Dec 4, 2015

‘Three pillars’ uphold the tart cherry industry

Some compare it to a three-legged stool. Others call it the “three pillars.”

Whatever metaphor they use, many in the tart cherry world say the structure and stability provided by three organizations – the Cherry Industry Administrative Board (CIAB), Cherry Marketing Institute (CMI) and CherrCo – are invaluable to a U.S. fruit industry that’s subject to wild swings in supply.

Jim Jensen, president of CherrCo, said the cumulative effort of the “three pillars” – CherrCo stabilizing prices, CIAB stabilizing supply and CMI working to expand markets through promotion – has in the last few years given the tart cherry industry some of the highest farm-gate returns in its history (minus 2012 – but more on that later). It’s certainly a much better situation than 1995 – the worst year Jensen has ever seen for the tart cherry industry.

The industry lacked a marketing order, and thus a stable supply of cherries, from 1987 to 1996. The tart cherry marketplace was fairly chaotic in that period. Handlers fought each other for business and buyers played them against each other until prices were abysmal. In 1995, prices plummeted to less than a nickel per pound, said Perry Hedin, CIAB’s executive director.

“It was a wake-up call to all of us,” Jensen said. “We needed to do something different if the industry was to keep going.”

CIAB and CherrCo were created in the wake of that terrible year – and grower returns have been far better since, Hedin said. According to USDA, the price for frozen cherries was 34 cents per pound in 2014.

But the industry’s current structure is not without its critics. A processor is challenging the legality of CIAB’s role. As of mid-November, USDA was still mulling the dispute.

Stabilizing prices

CherrCo was created about the same time as CIAB (1996-97). Despite their complementary roles, the two organizations are not affiliated. CherrCo’s purpose is to provide pricing stability to the frozen tart cherry market. Based in Ludington, Michigan, CherrCo is a federated cooperative under the Capper-Volstead Act. Its members are cooperatives of tart cherry growers across the United States and Canada who produce frozen products. CherrCo pools those products and markets them in common. A majority of tart cherries are frozen at one point or another as a method of preservation, so CherrCo ends up handling a significant percentage of the North American crop, Jensen said.

CherrCo also performs an administrative role, managing inventories and providing the majority of financing for the tart cherry industry through “big lines of credit negotiated with some of the largest banks in America,” Jensen said.

CherrCo’s activities help stabilize prices in the frozen segment – and the banking community has noticed, which gives the industry access to an “extremely attractive financing package,” he said.

The situation is so much different than it was 20 years ago, because the industry decided to work together, Jensen said.

Stabilizing supply

In a 2007 study, economists Gerald White of Cornell University and Kevin Kesecker of USDA laid out some of the tart cherry industry’s many challenges. White said tart cherry volume fluctuated more than any other commodity he had worked with. Tarts are extremely vulnerable to freezes and other vagaries of the weather. There’s often a large crop one year followed by a much smaller one the next. The industry also suffers from a small size, a lack of major processors (such as Ocean Spray for cranberries or Welch’s for grapes), demographic changes, competition from other well-established commodities and a lack of easily identifiable products.

The industry’s first federal marketing order ran from 1972 to 1986, when growers and handlers voted to discontinue it. After the chaos of the intervening years, the industry petitioned USDA for a second marketing order. USDA approved, and CIAB was in operation by 1997. Based in Michigan, which typically produces about three-quarters of the U.S. tart cherry crop, CIAB also encompasses growers and handlers in Utah, Washington, Oregon, Wisconsin, New York and Pennsylvania. Grower and handler assessment fees fund its activities, Hedin said.

Since 2006, CIAB has spent an average of $1.4 million annually (71 percent of its budget) on promotional activities, teaming with CMI on promotional campaigns to expand the tart cherry market, Hedin said.

CIAB’s traditional role, however, is balancing supply and demand. If tart cherry supply is predicted to be higher than demand in a particular year, CIAB restricts the surplus – not allowing it to be sold in domestic markets. Processors are allowed to sell restricted product in new markets and other designated outlets, however, Hedin said.

At least one processor strenuously objects to CIAB’s restrictive power. Bill Sherman manages Burnette Foods, a Michigan company. In 2011, he filed a 15A petition with USDA challenging CIAB’s propriety. In 2014, a USDA administrative law judge made a determination that partially supported Burnette. That decision was appealed to a USDA judicial officer, who overturned it earlier this year, stating that the marketing order was operating properly, according to Hedin.

Shortly after the judicial officer’s decision, however, the U.S. Supreme Court ruled against a different marketing order, California’s Raisin Administrative Committee, in a separate case. The high court declared it unconstitutional for the committee to claim control of a portion of the raisin crop.

The Supreme Court’s raisin decision didn’t directly affect the operation of CIAB. According to USDA, the raisin case addressed a narrow situation where the government-backed marketing order actually took title to a portion of the crop, and could physically appropriate that portion if it chose.

“Because no other administrative committee physically appropriates and takes title to the agricultural product as part of a volume control program, the court’s analysis (in the raisin case) will not affect the current operation of USDA’s other marketing orders, which help to stabilize market prices and are tailored to an individual industry’s marketing needs,” according to USDA.

In light of the Supreme Court’s decision, however, Sherman asked USDA’s judicial officer to reconsider his initial ruling. As of mid-November, both sides in the cherry dispute were awaiting the officer’s latest determination, according to Hedin.

Sherman did not return phone calls to Fruit Growers News for this story, but according to an interview he did with Interlochen Public Radio, he’s fed up with CIAB because its crop restrictions prevent him from selling product and expanding his business.

CIAB tweaked its method of calculation in 2012, which freed up more cherries for sale starting in 2014. The goal of the change was to boost domestic sales, according to Hedin.

The industry has an opportunity to renew or discontinue CIAB every six years, by holding a grower/handler referendum. To renew the marketing order, more than 50 percent of the voters – by number or by tonnage – must vote yes. There have been three referendums held since CIAB was created, and in each, growers and handlers have approved its function with strong majorities.

During the last referendum, in 2014, 512 growers and 39 handlers were eligible to vote. Seventy-six percent of the participating growers (representing 85 percent of participating volume) and 74 percent of the participating handlers (representing 74 percent of participating volume) voted to continue the order. That level of support was similar to the two previous referendums. That’s the most objective basis CIAB has for its support within the industry, Hedin said.

“Most processors understand what (CIAB) does and its value,” he said.

If CIAB were to be discontinued, it would be “devastating” for the industry, Hedin said. Prices plummeted after the first marketing order was discontinued. The industry created CIAB in response – and if that goes away, prices will probably plummet again.

Expanding markets

CMI, a national organization based in Michigan, has been around since 1988. Its primary mission is marketing tart cherries, but another component is funding research on behalf of the industry (such as studies of production practices and health benefits). CMI is funded by state marketing orders, which collect grower assessments at the state level, according to Phil Korson, CMI’s executive director.

For the last nine years, CMI has focused on reinventing tart cherries from a bakery ingredient into a healthful “superfruit.” As part of that, the institute spends about $300,000 a year on research that studies the health benefits of the Montmorency variety. More than 95 percent of U.S. tart cherries are Montmorencys – the largest supply of that variety in the world, Korson said.

About 15 percent of the U.S. crop is exported. The biggest customers are the United Kingdom and Germany, but CMI is looking at developing a bigger market in China.

“Our processors say ‘China, China, China,’” Korson said. “It’s a growing market with a huge population. There’s lots of potential.”

Devastating freeze events in 2002 and 2012 led to the loss of some markets. The U.S. industry permanently lost much of the international canned market after 2002, though it managed to build a stronger dried market. It’s still trying to recapture markets that were lost after the 2012 disaster. CMI is pushing hard to grow domestic sales in the juice concentrate category, for example, where imports pose stiff competition, Korson said.

“We’re working hard to recapture markets,” Korson said. “You can never get them all back, but you get some back.”

If a similar disaster year occurs in the future, the industry has taken some steps to try to minimize the damage. It’s trying to spread production across a wider geographic range so tarts aren’t concentrated in a handful of production areas – and thus more vulnerable to bad weather. The industry also managed to get crop insurance coverage for tarts, which was first available in 2014, according to Korson.

– Matt Milkovich