Food for thought part 2: Talking apples with Desmond O'Rourke

The Packer's Tom Karst visited June 23 with Desmond O'Rourke, economist and long-time apple industry observer. Karst asked O'Rourke about the ways the Washington apple industry has changed in the past 50-plus years, and what challenges and opportunities may lay ahead.

“I have nothing but admiration for the men and women of the fruit industry in Washington state,” O’Rourke said in the interview. “They just are so dominant. They’ve taken on so many challenges. Over the years that I’ve been working in the industry, they have continued to be optimistic about the future and continue to try and sell their products around the world. It’s certainly remarkable and inspiring to be around those sorts of people for all my career.”

Listen here: Packer Interview - Desmond O'Rourke

Q: But at the same time, (shippers) are now involved with the replenishment orders for retailers, correct?

A: It is pretty much an open book, as soon as the crop forecast comes out from Washington, in early August, and then from the US Apple Association meeting, all that information goes directly to the retailer. So, the retailers and the suppliers both understand what sort of challenge they have, what sort of varieties are going to be available, and then what the volume is, that tells them what the likely price would be so they can set up their marketing programs for months ahead, depending on what the retailer wants.

Q: Apples are one crop where you once you have (the fruit) under cover, it’s going to be there and you’re going to be able to pack it and send it out.

A: There still is a premium for varieties that can be produced early. And that was one of the huge benefits of Honeycrisp; Honeycrisp can be picked in early September, as can gala. So, they got a huge leg up in the market each year by being there first with really good quality fruit.
And that’s one of the problems that fuji and Cosmic Crisp and (other varieties have); they’re not really available in the early season when the competition is less difficult.

Q: Cosmic Crisp can be a later season apple. Growers have had volumes that are not real big yet, and some say that it eats even better after it is stored.

A: Yes, but by the time you’re selling apples in May, June, you’re starting to face the soft fruit competition, sweet cherry competition, watermelons, an awful lot of competition from the market as the year drags on, so there’s a major advantage from being an early variety. Honeycrisp and gala are the two big ones that are early, but then some of the club varieties like SweeTango are really early too, so they get an early season boost just by the lower level of competition at that time of year.

Q: There is a lot to consider as far as the present and the future; any broad observations about what we might see going forward?

A: I think one of the one of the huge changes, since I began working with the industry, has been at the retail level. In 1970, there were two big retailers; A&P pretty much stayed in the Eastern half of the country, and then Safeway pretty much stayed in the Western half of the country. 
Now you have Walmart, Kroger, Costco; they’re in every region of the country, and then, of course, in many foreign markets as well. So, the big retailers are in much more competition with each other. And as a result, they are very demanding of the suppliers. 
A&P was happy if you gave them a price cut; Walmart, Kroger, those guys, they want good prices, but they also want quality, they want the delivery on time, they want all sorts of certifications that you’re not beating up the environment or your workers. That’s become a very, very demanding system for suppliers here.
And it’s getting even tougher because, let alone, you have the Walmart, Kroger and so on that are well established, but you now have Aldi in the Midwest expanding pretty rapidly and also expanding in the Southeast. And you have Lidl coming in with the same sort of philosophy. And you have Costco with a slightly different philosophy, but again, they go for a very limited number of varieties. So, you’ve got really two classes of retailers; the expansive ones like Walmart and Kroger have many different varieties and then the limited assortment guys like Costco or Aldi only have a very, very small number of varieties. So that makes competing for space in those chains becomes really tough.

Q: The buyer landscape has changed, and the marketers have changed as well. There is more concentration in the shipping community compared to when you first started.

A: That’s been largely in response to the concentration at the retail level. So, most of our apples, sweet cherries and pears now are marketed by what I would call the integrated networks. In other words, they are marketers, packers and growers that are all working very closely together; the marketer gets the signal from the retailer on what variety, quality and so on, certifications as needed, passes that on to their affiliated packers. And then the affiliated packers pass those instructions on to the grower.
The grower has to be responsive to what the retailer currently wants, which is tough when you have a perennial crop like apples that takes quite a few years to bring into production. So, if your variety mix in 2021 isn’t right, it is going to take you five or six years to get it right, and a lot of the small growers can’t afford that.
Because the price varies pretty rapidly with response to the volume that’s put on the market, in a down year, they can get into financial problems very, very easily. 
The Food Safety Modernization Act has put another burden on the smaller grower because just keeping ahead of the paperwork is something that they find quite, quite difficult to do. Whereas the larger operators, the network operators, they can assign people full-time to meet all those needs.

Q: As far as marketing apples to the consumer, to the retailer, there’s a lot more digital media that the shippers can do, but introducing any variety is probably expensive, getting buy-in and getting enough momentum is challenging, right?

A: I think the Good Fruit Grower, when they did their club apple (feature), I think they’ve mentioned about 50 varieties across the U.S. that are recognized. And, of course, it’s a few others that are so small, and they haven’t yet got the limelight. There are probably 50 new varieties circulating right now in the U.S., and then there’s another 50 or so circulating in Europe, and they’re all trying to win some long-term support for consumers and it’s a very tough assignment.

Q: Obviously, Honeycrisp did it a big way. They’ve really exploded and then you’ve got Cosmic Crisp a variety that is been adopted by many growers. So that’s a variety too that we’ll see a lot more of and, I guess, as marketers are involved with that variety. How do you see that variety expanding its influence? And what does it need to do to kind of create real traction?

A: I think that one of the things that stood out this year was the lack of market discipline. There was a lot of poor-quality Cosmic Crisp that were placed on the market. Retailers are pretty picky about the size distribution that they want for varieties, and for Cosmic Crisp, there was way too many very large apples, and not enough of the small apples where they couldn’t get a good premium. 
So, there’s going have to be some sort of quality control better than what it was the current year. 
I think the other the other big thing is what will the consumers’ reaction be? Because you probably remember going to many, many meetings where people talked about all the problems of growing Honeycrisp. That was true, but when it got into the marketplace, so many different age groups, income groups, and so on, really liked the Honeycrisp and were willing to pay a very substantial premium for it. So that was consumer choice at its strongest that helped Honeycrisp to grow the way it has grown. I think Cosmic Crisp has to pass that same test; can it really win over a large number of consumers? Not just Cosmic Crisp: all the club varieties face the same challenge.

Q: Being an international observer, how does Washington state compare with other areas in the world? Is the state looking pretty good in terms of our competitive position compared to other countries?

A: From the production, packing, marketing (perspective), Washington state is right up there among the top competitors in the world. We’ve got a huge advantage that I don’t know any other — maybe Turkey — but no other major apple producer has got the Columbia Basin, this huge flat area (for potential expansion). 
The Washington state climate is deal for growing apples and sweet cherries, probably as good a climate as anywhere in the world. So, Washington has terrific advantages from that side. The problem they’re having right now is market access. With all the trade disputes, the WTO was supposed to police unfair trading practices, and it’s pretty much lost its mojo over the last few years. So as long as that continues — and as long as we’re in trade disputes with China, there’s one kind of ticking with Mexico; many other countries like Indonesia, take the law into their own hands and create temporary obstacles — that’s where we really are struggling is that apples are a very low priority with the trade negotiators for the U.S. In some other countries, it would be a much higher priority. 
We are fighting an uphill battle in the international markets. And with 30% of our apples, pears and sweet cherries going into international markets every year, those are really, really important to the profitability of growers.

Q: What’s the future of trade with Mexico?

A: We signed NAFTA in 1994 and probably every two or three years since Mexico has put up some sort of anti-dumping complaint. We haven’t had any for the last three or four years. Mexico is a great market, very close, and it is our best single market, but you never know when they may pull another of those blockages of trade.

Q: What type of changes do you think we’ll see in the industry in the years ahead?

A: There is no question that the concentration in the industry is going to increase. And there is just going to be a lot more outside investors, the local management will probably be left in place. But everything that I hear says that the industry is going to be quite different in five years’ time than it currently is now.
Those outside investors will be the ones that will have to make the decisions about, do we go with the old varieties that we (currently grow), do we invest a lot of money in new varieties, and how do we keep up with the technological needs for the industry? It’s going to be quite a different industry in the next five years.

Q: Of course, everybody’s waiting on robotic harvesting. Is that something we’ll see in five years or is it going to be a little farther down the road?

A: Again, a little bit of history. The first project that we had on apple packing was funded by the Washington Tree Fruit Research Commission, which was set up specifically to find mechanical harvesters. That’s 50 years ago. It might be a little dangerous to predict that we will soon have (robotic pickers).
I think the technology is advancing so rapidly that probably we’re going to have automated harvesting within the next two or three years.
And more and more, precision agriculture, artificial intelligence, all those things are going to be applied in the fruit industry. So, the technology is going to, again, change very, very dramatically over the next few years.