Apr 7, 2007

The Squeeze is On – Not Just in Apple Juice

Every orchard and every firm in the apple business needs to have a strategy for dealing with the charge from China. For growers, that probably doesn’t mean planting more Fuji apple trees.

Right now, China’s strong suit – and its weakness – is relying heavily on one product – large, autumn-harvested Fuji apples.

Desmond O’Rourke, the agricultural economist who founded Belrose, Inc., a Pullman, Wash., firm specializing in apple market analysis, spoke about the Chinese challenge to members of the Washington State Horticultural Association in December.

“Beating the Chinese product in the marketplace presents challenges,” he said. “In the case of apple juice concentrate, which is a relatively fungible commodity, it will be difficult to beat the Chinese on price.

“In contrast, the fresh apple market offers marketers many opportunities to differentiate their production on the basis of variety, size, region of origin, seasonality, production methods (such as organic), third-party standards, delivery methods, pre- and after-sales services, etc.

“The fresh market also offers opportunities for differentiation through the use of branding, promotion, creation of status or exclusivity, greater responsiveness to retailer or consumer concerns or other extrinsic qualities,” he said. “The consumer market in the developed world is likely to continue to splinter and to yield many opportunities for product differentiation.”

O’Rourke does not expect the Chinese challenge to go away, or even weaken.

“At one time or another,” he said, “we have become concerned about rising threats from France, Poland, Turkey, Chile and South Africa. However, no country has thrust its way on the world scene so rapidly, so forcefully and on such a scale as has China. The Chinese assault on world apple markets shows no sign of slowing down in the near future.”

Chinese production began to soar in about 1990, he said. Then a smaller producer than the United States, with 234 million boxes, by 2000 its production was four times as large as U.S. production. With an annual output of 1.1 billion boxes, its production was larger than all of Europe combined. Today, China produces one-third of the world’s apples.

China became an exporter “by default,” O’Rourke said. Even with 1.3 billion people, production grew so rapidly per capita that availability rose from half the world average in 1991 to twice the world average in 1999. Chinese apple growers flooded their domestic market, drove down the price and turned outward to relieve the price pressure.

Annual exports of both fresh apples and concentrated apple juice (CAJ) soared. Even with U.S. anti-dumping actions against CAJ imports, Chinese apple exports bounced back. This year, China will surpass both France and the United States to become the largest exporter of fresh apples.

Will Chinese exports continue to grow? O’Rourke said the capacity is there. Even without more trees, Chinese production could grow by another third by 2010 as growers use better methods and increase yields.

The Chinese are also adopting technology such as cold and CA storage and sorting and packing systems that will elevate the quality of Chinese apples and help them compete in global markets.

“It appears likely that Chinese exports of fresh apples and CAJ will continue to grow rapidly in the next few years,” O’Rourke said.

They could, in fact, become important world suppliers of applesauce and other fruit beverages.

Strategies used against the Chinese in the past probably won’t work. Blocking
Chinese product on sanitary or phytosanitary grounds will become more difficult because China, as a member of the World Trade Organization, is both improving quality control and gaining negotiating clout.

For American growers, the option is to “differentiate their product.”

For large organizations like major retailers, another option is, “invest in China” and buy more Chinese apples. They will increasingly look to China for cheap, quality product, since China has a third of the world’s apples and half its pears.

The Chinese need the investment money, O’Rourke said. The downside of that strategy is that China remains a non-market economy, and its commercial system “involves many pitfalls.”

For American growers facing marketers who source product globally, the Chinese economic system may also be their ally.