Growers Split Over Need to Control Flow : ORANGES

It might be called Mother Nature’s assembly line: At Johnston Farms on the eastern edge ofBakersfield, workers already are plucking the season’s first thick-skinned navel oranges from row upon neat row of trees in the family’s 600-acre grove as, in stores across the country, consumers buy the last of the year’s summer crop of juicy Valencia oranges.

Next the harvest will spread north into the San Joaquin Valley heartland, by far the major source of the state’s navel orange crop, sending forth a steady stream of fresh oranges to the nation’s produce markets until May, when the Valencias will renew their annual appearance.

What makes this year-round supply possible--besides the fact that navels and Valencias alternate growing seasons--is the fact that oranges can be “stored” on the tree for up to four months.

The trick is to decide how many oranges to pick at any given point in the growing season without alternately flooding and starving the market and sending prices on a roller-coaster ride of peaks and valleys.

But how that “trick” is done has become extremely controversial as the growers embark on the 1985-86 navel orange season.

Most growers say consumers can thank federal “marketing orders” for their year-round supply of fresh oranges at relatively stable prices.

To assure that, marketing orders for the perishable citrus crop allow committees of producers and packers, supervised by the Department of Agriculture, to regulate the flow of fresh fruit to market, week by week, stretching out the season, enhancing returns to growers and stabilizing retail prices.

In Florida, where the state’s oranges dominate the nation’s juice market and command top prices, growers send only a small percentage of their crop to the fresh market. (California’s thicker-skinned navels are the nation’s preferred eating orange; Florida growers like to say that running over a California orange would scarcely wet the road.)

Thus, Florida growers rarely need to impose volume controls to avoid a glut in the fresh market.

In California, however, such controls are almost routinely invoked to regulate the flow of fresh fruit from the Central Valley growing district centered around Fresno.

Here’s how it is done:

Each week of the season, the Navel Orange Administrative Committee, which meets in Los Angeles to administer the system, asks the area’s packers how many 1,000-box carloads of fresh oranges they expect to ship to wholesalers in the next week or two.

The committee, composed of 10 representatives of growers and packers and one non-industry member, then apportions that estimated amount among packers according to the share of the crop that they control through contracts with growers.

The resulting quota is called the prorate.

Marketing orders are sometimes confused with the costly price-support programs for such commodities as wheat, corn and rice, which taxpayers finance. In contrast, the citrus growers themselves, through assessments, pay the administrative costs of marketing orders; these also provide for research and market-development programs.

Growers face a unique situation in dealing with the economic laws of supply and demand. “Firms such as General Motors, IBM and U.S. Steel have a distinct advantage over farmers,” according to Edward V. Jesse, a professor of agriculture at the University of Wisconsin, who has written extensively on marketing orders.

“If prices for automobiles, computers or flat steel are too low because of excess supplies, the assembly lines can be shut down and inventories can be worked off until prices rise.”

On the other hand, he said, “When Mother Nature looks favorably on orange, cranberry or peach producers, they are inclined to look askance at their good fortune. . . . Where perishable commodities are involved, it makes little sense to push more produce on the market than consumers are willing to buy at prices that yield positive returns to growers.”

In short, there is no way growers can “shut down” Mother Nature’s “assembly line.” As a consequence, surplus and shortage are common in agriculture.

All the same, a significant and outspoken minority of growers say they believe that the citrus prorate system in California is overused if not a relic of the Great Depression.

These advocates of a more “free market” approach argue that profit-seeking growers, left free to market their crops as they wish, will adjust their picking to meet changing demand. The committee, they say, tends to overly restrict the flow of fresh oranges to market, forcing consumers to pay more than they should.

This minority, which includes some of the state’s largest independent growers, senses a more free-market political climate within USDA this year due to the appointment of a handful of key officials whom they expect to react coolly to volume controls.

Controversy Heated Up

Not surprisingly, the controversy has heated up in recent days as growers await the response of Agriculture Secretary John R. Block, who abruptly suspended prorate in the middle of the last navel orange season, to the 1985-86 marketing policy proposed by the Navel Orange Administrative Committee. Consequently, lobbying on both sides has grown intense in Washington.

As it happens, Don Johnston of Johnston Farms counts himself among the system’s critics.

“We’d like to see a sensible approach to the prorate system,” he said. “We don’t think it makes sense to have volume controls every week of the season.” These should be gradually phased out and reserved for emergency situations, he said.

On the other hand, Billy J. Peightal, the committee’s manager, credits the controls with having increased the sale of fresh oranges and fattened growers’ earnings. “We moved more oranges in the last four or five years than we used to grow ,” Peightal said in an interview.

“The committee members really try to move as many (fresh) oranges as they possibly can. The best way to do this is to keep a reasonable flow of fruit going to market. They will inject quotas when they estimate that the handlers by themselves would feed more (fruit to market) than demand would normally require.”

Room for Flexibility

Spokesmen on both sides of the issue say privately that there is room for greater flexibility in the use of the prorate system. But some proponents worry that any acceptance on their part of a more flexible use of prorate might be seized upon by opponents as “proof” that the system has outlived its usefulness, which they adamantly deny.

Last Jan. 28, when Block suspended prorate for the first time in 33 years, and with 48% of the navel orange crop still on the trees, he justified the action on the ground that supplies and prices were adequate--thanks to a smaller-than-usual crop of good quality oranges and to freezes in the Texas and Florida citrus belts.

This decision triggered intense reactions by proponents and opponents of prorate. Anti-prorate growers reacted first by forming Ag/MOP (derived from Agriculture for Market-Oriented Policies) to lobby on behalf of maintaining the suspension through the rest of the season. Prorate supporters, led by the giant cooperative Sunkist Growers and claiming to represent 80% of all growers and handlers, then organized Farmers for an Orderly Market to seek reimposition of prorate.

But Block held fast. As a result, analysts got a rare--if inconclusive--look at what lifting volume controls might do to the orange market.

The Navel Orange Administrative Committee last spring estimated that the suspension cost growers $10 million in revenue because prices fell very sharply after prorate was lifted. Sunkist publicized this finding, along with evidence from the Bureau of Labor Statistics figures that retail prices showed no corresponding drop; this suggested that middlemen--principally supermarkets--had taken advantage of the situation to fatten their usually slim produce margins.

Challenged Estimate

Ag/MOP immediately challenged the $10-million estimate as inflated because the analysis assumed that the relatively high wholesale prices that prevailed at the end of January would have continued for the rest of the season.

Peightal, the committee manager, conceded that wholesale prices normally fall but justified the technique as having provided a “flash” estimate of the economic effect of lifting prorate before the season ended. Based on actual wholesale prices paid for navel oranges after prorate was lifted, he said, the estimate was, if anything, understated; this refined analysis showed that growers lost not $10 million but $18.5 million, Peightal reckoned. (The committee’s figures explain this disparity by showing that prices dropped far more precipitously after Block’s action than in years when prorate remained in effect.)

The Department of Agriculture furthered the controversy in September when it released its own statistical analysis, which concluded that “grower income in the 1984-85 navel orange season would have been greater under the prorate suspension than under the (committee’s) utilization schedule.” USDA estimated that growers’ grossed between $1.5 million and $2.5 million more without quotas .

That conclusion leaves Peightal scratching his head.

Other industry observers have suggested that the situation last season was unique--as each season tends to be--and thus did not offer a true test of free-market forces versus volume controls.

Came Without Warning

For one thing, the suspension came without warning--in effect, changing the rules at mid-season. Growers and packers had based their marketing plans on the assumption that the committee’s prorate schedule would be followed until 85% of the crop was marketed, when it would self-destruct. The ensuing uncertainty triggered the initially sharp plunge in wholesale prices, according to this view.

California Citrus Mutual, a Visalia-based trade association whose 750 grower members include both supporters and opponents of prorate, concluded its assessment of last season by calling it “unique” in terms of reduced volume and unusually good quality of fruit. “If the suspension was destined for a season with a manageable crop, this was the year,” the trade association concluded. “We sincerely doubt that market conditions will ever be the same.

“However,” it added “we do know that greater flexibility (in imposing quotas) will aid our marketers, if handled properly, and, undoubtedly, will assist growers economically.”

Nonetheless, President Joel Nelsen said in an interview, “we felt that there was a loss of income to the industry and, subsequently, to the growers as a result of the suspension.”

As the new season’s first navel oranges begin trickling into supermarket produce bins--a mere 20 rail cars of early-maturing fruit were shipped during the week of Oct. 24, with another 200 expected to roll to market last week--lobbyists on both sides of the prorate issue were pressing Block and his staff hard to maintain the committee’s proposed prorate plan, modify it in ways that Block’s staff had suggested (and the committee rejected) or abandon prorate entirely.

Aims at Sunkist

Jim Moody, an attorney with the free-market-oriented Capital Legal Foundation in Washington, who is involved in litigation with the Justice Department over alleged abuses of prorate by a major independent grower-packers, takes particular aim at the market leader, Sunkist Growers. Sunkist, based in Sherman Oaks, is a cooperative of 6,000 growers in California and Arizona who produce 52% of the state’s crop.

Moody claims that Sunkist’s representatives, who fill five of the 11 administrative committee seats, manage the prorate system to maintain the cooperative’s market share. According to Moody, this “imbalance” means that prorate weighs less heavily on Sunkist’s packers than on independents because, if a weekly quota is significantly less than Sunkist’s orders, it can probably find a sixth vote to make a midweek increase. (Quotas can be increased but not lowered during the prorate week.)

“Prorate is a Sunkist program designed to keep its market share up against its competitors,” according to Moody.

Sunkist denies such allegations and notes that its representation on the committee is based on its market share, adding that Sunkist members frequently disagree among themselves. The prorate system helps all growers, large and small, according to the cooperative (whose membership includes producers with holdings of all sizes, but averaging about 40 acres).

While Sunkist obviously would have an easier time than a non-Sunkist packer to have a week’s prorate increased in midweek, Peightal acknowledged, packers routinely swap prorates almost daily. For example, he said, a packer with more fruit available than his quota will allow him to ship that week will find another with too little fruit who is willing to trade his unused quota for an increased share the next week.

“One thing about marketing orders,” Peightal said, “is that they don’t change economics. If a guy’s not a good farmer, he’s not going to survive. If a packing house doesn’t do a good job, it’s not going to survive.”

Can Be Abused

Nelsen of California Citrus Mutual conceded that prorate can be abused but maintained that, if properly administered, the system benefits consumers as well as the industry. “It lengthens the season and helps us manage a lot better,” he explained. “It also gives some farm workers year-round jobs--10 1/2 to 11 months a year in navels and Valencias. And when retailers have a consistent source of supply and a steady price, it’s easier to merchandise and for consumers to buy.”

Ag/MOP member Ken Wiseman, general manager of Bakersfield-based Belridge Farms, a wholly owned subsidiary of Shell Oil with 20,000 acres in production, said Belridge marketed through Sunkist until 1978, then decided it could do better on its own. Belridge Farms’ opposition to prorate itself crystallized a few seasons after the break, he said, when California produced a huge crop of generally small oranges of mediocre quality, while Belridge enjoyed what he called a better-than-average crop for which he had to turn away orders because of restrictive quotas.

“If you’re growing diamonds and I’m growing garbage, we both get the same market share,” he concluded.

“Everybody’s got a share of diamonds,” countered Peightal, repeating the point that one grower’s unused quota can normally be traded to a grower having more fruit to ship. “By and large, every handler gets some bum fruit, and every handler gets some outstanding fruit.”

While Wiseman and other free-market proponents maintain that growers and packers, seeking to maximize their own returns, will provide all the advantages attributed to prorate--a long season and stable prices--a free market run rampant is precisely what brought about marketing orders in the first place, according to Hoy Carman, an agricultural economist at the University of California, Davis.

Disputes Theory

The free-market theory is fallacious, Carman said in an interview, because it assumes the availability of perfect information. “In fact, you didn’t have perfect information then, and you still don’t have it today.”

Despite the Reagan Administration’s advocacy of minimizing government regulation and unleashing free-market forces, it does support marketing orders as a form of self regulation. In “guidelines” that the USDA issued in 1982, Block extended that support to the prorate concept with the warning that they should be “used guardedly so as to avoid stifling individual incentive or overly restricting market supplies.”