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Pundit’s Mailbag —
Paying More For Farm Labor

Jim Prevor’s Perishable Pundit, June 29, 2007

Our piece, As Immigration Bill Comes To A Vote, Questions Surface On Farm Wages, led Billy Heller of Sunripe Produce to comment in an article we entitled, Pundit’s Mailbag — A Future Without Farm labor.

Now another industry luminary, Frank McCarthy, who we’ve heard from many times, including comments on cartoon marketing here, private companies here, and the passing of Ernest Gallo here, pointed out a flaw in the assumptions made in a quote we excepted from a U.C. Davis publication.

The simple and uncomfortable truth is that we live in a global economy. We have already seen close to a quarter of the Washington State apple business move South or off shore; virtually all of the frozen fruit and vegetables are already imported precisely because of high US labor costs.

The supply chain must maintain its margins to be viable so a $.05 a pound cost increase for apples ($2 for a 40-pound carton) is equal to roughly $.15 per pound at retail. For that kind of money (and much less), consumers and retailers will change vendors.

I believe that the export of American food production is the cheapest form of foreign aid and that the State Department has used this as a policy to help and bring stability to our neighbors to the South and West.

— Frank McCarthy
Vice President of Marketing
Albert’s Organics
Bridgeport, New Jersey

The quote Frank is referring to goes as follows:

In order to determine how much raising farm worker wages would affect food prices, we have to know: (1) the farmer’s share of retail food prices, as well as; (2) what share farm worker wages and benefits are of farmer revenue or costs. For most fruits and vegetables, wages and benefits paid to farm workers are about one-third of a farmer’s costs. Thus, farmers who get about $0.16 for a $1 pound of apples, and $0.19 for a $1 head of lettuce, have farm-worker costs of 5-6 cents on a typical $1 retail item of produce.

How much would farm worker wages increase if some of these immigrant workers were not available? In 1966, one year after the end of the bracero program, the fledgling United Farm Workers union won a 40 percent wage increase for table grape harvesters. Average hourly farm-worker earnings were about $7.56 for US field and livestock workers in 2000, according to a USDA survey of farm employers, and another 40 percent increase would raise them to $10.58.

If a 40 percent farm-worker wage increase were fully passed on to consumers, and if there were no farm productivity improvements in response to higher farm wages, the 5-6 cent farm labor cost of a pound of apples or a head of lettuce would rise to 7-8 cents, and the retail price would rise from $1 to $1.02-$1.03.

A large increase in farm wages translates into a small retail cost increase because: (1) farm labor is a third of farmers’ costs; and (2) farmers receive only a fraction of the retail price of food. For a typical 2.5-person consumer unit, a 40 percent increase in farm worker wages that led to a three percent increase in retail fresh fruit and vegetable costs would increase the spending of a typical consumer unit by $9 a year, raising expenditures from $301 to $310.

Frank points out the Achilles heel of the analysis. It assumes that an increase in farm labor costs would be passed through to consumers without any other increase in costs. Now we know that, at least as business has traditionally been done, that won’t happen. Supermarkets typically mark up based on a percentage. For example, when they buy a more expensive product, they try to maintain percentage margins.

So the question has to be, “Is there another way?” Is it possible to pay more to farm workers without it reverberating through the supply chain? It certainly will be a challenge, and in some cases impossible, as a higher price often carries additional costs. Accounts receivable must be financed… insurance is a greater expense… a truck takes on greater liability in carrying a more expensive item, etc.

Still, there may be ways to make adjustments. We really are talking about looking for a domestic version of Fair Trade programs. These programs, very popular in Britain, focus on paying a premium to a community to help the people of that area. We’ve been critical of Fair Trade because it tends to help one area at the expense of others.

Here, though, that is the point: We won’t be helping Mexico by not hiring their workers. The whole point is to preferentially help Americans so they will take these jobs. We will leave for another day the question of whether that is actually in America’s interest.

In the U.K., major chains such as Sainsbury’s have gone Fair Trade on whole categories. This involves paying more to help banana growers in St. Lucia. It seems there are many British citizens happy, even anxious to pay this “Fair Trade Premium.” Is it inconceivable that Americans might be willing to do the same, especially to help their fellow Americans and, at the same time, maintain a domestic produce growing base?

Another way is to have the government pay it. We already do this to an extent with our Earned Income Tax Credit. Under this program, as long as they have a job, low-paid people get money from the government to subsidize their wages.

If it is an important national priority to maintain the viability of our domestic produce industry, and if the domestic industry cannot survive if it has to pay American-level wages to do the work, perhaps the Earned Income Tax Credit could be expanded to provide a bonus to those who labor in certain “critical industries.” Perhaps those industries getting this "critical" certification allowing increased Earned Income Tax Credits would be the same ones who were intended to benefit from the AgJOBS program.

Perhaps all this is unlikely to transpire. If so, the options are simple: Increased immigration, legal or illegal, or mechanization. There seems little stomach in America for more immigration of low wage, low skill workers so we better hope mechanization comes quickly.

Frank’s comments on the use of food in foreign aid is on the money. We have used cheap food as a form of foreign aid. Yet among development experts, such aid is deeply criticized. These poor countries can’t compete on Boeing Jets and supercomputers, but they can compete on farm products.

By donating food, typically the big grain crops, we depress local markets and make it impossible for local farmers to make a living. Thus, in some cases, our aid feeds everyone today, but also impoverishes them long term. As the saying goes: “Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime.”

Of course, in today’s cutthroat business world, we also know that if you “Teach a man to fish, you introduce another competitor into the marketplace.”

By the way, did you know you can make those “talking fish” toys say whatever you want? Try it here.

Many thanks to Frank for his astute commentary.

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