Supply Management Program Alternatives

For the Tart Cherry Industry*

by

Donald L. HinmanVisiting Specialist

Agricultural EconomicsMichigan State University

East Lansing, MI

Donald J. RicksProfessor

Agricultural EconomicsMichigan State University

East Lansing, MI

Abstract

Two interrelated supply problems facing thetart cherry industry are long-run cyclical patternsin industry productive capacity and substantialannual supply fluctuations. Following the termi-nation of a federal marketing order in effect for14 years, the industry has considered a number ofother supply management options, None havebeen adopted on a broad industry basis. Recentproposals involved formation of a multi-statesupply management cooperative and use of a statemarketing order in Michigan. Annual Supply

management alternatives include reserve pool,market allocation, and non-harvest. An orchardremoval incentive program was proposed toreduce industry productive capacity.

Introduction

Perennial crop industries often face specialchallenges in coordinating supplies with demand.Significant challenges in a number of perennialcrop industries stem from the simultammus opera-tion of two overriding supply phenomena: (1)long-term changes in acreage and industry produc-tive capacity relative to demand that may lead toperiods of over-production and under-production,and (2) annual supply fluctuations which areprimarily related to weather conditions.

The U.S. tart cherry industry has grappledwith these interrelated supply problems for severaldecades. Supply management programs that havebeen discussed and developed by the industry overthe years to deal with these problems have

*This research was supported by the Agricultural Cooperative Semite of the U.S. Department of Agriculture andthe Michigan State University Agricultural Experiment Station.

Journal of Food Distribution Research February 92/page 57

involved the joint efforts of growers and proces-sors. One such program, a federal marketingorder with supply management provisions, was ineffect from 1972 to 1986. Several other proposedprograms for supply management have been con-sidered by the industry over the years, but havenot been adopted on a broad industry basis.

Persistently large supplies and resulting lowprices, which had a significant negative impact onthe industry during the late 1980s, led to newconcerted efforts by the cherry industry to developan effective supply management program. Forexample, in 1990 and early 1991, tart cherryindustry leaders proposed a combination of severalprogram components to deal with their supplyproblems. These proposals involved creation ofa special multi-state supply management coopera-tive that would operate either by itself or incombination with a proposed state marketing orderin Michigan, the largest producing state.

This report explores certain aspects ofrecent tart cherry industry proposals for supplymanagement programs. Although the primaryemphasis is on several industry proposals thatwere considered in 1990 and 1991, the report alsoexamines the operation of the federal marketingorder and several other proposals considered afterthe termination of the marketing order in 1986.The tart cherry industry experience in developingsupply management program proposals may pro-vide useful case study examples of interest forsome other peremial crop commodity industriesthat also are challenged by industry supply-demand balancing problems,

The Nature of Tart Cherry Supply Problems

The tart cherry market faces two majorinterrelated supply problems: (1) long-run cycli-cal patterns in industry productive capacity and (2)significant annual supply fluctuations. Bearingacreage has exhibited a cyclical pattern over sev-eral decades. In contrast, annual productionvaries substantially from year to year becauseyields rise and fall due largely to climatic factorssuch as spring freezes.

Annual fluctuations in tart cherry produc-tion are perhaps the most volatile of all U.S.

perennial crops. The percentage change in annualproduction has been as high as 54 percent, andwas in the 30-40 percent range in a number ofyears. Over the period 1965-1990, the annualpercentage change in cherry production averaged17 percent, which was higher than the comparablepercentage changes in U.S. production for a num-ber of other perennial crops including hazelnuts(16%), almonds (15%), raisins (10%), sweetcherries (9%), blueberries (8%), freestone peaches(7%), nectarines (5%), and apples (4%). Year-to-year change is measured as a percent of averageproduction for each pair of adjacent years.

A key result of annual supply fluctuations isthat very low grower prices often occur in largecrop years and quite high prices in short cropyears. This is related to the fact that cherrydemand is inelastic, especially at the farm level,and significant demand expansion is not easilyachieved within a period as short as one year.The supply volatility and fluctuating prices in turnhamper longer-run demand expansion.

One of the results of the long run cyclicalpattern of bearing tart cherry acreage is alternatingperiods of industry over-capacity and under-capac-ity interspersed with periods of approximate bal-ance of industry productive capacity with demand.The period 1976-1983 can be characterized as aperiod of general under-capacity in the industry inrelation to potential demand, with frequent shortcrops and unusually high prices received forcherries. Growers responded to high prices dur-ing this short supply period with substantiallyincreased plantings, resulting in a period ofchronic over-capacity a few years later during theperiod 1984-1990.

Although short crops in 1990 and 1991provided a respite from persistently excessivesupplies, it remains to be seen if the recent periodof industry overcapacity has ended. Data from arecent orchard survey suggest that the challengesof industry over-capacity may continue for a fewmore years. Although it is clear that the shortcrops in 1990 and 1991 are partially due toweather-induced short-run fluctuations, opinionsdiffer within the industry on whether the indus-try’s productive capacity during the next few

February 92/page 58 Journal of Food Distribution Resasrch

years will be excessive or in approximate balancewith demand.

An industry-conducted Michigan orchardsurvey in 1990 provided recent data on tree num-bers and ages of cherry orchards. Using estim-ated yields by age of tree average production wasprojected to exceed estimated levels of consump-tion for several more years.

Industry ApproachesTo Deal With Supply-Demand Imbalances

The market price system plays the overallprimary role in coordinating supply and demandfor tart cherries as for all commodities in a mar-ket-oriented economy. However, reliance onmarket prices alone in the face of severe supply-demand imbalances may lead to less than idedlmarket performance, particularly from the grow-ers’ perspective, The effect on tart cherry pro-duction and market supplies from the combinationof weather-induced annual fluctuations in yieldsand the longer-run cyclical nature of bearingacreage often sends confusing market signals tothe industry, especially to growers.

Over the years the tart cherry industry hasdiscussed and developed various programs tosupplement and influence the basic role of marketprices. Two fundamental categories of approachesto deal with long-term supplydemand imbalanceare demand expansion and supply management.

Demand Expansion

For over 40 years the tart cherry industryhas had ongoing industry-wide demand expansionprograms, including generic promotion. Theseprograms supplement the advertising, promotionand marketing efforts of individual processingfirms. A number of people in the tart cherryindustry favor industry-wide collective action forboth supply management and demand expansion,while others argue in favor of demand expansiononly and oppose most or all supply managementprogram proposals. Although there have beensome controversial issues from time to timeregarding industry-wide promotion programs,cherry industry demand expansion programs have

generally enjoyed widespread support within theindustry.

A key impact of severe annual supply fluc-tuations is the constraint that the fluctuations canpose for effective demand expansion. During the1970s and early 1980s the unreliability of suppliesand sharply fluctuating prices experienced by thecherry industry influenced some food manufac-turers to drop cherries from their product linesand/or to de-emphasize promotion and marketingof cherry products. These actions by food manu-facturers in response to supply volatility constraindemand for processed cherries.

There may be considerable potential forexpanding demand for cherries over a period ofseveral years when production capacity is large,leading to large supplies over a multi-year period.On the other hand, history has shown that duringthe large acreage-production phase of the indus-try’s long-term cycle, production capacity tends tooverpower the moderate amount of demand expan-sion which is achievable over a period of severalyears. In the 1960s and again in the late 1980s,when the industry was in the large acreage-pro-duction phase of the long-term cycle, supplieswere substantially gre~ter than sales, in partbecause demand growth was rather limited.

This experience indicates that in the tartcherry industry demand expansion alone is inade-quate for the task of bringing about a long-termbalance between supply and demand at priceswhich allow growers a positive return on invest-ment. Demand expansion is nevertheless animportant component of long-term coordinationand an approach which has widespread supportamong tart cherry growers and processors,

In comparison to tart cherries, certain otherperennial crop industries such as blueberries andalmonds have achieved larger sustained increasesin industry demand over a period of 10-20 years.Although both the blueberry and almond industrieshave experienced substantial increases in produc-tion, both have generally been able to expanddemand by a commensurate amount. However,both industries have also faced some temporaryoversupply situations. If the tart cherry industrycould achieve long-term demand expansion at

Journal of Food Distribution Research February 921page 59

levels comparable to those attained by the blue-berry and almond industries, this could greatlyimprove cherry industry economic conditions.

Why has large, sustained demand expansionbeen historically possible to a greater degree inthe blueberry and almond industries than in thetart cherry industry? Although this question isworthy of further comprehensive study, a partialanswer includes such factors as: (a) greater stabil-ity in terms of annual supplies for these other twocrops when compared to cherries, (b) greaterdevelopment of export markets, especially foralmonds, (c) differences in industry organizationalstructure, (d) strength of brand position of retailproducts, which is especially strong for almonds,(e) a substantial and growing fresh market forblueberries, (f) decreasing consumer preferencesfor sweetened desserts, and (g) the difilculty ofachieving 100 percent pit removal in tart cherries.Consumer preferences for sweetened desserts suchas pies have decreased in recent years, which hasposed a challenge to tart cherry demand expan-sion, since historically a relatively high percentageof tart cherries has been marketed as sweeteneddesserts. In comparison, blueberry sales haverelied to a lesser degree on sweetened desserts asmajor final products. The blueberry industry hasalso been able to exploit the growth trend in con-sumer preferences for fresh produce withexpanded fresh blueberry sales, whereas tartcherries remain almost entirely a processed crop.

The tart cherry industry is interested intrying to learn from the demand expansion suc-cesses of other industries and to adapt somewhatsimilar strategies. To this end, some majorefforts have been undertaken in the cherry indus-try through such organizations as the CherryMarketing Institute.

Supply Management

Supply management programs have beendiscussed almost continuously within the tartcherry industry for the past 30 years. The indus-try implemented a supply management programunder a federal marketing order during the 1970sand early 1980s. This program included reservepool, market allocation and non-harvest diversionoptions as alternative provisions for managing

temporary excess supplies. Most other supplymanagement program proposals during the cherryindustry’s history have included some combinationof these three alternative approaches.

The fact that large crops tend to alternatewith short crops suggests a profitable role forstorage by individual firms. However, occasion-ally there is more than one large crop in succes-sion, and the possibility of two or more successivelarge crops contributes to the riskiness associatedwith storage. Because of this risk, during mostperiods of the industry’s history only small quanti-ties of tart cherries have intentionally been storedby individual firms. A marketing order reservepool program is one mechanism to organize indus-try-wide storage within the tart cherry industry.

Market allocation may be used to removeexcess supplies in large crop years by diverting aportion of the excess from primary market uses,such as frozen cherries, to secondary market usesincluding cherry juice, dried cherries, and newcherry products. The effect on the primary mar-ket in a large crop year in which market allocationis implemented is similar to the market impactfrom a comparable quantity placed in a storagereserve pool. One difference is that with second-ary market diversion, no reserve pool supplieswould be available to re-enter the primary marketduring a later short-supply period. A marketallocation approach is most appropriate whenpersistent oversupplies occur and there are noshortage periods for several years. A storagereserve approach is more appropriate duringperiods when very short crops are a frequentoccurrence, which was the cherry industry patternbetween 1972 and 1983,

Another alternative for reducing annualsupply fluctuations is a non-harvest option. In thetart cherry industry a common occurrence in largecrop years is that substantial tonnage is left unhar-vested even when the industry has no specificprogram for this. To address this problem, sev-eral supply management programs discussed and/or implemented in the tart cherry industry haveincluded a provision to allow growers a non-har-vest option in excessive supply years.

February 921page 60 Journal of Food Distribution Research

An additional approach somewhat similar tonon-harvest which has been considered to somedegree is a temporary “non-production” option.The idea behind this option is that it might betechnically possible to develop a plant growthregulator which a grower could apply to a portionof the acreage near bloom time to prevent produc-tion that year. The result of such an approach fora perennial tree crop as cherries would be similarto a decision by growers of annual crops to reduceplanted acreage for a year. Although this type oftemporary “non-production” approach is technic-ally feasible for a few peremial crops, the tech-nology has not yet been adequately developed fortart cherries. With further research it mightbecome technically feasible. This approach hassome definite advantages over non-harvest interms of costs and efficiencies.

Supply reduction through an orchardremoval incentive program has been proposed andconsidered at length within the tart cherry indus-try, but has not been implemented. Such a pro-gram could be used to reduce some of the indus-try’s surplus productive capacity during periods ofovercapacity as occurred between 1984 and 1990.The industry has emphasized in their discussionsregarding this proposed approach that any suchprogram would not be used on a continuing basisto restrict production. Instead, it was proposed tobe used only to speed the process of acreagereduction when the industry is in a period ofexcessive capacity from previous over-plantings.

Supply management program proposalsconsidered and debated by the tart cherry industryduring 1990 and early 1991 emphasized eithermarket allocation or a partial orchard removalincentive program, or combinations of the twoapproaches. Due to the short 1991 crop there hasbeen some resurgence of iilterest in use of areserve pool for inventory management,

A Supply Management ProgramFor the Tart Cherry Industry:The Federal Marketing Order Experience

From 1972 to 1986, a federal marketingorder was operated as an important industry-widesupply management program. The marketingorder program represented the culmination of

many years of development and consensus-build-ing in a major attempt to grapple with industrysupply problems. It was the result of agreementamong various segments of the industry, includinggrowers and processors, within the various statesthat were included in the marketing order pro-gram. The marketing order covered Michigan,New York, Wisconsin and Pennsylvania, but didnot include tart cherries produced in Utah, Oregonand Washington.

Program provisions were used primarily toaddress the problem of annual supply fluctuations.By and large this was appropriate since duringmost of the period in which the marketing orderwas used, the main supply problem in the industrywas widely fluctuating annual supplies. From thetime of initial implementation of the marketingorder in 1972 until 1984, the industry progressedthrough phases of the long-term supply cycle inwhich there were frequent occurrences of yearswith quite short supplies following years withtemporary large, excessive supplies. The federalmarketing order program for tart cherries hadthree main goals: (a) reduction in annual supplyfluctuations, (b) more stable prices and (c) some-what higher prices to growers, especially in largecrop years. The primary operational provision ofthe marketing order during its lifetime was thestorage reserve pool. The two other main provi-sions, market allocation and non-harvest diver-sion, were used in a secondary fashion.

The marketing order was implemented fivetimes (1972, 1975, 1980, 1984, and 1985). In1972, 1975 and 1980 there was special emphasisplaced on the reserve pool as the primary optionfor intended use. In 1984 and 1985 somewhatmore emphasis was given to secondary marketallocation provisions.

In addition to the five times the marketingorder program was implemented, the industryplanned to use it in 1982, another large crop year,However, this planned use of the marketing orderin 1982 was not permitted by a combination ofOMB and USDA policies under the ReaganAdministration. The disallowance of the industryplan to use the marketing order in 1982 wasunfortunate for tart cherry growers, who receivedprices that year considerably below the costs of

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even the most efficient growers. In addition,1983 brought an extremely short crop with recordhigh prices. Thus the very large supply fluctua-tions and market-price fluctuations of 1982-1983provided an ideal set of economic conditions forthe intended operations of a reserve pool.

In terms of overall program evaluation,many industry leaders agree that the marketingorder worked reasonably well for reducing supplyfluctuations with emphasis on the reserve poolduring the 1970s and early 1980s. Since this wasa period of frequent short crops, a logicalapproach to improving market performance was aprogram to store excess supplies in large cropyears and to release them in subsequent short cropyears.

The nature of the industry’s supply prob-lems changed substantially starting in the mid-1980s. Although the most significant supply-related challenge in the 1970s and early 1980s waswide annual fluctuations, by the mid to late 1980sthe chief problem had become persistent oversup-plies. This was due to large new plantings bygrowers in response to high prices received duringthe late 1970s and the early 1980s. Since by themid- 1980s the industry was entering an over-capacity phase of its long-term supply cycle, somechanges in the marketing order program emphasiswere needed. Industry productive capacity hadexpanded to the point where the likelihood of veryshort crops was substantially reduced. If no shortcrops occur for several years, cherries stored in areserve pool would need to be marketed intosecondary markets rather than being subsequentlyreleased to main commercial markets to supple-ment short supplies, which occurred regularlyduring the earlier period of marketing order oper-ation.

During use of the marketing order in 1984and 1985, the marketing order administrativeboard responded to the changing supply situationby shifting the emphasis of the program to relysomewhat more on market allocation and non-harvest and to reduce emphasis on the reservepool. Despite this shift by the board, most grow-ers continued to choose the reserve pool option,even in 1985 when there was a second restrictedpercentage in succeeding years (a condition which

would be expected to cause growers to emphasizeoptions other than the reserve pool). The reservepools formed in both 1984 and 1985 were eventu-ally sold to the USDA for school lunch and othergovernment feeding programs as secondary marketsales rather than being released into main com-mercial markets, which continued to be in surplusfor several years.

The federal marketing order program mighthave been modified even further to adapt theprogram to changes in the predominant industrysupply situation, which earlier was one of annualfluctuations, to the more recent situation of persis-tent oversupply. Had the marketing order contin-ued to operate, the board would probably havegiven even greater emphasis to the market alloca-tion and non-harvest options of the program. Inaddition, this type of shift in program emphasismight have been carried still further had theindustry been able to implement various additionalproposals which had been considered at length.Among the industry proposals considered wereamendments and modifications to the marketingorder program to permit (1) orchard removaldiversion credit, (2) temporary non-productionthrough bloom abortion, if technically feasible,and (3) at-plant diversion of some low qualitycherries.

In 1986 the federal marketing order wasdiscontinued following a continuance referendum.In the referendum, slightly less than half of thegrowers (representing, however, 55 percent of thetonnage) favored continuation.

Industry Collective ActionFor Supply Management:Recent Proposals

Although the federal marketing order supplymanagement program was terminated in 1986, thetart cherry industry continued to face substantialchallenges from excessive supplies throughout thelate 1980s until a temporary respite whichoccurred because of a shorter crop in 1990 and aquite short crop in 1991. The excessive suppliesduring the late 1980s were especially evident withan unusually large crop in 1987, resulting in verylow grower prices, which averaged well belowgrowers’ typical annual variable costs.

February 92/page 62 Journal of Food Distribution Research

Low prices and reduced grower and pro-cessor incomes during the late 1980s spurredindustry concern about the oversupply situation.As a result, industry leaders devoted considerabletime to analysis and discussion of alternativesupply management program proposals. Theseproposals, which were considered at differenttimes during recent years, included:

. A proposed new federal marketing order pro-gram.

This proposal was similar to the previousfederal marketing order, but with:

-- More emphasis on market allocation pro-visions.

-- De-emphasis on the reserve pool aspect.

-- Inclusion of a diversion cralit option fororchard removal to speed up the neededdownward adjustment in industry acreage.

-- The addition of a national industry gen-eric demand expansion program alongwith the supply management provisions.

● Extension of the stock tonnage concept usedby some cooperative processors to an indus-try-wide program involving grower deliveryquotas,

. A proposed industry financed orchard removalincentive program to be accomplished througha special new industry-wide cooperative.

. A combined program proposal of (a) orchardremoval incentives, (b) market allocation ofexcessive supplies to secondary markets and/or (c) non-harvest diversion of some excessivesupplies.

This program was proposed to be accomp-lished through combination of a special indus-try-wide cooperative and a state marketingorder program in Michigan. Another newancillary cooperative was also proposed byprocessors to facilitate the processing andmarketing of secondary market cherries that

would have been encouraged or required bythe proposed supply management program.

. A program similar to the previous one,including market allocation and non-harvestdiversion, but without the orchard removalincentive program,

This list shows that the industry discussedand analyzed a number of different supply man-agement options. These discussions spannedseveral years, begiming shortly after the market-ing order was terminated. Each of these fiveproposals will next be considered in more detail.

A Proposed New Federal Marketing OrderEmphasizing Mark@ Allocation

After the cherry marketing order was dis-continued, a new federal marketing order empha-sizing market allocation provisions was proposedby some industry leaders. Its primary purposewas to handle the persistent oversupply situation,but also to have substantial flexibility to adjust tosome fluctuations in annual supplies. A federalmarketing order was proposed as the organiza-tional vehicle, in part because a number of indus-try leaders were supportive of the previous mar-keting order’s overall performance and potential.In addition, the use of a federal mandatory pro-gram to minimize the free-rider problem washighly valued by many industry leaders.

Some in the industry advocated the inclu-sion of a reserve pool provision in a standby modeto be used when the industry returncxl to a phaseof the long-term cycle when short crops wereagain likely. Other industry participants opposedthe inclusion of a reserve pool, in part because thepersistent oversupply conditions at that time werenot conducive to its use for annual supply stabili-zation,

Adequate industry support was not attainedfor this proposed federal marketing order with itsemphasis on market allocation provisions. Inaddition, the USDA wrwreluctant to proceed withhearings without very strong evidence of wide-spread industry support for the proposal. Thelength of time necessary to follow all of the proce-dures to implement a new federal marketing order

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(estimated at 18 months to two years) was also asignificant obstacle. Another key element was theunderlying philosophical preference by many inthe industry for developing and implementing theirown industry program without governmentinvolvement. For these reasons industry leadersdecided not to proceed with a proposed new fed-eral marketing order but instead opted to empha-size somewhat different approaches for industrysupply management.

Use of Grower Stock Tonnage ContractsIn an Industry-wide Program

Stock tonnage contracts between coopera-tives and grower members have been used for anumber of years by some cherry industry coopera-tives and cooperative-corporation joint ventures.Many in the industry view use of these contractsas a workable and logical program to help balancegrower members’ planted acreage and productionwith the market demand for the processors’products.

There has been interest among some indus-try leaders in exploring the possible extension ofthe stock tonnage concept as a supply managementapproach to broader usage throughout the indus-try. Industry study committees did some analysisand discussion of this possibility, but they werenot successful in developing an industry-wideprogram considered sufficiently fair to all tartcherry growers. In particular, there was consider-able concern that the implementation of a stocktonnage program based on historical deliverylevels would be quite detrimental and unfiair to thesubstantial number of growers at that time whohad a high percentage of young trees with expec-tations of much greater future production.Because there was the perception that an industry-wide program based on the stock tonnage conceptwould meet with strong opposition from signifi-cant industry segments, this idea was not pursuedfi.ulher.

A Proposed Orchard Removal Incentive ProgramWith the Use of a New Cooperative

In the late 1980s there were several large tomedium-sized crops, which resulted in persistentsurpluses and low prices. Economic conditions

were very difficult for growers, but to someextent for processors too. When estimated indus-try production capacity was compared to likelylevels of demand, it appeared that there was sub-stantial excessive capacity in the industry, espe-cially in large crop years. A number of industryleaders became quite concerned about the need tobring supply and demand into closer balance. Aprogram was therefore proposed that would usefhnds from voluntary grower assessments to paygrowers who might choose to remove someorchards. The purpose was to speed up the reduc-tion in acreage and industry productive capacitywhich would otherwise occur only slowly.

An important goal of the orchard removalincentive program was somewhat higher growerprices which would at least cover annual variablecosts and be closer to breakeven prices for typicalgrowers than had been the case in recent years.Even with the program, however, the intendedprices would probably still have been below thebreakeven level for many growers.

The plan involved accepting the lowestgrower bids until the target level of orchardremoval was achieved. Target levels would beestimated to bring potential supply closer toexpected levels of demand, after accounting forIikely growth in demand. Growers could chooseto bid the amount of money that they wouldaccept to remove certain orchard blocks or theirentire tart cherry acreage.

To implement the “cherry orchard buyout”program, a special industry-wide supply manage-ment co-operative was formed called UnitedCherry Producers. It had grower membership inalmost all cherry-producing states with especiallystrong support from Michigan, Utah andWisconsin. The new cooperative and the orchardbuyout proposal also had strong support frommany processors in the industry.

Industry leaders who proposed the “orchardbuyout” program through the United CherryProducers cooperative imposed upon themselvesthe restriction that the program would not beimplemented unless growers representing 90percent of U.S. tart cherry tonnage signed up asmembers with the cooperative and hence agreed to

February 921page 64 Journal of Food Distribution Research

pay the assessment. This self-imposed thresholdwas based on their judgment regarding the extentof free riders they were willing to accept infinancing the program.

Within two months membership signup inthe United Cherry Producers cooperative repre-sented 73 percent of U .S. tart cherry tonnage, andover 83 percent of Michigan tonnage. However,since the 90 percent threshold was not reached intime to implement the program for the 1990 grow-ing season, the orchard removal incentive programwas not implemented, and in late spring 1990 theproposal was put on hold for the time being.

A Combined Program of Orchard Removal andAnnual Supply Management

During the summer and fall of 1990, therewas some re-evaluation within the industry whichresulted in some changes in the proposed supplymanagement program. Although the orchardremoval incentive program had received wide-spread industry support, as demonstrated by thehigh percentage of grower signup in the newcooperative, some industry leaders believed thatadditional attention should be given to annualsupply fluctuations. Therefore the next step wasa proposal to combine the orchard removal incen-tive program (to reduce excessive acreage by amoderate amount) with additional provisions formanaging temporary excess supplies in large cropyears, These provisions included market alloca-tion and non-harvest diversion.

Annual supply management provisions weregiven added emphasis because it was recognizedthat annual supply fluctuations would againbecome relatively more important (as was the caseduring the 1970s and early 1980s) if industryproductive capacity was rduced through anorchard removal incentive program. If enoughacreage were taken out to bring supply anddemand into approximate balance in average yearsor large-crop years, they would again face theprospect of demand-hampering shortages in small-crop years. Also, even though the orchardremoval part of the program would result in lessindustry acreage, there could still be surpluses inlarge-crop years due to continuing annual produc-tion fluctuations. Periodic surpluses would be

especially likely if orchard removal was imple-mented only to a limited degree, which was theintention of the proponents. In this case, thelikelihood of annual shortages would be mini-mized as compared to a situation where largeacreage removal was undertaken.

At the time that this proposal was beingconsidered, there was little widespread industryenthusiasm for a storage reserve provision, eventhough the implementation of an orchard removalprogram would likely have resulted in renewedrelevance of a storage reserve to avoid temporaryshortages. The lack of industry enthusiasm for astorage reserve at this time was due largely to thepersistent oversupplies from industry overcapacityduring the years immediately preceding (1984-1989). Many in the industry believed that itwould be more desirable to emphasize provisionsthat removed product from the primary marketaltogether (market allocation and non-harvest) thanto emphasize provisions related to a storagereserve and subsequent release of supplies ifshortages occurred. Consequently, a storagereserve pool was not a major provision for theprogram proposal that was pushed in late 1990.

In terms of the organizational structure toimplement this combined program, the proposalcalled for use of a mandatory state marketingorder program in Michigan, combined with thespecial supply management cooperative, UnitedCherry Producers, in all cherry-producing states.The United Cherry Producers cooperative mem-bership provided a substantial base upon which tobuild support for the combined program proposal.In addition, approval by referendum of the pro-posed state marketing order would have assuredmandatory participation in Michigan.

Since United Cherry Producers had a highmembership signup in Utah and Wisconsin, evenwith a relatively low signup among growers inNew York and Oregon, the program might havereadily achieved participation rates as high as 85-90 percent overall if the mandatory program hadbeen approved in Michigan. On the other hand,there were indications that at least some non-Michigan growers would have rescinded theircooperative membership, because they did notsupport the proposed annual supply management

Journal of Food Distribution Research February 921page 65

provisions. They had signed up originallybecause of their willingness to participate in thefinancing of the orchard removal incentive pro-gram. Nevertheless, since Michigan produces 72-75 percent of all U.S. tart cherries, the mandatoryfeature of the state marketing order would havehelped to minimize the overall free rider prob-lems--especially in comparison to the alternativeof a cooperative attempting to operate such aprogram on its own.

Some Michigan growers were concernedbecause the proposed program would be manda-tory in Michigan but not in the other states. Somebelieved that it was unfair for Michigan growersto bear a disproportionate burden.

A hearing was held on the use of a statemarketing order in Michigan, but a referendum onthe proposed mandatory program was not con-ducted. Obstacles to the proposed programincluded certain legal interpretations as well asless than full agreement within the industryregarding the desirability of the program,

An Annual Supply Management Program

After another period of re-assessment dur-ing the winter-spring months of 1991, the industryconsidered yet another modified proposal. Amoderately short crop in 1990 contributed to areduction in concern over the industry’s over-capacity problem and to some erosion of supportfor an orchard removal program. Some of thefocus of the supply management proposal shiftedback to annual supply variability. This programproposal therefore emphasized market allocationand non-harvest diversion provisions, while theorchard removal incentive program was dropped.The proposed organizational arrangement wasagain to be a combination of the supply manage-ment cooperative with membership in all tartcherry producing states and mandatory growerparticipation in Michigan through a state market-ing order program.

New hearings on the revised program pro-posal for annual supply management were held inApril 1991. An industry referendum was notconducted on this state marketing order proposal.

Since that time, the level of tart cherryindustry activity in the area of supply managementhas abated considerably. The reduced interest insupply management has been partly due to the factthat the 1991 crop was quite short because ofspring freezes, resulting in high cherry prices, atleast temporarily.

A Preliminaq ProposalFor a New Storage Reserve Program

Since the 1991 crop was quite short, thereis now renewed interest among some industryleaders in some type of broad based industrystorage program, This approach could help avoidexcessive supplies in the large-crop years andshortages in the small-crop years, much like theprevious federal marketing order program.Because this latest proposal is in a preliminarydiscussion stage, final decisions have not beenmade regarding the organizational vehicle to usewith this latest proposal. Some consideration isbeing given to the possibility of using some formof voluntary processor participation in a storagereserve or market allocation program. How theseideas may or may not develop into a major pro-gram proposal for the industry remains to be seen.

Some Challenges forThe Industry Supply Management Proposals

Any industry-wide supply managementproposals can expect to face a number of specialchallenges. Since. they are less common thandemand expansion programs, supply managementprograms are more likely to meet with skepticismor overt opposition regarding both their desirabil-ity and workability. Some challenges facingsupply management proposals examined in thisresearch report include:

. Difficulty in developing an adequate consen-sus within the industry regarding:

-- The seriousness of the problems.

(Were the problems sufficiently serious towarrant the implementation of an indus-try-wide supply management program?)

-- The nature of the problem.

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(Was the main problem one of excessiveproductive capacity, or annual supplyfluctuations, or both?)

Which type of program and which mainprovisions would be most effective insolving (or improving) the problem?

The workability of a program.

(Would a supply management programwork sufilciently well to be worth doing?)

Strong philosophic opposition by some inthe industry to supply management pro-grams in general, and to any mandatoryprograms in particular.

Difllculty in attaining an adequate level ofindustry support to:

Have an effective, workable program.

Avoid or minimize the “free rider” prob-lem.

Diftlculty in developing a comprehensiveprogrm- that would solve or reduce thecurrent supply problems, yet be suffi-ciently flexible to deal effectively withchanging future conditions.

Developing a substantial industry consensusin favor of an industry-wide supply managementprogram is important but difllcult to achieve.Because of consensus-building difficulties, manyindustry-wide program proposals include onlythose provisions likely to be acceptable to a sub-stantial percentage of the industry. Programdesign and development as well as industry con-sensus-building strategies are influenced by theseconsiderations. Most of the industry programproposals discussed in this paper contained onlythe minimum action provisions that would receiveadequate support and yet help to reduce some ofthe major industry problems.

Implications for Other Commodity Industries

Tart cherry industry experiences in dealingwith various supply management program propos-

als provide interesting examples of commodityindustry leaders facing serious economic adversityand working together to propose industry-widesolutions. Although none of the recent proposalshave yet been implemented, much energy andcreativity went into analyzing, discussing anddeveloping them. A number of program ideasthat were analyzed will likely receive timtherconsideration by the industry in the future.

The special supply management coopera-tive, which was intended to function with severalof the proposals either by itself or in conjunctionwith a state marketing order program, was anunusual and innovative organizational alternativefor accomplishing supply management timctions.Formation of a cooperative for the purpose ofundertaking industry supply management functionsis a concept that may warrant consideration fromother commodity industries that face similar prob-lems of periodic supply-demand imbalance. If ahigh degree of industry agreement can be reached,a cooperative may be a less cumbersome form ofindustry-wide collective action for supply manage-ment than a method such as a marketing orderwhich requires government action. On the otherhand, free rider problems can be reduced if sucha supply management cooperative were to operatein conjunction with a state or federal marketingorder that can employ mandatory features toincrease industry participation,

The tart cherry industry program proposalswere aimed at supply problems that occur periodi-cally in a number of perennial crop industries--(a) surplus industry productive capacity fromoverplanted acreage, and (b) large annual fluctua-tions in production. Although these two types ofsupply problems have been especially pronouncedin the tart cherry industry, they also affect mosttree fruit and perennial crop industries to somedegree. A number of perennial crop industries,including almonds, raisins, hazelnuts, prunes andwalnuts, have developed industry- wide supplymanagement programs that are somewhat similarto those of the tart cherry industry. Industrycollective action of this nature for the purpose ofimproving commodity industry performance mayalso be beneficial for certain other perennial cropindustries. Comparisons to the tart cherry indus-try experience may be interesting and usefid to

Journal of Food Distribution Research February 92/page 67

other industries that face somewhat similar prob-lems.

References

Ricks, Donald J., Larry G. Harem, and W.Compton Chase-Lansdale, lhe Tar? CherrySubsector of U.S. Agriculture: A Review ofOrganization and Pe~ormance. N.C. Pro-ject 117 Monograph 12, North CentralRegional Publication 278, University ofWisconsin, July 1982.

February 921page 68

Ricks, D. J., “Marketing Coordination in theUs. Tart Cherry Industry, ” ActsHorticultural 203, June 1987.

Ricks, Donald, “The U.S. Tart Cherry Industry’sEconomic Situation: Past, Present andFuture, ” Staff Paper 90-66, Department ofAgricultural Economics, Michigan StateUniversity, East Lansing, September 1990.

Journal of Food Distribution Research