Jun 2, 2011
Marketing orders, agreements perform different functions

Federal marketing orders and agreements were first authorized in the Agricultural Marketing Agreement Act of 1937. The chief role of such programs is to “help provide stable markets for dairy products, fruits, vegetables and specialty crops,” according to USDA’s Agricultural Marketing Service (AMS), which manages federal orders and agreements.

Marketing orders are binding on all individuals and businesses classified as “handlers” (usually processors) who fall under the order’s jurisdiction. Marketing agreements are voluntary, involving growers and handlers who agree to participate, said Michael Durando, chief of AMS’ Marketing Order Administration Branch.

Through the years, a number of orders and agreements have been organized under the 1937 act. Some have survived; some haven’t. Currently, there are 32 federal marketing orders for fruit, vegetable and other specialty crops, but no marketing agreements, according to Durando.

Marketing order duties include market and production research, data collection, volume control, container regulation, inspections, grade standards and generic promotion. Different orders perform different functions, depending on industry needs, he said.

Orders are funded by handler assessments, which are levied by USDA. For fruit and vegetable orders, the assessments are based on volume, Durando said.

Orders are only put in place when an industry asks for them.

“USDA doesn’t decide a particular industry needs to be regulated,” Durando said. “The industry has to approach us and request to be regulated.”

In order for USDA to recommend a new order, it has to have a high degree of confidence that members of the industry will vote in favor. Generally speaking, at least two-thirds of the producers and handlers who vote (who also represent at least two-thirds of total volume) have to vote in the affirmative to create the order. Once it’s created, every handler in its jurisdiction has to pay assessments, he said.

“Historically, we’ve found that successful orders are those that enjoy eighty to eighty-five percent support in a referendum,” Durando said. “Otherwise, they have challenges down the road.”

Sometimes, growers and handlers decide a marketing order has outlived its usefulness and vote to dissolve it during one of its periodic continuation votes – usually held every few years.

In California, peach and nectarine growers recently voted to discontinue their federal marketing orders. The California Tree Fruit Agreement (CTFA), the umbrella organization for those orders and others, is in the process of terminating both and shrinking its overall size, said Executive Director Gary Van Sickle.

What happened with CTFA is a good example of the evolution of an industry over time. There’s been tremendous consolidation on both the supply and demand sides in certain segments of the California tree fruit industry. When suppliers get to a certain size, they can start replicating the activities of a marketing order – which is often when support for the order begins to erode, Durando said.

Free speech?

Starting in the late 1980s, some marketing orders became embroiled in free speech disputes, Durando said. Lawsuits alleged that forcing an order’s members to pay assessments for generic advertising that benefited their competitors was a violation of their right to free speech.

The debate was resolved in 2005, when the U.S. Supreme Court ruled that communications by marketing orders were not a violation of free speech rights, since they were considered government speech, Durando said.

The free-speech controversy affected state-level marketing orders, too.

From 1937 – the year it was created by the state government at the request of the Washington apple industry – until 2003, the Washington Apple Commission’s (WAC) emphasis on generic domestic promotion stayed more or less the same. In 2003, however, a federal judge’s ruling forced the commission to change its focus, said Todd Fryhover, WAC’s president.

Ironically, WAC was behind the 2001 lawsuit that led to its restructuring. The commission, hoping to clarify its authority to collect assessments and bar any future challenges, agreed to pay the legal bills of two growers who sued the commission. A handful of organic growers and warehouses intervened in the lawsuit, seeking refunds for past assessments. WAC’s plan backfired when the judge ruled that forcing the state’s apple growers and shippers to pay for promotions that benefited their competitors infringed on their free speech rights.

Fryhover, who’s been with WAC about two years, wasn’t there when the ruling was made, but he knows the commission shrank significantly because of it and lowered its assessment to the current 3.5 cents per 42-pound box (WAC represents about 2,200 growers).

In comparison, WAC’s mandatory assessment for the 2002-03 crop was 25 cents per box, which generated about $21.5 million, according to a 2003 FGN story.

The 2003 ruling also led the commission to redirect its focus from domestic marketing to international marketing. WAC could conceivably go back to doing what it did before 2003 – since collecting mandatory assessments for generic domestic advertising is now considered constitutional – but that’s not likely to happen. The state’s growers seem to be handling domestic promotion pretty well on their own, Fryhover said.

Back and forth

On at least one occasion, a fruit industry voted to dissolve a federal marketing order – then decided it made a mistake and created a new one.

From 1972 to 1986, the Cherry Administration Board regulated the tart cherry industry. By the latter year, growers and handlers had decided they didn’t need the board and the reserve system it provided.

They found, however, that the marketplace was fairly chaotic without it. Handlers fought each other for business, and buyers played them against each other until prices were abysmal. The low point was 1995, when there was so much supply and so little demand that the price of tart cherries plummeted to about 5 cents per pound. Such conditions convinced growers and handlers they needed another marketing order, so they created the Cherry Industry Administrative Board in 1996, said Perry Hedin, CIAB’s executive director.

CIAB assesses handlers in the seven major production states: Michigan, New York, Oregon, Pennsylvania, Utah, Washington and Wisconsin. The assessment rate is .0075 cents per pound, according to the board.

CIAB has a promotion function, but also regulates how much of the tart cherry crop can be moved onto the domestic marketplace. The power to create a reserve during excess harvests helps balance supply and demand, which is important in an industry that has extreme swings in production from year to year, Hedin said.

A prime example of the usefulness of creating a reserve occurred in 2002, when the industry produced only 60 million pounds of fruit (tart cherry harvests fluctuate so much that it’s hard to come up with an average, but 250 million pounds is “sort of” the norm, Hedin said). CIAB released its reserve cherries, and the industry managed to sell 161 million pounds of fruit that year. It wasn’t enough to preserve every market, but it helped soften what would otherwise have been a disaster, Hedin said.

Still viable

Do marketing orders and other commodity groups still perform necessary functions for their industries, or are they unnecessary relics of the past?

The people who run them still see their worth.
Marketing orders provide growers with the tools they need to be competitive in the global market, and give them a voice on issues important to their industries, said Phil Korson, executive director of the Michigan Cherry Committee, the state’s tart and sweet cherry order.

More fruit industries should utilize marketing orders, or organizations that perform similar functions. It’s a great way to maximize dollars. And if growers and others in the industry decide the order isn’t working anymore, they can vote to abolish it – or at least lower the assessment rate. Checks and balances are built into the system, said Alexander Ott, executive director of the California Apple Commission, California Blueberry Commission (both state orders) and the California Olive Committee (a federal order).

“It’s one of the purest forms of local government control you can have,” Ott said.

Marketing, politics, budgets, research – the list of reasons why growers still need to work collectively through commodity groups could go on and on, said Denise Donohue, executive director of the Michigan Apple Committee.

In Michigan especially, consolidation and competition on the retail end demand that Michigan’s 900 growers – most of whom grow on 200 acres or less – have unified representation to better compete for sales, Donohue said.

By Matt Milkovich

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