April 19, 2000 Dear Decas Grower: I feel obligated at this time to share some of my thoughts with you regarding the cranberry marketplace. It has always been my policy to make every effort to keep you well informed in this regard. I try as much as any handler to do so in an informative and timely manner. You cannot manage your business or your life without full knowledge of marketing trends in our industry. We at Decas have concluded that Ocean Spray will pay their growers less than $10/bbl. for the 1999 crop. There are two primary reasons for our conclusions. The first reason is that Ocean Spray’s overhead has been increased immensely by their huge surplus. They have finally admitted to a 3,000,000+ surplus after lying to the industry, the trade, the Cranberry Marketing Committee and their own growers by saying that the surplus was all outside Ocean Spray. In recent years, this sort of misinformation has resulted in confusion to the trade and to the competition, causing a chain reaction of events that has significantly contributed to the mess we are in today. If they had triggered the Cranberry Marketing Order or unilaterally imposed such a program upon themselves one, two, or three crops ago, they would have saved enough money to pay their growers an additional $3-5 per barrel per year during that time, by my calculation. Furthermore, the remaining berries would have generated more value in the marketplace, also resulting in greater returns to their growers. Not only did they choose not to do so, but they also continued to contract new acres, particularly in Canada, knowing that they had no market for those berries. This madness on the part of Ocean Spray continues to this day. The second reason we calculate a historical low return to Ocean Spray growers is because of their pricing practices. Ocean Spray is just destroying the value of all cranberry products across the board by discounting all categories to the point where they are virtually giving away cranberry products, both industrially and at the retail level. There is nothing left in our industry that can be described as a value-added product, with the possible exception of fresh fruit. Everything else we sell has become nothing more than a commodity. I fear that even fresh fruit will be reduced to that level with the 2000 crop. Why are they doing this? What are they trying to achieve? I believe that Ocean Spray, as a matter of strategy, has decided to kill two birds with one stone and get it done as soon as possible. Whatever the reason or motivation for them to have accumulated a three million barrel surplus, they now realize it must be reduced quickly. They also realize all growers cannot be saved in the process, so by quickly driving prices and returns to historical lows, growers will be unable to grow full potential crops and, indeed, many growers will go out of business while, at the same time, these predatory pricing practices will gain back market share by killing off competition. They believe they can put Northland in receivership while targeting Decas as their main competition in the ingredients category. I do not believe they will achieve either, but they are inflicting a lot of pain on us and other Independents but ironically mostly on their own growers. The volume regulation under the Cranberry Marketing Order also gives them additional opportunities at the expense of Independents. This program forces many Independent handlers with no surplus inventories to participate in the volume reduction, forcing them to replace these berries on the open market. Particularly damaged are the private label companies (Pappas and Cliffstar). They do not enjoy the benefit of fresh fruit exemptions, but they know that cheap berries are available to them from Ocean Spray to cover their needs, if necessary. This protects them, but not their growers. Without fresh fruit exemptions, our company and our growers would be denied the ability to compete because Decas is not allowed to buy Ocean Spray berries at the discounted levels available to the private label companies. In their generosity, Ocean Spray has offered to sell us berries for $39/bbl., while they pay their growers less than $10 for the same berries. So the Ocean Spray plan to eliminate surplus will be done with three fast, hard-hitting steps:
The purpose of this letter is not to add to the endless stream of criticism of Ocean Spray, but rather to show you the reality of the situation and what you and I are faced with and need to do to compete in this environment. In 1997, we paid you at a level of about 32% above the Ocean Spray grower returns. In 1998, you were paid 85% more than Ocean Spray growers, and for the 1999 crop, based on what you have already received, we estimate that your returns will be about 100% over the Ocean Spray return. Paying twice as much as our competition for berries in 2000 and beyond is not sustainable. To be competitive that difference needs to be reduced to reasonable levels. You have just received a check for $3/bbl., bringing your returns for the 1999 crop to $18/bbl. We cannot be certain at this time if and when we can make an additional payment for 1999. Any additional payment that may be made will be made sometime in August or September. I realize that $18/bbl. is well below your costs, even if it is double the return to Ocean Spray growers. While it is too early to predict the returns for the 2000 crop, I have no basis for predicting the same returns, let alone higher returns. The surplus has to go away before things get better. Regarding that, I wish to make the following points regarding the fact that I believe the surplus will moderate sooner than expected:
If I am right and the industry begins to rebound, you will get the benefits of the rebound sooner than your Ocean Spray counterparts. You must make every effort to survive in the short term to succeed in the long term. A few thoughts along this line:
We, as your handler, are investing in the future. Despite the way things are, we believe in the future. We are spending considerable sums in the promotion of cranberries, we continue to invest in R&D to accommodate new markets with new and improved products, we are planning an expansion of our production plant, and we plan to build a new and modern fresh fruit plant to be ready for the 2001 crop. We will consider any opportunity to develop strategic alliances with other companies that will result in successfully expanding our ability to sell more berries. We anticipate success in this regard in the near future. Any continued attempt to inflict illegal harm upon our growers and us will be dealt with in the appropriate fashion. It would appear at this point that legal conflicts within our industry are inevitable. Whether such conflicts will include our company remains to be seen. There is a limit to what we are willing to endure.
Sincerely, John C. Decas |