How are those contracts working out for you?
Updated: Jan 19, 2020
HOW ARE THOSE CONTARCTS WORKING OUT FPOR YOU?
Everyone wants produce on contracts, except me, from growers to retailers, they stand in line at the beginning of the season to make their best deal for themselves. I may add they all love when they win and hate when they lose, and usually there are winners and losers. Another way to put it is everyone wants a contract until it does not go their way.
This year’s Mexican season is a prime example why contracts usually don’t work, and they should be use as a supplemental purchasing vehicle not an all encompassing one. This season we had heavy rain, many cloudy days, cool temperatures, cold temperatures, mold, mildew, bloom drop, viruses all contributing to an across the board lack of production across many commodities. So, let’s look at those contracts from both sides of the equation.
Growers, in a perfect world the grower contracted part of his crop to Retailer A ( The names have been changed to protect the guilty). Keep in mind, sometimes there is no profit for the grower because many retailers play very hard to pay less and less when expenses are more and more. First remember I said sometimes, some growers are smarter, second because of the supply and demand of these markets his hope would be that he could sell the rest at an increased profit and get a good average for his crop and make it profitable, this is also not guaranteed. Crop size and production cost are estimated in advance of the growing season and this is also when contracts are negotiated. All are betting on outcomes that can’t be determined and here lie the flaws with contracts. Production cost are less when the crop is healthy and abundant, because we get more cartons per acre and also the packers are more productive when the plants are full of fruit and they don’t spend too much time to search for plants with fruit, which happens when we have a low production year, which means higher costs. To summarize a good grower year would be favorable weather, no disease, great yields per acre, which translates into low production cost.
Retailers, I am not here to bash retailers they are the driving force of the produce business. I do have a problem with the way many large retailers merchandize, display and price produce but fortunately I do see some changes on the horizon that seem to address my displeasures. Retailers want fixed pricing. They want to negotiate the price and then want the product delivered on autopilot to their DC’s every week. This does work with appliances and manufacturing, but it does not work with produce. We can’t turn the machine on high when we need more, and we can’t turn the machine off when we have enough. Retailers buy cheap but rarely pass those buys on to consumers. I have countless stories to prove this but for time’s sake I will state one. In years past roma tomato contracts were done to retailers from $8.30 to $9.00 for a 6-month period at a delivered cost of about $12.00. I NEVER saw an East coast chain put roma tomatoes on sale for $.99 a pound. The best was $1.49 may be on sale and most of the time $1.99 a pound. FYI independents sold for $.99 and sometimes went on sale for $.79 to create action. There is so much more to write about this process for growers and retailers, but I can see your eyes glassing over, so I’ll get right to the punchline.
How are those contracts working out for you this year?
If you are a grower you have at least of your production cut in half or more. With supplies short the market prices rise significantly. Under normal circumstances you would be able to much more for your product which could help with the shortfall of production. Unfortunately, you are on contract and your limited supply goes to fulfilling your contracts for much less than the current market price which exacerbates and already distressful situation. What is truly sustainable agriculture is the grower to make a profit so he can grow again the following year. The best way to achieve this is with sales that coincide with supply and demand cycles.
Now if you are a retailer on contract you are screaming for the product that was committed but all the screaming is not going to change the fact that the product is not available. What makes matters worse is with this limited supply you have may have more demand in your stores. So you yell and scream more, you try to ask other suppliers to pick up the slack but they are in the same situation. You try to pad a few PO’s but there is nothing more to give. When all else fails you go to the open market and those XYZ’s that were on contract for $12 are now $32. Oh well.
Both grower and retailer are the losers here. The problem with these contracts to fulfill much of the buying of produce is that many years someone thought that what worked in manufacturing would work in produce and they were dead wrong, and I would argue they knew absolutely nothing about produce, probably an accountant or MBA. Produce one day me be automated to the point where you can turn on and off the production machine but that is not the way now. Before all of us old fools are gone large retailers have to integrate some of this old supply and demand knowledge into their purchasing practices. Remember the supermarket battles will be fought in grocery (and technology) but the war will be won in fresh (Produce)
Just in case you are wondering the contracts don’t work in a year of abundance either but that is a posting for another time.
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