Crop Production/Industries, Demand and Price Analysis,

Baires, Filadelfo

Clevenger, Tom

English

Research Papers in Economics

The  Propensity  to  Excess  Capacity  in
the  Lettuce  Subsector
Filadelfo  Baires and Tom Clevenger
Commercial  lettuce,  grown  principally  in  the
West,  is  produced  continuously  throughout  the
year  but  in  different  areas  with  growing  periods
of various  lengths.  These  various  growing  periods
are due to different seasonal climatological patterns
among  producing  areas.  Weekly  lettuce  shipments
are generally dominated by a few growers or grower-
shippers with large  acreages.  Shippers have control
over  85  percent  of  all  lettuce  planted  for  some
harvesting  periods  and  65  percent  for  others,
through  coordination  arrangements  with  growers.
Due  to  the  perishable  (non-storable)  nature  of
lettuce,  the  amount  harvested  is  the  amount
shipped  to consumption centers.
The  lettuce  subsector  appears  to  behave  in  a
coercive  (predatory)  manner.  This  conduct  is
evident  in  the  long  periods  of  relatively  low
prices  and  the  short periods  of high lettuce  prices
experienced  in  the  subsector.  Lettuce  prices  are
characterized  by  wide  intraseasonal  variation
largely  because  of an  increasing  overlap  of harvest
periods  among  producing  areas,  production
expansion  to  new  areas,  and  weather  conditions.
The  outcomes  are  the  short-run  surpluses  or
deficits  experienced  by  the  subsector. This market
instability in turn causes farmer and shipper income
instability.  The lack of adequate information  about
lettuce  acreage  planted  each  week  contributes  to
additional  uncertainty  regarding  the decision grow-
ers  and  shippers make  about lettuce  acreage  to be
planted  at  a given  time  in a particular area. Inade-
quate  information  on  acres  planted,  compounded
with the uncertainty  of weather patterns, becomes
a  major  problem  in  attempting  to  decrease  the
Filadelfo  Baires  and Tom Clevenger are research  specialist
and associate  professor,  respectively,  Department of Agri-
cultural  Economics and Agricultural Business, New Mexico
State  University.
Journal  article  597,  Agricultural  Experiment  Station,
New Mexico State University,  Las Cruces, New Mexico.
magnitude of the potential yield commodity-supply
cycles.  Uniquely  for this subsector, potential yield
exceeds  the  actual  amount  harvested.  Does  this
indicate  a  misallocation  of resources?  The  lettuce
subsector  problem  of concern  here  is  to  achieve
increased  supply  and  demand  harmony  through
vertical coordination.
This  paper  presents  the  important  parameters
affecting  lettuce  subsector  behavior,  stipulates  an
appropriate  simulation model, and  examines policy
alternatives  to  achieve  improved  subsector  co-
ordination  with weather  remaining  given  through-
out the  period of study. The  1967-1968 period was
selected  for  analysis  on  the  basis  of  its  stable
market  structure.  Due  to the  wide  price  variation
experienced  at the farm  level,  it  was  decided  that
a seasonal-weekly model would yield most meaning-
ful behavioral  results.
The seasonal-weekly model of the  United States
lettuce  subsector is represented in the flow diagram,
figure  1.
The  model  was  based  on  lettuce  subsector
characteristics  for which parameters were estimated
and  tested  for  their  statistical  significance.  The
model is shown below:
AC(i)  =f (AC(i)t_l; P(i)t_l)
Y(i)  =f(P(i))
Q(i)  =f(DI(i), M(i), P(i)) 2
PR(i)  =Y(i) x AC(i)
P(i)  =f (Q(i), PR(i))
1The  four  seasonal  demand  functions  were  obtained
from  a  previous  study  by  Shelly.  Disposable  income  and
marketing  margin  were  held  constant  for  each  season.
161Western J. Agr.  Econ.
Fig.  1.  Flow  diagram  of United  States  lettuce subsector
Acreage  -- _  _  >  Shipping Rate  ___
Initiation  (Supply)
I  A  A  /  . 1\  \ A  /  ,  P  N
I
Aci
Deter
By  Sh
Acr
Adjus
De
I  I  \  e  /  \  M
I  I  \  Weather  /  \  \  Mai \  . a
/  I  j  \  /  Margins  I
/  I  i  \  Carlot  /  \  I  \
I  I  'Equivalent  /  \  \
I  I  \  . I/  \  N  \
I  \  I  /
I  \IV  /
reage
mined  I  Maturation  Rate
tippers  I
I  I  .
A-  I  -
I  I
reage  I  Yield  Growing
;tment  I  Delay
*lay I
I
I
I  Season
I  I  of
I  Consum
I
I  I
I  I  / I  I  /
I  I  /
I  /
I  /
II.I.I l_  I  ._____  \  V  V  /
Expected  Average  F.O.B.
Price  <-  ----  Seasonal  <--  - - - - Lettuce
By  Farmers  Price  Price
A  A
Expected  Price  Price CWT
Adjustment  Delay
Where:
AC(i)  =seasonal  lettuce  acreage  planted
AC(i)t_l=seasonal  lettuce  acreage  planted  the
previous year
P(i)tl_  =seasonal  lettuce  FOB  price  the  pre-
vious year
Y(i)  =seasonal marketed yield
P(i)  =seasonal lettuce FOB price
Q(i)  =seasonal demand for lettuce
DI(i)  =seasonal  consumer disposable income
M(i)  =seasonal marketing margin
PR(i)  =supply  of lettuce
i  =w,  s,  su,  f  season;  winter,  spring,
summer, and fall,  respectively
/
The  estimated  results  for  the  seasonal  lettuce
acreage  planted  and  seasonal  yield equations  were
based  on  seasonal  data  for  the  period  1960-74;
the  price  equation  is a  seasonal-weekly  price func-
tion based on weekly  data for the period  1966-70.2
AC =  2802.2597 + 0.8535 ACt_-  + 1140.6475  Pt-i
(11.94)**  (2.29)*
F =  73.08**  R
2 =71.94%
Yw=  127.1510+  10.11,79Pw
(3.17)*
Ys=  116.8755  Ps
0.26 17
F  =  10.06*  R
2 = 43.62%
F  =  9.54*  R
2 = 42.32%
Ysu =  17.9437 + 87.8513  Psu - 7.8900 P2su
(4.59)*  (-4.01)*
F  = 23.27**  R
2 = 79.50%
Yf=  131.9377  pf0.1765
(2.71)* F = 7.34*  R
2 36.08%
P  = 5.6820 - 0.00062 Q - 0.00101  PR
(-12.51)**  (-6.84)**
F  =  109.71**  R
2 =  46.15%
2 Numbers  in  parentheses  are  t-values,  * means  90%
confidence  level and ** means above 90% confidence level.
Data  used  in  the  analyses  were  obtained  from  the four
USDA source references.
162
ne
ality
iption
-1
June 1977
I
I
I
I
IProspensity  in the Lettuce Subsector
The  weekly  simulation  output  is  obtained  by
dividing  the  seasonal  results by  13 (weeks in a sea-
son).  These results  are  inputs  into the price  equa-
tion  as  weekly  supply  and  demand;  in  turn,  the
weekly prices  are used in the  seasonal equations  to
complete  the systems  cycle.
The  system  simulation  model is a translation  of
the mathematical  model into  a computer language
using Industrial  Dyamics  as the methodology. Pro-
duction  initiation begins  with the  acres planted to
lettuce. This  decision  is made  on  the  basis of how
many  acres  growers  can  forward  contract  with
shippers,  who  in  turn  make  their decisions  based
on  past  experience,  and  lettuce  prices  paid  to
farmers  lagged one year.  The initial lettuce  acreage
planted  is  slightly  decreased  prior  to  harvesting
due to weather, insect, and disease fattors.
The  acres  planted  do not reach  maturity  all  at
one  time,  but  the  bulk matures  at  an  average  of
100  days  (called  a growing  delay). Growing delays
are  affected  by  climatological  conditions  among
and  within producing  areas. In the basic run of the
model, growing  delay was assumed constant.
The  system  simulation  model incorporated  the
difference  between  potential  and  marketed  yield
with  an  average  potential  yield  of  900  cartons
per  acre,  and  a marketed yield determined  by eco-
nomic  factors  at  the time  of harvest.  Price  at the
time  of  harvest  is  the  factor  which  affects  the
amount of lettuce to be shipped to the consumption
centers.  Marketed  yields  in  the  model  have  an
upper  limit set by the  average  potential  yield and
a lower limit of no harvesting resulting from lettuce
prices below  the variable costs of harvesting,  pack-
ing,  cooling,  and  selling.  The  shipping  arrivals
were  assumed to have a one week delay for lettuce
reaching the consumption  centers.
The  system  simulation  model was  used  to esti-
mate  104  weekly  periods.  Adjustment  delay  to
consumer's  response  to  change  in  lettuce  price
was  assumed  to be non-existent.  The  weekly FOB
lettuce  price  is  determined  by  the  interaction  of
total  weekly  lettuce  shipments  and  weekly  con-
sumption  rates.  These  prices are determined in the
model  by  the  continuous  interaction  of  supply
and  demand  at  the  shipper-retailer  and  retailer-
consumer levels.  The role of wholesalers  is assumed
to  be  insignificant,  because  direct  retail  store
buying  has  increased  in  volume  leaving  only
a  small  portion  handled  by  terminal  markets
[Bohall: 1].
Model  Validation
The validity of the system simulation model was
evaluated  through  sensitivity  analyses  and  a com-
parison  of  the  actual  and  generated  data.  These
two  elements  of model  validation  were  simulta-
neously  considered  to  provide  an  overall  test  of
the model validity.
The  sensitivity  analyses  were  designed,  by
varying  growing  delay,  to  detect  logical  errors  in
the  system  simulation  model.  Growing  delay  was
not known  with  a  high degree  of confidence; the
average  growing  time  for  lettuce  is  between  90
and  100  days  and  the  limits  are  70-150  days.
Thus,  the  sensitivity  analyses  were  performed
by  varying  growing  delay,  using  13  weeks for  the
basic  run,  10  and  18  weeks in subsequent runs for
comparison.
The  expected  behavior  of the lettuce subsector
follows:  Given  that  lettuce  shippers  have  control
over  a  large  percent  of the  total  lettuce  acreage
planted,  a  shorter  growing  time  would  tend  to
diminish  barriers  to  entry  and  exit.  There  would
be  more  frequent  opportunity  to  enter  or  exit
from  the lettuce  subsector.  With a shorter growing
delay,  shippers  and  growers  would  be  even more
responsive  to economic  factors, resulting in greater
week-to-week  price  variation  within  the  overall
price cycle. Given the apparent coercive (predatory)
conduct  among  shippers,  a  decrease  in barriers  to
entry  will  increase  competition.  As  a  result,
simulated  FOB lettuce  prices,  with a shorter grow-
ing  delay,  are  expected  to  average  higher  than
prices  generated  by  the  basic  run.  With  a  longer
growing  delay,  the  expected  subsector  behavior
will  increase  barriers  to  entry  and  exit  and  con-
sequently,  decrease  average  FOB  lettuce  price,
assuming present conduct continues.
By  comparing  the  generated  results  of  the
simulation  model  basic  run  with  the  runs  of  10
and  18  weeks  growing  delay,  the  model  was
found  to  behave  in  accordance  with  expected
behavior of the lettuce subsector.
A  comparison  was  conducted  between  results
generated  by  the  simulation  model basic  run  and
historical  data  (weekly  FOB  lettuce  price  and
total  U.S.  shipments  for  the  period  1967-1968)
to  determine  the major  turning point errors.  The
few  major  discrepancies  between  generated  and
historical  data  were  partially  due  to  climatologi-
cal conditions and labor strikes which occurred dur-
163
Ba~ires and ClevengerWestern J. Agr. Econ.
ing the period of study. The model generated  a data
series which followed the historical data pattern.
In  a  combined  view  of the two  approaches  to
model  validation,  it  can  be  said  that  the  system
simulation  model  generally  follows  the  subsector
dynamics  considering  that  climatological  factors
were held constant in the model.
Policy Alternatives
Policy  in  the  context  of this  paper  refers  to
changes  which could  be introduced  in the model's
operating rules or its structure. Policies investigated
dealt with altering lettuce supplies  through restrict-
ing  acreage  planted.  This  might  be  achieved,  for
example, through grower or shipper group action.
Policy  I  was  to restrict  acreage  planted  by  20
percent  throughout the year. The results show that
shipments  and  FOB lettuce  prices  each  maintain
their  respective  pattern,  as  if no  policy  had been
implemented.  The  existing  potential  to  increase
market  yield  is  because  there  are indications  that
there  exists  a  large  percentage  of  unharvested
lettuce  production,  making  it possible  to increase
producer  net  revenues.  Prices  maintain  the  same
pattern  because  total  lettuce  quantity  marketed
remains  the  same  and  acreage  planted  decreases,
resulting  in  lower  total  costs.  Thus,  Policy  I
would  increase  net  revenues  to  lettuce  growers
given  that  growing,  harvesting,  and  climatological
patterns remain unchanged.
Policy  II  was  to  restrict  acreage  planted  for
summer harvest by  20 percent.  Lettuce FOB prices
are  lowest  during  summer  months when  the  bulk
of lettuce is available. As a result of Policy  II, FOB
lettuce  prices  for  the  summer  season  increased,
smoothing  out  the  seasonal  cycles  exhibited  by
FOB  prices  in  the  basic  run.  The  price  increases
resulting from  such  a policy  are much greater than
the  decrease  in  lettuce  shipments,  thus  indicating
an inelastic  demand for summer lettuce. The results
do  not  agree  with  some  studies  which  indicate
that  price elasticity  of demand for summer lettuce
is  elastic  [McGlothlin;  Shelly].3  Total  revenues
The  price elasticity  of demand  for lettuce is -0.0245,
calculated  as  an arc  elasticity. The  disagreement  between
the  result  of  this study  and  previous  ones  is  apparently
due  to the  two year period of the data used in calculating
this  price  elasticity;  elasticities  based on long-time  series
yield  more  elastic  results  than  the  elasticities  based
on shorter periods.
received by  lettuce  growers increased  as a result of
the increase  in price.  Total  cost decreased because
of less  acreage  planted; thus, net revenues for pro-
ducers increased.
Conclusions
It  is  appropriate  to  try  to  draw  conclusions
concerning  the  stage  of  development  reached  in
constructing  the lettuce  system  simulation model.
The  model  follows  the  dynamic  behavior  of the
lettuce  subsector.  This  is  not  to  state  that  the
model  is  complete.  The  model  is  an  economic
model  which  indicates  the  likely  economic  con-
sequences  of alternative  policies in the  context of
the model'sstructure.
The  model  did  not explain  all of the variation
observed  in  the  historical  data  for  shipment  and
FOB  lettuce  price  as  it  does  not  include  certain
parameters  such as  weather  which affect potential
yield,  marketed  yield,  and  growing  delays.  As  a
consequence,  the  inclusion  of  weather  in  subse-
quent models might improve the simulator.
After  analyzing  the  two  alternative  control
policies,  it  was  concluded  that  lettuce  growers
can  increase  their  net  revenues  by  restricting
acreage  devoted  to lettuce  and  allowing marketed
yield  per  acre to  increase  in view  of the potential
availability  of lettuce now abandoned in the fields.
Lettuce  planting  information  on  a  weekly
basis would help the lettuce subsector to coordinate
the  acreage  planted,  to  diminish  harvest  overlaps
considering  that  lettuce  growing  delay  varies
among production areas and the season that lettuce
is  planted.  By  diminishing  harvest  overlaps,  the
production  cycles  and  price  variation  could  be
decreased.  These  results,  of course,  assume  that
the  excess  capacity  or abandoned  production  do
not  represent  an  allowance  for  weather  risk  in-
volved  in lettuce growing.
References
Bohall,  Robert  W.,  Pricing Performance in  Marketing
Fresh  Winter  Lettuce,  Marketing  Research  Report
No. 956, USDA, ARS, May  1972.
McGlothlin,  R. S.,  Price Relationship  in  the  Western
Lettuce  Industry,  Arizona  Agricultural  Experiment
Station Bulletin No. 287, Tucson,  Arizona,  1957.
164
June 1977Prospensity in the Lettuce Subsector
Shelly,  William  Vernon,  "A  Simulation-Equation  Analy-
sis  of the  United  States  Demand  and  Supply,  1949-
1970,"  unpublished Master's thesis, New.Mexico  State
University, Las Cruces, New Mexico,  1971.
United  States  Department  of  Agriculture,  Agricultural
Statistics, United  States  Printing  Office,  Washington,
D.C.,  1960-1974.
United  States  Department  of  Agriculture,  Consumer
and  Marketing  Service  and  Arizona  Fruit  and  Vege-
table  Standardization  Service,  Bureau  of  Market
News, Marketing Central  and Eastern  Arizona Lettuce,
Phoenix, Arizona,  1965-1970.
United  States  Department  of Agriculture,  Fruit and Vege-
table  Division,  Market  News  Branch  and  California
Department  of  Agriculture  Division  of  Marketing
Services,  Bureau  of Market  News,  Marketing Lettuce
from Imperial Valley and Blythe Districts, Sacramento,
California,  1965-1970.
United  States  Department  of  Agriculture,  Fruit  and
Vegetable  Division,  Market  News  Branch  and  Cali-
fornia Department  of Agriculture Division of Marketing
Services,  Bureau  of Market  News,  Marketing Lettuce
from Salinas-Watsonville and other Central California
Districts, Sacramento,  California,  1965-1970.
165
Baires and Clevenger

Agriculture, Consumer and Marketing Service and Arizona Fruit and Vegetable Standardization Service, Bureau of Market News, Marketing Central and Eastern Arizona Lettuce,

Agriculture, Fruit and Vegetable Division, Market News Branch and California Department of Agriculture Division of Marketing Services, Bureau of Market News, Marketing Lettuce from Imperial Valley and Blythe Districts,

Agriculture, Fruit and Vegetable Division, Market News Branch and California Department of Agriculture Division of Marketing Services, Bureau of Market News, Marketing Lettuce from Salinas-Watsonville and other Central California Districts,

in the Lettuce Subsector Shelly, William Vernon, &quot;A Simulation-Equation Analysis of the United States Demand and Supply, 1949-1970,&quot; unpublished Master's thesis,

Pricing Performance in Marketing Fresh Winter Lettuce,

Relationship in the Western Lettuce Industry,

THE PROPENSITY TO EXCESS CAPACITY IN THE LETTUCE SUBSECTOR

THE PROPENSITY TO EXCESS CAPACITY IN THE LETTUCE SUBSECTOR

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Research Papers in Economics