Supply and Demand from Farm to truck, market, Retail and Consumer.
Updated: Sep 8, 2019
Aspromised on my video posting last week, I will now put to paper my thoughts on Supply and demand and what it means to growers, retailers and consumers. I will point out some good and bad aspects of fixed or contract pricing and its affects as well. I don’t claim to know it all when it comes to produce but after over 40 years in this business, I have picked up a few things along the way. The following is a partial quote from my website sustainingproduce.com “I am always searching for new opportunities to marry old school produce knowledge with new school technology and omni channel marketing”. I have to say sometimes I read about new studies and new metrics, touted as “big news” and I think did you need that new data report to tell you this, I knew it just by observing. Many large retailers are now realizing what I what I have been saying for over 20 years, “battles for supermarket supremacy will be fought in grocery but the war will be won in fresh” The also are treating less plastic like it’s a new idea? Hello, I come from a time when there was no plastic and that’s where we are headed again, and you will be helping the environment and your displays and profits will benefit from it. Produce looks better naked.
There is no doubt there are younger and smarter people in produce than I and I wish to learn from you but like a history lesson the past can lead the way to the future. There were many tried and true buying and selling lessons of the past and many are still relevant today, one of them is Supply and Demand.
One of the things I hear today, and this is not made up .DC: I need 77 boxes of tomatoes. Me: There are 80 on a skid, I’ll give you 80. DC I only need 77. WHAT? If you are a real produce buyer a computer is a tool to make you better, it’s not the answer. Things change daily, sometimes by the minute. Just because you sold 80 last week, month or year that does not translate into today, tomorrow, next week, month or year. Demand is the most important factor and you can create it or increase it by price, improving your in-store displays, educating your staff and they in turn your customers. Produce is always evolving. Technology will bring us to better yields and products, these must be priced and merchandised to the consumers to pick up the increased volume. I can assure you if you don’t change you will lose this war. Look how many large retailers have come and gone, change your ways or you could be next. Supply and creating increased demand will increase sales and your profits.
There are no other items that are sold like fresh produce. When I had a brief stint on Wall street training brokers in sales, I told them these things.
“All of you Harvard MBA’s I can put 6 produce guys in this office, and they will run circles around you, “SCOFFS” In produce a half day is 12 hours, not 9 to 4. In produce prices go up and down like in stocks, but while they go up and down the product goes rotten. Physical delivery of a perishable commodity, if you can sell that you can sell ANYTHING”
Growing up in this business there were not any supercenters and Supermarkets were not a big thing. My Mom went, or sent me to the butcher for meat, fish store for fish, bakery for bread and fruit store for vegetables. Back then there were many fruit stores as well as fruit peddlers, that is where I had my start. Stores, peddlers all went to the Hunts Point market and back then the fruit auction too. Produce was also seasonal in the “olden days” so we sold what was in season. Whenever there was a glut, that meant prices were cheap and stores and peddlers bought them up. Stores sold them outside to promote sales and peddlers like myself sold them on street corners. This helped move the product from the Farms to the market and to the customers and supplies were brought into equilibrium and prices would rise but then a new set of items would appear, and the system was repeated time and time again. I always say no matter what level you are in this business “the story is the same only the volume is different” I need, I don’t need, I have too many, I don’t have enough, the list goes on an on and you can put from consumer to the largest grower/ shipper and everyone in between and the only thing that changes is the volume we are speaking about. 1 piece, 1 skid, 1 load, 1 field.
About 20 years ago someone came up with the idea to change this system that has worked so well for so long. I believe this person or group had no experience AT ALL with produce, and if I had to point to a profession, I would say an accountant or a Harvard MBA, which I have had previous encounters with and are capable of this foolishness J. Probably went like this. What do you mean prices change daily? What do you mean sometimes we have and sometimes we can’t get? What do you mean it’s raining, why does that matter? The list goes on, add a few of your own. At about the same time some successful farmers sent their offspring off to college so they could improve their lives as well as the farms. Unfortunately, these 2 groups met at school and decided we should sell produce the same way they learned in class to sell widgets. They all went back home and came up with contract or fixed pricing, forgetting what their elders taught them about rain, draught, gluts crop failures, disease, cold and the daddy of them all DEMAND.
Demand is the most important factor in the supply and demand equation. Some will argue its supplies, mostly growers view. I explain this way. If you had the only Horace Wagner baseball card and you paid $1,000,000 for it, what is it worth? It’s only worth what the next buyer will pay. I have seen many markets over the years where supplies were so short that the market had to get hot, but it didn’t, you know why? Demand was even less than short supplies. Let me use this example. When supplies are very short prices are generally vey high. There are a certain set of customers that need the product no matter what the price. Foodservice that deal with restaurants are a good example of this, it’s on the menu so restaurants want and need the item. In the beginning of the cycle retail, wholesale and food service grab all that they can get in a short market. The prices at the store reflect the shortage in the way of much higher prices. Consumers back off this item and search for cheaper options, in turn retail orders slow, demand drops. The market is still short until there is 1 box more than the people that need it is available, that’s where the market stalls. Now if we get an increase in supplies shortly thereafter that’s where you see a market CRASH. You know the ones that go from $30 to $4. You know why? Because large retail will not change their price. That’s right they leave the retail the same instead of what any real produce man would do is adjust to the market or just get out, take a loss and get right back in at the lower prices. This is what is broken with our system and needs to change. The main driver of demand is the consumer and large retail treats them like the enemy and the caveat the consumer is the only thing keeping you from extinction.
As I stated in my video posting I do some fixed pricing contracts and they can be used to fill some supply and logistical issues, but they need to make sense and should not be 100% of any item, especially for retail. Food service I could understand fixed pricing because restaurants like to know their serving cost and they charge so much, and demand is much more consistent than in retail, so the fixed pricing is not a huge factor. I have done Roma tomato contracts for the past 5 years, maybe longer. I deliver XL roma tomatoes to the East Coast from $12.50 to $13.50 depending on location. To me this is a no brainer contract. My retailers can be $.99 a pound for 6 months and double their money. Most chain stores in the NE very rarely go to that price and use $1.49 as an ad price. As I said no brainer contract. Some other contracts are not that advantageous. My recommendation to my customers “take half of your volume on contract and play the market with the other half and average the cost”. With this scenario if your contract was $20 and the market goes to $10, you have lowered your cost. More importantly you should take the opportunity to lower the retail to better compete and to sell more volume.
Side note something else they didn’t teach in MBA school, average costs when it comes to produce. Before you say we, don’t sell more at a lower price, I will ask you then WHY DO YOU PUT THINGS ON SALE? Why does your volume double or triple when you are on sale? Stop with the BS and start selling produce the way it was meant to be sold.
Let’s talk a moment about sustainability. You know what is sustainable to a farmer? Selling his crop is sustainable. Farming is not a machine you can’t turn off the switch when you have too many and any you can’t speed up production when you have too few. Growers count on an average for their crop. When there is a shortage prices are up when a glut occurs prices are down. Selling their entire yield becomes very important to get a better average. The farmer does not need to sell everything he has for $10 in a $20 market and he does need to sell everything even when the market is $4 and it’s under production cost. You know why? Because $4 gets you a better average than $0! In the supply and demand scenario as it pertains to fixed pricing, retailers want everything the farmer has in a $20 market for $10 because that usually correlates to great demand. Many retailers, not all will use this bargain to make more profits and not pass it on to the consumer. When the market changes and the same retailer has a price of $10 and the market is $4, they generally take less volume at a time the farmers need them to take more volume. WHY? First the competition may be retailing off the $4 price. Second, they are locked into a $10 price and more importantly they don’t change the retail price, they hardly ever change the retail price when prices get cheap and this stifles demand, and this is the biggest problem in large retail today. Two years ago, I wrote about a chain store that had red peppers on sale in the news circular for $2.99 a pound. At that time there was a glut in Mexico, and I was delivering 15# xl red peppers to the Northeast for $4.50, yes $2 FOB. That is $45 back on a $5 item, this is the problem with our current retail produce paradigm. Selling produce with it’s natural ebb and flow, high and low is the way to the future. As competition heats up, I can see some changes on the horizon, and I hope it’s not a mirage.
I have been around long enough to see some very good and bad ideas come and go. I can say with the utmost certainty the independents that use supply and demand buying in concert with their retail pricing beat every large retailer every day. The one exception is when there 3-week sale hits a shortage and prices skyrocket. The caveat there is they didn’t get all they needed because the market was short, more proof. Side notes on Brokers. I don’t consider myself a broker any longer, mostly because I sell several exclusive deals and secondly because it seems to be a dirty word. Every chain say “ We don’t do business with brokers” Now let me tell you something Walmart, stop and shop, Wakefern, Giant to name just a few, I have covered too many of your orders on a variety of items to count, so you’re welcome.
Independents cater to their local community, something large retailers need to learn. I recently read Walmart is introducing produce 2.0. It sounds encouraging because they are going to speak with their produce managers which is a step in the right direction because it looks like they have been listening to those accountants for too long. I believe Walmart could captivate the retail produce industry with some store and ideology changes. If you are reading this Walmart please read my produce manifesto for retail.
The way forward for all of us from grower, wholesaler, retailer and consumer is to use natures natural growing cycles and to adhere to the perfection of a supply and demand market and to price produce in accordance with these cycles. The days of retailers paying too little for product from farmers and charging consumers 40%-600% is past it’s time. We need every link in this equation to work together. As I have stated Demand is the daddy of this equation and the demand comes from the consumer so you must realize that catering to them with price, quality and value is the shortest route to increased demand, just in case you didn’t learn that in college. Many of the thing I have learned were through experience and love affair with the produce business. These things were not taught or could be learned in college. Let's take what I have learned through experonce and all gthat you ahve learned in collage and data collection and metrics, put them together and propel this industry into the future with the knowlegde of the past. Deal? I am ready.
Thank you and let’s Make Produce Great Again. #mpga
Original Supply and demand video. Sorry for the mixed fonts. I have no idea why it transferred to the website like this and I am am to imcompetent to fix it.
Termanial Market Report
The Produce manifesto for retail