Short and Long Run Implications of Production Volatility: A Case Study of Marion Blackberries By Larry Lev, Patricia Lindsey, and Michael Walker (revised 2/96) KEYWORDS: production variability, demand, supply, substitution, market power

The U. S. commercial blackberry industry is highly concentrated in Oregon's Willamette Valley. The vast majority of blackberries are consumed as ingredients in processed products such as yoghurt, baked goods, jam, and juice mixtures. These processed blackberry goods are not stand alone products but rather occupy a place within a broad line of other similar fruit-based products.

Marionberries have become the dominant commercial blackberry because of their superior texture, color, taste, and overall size. The roughly three hundred Marionberry producers in Oregon perceive themselves as constituting a separate and distinct industry. In common with many agricultural crops, the Marionberry industry appears to cycle from boom to bust and back again. This brief case study examines the short and long run implications that the production volatility of the industry pose for the development of a more stable and profitable future. As will be discussed, in the short run, price increases for the raw product are constrained by the availability of close substitutes in the marketplace. More importantly, in the long run a fluctuating and unpredictable supply of Marionberries undermines the willingness of food processors to invest in the development of additional Marionberry-based consumer products. Since similar problems plague many agricultural crops, the discussion that follows is quite general. The information presented here is derived from a broader industry study conducted by a group of Oregon State University students under the direction of Dr. Patricia Lindsey.

How variable is the Marionberry industry? The following chart provides production, price, and value of production data for Marionberries for the period 1991-1995.

Periodic, severe freeze damage (such as 1991) remains a characteristic of the industry. Substantial production increases in response to high prices is another characteristic. Comparisons with three other Oregon crops, (raspberries, strawberries, and potatoes) for the period 1974-1993 show that Marionberry production was 66 percent more variable than raspberries, 83 percent more variable than strawberries, and three times more variable than potatoes. Marionberry prices were also considerably more volatile: two and a half times more variable than potato prices, more than twice as variable as strawberry prices, but just 14 percent more variable than raspberry prices.

While this high level of production variability is certainly disruptive, Marionberries could still provide stable and attractive returns to growers if the growers could pass along their higher per unit costs of production in years of limited supply (and find a home for the entire crop when production is high). This would happen if, as many producers like to believe, their Marionberries were unique and irreplaceable. The truth in the marketplace is nearly always quite different. Even if there is only one Burger King or Subaru dealer in town there are many acceptable substitutes. As a result whenever prices are raised for Whoppers, Subarus or Marionberries some sales are lost to other products.

A statistical analysis of the Marionberry market confirms the existence of these close substitutes. The marketed quantity of other blackberries directly influences the Marionberry price and the prices of a set of other berries move together with the Marionberry price. Thus, producers must be knowledgeable about and react to this larger market rather than focusing solely on their own submarket.

In a given year, the critical marketing question is how the farm price will vary in response to the size of the crop? Based on the study data for the period 1980-1993, when the quantity of blackberries produced increases by 1 percent the price paid to farmers decreases by 0.7 percent. This is good news for the industry because it means that total revenue at the farm level (price times quantity) increases when production expands. The flip side, though, is that when production contracts the price does not increase by enough to make up for the decline in quantity and farm revenue falls. Markets for the majority of agricultural goods operate in exactly the opposite fashion to this.

This average price response, however, can be misleading in years that are very different from the average (and there are plenty of those in the Marionberry market). In a high price, low production year such as 1991, the statistical model suggests that the Marionberry price increased only 0.25 percent for the last 1 percent reduction in the quantity marketed. And when the tables were turned in 1993, the last 1 percent increase in production dropped the price by a much larger 1.4 percent. In both of these "extreme" years, the market appeared to act to reduce farm revenues. Over time, most in the industry believe they do best in years in which the price hovers in the mid-range around 50 cents a pound. But the price rarely stays in that range.

Looking at the price implications of selling the crop of Marionberries on a year by year basis ignores the longer term reasons why the market for these berries is restricted. From the perspective of processed food manufacturers and retailers, consistency in price, volume and quality are all major concerns. Food manufacturers do not want to be constantly changing recipes and products and retailers prefer not to alter shelf space based upon year- specific production conditions.

The result is even greater price volatility for Marionberries -- when production is down in the short run there is a rush for supplies to maintain the current list of products. But the high prices also cause the processors and retailers to reconsider the long run attractiveness of Marionberries. Then, when production is up prices fall because there of this reluctance to develop new products that may not have supplies or may face high prices in future years. Over time the marketplace presence of the crop does not grow.

The Marionberry Marketing Association (MMA) has been organized by growers to seek to address the price volatility that they have faced. The growers believe that by bargaining as a single entity (the MMA represents about 75% of production) they can receive a "fair" farm level price no matter the size of the crop. This price must take into account the availability of substitutes in the marketplace.

The MMA and others in the industry recognize that this year by year approach is insufficient and that the marketing chain concerns with inconsistent supply must also be addressed? The target of a stable supply provided to the processors is easily stated but more difficult to achieve. Two basic paths present themselves. The first and most direct would be the development of new production technology that would allow producers to avoid periodic freeze damage. So far limited progress has been made on that front. And reducing the potential for freeze damage handle the problems that stem from high production years.

The second approach to supply stabilization that is being actively considered is the development of a storage strategy for semi-processed product that would siphon off production in the high years and provide Marionberries to the market in the freeze years. To date, storage stocks have been held by individual primary processors who incur the storage costs. These firms generally seek to assure supplies to specific final good processors rather than expand the market or stabilize returns to growers. The MMA is proposing to finance and hold its own excess stock. These stocks could be used to demonstrate to consumer good producers that a reliable stock of Marionberries are available at a relatively stable price. Only time will tell whether they can succeed with this endeavor.

There are two lessons from this case study for producers of other agricultural commodities should draw. First, they should seek to better understand the nature of substitutes in the marketplace. Many producers focus too intently on their own commodity and don't adequately recognize the broader competition that they face. As an example, white wheat growers should determine the range of products (from other classes of wheat to rice) that they must compete with in markets around the world. This recognition is necessary to make informed production and marketing decisions.

Second, producers of the raw materials for processed products must understand the long run concerns and considerations of their customers further along the marketing chain. In the case of Marionberries this means recognizing the barrier to increased demand caused by supply uncertainty. Until this uncertainty is addressed, little progress will be made. Other industries such as the white wheat industry that is moving into the provision of protein- specified lots for certain customers must also demonstrate the ability to provide consistent supplies over time in order to develop and maintain their competitiveness.

Larry Lev, Patricia Lindsey, and Michael Walker are respectively Associate Professor, Assistant Professor, and former research assistant in the Department of Agricultural and Resource Economics at Oregon State University.

Return to Commodity Specific Studies Index

Return to the Western Extension Marketing Committee

This site is hosted by the Department of Agricultural & Resource Economics, University of Arizona
Questions regarding content: Russell Tronstad
Send all other questions and feedback to: arecweb@ag.arizona.edu

Document located at http://ag.arizona.edu/ext/wemc/papers/Marionberries.html