(UPDATED April 21) Forecasting the effect of the California drought on fresh produce prices may be as difficult as predicting when it will end.
Avocados and lettuce may see the biggest produce price increases this year because of drought conditions in California, according to research conducted by Timothy Richards of the W.P. Carey School of Business at Arizona State University. In a study that highlighted in the Wall Street Journal on April 15, Richards looked at retail data from the Nielsen Perishables Group to estimate the sensitivity to supply shocks from the drought. That list also includes berries, broccoli, grapes, packaged salad, peppers and tomatoes.
Consumer prices for avocados may increase by 28% and lettuce could jump 34%, according to Richards. Shoppers are least price-senstive to those items, he said, and more willing to pay higher prices to get them.
“For those two commodities, consumers tend to be relatively price insensitive, so you could jack (up) the price of lettuce and avocado, and consumers don’t seem to change their habits that much relative to the other commodities,” he said.
The research mainly considered the demand and price response to reduced output, Richards said. To estimate the supply effect of the drought, Richards said he relied on estimates published in the media that say from a half-million to 1 million acres of all agricultural land will be hurt by the current California drought. Richards believes between 10% and 20% of the supply of certain fruit and vegetable crops could be lost, based on the number of acres planted to those crops in the state.
Some industry operators said the study overestimates the effect of the drought on production this year. The bigger worry, they say, is the long-term effect.
“We’re not too concerned about this summer on getting products out of the Salinas Valley or in the (Central) Valley where the drought is really going to affect them,” said Mike Gorczyca, procurement manager for Pro*Act, Monterey, Calif. “The main concern we have is what is going to happen next year or the year after that what is this drought going to do to the trees and the vines.”
For this year, Gorczyca said onion sizing in the Huron deal could suffer because of water shortages there. That may create active market conditions before the deal moves into Washington and Idaho, he said.
Strawberry suppliers have expressed concern about next year’s spring crop in Oxnard, he said, with expectations that acreage could decline because of water shortages.
The industry doesn’t expect a major disruption in grape and tree fruit volume in 2014, said Barry Bedwell, president of the California Grape & Tree Fruit League.
“There could be a slight reduction, but I don’t think it will be anywhere in the neighborhood of (10% to 20%),” Bedwell said.
“Our message is that the overall crop level may come down, but not to a point I think where anybody should be anticipating a disruption in available supplies for consumers. I just don’t see it.”
Bedwell said he doesn’t see any large parcels of grapes or tree fruit being bulldozed this year. Groundwater management issues will be hotly debated in the next year, he said.
“There’s no question we are looking at one of the most serious drought situations that most people can remember,” he said.
Kevin Bateman, a salesman with Salinas, Calif.-based Produce Alliance, said Salinas area suppliers have indicated no drought-related reduction in lettuce acreage through the first crop cycle that extends to mid-June.
Following that, he said growers have said there may be issues of the quality of water being pumped, relating to higher salt content. That could hurt yields and may cause acreage reduction later in the season, Bateman said.
While the Arizona State study may have overestimated the drought’s effect on some commodities, Joel Nelsen, president of California Citrus Mutual, Exeter, said the study failed to account for the effect of the drought on citrus growers.
“There are some acres getting bulldozed,” he said. “Growers are deciding block A will survive but block B will go down.”
Overall, Nelsen said about 50,000 acres of citrus out of 200,000 acres of total citrus acreage are vulnerable to the drought on the east side of the San Joaquin Valley. It is unknown how many acres might be bulldozed this year.
“Prices this year have been higher than historical levels because of the freeze in December,” he said.
Citrus trees were setting a crop in the spring, and Nelsen said an inadequate supply of water could result in reduced harvest of navels in October.
Any citrus acres removed will have an ongoing effect, Nelsen said.
“It takes six years from the time you replant to begin harvesting,” he said. If all 50,000 acres are lost, that would equal a $3 billion hit to growers, Nelsen said.
More research is planned on the issue in coming months, Richards said, including a closer look at what crops that will suffer declines and how import markets will respond.
Sherry Frey, vice president of Nielsen Perishables Group, said in a news release that certain consumers — young consumers of avocados, for example — will be more heavily affected by the price increases.
“While some consumers will pay the increased prices, others will substitute or leave the category completely,” she said in the release.
For a category like avocados, reduced purchases will also hurt sales of some non-produce snacking categories, such as chips, crackers and ethnic grocery items. Higher prices will mean retailers will start looking elsewhere for produce, she said in the release.
“This means we’ll see a lot more imports from places like Chile and Mexico, which may be an issue for certain grocery customers who want domestic fruit and vegetables.”
Richards said his research only looked at domestic supply and fruits and vegetables and did not try to account for possible increases in imports. Over the medium term, Richards said he expects there will be more imported produce supplied to U.S. markets to substitute for any shortage from California. “That will be the thing that will moderate the price impact relative to what we have here,” he said.
Richards said consumers may try to substitute some items like berries to fruit not affected by the drought, such as apples.
Richards estimates the following possible price increases due to the drought:
- avocados, up 17 to 35 cents to as much as $1.60 each;
- berries, up 21 to 43 cents to as much as $3.46 per clamshell;
- broccoli, up 20 to 40 cents to a possible $2.18 per pound;.
- grapes, a rise of 26 to 50 cents to a possible $2.93 per pound;
- lettuce, could rise 31 to 62 cents to as much as $2.44 per head;
- packaged salad, up 17 to 34 cents to a possible $3.03 per bag;
- peppers, up 18 to 35 cents to a possible $2.48 per pound; and
- tomatoes, likely to rise 22 to 45 cents to a possible $2.84 per pound.