California processing tomato growers were happy last winter when they scored a $70 per ton contract price from processors for their 2008 crop.
Growers are smiling no more. Since processors and growers agreed on a price, fuel, fertilizer and irrigation water costs have soared to the point historic price levels are no longer attractive.
Processors are not happy since the price they agreed on last winter may not generate the profit they need.
“The 2008 contract price of $70 was a fair price,” says Bret Ferguson, grower in Huron, Calif. and chairman of the board of the California Tomato Growers Association (CTGA). “However, energy costs and fertilizer costs have recently shot up — factors we didn't fully anticipate last December/January. Then add the cost of water to that. Right now, we're looking at a 40 percent allocation from Westlands (Water District).” Growers will have to supplement with outside water or groundwater.
“Therefore even with the higher contract price that we're getting in 2008, we're not in any better position than we were last year.” Last year's contract base was $63.”
“The $70 contract is losing its luster rapidly,” says Don Cameron, manager of Terranova Ranch in Helm, Calif. and immediate past CTGA president. “Water allocations haven't changed recently (after virtually no rainfall in March and April), and from what I have heard, open market water is trading at $300-500 per acre-foot.”
“We've seen a 77-cent increase per gallon in diesel fuel at the wholesale level,” Ferguson says. “At one point, it went up 30 cents in seven days. You can try to hedge, but you never know which way the market is going to go.”
Competing crops are crowding out processing tomato acreage as growers look to lower their risk and take advantage of record high commodity prices on wheat, corn and safflower.
“Competing crops and the water tightness have pushed the (2008) tomato price higher as commodity buyers bid for acres,” says Ross Siragusa, president of the California Tomato Growers Association (CTGA) in Sacramento, Calif. Mechel Paggi, director of the Center for Agricultural Business, California State University, Fresno, recently submitted a proposal to CTGA to develop economic models for San Joaquin Valley farms to evaluate processing tomatoes compared to cotton, corn, wheat, safflower, alfalfa, and melons.
The project's goal is to create an objective tool useful for price discovery during annual bargaining, according to Siragusa. Target tomato prices could be adjusted more accurately for yield risk and water availability with such a model.
The ag business center at Fresno State in collaboration with the California Institute for the Study of Specialty Crops (CISSC) has already developed 20 California simulation models. “From there we can analyze the impact a new policy may have on a producer's net income or net present value prior to implementation,” Paggi says. “They can also determine the impact a change in production practices may have on the producer's financial statements prior to actually changing practices. These models act as a decision-making tool.”
Processed tomato growers face difficult choices which are not easily reconciled by simple economic analysis. Recent increases in commodity prices and rising input costs have enhanced the difficulty in making those choices, according to Paggi.
As proposed, this model for processing tomatoes would evaluate the economic impacts of growing each of the alternative crops under various scenarios concerning plugging in variables like energy and fertilizer costs and general economic factors (interest and inflation rates), he says. “In addition, the model would provide a comparative return to water use.”
It is a real-time situation and not a model for some California processing tomato growers who have already jumped ship and others threatening to do the same if the economic and water outlooks do not improve. This could leave processors short of their market needs.
“Some canners are (already) short tonnage on the late tomatoes,” Cameron says. “I don't know of any that wouldn't like a few more. Market demand for California products is good, both export and domestic, with higher prices for the canners. However, there is no real incentive for growers to plant late tomatoes considering the increased risk and the water situation.”
“There are still a few processors that are looking to pick up a few tons on the back- end of the season — from mid-September on,” says Roger Scriven with the Morning Star Co. in Stockton, Calif. “It is especially affecting the Fresno area. They've backed away from late tomatoes due to water concerns. Later season tomatoes take more water.”
“Alternative crops such as wheat, corn and safflower have made it interesting trying to contract tomatoes,” Scriven says.
However, there are still financial incentives for growers willing to take the risk on late planted tomatoes, according to Siragusa. “Actually the incentive for late tomatoes this year is considerably better that it has been in past years,” he says.
Late season harvest date premiums (per ton) this season are:
Sept. 15 - $5
Sept. 22 - $7.50
Sept. 29 - $10
Oct. 6 - $15
The future is no clearer. “Come November, our water supply is probably going to be more uncertain than it was last year,” Ferguson says. “We were looking at 15 percent to 20 percent estimates in preliminary allocations from Westlands Water District this year. It doesn't look any better than that going into next year, so the water supply situation going into the 2009 crop probably looks worse than it does now.”
Logistics are critical to the California industry. Growers and processors need to be in close proximity to make the numbers work. Current fuel prices have made that economic reality crystal clear.
“Processors cannot really go back down to the southern desert/Blythe area for tomatoes” and then truck them to the Central Valley processing plants, Ferguson noted.
“They're no better off there than we are here in terms of water, and the freight to move the tomatoes from there to the processing plants here just doesn't make sense.”
Even considering the current circumstances, Scriven remains optimistic about the future of the industry. “Morning Star is a growing company, and we're always looking to increase our tonnage,” he says. “Export potential is up due to the devalued dollar and shorter crops overseas. Our biggest challenge in California right now is water. That's the one we need to solve.”