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Buyer Commitment To Higher Standards
Means Willingness To Pay More

Jim Prevor’s Perishable Pundit, November 16, 2007

When WGA issued its letter to Publix, we questioned the applicability of some its concerns:

WGA seems to be missing the important point that Publix is a company free to make its own procurement policies. Even its letter to Publix, in point ten (10), seems to imply that WGA is missing this key point:

10) How do you propose to impose these standards internationally without violating WTO and other international trade agreements?

This literally makes no sense. As a corporation, Publix is not bound by any WTO rules. Publix is free to announce that it chooses not to buy produce, for example, from China — case closed. It is the government that is bound by WTO rules. The government cannot enforce rules against foreign countries that are not enforced against US producers and are not justified by the science. But private companies can and do discriminate every day.

Other issues that are raised in WGA’s letter really don’t make economic sense as questions to be asked. For example points 8 and 9:

8) How do you propose to reimburse growers/handlers for the increased costs of these food safety measures? Will you agree to a “food safety line item” on invoices that would be auditable?

9) Do you now reimburse growers/handlers for the increased costs already incurred by complying with the existing standards for lettuce and leafy greens?

Al Siger of Consumers Produce, speaking at WGA’s Annual Meeting in Maui, made this point:

On market valued produce commodities (as opposed to value-added such as fresh-cut) adding a line item charge for any item, whether it be palletizing, pre-cooling, or food safety, has a net effect of zero in terms of returns to the seller. Buyers paying a $5 fob plus a $2 charge factor their selling prices the same as they would paying a $7 fob with no additional charges. Markets go up and down based on all costs to the seller, so adding a line-item charge will only reduce the fob prices accordingly.

We would expand the point to say that the key interest of growers when it comes to food safety is making sure buyers constrain their supply chain.

The real problem for growers is not the expense of meeting the new Food Safety Leadership Council standards. The problem is making sure the buyers really are committed to the product.

Typically, if a buyer wants something that is not standard practice — say the product put in RPCs — few people are willing to do it on the come. They want a contract. But the instant Wal-Mart told its suppliers this is what it wanted, the suppliers were willing to do it.

The disagreement over the metrics and complaints about its arrogant way of handling things obscures the real issue with the Publix letter. There may be a few things in the Food Safety Leadership Council metrics that are impossible in some places. But if they are impossible, they won’t be done, and the metrics will be changed.

But if Publix had gone to its Romaine vendor and openly negotiated a fair price for a contract for 10 trailers a week of Romaine grown to its specs, the whole thing probably would have never gone to Western Growers. The grower would have been busy figuring out a reasonable price.

Alternatively, Publix could have said it wants to develop a national market for product grown to a special food safety specification and, as this alternative market will have a different cost structure and, more important, a different supply and demand dynamic, Publix recognizes this product — just as organic product — will have a separate price point.

In this case, to entice growers to grow to this standard, Publix would commit to buy X amount of produce of this new standard over some time period.

The truth is that the only people who would sign a contract such as the one Publix drafted — a contract that imposed tremendous expense on producers without any reciprocal responsibilities on buyers — would be people who weren’t taking it literally. These may be some long-time Publix vendors who were whispered sotto vocce that the vendors were going to get the business and they could rely on those informal representations.

Al Siger is right; markets determine prices, not in the way it is laid out on the bill. So since a separate $2 charge for “food safety” alters neither supply not demand, it will not alter grower returns.

To ask how buyers will “reimburse” producers for food safety costs is no more helpful than asking how buyers will “reimburse” growers for real estate taxes, insurance, labor or any other cost of production. All these things are paid for out of the price they pay. If the price is not equal to the cost of production and the cost of production cannot be reduced, then production will fall until the market clearing price allows people to stay in business.

Tough food safety standards actually will increase returns to top producers. Many growers won’t be able to meet them, so supply will drop. If WGA wants to help boost grower returns, the focus should be on making sure that buyers who urge high food safety standards don’t ‘cheap out’ and buy sub-standard product when the higher standard product gets pricey.

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