Ward, Ronald W.

English

Research Papers in Economics

SOUTHERN  JOURNAL  OF AGRICULTURAL  ECONOMICS  JULY,  1976
A TWO-PRICING  SYSTEM  FOR
EXPORTING  FROZEN CONCENTRATED
ORANGE  JUICE*
Ronald  W. Ward
The  Florida  citrus  industry  is  in  the  unique  essence,  imports  provide  one  way  of  achieving  a
position  of  being  both  importer  and  exporter  of  two-pricing system  for Florida's  exports.
frozen  concentrated  orange  juice.  On  one  hand,  A second basic question relates  to whether or not
exports provide  the industry with an additional outlet  this  type  of international  transaction  is desirable  for
for concentrate.  On  the other,  imports  being brought  the  citrus industry.
into  the  U.S.  market creates  considerable controversy  Two  aspects  of  international  markets  allow  the
as  to  whether  this  imported  juice  is  economically  above  programs  to  become  operational.  First,
desirable  for the industry.  Florida's  domestic  price  has  consistently  been  at  a
Two  basic  issues  have  evolved  from  these  inter-  premium  relative  to  the  world  price.  Second,  U.S.
national  trading  activities.  First,  Florida  exports  tariff  controls  allow  99  percent  of  all  duties  on
concentrate  on both Canadian and  European markets.  concentrate  imports  to  be  regained,  once  an  equiva-
The  former  differs  little  from  the  domestic  market  lent  quantity  of concentrate  is  exported.  The  latter
[1,  3].  In contrast,  the  European  market  is expected  policy  is  known  as  the  "duty  drawback"  provision.
to  differ substantially  from  the  U.S.  market.  Florida  Thus,  imports  can  be  brought  into  the  domestic
faces  a  number  of  competing  suppliers  in  Europe.  market  if  an  equivalent  quantity  is  exported  within
Often,  the  price  of  foreign  concentrate  exported  to  three  years.  Under  these  arrangements,  the  differ-
Europe  is  priced  lower  than  Florida's  export  price.  ential  between  Florida and  world  prices  can  be used
Recognizing  that competition  exists  in  the  European  by  exporters  to  average  down their  European  export
market,  how  then  should  Florida  price  its product  price.
relative  to  the  world  price?  Similarly,  should  the  In  this  paper,  the  basic  economic  usefulness  of
Florida export  price  be discounted to the domestic?l  imports  and  exports  to the  Florida citrus  industry is
Many  Florida  processors  have  argued  that  a  evaluated.  A  European  demand  model  is  estimated
two-pricing  system  between  domestic  and  exported  and  then  used  to  evaluate  effects  of  maintaining  a
juice is desirable.  However, an equally important issue  two-pricing system,  using foreign imports.
revolves  around  how  a  two-pricing  system  can  be
established.  Presently,  Florida  processors  import  EUROPEAN  DEMAND
cheaper  foreign  concentrate  into  the  U.S.,  using  this  European  demand  for Florida concentrate  can be
juice  to  average  down  the  price  of their exports.  In  explained  in  part  by  levels  of  both  Florida's  export
Dr. Ward is an Associate  Professor in  the Food and Resources  Economics Department,  University  of Florida.
*Florida Agricultural Experiment  Stations Journal Series No. 9081.
1Pricing  policies  are  generally  established  by  each  Florida  processor;  however,  considerable  price  leadership  by  larger
processors  is  evident. A  policy  of establishing  a two-pricing  system  by one  processor  may,  then,  lead to  similar adjustments  by
others. A similar leadership  role can also follow in using imports  as means for supporting a two-pricing system.
While  the  industry  does  not  have  direct  control  over  pricing,  there  are  a  number  of  indirect  programs  and  proposals
designed  to  influence domestic  and foreign marketing  of citrus.  Foreign and branded advertising tax subsidities,  adjustable tariffs,
quality and  product  labeling restrictions,  import  bands,  and  industry  reserve  concentrate  pools  are but  a  few programs that can
indirectly influence processors'  pricing strategies  [3].
Hence,  having  an  empirical  measure  of  the  effect  from  various  price  changes  is  essential  for  development  and/or
implementation  of structure changes and marketing policies.
131price  and  world  price.  Adjustments  in  European  equation  model,  although  the  parameters  shown
demand  for  Florida  concentrate,  in  response  to  below  were  estimated  using  two  stage  least  squares:
changes  in world  price,  give a  good indication  of the
degree  of competition  Florida  faces.  Similarly, direct  Log(QXU) = -2.259  Log(QPU)+.966  Log(QPI)
response  to  changes  in  Florida's  export  price  gives  (1.26)  (.920)
guidelines  for  desirable  price  adjustments.  Finally,
demand  most  probably  shifts  over  time,  resulting  +6.676+.078 t+.479 S1+.748 S2
directly  from market  development  and  shifts  accord-  (1.04)  (.012)  (.171)  (.175)
ing to seasonal consumption patterns.
A  quarterly  export  demand  model  is  defined  +.477 S3 R2 = .804  (2)
below:  (.170)
QXUt = [QPUt]  XP  [QPIt  XC  Standard  errors  are  reported  in  parentheses  and  a
comparison  of actual  and estimated values of exports
[e(Io+±l  t+lI2  S1  are  given  in  Figure  1.  Standard  errors  and  related
statistics  are  subject  to  the  limited  interpretation
+I 3 S2+I14  S3+V)]  (1)  associated with the use of TSLS.
where  A TWO-PRICING  SYSTEM
As  indicated  initially,  a  two-pricing  system  has
QXU = Florida's  quarterly  exports  of  FCOJ  to  been  assumed  desirable  but has  not been  empirically
Europe  (thousands  of  gallons  45° brix)  shown  so.  Equation  (2),  along with  results shown  in
QPU = Florida's  quarterly  FOB  export  price  to  footnote  2,  suggest  that  a  price  differential  between
Europe ($/gallon)  Florida's  domestic  and  export  price  is,  in  fact,
QPI = world  or  international  concentrate  price  desirable.
approximated  by  Brazil's  export  price  The  direct  export  elasticity  is  elastic  while  the
for 45 ° brix concentrate ($/gallon)  domestic  demand  is  inelastic,  as  shown  where:
t = quarterly  time  periods  with  1=first  exp=--2.259 and  eDP=-.52.  Note  that  both  elas-
quarter  1968;  2=second  quarter  1968;  ticities  are  measured  at  the  FOB  level  at  Florida
3=third  quarter  1968;  ....  28=fourth  ports.  Hence  both  domestic  and  export  prices  are
quarter 1974  per-unit  values  for  the  same  product  as  sold  in two
Si = 1 if ith  quarter,  i=1, 2,  or 3;  0 otherwise  distinct markets.
exP = direct  price  elasticity for  export demand  A  comparison  of  these  elasticities clearly  shows
exc = cross price  elasticity  for export  demand,  the  desirability  of  a  two-pricing  system.  Gross reve-
and  nues  to  the  industry  can  be  increased  by  reducing
llj = trend and seasonal parameters.  export  price  and  increasing  domestic  price,  since
marginal  revenues are:3
Equation  (1)  is  one  of  a  seven-equation  simul-
taneous  model  developed  by  this  author  but  not  I
reported  completely  here.2 Details  of the  full  model  D =  Q  QPD[-.92]<  (3)
are not essential to  this paper; therefore,  equation (1)
for interpretation  purposes  can  be  treated  as  a  single  and
2Ward  has  estimated  a  complete  simultaneous  model  relating  factors  influencing  level  of  imports,  derivation  of  prices
demanded  by  Canadian  and  European  export  and  domestic  demand  [3].  A  number  of  structural  forms  for  the  complete
simultaneous  system  were estimated.  However,  demand equation (1)  gave the best set of alternative specifications. While the final
form is restrictive  in that elasticities are fixed, a linear model is likewise restrictive in that slopes are fixed.  The final demand form
was  not  selected  according  to  prior restrictions.  Rather,  it  was  determined  from  empirical  results  for  the model's alternative
specifications.
In  addition to European  demand,  the simultaneous  model  shows  domestic price  elasticity of  demand  (eDp)  to be -.52 at
the  Florida  FOB  level,  using  a  domestic demand  equation  where:  QD=QPD
- .52 ADJ,  QD=Florida's  domestic  concentrate  sales
(thousand gallons),  QPD=Florida's FOB price ($/gallon),  and ADJ=seasonal adjustments.
3Although  the  model  suggests  that  a  two-pricing  system  is desirable  (and  economic theory indicates  that  optimal pricing
occurs  where  MRX=MRD),  pragmatically,  such  an  allocation may be impossible. A derived optimal allocation could lead to price
levels beyond  the range  of present  data.  Estimated  elasticities may  not be valid when prices are extended too far beyond data for
which they were based.
132Florida's  Exports  relative  to  domestic  by  a  factor  of  1--,  where
to  Europe
(thous.  gallons)  0<￿<1.  These  two levels  of exports are  illustrated  in
,l  Figure  2 and  derived below:
maximum  =7.8  actual
/  QXUD  -[QPD]  XP  [QPI]  X  A  (5)
\X  ;  0  \/  QXU =  [QPU]  x  [QPI]  XCA  (6)
where
,  |  XI  ~  J  ,  QPD = Florida's domestic  price ($/gallon)
.AI'  \\  ,V  '-estimate  QPI - world of international  price  ($/gallon)
A = seasonal  and  trend  adjustments  in
/\  \l  \\l  equation  (2).
minimum  =  5.4  \  Initially,  the  difference  in  (6)  and  (5)  is  gain  in
gallons  of  concentrate  exported  due  to  a  price
l—1  —  I  \  I  —  Time  reduction.  However,  if  imports  were  necessary  to
1968  1969  1970  1971  1972  1973  1974
achieve  the  price  discount  (1-3),  then  net  Florida
FIGURE  1.  ESTIMATED  AND ACTUAL GALLONS  concentrate  exports  are  some  level  less  than  QXU,
OF  FLORIDA  FROZEN  CONCEN-  defined  to  be  QXU*.  The  difference  between  QXU
TRATED  ORANGE  JUICE EXPORTED  and  QXU*  is  the  level  of  imports  needed.  A  basic
TO  EUROPE  EACH  QUARTER  [SEE  question  to  the  citrus  industry  is  whether
EQUATION (2)]  QXU*~QXUD  as  seen  in  Figure  2.  If  QXU*=QXUD
then the  industry  is  indifferent to the  use of imports.
If  QXU*<QXUD the  industry  would  most  likely
[Mx  1=~ 1~ F5]0  ()  oppose  the  use  of imports,  since  additional  concen- MRx  - QPU  l+I  =  QPU[.56]>0  (4)
M  Ex  xp  trate would  be forced into domestic markets.
PRICING WITH IMPORTS  Price
($/gallon)
As  the  European  export  market  develops,  the  4.00  -
Florida  citrus  industry  has two  basic  pricing  alterna-  .... _..
tives.  First, export  price  can  be  equated  to  domestic  '  \
price  and  exports  estimated  accordingly.  Secondly,  3.50  -QPu  ,  ,7
export  price  can  be  discounted  to  the  domestic  3.25  - '  European
I  ]  sa  lDemand
market.  As  shown  above,  this  is  an  economically  l  i
3.00  - I
desirable  alternative.  However,  the  major  problem  '  i
arises  with  the  implementation  of  a  two-pricing  2.75-  i 
IQP
system.  2.50-  QPI  ---  —
The  industry  now  uses  imports  as  a  means  for  ',  g  a
discounting  its  export  price  relative  to the domestic,  6.0  7.0  f  gallons)
since  the  world  (or  Brazilian)  concentrate  price  is  Qxu*  QXU
D
Qxus
generally  lower  than  Florida's  domestic  one.  Given  FIGURE  2.  EUROPEAN  DEMAND  FOR  FLORIDA
that imports  are brought  into  Florida and equivalent  FROZEN  CONCENTRATED  ORANGE
quantities  eventually  exported,  does this  benefit  the  JUICE  [EXAMPLE  IS  BASED  ON  AN-
Florida  citrus industry?  The demand model  estimated  NUAL  SALES  FOR  1975  USING  AN
in equation  (2)  addresses this question.  AGGREGATE  OF EQUATION  (2)]
Florida's  European  export demand indicates that
exports  at  level  QXUD  could  be  expected  if  export  A  level  of  imports (QXU-QXU*)  necessary  to
price equals domestic-assuming  other prices fixed-in  reduce  the  export  price  (QPU) to  3[QPD]  is  derived
a  given  time  period.  In  contrast,  exports  should  using  results  for  calculating  Florida  export  price
increase  to  QXU  if  export  price  were  discounted  below:
133QPU - (QXU-QXU*)QPI+(QXU*)QPD  (7)  Equation  (12)  then  establishes  conditions  where
QXU  ()  imports  may  or  may  not  be  beneficial,  in  terms  of
increased  movements  of Florida  concentrate.  Table 1
then  gives  empirical  results  for the right-hand  side of (12).
From  this,  values  indicate  that,  at  a  minimum,
QXU*  - QXU [IQPD-QPI  domestic  price  must  be  nearly  twice  that  of  world
L QPD-QPI  ()  price before imports are beneficial  to the industry.
Historically,  relative  prices shown  in the left side
Further,  from  equations  (6)  and  (8)  it  immediately  of (12) have averaged  1.43  with the minimum of 1.14
follows that:  and  a maximum  of  1.68.  Based  on  these  past prices,
results  from  (12)  indicate  that  QXU*<QXUD  (or,
QXU"*=  FQPD-QPI  [QPD]Xp  intuitively,  total  export  gains  achieved  through
LQPD-QPIj  averaging  down  export  price  with  imports)  are  not
sufficient to result in net export gains  for Florida.
e  e  Referring  to  Figure  2,  above results indicate that
[QPI]  XC  XP  A  (9)  QXU*  will  generally  lie  to the left of QXUD.  Hence,
using  imports  to  maintain  a  two-pricing  system  will
Equation  (9)  shows  the  resulting  net exports  of  result  in  more  concentrate  added  to  the  domestic
Florida  concentrate  after  necessary  imports  (for  market,  rather than expanding foreign  sales of Florida
averaging  down  Florida's  export  price  to PQPD) have  concentrate.4 In  Figure  2,  this  addition  to domestic
been  subtracted  from  total  exports  QXU.  Hence,  a  supplies  is determined to be QXUD-QXU*.
comparison  of QXU*  from  (9)  to QXUD in equation  As  a  final  note,  usefulness  of imports and  gains
(5)  shows relative  gallons  gained  (or lost)  from  using  from  exports  depend  on  the  elasticity  of  exports.
imports.  The  ratio  of  QXU*  to  QXUD  provides  an  Greater  export  levels  would  be expected  for a change
index of such  gains or losses:  in export price if that market were  more elastic.  For a
more  elastic  market,  it  follows  that  the  ratio  of
QXU*  r-QPD  QPIl  exp  domestic  to  world  prices  [shown  in  equation  (12)]
QXUD  L  QPD-QPI  (10)  can be less, while imports are still economically useful
where
QXU*  (>  1  net export gains to Florida  TABLE  1.  EMPIRICAL  RESULTS  FOR  EQUA-
QXUD  = 1  no change  TION (12)a
<  1 net export losses  to Florida
The  solution  from  (10)  shows  that  net  results  of  XP_1
imports  to Florida  depend on  relative prices, amount  +eP
of  export  price  discount,  and  elasticity  of  demand.
Letting  the  right-hand  side  of (10)  be ;1, it follows
that:  .9  1.89
.8  2.02
QPD  +exP-1]J  -QPI  xP-1J  2  0  (11)  .6  2.40
.5  2.71
or  .4  3.19
.3  3.99
QPD  0 x--1 
QPI  1  (12)  XPaBased  on  EXp=-
2.
26 from equation (12).
QPI ~  k'~X  P_l  J1
While the  present paper is limited to an analysis  of gains or losses for Florida concentrate,  net of imports,  additional studies
include  a measure  of full revenue  resulting  from two-pricing  alternatives.  Additions  to  domestic supplies  from imports have  an
especially  negative  effect  on the  domestic market,  this market  being  inelastic.  Revenue  gains (or losses)  are addressed  by Ward
[3].  However¥it  is easy  to  show that  gains or  losses from export markets are directly proportional to relative  movement  in  (10).
Define  RQXU— to be revenue  without  a two-pricing  system.  RQXU is that using imports to support a two-pricing system. Then:
RQXUD=(QPD)(QXUD),  RQXU=(f3QPD)(QXU)-(QPI)(QXU--QXU*).  From  equation  (8)  it  then  follows  that:
RQXU=(QPD)(QXU*).  Hence,  the revenues  differ by QPD (QXUD--QXU*).
134to  the  Florida  citrus  industry.  This  is  demonstrated  growth  in  foreign  competition  may  lead  to  a  more
mathematically,  since  the right-hand  side of equation  elastic  market.  Then,  imports  may  become  more
(12)  declines  as  IexPI  increases  from  that  shown  in  useful to  the industry.
(2).  From equation (12),  define:
CONCLUSION
r-lexpll Fi  -leXp  1-  European  exports  of  frozen  orange  concentrate
R  —L3  —"-1]J  Ln  —J1j  can  be  expected  to  increase  over  time  as  derived  in
the  export  demand.  In  contrast  to  the  domestic
then  market,  such exports  are highly  elastic.  Gains can  be
realized  from maintaining  a  two-pricing system,  with
-lexI  Florida export  price discounted to the domestic.
aR  a  XP  Log(2)(1-  -)  < 0  (13)  A  Florida  two-pricing  system  has  been  main-
alel  (-  exp 1 )  tained  by  bringing  in  cheaper  foreign imports,  using
these  gallons  to  average  down  concentrate  export
price  from  the  state.  Results,  however,  show  that
since  0_4<1.  Equation  (13)  illustrates  an  interesting  under  most circumstances  this use of foreign concen-
phenomenon  about  the  citrus  industry.  As  Florida  trate  does  not  result  in  net  increases  in  exports  to
attempts  to  further  differentiate  its  concentrate  in  Florida concentrate producers.
the  world market,  its export  demand  should  become  Results presented have been limited  to a study of
less elastic-thus  making  imports for pricing purposes  gallons  moved  only.  Additional  research  has
even  less useful. In contrast, market development and  addressed  the full  impact on revenues to Florida [3].
REFERENCES
[1]  Chern,  Wen  S.  "Econometric  Analysis  of the Consumer Demand for Orange Juices in Canada,"  ERD Report
73-2, Economic Research  Department,  Florida Department  of Citrus, November  1973.
[2]  Ward,  Ronald  W.,  and  James  A. Niles.  An  Economic  Analysis  of FCOJ Imports  and Exports, Florida  State
Horticultural  Society Journal, Proceedings,  November  1975.
[3]  Ward,  Ronald  W. "The  Economics  of  Florida's  Importing  and Exporting  of Frozen  Concentrated  Orange
Juice:  An  Econometric  Analysis,"  Economic  Research  Department,  Florida  Department  of  Citrus,
1976.
135

A TWO-PRICING SYSTEM FOR EXPORTING FROZEN CONCENTRATED ORANGE JUICE

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