All bogged down
Record cranberry crops, soft markets force industry to eye marketing order
By Pamela J. Karg
Where Ocean Spray Cranberries goes, so goes the entire industry. These days Ocean Spray and the cranberry industry are both in a severe slump. A glut of fruit has depressed prices to levels that have many growers hovering on the brink of bankruptcy.
In only a few years, the price of a barrel of cranberries has plunged from a high of $80 to lows of near $11. A grower needs to make about $35 a barrel just to break even.
Ocean Spray has for many years been a poster child of success for farmers who want to add value to their crop by processing and marketing it themselves. Indeed, many credit Ocean Spray for making the industry. But the market has become so precarious that earlier this year some growers - for the second time in two years - forced a referendum that could have made the cooperative sell its assets to a giant beverage company. That effort failed, and now the cooperative is helping lead the fight to stabilize the market and enable growers to survive the downturn.
Co-op boosts entire industry
"Ocean Spray has really done a lot to benefit the entire cranberry industry," notes Nodji VanWychen. She and her family are independent growers near Warrens, Wis., the gateway to the state's cranberry country.
A three-generation farm operation, the VanWychens grow, harvest, pack and market their own line of cranberries under two labels they own. As independent growers, they also market fruit for the private label business. That's in direct competition with Ocean Spray, the nation's largest cranberry marketing organization headquartered in Lakeville-Middleboro, Mass. Yet VanWychen freely admits that the cooperative's success directly impacts member-growers and independents alike.
Like many other agricultural commodities, the cranberry industry is bogged down with over-production because of increased acreage and good weather. Research and development of new products also slowed in recent years as the financial strains started up. In response to the turmoil plaguing the industry, Ocean Spray has changed its top managers and has promised to roll out nearly 50 new products in the next two years. It's going to take time, says Chris Phillips, Ocean Spray communications director. Meanwhile, financial woes abound.
Ocean Spray reported last fall that its sales rose slightly, from $1.36 billion to $1.4 billion. But net income declined 45 percent, to $73.5 million, a chasm away from the $280 million earned in fiscal 1998. It was the second year in a row the co-op reported weak financial results.
Ocean Spray's disappointing numbers came as no surprise. Phillips said the co-op had been predicting serious problems for several years. Wisconsin co-op member William G. Hatch concurs. "However, the problem was that they had been 'crying wolf' for so many years that no one believed them," Hatch says. "I just think everything was so good for so long, now we have enough blame to go around the entire industry."
So who is to blame for the challenges facing growers and co-op alike in an industry that has been around since America itself? It depends on who is speaking.
Phillips says the industry has expanded faster than consumption has risen. Some of that expansion was by the cooperative. Independent growers also expanded. In Wisconsin, for example, in 1989 there were 150 farmers with 10,000 acres of cranberries. Today, 260 growers farm 18,000 acres of cranberries.
Under a new Ocean Spray management team, surveys showed that consumers associated the co-op brand with high-quality products, but also higher prices. At the same time, supermarket consolidations and shifts in the food industry meant processors were contracting production, packaging a range of foods under private labels. Those labels were cheaper and still had perceived value with consumers.
And when grower prices were starting to head south about two years ago, the Ocean Spray board voted to pay members a little more money. That left the co-op with less to invest in research and development and for new product introductions.
Support grows for market order
Jeff Kapell is an Ocean Spray member who has grown cranberries near Plymouth, Mass., since the 1970s. He says this is the worst economic crunch the industry has ever faced during all his years in the business.
"I was not able to cover my cost of production last year," says Kapell. "Folks who have capital reserves and aren't heavily mortgaged will probably be able to come out of this OK. But growers who don't have much in reserve and are carrying a big mortgage will be hard pressed to survive."
Does he think the cooperative is taking the right road to turn the situation around?
"Only hindsight will tell for sure. But if it does turn around, Ocean Spray should be in a good position to continue to be of major value to its growers in the future."
Regarding the cranberry industry's rapid plunge from boom to bust, Kapell says "there were subtle indications earlier of looming problems on the horizon. This is a relatively small industry and it is very sensitive to even small shifts in supply and demand. Right now we are looking at more than a small shift - we have a significant surplus to deal with."
He feels an industry-backed marketing order is the best way to manage the surplus.
Hatch walks the line between independent grower and Ocean Spray member. He and his father, William, have 360 acres of cranberries, which makes them large growers. When the co-op was looking to expand acreage, the Hatches had some acres they placed into co-op membership. And they also have some acres which remained out of co-op membership, the fruit from which is contracted to an independent handler. The younger Hatch also serves as president of the Wisconsin State Cranberry Growers Association (WSCGA).
"If you read the Stressline (an online cranberry news website) you hear from lots of growers, anonymously, about what's happening," Hatch says. "And some of our own surveys with just our (WSCGA) members show that growers are divided [over how to deal with the glutted market]. The only thing we know for sure right now is that growers have agreed they want a marketing order in place this year."
That's a big step. A little more than a year ago, growers could not agree on that vital issue. A WGCGA survey showed that more than 90 percent of its membership supported a marketing order to help the industry achieve greater balance. The crux of the dispute is whether the industry should be producing about 4.7 million or 4 million barrels each year, says Hatch.
Tom Lochner, WSCGA executive director, agrees that this is the key issue, adding that about three-fourths of the membership supported eliminating the surplus in one year. "The debate right now is what is the right number?" he says. "As a board, we agreed that our association is going to urge USDA to enact a regulation. But we don't have a consensus on what that regulation should be," adds Lochner.
How much is enough?
So the industry finds itself divided once again. The question centers around how much to reduce production to ease the surplus.
At a meeting in early March in Wisconsin Rapids, Wis., the Cranberry Marketing Committee (CMC) agreed to cut the surplus by 32 percent this year. The CMC represents growers and handlers and makes recommendations to USDA, the only power that can mandate production cuts. The committee hoped Agriculture Secretary Ann Veneman would accept the plan by the end of March, in time to affect this year's crop. However, no decision had been announced by mid-April and growers such as VanWychen and Hatch were getting nervous about how to manage their cranberry marsh beds.
"It's not like a corn or soybean grower who finds out he doesn't need to plant this year," says Hatch. "We already had plants in the ground, money tied up in taxes and even more resources into maintaining growing those plants until they bear fruit."
A marketing order that would limit the 2001 crop to 4.7 million barrels, excluding fresh fruit, was recommended to USDA by CMC. Such a move would be expected to reduce the surplus to 2.5-3.5 million barrels, officials said.
Dick Ducklow and Gary Jensen, members of CMC, voted against this recommendation during the March meeting because it does not eliminate the surplus in one year or raise grower returns sufficiently.
Ed Jesse, ag economist from the University of Wisconsin-Madison, recommended a 4-million-barrel limit to CMC. He said it would reduce the 4.4-million-barrel surplus to 2 million barrels, which is considered a normal carryover. Eliminating the surplus in one year, some growers contend, would bring grower returns in line with the $35 per barrel cost of production.
Currently, the price is hovering at $10 - $15 per barrel. The 4-million-barrel plan would get the grower price up to cover production costs sooner, proponents say. They want to eliminate all the pain in one year, eliminating nearly all the projected 2.3-million-barrel surplus so good times can roll again. They also worry there won't be enough demand for the 5 million barrels that still would be produced.
But handlers supported carrying over a larger surplus. Ocean Spray, for example, recommended a market order that sets the crop at 4.8 million barrels. "Any more and it cuts into new product development and new market expansion," says Phillips. "We need enough fruit to grow demand. We can control supply in the short term, but we still need enough fruit to meet new product development and market expansion."
Either cutback would be considerably more than last year's 15 percent withholding, and those who forged the agreement say it shows the industry can work together. But some growers still lobby for deeper cuts that would make a bigger dent in the surplus.
Some growers say the handlers, who buy and sell berries, care more about keeping prices down than about protecting growers, some of whom are certain to fold if prices don't increase. That criticism also goes against Ocean Spray, which controls about 70 percent of the U.S. cranberry market. Like everyone else in the cranberry industry, Phillips says there's enough blame to go around. Low prices also hurt the co-op because it does not have the financial resources to market the fruit, he adds.
"They all want cheap fruit. And what happens with cheap fruit? That means the growers are going to be sacrificed," counters Hal Brown, who runs the grower "cranberry stressline" website.
Hatch admits poor prices have impacted his operation. Farming near Necedah, in the central sands region of Wisconsin, Hatch has released 50 percent of his workforce. All growers are spending less in town, and "people are just trying to survive; we're just trying to lose as little money as possible and cutting back wherever we can," he says.
"A lot of growers will probably go out of business if this marketing order is implemented the way they've written it," Doanne Andreisson, a grower from Duxbury, Mass., recently told the Boston Globe.
The loyalties are complicated, however. Ocean Spray, which has four seats on the eight-seat CMC, is the largest handler, but also represents 70 percent of the growers and is obligated to defend their interests. Phillips says the 4-million-barrel-agreement is a good deal in the long term for growers. "It was an important decision, not a popular decision with everyone, to be sure," he says.
Ocean Spray needs the fruit because its revamped marketing plan should increase demand, it claims. The co-op plans to roll out as many as 21 new products this year and 32 next year. "You've got to have new product introductions to keep consumers interested," Phillips says.
Meanwhile, in the cooperative's last annual report, Ocean Spray's new CEO H. Robert Hawthorne and Chairman Sherwood J. Johnson express hope that better days are ahead. "We do expect proceeds to turn upward this fiscal year," they wrote.
Phillips adds that initiatives the co-op put in place this past year will stimulate demand and reduce the surplus. Besides introducing new products, the co-op plans to re-vamp its familiar blue-tidal-wave label, will implement $76 million worth of cost-cutting measures and will narrow the price-gap between Ocean Spray and store-brand cranberry juices. Ocean Spray also has created a new distribution network for its single-serve products, and it vows to improve marketing efforts as it brings its new products to market these next two years.
Co-op's sale still supported by some
Nevertheless, some growers still think Ocean Spray should be aggressively exploring opportunities to sell itself to a giant beverage conglomerate. For the past two years, some growers have tried to force the issue onto the co-op's annual meeting agenda.
For all intents and purposes, Ocean Spray shares have a fixed value of $25. But if Ocean Spray were sold, those shares could be worth far more, some growers contend, citing studies by Ocean Spray's own consultants.
In 1999, Ocean Spray's board weighed a number of strategic options, including a sale. In the end, a decision was made tore main a cooperative, to hire a new CEO and to focus on reorganizing operations. Efforts at both the 1999 and 2000 annual meetings by members who wanted to sell were not successful.
The Ocean Spray sale appeared as though it could provide growers with enough money to hang on until barrel prices rebound. But when it was turned down in 1999, a group of growers filed a lawsuit to force Ocean Spray tore consider a sale. The matter was finally put to rest when it was defeated at the co-op's 2000 annual meeting in San Diego in December.
"We believe the turnaround strategy we've set in motion is the right strategy for recovery," Hawthorne and Johnson conclude in the annual report.