Nov 6, 2008
Growers Face Customers More Reluctant To Spend

Even as the year started, growers knew it would be interesting, probably nerve-wracking.

Energy prices were rising and with them the price of farming inputs: fuel, fertilizer, chemicals. But food prices were rising, too, an encouraging offset. Grower optimism showed in the rising cost of land rent – a good indication they want space on which to grow things and were bidding for it. But while prices of fruits and vegetables had risen, the prices of commodities like corn and soybeans had risen more, doubling and tripling historic levels.

Even with the new emphasis on the healthful benefits of fruits and vegetables, specialty crops growers weren’t doing as well as producers of ordinary commodity crops like grains and oilseeds.

In June, horticultural producers could point to the new Farm Bill as evidence of the country’s new appreciation for specialty crops, and the “buy fresh-buy local” movement was helping direct marketers.

But by August, warnings of deteriorating conditions were starting to appear – and a month later the financial world really hit the skids. October brought questions about the future availability of credit – in addition to questions about consumers’ ability to buy stuff after paying their energy bills and losing trillions of dollars in the value of their homes and retirement assets.

Desmond O’Rourke, the Washington state apple market watcher who runs Belrose Inc., sounded the tocsin at the U.S. Apple Association conference in Chicago in August. He was joined by other speakers issuing warnings about change coming in the market for apples – and food in general.

In a later interview in October, O’Rourke said that, given the short apple crop this year, growers should make it through just fine. But sweet cherries would be the indicator to watch next summer. Will consumers have the money to buy this fruit, which they supported so well when they had plenty of discretionary income?

In his talk in Chicago, O’Rourke said that Americans had lost, in the last year, $5.2 trillion in wealth – the value they had accumulated in their homes and in the stocks they had purchased to fund their retirements. But during the next month, in September alone, he said, that loss doubled. Consumer confidence was shaken. In the weeks after the $700 billion Congressional rescue of the financial system, ordinary people didn’t feel rescued and prices of stocks and homes continued to fall.

Falling values put pressure on banks’ balance sheets and their ability and willingness to lend. In an economy where consumer spending has averaged 6.5 percent more then consumer income for nearly 20 years (according to financier George Soros) credit is essential for both producers and consumers if current “standards” are to be maintained.

In October, the Farm Credit System sent letters to shareholders stating that “in the wake of this unprecedented volatility in the financial industry,” Farm Credit is financially strong and has adequate funds available to lend. Unlike Freddie Mac and Fannie Mae, it has been subject to strong regulatory oversight and can sell bonds using the full faith and credit of the United States government. Moreover, agriculture is doing well and is a bright spot in the economy. Credit for farmers and agribusinesses is available, but at a slightly higher price.

O’Rourke’s view

While O’Rourke speaks mainly about apples, much of what he says applies to other fruits and to vegetables as well, although vegetables are much less subject to impulse buying.

“Normally, economic slowdowns appear to have little impact on sales of fresh apples and apple products,” he said. “Apple markets tend to be more heavily influenced by the supply and quality of the annual crops, by the availability of major competing fruits and by the availability of imports of competing apple products.

“However, there is reason to believe that the current economic slowdown is exceptional in a number of ways, that it is leading to dramatic shifts in consumer attitudes and behavior, and that it could affect food markets more than many previous slowdowns.”

Middle- and lower-income groups have been hardest hit by the combination of setbacks, he said. Since they spend a higher percentage of their income on food and fuel, their discretionary income is pinched hard.

“There has already been a sharp cutback in eating away from home, with mid-range dining places suffering the most, while fast-food hamburger and sandwich chains have benefited,” he said. “Customers have been shopping grocery stores for the ingredients to build meals for cooking at home that they would previously have gone out to enjoy. Some customers have responded by reducing the number of shopping trips while others have increased their trolling for bargains.

“Retailers have noted increased buying of private label brands versus national brands, a drop-off in purchasing later in each month, purchases of cheaper canned vegetables instead of fresh vegetables, more purchases of smaller-size packs and generally greater sensitivity to price.

“There is speculation that purchasing of organic, fair trade and other ‘caring’ or ‘convenience’ products will lose ground as consumers become more concerned about price and value for money.

“Customers have also been switching their allegiance among differing store formats. In general, the big gainers have been supercenters such as Walmart, warehouse club stores such as Costco and discount outlets such as Aldi, Lidl and Sav-a-Lot. The main losers have been the mid-range, traditional supermarket chains.”

Another view

John Stanton, a marketing expert from St. Joseph’s University in Philadelphia, who examines consumer motivations in food purchasing, reinforced O’Rourke’s message. He also spoke during the Chicago apple meeting.

Consumers, faced with less income as well as less wealth, have moved price back to the top of the list, after some years of price being less important than convenience, taste and health – in that order, he said. Consumers are “trading down.”

“Consumers will trade down to basics,” he said. “And they will shop channels that are price-oriented.”

Will this have an effect on farm markets and farmers’ markets?

Stanton said consumers are still very concerned about food safety, and they trust farmers, especially local farmers. But farm marketers have profited greatly from the desires of well-to-do consumers looking for freshness, food safety and a unique shopping experience. A key question is, do these markets entice poorer shoppers?

“Don’t ignore the rich,” Stanton advised. “Profits come from the rich. But marketers now need to be a little more vigilant to the have-nots.”

Trading down for consumers means giving up some convenience, he said – cooking more from basic products, eating more at home.

More from O’Rourke

O’Rouke noted that, between 1980 and 2008, consumers became much more discriminating and sophisticated in what they expect from the food supply system.

“They have heightened concerns about the effect of food on health, nutrition, obesity, longevity, etc. A segment of consumers of varying size has been willing to devote increased search time, and to pay a price premium, for products that satisfy environmental, social or philosophical issues such as more judicious use of pesticides, reduced impact of farming practices on wildlife or business practices that are more benign for local communities.

“There is no way to know how much that discriminating segment will shrink if economic setbacks are prolonged.”

“Clearly,” he said, “the longer the slowdown lasts, the tighter the credit squeeze, the higher the rate of unemployment and the greater the price inflation, the more consumers are likely to change their lifestyles and purchasing habits.”

Apple growers, he said, (and, in reality, all growers) need to adjust and prepare to deal with the effects of the current economic times. Here are some things to look for:

• Consumers are likely to shop less often and to make each shopping visit more effective.

• They are more likely to prepare shopping lists and plan menus.

• They are likely to become much more price-conscious, less willing to pay for convenience, and perhaps less concerned about the social and environmental issues that have been growing in importance.

Retailers are likely to make numerous adjustments to their stores:

• They will be less willing to stock slow-moving items that do not generate adequate sales or profits.

• They will be inclined to increase the share of private-label products on their shelves and to exploit the opportunity to take the ready-to-eat meal business away from mid-price restaurants.

• They will be willing to use coupons, club cards or other schemes that offer loyal customers a price break. They will be eager to demonstrate to shoppers that they feel their financial pain by providing “better value” items, that is, high-quality items at relatively low prices.

• The recent buoyancy in retail prices of fresh fruit is not likely to continue. Sooner rather than later, produce suppliers will be asked to reduce their offer price for their products.

The bottom line seems to be: Pay attention. Be aware that food consumption patterns are going to be changed by this “economic slowdown,” which some are calling a depression.

Remember what happened in past slowdowns. History has a way of repeating itself.




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