Record apple crop challenges industry
Marketers, shippers look overseas to sell bountiful production; quality a key
By DAN WHEAT
WENATCHEE, Wash. -- Ten years ago, Washington apple shippers and marketers worried if they could successfully handle crops of 100 million boxes or more.
When the 2004 crop came in 24 percent -- 25 million boxes -- larger than the 2003 crop, the average annual wholesale price of all varieties fell from $17.92 to $13.25 per 40-pound box.
Many growers yanked out orchards and went out of business after years of low prices mostly blamed on too many apples, especially the Red and Golden Delicious varieties.
But as the mix of apple varieties and other factors improved, the industry has turned a corner and logged at least five strong years out of the last nine with crops ranging from 100 million to 109 million boxes.
With crop volume jumping 15.5 percent this year, the industry is in the midst of another quantum leap. Can it maintain good sales and prices with a new norm of 120-million-box crops and larger?
Some of the largest shippers, leaders of industry organizations and a longtime economic observer offer a mix of optimism and caution in their answers.
"It will be tough. With $8 per box freight to the East Coast our ability to be competitive with the local crops in the Midwest and population centers in the East will be a challenge," said Mark Zirkle, president of Zirkle Fruit Co., Selah.
This year's 129.2-million-box crop has been selling well at good prices because weather wiped out much of the crops in the Midwest, East Coast, Canada, Mexico and Europe. The season-to-date average of all varieties on Dec. 22 was $27.08 per box compared with $23.46 a year earlier and $20.28 two years earlier. Average costs of production range from $15 to $17 per box.
But when crops in those areas return to normal levels the resulting abundant supply "will surely suppress prices," Zirkle warned.
Exports and increasing consumption are the keys to maintaining profitability, he said.
Washington produces far more apples than any other state. It grows about 65 percent of the nation's fresh apples and 50 percent of the apples used in processing into juice, sauce and baking ingredients.
The new norm
"If we hit 130 million boxes as a stepping stone, this was the right year to do that (with other areas down)," said Reggie Collins, general manager of Chelan Fruit Cooperative.
The new norm will be around 120 million boxes and it is needed to serve growing export markets, said West Mathison, president of Stemilt Growers Inc., Wenatchee.
"Quality will always be a huge driver of demand. There will be pressure to move these crops, yet the consumer will buy more if we deliver a quality, dessert-eating experience," Mathison said.
A big challenge in doing that, he said, is picking the fruit properly.
Bruce Grim, executive director of the Washington Horticultural Association and manager of the Washington Apple Growers Marketing Association, said this is a "high-water mark year" that will be talked about for a long time.
"We won't hit 130 million boxes again for a while," Grim said. "Mother Nature has a way of evening things out."
Spring freezes that decimated Midwest and Eastern crops could pay Washington a visit, he said.
More high-density plantings, perfect spring weather for cell division, good conditions for chemical thinning and great growing conditions, with the exception of some isolated hail, all led to this year's bumper crop, Grim said. It was also boosted by good weather late into harvest increasing fruit size, he noted.
He believes the industry can successfully maintain sales and prices at a new norm of 110 million to 125 million boxes because of a great mix of varieties and quality.
National apple volume has been declining for 10 to 15 years and Washington, already the leader, is gaining a greater percentage of the fresh market, he said.
This season is giving Washington marketers deeper inroads into East Coast markets and a chance to maintain them, he said.
Challenges, Grim said, will include avoiding overproduction, capturing new markets and keeping costs under control. Laborers are no more productive but they continually cost more because of the state's "never-ending minimum wage increases," he said. Washington's minimum wage, currently $9.19 an hour, is tied to the inflation rate and adjusted annually.
Desmond O'Rourke, a retired Washington State University agriculture economics professor who has followed Washington's apple industry for 40 years, said 120 million boxes will be the new norm for several years before climbing again because of more high-density plantings coming into full production.
"The standard used to be 35 bins per acre and now guys aren't happy unless they have 70 bins per acre," he said. "Yield jumps are scary and will continue to grow."
He believes the industry can continue to do well if it continues to increase exports and domestic market share. Washington's climate is better for growing newer varieties that are gaining in popularity while the East's older varieties like McIntosh, Empire, Idared and Rome are losing out, he said.
Washington apple exports hit a record 36.6 million boxes in the 2011-12 sales season but that was up less than 2 percent from the previous year.
As of early December, exports were still running 20 percent ahead of the same period a year earlier but by Jan. 1 slowed to 8.7 percent ahead. The pace was mainly because of light crops elsewhere but the low value of the dollar compared with other currencies also helped, said Todd Fryhover, president of the Washington Apple Commission.
"Washington is a consistent, uniform, quality-driven and sophisticated supplier of fresh apples -- better than any other supplier in the world," Fryhover said.
But even more growth is needed in exports and for that to happen export promotions need to be stepped up and better funded, O'Rourke said.
The current $7.5 million a year in export promotions isn't enough to compete globally, O'Rourke said. The money comes from a 3.5 cent per box grower assessment and the federal Market Access Program.
While the industry is correctly targeting Southeast Asia, so are other apple producers such as China, Chile, New Zealand, France, Italy, South Africa, Argentina and Brazil, he said.
Even though China's production is down this year, it's still exporting 55 million boxes of apples, he said.
"Competition will be fierce and one of the big battles will be which varieties win out there (in Southeast Asia)," O'Rourke said. "New Zealanders say they are successful with Jazz and Pacific Rose and China is strong with Fuji. Asians like our Reds but what will they continue to buy?"
While growing middle classes in India, Indonesia and Vietnam are key to increased exports, they are not high-priced markets, O'Rourke warned. Those countries like Washington Red Delicious, he said, but with Reds running at $23 a box and costing $10 more to reach Southeast Asia, he wonders what the acceptable price limit is.
Europe is a declining apple market because of recession and a flat and aging population, he said.
O'Rourke pushed the idea of spending more on export promotions in December 2011 in his keynote address at the Washington State Horticultural Association, but his plea seemed to fall on deaf ears.
Large marketer-shippers prefer controlling promotions themselves like they have in the domestic market since 2003, and there's a lack of belief larger generic export promotions will really help, said David Douglas, president of Douglas Fruit Co., Pasco, and immediate past president of the Horticultural Association.
"During the heyday of the apple commission (huge generic domestic promotions) the commission had a $50 million budget, the industry committed all that money and saw it didn't have that much impact," Douglas said. "So to raise assessments -- it's hard to get people to buy into that."
Fryhover said the industry hasn't had to spend more on export promotions because demand exceeds supply.
"But today, as we get a glimpse of the future (of supply exceeding demand), we should be discussing this exact topic," he said.
The domestic market must be considered first because it has taken 69.2 million boxes per year, over the past five years, Fryhover said.
If strong export promotions are desired, it will take several times the industry's current 3.5 cents per box assessment, which funds not only export promotions but large portions of the budgets of the U.S. Apple Association and the Northwest Horticultural Council, he said.
In addition, Fryhover said, international promotions have issues not found in the domestic market -- multiple cultures and languages and global fresh produce competition.
Not only are greater promotions needed but so are larger efforts in market access and protection, O'Rourke noted. There are access issues in India, Indonesia and China, the largest growth markets. China, viewed as a potentially huge market, shut out all U.S. apples this fall over alleged pest concerns but more likely as leverage to gain access into the U.S. for its apples.
In a major policy shift, the Washington Apple Commission on Dec. 5 endorsed allowing Chinese apples into the U.S. as long as all U.S. varieties gain access to China. Only Red and Golden Delicious have been allowed so far. Fryhover believes Washington growers have more to gain in China than they will lose domestically because of superior quality.
But many in the Washington industry are still wary, if not fearful, of Chinese competition in the U.S. market.
One of the optimists is Mac Riggan, director of marketing at Chelan Fresh Marketing, one of the four largest apple marketers in Washington.
Riggan believes Washington can sell more apples to China than China can sell in the U.S.
"They screwed up with lead in the paint in Disney toys a year ago and tainted dog food," he said. "Costco doesn't want to mess with sources that are not proven in food safety and neither do American consumers."