The price of industrial cranberries has crashed from $60 to $20. People are blaming it on surplus. Demand has remained at about 5,500,000 barrels a year as supply has increased to about 7,000,000 barrels a year.

The real culprit is not the surplus. It is the panic of sellers. We’ve been brought up to respond competitively. One handler’s first thought is, "I’ll cut my price by $5, sell all my fruit and stick my neighbor with the unsold surplus." The neighbor responds by cutting the price by another $5. Soon, the price is $20. The total amount of fruit that sells is about the same. The big difference is the price. If we sell 5,500,000 barrels today at $60 the total crop value is $330,000,000 compared to selling them at $20, which brings us only $115,000,000. Our 7,000,000-barrel crop today has a total value of only one third that of our smaller crop two years ago. Why? Only one reason. We offered to sell it for less. Our customers were willing to pay $60 two years ago and it is reasonable to expect they would pay $60 today, if that was the price. We can’t blame the customer for the fact that in the effort to beat out our neighbor we dropped the price to $20.

If something happened to the surplus fruit—perhaps lightening blowing up a freezer--every handler would know demand equaled supply so they could be sure of selling their entire supply. Panic would subside and they would once again be willing to hold out for $60. The result of taking the surplus fruit off the market is to raise the price from $20 to $60. Having less fruit triples the value of the entire crop!

Most growers feel helpless. Maybe that is why this site is called "Stressline" instead of "Actionline." Growers who feel helpless get stressed. Show us how to fix things and we will take action.

OPEC Demonstrates Cooperation Stabilizes Prices

We don’t have to be helpless. Randy Jonjak posted the example of OPEC. Each and every one of us sees and feels the power of the oil producer every time we go to the gas pump. Their situation was the same as ours. There is a surplus supply of oil. Eighteen months ago the price was below $10 a barrel. But, oil producers got together, agreed to each sell less oil, and the price has tripled to $30 a barrel. They accomplished this by reducing available supply. OPEC has shown that what determines market price is not potential supply, but available supply. When OPEC made available only enough supply to match the demand, the price of oil tripled. If Cranberry Growers could make available only enough supply to match demand, we could also triple our price and return to $60 cranberries.

Our first problem is the law. If competing growers and handlers get together to talk about price or supply, it is a violation of anti-trust law. One way around the law would have been the marketing order, but since a volume restriction was voted down, we have to look elsewhere. The most promising place to look is the Capper-Volstead act, which grants grower-cooperatives a limited exemption to the anti-trust laws.

Capper-Volstead Act Allows Grower-Cooperative to Stabilize Prices

The anti-trust exemption is not unlimited—cooperatives may not "unduly enhance" prices. But, a cooperative can "duly" enhance prices. A return to a $60 price level is unlikely to be considered an "unduly" enhanced price since that is the price previously established by the market.

Increasing Cooperative's Share of Supply Decreases Panic Price Cutting

Increasing share of supply within a cooperative can be done legally. Why go to the effort? Because having enough share of supply prevents panic selling. If one seller has 100% of the supply, there is no reason to drop the market price on cranberries just because of a surplus. Price wars start when two or more sellers are each trying to avoid being stuck with any surplus, so they try to undercut the other sellers' price. But, if one company has the entire supply, they know they are going to be able to get the entire market and need not cut prices to make sales. Prices must still be reasonable or customers will change to other products such as apples or grapes or oranges. But, customers were paying $60 until handlers dropped prices. Customers would pay $60 again, if that were the price.

Once our coop sells all the fruit it can to traditional customers, what does it do with the extra? Growing demand for new products is the ideal solution, but as it waits for those markets to develop it can sell the surplus for uses that will not destabilize current markets—perhaps as a cattle feed ingredient or perhaps blend it with peat and sell it as a garden mulch. Even if the return per barrel is zero, the co-op still benefits by eliminating the destabilizing effect of trying to sell a surplus that the customer doesn't want at any price. The co-op could also enact its own volume reduction program, asking each grower to reduce production an equal percentage so as to eliminate the surplus. Every grower could put a few beds out of production, saving himself or herself growing costs. Or, the co-op could ask some growers to not grow a crop; paying them the money the co-op would save from reduced handling and storage of surplus fruit. The growers who did grow a crop would then get more return per barrel because it would cost less to pay the co-ops savings to non-producing growers than it would cost to pay them full pool return for the fruit they would have otherwise delivered but which would not generate any sales income.

If the co-op had enough share of supply to be able to raise the current industrial fruit market price back to $60, what would it mean for the grower? This chart gives an example of the possible result if a cooperative had different shares of supply. Some might quibble about the figures used for industry supply and industry market. I have also ignored handling costs. But, the figures are close enough to demonstrate the principle that a larger share of supply can mean a better return per barrel for everyone.

Impact of Share of Supply on Pool Returns.

Start with the "Yesterday 100%" column. If, when the surplus first hit, there were a supply of 7,000,000 barrels and a market for 5,600,000 barrels, the cooperative would have had the entire market of 5,600,000 barrels at $60, bringing in $336,000,000. Even if nothing was realized out of the 1,400,000 barrels of surplus, the average income for the entire 7,000,000 barrel cooperative would have been $48—a far cry from today’s $20!

Even if the cooperative had only 70% of the supply when the surplus hit, they could have held the price. The independents, with 30% of the crop would have had 2,100,000 barrels. If they cut their price to $55 they would sell all their crop before the co-op sells any, so there would be only 3,500,000 barrels of market left for the co-op, but even this brings in $210,000,000 at $60. Once this income is averaged across the total 4,900,000 barrels of coop supply, the return per barrel is $42.86. If the cooperative had 85% of the supply, they could have returned $45.88.

One message is that if Ocean Spray had held their price on industrial fruit at $60 instead of joining the price war down to $20, the value of the fruit would have been twice as much. Independents would have been getting $55 while Ocean Spray growers were getting $42, but isn’t that better than everyone getting $20?

Current Surplus Can Be Eliminated Without Further Reducing Grower Returns

Now let’s consider what the skeptics have to say. Some say, "trying to hold price would have been fine when we only had a 7,000,000 barrel supply to a market of 5,600,000 barrels, but today the supply is 11,000,000 barrels and the market is still only something like 5,600,000. Well, look at the calculations. Even today, with 70% of the crop, the cooperative could hold the price on industrial fruit. Assuming the surplus is divided evenly among everyone, the independents would have 3,300,000 barrels and would get to sell it first. This would leave a 2,300,000-barrel market for the cooperative, which at $60 would be worth about $138,000,000, which happens to be slightly greater than the proceeds Ocean Spray generated last year. So, our co-op could get rid of the industry surplus in one year with no decline in proceeds if we returned the price to pre-crash levels and had the patience to let the independents sell their fruit before we get to sell ours. If the cooperative could increase its share of supply through mergers or gaining new members, an 85% share of supply would improve the return per barrel to $25. A 100% share would improve it to $30. After the one year hit as the co-op sold off the surplus for no return, the excess inventory would be gone so we would have to deal with only the 7,000,000 barrels produced annually. The results for this are the same as the "Yesterday" columns, with average return per barrel rising above $40, the price increasing as share of supply increases.

Why Increase Share of Supply When Co-op Already Has Enough Fruit?

Another comment from the skeptics is, "Why should a cooperative take in surplus fruit it doesn’t need?" The answer is that fruit is like ammunition in a war. If we are at war and have surplus ammunition and face an enemy across the border who also has surplus ammunition, would we be willing to buy all their ammunition even though we don’t "need" it? Of course! An enemy without ammunition can’t fight, so we would acquire it not because we "needed" it, but to deprive the enemy of ammunition. That is also the situation in the cranberry business—if the co-op is the only one holding the price of industrial fruit, every barrel of cranberries the independents have is going to sell first. The co-operative will be able to sell only to the market that is left after the independents exhaust their supply. Every barrel of cranberries that leaves the independents and joins the cooperative means one barrel less available for the independent to sell. Since the market size is fixed, if the independent has one less barrel of fruit to sell, the cooperative is able to sell one more barrel of fruit at $60. Assuming the cooperative had a 70% share of supply in the 7,000,000 barrel of supply scenario, the cooperative would pay pool average--$42.86--to acquire another barrel of fruit, but the cooperative would now be able to sell one more barrel of fruit for $60 because the independents would have one less barrel of fruit to sell. Therefore, the pool would make money off every barrel of independent fruit acquired since the increased sales would be greater than the increased expense.

What Will The Cranberry Industry Do?

Others can debate the juice side of the business--whether the juice company should be sold or whether it should be kept. But regardless of what happens to the juice business, the price of cranberries will be determined by which of the following choices the industry as a whole makes:

1. Try to grow demand until it catches up with supply. It will probably take about 10 years for demand to catch up with supply because demand is going to grow slowly. In the short term, supply is also likely to increase because of all the new acreage coming into production in low cost growing areas. Even in established areas where many growers will go bankrupt, someone new will buy their property for pennies on the dollar and will be able to survive longer because they will have less carrying costs for the cost of the property. The result is that we can expect $20 prices until demand and supply once again balance and that will be far too late for most growers.
2. Try to use the marketing order to reduce the number of cranberries going to market. This option has just been voted down. If an effective volume reduction were enacted which forced all growers to share the cost of eliminating the surplus, we could have a return to profitable prices within a year or two.
3. Grower's can join together in one co-op to take advantage of using share of supply to eliminate the destabilizing effect of surplus. Ocean Spray could do it alone, but the more growers who can be encouraged to join Ocean Spray, the more effectively and quickly this can be accomplished. Prices would remain at the current low levels for another year as we eliminate the surplus, but the following year prices could return to the $40 level. This will be a frustrating solution for many as a few people remain independent in order to be able to get a few dollars a barrel more, but the history of the cranberry industry is that most growers understand if we all band together we will all be better off even if a few free-load on the sacrifices of the majority. I would still rather get $40 a barrel even if it means my neighbor gets $55, rather than to see us both suffering at $20.

What You Can Do?

How can we make this happen? Each grower who is a member of Ocean Spray can call his or her Director, ask them to read this discussion, and ask them to advise management that the first priority of the shareholders and of the board is to come up with a supply-demand strategy that can return industrial fruit prices to profitable levels. Despite our reliance on management, this company still belongs to the shareholder and the Directors have the responsibility for communicating shareholder priorities to management.

For those who are not Ocean Spray members, consider whether you would be willing to join Ocean Spray if a plan were devised that gave confidence Ocean Spray could return prices to the $40 level with grower support. If this is a concept you are willing to consider, contact an Ocean Spray Director and let them know you would consider joining Ocean Spray if a fair plan could be devised which would treat both existing members and new members fairly and that would bring all growers more money than the present.

I have sketched an outline of these ideas, but more sophisticated studies also support these conclusions. Ocean Spray's Board has been presented with summaries of studies based on statistical analysis. They conclude that the market price of a commodity is determined primarily by supply and demand. Several studies state return per barrel will be increased several dollars for each million barrels of surplus that is taken out of the market.

Ocean Spray management is focusing on the juice company. This is to be expected since that is the training and the experience of every professional manager. I have never met a professional manager who had been taught how to optimize the price of a commodity for the benefit of the producer. However, in talking with one of Ocean Spray's advisors, Professor Willy Pietersen, I was reassured to discover that he understood the value of share of supply and the value of stabilizing market prices. Rob Hawthorne has a lot on his plate. I am confident he will whip the juice company into shape, though it is going to take money to do that and a lot of the money is going to have to come out of the Grower's return per barrel.

The problem is that fixing the juice company doesn't solve the Grower's problem. No matter how profitable the juice company, most Growers will not have profitable farms if the return per barrel stays at $20. Even if the juice company pays enough dividends to subsidize the farm or even if the juice company is sold for a price that pays off all the farm mortgages, the farm's profitability still depends on cranberry prices, not juice company subsidies. If the farm is profitable, it makes sense to operate it with or without a juice company. If the farm is not profitable, it is financially unsound to waste juice company earnings trying to subsidize it.

I have talked about encouraging Ocean Spray to gain share of supply by bringing in all who wish to become members. I have also encouraged non-members to join Ocean Spray. However, that is not the only solution. If Ocean Spray were to sell its juice company, we don't know how the remaining cooperative handler might look. It is possible that at that time a new cooperative could be formed between those who were once Ocean Spray members and those who are now working with other handlers. From a legal point of view, the only way growers can work together to stabilize the market is through all being in the same cooperative, whether that cooperative be Ocean Spray or whether it be a successor to Ocean Spray. The cooperative known as Eatmor Cranberries ceased to exist during a prior industry crisis, with most of its members immediately joining Ocean Spray to create a unified industry within one company. History could repeat itself.

If OPEC Nations Can Cooperate, So Can We