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Perishable Pundit
P.O. Box 810425
Boca Raton FL 33481

Ph: 561-994-1118
Fax: 561-994-1610


email:
info@PerishablePundit.com

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Produce Business

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American Food & Ag Exporter

Cheese Connoisseur



FDA Fumbles Again On
Cantaloupe ‘Alert’

The situation regarding cantaloupe, salmonella and Honduras has been getting stranger by the moment.

The FDA started out by issuing an “import alert” regarding cantaloupes produced by Agropecuaria Montelibano:

FDA WARNS OF SALMONELLA RISK WITH CANTALOUPES FROM AGROPECUARIA MONTELIBANO
The agency detains products from the Honduran manufacturer

Agropecuaria MontelibanoThe U.S. Food and Drug Administration has issued an import alert regarding entry of cantaloupe from Agropecuaria Montelibano, a Honduran grower and packer, because, based on current information, fruit from this company appears to be associated with a Salmonella Litchfield outbreak in the United States and Canada. The import alert advises FDA field offices that all cantaloupes shipped to the United States by this company are to be detained.

In addition, the FDA has contacted importers about this action and is advising U.S. grocers, food service operators, and produce processors to remove from their stock any cantaloupes from this company. The FDA also advises consumers who have recently bought cantaloupes to check with the place of purchase to determine if the fruit came from this specific grower and packer. If so, consumers should throw away the cantaloupes.

To date, the FDA has received reports of 50 illnesses in 16 states and nine illnesses in Canada linked to the consumption of cantaloupes. No deaths have been reported; however, 14 people have been hospitalized. The states are Arizona, California, Colorado, Georgia, Illinois, Missouri, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Tennessee, Utah, Washington, and Wisconsin.

The FDA is taking this preventive measure while the agency continues to investigate this outbreak in cooperation with the Centers for Disease Control and Prevention and state partners. Such intervention is a key component of FDA’s Food Protection Plan.

The “import alert” was peculiar in several ways. First of all, what in the world is an “import alert”? Do we have something called a “domestic product alert”? What does this term mean?

Second, no consumer in the country and precious few produce clerks would have any idea if their cantaloupes came from a particular grower.

Agropecuaria Montelibano is a major grower and its product is marketed under well known brands such as Dole, Chiquita and Mayan Pride from Central American Produce — perhaps others. Since these are all imported products, there is an importer of record and a customs declaration filed on every shipment. How is it possible that more than 24 hours after the initial FDA statement, there is still no notice issued with brands that might actually mean something to consumers?

Third, what is with this cryptic “based on current information”? What exactly is this information? On what basis did the FDA decide this grower’s cantaloupes were unsafe?

Misinformation started spreading quickly. Dole did have cantaloupes from this producer and advised retailers and distributors to hold product — but did not do a recall. But a bunch of websites that were not paying attention picked up information about a Dole recall in February of 2007 and mistakenly announced that Dole had done a recall.

This information was picked up on websites, print publications, radio and television. It was a perfect illustration of Mark Twain’s admonition that “A lie can travel halfway around the world while the truth is putting on its shoes.”

Chiquita explained its position this way: “Out of an abundance of caution, Chiquita has withdrawn (not a recall) cantaloupes grown by the grower-packer referenced in the Import Alert and public advisory from FDA. Chiquita received no calls regarding consumer illness and is not implicated by FDA in the Salmonella outbreak. Chiquita made the decision based on its food safety commitment and to fully support the FDA action.”

Central American Produce emphasized to us its desire to act productively for the trade, and it also was following FDA recommendations to withdraw product from this grower. Yet it pointed out that it wasn’t 100% persuaded that there actually was a problem. The company pointed out that Agropecuaria Montelibano was a long-established producer with top food safety credentials.

Agropecuaria Montelibano itself issued a strong statement and made available many documents testifying to the strength of its food safety program:

Public Statement

The U.S. Food and Drug Administration has issued an import alert regarding entry of cantaloupe from Agropecuaria Montelibano, a Honduran grower and packer, because, based on current information, fruit from this company appears to be associated with a Salmonella Litchfield outbreak in the United States and Canada. The import alert advises FDA field offices that all cantaloupes shipped to the United States by this company are to be detained.

In addition, the FDA has contacted importers about this action and is advising U.S. grocers, food service operators, and produce processors to remove from their stock any cantaloupes from this company. The FDA also advises consumers who have recently bought cantaloupes to check with the place of purchase to determine if the fruit came from this specific grower and packer. If so, consumers should throw away the cantaloupes.

There is currently a multi-state outbreak of Salmonella Litchfield. CDC reports 58 cases in 16 states (California, Colorado, Georgia, Missouri, New Jersey, New York, Ohio, Oklahoma, Oregon, Tennessee, Utah, Washington, Wisconsin, Arizona, Illinous, and New Mexica) and Canada having culture-confirmed Salmonella Litchfield infections with matching PFGE patterns since January 10, 2008. The serotype is characterized as uncommon. Based on findings of a case-control study, CDC concluded a statistical association between consumption of cantaloupe and illnesses, and requested that FDA initiate a trace back.

The FDA is taking this preventive measure while the agency continues to investigate this outbreak in cooperation with the Centers for Disease Control and Prevention and state partners.

Even though we do not question the CDC study conclusion that relates cantaloupe and illnesses, we do question the incrimination of our company because:

  1. The incrimination is solely based on the trace back of two cases. By common sense, a trace back will never be reliable considering the fact that inventories are constantly moving at all levels of the supply chain and it is impossible to guarantee that the consumed cantaloupes were actually ours. And it is even more questionnable with so few cases being studied.
  2. The incrimination is missing the most important factor, which is a positive sample of our melons with a culture-confirmed Salmonella Litchfield with matching PFGE patterns. FDA has not performed any tests on our shipments and has not come to our farm to take any samples.
  3. At the moment we have 6 entries in process of examination with FDA prior notice codes:
    080076921702, 0076821451, 080077397691, 080077397816, 080077544831, 080077161835.

    We assume that the FDA will sample these shipments and perform appropriate tests. We will closely follow these results and inform you accordingly.
  4. We feel completely confident that all results will be negative and that our melons are not the ones that have created the problem based on the fact that there are a total of 113 specific salmonella analyses performed on our cantaloupes at independent certified laboratories that picked the samples themselves from December 22, 2007 to March 13, 2008 and a total of 24 specific salmonella analyses of packinghouse water, irrigation water, land, packing personal; done from the 12th of December 2007 to March 14, 2008. The results of all the analyses have been negative. It seems unlikely that any contamination would not have been identified in all these recent analyses.

You have honored us by being our custumers, many of whom go back since we started 30 years ago. Most of you and your costumers have visited our operation and know the amount of effort and dedication that every one of us put in to every detail. It is no accident that we have gained your confidence and the confidence of so many of your customers. The most important supermarkets and fresh-cut processors in the US, the UK and Europe buy our products. Every one of them has specific needs and requests, and we have managed to comply with them. This is what has allowed us to perfect our agricultural, packing, and cooling practices.

Besides complying with the customers’ own audits, we have been working with third-party auditors for many years, our last audit was done from the 15th to 22nd of January 2008 and our scores are as follow:

Santa Rosa Farm
Good agricultural practices 97%
Good manufacturing practices 96%

Montelibano Farm
Good agricultural practices 99%
Good manufacturing practices 98%

In addition, we are also certified under the GlobalGAP norm.

It’s still too early to quantify the damage of this precipitous action by the FDA, but it could mean bankruptcy and leaving up to 5,000 hardworking people jobless.

In this document you will find:

1. Cantaloupe microbiological analysis at origin

2. Cantaloupe microbiological analysis at destination

3. Packing plant water microbiological analysis

4. Irrigation water microbiological analysis

5. Workers hand microbiological analysis

6. Third party certificates

7. Honduran government official visits

We have a meeting schedule for Monday the 24th of March at 2:00 PM with the FDA authorities with representative from our company, Honduran officials and our legal representatives. We will keep you posted on the result of this meeting and all new developments.

In addition to the seven documents above, Agropecuaria Montelibano also made available several additional documents here, here, here and here.

The President of Honduras described the actions of the FDA as “unjust” and “extreme and imprudent”:

The president of Honduras on Sunday dismissed as “unjust” a U.S. alert urging consumers to discard Honduran cantaloupes after a salmonella outbreak sickened 59, saying the U.S. presented no evidence that the bacteria originated in his country.

The U.S. Food and Drug Administration on Saturday warned grocers to remove melons shipped by the Honduran company Agropecuaria Montelibano from their stock and suggested shoppers check with stores to see where recently purchased melons came from. It is also seeking to hold the company’s future cantaloupe shipments to the U.S.

Honduran President Manuel Zelaya called the move “extreme and imprudent,” noting that the melons were contaminated on their peel, not inside, meaning they may have come in contact with salmonella bacteria after they were shipped.

“It’s unjust that the (U.S.) has declared a unilateral health alert without any laboratory or clinical tests,” he told reporters.

Trade Minister Fredys Cerrato meanwhile called for the FDA to release details of studies it performed on the tainted cantaloupe to prove it was in fact from Honduras — where there has been no corresponding outbreak of salmonella.

“This is causing us direct economic damage,” Cerrato told CNN en Espanol on Sunday, noting that 5,000 Hondurans work processing melon, part of a US$100 million (€65 million)industry centered around the country’s southern Pacific coast.

Honduran agriculture experts will meet with FDA officials in Washington on Monday, he said, warning that the U.S. will have to compensate Agropecuaria Montelibano for its losses should the contaminated fruit be found to have other origins.

The FDA confirmed to the Pundit that it had no test results tying melons from Agropecuaria Montelibano to the outbreak but was relying on tracebacks based on consumer memory of what the consumers ate and when as well as survey results that made the consumption of cantaloupe the common factor among those sick with salmonella.

Of course, these are imperfect tools. Consumer memories can vary and salmonella, which typically is found on the exterior of the melon and affects the flesh only when the knife cuts through, could come in contact with the melons anywhere along the distribution chain.

Even assuming the FDA is correct and this farm’s product was the source of the salmonella outbreak, its actions in the “import alert” seem overly broad.

First the Centers for Disease Control tells us that there have been no new cases discovered since March 5, 2008:

An investigation that used interviews comparing foods eaten by ill and well persons is showing that cantaloupe from Honduras is the likely source of the illness.

Between January 18 and March 5, 2008, state health departments identified 50 ill persons in 16 states infected with Salmonella Litchfield with the same genetic fingerprint. Ill persons with the outbreak strain have been reported from Arizona (1 person), California (10), Colorado (1), Georgia (2), Illinois (1), Missouri (1), New Jersey (2), New Mexico (1), New York (5), Ohio (1), Oklahoma (2), Oregon (5), Tennessee (1), Utah (5), Washington (9), and Wisconsin (3). In addition, 9 ill persons with the outbreak strain have been reported in Canada. Their ages range from <1 to 93 years; 58% are female. At least 14 persons have been hospitalized. No deaths have been reported.

Salmonella has an incubation period of 12 to 72 hours after infection. So if the last person was reported sick on March 5, 2008, any melons sitting around would be over two weeks old and probably more than three weeks old. An FDA spokesperson told us that the reported cases had been following a bell curve so they had tapered off substantially by March 5, 2008 when the last case was reported.

So how does urging consumers to throw out melons that were imported on Friday help them be safe from salmonella tainted melons imported in January or February? This makes no sense.

And why impose an alert against a whole company as opposed to a particular packing house or farm or field? That also makes no sense. If you read the link to third-party certifications, you will find the Primuslabs.com/GlobalGAP certification for Finca (that is farm) Apacilagua, Finca Montelibano and Finca Santa Rosa. Who says that the melons being shipped by the company in March came from the same farm, much less the same field, as the production back in January or February when, theoretically, there might have been a problem? Who says they came from the same packing house?

We commend Agropecuaria Montelibano for its transparency in releasing so much information. From Scientific Analysis Laboratories Ltd. reports done for Dole’s subsidiary JP Fresh in the United Kingdom to the PrimusLabs.com Good Manufacturing Practices and Good Agricultural Practices and GlobalGAP audits, it is clear this is a company dedicated to world class production and proper food safety practices.

Now that doesn’t mean Agropecuaria Montelibano can’t have a problem, but the proper announcement would be to urge people not to consume melons imported in January and February in case a few people have some in the freezer or preserved the cantaloupe in some way — not to crush a company and a country and disrupt an industry for no purpose.

We are the first to stand up for the consumer and we are deeply sorry that anyone was sickened from these products at any time. But this is not about helping consumers — the FDA was just too slow for that in this case — this is about the FDA trying to make itself relevant when its role has basically passed.

We commend the President of Honduras for standing up for what is right. We hope he sticks with Agropecuaria Montelibano, and we extend our hope that the company, the country, and the US trade damaged by this unjustified action should all make a speedy recovery.

******

One quick take away: It is prudent for legal entities to be as small as possible. If the three farms we mentioned all were separate companies shipping under separate legal entities, the FDA “import alert” would likely not apply to all of them.




Wal-Mart Announces
Product Removal Fee

Not too long ago, we received a letter from a QA executive at an important retailer:

I’m a loyal reader and am in Quality Assurance for H-E-B, a retailer located in Texas and Mexico.

I’ve been working on our recall system and on improving it. I’ve heard but been unable to confirm that some of the other retailers (Wal-Mart, Kroger, Albertsons) charge suppliers for recalls. This is a charge in addition to the value of the products removed and not in lieu of discharging any liability.

Do you have any information on this? How much do they charge? Could you have other readers weigh in on this issue?

— Richard Parker
H-E-B Quality Assurance Analytical Services
San Antonio, Texas

It seemed like a reasonable question, and with the cantaloupe situation certainly top of mind, so we called around a bit to ask about policies. On the foodservice side, it was a pretty easy question. Virtually all foodservice distributors seem to charge suppliers for conducting a recall. These are charges that are in excess of actual costs for product loss, transportation, etc. Essentially, the foodservice distributors are imposing a penalty for the hassle.

We couldn’t determine any rhyme or reason as to how the fee was set — for a small recall from a midsize distributor, we were quoted fees from $5,000 to $15,000.

Retail seemed more difficult. Although most retailers claimed that their contracts or policies allow them to impose such charges, many report not having done so in the past.

This seems like a timely issue, as Wal-Mart’s legal department has recently sent out a piece called the “Product Withdrawal Letter” and it packs quite a punch:

March 4, 2008

Dear Wal-Mart Supplier,

As you may have heard, at last week’s Supplier Summit we presented to our supplier partners a new policy on product removals (including recalls and withdrawals). As we described at the Summit, the current version of the standard Suppler Agreement allows for Wal-Mart to recover all costs, including lost sales, associated with a recall of merchandise for any reason, and Wal-Mart intends to begin recouping some of our costs associated with a recall that is the result of a supplier issue.

Our hope is that there is never the occasion to actually collect such withdrawal costs and that we don’t have any product removals. But the reality is that when there is a removal due to issues within a supplier’s control such as labeling errors, quality, contamination, or government requirements Wal-Mart incurs significant labor and store-related administrative costs for executing the withdrawal. Our costs increase substantially if the product being withdrawn must be managed as hazardous waste.

Accordingly, effective March 1, 2008, Wal-Mart will assess a minimum charge of $20 per store for all product removals to recover store labor costs associated with a withdrawal. In addition, if the supplier requests Wal-Mart dispose of the removed item at store level, Wal-Mart will assess a minimum disposal charge of $50 per store. Removals of chemicals or other items that must be managed as hazardous waste in our stores will result in a minimum disposal charge of $200 per store to offset the higher cost of proper hazardous waste disposal in addition to the store labor costs. Product removals that are to be sent to the return centers for consolidation will incur the $20 per store assessment (as described above), plus handling fees as outlined in the supplier agreement. We will not assess any charges for items that are subject to a “pull and hold,” unless that “pull and hold” ultimately results in a removal of the item. For your convenience, I have attached the current version of our Withdrawal Processing Fee Guide.

Wal-Mart also reserves the right to seek any other remedies or relief as may be appropriate in the event of a product withdrawal, including recovery of lost profits. Such determinations as to whether to seek recovery of profits will be made on a case by case basis by Wal-Mart. Wal-Mart also reserves the right to seek any other remedies or relief as may be appropriate in the event of a product withdrawal.

We greatly value our partnership with our suppliers, and look forward to providing our customers with the quality products they deserve so that they can save money and live better. Should you have any questions about this new process, please feel free to contact me or Steve Wyckoff at (Phone number and e-mail address redacted by the Pundit).

Sincerely,

John Peter Suarez

CC: Jack Sinclair
DeDe Priest
Pam Kohn

To help explain the process, Wal-Mart, sent along with the letter a handy Wal-Mart Stores Product Removal Processing Fee Guide:

Wal-Mart Stores
Product Removal Processing Fee Guide

The following product removal processing fees apply to the withdrawal, removal, or recall of any product from Wal-Mart stores and distribution centers that is the result of quality concerns, labeling errors, possible contamination or threat of illness, packaging errors, regulatory requirements, adulteration, purported infringement or other legal claim or concern, or any other reason that is the result of a supplier-controlled product issue. These fees will not apply if the product removal is the result of Wal-Mart’s improper handling of the item.

$20 minimum per store per item number/UPC withdrawn — Every item (each item number or UPC) removed from sale will be subject to this assessment to offset store labor and associated administrative expenses incurred as a result of the removal. An additional assessment may apply for increased costs in unusual situations.

Item disposal fees — Wal-Mart prefers that all non-hazardous/non-chemical items be returned to the Supplier for proper management or disposal. Any item disposed of at store level would be subject to the following additional minimum charges:

$50 Minimum per store for non-hazardous/non-chemical items disposed of at store level in compactors.

$200 Minimum charge per store for any item that must be disposed of through our hazardous/chemical waste management process. Depending upon the volume and weight of the item(s), this charge may vary and alternative methods of managing proper disposal may be required.

Additional charges for any unusual processing or burdens may be assessed.

Suppliers are responsible for all shipping costs.

Shipments to and consolidations by the Return Center will include a handling fee as provided for in the Supplier Agreement.

Items that are subject to a “Pull and Hold” will not incur any fees unless and until the “Pull and Hold” results in an actual removal of the item.

Additional costs related to any special handling requirement or burdens will be addressed as circumstances warrant. To be clear, the fees as provided in this guide are the minimum fees, and do not limit Wal-Mart’s right to recover any costs (whether at store, DC or Return Center) of a product removal greater than the guideline amounts.

The following are examples of how Wal-Mart will assess Product Removal Processing Fees.

Example 1 — A supplier has three items in 1,100 stores that are removed from sale and returned to the supplier for management and disposal.

Example 2 — Same scenario as first example, except the Supplier opts to have the non-hazardous items disposed of at the stores.

1. Processing Fee only
Fee per item (UPC)$20
Number of Stores1,100
Number of items withdrawn2
Total processing fee$44,000
2. Processing fee plus non-hazardous item disposal
Processing fee (see example 1)$44,000
Non-hazardous disposal fee / per store$50
Number of stores1,100
Disposal fee sub-total$55,000
Total withdrawal fee charged to supplier$99,000

Note that, in any case, the Supplier will be obligated to bear any shipping costs and any Return Center handling fees.

We suppose there is some rationality to the idea of imposing fees on vendors. There are expenses. Presumably the vendor could have prevented them — and, anyway, they might be covered by insurance. Although in the spinach crisis of 2006, there never was an actual recall and the insurance situation was dicey.

Yet we also sense an argument beyond this. Maybe we hear the voice of the Poppa Pundit teaching us that you don’t kick a guy when he is down.

After all, the letter mentions the “partnership” Wal-Mart has with its vendors. A partnership presumes good faith dealing, so Wal-Mart knows that its “partners” did all they could. Nobody is questioning charging the vendors for the cost of product, transportation, dumping costs, etc. Is it really necessary to heap insult upon injury and ask one’s “partner” to compensate for employees in the stores anyway who throw some produce in a box or fill out some paperwork?

It is also notable that Wal-Mart is not going to actually prove before a neutral party that it cost them anything at all — they are just going to take the money from unpaid invoices.

Maybe this is thinking too far out of the box for Wal-Mart or other buyers to contemplate, but here is a theory: We will have better food safety in the industry if buyers suffer when there is a recall.

One of the basic food safety issues for the industry is how to encourage a culture of food safety. When Costco had a recall on carrots, we were a little shocked to find a premier player such as Costco buying from anyone other than the premier name in the business.

It was indicative of an industry-wide cultural problem in which buyers buy to spec but have no incentive to go beyond spec. This can make sense in terms of product quality: If Wal-Mart’s snack bar has a market for a cheap hot dog but the hot dog buyer is offered an all beef, kosher hot dog at a much higher price, it makes no sense to buy it, even if the higher price is a “bargain”.

Yet food safety is more problematic. Because there is no absolute food safety, we can only judge based on procedures. Yet if Vendor A significantly exceeds the retailer’s requirements on food safety, the retail buyer has no incentive to pay more for this product.

In other words, regardless of the CEO and the VP issuing pronouncements about food safety being the top priority — it is never the top priority in any individual procurement transactions.

Imagine the sea change in culture it would cause if instead of issuing the memos we reprinted above, Wal-Mart issued this memo to its own buyers:

Food safety is the Number One priority here at Wal-Mart. There is nothing more important to us than ensuring the health and safety of our customers.

QA has done a great job of pre-qualifying vendors, but as the buyer, you are the closest to the field. We are happy to pay more for product that exceeds our food safety standards.

We view our vendors as partners. As such, though we will continue to charge for actual losses such as product and transportation in the event of a recall, we are going to eat the cost of our own staff time in the event of a recall.

Partly this is because our vendors are our partners, and we are not going to kick a partner when he is down.

Also, though, this is because we want you, as our associate, to realize that we consider food safety a shared responsibility. Sometimes by pushing prices down too far, we can put pressure on vendors not to follow the optimum food safety procedures.

Occasionally we recognize that there is a superior vendor who follows better food safety policies, but we buy somewhere else for price. Sometimes we demand continuity of supply when no available area meets the highest standards.

Once in awhile, we use subterfuge to get around our own systems, so we may require QA to sign off on a vendor, but then we ask a vendor to act as a broker and buy some product for us from someone not fully vetted.

Perhaps we waive our food safety standards to accomplish other goals such as locally grown programs.

In all these cases and more, we are to blame for a food safety outbreak as much as the actual producer of the product.

We hope the knowledge that we are going to charge the fees that we would have charged the vendors to the specific department that has the recall will serve as a powerful reminder of your role in executing Wal-Mart’s responsibilities toward food safety.

A memo like this would change a lot of attitudes toward food safety and the notion of partnering with vendors. Unfortunately, we wouldn’t hold our breath waiting to receive it.

As for Richard from HEB, we really appreciate the letter and certainly invite the industry, as per Richard’s request, to weigh in on the matter.

We’ve done our best to present what others are doing, but we would caution that just doing what others do is the path to mediocrity. Maybe HEB can rise above the short term maximization of profit and set a policy that strives for a true partnership with vendors.




Tanimura & Antle Changes:
A Sign Of The Times

Sometimes when events occur, we make the mistake of focusing on why the changes occurred as opposed to asking why things were as they were.

On November 1, 2004, Ready Pac announced the completion of its acquisition of the Salad Time fresh-cut processing unit of Tanimura & Antle. As part of the deal, Ready Pac took over Salad Time’s processing plants in Salinas, Montreal, Jackson, Georgia, and Plymouth, Indiana.

At the time, Ready Pac said the Salad Time business did a volume of about $220 million each year.

When that deal closed, we expected Tanimura & Antle to thin down its management, on three counts:

  1. That was a big chunk of its business, so Tanimura & Antle would now be a smaller company.
  2. Although we would be the last to say that running a commodity vegetable company is easy, running a national fresh-cut processor with regional plants requires marketing, product development, food safety and other competencies that go well beyond what most commodity shippers have to maintain. It is just a more complex business.
  3. Value-added has higher margins than shipping commodities and thus can sustain a thicker management structure. Commodity sales means basically commodity prices, which places an imperative on reducing costs.

Tanimura & AntleSo after Tanimura & Antle management lost responsibility for running Salad Time, we expected the other shoe to drop in terms of reductions in the management team at Tanimura & Antle. Yet it never did…at least until this month.

The best explanation is an expectation on the part of strategists at Tanimura & Antle that it would be able to grow substantially or do acquisitions as part of a supply side consolidation that would match that which has occurred on the retail side. That has still not occurred.

We can all have a lot of fun with industry gossip, but our sense is that it is this lack of consolidation that is a big part of the “story behind the story” of the resignations of President Ken Silveira, Rick Bravo, vice president of sales and marketing, and Rick Russo, vice president of crop management, from Tanimura & Antle.

For years now, Tanimura & Antle has maintained an executive infrastructure expecting to be able to capitalize on a consolidation that has simply not developed.

Of course, this still raises the question of why act at this particular moment. The answer to that lies in a few other dynamics that are confronting the industry.

One is the way in which the growth of processing is distorting pricing on commodity items. In February. we ran a piece entitled, Just Say No: The New Dynamic Of Producer/Buyer Relations, in which we discussed Tanimura & Antle’s decision to cease most sales to processors. One of the unwritten subtexts of that decision poses a real challenge for the industry.

The fresh-cut industry may look to buy inexpensively but each firm has a vested interest and in some cases a contractual obligation to keep whatever shelf space it has at retail. So if raw material is short, processors will fight hard for available produce. The heavy purchasing from processors reduces bulk supplies available for the fresh market, which drives up FOBs that then get reflected in higher retails. Those retails can be a little “sticky” and come down far more slowly than the FOBs come down.

These higher retail prices depress consumer demand, so the processing-driven run up winds up depressing the sales of bulk product. To a significant extent, that is what happened last October as high prices wound up sewing the seeds of lackluster demand.

Much as selling Salad Time reduces the size of the organization and the managerial complexity of running it, the decision to not sell to processors pointed to a reduction in the breadth and depth of management needed to run the company.

Another issue is that competitive uses for land are making production of crops on leased acreage less feasible. All over the produce industry, from the strawberry industry in Florida to leafy greens and vegetables in Salinas, we hear the same refrain: we can make a living on land we own, even if we may not be getting an appropriate return on the value of that land, but leasing land to grow produce is often a loser.

In parts of California, we are told that land people were happy to lease to grow cantaloupes at $100 an acre is now bringing $400 to $700 an acre to grow wheat.

High prices for grains and competition from biofuels, including ethanol, are making it marginal, at best, to rent land to grow more produce. Now Tanimura & Antle and the families behind it have a pretty impressive asset base; it will be one of the nation’s largest produce companies without renting an acre. But, once again, reducing the use of leased acreage both reduces the size and complexity of the business and thus reduces the need for the kind of management team that was in place at Tanimura & Antle.

Obviously you never like to see people lose their jobs, though Tanimura & Antle is a larger organization and one supposes that people had employment agreements and didn’t leave empty handed. Also, traditionally, Tanimura & Antle executives have been coveted for managerial positions in other firms, so we suspect and hope that Ken and the two Ricks will land on their feet and soon.

Yet to us this story is not really about three respected industry executives or one prominent firm; it is about big challenges facing the Salinas Valley and the industry at large:

  1. Too many marketers for the number of buyers is leading to undisciplined markets.
  2. A growing processing sector disrupts the normal ebb and flow of pricing in the bulk commodities, with run ups at retail leading to depressed commodity markets.
  3. Competitive use for land from higher paying industries outside of produce is starting to restrain production in some areas.

There may not be much we can do about land being prized for other agricultural uses, but both points one and two relate to the strength of marketing organizations. When the Pundit was just a pup in the industry, we had the pleasure of learning from Marty Michaelson, a longtime family friend who ran a company called United Apple Sales in New York State. He taught us that the size of a crop was only one consideration in its impact on pricing. Although he marketed New York apples, he explained that a bumper crop in Washington State had far less effect on pricing than a big crop in Michigan, New York and other areas.

The reason was that the large shippers from Washington were more disciplined marketers with greater capabilities and would manage the increased volume. Many of the other regions had smaller shippers, many of whom would wind up dumping product in terminal markets, which would cause a price collapse.

We need fewer, larger, more capable, more disciplined marketers better able to negotiate with large buyers and able to smooth market gyrations caused by processing needs.

For the moment, Tanimura & Antle has adopted a ”back to the future” strategy, bringing Bob Antle back running the sales desk. The history of the Tanimura and Antle families is a rich one, and among the great winners from this situation are the salespeople at Tanimura & Antle who will get to work side by side with an industry legend.

Bob Antle joined his father’s (Bud Antle) company back in 1949. Things have changed a lot since Bob ran the sales desk. There is a lot more program business and there are a lot fewer buyers to sell. But the basics of sales don’t change and in some ways by pulling back to a core operation, one is liberated to do what one does best and to start building again on a new and stronger foundation.

We wish Ken Silveira, Rick Bravo and Rick Russo a speedy voyage to the next stage of their careers, and we wish the Tanimura and Antle families as well as all the folks at Tanimura & Antle a prosperous future.




Lousy Fruit Undermines Consumption

Elizabeth PivonkaWe think we should nominate Elizabeth Pivonka, President of the Produce for Better Health Foundation, as the holder of the most thankless job in the industry. Here she is charged with boosting consumption through marketing and education and we so often don’t do the job with product and at retail that is required to build consumption.

This weekend, we went shopping at a local supermarket — part of a well-respected chain — and bought lots of fresh fruits and vegetables. Most were fine but among the purchases was one box of imported clementines and some imported nectarines.

We typically eat these clementines like they are candy. Sweet, seedless and perfect for little kids to peel themselves — but at the bottom of the crate there were four dead rotten clementines. After gingerly dumping those and putting the “good” fruit in a bowl, we gave one to the Jr. Pundit Primo, aka William, age six. He spit it out. We don’t blame him. It was dry and basically inedible, as was the next one we tried and the one after that.

Fortunately we had those nice nectarines but, once again, one bite showed they ate like sawdust. They were rock hard and basically inedible.

Now we suspect that the store will gladly refund our money or give us other fruit if we ask, but it should be noted that there is no signage indicating that at all. Plus it is an inconvenience; we don’t go there every day, and we probably won’t have the product or the receipt with us when we do go back.

Maybe the nectarines can be ripened… we are putting them in a paper bag and we will see. But there was no signage or other suggestion that this fruit is unfit for human consumption if you don’t put it through a procedure.

Now the problem is that both of these situations are not aberrant. It is not the luck of the draw that we stumbled on bad produce in an island of great product.

The clementines are either very old or really at the end of the season. The same store didn’t have clementines the week before — at least not on the floor. We went back to look at the other cases of clementines, and every case has rotten fruit, some with insects flying around. It shouldn’t be for sale. Yet there it is on the sales floor of a highly respected chain in a fairly fancy neighborhood.

Was this a forced distribution? A manager who “discovered” some product in the cooler? We don’t know but someone was putting shrink reduction ahead of the customer.

Our nectarines weren’t an exception either. All the nectarines were hard as a rock and tasteless. Yet there was zero signage as to what consumers should do about this fact or if anything should be done at all. We are not sure that fruit such as this should be sold at all. If it is put on display, it certainly should be sold with a clear indication as to what a consumer can expect to do to make it edible.

Consumption in general can only be increased if individuals consume more. It is no small matter for a six-year-old to be turned off to our products because we offer lousy produce for sale.

Warren Buffet, the famed billionaire investor, once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Elizabeth works hard, as have a long line of staffers and board members at Fruits & Veggies — More Matters, Five a Day and the Produce for Better Health Foundation, but whatever good they do can be undone in one bite by a small child sold subpar fruits and vegetables. We better start thinking about doing things differently.




Lessons For Everyone
From Bear Stearns

With the collapse of Bear Stearns there will be many questions to be addressed. One valuable one is for all business people to understand how such a dramatic collapse could occur.

When The New York Times did a piece on March 20 entitled, At Bear Stearns, Meet the New Boss, it covered the visit of James Dimon, the CEO of JP Morgan Chase, to visit the executives at Bear Stearns. He made a point of not blaming Bear’s top executives:

“I don’t think Bear did anything to deserve this,” Mr. Dimon said. “Our hearts go out to you.”

“No one on Wall Street could have anticipated this,” he continued.

That may have been a politic thing for James Dimon to say. After all, Bear Stearns employees hold about 30% of Bear Stearns stock, and he needs their votes to complete his acquisition.

But it is not true.

What happened was unpredictable as to timing but highly predictable as to likelihood.

There are two timeless business lessons that the collapse of Bear Stearns should remind all business people of:

1. Leverage is a two-edged sword.

Bear Stearns’ assets were 33 times greater than its equity capital. In other words for every dollar Bear had, it borrowed 32 dollars to buy investments. Among other things, this means its vaunted great investors were not so great. Tiny advances in the market price of assets it bought would translate into enormous returns because the equity base was so small.

Conversely, Bear Stearns was always at great risk because tiny decreases in market value could leave the company insolvent.

In other words, if Bear had a billion dollars in equity, it would then borrow $32 billion and wind up owning $33 billion of assets. If the value of the assets went up 5%, Bear made $1.65 billion, or a 165% return on the one billion in equity.

Conversely, if the value of the assets dropped by 5%, the $33 billion in assets would be worth only $31.35 billion, and since Bear borrowed $32 billion, the company would have negative equity of $650 million — in other words, Bear would be insolvent.

Bear supposedly engaged in sophisticated risk management techniques so it could diversify its risk and hedge its positions and thus not be as much of a house of cards as its thin equity position would imply. However, as we learned from the collapse of Long Term Capital Management (LTCM), whose Board of Directors included Nobel Prize winners Myron Scholes and Robert C. Merton — Scholes being the father of the Black-Scholes option pricing model — even brilliant minds cannot account for future changes in relationships between different asset classes.

The Wikipedia entry for LTCM describes what happened this way:

… if the fund had been less leveraged, it would have weathered the spike in volatility and credit risk: In the end, the idea of LTCM’s directional bets was correct, in that the values of government bonds did eventually converge. Due to the high leverage, however, this only happened after the firm’s capital was wiped out. Thus, the incident confirms an insight often (though perhaps apocryphally) attributed to the economist John Maynard Keynes, who is said to have warned investors that although markets do tend toward rational positions in the long run, “the market can stay irrational longer than you can stay solvent.”

2. Borrowing short and lending or investing long is a big problem.

Even Bear’s high leverage might not have proven its undoing — if the maturity of the leverage matched or exceeded the holding period for the assets. In other words, even if you over-leverage your house, as long as you can make the payments, over long periods of time the market may come back and save you.

Many of the problems in the market today, of Bear Stearns, but also companies such as Peloton and Carlyle Capital, are not due to investments in subprime mortgages that turned out to be worthless. Many of the problems are due to changing valuation for assets such as the bonds issued by Fannie Mae and Freddie Mac. These are referred to as “Government Sponsored Entities” and occupy a kind of nether land between “full faith and credit” bonds issued by the federal government and corporate bonds for which the government is not responsible.

If an entity sells 30-year zero coupon bonds and thus becomes highly leveraged but then uses the money to buy Fannie Mae 29-year-and-11-month zero coupon bonds, if market valuations shift and the Fannie Mae bonds drop in value, the entity may be technically insolvent, it couldn’t liquidate its assets and repay its debts — but that doesn’t matter. The entity doesn’t have to liquidate its assets, it can hold to maturity and as long as Fannie Mae pays its bonds upon maturity, the entity will have enough money to pay its obligations.

The problem here is that all kinds of financial institutions were attempting to make the differential between long and short term rates by borrowing on very short maturities, such as overnight, and investing in long term bonds and other long term investments, many of which had Triple A ratings.

But all that had to happen is that for any reason people and organizations didn’t want to roll over those 24-hour loans, and hedge funds and investment banks were forced to start selling their better holdings to raise cash. This put pressure on the market price for these higher quality holdings and turned a liquidity difficulty into an insolvency problem.

It is worth noting that just as Long Term Capital Management was correct, if it had been able to hold onto its investments, everything would have turned out all right, so too, if Bear Stearns had been less leveraged or had leverage with maturities tied to the maturity of its holdings, it is very possible that it would have come out of the current economic situation in very good financial shape.

****

The dangers of leverage and its timing are not confined to Wall Street. Produce companies have filed for Chapter 11 never having missed one payment, but just because a bank decided not to roll over a loan — the value of land and changes in banking made it impossible to find someone to take over the loan — and that was the beginning of the end.

Had these produce companies raised equity to lessen their leverage or acted to keep the maturity of their loans always far in the future, it was unlikely they would have had to file.

The government’s efforts to manage the situation may or may not work. Although stepping up to save Bear Stearns may have avoided panic, it reduced the transparency of the market. In some ways, the best thing would have been to auction of Bear Stearns assets so clear values could be assigned. This would make people confident in doing business with other holders of the same assets.

Andrew Mellon Herbert Hoover disagreed with Andrew Mellon, his Secretary of the Treasury, who had served three presidents and was widely seen as the greatest treasury secretary since Alexander Hamilton. When the stock market collapsed, Mellon famously argued that the government should “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” — in that era before Stalin’s Great Purge, he didn’t mean to kill anyone, just to not stand in the way of bankruptcy laws and markets for that would require debitors to liquidte assets to pay lenders whatever they could.

In economic terms, he was arguing that the prices of assets had to be allowed to fall in order to clear the market for each asset. He felt this would “purge the rottenness out of the system” and that once this was done, a recovery would be swift.

The bail out of Bear Stearns — the Treasury has agreed to basically guarantee the asset value of $30 billion in assets although a change in the agreement now calls for JP Morgan Chase to take the first billion dollar hit itself — can best be seen as the government resisting Secretary Mellon’s advice from the grave.

We will know soon enough if the government’s efforts will work.

Clearly for an individual business looking to avoid liquidation, decreasing leverage and ensuring the maturity of any debt is far in the future is a consideration of prime importance.




Pundit’s Mailbag — Observations On
Fresh & Easy’s Competition And Britishness

Our coverage of Tesco’s journey to America has often focused on business aspects of the launch of its Fresh & Easy concept. Yet in the end, the success or failure of the concept is likely to depend, as much as anything, on consumer acceptance of its private label offerings, including fresh-cuts and prepared foods.

The minute we saw that 25% of the fresh-cut salad SKUs were being devoted to watercress-based salads — popular in Britain but not so in America — we wondered if British perceptions were being allowed to influence product selection.

One of the most innovative women on the production side of the fresh produce industry sent us a note regarding her first experience with a Fresh & Easy:

I wanted to let you know that I visited my first Fresh & Easy… in Las Vegas… across the street from a Wal-Mart Neighborhood Market… and caddycorner from a very nice Albertson’s.

Anyway… I used to live in London and know Tesco well. I preferred M&S and Sainsbury’s myself, but I think that is because they were very close to my home in London.

Anyway… to the point… loved the Wal-Mart store… reminiscent of a Whole Foods/Trader Joe’s style… produce was the best area.

Afterwards I went to the Fresh & Easy and the parking lot was empty. It was just one other person and myself in the store. I bought a bunch of the value-added produce items to research them, but what I found interesting is that there was a corporate person there hanging out and talking to an employee up front who was there to help you self check-out. She was doing an exit interview on the other person when I was checking out.

I also bought a curry chicken salad for my flight… and once safely on my plane, I saw that the single serving had 850 calories and 65 grams of fat. YUCK. I didn’t eat it. Obviously… anyway… all your commentary made me curious… and thought the corporate survey person doing an exit interview while the employee was working and right in front of a customer was sort of odd too.

This letter is really written from a consumer perspective and points to two things. First, competitive stores respond to the strengths of a new competitor. We mentioned here that Safeway was responding to Fresh & Easy and, doubtless, all nearby stores have it in mind.

Stores near Fresh & Easy are disproportionately being slated for remodels and upgrades, assortment is being adjusted, and price promotions are focused on perceived areas of strength for Fresh & Easy.

Second, it is interesting that it was a dish with curry that our correspondent found so awful. Long ties between India and Britain have led Indian cuisine to be very popular in the UK and in many ways the centerpiece of the prepared foods efforts of food retailers in London.

One wonders if, along with the watercress salads, this is another example of British influence on the product mix.

As far as the odd exit interview — sounds to us as if the corporate exec didn’t actually expect to find many customers in the store!

Many thanks to our correspondent for sending along her insights.

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