic demand can increase total revenue to producers. Any effective minimum quality standard will restrict the quantity of commodity marketed, but supply control is not the usual focus of such standards. Federal marketing order regulations on grade, size, quality or maturity also applies to imports of the same commodities from other countries during the period the marketing order is in effect. The use of some minimum quality standards has been controversial. Concerns include charges that quality standards are a hidden form of supply control, that quality standards waste edible fruit with the primary impact being on the poorest consumers, and that quality standards are sometimes not equitable because of regional variations in production conditions. While empirical analyses of the economic impact of minimum standards of grade, size, and maturity for California commodities are limited, those available indicate that it is probably relatively small .The purpose of commodity group expenditures on generic advertising and promotion is to increase the demand for the commodity so that more commodity can be sold for the same price, or the same amount can be sold for a higher price. The rationale for mandatory support by all producers is based on the distribution of documented program benefits and the “free-rider problem.” 5 Research completed and underway documents significant increases in product demand as a result of commodity advertising and promotion programs, with net monetary benefits to producers being much greater than costs. For example, Alston et al. estimated that the elasticity of demand with respect to promotion for California table grapes was 0.16.

Using this promotion coefficient, they estimated that the promotional activities of the Table Grape Commission had increased per capita consumption by about 1.5 pounds over that which would have existed in the absence of a promotional program. This increase was about one-third of recent total per capita consumption. The benefits to producers were very high in both the short- and long-run. The short-run marginal benefit-cost ratio was estimated at over 80:1—for every $1 spent on the program, the industry gained net benefits of $80. When producer supply response was factored into the analysis, the benefit-cost ratios decreased. Using a supply elasticity of 5, the average benefit-cost ratio was about 10:1 and the marginal benefit-cost ratio was about 5:1. Studies of the estimated returns from advertising and promotion programs for other California commodities include avocados , prunes , almonds , eggs , raisins , and walnuts . Each of these studies found that advertising and promotion increased the demand for the product and that program returns exceeded costs by a significant margin. The U.S. government has funded agricultural commodity groups, as well as private firms, to conduct promotional programs in export markets. The Market Access Program and its predecessor programs, the Market Promotion Program, and the Targeted Export Assistance Program, have provided matching funds for the promotion of a number of California commodities. Federal allocations of funds to 15 commodity boards, commissions, and other groups promoting only California fruits, nuts, and vegetables totaled $18.67 million in fiscal year 2002. These funds accounted for 18.7 percent of $100 million awarded to all organizations. Organizations that promote products produced in other states as well as California also received large allocations. California organizations receiving 2002 awards greater than $1 million included Blue Diamond Growers/Almond Board of California, California Prune Board, California Table Grape Commission, California Walnut Commission, Raisin Administrative Committee, Sunkist Growers, Inc., and Wine Institute.Research and development provisions are included in most of the California marketing programs. In 1992, there were 28 programs with research expenditures totaling almost$8.5 million . This increased to 38 California programs with a total 2002/03 or 2003/04 budget of $20.2 million. The largest research budgets were for citrus , rice , market milk , almonds , avocados , fresh strawberries , and walnuts . Overall, research expenditures increased from about 7.5 percent of total 1992 commodity group expenditures to just over 10 percent of 2003 expenditures. In terms of the total farm level value of production, research budgets averaged just over 0.1 percent of the 2001 value of covered commodities. Summary statistics on the economic impacts of commodity group research expenditures are limited, but those available indicate attractive rates of return. Most of the research funded by commodity groups operating under state marketing orders and commissions is done at the University of California. A study valuing California agricultural research concluded that the average annual internal rate of return for public investment in California agricultural research and extension for 1949-85 was about 20 percent . Consider, for example, the case of strawberries. California has become the world’s pre-eminent strawberry producer, now accounting for about 80 percent of U.S. fresh and processed production.