The rate of change

ApplesMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

A recent visit to the Washington State Tree Fruit Association (WSTFA) Annual Meeting hammered home an observation. The rate of change in agriculture and food continues to accelerate with new technology pouring in from the electronics and genetics world. One of the points that I often make about economics is that “it isn’t about us.” Technology firms would never invest the vast sums of research and development funding simply to support agriculture and food. The payback would be too small to risk the capital. But if you create new sensors for the next generation of smartphones, then you might as well use them for everything else.

In addition to the rate of technological change, I noticed that larger and more agile agricultural producers are shortening the cycles. One of the deans from the University of Washington cited some statistics on the rollout of the newest apple varieties. The variety, called Cosmic Crisp, is seen as the new Honeycrisp. Some apple producers refer to Honeycrisps as “Moneycrisps”, because this variety has been able to maintain an amazing price premium compared to the other apple varieties. Over the last three years, for apple shippers in Washington, Honeycrisps were priced at two and a half times the average of all other varieties. However, price erosion has hit the Honeycrisps hard. The most recent data shows that the premium has fallen from 250% to 200%, and it’s likely that the premium will begin to fall even faster.

Yakima Valley Price Comparison Honeycrisps and Everyone else

The prognosis for the new variety Cosmic Crisps should give the apple growers reason for concern. Cited statistics indicated that one million saplings will be planted this year, and 5 million more saplings will be planted in both 2018 and 2019. It will take four to six years for these new orchards to start hitting their real potential for production, and in the interim, older orchards will be replaced thereby restricting production of other varieties. However, once these 11 million saplings get rolling, there should be a tidal wave of Cosmic Crisps on the market. That represents a “make or break” bet for the industry. If people really love the variety, it will be a boost for industry profitability before it, too, becomes oversupplied. If people don’t love the variety enough to pay a hefty premium, it could become a real albatross around the industry’s neck.

The increasing rate of change doesn’t respect any segment or practice. Even organic price premiums have begun to fall quicker. Producers have been fast to adopt and adapt the best practices from the organic world, and the price of organic varieties has started to converge with the price of conventional varieties. The supply of organic has risen fast enough that the market needs to chase the occasional buyer. There is the segment of apple buyers who will only buy organic, and are indifferent to the price. Then, there is the much bigger segment of buyers who are happy to buy organic, if the organic price is equal to or close enough to conventional prices. Further price convergence should be expected as the producers and consumers go through all of their options.

Yakima Valley Price Comparison Gala conventional and Gala organic
Yakima Valley Price Comparison Fuji organic and Fuji conventional

None of these responses are surprising given the market’s incentive to chase profit opportunity, but the rate of change continues to increase. Agricultural producers and food processors will have to take the shortened payback periods into consideration when making their investment decisions.