Division of Agricultural c i e n c e s UNIVERSITY GROWER-PROCESSOR INTEGRATION WMS&$ft$ r *£ ';' A study of vertical integration between growers and processors of tomatoes in California k NORMAN R. COLLINS WILLARD F. MUELLER ELEANOR M. BIRCH CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 76 8 Summary c alifornia tomato processors and growers integrate certain of their production and marketing activities. On these matters, the firms do not make independent decisions but instead relinquish some of their auton- omy to each other or to a joint decision-making unit. This bulletin pre- sents the results of a study of vertical integration between growers and processors of California tomatoes. The publication explains the nature and extent of the integration found in this industry, discusses the bene- fits integration confers on both parties, and cautions that vertical integra- tion is not a panacea for all agricultural problems. The extent of integration depends upon an extremely complex com- bination of economic and noneconomic forces. Perhaps the most impor- tant force encouraging integration between California tomato canners and growers is their desire to reduce uncertainty. Integration gives the canner some control over his tomato supplies, regarding their quantity, quality, location, and timing of delivery to the processing plant. It gives the grower an assured market for his crop. To both parties it means the establishment of policies on prices and other matters. The degree of integration (i.e., the number of grower decisions con- trolled) in this industry varies. For example, canners' fieldmen give much more advice to new and inexperienced growers than to established ones; THE AUTHORS: Norman R. Collins is Assistant Professor of Agricultural Economics, and Assistant Agricultural Economist in the Experiment Station and on the Giannini Foundation, Berkeley; Willard F. Mueller is Associate Professor of Agricultural Economics, University of Wisconsin (formerly on staff of University of California); Eleanor M. Birch is Assistant Specialist in Agricultural Economics in the Experiment Station, Berkeley. OCTOBER, 1959 and processors are likely to exercise more rigid control over growers who are financially indebted to them. In ascertaining the degree of integra- tion, one must not confuse all services provided by canners as forms of integration. Some of these services are simply nonprice payments to growers. Some economic forces are operating to encourage disintegration. For example, California tomato growers are now specialists in their business, and canners do not need to control as many of their production practices as they once did. Also, processors no longer require growers to buy seeds or plants from them in order to control product quality; virtually all seeds and plants are now grown by specialized firms. Canners do less financing of growers today than they did in the past; banks satisfy most credit needs now that growers have increased their financial strength. Processors have less incentive than ever to integrate completely to the farm level, i.e., to grow their own crops, because growers in this industry generally produce tomatoes that meet canners' needs. In spite of its many advantages for growers and canners, vertical inte- gration is not a solution for all agricultural problems. It may facilitate adjustments of supply; but the extent of horizontal integration may be more important in affecting production stability. Similarly, it is the relative market power of the participants, and not the mere existence of vertical integration between them, that is the crucial determinant of farmer and processor incomes. I. Nature and Scope of the Study WHAT IS GROWER-PROCESSOR INTEGRATION? ^^rower-processor integration is the linking — by contract or otherwise — of certain activities and decisions of grow- ers and processors so that either or both relinquish some of their rights in produc- ing and marketing their products. For example, one party may agree to permit another to make a decision which pre- viously he had made independently, or both may agree to make decisions jointly which previously one or both had made independently. In either case, the effect is the same: certain production and mar- keting activities, on which individual firms would otherwise make independent managerial decisions, become integrated under a single or joint decision-making unit. Thus, each firm does not strive di- rectly for its own profit objective. Its actions are constrained by a new profit goal which must compromise the income objectives of the participants since no set of actions is customarily found which simultaneously maximizes the expected profit position of each. This may be considered as one form of vertical integration. The term vertical integration is generally used to indi- cate the coordination of decision-making processes of two or more stages of pro- duction. There are many gradations in the degree of such coordination. The lim- iting form of integration, for example, is found where successive stages of production are brought under unified management through ownership, either through merger of previously independ- ent firms or through the vertical expan- sion of one firm's activities by internal growth. Grower-processor integration usually is a less complete form of inte- gration than that created by ownership) — it covers fewer activities and decisions, is more readily altered or terminated, and permits retention of ownership identity. 1 PURPOSE OF STUDY Although grower-processor integration in various forms has been common to California agriculture for decades, there are important gaps in our knowledge of its scope and economic significance. Its wide and apparently growing use in many agricultural industries has stimu- lated questions concerning its effects. To understand its advantages and disadvan- tages and to see how these are shared between the integrated parties requires more thorough knowledge than is pres- ently available. As a step toward obtain- ing more complete information on these 1 Some economists may disagree with the use of the term vertical integration to describe this relationship, I<»r example, Oxenfeldt defines control of successive stages of production as "vertical extension" and reserves the term vertical integration for the case where such control is accom- plice :d through ownership. Oxenfeldt, Alfred R., Industrial Pricing and Market Practices (New York: Prentice-Hall, 1951), p. 207. In research, however, economists often find this definition too narrow to be Operational. For example, J. G. McLean and R. W. Haigh employ a definition similar to that used in tlii<- paper. The Growth of Integrated Oil Companies (Boston: Harvard University Press, L954), p. 8. [4] matters, it was decided to make an inten- sive study of a California agricultural in- dustry in which such integration exists. 2 We believe the northern California tomato canning industry presents a sig- nificant instance of grower-processor in- tegration. It ranks among the most important of the California processed fruit and vegetable industries. In 1956, California growers harvested 151,500 acres of canning tomatoes; they pro- duced 2,772,400 tons of tomatoes, which they sold to processors for $62,933,480. In addition to its economic impor- tance, this industry was selected for study because of two other characteristics. First and most important, it is an industry in which grower-processor integration exists. Growers do not make completely independent decisions in producing and marketing their products nor do they sell in an "open market." Instead, some of their activities are coordinated or in- tegrated with those of particular buyers. Second, integration in this industry is not complicated by state and federal mar- keting programs such as are common to many California agricultural industries. The exploratory hypothesis of this study is that there are certain indentifi- able economic reasons for farmers and processors to integrate their activities in certain respects. Economic theory sug- gests some crucial factors involved in selling and buying agricultural products which may encourage integration, and others which may influence the distribu- tion of income between the integrated parties. But understanding the specific causes and effects of integration in a par- ticular industry requires empirical study of its unique characteristics. This proc- ess requires the researcher to move sys- tematically: he must test hypotheses suggested by economic theory and modi- fied by reality as he becomes familiar with the industry's structural and other economic and institutional components. Specifically, this study will try to answer the following questions: What is the economic structure of the California tomato industry? What is the extent and form of the integration found in this industry, and what production and marketing problems encourage farmers and processors to be- come integrated? How does the pricing process work in this industry? What are the implications of the inte- gration existing in this industry? THEORETICAL BASES OF VERTICAL INTEGRATION The conditions encouraging integra- tion of farm and processing activities may best be understood by first examin- ing circumstances in which there is little or no need for it. Consider the selling and procurement policies of a firm which achieves optimum size when performing a single function and which buys and 2 Three studies have been made at the University of California which touch on vertical integra- tion in California agriculture. Two of these deal with the integration between broiler producers and credit institutions, feed suppliers, hatcheries, and others as a result of various financing arrangements. See Abbott, John C, Fryer Marketing in the East San Francisco Bay Area, Cali- fornia (Berkeley: University of California, Division of Agricultural Sciences, Agricultural Experi- ment Station, March, 1953), 86p. (Giannini Foundation Mimeographed Report No. 146.) Proc- essed. Also, Naden, K. D., and G. A. Jackson, Jr., Financing Western Broiler Production (Berkeley: 1956), 32p. (California Agricultural Experiment Station Bui. 753.) Another study deals with the way in which marketing contracts integrate farmers with their cooperatives. Of course, this is a more complete form of integration than we are concerned with in the present study because it is based on ownership. But in many respects it is similar in effect to that existing between farmers and noncooperative processors. See Mueller, W. F., and J. M. Tinley, Membership Marketing Contracts of Agricultural Cooperatives in California (Berkeley: 1958) , 64p. (California Agricultural Experiment Station Bui. 760.) [5] sells in a perfectly competitive system of markets. A processing firm operating under such conditions will not decrease its costs by performing additional func- tions of production; at any time it can buy the kind and amount of a product it wants at prevailing market prices. 3 It would have no incentive to become verti- cally integrated with its sources of supply either through ownership or otherwise. In fact, it would be expected to avoid doing so because this would increase its costs and decrease its operating flexibil- ity by obligating it to obtain its require- ments from a particular source. For the same reasons, farm firms of this type operating in such markets would have no need to integrate forward into processing. In such a theoretical world, it is price that coordinates — or integrates — the ac- tivities of buyers and sellers. And price performs this coordinating job perfectly : with prices as their guide, farmers pro- duce the right products at the right time in response to consumers' demands as reflected perfectly through all stages of the marketing system. But the real world departs markedly from this theoretical model. The cost conditions associated with some stage of production or marketing may be related to the decisions made in connection with another stage. And imperfect markets are the rule rather than the exception: mar- ket knowledge is usually poor, not per- fect; and buyers are often few, not many. The existence of such technological and market conditions may encourage firms to become vertically integrated to some degree. Technological conditions Two technological conditions may en- rourage integration. First, the physi- \: .*■ «> I 2 k Q. o c T3 I CO fl © © Eho5 ■§3 • e« eo © Ifi TJ © Its H33 ? o If © cS w ills O IO OONTf OH ON WOO t-00 t-> o tj< o *h tN c* N IN N M » M M W M H 00 W CS (O H H N M H H W OS t- os ^ IO CO CN m tH CO p (J) » 3 © M ■a © 85 O bO o° 55 > © c 2 ° 2o -1 S3 if! © O bc-rt © o > 1 .8° © 5 oO 51a bo"rt CO (O rt (O H (O H (O (NMM^^iOiO O) O) O) 9> 9) O) o (N (N CO M -«}< Tjt IO OS OS OS OS OS OS os W g n tively, into only 12.3 cases of tomato paste. 11 This is an important reason why more than twice as many California to- matoes go into paste than into any other tomato product. Nature of the processing segment of the industry Multiple-product processing. The California tomato canning industry is characterized hy multiple-product firms both in the sense that they process more than one tomato product and that they also can products other than tomatoes (Table 4) . This is in sharp contrast with the situation in other important process- ing states (Table 5) . For example, Mary- land and Virginia firms are highly spe- cialized in canned whole tomatoes (Table 6). In New Jersey the production of Table 4. Frequency Distribution of California Tomato Processing Firms by Number of All Products and by Number of Tomato Products* Processed, 1955 Number of all products Number of firms Total 57 1-5 8 6-10 23 11-15 10 16-20 5 21-25 1 26-30 3 31-35 2 36 or more 5 Number of tomato products Number of firms Total 57 1 10 2 10 3 12 4 12 5 6 6 6 t 1 * The six tomato products considered are: whole tomatoes, juice, puree, paste, sauce, and catsup. t Not specified. Source: Descriptions of individual firms shown in: Western Canner and Packer, "United States Food Products Directory, 1955" (Miller Freeman Publications: 1955), vol. XIII. Table 5. Frequency Distribution of Tomato Processing Firms by Number of Tomato Products* Processed, Ten States, 1955 State Number of firms which process specified number of tomato products Total Not specified California. . . Illinois Indiana Maryland. . . New Jersey . New York . . . Ohio Pennsylvania Texas Virginia number 57 30 91 124 33 61 59 54 46 73 10 10 12 12 6 6 14 11 1 2 33 29 16 11 1 1 109 9 2 4 15 13 5 19 29 7 4 1 30 16 6 6 1 42 8 3 1 20 11 10 4 1 70 2 1 * The six tomato products considered are: whole tomatoes, juice, puree, paste, sauce, and catsup. Source: Descriptions of individual firms shown in: Western Canner and Packer, "United States Food Products Directory, 1955" (Miller Freeman Publications: 1955), vol. XIII. Hoos, op. cit., p. 34. [13] whole tomatoes and puree is emphasized. Very few firms other than those in Cali- fornia process any paste or sauce. Not many canneries in other states process more than two tomato products, while almost two-thirds of the California proc- essors do so. This compares with about one-third for Texas and Indiana firms and far less than a fourth for all other states. Striking differences also exist in the number and kinds of other foods proc- essed by tomato canners in various sec- tions of the country (Table 7) . In Texas, a relatively large number of firms process citrus products. Beans and variety prod- ucts such as chili and Mexican specialties are also produced by about a third of the Texas tomato canners. Deciduous fruits and berries are important lines for Cali- fornia and New York firms. New York is the only state where production of frozen foods is an important activity of tomato processors. In all states other vegetables are processed by a substantial proportion of the tomato canners. The difference between diversification patterns of California firms and those of other areas which was noted above for tomato products alone is equally marked when all products are considered. Cali- fornia tomato canners process an aver- age of 15.5 products of all kinds. Next in rank are Illinois and Texas, with 10.6 and 10.3 products per firm respectively. These data suggest that the California tomato processing industry has a much wider market orientation than its coun- terparts in other sections of the country. Characteristically, West Coast canners enter the market with a larger number of processed tomato products and a more complete line of other canned fruits and vegetables. The typically large size of their tomato operations permits them to realize efficiencies in the internal organi- zation of their plants. In contrast with the specialized tomato canners in the East, California firms operate for a substantial part of the year. Thus, a higher degree of mechanization is possible since much of the equipment can be used for other products as well. These year-round, large volume operations have made it possible for California tomato processors to or- ganize highly trained field departments. Much of the coordination of grower- processor activities discussed later is car- ried on by these field staffs. Table 6. Number of Firms Which Process Specified Tomato Products, Ten States, 1955 State Tomato products Total Whole Juice Puree Paste Sauce Catsup Number of firms California. . Illinois Indiana Maryland . . New Jersey. New York Ohio Pennsylvania Texas Virginia 48 28 34 25 27 20 10 8 1 2 84 53 33 2 2 122 12 8 2 2 29 4 13 1 3 44 43 17 4 3 54 22 19 2 2 44 12 7 3 44 16 21 2 6 73 3 1 1 18 6 20 3 6 9 10 5 4 1 Source: Descriptions of individual firms shown in: Western'Canner and Packer, "United States Food Products Directory, 1955" (Miller Freeman Publications: 1955), vol. XIII. [14] XI W m •CO Q«2 t-lOON^rlHHMO m a *■ s &.** c o 1- a .2 s t>C000& j- O X! CO CONOlOrHiHOiHOlO u. £ >s -fi en (A CSX) lOOOrlCfit-OMOJCOlO tH i-H iH t-H u. ■ s j- X) w w Q, W 4- 3 ©.2 « 1 T3 O s s o tflO5O5Cqfl0lO^MN00 0) «A 215 co bo HH CO cs 43 i-H tH t>* r-l i-H iH t-H CO 0) w £ fc> a i. Am a. O a> cs^iHcocowooocseo ■Si MHN'trlMnNNH 21? E-« > IE * IA E B9 CO O^ONt-NHHIOH In CD iH tH ■Z n 0) *«» $32 5'3 lOCfirltflMCDIOrinO w "«* CO iH rH O on i. a *- 2 w £ 11 ■^oooooooooo o b£ K- «*■ £ 3 1 t-OH^MHO^OCO o Eh IOC«30)NM»IOIO^[. z • IS eg a> ■ >> "2 3 c i- 31 BO cei •a c *■* s 3 CD O S fc fc o e9 j> el 11 ■9 d ef a x Ph Eh ■6 > 3 iH i-H ^ Size and location of California to- mato processing plants. Most of the California tomato processing firms are in the northern part of the state. Only about a fifth of them operate tomato can- ning plants in southern California (south of San Luis Obispo and Kern counties) ; most of these are near Los Angeles or even farther south. Less than 10 per cent of the state's acreage of canning toma- toes is in southern California, so the tomato operations of these firms are rela- tively smaller than in the north. They process fewer tomato products on the average and produce a narrower general line than tomato canners in the state as a whole. Southern firms tend to process, in addition to their tomato output, such specialty items as pickles, relishes, ex- tracts, and similar variety products. Northern firms typically can the stand- ard packs of fruits and vegetables such as peaches, apricots, and asparagus. These northern California firms, com- prising the bulk of the industry, are the focus of this study. There are approxi- mately 45 of these canners. This study obtained information on the largest 40 firms; only 29 canners were directly in- terviewed, however. These 40 account for virtually all of the acreage grown in the twelve-county area (shown in Fig. 1) which effectively delimits the major pro- ducing region in northern California. It should be noted that a few of these firms also contract some acreage beyond the boundaries of this region — for example, in the Merced area or in Contra Costa, Butte, or Colusa counties which were not included in the scope of this study. Thus, discussion on the relative size of plants or other aspects of these firms is based only on the data concerning tomatoes ob- tained within this twelve-county area. As the production region encompassed by these 12 counties accounted for 95 per cent of the northern California produc- tion of canning tomatoes in 1956, this 1 " Actually 51 plants, but in two cases, two pi as single plant units in this study. restriction has very little effect on our conclusions. These 40 firms have 49 plants which process tomatoes in northern California. 1, They are almost all located within the twelve-county producing area. A few are just beyond the boundary but neverthe- less obtain their acreage largely from within the region. For convenience, and also to protect the identities of individual firms, these plants have been grouped by location into eight major processing cen- ters: (1) Sacramento, (2) Antioch, (3) Stockton, (4) Manteca, (5) Modesto, (6) Oakland, (7) San Jose, and (8) Hollister (Fig. 2). These designations are general Fig. 2. Eight major processing centers in northern California rather than specific. The Sacramento center, for example, embraces not only plants in that community but a few iso- lated plants in other northern cities. Similarly, the fourth processing center, Manteca, includes plants in the entire southern San Joaquin County-northeast- ern Stanislaus County region. Thus, cities as far west as Tracy and as far east as Oakdale would be considered part of the ants located very near each other were considered [161 Manteca complex. The Stockton center includes firms in other northern San Joaquin County cities, and the Oakland group is comprised of plants in the Bay Area. The size of plants, with respect to their tomato operations alone, varies consider- ably from those that take 300 acres or less to those that process tomatoes from more than 10,000 acres in a season. The average for all 49 plants is 2,612 acres, and about two out of three contract for less than this amount. The largest plants, as far as tomato purchases are concerned, are in the Oakland and Sacramento proc- essing centers; on the average, they proc- essed tomatoes from well over 4,000 acres during the 1956 season (Table 8). The plants that purchase fewest tomatoes are in the San Jose and Hollister centers, although the San Jose average is strongly affected by the presence of a number of firms that might be considered marginal in tomato processing. Some of these firms are large and quite diversified, and their tomato operation is only a minor sideline. Plants located in the Central Valley (Stockton, Manteca, Modesto, and Antioch) are slightly smaller than the average. They also tend to be more heavily dependent on tomato processing. Raw product procurement: con- centration and purchasing patterns. More than one-third of the acreage grown in the twelve-county area is contracted by firms in the Oakland and San Jose processing centers (Table 8). The great importance of these two processing cen- ters, in terms of tomato tonnage handled, is in sharp contrast with the relatively small tonnage that is produced on acreage in their vicinity. There are a number of factors responsible for this. Many of these plants, in operation for 20 or 30 years or more, were originally located close to the main tomato producing areas, but the centers of production have moved away. Also, the plants in Oakland and San Jose are typically large and diversi- fied and tend to process a general line of fruit and vegetables, many of which are available in the vicinity; thus, their locational disadvantage is not so great as it might appear from the tomato situa- tion alone. Good transportation facilities, the presence of related supplier indus- tries, and the availability of an experi- enced labor supply, also favor these two Table 8. Number of Tomato Processing Plants and Acreage Contracted by Them (in the Twelve-County Producing Area) for Eight Processing Centers in Northern California, 1956 Processing centers Number of plants 1956 acreage contracted Percentage distribution of acreage contracted Average acreage contracted per plant number acres per cent acres Total 49 6 4 8 5 5 7 10 4 128,000 26,149 8,400 20,590 11,297 10,619 30,188 14,157 6,600 100.0 20.4 6.6 16.1 8.8 8.3 23.6 11.1 5.1 2,612 1. Sacramento 2. Antioch 3. Stockton 4. Manteca 5. Modesto 6. Oakland 7. San Jose 4,358 2,100 2,574 2,259 2,124 4,313 1,416 8. Hollister 1,650 Source: Confidential data provided by industry sources, chiefly processor interviews covering 29 firms with 37 plants. (See p. 8 for fuller description of processor sample.) [17] areas as tomato processing locations. The firms in this region, of course, would prefer to obtain more tomatoes in the neighborhood of their plants, but the relative shortage of such supplies forces them to haul from greater dis- tances. For example, during the 1956 season, only some 5,000 acres of canning tomatoes were grown in the vicinity of these plants; any one of at least five plants in the Oakland and San Jose cen- ters required at least half this amount. The difficulties faced by these canners are even greater than the acreage discrep- ancy indicates. Processors interviewed in Oakland and San Jose also mentioned the comparatively low yields in Alameda and Santa Clara counties, the disease problems, the fact that the land has been used for so many years it is "worn out" for tomatoes, and the increasing use of land for residential construction which has affected land values. When the tonnage required by each processing center is compared with the acreage grown in its immediate produc- tion area, it is evident that the Oakland- San Jose region is the only one with a serious deficit in tomato supplies. No major processing plants are located in the Marysville, Napa, and Monterey areas; thus, these are regions with sur- plus tonnage. Plants in the Manteca and Antioch centers do not absorb the full production of the Tracy and River areas, so these two districts also have some sur- plus tomatoes. The remaining areas are pretty evenly balanced with the tonnage produced just about equal to that proc- essed by local canners. 16 Tomatoes from surplus producing areas tend to be hauled greater distances than those from balanced areas, which in turn are hauled on the average farther than those from deficit areas. The surplus producing re- gions of Marysville, Napa, and Monterey ship their tomatoes an estimated average of 51, 81, and 56 miles, respectively (Table 9). T he average distance traveled Jfl For a description of production areas, see Appendix B. in the Oakland-San Jose producing re- gion is only 10 miles. Each processing center tends to ac- quire the largest single portion of its acreage in its home area (Table 10). Since hauling distance and hauling costs are directly correlated, this pattern of buying indicates that all companies wish to minimize field-to-plant distance in order to keep costs low. However, some firms are much more sensitive than others in this regard. Of the 29 processors interviewed, 14 regarded hauling costs as highly im- portant. Eight of these had plants that hauled their tomatoes less than 15 miles on the average — the lowest average dis- tances in the entire industry ; four others, in the San Jose processing center, hauled long distances, but managed to achieve distances substantially shorter than the average for all San Jose plants. Six of the 29 firms regarded hauling costs as relatively unimportant. All these firms had plants that hauled their toma- Table 9. Average Distance (Weighted by Acreage) From Grower's Field to Processing Plant for Ten Production Areas of Northern California, 1956 Production area Average distance* miles Total 31 (30-38) 1. Marysville 2. Napa 51 (51-81) 81 (81-81) 30 (29-40) 37 (36-37) 19 (18-30) 34 (30-34) 31 (28-45) 10 (9-22) 10 (10-14) 56 (56-60) 3. Sacramento 4. River 5. Stockton 6. Tracy 7. Westside 8. Oakland-San Jose 9. Gilroy-Hollister 10. Monterey * The ranges enclosed in parentheses refer to dis- tance estimates calculated on the basis of minimum and maximum allocation of acreage as described in Appendix A. Source : Data from large sample adjusted to area and company totals by means described in Appendix A. 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Four of these six firms, in fact, hauled their tomatoes an average distance of well over 50 miles — farther than any others in the industry. The companies for which hauling costs were not of paramount concern tended to be larger and more diversified than average, while those to which haul- ing costs were considered crucial typi- cally had smaller, less diversified opera- tions. For these smaller firms which are rather dependent on tomato processing, hauling costs are a substantial com- ponent of total costs. These companies shy away from acreage distributions (or purchasing patterns) that increase haul- ing costs because the effect on total cost is significant. As Table 10 shows, the various proc- essing centers differ considerably in the proportion of their needs that is met in their home areas. There are two impor- tant reasons for this: ( 1) as we shall see in Section III. most companies follow a deliberate policy of dispersing their pur- chases over a number of areas rather than one of strictly minimizing hauling distances; and (2) as pointed out above, some companies are located in deficit production areas and are unable to pur- chase as many tomatoes near their plants as they would like. The Sacramento, Stockton, and Hollister centers are per- haps most fortunate in this respect; they obtain more than half their requirements in their home areas. Plants in these cen- ters have achieved hauling distances at least 10 miles lower than the over-all aver- age for the entire industry (Table 11). Plants in the Manteca center, too, haul their supplies only about 20 miles. Al- though they do not obtain half their re- quirements in their home area, Tracy, two other rich areas, Stockton and West- side, are strategically close to them. From these three areas, they receive al- most nine-tenths of their tomatoes. These Sacramento, Stockton, Hollister, and Manteca plants contract in only four areas, on the average, and achieve haul- ing distances substantially lower than average. Plants in Antioch and Modesto are more on the fringe of the rich producing areas than those described above. They acquire less than half their needs in their home areas, and they disperse their pur- chases, contracting in an average of six areas. They haul their tomatoes about 30 miles — very close to the industry aver- age. Firms in Oakland and San Jose, the only processing centers unable to obtain the largest single portion of their re- quirements in their home areas, acquire less than one-fifth of their needs near their plants. They are forced to depend on the Tracy region for the main part of their supply, contracting about one- third of their acreage there. Since these plants must reach out beyond their home area, the Tracy region is their best alter- native. The magnitude of their supply problem is illustrated by the facts that even the Tracy area is 43 miles away, and that they have to disperse their pur- chases very widely: among seven areas for Oakland, and among 10 areas for San Jose canners. All these factors contribute to substantially higher hauling costs for these firms. While the average hauling distance is 31 miles for the entire indus- try and only 21 miles for plants in all other locations, for Oakland-San Jose firms it is almost 50 miles, or more than double that of processors in other cen- ters. Although no one company dominates the market, concentration of buying is rather pronounced. Almost two-fifths of the acreage is purchased by the five largest firms, and one-fourth of the firms take almost three-fifths of the acreage (Fig. 3) . At the opposite end of the scale, the 10 smallest firms account for less than 5 per cent of the purchases. [21] IUU -o 90 1 1 1 1 L^^ 0) o I 80 — c o o & 70 - D o> S 60 — / — o CD ? 50 / — c CD o 40 / _ o ° 30 — CD CT O I 20 - - if CD a 10 o 1 1 1 i i i 10 15 20 25 30 35 Number of northern California tomato processing firms 40 Fig. 3. Cumulative distribution of northern California tomato processing firms by percent- age of total ten-acre acreage contracted, 1956. In particular production areas, con- centration is even more striking. For example, in the Napa area virtually all the acreage is contracted by one firm. Only six companies purchase any acre- age in the Monterey region (Fig. 4). In general, for all production regions there is an inverse relationship between the degree of purchase concentration and the amount of acreage grown (Table 12). 17 This would seem to indicate that a wider selection of canners is available to grow- ers in the main producing area. However, this does not seem to have had a signifi- cant influence upon terms offered to growers in the various areas. As will be seen in Section III, a great deal more significance is attached to the over-all purchase concentration in the entire 10 producing areas combined. Organization of buyers. The Can- ners League of California, a trade organi- zation representing most of the process- ing firms, was formed in 1905 and presently has more than 40 members. About 85 per cent of the total California fruit and vegetable pack is processed by members of the League. The 29 member firms that purchase tomatoes account for more than two-thirds of the state's acre- age of canning tomatoes and for almost four-fifths of the acreage grown in the twelve-county producing region of inter- est in this study. The Canners League is not a market- 2 10 9 8 13 7 5 46 90 80 70 ~io' til J // ii// / / A Production Area 60 -qi V'i 1 Marysville 50 8'j 1 ' 2 Napa 3 Sacramento 4 River ll'f 5 Stockton 40 -l'< 1 6 Tracy 7 Westside 8 Oakland- San Jose 30 4. ~6-' 9 Gilroy- Holhster - 10 Monterey 20 5^ 10 n - 1 1 1 1 I 5 10 15 20 Number of northern California tomato processing firms 25 Fig. 4. Cumulative distribution of northern California tomato processing firms by percent- age of total acreage contracted in each of ten production areas, 1956. 17 In this study, the degree of purchase concentration in an area was measured by the number of firms contracting 85 per cent of the area's acreage. The lower this number, the higher is the degree of purchase concentration. The inverse relationship would be perfect were it not for the Sacramento area which ranks higher in concentration than would be expected. The Sacramento canning plants are very well located in the heart of this area, especially in comparison with plants in other processing centers which are well over twice the distance away. These plants are also the heaviest consumers of tomatoes in the industry, so their substantial requirements tend to absorb a large proportion of the acreage in the Sacramento area. In fact, they take two-thirds of the available acreage in this district which is the largest of all the production areas. [ 22 ing organization nor a collective bar- gaining agency for canners' procure- ment. Its major effect on industry buying practices results from making available a contract form. Use of the League's contract form is not a condition of mem- bership, but only a few of the larger com- panies use distinctively different forms of their own. Most of the activities of the Canners League are in the sphere of public rela- tions. The League acts as a spokesman for the industry before governmental agencies. It encourages the exchange of ideas among growers and canners by means of "clinics" set up for the discus- sion of common problems. It attempts to improve quality by sponsoring annual meetings to examine samples of products packed by members. It also collects statis- tics on the processing industry which are made available to the public. Of a more direct service nature is its program to protect the box investment of member canners. Since the early 1930's, repre- sentatives of the Canners League have collected and sorted misplaced boxes and returned them to their owners. Demand for Processing Tomatoes at the Farm Level In discussing demand for processing tomatoes at the farm level, it would be most desirable to determine the net price- quantity relationship facing the pro- ducer. However, the structure of the can- ning industry, and the kinds and extent of uncertainty facing the industry, make the attainment of such precision practi- cally impossible. Accordingly, the im- portant general attributes of demand are summarized here without attempting to derive their precise quantitative expres- sions. Many writers use the term "derived de- mand" to suggest that producer-level demand is obtained by subtracting proc- essing and distribution costs from retail prices. The term "derived" suggests an important element of truth as ultimate Table 12. Relationship Between Degree of Purchase Concentration and Acreage of Tomatoes for Processing, Ten Production Areas of Northern California, 1956 Production area Area's rank in Degree of purchase concentration* Acreage of tomatoes for processing f Napa Monterey Gilroy-Hollister. . Oakland-San Jose Marysville Sacramento Westside River Stockton Tracy 1 2 3 4 5 6 7 8 9 10 10 9 8 7 6 1 5 4 3 2 * In this study, the degree of purchase concentration in an area is measured by the number of firms con- tracting 85 per cent of the area's acreage. The lower this number, the higher is the degree of purchase concentration. The ranks shown in this table for purchase concentration are based on the intermediate assignment of acreage (see Appendix A). When the maximum and minimum acreage allocations were used, the ranks were reversed in only a few instances and the general inverse association between purchase concentration and acreage was con- firmed. f The area with the most acreage has a rank of 1, etc. Source: Purchase concentration based on data from large sample adjusted to area totals by means described in Appendix A. Acreage: Table 17. [23] consumer demand is a basic determinant of farm demand. But actually we face the aggregation of a number of quite sepa- rate consumer demands. Important out- lets for the raw processing tomato crop include paste, juice, sauce, whole toma- toes, catsup, and puree. Of the few studies estimating price elasticities for the demands of these products, one con- cluded that the retail price elasticity for canned tomatoes was relatively low (-.4). 18 For tomato juice, it may be slightly higher. Demand at the farm level is commonly even less elastic than at re- tail. Remanufacturers' demands for to- mato paste and sauce probably are also relatively inelastic since they represent minor proportions of the foods in which they are used. The term "derived" implies that proc- essing and distribution costs must be considered in determining farm demand. These costs represent an important com- ponent of the retail bill for most agri- cultural commodities including proc- essed tomato products. Processing costs alone account for almost half of the re- tail price of canned tomatoes. 19 Their effect on demand at the farm level is that the price elasticity coefficient tends to become smaller as these amounts paid for processing and distribution increase. This view of farm demand is an over- simplification. It attributes a passive role to the processing and distributing firms in determining the payments made for the performance of their functions. 20 It implies that competition forces these firms simply to deduct from consumer payments the amount necessary to cover the costs of doing business. The data previously presented suggest that the purchasing of tomatoes for processing may be sufficiently concentrated in the hands of relatively few buyers to render unwarranted the assumption that con- sumer demand is translated back to the farmer in any direct or simple fashion. When there are only a limited number of tomato processing outlets available to growers, buyers can be expected to exer- cise a measure of discretion over their purchase terms. To consider farm demand as mechan- istically "derived" from consumer de- mand is liable to the additional criticism that the time dimension is ignored. The concept assumes that consumer demand is immediately translated to the primary production level by the appropriate sub- traction of processing and distribution costs. All the elements necessary to com- pute the margin are assumed to be known. Actually, however, consumer demands for processed tomato products are not known with certainty for as long as a year after the canning date. Most California canners do not make definite sales commitments much in advance of actual delivery. These same canners, however, make specific contractual ar- rangements with growers, including both price and quantity provisions, prior to planting time. Thus, the important as- pects of farm demand must be deter- mined without complete information either on consumer demand or on proc- essing and distribution margins. The un- certainties of forecasting consumer de- mand, inventory conditions, and process- ls Shuffett, D. Milton, Demand and Price Structure for Selected Vegetables (Washington: Govt. Print. Off., 1954), p. 110. (U. S. Department of Agriculture Technical Bulletin 1105.) The coefficient of price elasticity, as used by the economist, means the ratio of the relative change in quantity taken of a commodity to the corresponding relative change in price. The coefficient of -.4 indicates that, on the average, a 4 per cent increase in quantity consumed will result from a decline in price of 10 per cent. "' U. S. Bureau of Agricultural Economics, The Marketing and Transportation Situation (Wash- ington, D. C: August, 1950). (MTS-87.) ^Q^ OX, Karl t A " The Andysis °f Deman d for Farm Products (Washington: Govt. Print. Off., 1954), p. 18. (U. S. Department of Agriculture Technical Bulletin 1081.) [24] ing costs are great. 21 Added to these are the uncertainties in predicting the level of supplies forthcoming from the other major producing regions. In recent years, adverse weather conditions at har- vest time have contributed to rather large fluctuations in the production of eastern states. These factors suggest that consumer demand is not translated back to farm- level demand in any simple manner. Moreover, the quantity of farm product demanded cannot be expressed in terms of price alone. In a perfectly competitive market, price is assumed to be the mechanism that coordinates the decisions and activities of farmers and processors. But there are other factors in the demand picture for canning tomatoes; conse- quently, the function of price as a coordi- nator of demand and supply is dimin- ished. These other factors involve such items as box rental payment, hauling al- lowances, granting of credit, and giving of advice and technical assistance by can- nery fieldmen. As the farmer views his market, all of these factors enter into his determination of the profitability of to- mato production. CHARACTERISTICS OF THE SUPPLY STRUCTURE FOR CALIFORNIA CANNING TOMATOES Production of tomatoes for all uses is a very important agricultural industry in California. This state grows about one- half of all the tomatoes produced in the United States (Table 13). During the years 1954-1956, California's annual production averaged more than 2 million tons, while the United States figure was about 4.5 million tons. The great bulk of the state's tomato crop is used for processing; less than one-eighth is sold on the fresh market. This does not mean that California is unimportant as a source of fresh tomatoes, however. Al- though tomatoes destined for market in an unprocessed form are only a small share of the state's total production, they represent more than 25 per cent of the total United States crop of fresh toma- toes. Because the state possesses a variety of climatic conditions, tomatoes are pro- duced year-round in California, with the smallest production in March. The south- ern desert regions have a unique impor- tance at this time since they can help to supply the fresh market during the winter and early spring when other areas in the state are out of production. The height of the fresh market season occurs from June to November; during the last two months of that period, California is the chief source of supply for eastern markets. Most of the state's shipping to- matoes are referred to as "greens" or "green wrap" because they are harvested in the green stage, wrapped, and then shipped to their destinations where they are ripened prior to their sale to con- sumers. The fully ripe fruits are sold locally. By far the most important pro- duction period for all tomatoes is early fall, partly because this is the time of the heaviest production for fresh market, but chiefly because the very large crop of canning tomatoes also is harvested then. All producing areas of the state harvest tomatoes in the fall, with the northern San Joaquin Valley and the southern Sacramento Valley contributing the major share. In general, southern Cali- fornia — the coast as well as the interior 21 Farm demand in any given year is affected substantially by the level of inventories. It is not uncommon for canners' stocks to range between 30 and 50 per cent of the annual pack immediately prior to harvesting. In some years, the carry-over is virtually zero at this time. The elasticity of demand at the farm level is probably greater in those years when canners are holding large inven- tories. See: Ibid., p. 20, for a discussion of this point. [25] tie 'to tN to iH M fi t> t> o tH *H lO o r-t M c £ 4) 4) H J«] 3 (A 2 a a CO co t> u a 03 a CO tJ* t> CD t> Q. £ o 3 CO tN CO lO i-l CO c H tH 00 Oo sin s» bO t> t- 14 «0> .5 '33 en s tN CD co" O CO u o iH CO lO £ co~ ci x """ U) „_ Jo ^ "■ a o 0) c- o »- 0) '■g 3 a CO °l °° tN G V 0) 3 a 2 CTJ" n*" ta t>" T3 O A CO 0) 0_ tN 1 a tN SI Pi £ tH fa 4) 0_ *" ^J* k> si I 1 C7J iH 3 o O CO to" lO OS d H (N O W CO_ T* tN lO E o fiE bo O t> »4- G y-\ CD ort 'm m tN CO 1MB 45 co" in CD* "0 G o »H iH CO "5WI o Ph CO *H >-T5 _ C ' 4> c 5 t> O G (A w CO o tN iH m k • _> ^ e3 4> a 4) CO" CD id C o £ o JS gB CO CO tH < to e tN •£«/* fa u 3"0 "0 o.t: -5 t> k> 3 o Tji CO t> CO CD «H s Eh •** lO tN IO tH 0) 1 !■ «M w O < (U - bp CO c« • ^ fl » 0) ^ to S. 8 -Q CO a> w * K- * W ■*» w * — - w -a « ? »rt Sh t-i -w ££ 5 -a •a =a ^ P > O o S 1 .-TJ in ~ - - od « 09 o'5 w £ ■s £ fe E « «> oS i «s **'£ Si* . d ^ O'-'Cft | Q 2 ^ c " .: .52 § Ifa *s 3: o was 3- 4) 5 o9 UC C g as £ W O S I 1-2 to w to 333 45 4> 4) ho be bo 4) 43 4> >>> P4 | - 3 m o OS U3 H .J « M I i ■ a £ 1 8 • 2 1 fl co i) % I \ \ 5 c O 4) a x! i £ - J5 n C^3 to oJ rt 4J ,* « in to i M * *! ^ to *» 5 52 4> 4> '>>'>• - >6' V 45 4) UlVll/1 !«' be bo bo C; bo.2*- * .S .5 .S 2 a * a -S ** "? *» N '♦» r" 4) Si 4) 4> 45^ 4) .g > - S M Jri J< «• ^ -3 ••- "r c8 W 08 ^ cd |ZI*S .. ^j "o1"3'3'oj"3'3 **'» ssa-g 3.235 to to • © o S S Si to 3 S desert valleys — tends to be more special- ized in the production of tomatoes for fresh market, while the bulk of the proc- essing crop is grown north of the Tehach- api Range. Many varieties of tomatoes are grown in California, differing with respect to their final uses, disease resistance, and reaction to climatic conditions. Earliana types are often used in the southern desert regions to obtain an early crop for fresh market. Pritchard and Pennheart varieties are grown for much the same purpose in the southern San Joaquin Valley. The most important variety, how- ever, is the Improved Pearson, which is the choice of the overwhelming majority of California growers. It sets fruit over a wide range of temperatures and is adapt- able to both processing and fresh market use. The Improved Pearson is by far the most popular of the round-type canning tomatoes. Among the pear-shaped toma- toes used for processing the San Marzano is the chief variety; it is commonly used for tomato paste because it gives a prod- uct of thick consistency. Production of tomatoes for processing The canning industry of California utilizes the major share of the state's tomatoes. In 1954-1956, 88 per cent of the crop was sold to processors. Cali- fornia tomato growers tend to be spe- cialists in either the processing or the fresh market. As a result, there is little exchange between the two markets. Most of what little interchange there is tends to be in the direction of sending tomatoes originally intended for the fresh market to the canneries. ( See Page 48. ) In con- trast, Virginia and Texas are states where the fresh market is sharply com- petitive with the processing outlet. In Virginia, virtually all tomato acreage is dual purpose, and the greater part of the Texas processors' supply comes from 22 This information was supplied by Mr. V. Texas, and Mr. T. L. Stuart, Federal Agricultural Statistician for Virginia. acreage grown for and largely used in the fresh market." California's growing importance. California's current importance in the national picture is shown by the fact that it produces more tomatoes for process- ing than all other states combined ( Table 14). Average annual production in Cali- fornia for the years 1954-1956 was 2,030,767 tons grown on about 115,000 acres. This represents an average yield of 17.6 tons per acre. California enjoys a decided advantage as the yield of can- ning tomatoes in all other states averages only 7.5 tons per acre. The state has al- ways shown a higher yield than the rest of the nation, and it has improved its standing through the years. Thirty years ago California's yield averaged 6.1 tons per acre compared with 4.2 tons in other areas — a yield advantage of 1.9 tons. Since that time, the state's edge over other producing regions has climbed to 10.1 tons per acre. Acreage and production of canning tomatoes in the United States have in- creased during the past three decades chiefly owing to the enormous growth which has taken place in California. The state's production has increased more than 30 times as fast as that of all other areas. Acreage has almost quadrupled in California, while it has decreased by more than 25 per cent in other producing states. Consequently, California's share of the national production of canning tomatoes has increased from about 13.4 per cent to 57.8 per cent during the past 30 years. Geographic shifts in canning to- mato acreage within California. The main centers of production of Cali- fornia canning tomatoes have shifted to the north and east, and production has become more highly concentrated in the chief producing areas. At the end of the T920's, the area around San Francisco Bay was the center of canning tomato C. Childs, Federal Agricultural Statistician for [27 CO o OS CO i> to m ^ ^ CO lO -tf to t> tH -^ tH lO CO 0> to to m in t- 00 CO iH tH •«# CO iH t- in t- CO «* ^ 0fl g 8.8.22 ea o> - « Q, ^ ^i (C ^ H a 00 co w o co to ^J b- ',4 h N (N CO ^ W *2 t- ^ t- t- O t- O 5 co to to era co to 5« lO 00 l> tH i^ tH CO CO CO to "^ to 00 o CO t- CO era CO s oo to CO CT) CO tH era era m tH tH CO r^ o o o CO o CO (T> CO to t- era CO m 00 in "^ era m CO ro Ol r- CO era CO o CO CO tH 9 CO m m CO tH CO tO tH tO tH tO tH tO NCOCO ^^ WW era era era era era era era tH tH tH tH tH t-H tH 4< era 4< era ^ era ^ co co co co -tf "^ m era era era era era era era in era 2 H S | S? ta j» «° w 00 W 3 tH tH 3 * "O" fc •£ w *h to - .. S .1 » IP © o 5 fo _ e 5 © 'J5 M ^ c9 • £ > o » C. * - >» a © S*- a 2 * M 6 2 «2 m s 2 P 5 ° c >-. w w -u ^ 4! a) » " bo ho M -;ea ho t»o -;ea > > .SS w -r «> d S >d2a § •« ( V £ g w . I S o o W 5 »3 © bo* •— eas «) > SO wiS ©T3 £«bfW M ^ SSSSSSS p. tion of acreage than in 1929-1931 when the three leading counties contributed only one half of the total. Concentration of production is slightly more pro- nounced than these figures would indicate because these areas also have high yields. Characteristics of the growing enterprise The canning tomato growing enter- prise in California not only has grown and shifted its center of production, it also has become a more "commercial" operation. This is reflected in the size of operations of the average grower, the complexity of techniques employed in tomato growing, and a tendency of the growers to rely heavily upon processing tomatoes as a cash crop. Number of growers and size of enterprise. California, growers tend to have much more substantial tomato operations than their counterparts in other sections of the country. In 1954 there were 2,896 California farmers growing tomatoes (for all uses) on 92,715 acres — an average of 32.0 acres of tomatoes per grower. 23 This is in sharp contrast with other important producing states where the typical size of tomato plantings is less than 10 acres. Average acreage per grower has been increasing rapidly during recent years in all areas. In California it rose by almost 10 acres between 1949 and 1954. In the twelve-county area of this study, the average size of tomato operations is considerably larger than in the state as a whole; it was 42.5 acres in 1949 and 54.5 acres in 1954. Within this area, the larger enterprises are found in the in- terior valley region where production has been expanding at the faster rate. In the valley area, the average tomato acreage per grower was 64.8 in 1954, while it was only 23.8 in the coastal region. 24 These 23 U.S. Bureau of the Census, 1954 Census of Agriculture (Washington: Govt. Print. Off.. 1956). vol. 1, Counties and State Economic Areas, Part 33, California; State Table 16. p. 34. " 4 The seven valley counties are: Yuba, Sutter, Solano, Yolo, Sacramento, San Joaquin, and Stanislaus. The five coastal counties are: Napa, Alameda, Santa Clara, San Benito, and Monterey. production (Table 15). These central coast counties contained more than 40 per cent of the state's acreage (Table 16) . This was the period when the region around Oakland and San Jose was es- pecially important, as Santa Clara, Ala- meda, and Contra Costa were the state's three leading counties in canning tomato production. During the 1930's, the south- ern part of the state maintained its level of relative importance at something ap- proximating one-sixth of the state's acre- age. But in central California some trends were already noticeable. Santa Clara and Contra Costa lost ground while counties farther inland and to the north gained in importance, notably San Joa- quin and Sacramento. Between 1940 and 1945, the impact of World War II contributed to almost doubling California's canning tomato acreage; and in this upward spurt, the northern and interior valley counties continued to increase in importance. Whereas in 1930 the Sacramento Valley and Delta areas combined did not con- tain as much acreage as the central coast region, by the war's end each of these areas had surpassed the central coast in canning tomato production. In the readjustment following the war, the state's acreage declined, although not to its prewar level. Producing areas in the southern part of the state and along the central coast dwindled into insignifi- cance as the central valley counties took the lead in canning tomato production. At the present time, the Delta region sup- plies almost 40 per cent of the state's acreage, and 83 per cent of that is located in a single county — San Joaquin. The three main producing counties are now San Joaquin, Yolo, and Sacramento, pro- ducing among them about three-fifths of the state's acreage of canning tomatoes. This represents a much higher concentra- [29 Table 15. Acreage of California Tomatoes for Processing, by County, Three- Year Annual Averages, 1929-1931 to 1954-1956 County Years 1929-1931 1934-1936 1939-1941 1944-1946 1949-1951 1954-1956 The State Desert Imperial Riverside South Coast Los Angeles Orange San Bernardino . San Diego San Luis Obispo. Santa Barbara . . . Ventura Central Coast Alameda Mendocino Monterey Napa San Benito San Mateo Santa Clara Santa Cruz Sonoma San Joaquin Valley . Fresno Inyo Kern Kings Madera Merced Stanislaus Tulare Delta Contra Costa. . . . San Joaquin. . . . Solano Sacramento Valley . Amador Butte Colusa Glenn Sacramento Placer Sutter Tehama Yolo Yuba 40,681 1,525 1,525 5,469 2,600 1,645 536 41 647 17,212 6,012 651 114 1,776 23 8,231 160 245 2,057 396 1,661 9,383 5,888 3,187 308 5,035 3,527 1,508 68,820 2,055 787 1,268 10,268 4,691 2,383 962 205 137 44 1,846 20,520 6,332 43 1,305 679 4,137 25 7,467 334 198 4,827 124 64 2,028 2,505 106 19,582 6,217 12,398 967 11,568 6,738 50 665 4,062 53 73,036 310 7 303 10,159 3,709 1,637 1,904 393 51 836 1,629 20,853 10,573 292 888 3,618 18 5,351 68 45 2,225 16 763 1,213 233 22,490 3,390 17,624 1,476 16,999 87 9,377 5 371 7,153 6 129,144 1,332 39 1,293 9,466 2,503 2,189 1,246 358 1,565 1,605 31,129 13,113 3,504 2,061 4,293 77 7,402 124 555 7,542 445 34 33 839 2,561 3,145 485 40,167 4,038 33,287 2,842 39,508 5 249 350 47 14,772 107 1,330 22,366 282 99,754 1,230 1,074 156 7,123 1,465 2,138 220 781 29 600 1,890 11,009 4,251 3,144 689 618 3 2,231 36 37 115,767 2,248 1,540 708 7,608 390 2,577 44 > 345 5* 102 < 4,145 11,320 3,785 2,372 565 1,718 2,852 20 * 8* 8,035 10,008 103 700 105 22* 7 1 138* 1,325 2,693 6,409 6,372 85 83* 38,906 45,956 2,062 1,833 33,457 38,210 3,387 5,913 33,451 38,627 14 467 465 381 252 11,263 10,725 22 5,058 5,507 62 15,131 20,640 1,053 1,038 (Footnotes on following page) 30] figures include acreage for fresh market as well as for processing. No published data exist on the number of growers or the size of enterprise for canning tomatoes alone. But the large sample used in this study provided infor- mation on 746 such growers with 67,980 acres of canning tomatoes in 1956 (53.1 per cent of the actual acreage in the twelve-county area) — an average of 91.1 acres per grower. This is much larger than the 54.5 acres quoted above for growers of all types of tomatoes. In spite of the limitations of the data from this large sample, as indicated on page 8, the conclusion seems reasonable that northern California canning tomato growers operate substantially larger holdings than growers of tomatoes for fresh market. Most of the former are located in the interior regions, such as the Sacramento and San Joaquin valleys where large irrigated commercial opera- tions are typical. This was confirmed by evidence from the large sample which in- dicated that growers in the valley areas had twice as much acreage planted to canning tomatoes as those in coastal regions. Average holdings per grower were 100.5 and 50.8 acres, respectively, in the two areas. Table 16. Per Cent Distribution of Acreage of California Tomatoes for Processing by Region, Three- Year Annual Averages, 1929-1931 to 1954-1956 Region Years 1929-1931 1934-1936 1939-1941 1944-1946 1949-1951 1954-1956 per cent The State 100 3.7 13.4 42 3 5.1 23 1 12.4 100 3.0 14.9 29 8 7.0 28 5 16.8 100 0.4 13 9 28.6 3.0 30 8 23 3 100.0 1.0 7 3 24 1 5.9 31.1 30 6 100 1.2 7.2 11.0 8.1 39 33 5 100 Desert South Coast 1.9 6.6 Central Coast San Joaquin Valley. . Delta Sacramento Valley . . 9.8 8.6 39 7 33 4 Source: Table 15. * Estimated by authors. Sources : 1929-1931: Federal-State Crop Reporting Service, "California Acreage of Specified Commercial Vege- table Crops by Counties, 1929-1933" (Sacramento: 1934), 12 p. Processed. 1934-1936: California Cooperative Crop Reporting Service, "Commercial Vegetable Crops, California, Acreage by Counties, 1934-1938" (Sacramento: 1939), p. 21. Processed. 1939-1941: California Crop and Livestock Reporting Service, "Vegetable Crops in California, Commercial Acreage by Counties, 1939-1944" (Sacramento: 1945), p. 29. Processed. 1944-1946: California Crop and Livestock Reporting Service, "Vegetable Crops in California, Total Acreage, Production and Value of Commercial Crops, 1939-1948, Commercial Acreage by Counties, 1943- 1948" (Sacramento: 1949), p. 29. Processed. 1949-1950: California Crop and Livestock Reporting Service, "Vegetable Crops in California, Total Acreage, Production and Value of Commercial Crops, 1941-1950, Commercial Acreage by Counties, 1945- 1950" (Sacramento: 1951), p. 30. Processed. 1951: California Crop and Livestock Reporting Service, "Vegetable Crops in California, Total Acreage, Production and Value of Commercial Crops, 1918-1952, Commercial Acreage by Counties, 1951-52" (Sacra- mento: 1953), p. 78. Processed. 1954: California Crop and Livestock Reporting Service, "Vegetable Crops in California, Total Acreage, Production and Value of Commercial Crops and Acreage by Counties, 1952-1954" (Sacramento: 1955), p. 14. Processed. 1955: California Crop and Livestock Reporting Service, "Estimated Harvested Acreage of California Vegetables by Counties, 1955," p. 6. Processed. 1956: California Crop and Livestock Reporting Service, "California Tomatoes for Processing, Acres Harvested and Tons Produced by Counties as Reported by Processors, 1956 Crop, March, 1957." Single sheet release. Processed. [31] Sacramento Fig. 5. Twelve-county major producing region of northern California: ten production areas. 32 Other grower characteristics. Growers do not typically own the land on which they produce canning tomatoes; leasing is widely prevalent in California. Few data are published on the extent of leasing practices, but almost 75 per cent of the small sample of 116 growers in Yolo and San Joaquin counties were growing their 1956 crop of canning to- matoes on rented land exclusively. A great variety of rental terms was em- ployed. Most commonly, shares of the crop were paid to the landlord, who frequently supplied water and shared certain costs as for fertilizer and dusting. The typical duration of a lease was one year, although about 10 per cent of them were in effect for five years or more, and another 10 per cent were obtained from relatives on a long-term but indefinite basis. California growers are specialists in the production of canning tomatoes, both in the sense that they are experts in the technique of growing the crop, and that a majority of them grow canning to- matoes every year. They are not, how- ever, one-crop growers; to designate them as specialists in that sense would be misleading. Only 10 of the 116 growers interviewed in Yolo and San Joaquin counties grew tomatoes exclusively. Most growers produced two, three, or four crops including tomatoes. A great many different crops were raised by these growers; actually, 51 were mentioned. However, only three were grown by as many as one-third of the growers; these were sugar beets, alfalfa, and barley. A typical rotation for tomato growers is tomatoes, sugar beets, barley, and alfalfa, and it seems likely that most of the sample growers were dividing their hold- ings among two or more of these crops to keep their rotation in effect. Because county boundaries are of little significance in delimiting tomato-grow- ing regions, the 12 counties included in the study were reclassified into produc- tion areas. In many instances, portions of several counties were combined to form one homogeneous area. The names, descriptions, and estimates of the relative importance of each of these production areas were provided by the Farm Ad- visors in each of the 12 counties. The 10 production areas thus formed were modeled as closely as possible on the districts shown in the publication of the California State Department of Agricul- ture, Bureau of Fruit and Vegetable Standardization, Canning Tomato In- spection, Report of Defects, 1952, 1953, 1954. These districts were defined not so much on the basis of geographical con- siderations as on the similarity of can- ning tomato fruit characteristics. In this study, it was convenient to select the production areas to correspond to these districts because the report cited above includes data on the canning tomato ton- nage harvested in each district by 10-day periods throughout the season. Appendix B contains a brief description of each production area together with the inspec- tion points of the corresponding Bureau of Fruit and Vegetable Standardization district." 5 The geographical location of each production area is pictured in Figure 5 . Table 17 shows the actual acreage and the corresponding large-sample figure for each of these production areas in 1956. The actual acreages shown for re- gions within counties are not available in any official state publication but are esti- mates made for this study. They are based on information received from the Farm Advisors, adjusted to add to the actual county acreages published by the 2o In two instances, the state inspection district encompasses two production areas. Appendix B contains detailed maps which will allow the reader to compare more carefully each production area with the corresponding set of inspection points comprising a state district. Included on the maps also is information on the location of the acreage of the large-sample growers. [33 Table 17. Actual and Sample Acreage of Tomatoes for Processing, Ten Production Areas (Twelve Counties) of Northern California, 1956 Production area, county and region The State Ten production areas . Area 1 : Marysville Sutter County, total. . Yuba County, total. . . North of Marysville South of Marysville Areas 2 and 3 Area 2 : Napa Napa County, total Area 3 : Sacramento Yolo County Woodland Esparto Davis- Winters Sacramento County. . . Elk Grove Natomas Pocket Solano County Dixon Area 4 : River Yolo County Clarksburg Sacramento County. . . River Solano County Rio Vista San Joaquin County. . . Thornton Area 5 : Stockton San Joaquin County . . Linden Roberts Island Lodi Stockton-Manteca . Actual acreage 151,500 128,000 8,670 7,260 1,410 940 470 29,752 Per cent distribution of actual acreage To state To ten areas per cent 100.0 84.5 5.7 4.8 0.9 0.6 0.3 19.7 720 0.5 0.5 720 0.5 0.5 29,032 19.2 22.7 20,360 13.5 15.9 10,716 7.1 8.4 4,286 2.8 3.3 5,358 3.6 4.2 3,648 2.4 2.9 1,581 1.0 1.2 1,459 1.0 1.2 608 0.4 0.5 5,024 3.3 3.9 5,024 3.3 3.9 20,338 13.4 15.9 6,430 4.2 5.0 6,430 4.2 5.0 8,512 5.6 6.7 8,512 5.6 6.7 2,706 1.8 2.1 2,706 1.8 2.1 2,690 1.8 2.1 2,690 1.8 2.1 21,472 14.2 16.8 21,472 14.2 16.8 9,450 6.2 7.4 4,212 2.8 3.3 3,610 2.4 2.8 4,200 2.8 3.3 100.0 6.8 5.7 1.1 0.7 0.4 23.2 Sample acreage 67,980 67,980 4,749 4,111 638 638 16,959 389 389 16,570 11,912 7,940 1,392 2,580 2,322 855 987 480 2,336 2,336 13,110 4,593 4,593 5,336 5,336 1,019 1,019 2,162 2,162 10,921 10,921 2,068 3,156 3,122 2,575 Sample acreage as percentage of actual per cent 44.9 53.1 54.8 56.6 45.2 67.9 57.0 54.0 54.0 57.1 58.5 74.1 32.5 48.2 63.7 54.1 67.6 78.9 46.5 46.5 64.5 71.4 71.4 62.7 62.7 37.7 37.7 80.4 80.4 50.9 50.9 21.9 74.9 86.5 61.3 (Continued on next page.) 34 Table 17 — (Continued) Production area, county and region Area 6 : Tracy San Joaquin County . . . Tracy Union Island Area 7 : Westside Stanislaus County, total Areas 8 and 9 Area 8 : Oakland-San Jose Alameda County, total . . Centerville Pleasanton Mt. Eden Warm Springs Santa Clara County. . . . San Jose Morgan Hill Area 9 : Gilroy-Hollister . . Santa Clara County .... Gilroy San Benito County, total Bolsa San Juan Bautista . . . Paicines Area 10 : Monterey Monterey County, total . Actual acreage 24,138 24,138 21,000 3,138 10,180 10,180 10,330 Per cent distribution of actual acreage To state To ten areas per cent 15.9 15.9 13.8 2.1 6.7 6.7 6.8 5,362 3.5 3,530 2.3 2,017 1.3 807 0.6 504 0.3 202 0.1 1,832 1.2 1,628 1.1 204 0.1 4,968 3.3 2,238 1.5 2,238 1.5 2,730 1.8 1,366 1.0 682 0.4 682 0.4 3,120 2.1 3,120 2.1 18.9 18.9 16.4 2.5 7.9 7.9 8.1 Sample acreage 10,711 10,711 8,912 1,799 4,759 4,759 4,126 4.2 1,549 28.9 2.8 1,132 32.1 1.6 527 26.1 0.6 397 49.2 0.4 140 27.8 0.2 68 33.7 1.4 417 22.8 1.3 417 25.6 0.1 3.9 2,577 51.9 1.8 681 30.4 1.8 681 30.4 2.1 1,896 69.5 1.1 1,119 81.9 0.5 355 52.1 0.5 422 61.9 2.4 2,645 84.8 2.4 2,645 84.8 Sample acreage as percentage of actual per cent 44.4 44.4 42.4 57.3 46.7 46.7 39.9 Sources: Actual acreage: Data for regions within counties are estimates made for this study, not official state statistics. They are based on information received from the Farm Advisors in the twelve counties (see p. 9), adjusted to add to actual county total acreages in 1956, as shown in: California Crop and Livestock Reporting Service, "California Tomatoes for Processing, Acres Harvested and Tons Produced by Counties as Reported by Processors, 1956 Crop, March, 1957." Single sheet release. Processed. Sample acreage: All data are from large sample of growers (see pp. 8-9 for description of this sample). California Department of Agriculture. Table 13 shows the 1952-1954 annual average tonnage of canning tomatoes produced in each of the production areas (in two cases, combinations of two pro- duction areas) . Seasonality of production. Four of the production areas — Sacramento, River, Stockton, and Tracy — together ac- count for about three-fourths of the can- ning tomato acreage and production in all areas combined. Included in these areas are the state's three most important producing counties: San Joaquin, Yolo, and Sacramento. Of the major producing districts, the combined Napa-Sacramento district is by far the leader with almost 25 per cent of the production. Unlike [35 Table 1 8. Production of California Tomatoes for Processing, Round and Pear-Shaped Types Combined, Ten Production Areas of Northern California, Annual Average of 1952—1954 Production areas Production of tomatoes for processing Production as percentage of State total Ten-area total per cent The State Ten-area total 1. Marysville 2 and 3. Napa-Sacramento ... 4. River 5. Stockton 6. Tracy 7. Westside 8 and 9. Oakland-San Jose and Gilroy-Hollister 10. Monterey 1,569,550 100.0 1,441,785 91.9 102,679 6.6 356,969 22.8 256,266 16.3 223,805 14.3 210,616 13.4 130,473 8.3 115,033 7.3 45,944 2.9 100.0 7.1 24.8 17.8 15.5 14.6 9.0 8.0 3.2 Source: California Department of Agriculture, Bureau of Fruit and Vegetable Standardization, "Canning Tomato Inspection Report of Defects, 1952, 1953, 1954." In this report, data were shown separately for each of the three years. They were averaged to obtain data shown in this table. Data for the state inspection districts are attributed to the corresponding production areas or combinations of production areas. some other areas, its rank does not alter much during the season. It produces more tonnage than any of the other areas in every 10-day production period from August 1 on past November 1 which usually marks the close of the canning season (Table 19). Its production forms a larger share of the total early in the season during August when half or more of the available supply comes from this production area. In late September and October, its contribution drops to about one-fifth. This merely reflects the fact that few areas produce many tomatoes early in the season while, at the peak, production is more widely diffused over many areas. Harvesting of canning tomatoes in all areas combined is very highly concen- trated within a brief time span (Fig. 6) . The season lasts about three months, and 75 per cent of the tonnage is delivered within a single month — from mid-Sep- tember to mid-October. Each area's har- vesl is also rather concentrated, but there ^ Total ; Ten Areas Ai Monterey Marysv ille— rr\ II /«\\\ Oakland -San Jose and V 1 \\\ Gilroy- Hollister /// Tracy \ \ \\\ /Stockton \ \\\\ III / River \ \ Y /jw/ Napa and Sacramento \ S 1 1 1 Sept. Oct. 1 Nov. Dec. 1 Fig. 6. Seasonal pattern of the total canning tomato production in ten areas of northern California, average of 1952-1954. 36] >> a> "tf CO00d^|>CO^O) u tj« cnoH^tOH^t- O 05 CN0000Oi<7>CN^C0 V H fl 10 «* 0" i-T co TJ i ^ *H tH tH c ^ .= m -Q o E7 05 CO © IO W CI CO X X L- ro ■0 co toiooit-owt-eoo 5S O cot> L ,> L co .. ,J 3 ° c 'l o l 3 J«J 03:3-3 10 co~ co~ 00 irf © t> t-T 00 rt » C5iS iH H N (N N rl O — >«0 CO MOc-05HinMt»0) t- OOiOCNCNOOiHO ped rage fr- S t* ^ l> tf H (O M «D M 10 0] 0) h h t|T co cn cxT co" cn £ CO d (N CO N d d !> •?< co ioa>(Not-ot>cq^ >> iH ddlAC)(Dlflt<00(O *■ c ee a a u H CO lO0000CN co to d w of cn cn cn iH H t}I O CO CO N Z •O CN lO CO -^ CO CN £ fl) CN 2* a z CO 1 s a> ^tociddNcowoio ■a g co loaocoootDioioioo) O COiHOt-OCJt-OCO »■ ~_ a3 09 CO CO CO CN i-T of tH r-T IO CN 00~ t- OiCOCNOOCOWCOOOt- CO lOlOCNt^lO-^lOlO < H n cc ll CN 1- lOTH"cO00~00""t>COTd""Tjr It Q. 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The Monterey dis- trict, for example, is very sharply peaked, marketing half its crop within the top 20 days of its season (Table 20). The Oak- land-San Jose and Gilroy-Hollister areas (production areas 8 and 9 considered together) are also highly seasonal, har- vesting about 47 per cent of their crop in 20 days. On the other hand, the Napa- Sacramento district shows the least con- centration in deliveries. It is the only area which harvests less than 60 per cent of its total within 30 days. Another factor affecting seasonality is the timing of production peaks in differ- ent areas. Even if all areas had identical harvesting patterns — and, as we have seen, they do not — there would still be variations in deliveries between areas. This is due to the fact that the top 20 days in one district may be earlier or later than those of another district even if both should harvest the same proportions of their crops, or the same absolute quantities, within the same number of days. As Table 20 shows, the peak pro- duction periods do not occur simultane- ously in all production areas. There actually is a lag of four or five weeks between the times the earliest and latest areas reach their production peaks. The River area exhibits a fairly stable pattern similar to that of Napa-Sacramento, con- tributing 10 per cent or more of the total in each production period from the end of August to the season's close. But areas such as Marysville vary greatly in impor- tance from one period to another. During August, Marysville ranks second after Napa-Sacramento, but thereafter its im- portance rapidly diminishes. Its total contribution is rather small, amounting to only 7 per cent over the entire season; but because of its early peak, it has a par- ticular importance to canners who wish to begin their operations early (Fig. 7). Other areas with definite seasonality are the Oakland-San Jose, Gilroy-Hollis- ter, and Westside production areas which contribute more heavily toward the latter part of the season. In general, there is a progression from northern to southern areas with the northernmost coming into production early in the season and the more southerly gradually becoming more important as the season progresses. There is also some variation in maturity dates within areas. For example, the Stockton district embraces a rather wide area, with its northern part customarily maturing at least a week before the southern part. Organization of sellers. In apposi- tion to the Canners League on the proces- sors' side of the market is the California Tomato Growers Association. Its mem- bership is open to "any person, partner- ship, association, or corporation engaged in growing tomatoes." It has no member- ship fee and in 1956 covered its oper- ating expenses with dues of five cents for each ton of tomatoes produced by the member. In that year, about half of the northern California canning tomato growers were members of C.T.G.A. The main objective of the Association is to improve the growers' bargaining po- sition by providing them with informa- tion on which to base their decisions — for example, market and crop prospects in California and elsewhere, harvesting progress and difficulties, and other fac- tors that might affect the market for to- matoes. The organization also tries to secure revision of various provisions in canners' contracts. In this connection, it has designed its own contract form which it recommends for canners' use. Among other ways in which the Asso- ciation serves its members are the follow- ing: it supports legislation beneficial to growers and opposes laws unfavorable to them; it gathers information, at the request of individual growers, on the fi- nancial condition and the history of can- ner-grower relations of particular firms; in some cases it represents its members in their differences with canners over de- livery and related problems; and it co- [39 Napa and Sacramento \ Stockton g 40 o +- "D § 20 / ^ o .c H n J\ i i V Westside Oakland- Gilroy- Hollister San / Jose and ■ y f i \, Marysville Monterey Aug. 1 Sept. 1 Oct. 1 Nov. 1 Dec. 1 Aug. 1 Sept. 1 Oct. 1 Nov. 1 Dec. 1 Fig. 7. Seasonal pattern of canning tomato production in each of the ten areas of northern California, average of 1952-1954. operates with state agencies and the Uni- versity of California on various types of research affecting the tomato industry. While its main efforts have been pri- marily educational and informational, the Association has, on several occasions, attempted to expand its function beyond this. In the fall of 1954, it asked its mem- bers to sign marketing contracts which would bind them to sell processing toma- toes "upon such terms and conditions as [the] Association shall fix." This con- tract, similar to those used by other co- operative bargaining associations, would have made the Association the price bar- gaining agent of its members. However, 40] it did not become effective because an insufficient number of signatures was obtained. Even though the C.T.G.A. has not, in the past, achieved the status of official bargaining agent, it has on some occasions played an important role in af- fecting prices received by growers."" Thus, the California Tomato Growers Association is much more active in its attempts to influence the market directly than is the Canners League. III. Grower-Processor Relationships In Section II we have described the mar- ket structure on the buying and selling sides of the California tomato processing industry. Economists study industrial market structures in order to help isolate strategic factors affecting industrial con- duct and performance. This study is pri- marily directed toward those aspects of market conduct which pertain to the interfirm relationships between growers and processors. Economic theory is a use- ful preliminary tool in examining such relationships. It instructs us as to some possible types of conduct that may be associated with different market struc- tures. But this knowledge alone usually is not sufficient for a complete explana- tion of the unique way an industry oper- ates. Specifically, in this case, the par- ticular procurement problems of proc- essors and the related marketing and pro- duction problems of growers must be considered to understand properly the role played by their integrated relation- ship. This section discusses: (a) the techni- cal and market conditions that lead to interdependence between tomato growers and processors; (b) the nature of the in- tegrated relationship that has arisen in this industry and the legal basis for it; and (c) some aspects of the industry's performance, particularly with respect to pricing policy. FACTORS AFFECTING INTERDEPENDENCE OF GROWER AND PROCESSOR INCOME POSITIONS According to the theoretical discussion in Section I, some form of integration often develops when the income positions of growers and processors are inter- dependent owing to the presence of cer- tain market and technical factors. In many industries this interdependence arises out of the interrelationships that exist among the physical input-output functions of the individual firms. The major subject that conceivably could be of such mutual interest in the tomato processing industry is the raw product supply. The economic rationale for some form of coordinated decision-making over the activities of production and processing firms lies in their dependence on one another for tomato outlets and supplies. Some procurement problems of processors and related production and marketing problems of growers may find their solution in an integrated interfirm relationship; these problems are investi- gated here by discussing the attributes of raw product supply which are important to the income positions of both canners and growers. Total quantity of raw product Processors are particularly concerned that an adequate total quantity of toma- toes is available. Sufficient inducement 20 Since this bulletin was prepared, the Association has apparently had more success in this respect, particularly in the 1958 season. [41] Such commitments are also encour- aged by lending institutions advancing growers all or part of their preharvest expenses. If the producer has no assur- ance of a "home" for his tomatoes, most credit sources will look upon him as an extremely poor credit risk unless he has other forms of collateral. The foregoing factors magnify the ef- fect of uncertainties inherent in the mar- ket structure concerning whether the product may in fact be sold at all. These same structural characteristics of the processing industry lend them- selves to considerable price uncertainty on the part of the grower. In evaluating production alternatives, some estimate of the product's sale price must be made. A relatively few canners buy a large per- centage of the total output. Canner pro- curement policies are not determined in any mechanistic sense in an open mar- ket as would be true if there were a large number of relatively small buyers openly bidding at time of harvest. The uncertainties resulting from these various technical and market conditions make it extremely difficult to appraise the potential profitability of tomato produc- tion. In the California tomato canning industry, certain important factors are crucial to the decision-making process of growers but cannot be predicted in any systematic or meaningful way without some explicit arrangement with proces- sors. Producers, therefore, find strong encouragement for some form of grower- processor relationship which will effec- tively resolve some of their uncertainties and which will help them decide whether or not to grow tomatoes. Canners also may welcome such rela- tionships with growers as they, too, are confronted with important uncertainties. If there were a large open market for to- matoes at time of harvest, the processor might be expected to bid for the tonnage L ' 7 For one estimate of such costs, see MacGillivray, John H., A. E. Michelbacher, and C. Emlen Scott, Tomato Production in California (Berkeley: 1950), p. 15. (Table 5.) (California Agricul- tural Extension Service Circ. 167.) must be presented to growers so that they plant enough acreage to supply the to- matoes needed. The nature of the market outlets is im- portant to the grower in making his plans. Tomatoes grown solely for proc- essing must be sold to canneries within a limited radius. If these plants are op- erating at capacity, there are no other satisfactory uses for the tomatoes. On the other hand, growers of fresh-market tomatoes have available a nationwide market of many buyers and are virtually certain they can dispose of their crop at some price. Such uncertainties about available buyers take on increased importance to the grower because his out-of-pocket pro- duction costs are substantial. Even before harvest, a producer must invest about $100 an acre for seeds or plants, trans- planting, fertilizer, pest and disease con- trol measures, weeding, irrigation, and land preparation. 27 An additional reason why growers pre- fer an assured market outlet is the fact that a large percentage of the tomatoes are raised on leased land. It was esti- mated from the small sample data for Yolo and San Joaquin counties that more than four-fifths of the crop was so grown. Tomato leases in California usually are made on a year-to-year basis because to- matoes are customarily not grown on the same land for more than one or two con- secutive years. To obtain new land every year, the producer must fit his tomato operations into the crop rotation of the prospective lessor. But the landowner, particularly if a share-rent arrangement is used, is anxious for his tenant to have an outlet for the tomato crop. Since leas- ing must take place well before planting time, the grower is encouraged by the lessor to obtain a cannery commitment to make sure the tomatoes will be pur- chased. [42 desired at that time. The hope would be that growers would operate in such a manner that the total supply forthcoming would fit the processing requirements. The competitive structure of the canning industry effectively precludes such pro- curement methods on the part of at least the major canners. If a processing firm were relatively small compared with the total canning industry, its individual pur- chases would have no effect on total de- mand, and it could always hope to satisfy tonnage requirements at some price. But the California canning industry does not have such characteristics. In every pro- ducing area, four canners purchase over 40 per cent of the total acreage, and eight canners purchase more than 65 per cent (Fig. 4). Consequently, the demands of certain canners do constitute an appreci- able portion of the total demand. These purchasers cannot expect, therefore, that their procurement actions will not affect actions taken by other canners. Since the large canners cannot expect that an ade- quate supply will be available at all times in the open market, there is a strong in- centive for them to take special action to insure that they obtain the desired quantity of raw tomatoes. One method of accomplishing this is to make direct deal- ings with growers to insure that their ton- nage will be delivered to a particular cannery. Once it becomes advantageous for the large canneries to make preharvest com- mitments with growers, the chances are very much lessened that the smaller can- ners will find sufficient uncommitted ton- tage available at harvest time. The open market supply (tomatoes not committed to a particular buyer) is reduced. Also, growers with production, leasing, and credit problems are likely to make con- cessions to canners in order to obtain a preharvest — or possibly a preplanting — purchase commitment. Canners who are not parties to such arrangements will find the available unsold tonnage at harvest reduced even further. Thus, the fact that the large processors are induced to enter into some form of grower-processor rela- tionship lends strong encouragement for similar actions to be taken by all canners. Location of supply Location of supply is also of economic importance to canners. Processor profit is affected by hauling expense, over-all yield stability, and timing of maturity dates which vary with acreage allocations among the different production areas. Although other factors affect the firm's choice among alternative locational pat- terns of tomato acreage, the effect on total hauling expense is an important consideration. Other things being equal, canners — particularly those in deficit producing regions — are interested in in- ducing greater production close to their plants. The incentive to reduce uncertain- ties as to the total quantity available through some form of integrated rela- tionship with growers, as discussed above, is reinforced by this further de- sire to control its location as well. The canner's interest in yield stability also prompts his concern for the loca- tional distribution of acreage. One of his problems is to convert estimated raw product needs into the acreage which growers should be encouraged to plant. The possibility of abnormal weather, pest, or disease conditions makes it diffi- cult to predict the actual relationship be- tween acreage and tonnage harvested. These causes of yield variation almost always affect yields more in one area than in others. Yields in particular pro- duction areas vary more on the average from year to year than does the average yield for all areas combined. This can be appreciated by examining recent data. The average yield per acre in the twelve- county area was 10 per cent higher in 1956 than in 1955. But the variation in certain counties was much greater : Yuba. +29.3 per cent; Napa, -29.2 per cent; Monterey, +29.8 per cent: Alameda. +25.9 per cent; and Yolo, +16.6 per [43] cent. 28 Thus, by not purchasing all of his tomato requirements in a particular pro- ducing area, a processor can more closely predict the final acreage-tonnage ratio. This provides another incentive for a di- rect relationship with tomato growers in order to affect the production decisions on location of acreage planted. The third factor encouraging canners to affect these production decisions is re- lated to the customary maturity and har- vesting dates characteristic of each major producing area. Tomatoes do not mature evenly or uniformly throughout the har- vest season. Tomato processors, dealing with a perishable product, must pack the entire crop shortly after harvesting. The fact that in each of the production areas a large percentage of the crop matures within a very short time creates some serious technical problems for the proc- essor. Canners cannot completely over- come these problems but can minimize their effects by ( 1 ) varying plant opera- tions to meet supply variations, or (2) modifying or controlling the maturity dates and hence the time of delivery. Cali- fornia canners do both. Most tomato processing plants are quite flexible regarding the quantity of tomatoes they can handle efficiently dur- ing a given time. This flexibility is at- tained in several ways. A number of proc- essing lines may be available. And since the seasonal labor supply is fairly flex- ible, the number of lines in operation at any time can be varied. When all lines are operating, additional output can be obtained by employing two shifts. Often during the peak of the tomato harvest, California tomato canners operate all of their lines for two 10-hour shifts or even three 8-hour shifts. Also, the speed of processing a given tonnage can be varied depending upon which final product is being produced. Tomatoes can be proc- essed more rapidly into tomato paste, for '"California Crop and Livestock Reporting type tomatoes only. example, than into canned whole peeled tomatoes. But once capacity operation is reached, adjustments must be made in the delivery rates of the raw product. Canners have an incentive to reduce per unit produc- tion costs by operating their plants near capacity for as long a period as possible. This permits spreading overhead costs over a greater volume of output. One im- portant way to accomplish this is to pack other products before and after the to- mato season. Most California tomato canners have such multiple-purpose plants. Canneries can easily become glutted during the top two or three weeks of the harvest season. It is not uncommon for 40 to 45 per cent of the total tonnage to be delivered within a 3-week period (Table 20). The data show, however, that these periods of concentration vary somewhat among the various production areas. The Marysville production area is the first to reach its seasonal peak, and the Monterey, Oakland-San Jose, and Gilroy-Hollister areas are the last. If a canner relied upon the tomatoes from only one production area — say, the near- est one — he would be subject to an ex- tremely variable supply over the harvest season. In order to take advantage of whatever differences there are among production areas in the timing of har- vest, a canner must acquire tonnage grown in a number of areas. Again, the processor is interested in affecting the location of tomato supplies. This pro- vides further incentive for him to enter into an explicit relationship with growers so that the tonnage obtained may be spread in an optimum manner over the various producing regions. The importance of this voluntary dis- persion of acreage practiced by northern California canners is evidenced by the Service. Calculations based on contracted round- [44] fact that only eight of the 29 firms inter- viewed made no effort to practice it. These firms were smaller than average and had much lower than average dis- tances from field to plant. These tend to be the same plants for which hauling costs are of paramount importance. Four of these firms even expressed some in- terest in extending their operating season but were able to accomplish it sufficiently well for their purposes within a small area. These firms with small acreage re- quirements are able to give their growers very close supervision and to exert tight control over grower practices because of the limited area in which they buy. The remaining 21 firms planned their purchases with dispersion clearly in mind. The chief reason for this was their desire to extend the operating season and to level peak deliveries by taking ad- vantage of seasonal differences between production areas. Nineteen of the 21 firms which dispersed their purchases mentioned this as a reason for doing so. About a third of these considered it the main factor in their purchasing plans. They were among the largest firms in the industry in terms of tomato acreage con- tracted. Nine firms practiced dispersion in order to obtain a specific quality of tomato or, equally important, a "good grower." Five companies used disper- sion of their purchases as an insurance measure against catastrophe following the principle of diversification. Natu- rally, many firms were concerned with more than one of these advantages. The opinions expressed by the cannery offi- cials interviewed on this subject were borne out by the sample data. Firms which did not practice dispersion con- tracted in very few areas, usually only one or two and in no case more than three. On the other hand, companies ac- tively interested in affecting the location of their supplies always contracted in at least three different production areas, and six of them were active in more than five areas. The average number of areas in which these dispersing firms pur- chased was five. Right kind of product A third area of concern to canners — in addition to quantity and location — is the physical characteristics of the raw product. Two attributes are important: variety and quality. Variety. California processing toma- toes are of two general types: round and pear shapes. Round tomatoes are all-pur- pose canning tomatoes and have com- prised approximately 95 per cent of the crop in recent years. Pear tomatoes are used primarily in the manufacture of paste because they give a product of thicker consistency. The Improved Pear- son is the predominant round variety grown in northern California; the San Marzano is the principal pear-shaped va- riety. Because there are differences in the canning qualities of these two gen- eral types of tomatoes as well as in the different varieties within each type, proc- essors are interested in sharing the pro- duction decisions concerning the acreage allocation among them. Some firms engage in extensive variety development programs. Certain proces sors feel that the varieties and strains o canning tomatoes used are of critical im portance in assuring a uniform product If consumers, for example, have devel oped a preference for a soup of particu lar taste attributes, canners do not want these characteristics to change from sea- son to season because of varying mix- tures of raw product varieties used. Since tomatoes are customarily obtained from a large number of growers, uniformity of the offerings can perhaps best be ob- tained by the canner who can affect the corresponding production decisions of all his suppliers. In other words, vertical integration of the activities of growers and of a marketing firm is probably an effective device to achieve the desired de- [45 gree of horizontal coordination at the producer level."' Quality. Vegetable processing today is a mass-production operation, and some physical characteristics of the prod- uct are crucial to the speed and effective- ness of the canning process. Among them are the existence of worms and mold, color of the product, size, ripeness, and presence of certain defects such as cuts, sunscald spots, and stems. Presence of worms, mold, and defects in the raw product contribute to much higher costs of processing. If quality is too low, par- ticularly due to the worm and mold count, the product may not meet mini- mum quality standards of a particular brand or of the U. S. Food and Drug Administration. Color is crucial to the appearance of the final product, particu- larly in canned whole tomatoes. It is evident that the profit of the can- ner is affected by the quality character- istics of the raw product. Therefore, he has an incentive to control the kind of product he will receive. Exerting control over certain production actions at the farm level is one way to accomplish this task. Time of picking affects color. Irri- gation practices affect sizes and uniform- ity of size. The timing, quantity, and kinds of fertilizer affect color, size, ma- turity dates, and chemical composition of the raw product. Proper use of insecti- cides is also of great importance in ob- taining satisfactory yields of a product with a desirable appearance. Timing of deliveries Since deliveries in each production area are highly concentrated, plants may easily become glutted. Therefore, proc- essors desire to disperse acreage from which tomatoes are purchased, to lessen the concentration of deliveries. Variety affects crop maturity and hence delivery. From an all-around proc- essing standpoint, the Improved Pearson is the best variety presently available. " Collins and Jamison, op. cit. But because Early Ace and Earliana Santa Clara varieties mature approxi- mately a week earlier, canners may pre- fer that a portion of the acreage be planted to these in order to stagger the maturity schedule. Some dispersion of maturity dates may be gained by using tomatoes grown both from seeds and from transplants. Transplants usually result in an earlier crop. Further spreading of crop maturity dates can be obtained through staggering the planting operations over a two- to three-week interval. All these efforts, however, will be in- adequate to accomplish complete coordi- nation of grower and processor activities at time of harvest. A number of factors may cause the processing facilities to be- come temporarily glutted even though the planting decisions have been jointly controlled by canner and grower. Un- usually favorable weather conditions may upset yield predictions. Unusually cool weather early in the season may slow up the early-producing areas so that they reach maturity about the same time as the ordinarily later ones. Unusually hot weather later in the season may hasten ripening in the late districts so that several areas will reach a peak at once. Use of large picking crews may enable one or a very few growers to de- liver tonnage on a particular day which exceeds plant capacity. The typical cannery does not possess sufficient flexibility to compensate fully for whatever actions or situations may occur at the producer level during har- vest. If a processor is accepting delivery from a large number of growers, as is usually the case, coordination among these farm units is necessary to insure a uniform total flow from the fields. It is evident that attempts to control deliveries by the cannery are also of significance to the grower. Tomatoes may mature very rapidly and losses may result if cannery capacity is insufficient to handle them when they should be picked. [46] This discussion has shown many fac- tors of mutual importance to canner and grower; their income positions are inter- related. This being the case, one would not expect that complete independence of action on the part of canners and growers would result in an optimum in- come solution for either or both parties. A need, therefore, exists for coordinated decision-making over the many produc- tion and processing activities that are im- portant to the income positions of both growers and canners. GROWER-PROCESSOR INTEGRATION The role of forward buying Practically all California canning to- matoes are contracted by canners prior to the time of planting. Forward or ad- vance buying apparently has been used during most of the history of the Cali- fornia canning tomato industry. As early as 1922, when about 24,000 acres of can- ning tomatoes were harvested, an esti- mated 17,000 to 18,000 acres were under contracts to canners. 30 This method of buying California can- ning tomatoes has been followed so con- sistently through the years that it may properly be termed an industry procure- ment policy. While forward buying is common also in some other agricultural crops, it has been given "little systematic attention by marketing economists." 31 While buyers and sellers both favor a policy of forward buying for the many reasons previously discussed, a number of economic and institutional factors condition the actual time canners buy in a given year. Some of these factors tend to encourage late buying; others favor early buying. Certain characteristics of tomato production set limits on the time Avithin which buying normally takes place. If canners want to induce growers to grow tomatoes or to affect certain de- cisions as to variety and location, they must buy at least long enough before planting time so that growers have ade- quate time to formulate production plans. The time required for this purpose varies among growers. Those growing to- matoes on their own land are most flex- ible in this respect. In northern Cali- fornia, they often can delay their deci- sion until mid-April; they can, at this date, still buy tomato plants and get pro- duction under way in time. If they use field seeding, the decision must be made early enough to permit planting in late March or early April. But most canning tomato growers in California do not own the acreage on which they plant tomatoes. They lease it from others, usually on a year-to-year basis. And because leasing occurs well before planting time, some growers must have assurances of an outlet well before this. These growers must receive con- tracts or promises of contracts much ear- lier than those growing on their own land. Several factors condition the exact time canners prefer to begin buying. Some of the smaller canners make for- ward contracts for the sale of their proc- essed products such as tomato paste. Often these canners do not begin buying all their requirements until this contract is signed. Thus, the ultimate buyer of the processed product indirectly influences the buying time of such canners. More important, however, is the date when the leading canners begin their buying. Buying at a specified price sel- dom begins before one of the industry's :5 ° Yaw, Fred L., Report on Survey of the Canning Tomato Industry with Suggestions for Improve- ment (Berkeley: 1924), p. 6. (California Agricultural Experiment Station Circ. 280.) 31 Waugh, Frederick V., Readings on Agricultural Marketing (Ames: Iowa State College Press 1954), p. 172. [47] recognized price leaders begins buying. Other canners simply are unwilling to make a price commitment until they know with some certainty what their competitors are paying. But after an in- dustry leader has started buying and thereby effectively establishes a price, the remaining canners will soon begin. For even if a particular canner prefers to wait, competition among canners forces all to begin negotiations with growers. While a processor may not wish to begin formal contracting until an indus- try leader does, he may be able to make a precontract arrangement to assure the retaining of good growers. Thus, in a real sense contracting may be said to begin well before formal buying begins. The larger canners are under greater pressure to begin contracting by the very size of the acreage they must contract. It may take longer than a month to sign up enough growers to fill their acreage re- quirement. The mere mechanics of allo- cating the acreage to the proper locations poses a large problem for the major canners. Experience with forward buying Approximately two-thirds of the can- ners interviewed in this study reported that they normally contract most of their expected requirements during January and February. When demand conditions appear to warrant a large tomato crop, contracting may begin before the first of the year. For example, the 1955 and 1956 crops were relatively large — 116,300 and 151,500 acres, respectively. In both sea- sons contracting began in October and November, with most of the crop being contracted from December through Feb- ruary. On the other hand, when demand warrants smaller purchases by canners, they usually begin buying later. The 1953 and 1954 crops were relatively small — 83,000 and 79,500 acres, respectively. In L953 most contracting occurred from February through April and in 1954 dur- ing March and April. All but two of the canners interviewed reported that they normally contact some of their growers before actual formal contracting begins. They often make ten- tative agreements with some growers during harvest for the next year's crop. Both growers and canners recognize that such tentative promises are not legally binding. Often such precontract arrange- ments simply involve informal exchanges of the following year's plans of each and result in a tentative promise by the can- ner that he will likely take a certain mini- mum amount of a grower's crop at going market prices. Some canners report that they have such informal agreements with all but their "fringe" growers. As one canner put it, "By contract time we al- ready have most of our growers about half-way lined up." And some growers reported that, even though no promises of this sort are exchanged, they "know" that "their" canner will give them a con- tract when buying begins. Here the rela- tionship between buyer and seller is of such long standing that neither bothers to contact the other before contract time. Although nearly all California tomato growers prefer to grow tomatoes on a for- ward contract basis, some growers plant processing tomatoes without first receiv- ing a contract for them. The industry re- fers to this practice as growing "open" acreage. These growers fall into three categories. First and most important are those growers who intend to ship their toma- toes fresh as long as the price is better than the price for canning tomatoes. Then if fresh market prices are de- pressed, they plan on selling to proces- sors. Most of these growers are located in the Merced area, on the southern edge of the northern California processing to- mato region. Second, some growers plant process- ing tomatoes without a contract because they are unable to get one at planting time. They hope either to obtain a con- tract before harvest or else to find out- [48] lets at harvest time with canners who have undercontracted. Third, some growers intentionally grow tomatoes without a contract be- cause they believe they will thereby earn a larger profit. They act on the assump- tion that at harvest time demand may be so great that canners will be willing to pay them higher prices for their crops than they offered at planting time. These growers generally plant only some of their land to open acreage. Some canners dislike contracting with such growers be- cause they fear that the growers will try to deliver tomatoes from their open acre- age along with those from contracted acreage if they cannot find other outlets for them. This can create serious difficul- ties for the canner during supply peaks. No reliable data are available on the amount of open acreage grown for each of the above reasons. But the consensus of industry leaders is that since World War II less than 10 per cent of the ton- nage each year has been grown on open acreage. This indicates that practically all California processing tomato growers, rather than growing for an open market, integrate their activities with particular canners by signing contracts before planting time. This forward contract is the legal basis underlying the integration of tomato growers and processors. Once a grower and processor sign such a con- tract, each can no longer act entirely in- dependently of the other in certain im- portant respects. These contracts spell out the duties and rights of each with respect to certain of their integrated ac- tivities. Marketing contracts Marketing contracts take on added sig- nificance when viewed as the legal basis of grower-processor integration. How- ever, they are not necessarily the only rules spelling out this relationship nor does their legal wording actually indicate the manner in which this integration works in practice. In truth, the nonlegal agreements or understandings between growers and processors are often more important to successful integration than the legal ones. For, ultimately, it is the mutual satisfaction of growers and proc- essors in their dealings with one another which determines the success of their in- tegrated activities. Accordingly, we shall also consider some of the nonlegal bases of grower-processor integration. We shall deal here mainly with the pro- visions of the standard tomato contract form issued by the Canners League of California. It is used by most of the to- mato processors in northern California. Of the 29 canners interviewed, 21 used this form or some minor modification of it; only seven used their own forms, and two of these were similar to the Canners League contract in most respects. One small firm used the contract form recom- mended by the California Tomato Grow- ers Association. Except where otherwise indicated, our references will be to the standard form. Price provisions. Both parties usu- ally consider price the most important contract item. The customary practice is for the parties to agree to a specific price per ton when the contract is signed. Virtually all other contract items dis- cussed below also affect the net revenue of farmers. Perhaps most directly related to price are the payment tolerances spelled out in the contract. Grades are not used in buying California tomatoes; nevertheless, quality has an effect upon the prices growers are paid. This adjust- ment is accomplished through payment tolerances. For example, in 1956, north- ern California canners, as a rule, did not permit any such tolerances on worms and mold. This meant that if 5 per cent of a load of tomatoes suffered from worm and mold damage the canner had to pay the grower only 95 per cent of the contract price. Most canners did provide for a payment tolerance of 5 per cent on gen- eral defects: if a grower delivered toma- toes with 5 per cent or less of general [49 in September and October.) One canner's contract sets the cutoff date at October 25 and another at October 26 or before this date (1 ) if his growers have already delivered an average of 20 tons, (2) if three-fourths of his growers have already delivered their entire crop, or (3) if his growers have made no deliveries during the previous seven days. The form recom- mended by the California Tomato Grow- ers Association, which was used by one of the processors interviewed in 1956, does not include starting or closing dates. Another important delivery require- ment is that controlling quality. The standard form first defines "tomatoes suitable for canning." These specifica- tions are taken verbatim from the tomato standards section of the California Agri- cultural Code. Next, the contract spells out the conditions under which canners may reject tomatoes. Clause (d) of this section at times has especially important implications for delivery. It provides that "any load of tomatoes offered for de- livery hereunder may be rejected at buyer's option and turned back to seller if such load contains less than 60% by weight of 'well-colored' tomatoes, by which is meant that the average color of the tomato flesh is 90% good red to- mato color as such color is shown on the California Standard Color Chart for Can- ning Tomatoes issued by the California State Department of Agriculture, Bureau of Fruit and Vegetable Standardization, in 1942." Two canners using their own contracts have color requirements identical to those of the standard form. The other four canners' contracts inspected vary on this point. One provides that the can- ner may reject if less than 20 per cent are well-colored; another stipulates that the processor may reject if more than 82 The Canners League Standard Form adopted November 19, 1935, also included such a pro- vision. It stated in part: "Buyer agrees to take delivery hereunder of a tonnage of each variety named herein of not to exceed ten per cent (10%) in excess of the estimated tonnage of such variety. . . ." However, it gave the buyer the option of taking more than the estimated tonnage if he so desired. This provision had been deleted from the Canners League form by 1942. defects, the canner paid the full contract price. But if 10 per cent of them had de- fects, the grower would receive only 95 per cent of the contract price. Quantity provisions. The standard form contract specifies that growers de- liver all tomatoes from a certain acreage. At times canners modify this provision by writing on the face of the contract that they need accept only a specified number of tons per acre. However, in recent years this practice of setting upper limits on deliveries apparently has not been very common. In 1956 two canners using their own forms placed specific upper limits on the quantity of tomatoes they were obligated to accept. Both placed "estimated" ton- nages on their contracts in addition to the acreage contracted. One of these processors employed a clause which stated that he need accept no tomatoes beyond this amount, and the other stipu- lated that he need not take more than 10 per cent in excess of the tonnage esti- mated. " In practice these firms have set the estimated tonnage figure, at least in part, on the past yield experience of their growers. Delivery provisions. The quantity of tomatoes growers can actually market is modified by various delivery provi- sions: the times during which products may be delivered, the quality of deliver- able products, and the rate at which they may be delivered. One factor determining how much a grower may deliver to his canner is the period during which the canner will ac- cept tomatoes. The standard form pro- vides that canners need not take tomatoes before September 1 nor after October 31 nor on Saturdays, Sundays, and legal holidays. (For the ten areas shown in Fig. 6, 95.7 per cent of the crop was marketed 50 20 per cent do not have a red color ex- tending over 75 per cent of their surface; a third provides that the company will accept as much of the crop "as shall in its judgment" comply with the speci- fications of its contract; and the fourth, the California Tomato Growers Associa- tion contract form, agrees to take all loads having at least 5 per cent well- colored tomatoes, that is, all those meet- ing the state grade. The potential significance of these pro- visions becomes apparent when it is rec- ognized that canners customarily accept loads containing a much lower percent- age of well-colored tomatoes than their contracts specify. For example, in the years 1952-1954, half (50.5 per cent) of the tomatoes that passed the state in- spection were less than 60 per cent well- colored. While most processors could have rejected these tomatoes, very few did. Almost three of every four canners interviewed stated that they normally ac- cept the state grade (at least 5 per cent well-colored) although the overwhelming majority of them specified 60 per cent well-colored in their contracts. A few canners admitted they were more strict in adhering to high color requirements at the peak of the season, when their plants tend to become glutted, than they were at other times. Thus, the large gap between contract terms and customary practice provides the processor with a means of controlling deliveries. There are many other ways, too, in which a canner can control the flow of tomatoes to his plant. Perhaps the most important is an outright limitation on the amount growers may deliver during a specified time — the so-called quota or prorate. The standard form contains no such legal restriction, but nearly all proc- essors add to their contracts a provision to this effect which gives them discretion- ary power to limit deliveries. This usually restricts the grower to delivery of not more than 2% tons P er acr e P er week or, equivalently, % ton P er acre P er day or 20 lug boxes ( V2 ton) per acre per day. Occasionally, there is some variation from this, such as 2 tons per acre per week or 16 lug boxes (800 pounds) per acre per day. Two of the 29 processors interviewed gave no information on their use of the quota. Of the remaining 27, however, 24 included such a provision in their con- tracts, and 15 of them said they used this restriction to limit deliveries when they had problems of oversupply at the peak of the season. Only two canners stated that they never used the quota because they had sufficient capacity to match peak deliveries. The remaining seven processors prefer to use methods other than the prorate — for example, the supply of boxes may be reduced or their fieldmen may suggest to the grower that he slow down on picking for a few days. ( It should be noted that when a cannery is operating at top capacity the supply of boxes may actually become short. ) Even the three canners who have no pro- rate clause in their contracts do in prac- tice use some kind of delivery limitation, such as slowing up on box supply or closing their plants on weekends, which the contract permits them to do. Most canners recognize that these limiting de- vices, although necessary for their own operation, may work a hardship on growers, and they make efforts to divert excess supplies to other processors when- ever possible. Even when the quota is imposed, it normally remains only a short time — rarely longer than two weeks and often only a few days. Tomato variety. All contracts specify the variety of tomatoes to be grown. They always call for either round or pear- shaped varieties. Some canners at times also specify a particular strain of round variety — for example, Improved Pearson or John Moran. As mentioned above, this is done more to control maturity date than product quality as such. Planting time. California tomato [51] contracts no longer specify that canners shall determine planting time. The Can- ners League form gave canners this right as late as 1942. However, canners' field- men frequently advise or consult with growers in this respect. As mentioned above, processors attain staggered de- liveries by relying mainly on geographic dispersion of acreage and prescribing the type of tomato to be grown rather than by controlling planting time. Seeds and plants. The standard form provides that canners need not "ac- cept any tomatoes produced from seed or plants other than buyer's seed or plants where in buyer's opinion the strain or variety may affect the quality or variety of such tomatoes." Although this would seem to indicate that canners require growers to use their seed, this is mislead- ing. At one time canners did this, but to- day they do not. Many still handle seeds and plants for growers, but strictly as a service on a voluntary basis. Canners re- port that growers take adequate care in selecting their seeds and plants so that canners need not control this activity any longer. Cultural practices. The standard contract form provides that "seller shall till, cultivate, fertilize, irrigate, and en- deavor to eliminate and control worm and insect infestation by spraying or dusting with an insecticide, all in the manner customary or best adapted to the proper care and growth of the best quality of tomatoes." Canners report that today they need exercise practically no supervision of growers' cultural practices in these respects. In fact, most of them stated that California tomato growers generally know much more about proper cultural practices than their fieldmen. The main exceptions are new growers who sometimes receive considerable as- sistance from fieldmen. Also, at least one firm employs specialists who give its growers advice on disease and insect control measures. But this is strictly a service to growers: the canner is not legally required to give it nor are the growers obligated to accept it. Time of payment. The standard form provides that growers be paid for each week's deliveries on the following Friday. All but one of the other forms provide for payment between Wednesday and Saturday of the week following de- liveries. The one exception is a form pro- viding for payment on the second Tues- day after delivery. Occasionally, despite the wording of the contract, a canner will pay a grower on some other basis at the grower's own request. Lug boxes and pallets. California canners provide picking boxes and pal- lets to growers. Most processors charge a one-cent-per-box rental for lug boxes and payment for all damaged and lost boxes and pallets. Only five canners of the 29 interviewed provide lug boxes to their growers free of charge although two of these specify the one-cent-per-box rental in their contracts. With the excep- tion of these few companies, most firms tend to follow the industry leaders on this matter. Thus, in 1956 most canners charged box rent; however, in times of short supply virtually all companies pro- vide free boxes. Hauling provisions. The standard form leaves it to the parties to decide which is to do the hauling from farm to plant. Some California canners provide hauling for growers, usually through con- tract haulers; others do not. In the latter case, canners give growers a hauling al- lowance which about equals the commer- cial hauling charge from the farm to the canner' s nearest plant or receiving station. Grading of tomatoes. The Califor- nia Agricultural Code provides that all canning tomatoes must be inspected and graded by representatives of the Califor- nia Department of Agriculture in or- der to determine conformance with the state's tomato standards requirements. The standard form provides that canners and growers may also inspect loads if [52] they are dissatisfied with the state grade. In practice the entire industry virtually always accepts the state grade as final, and we found almost complete confidence by growers and canners in the state grad- ing system. All members of the industry agreed that third-party grading elimi- nated one of the most serious areas of potential friction between growers and processors. Other contract provisions. The standard form covers several other mat- ters which may affect the way grower and processor activities are integrated. Of occasional importance is a clause pro- viding for arbitration of controversies over questions of fact involved in carry- ing out contract terms. Another provides for modification of the contract terms in the event of passage of legislation or marketing agreements affecting the in- dustry. Also included is a provision which prevents the seller from delivering to the buyer any tomatoes grown on acre- age not covered by the contract. Processor integration through ownership Thus far we have dealt only with nonownership forms of integration in this industry. At times, however, proc- essors have integrated directly with their sources of supply through ownership. An appropriate question, therefore, is: what determines whether it is preferable to use ownership integration rather than some nonownership form? In 1956 California canners themselves grew less than 3 per cent of their tomato acreage requirements. There apparently are several reasons why they have not found it desirable to grow significant amounts of their own supplies in recent years. The optimum size farm for grow- ing tomatoes evidently is considerably smaller than the optimum size process- ing concern. Management problems, to say nothing of the capital needs, asso- ciated with operating the acreages re- quired for most modern canneries would be almost insurmountable. These prob- lems are further magnified in firms proc- essing a large number of different products, many of which require inte- gration of processing and farm opera- tions. As indicated before, California tomato canners process an average of 15.5 different products. Inflexibilities as to location and quan- tity of tonnage also arise when canners operate their own farms. Acreage is com- monly dispersed over a wide area in order to stagger delivery dates. Further- more, many vegetable crops are grown within a well-developed rotation which includes nonprocessing crops such as alfalfa and grains. Such diversification of a processor's management interests would scarcely seem practical. Of course, these deterrents might not prevent inte- gration through ownership if the off- setting advantages could not be obtained through other forms of integration. Although processors may not grow all their own supplies, it may be to their advantage to grow some of them. Where farm suppliers do not grow the proper quality product and grower-processor integrating arrangements cannot be de- vised to bring improvement, processors are encouraged to grow some of their own supplies. However, this has not been a problem for California tomato proces- sors. They report that tomato growers generally provide them with the kinds of products they want. Another factor which might encour- age processors at times to grow some of their own crops would be a fairly inelas- tic supply; in this event, they may cut procurement costs by growing some of their own needs. For example, a proces- sor may wish to contract 5,000 acres of a given crop. But at going prices, he may be able to contract only 4,500 acres. He has three alternative ways of obtaining the additional acreage: engage in price competition, engage in nonprice compe- [53] tition for the marginal amount, or grow the additional 500 acres on his own or leased land. The first alternative would almost certainly increase the cost of his entire acreage, not just the additional 500 acres. The second might do the same although not necessarily so. But by the third method, he could obtain the extra 500 acres without raising the price paid for the other 4,500 acres. And, signifi- cantly, this processor would have an in- centive to grow some of his own crop even though his farming costs were higher than growers'. For growing some of his own raw product would enable him to get his total requirements for less than if he bought all of his needs from growers. If canners grow some of their own sup- plies for this reason, it is symptomatic of the absence of competition in buying. But competition has been keen among California tomato canners in recent years. Because most canners feel that their supply is quite elastic at the indus- try price, they normally would have no incentive to grow their own supplies. Of course, should the number of firms de- crease materially and thereby make all firms more conscious of the impact of their own purchases on industry price, this situation could change. PRICING POLICY IN PROCURING TOMATOES Up to this point, we have dealt mainly with the motives and methods of grower- processor integration. Tomato farmers and processors alike have sound reasons for integrating certain activities. In many industries, forces such as those described above have led to vertical integration through ownership; that is, a single firm owns several stages of production. In such vertically integrated firms, there is no pricing in the common sense although, for accounting purposes, prices are often assigned to products produced at various stages of the integrated process. But in the case of grower-processor integration, pricing of the commodities exchanged must occur. Growers and processors may welcome integration of many of their production and marketing activities, but as long as ownership remains separate the returns going to the respective owners remain of crucial importance. The parties are not concerned simply with the po- tential aggregate income of the farm and processing operations but with the way this income is distributed between them. And unless a satisfactory exchange price ( including nonprice items) is arrived at, such firms are unwilling to become inte- grated with one another. The following is an analysis of the functioning of the pricing process in this grower-processor integrated industry. The policy of price leadership The pricing policy in the California canning tomato industry largely reflects its market structure. In perfectly compet- itive markets, where no buyer or seller is large enough to affect prices by his own actions, no firm can be said to have a pricing policy. Each firm simply ac- cepts market-determined prices and ad- justs its operations to them. Conversely, in markets of relatively few buyers or sellers, firms must adopt a price policy of some sort since each firm cannot avoid having some effect on prices. The market structure for California processing tomatoes is made up of many sellers and relatively few buyers. As was noted previously, four canners acquired about a third of the 1956 crop in north- ern California, eight acquired more than half, and 35 firms purchased virtually the entire crop. The extent of market concentration in particular geographic areas is even greater. (See Fig. 4.) On the other hand, these canners bought from about 1,500 growers, each of whom [54 For example, after the outbreak of the Korean War in June, 1950, the industry's price leaders increased the price origi- nally agreed upon by $2.50 per ton. A few firms failed to follow this lead, as they legally could, because they had al- ready closed their contracts at $20.00 per ton early in the year. But most of those failing to follow the price increase ran into serious grower resentment in subse- quent years. Some growers, after six years, still felt strongly about the way they were treated by these firms. One firm apparently felt compelled to com- pensate for its 1950 behavior by offering growers special price and nonprice in- ducements in subsequent years. Thus, if a firm feels that good grower relations can be maintained only if it will pay the competitive price, it must have knowledge of that price before it can sign up any large proportion of its growers. To avoid paying more than the competitive price, the firm will wait until some qualified buyer takes the initiative in deciding what that price should be. 54 The growers themselves contribute to the practice of price leadership; they are hesitant about signing forward contracts with small and medium sized firms until a recognized leader comes out with a price. They have learned by experience that the larger firms may subsequently come up with a higher price which will be followed by the rest of the industry. Thus, both growers and small processors feel that they are likely to come out bet- ter in the long run if they regularly ac- cept the price established by a recognized price leader. 3. The practice of forward buying also contributes to industry acceptance of a policy of price leadership. Forward buy- ing complicates the price decision b\ 88 The California Tomato Growers Association represents growers in many ways (see pp. 39-41) . However, in the 1956 season, the Association was not a formal bargaining institution in the market. Its members did not have contracts permitting the Association to bargain for them. 84 A means occasionally used to avoid choosing a price in the early stages of contracting is to sign "open price" contracts, i.e., those in which the canner agrees to pay the going price for the season. However, this practice itself indicates that those using it (growers and canners alike) will accept the price later established by the price leader. acted in his own behalf in selling his crop."' Thus, we have an oligopsonistic market structure — few firms buying from many essentially unorganized sellers. Firms in such industries must employ some type of pricing policy. The policy in the California tomato canning indus- try, as in many others with similar struc- tures, is a form of price leadership — a price policy where one firm takes the initiative in making price changes for the entire industry. Factors conducive to price leadership policy A combination of factors makes the emergence of some form of price leader- ship on the buying side of the Califor- nia tomato canning industry almost inevitable. 1. The structure of the industry — its relatively few buyers — makes perfectly competitive price behavior impossible. Only the very smallest firms can ignore the indirect consequences of their own buying behavior on prices. Economic theory and practice suggest that such in- dustries are likely to develop some for- mal or informal price policy to prevent "price wars" or other disrupting forms of price competition. 2. The selling side of the canning to- mato market is not perfectly competitive either. In order to maintain good rela- tions, canners are forced to treat growers as individuals rather than as anonymous competitors. Processors almost unani- mously reported that they do not dare pay prices lower than the general price established in the industry; to do so would result in serious deterioration of their relations with "their" growers. The experience of those who have done so has proven the wisdom of this feeling. [55] forcing buying under conditions of great uncertainty concerning the future. Rep- resentatives of most small and medium sized firms indicate that because they do not have market analysts of their own, they prefer as a rule to leave the initial price decision to those firms most quali- fied to appraise market conditions. The theory of price leadership The term "price leadership" describes any pricing policy where one firm takes the initiative in making price changes for an industry. There are different types of price leadership and the resulting prices range from monopolistic to com- petitive levels. "Dominant Firm" leadership. The best known cases of price leadership are those in which one firm, by virtue of its size, determines the industry's price policy. 3 ' The industry is assumed to con- sist of the one large firm and a great many smaller ones, none of which buys a large enough proportion of the total supply to affect the industry price by its own buying policy. Thus, the small firms are passive as to price — they simply ad- just their operations to the industry price. In such a situation, the dominant firm is forced by circumstances to play the leader's role. The theoretical model of the dominant firm type of industry structure turns out to be merely a modification of monopo- listic structure; if the leader knows the prices his smaller rivals will offer, he can choose the price that maximizes his profits in much the same manner as a pure monopolist. The presence of the competitive fringe of rival buyers merely restrains the degree of the leader's mo- nopoly power. "Barometric" price leadership. The barometric price leader "commands adherence of rivals to his price only be- cause, and to the extent that, his price reflects market conditions with tolerable promptness." 36 In other words, the leader acts as the industry's price barometer, and the others are willing to let him play that role as long as he performs it well. However, the firm that plays the role of price leader for an industry does not necessarily possess substantial market power. The price set by the barometric price leader may be competitive, monopolistic, or something in between. Thus, it is pos- sible to have a competitive or a monopo- listic barometric price leader. Certain types of market structure are most con- ducive to competitive behavior, and cer- tain patterns of action may be taken as implicit evidence of it. First, if the leader has too many rivals to make some form of collusion or tacit understanding workable, the barometer may be forced to indicate a price at or near competitive levels. A more profit- able price for the leader would be in con- stant danger of being shaded by one or more of his rivals who would see an op- portunity for short-run gain by making price or nonprice concessions. Secondly, as Markham says: "Unless a particular firm has demonstrated unusual adeptness at adjusting prices to market forces, in the absence of conspiracy, one would certainly expect occasional changes in the identity of the competitive baromet- ric price leader." 3 ' Finally, we might expect that when the competitive baro- metric price leader's choice does not accurately reflect supply and demand conditions, the price he establishes either 86 Cf., Stigler, "The Kinky Oligopoly Demand Curve and Rigid Prices," Journal of Political Economy, vol. 55, no. 5, October, 1947, pp. 444-445; reprinted in The American Economic Associa- tion, Readings in Price Theory (Homewood, Illinois: Richmond D. Irwin, Inc., 1952), pp. 410- 439. Also, Markham, Jesse W., "The Nature and Significance of Price Leadership," American Economic Review, vol. 41, no. 5, December, 1951, pp. 891-905. 1,1 Stigler, "The Kinky Oligopoly Demand Curve . . .," p. 446. :,T Markham, op. cit., p. 897. [56 may not be followed or, if followed, may be modified considerably by a variety of nonprice concessions by other firms. The existence of more than a very few rivals, frequent changes of the price leaders, and frequent price or nonprice departures from the leader's announced price are inferential evidence that the barometric leader is of the competitive variety. Both economic theory and actual in- dustry experience suggest that price lead- ership in the California tomato canning industry is the competitive barometric type. For years, the industry's largest tomato processor was regarded by both growers and processors as the best quali- fied price leader and, in most seasons, set the price. In recent years, a second firm of comparable size emerged and has, on occasion, assumed the leadership role. While both of these firms are large, nei- ther derives its position as price leader because of its size in the sense of the dominant firm theory of price leadership. Furthermore, the identity of the leader has changed from time to time. When the established leader failed to play his part well (as judged by the rest of the industry), others temporarily assumed the role or the industry refused to follow closely. More recently, the firm which had been accepted as the price leader for the last few years announced early in November, 1956, that it would contract its 1957 crop needs at $20.00 per ton. A period of "wait and see" followed that announcement. A number of growers signed contracts at that price, but con- siderable grower resentment was ex- pressed because this was a $2.50 per ton drop from the 1956 crop price. Apparently, few canners followed the leader's price. Then, in early December, another firm announced that it would buy its requirements at the old price of $22.50 per ton. In the following weeks, most of the other canners followed that price in contracting their requirements. This behavior suggests that the price leadership is of the competitive baro- metric type. Another clue is the extent and forms of nonprice competition as discussed below. If the price leader approximated the dominant firm or the monopolistic baro- metric variety, we would expect (1) very little nonprice competition among buy- ers, and (2) if nonprice payments were offered growers, the price leader would take the lead in determining the number and size of such concessions just as he does in the case of price. But if price leadership is of the competitive baro- metric variety, we could expect the price followers to modify the leader's price substantially through nonprice competi- tion. The evidence on this score further supports the hypothesis that the price leadership policy in this industry ap- proximates more closely the competitive barometric model. Although early in the season a price leader sets a price which usually is fol- lowed by the rest of the industry, the followers often resort to a wide variety of nonprice competitive devices in procur- ing their supplies. The following are most common: 1. Waiver of picking box rent. One of the most frequently used forms of nonprice competition is the waiver of picking box rent. Practically all con- tracts provide for a charge of one cent for each picking box used by the grower each time it is used. But. as one buyer put it, "Whenever a canner finds his sup- ply a little short at the announced price, the first thing to go is the box rent." The elimination of box rent increases grow- ers' net returns about 45 cents a ton. Also, at such times, canners may forego charges for lost or damaged boxes and pallets. Usually the contract requires the grower to "pay the reasonable replace- ment cost to buyer of all boxes and pal- lets lost, damaged, or destroyed." One canner spells out this amount at 80 cents per box and $3.00 per pallet not re- turned. [57] The same firms do not always take the initiative in eliminating box rentals in "tight" years. In some cases, the leaders themselves are the first to make this con- cession, but apparently, most often, the medium and small firms take the initia- tive. In any case, once several firms elim- inate box rent, most of the others usually feel compelled to do likewise even if they have already signed contracts calling for such charges. 2. Hauling allowances. Another way in which canners frequently shade the price leader's announced price is to vary the amount of the hauling allowance given to growers. It is an industry prac- tice to quote prices f.o.b. the farm and to quote the same price to all growers re- gardless of their location. Under this system, buyers absorb the hauling cost. Often, canners do the hauling themselves. But most frequently they give the grower a hauling allowance and leave it to him either to do the hauling himself or to hire others to haul for him. In the latter case, the hauling allowance is ordinarily the same as that charged by the contract hauler. But occasionally when canners have difficulties getting their supplies at the going price, the allowance may exceed that amount. This practice is rare in most producing areas except in "tight" years. But in certain deficit producing areas such as Oakland-San Jose, where canning capacity always is greater than tomato production, the hauling allowances paid by many canners often exceed actual hauling costs. This appears to occur be- cause, while the price established by the price leader may accurately reflect over- all supply and demand conditions, it does not represent conditions in that area. It should be recognized that while growers in deficit producing areas may receive more than other growers, net costs to canners buying from them may be lower than for tomatoes they can acquire from other areas. 3. Payment tolerances. Payment tolerances for worm or mold damage and for other defects vary. Particularly in years when supply becomes short at the price announced by the price leader, some canners readily increase payment tolerances in their contracts or fail to enforce them at harvest time. Small can- ners seem to follow this practice most frequently, though once it becomes fairly widespread in a given year, most others are forced to do likewise. This practice may have the effect of increasing the net returns to some grow- ers by a dollar or more per ton. For ex- ample, in 1954 more than 98 per cent of the state's canning tomatoes had some mold damage; 27.4 per cent had between zero and 1 per cent, 64.7 per cent had between 1 and 5 per cent damage, and 6.1 per cent had between 5 and 10 per cent damage. In the same year, 8.3 per cent of all round tomatoes inspected had 6 per cent or more general defects. 4. Credit. Some processors find it convenient to assist growers by provid- ing them with preharvest credit — and oc- casionally with harvest credit — and tak- ing repayment at harvest time. The extent of this practice varies with competitive conditions. Nearly all canners used credit extension to growers as an aid in procur- ing supplies during World War II. It was still practiced extensively in the early postwar years, but nearly all medium and large canners report that they have used it less since then. Some canners, espe- cially those buying in the Oakland-San Jose area where competition for the available supply is always intense, have made use of this practice in recent years. A few small canners have apparently financed nearly all of their growers. Several representatives of firms indicated that they would like to get out of the "lending business" but, apparently, com- petition forced them to continue in it in order to keep especially good growers. 5. "Tie-in" arrangements. A par- ticular kind of nonprice concession is given to some prospective tomato grow- ers because of special competitive condi- [58 tions in other farm products. As few growers will raise tomatoes without a contract, the offer of a contract may itself be considered a nonprice concession in years when it is hard for some farmers to obtain them. Some growers are able to get tomato contracts in these years through a sort of tie-in selling arrange- ment. In these cases, the grower agrees to provide the canner with some other product if the canner will take the grow- er's tomato crop as well. The two crops most often tied in with tomatoes are peaches and asparagus. More than a third of the processors interviewed stated that they gave tomato contracts to peach or asparagus growers as an inducement to obtain the other crop. This practice often adds to the proces- sor's hauling costs. Of course, some of the growers so treated are located within the purchasing company's normal con- tracting areas, so the hauling distance for tomatoes is not inevitably increased. However, many peach growers who also grow tomatoes are located in the Marys- ville production area, and some com- panies would not expand their tomato purchasing so far northward were it not for the tied-in peach supply. Four can- ners specifically mentioned their Marys- ville peach-and-tomato growers in this light. The practice of giving a tomato con- tract to a grower in order to obtain his peaches is the result of two factors : ( 1 ) canning tomatoes are considered a good cash crop by northern California grow- ers, and thus a tomato contract can be used as an inducement; and (2) there usually is a tendency toward price com- petition among peach buyers which is frustrated by a clause in contracts they sign with the peach growers' bargaining association; the clause specifies that if a canner pays one member-grower a price higher than the price bargained for, he must pay all others the same price. Conse- 88 Stocking, G. W., and Mueller, "Business Reciprocity and the Size of Firms Business of the University of Chicago, vol. XXX, no. 2, April, 1957. pp. 73-95. quently, processors resort to this and other nonprice means of attracting peach growers. Although this practice is not a direct outgrowth of competitive condi- tions in the tomato industry, it is indica- tive of the nonprice considerations which at times are important in allocating re- sources of this and other agricultural in- dustries. In principle, it is comparable to some of the forms of reciprocal favors exchanged between industrial concerns.'" 6. Other services and concessions to growers. Quite apart from the peri- odic use of nonprice concessions men- tioned above, some canners continuously offer special inducements to "their" growers. Practically all canners will sell seeds and plants to growers who want them. Some firms offer technical assistance such as advice on crop rotation, disease control, irrigation, and fertilizer prac- tices; such services, however, have be- come less important over time. One processing firm has entomologists who periodically inspect its growers' crops and advise them on pest control. Others have "field days" at which they keep growers posted on new seed varieties and cultural practices. A few distribute monthly newsletters and other publica- tions of interest to the tomato growers. One canner carries on research to im- prove tomato varieties, and passes the findings on to his growers. This is done in part to control the quality of the raw product but also has the effect of helping his growers to attain superior yields. Such continuing services or conces- sions differ in their basic causes from the periodic nonprice concessions. The peri- odic concessions are prompted mainly by a disequilibrium of current supply and demand at the leader's announced price: the continuing concessions are prompted by longer-run considerations. Firms granting them believe they will gain greater selectivity in integrating with The Journal of [59 good growers. So, in effect, such conces- sions represent a continuing, though diffi- cult to quantify, premium over the price (including the periodic nonprice conces- sions) prevailing in a particular year. This distinction between the reasons for the various nonprice concessions is important. The periodic types give us significant clues as to the price leader- ship policy followed in this industry; the continuing ones do not. Long-run price concessions by some or all firms are con- sistent with any of the price leadership models discussed above. Pricing in the California canning tomato industry obviously cannot be like that found in some agricultural markets, e.g., the grain exchanges. There are not enough buyers to make complete inde- pendence of action possible. While per- fectly competitive behavior is thus ruled out by the structural characteristics of the industry, the preceding analysis sug- gests that the industry's price leadership policy is of the competitive barometric type. Under these conditions we may ex- pect results similar to those in competi- tive markets, even though they are not brought about in the same way and may seldom be identical to them in the short run. Prices in this industry do seem to ap- proximate what economists call effec- tively competitive levels. The price lead- er's role is limited mainly to that of act- ing as a barometer of competitive prices. The recent growth of a second large firm has intensified the buying rivalry that already existed in the industry. The existence of a quasi-bargaining associa- tion of growers has further tempered the market power of buyers. And the fact that few California tomato canners grow any of their own supplies suggests that the individual canner considers his sup- ply relatively elastic. This further sup- ports the hypothesis that price in this in- dustry is effectively competitive. IV. Some Concluding Observations on Grower-Processor Integration DISTRIBUTION OF INCOME BETWEEN PROCESSORS AND GROWERS California processing tomato growers and canners integrate some of their operations to achieve certain production and marketing economies. There are im- portant physical input-output relation- ships between the raw and processed product, and the structure of the market creates market uncertainties for both growers and canners. Thus, there are im- portant advantages in achieving a verti- cally integrated arrangement of some kind. But how does such integration affect the income positions of the inte- grating parties? We concluded that the prices received by growers and paid by processors in this industry depended on the relative bar- gaining position of growers vis-a-vis canners. If our analysis of the pricing policies in this industry is correct, grow- ers receive essentially competitive prices. The significant point to be emphasized here is that, if the market structure were different (for example, if growers were completely unorganized and if they sold to only a very few large canners), the income position of growers could be far different. It is the relative market power of the participants and not the mere ex- istence of a vertically integrated relation- ship that is the crucial determinant of farmer and processor incomes. Thus, the [60] only way to determine how farmers fare careful analysis of the market structure under an integrated relationship is by within which it exists. INCREASED INTEGRATION VS. DISINTEGRATION Another implication of the present study is that there are forces working not only toward further integration but toward disintegration as well. For ex- ample, because today's California tomato growers are specialists in their business, they often know more about proper pro- duction techniques than processors' field- men. California canners control very few production practices of growers. Further, processors no longer require growers to buy seeds or plants from them in order to control product quality. All processors have disintegrated from the plant business, as have most growers, and now several independent concerns grow practically all tomato plants and seeds for growers. Also, as California growers have be- come financially stronger, credit insti- tutions provide most of them with their credit needs. Practically all California tomato canners are doing less financing today than they did in the past. Canner-grown acreage comprises vir- tually none of the total today, largely because growers are producing such sat- isfactory crops that canners have little incentive to grow any of their own. It should be recognized that there is a variation in the degree of integration (that is, the number of grower decisions controlled) between California tomato growers and processors. Typically, can- ners' fieldmen give much more advice and assistance to new and less experi- enced growers. Similarly, processors are likely to exercise more rigid control over growers who are financially indebted to them than over others. This evidence indicates that there are forces working toward less integration as well as toward a greater degree of inte- gration between farmers and processors. In attempting to ascertain the degree of integration existing in an industry, the observer must not confuse all services provided by canners as forms of integra- tion. A distinction must be made between those services which are offered for pur- poses of economic integration and those which are simply nonprice payments to growers. For example, many canners originally supplied seeds to growers in order to control the quality of the raw product. But today canners supplying seeds do so as a service to growers. Thus, the reason for this act is no longer to integrate the activities of growers and processors in order to achieve better technical coordination, but rather it is part of the payment growers receive for their crops. VERTICAL INTEGRATION AND PRODUCTION STABILITY The argument has been made that ver- tical integration is a means for bringing about greater production stability in ag- riculture. It is true that vertical integra- tion may facilitate better adjustment of supply to changes in demand than a non- integrated marketing system depending entirely on price to perform this func- tion. But unless considerable horizontal concentration in processing exists as well, serious instability may still arise be- cause of the independent actions of processors. In part, it is such lack of con- centration at the national level that causes frequent overcontracting and un- dercontracting of vegetable acreages with consequent wide variations in farm out- put. For example, between 1945 arid 1956, California processing tomato acre- age varied, on the average, more than 25 [61] per cent from one year to the next. Thus, the degree of production stability found in a particular vertically integrated in- dustry may, like income distribution, depend on the degree of horizontal inte- gration as well. It is not our purpose here to disparage the importance and significance of grower-processor integration. Previous sections of this study have detailed rea- sons for this type of interfirm relation- ship that are important to both grower and processor. Rather, the purpose of this concluding section is to recommend caution in accepting the conclusion that certain important goals associated with production stability and with producer and processor income positions may be obtained solely through increasing the extent of grower-processor integration. Nor is the conclusion warranted that ir- reversible economic forces are at work making for increased integration; there are also forces at work encouraging dis- integration of certain grower-processor relationships. ACKNOWLEDGMENTS The authors express their appreciation to Varden Fuller, Professor of Agricultural Economics, Berkeley, for his assistance in formulating and initiating the research work reported in this bulle- tin; to Bruce J. Glassburner, Associate Professor of Economics, Davis, for his participation in the planning stages and in the processor and grower interviewing; to Howard J. Wilson, former Secretary-Manager of the California Tomato Growers Association, for his cooperation; to James N. Boles, Assistant Professor of Agricultural Economics, Berkeley, for his advice on calculations of average field-to-plant distances; to S. R. Whipple, Assistant Chief, California Bureau of Fruit and Vegetable Standardization, for his advice and cooperation regarding work on the production areas shown on the maps; to the following Farm Advisors for their cooperation in the study: Walter M. Anderson, Yuba County; John H. Lindt, Jr., Sutter; John N. Fiske, Napa; David M. Holmberg, Yolo; Stephen P. Carlson, Sacramento; Everett F. Nourse, Solano; John P. Underhill, San Joaquin; G. E. May, Stanislaus; Robert Harkens, Alameda; William S. Seyman, Santa Clara; Roy D. McCallum, San Benito; and A. A. Tavernetti, Monterey; and to all segments of the industry for their valuable advice and assistance. [62] APPENDIX A CALCULATION OF AVERAGE FIELD-TO-PLANT DISTANCES The information obtained from the large grower-sample and that supplied by the Farm Advisors in the 12 northern California counties made available all the data necessary for a description of the locational aspects of the industry; yet, a major problem was encountered in the analysis. Had the large sample been selected in accordance with standard statistical procedure, this difficulty would not have arisen. The sample would have been assumed to be representative of the universe of all growers, at least within certain limits. The large grower-sample could hardly be interpreted in this light in view of its limitations. However, there were at least two independent sources of data against which its accept- ability or reliability could be checked. One was the statistics published by the California Crop and Livestock Reporting Service on the acreage grown in each county. With the information received from the Farm Advisors, these 12 coun- ties were reclassified into 10 production areas (see page 33 and Appendix B), and the actual acreage included in each was estimated (table 17). Similarly, the sample data were organized on the basis of production areas, and the proportion of the true acreage in each area which was included in the sample was calcu- lated. The variation in this proportion from one production area to another was very great, ranging from a low of 28.9 per cent to a high of 84.8 per cent. A similarly large variation was found when these proportions were calculated on the basis of counties rather than production areas. A second check was provided by the number of acres purchased by each firm as reported in the interviews with proces- sors. 3 " The 29 firms included in the processor sample purchased almost nine- tenths of the acreage in the twelve-county area. A total of 11 other firms with 12 tomato processing plants were mentioned as destinations for grower acreage in the large grower-sample, and it was assumed that these 40 firms together accounted for all the acreage of canning tomatoes grown in the entire 12 counties (or 10 production areas). The 11 firms not in- cluded in the processor sample were all fairly small, and with some industry ad- vice, it was not difficult to estimate the total acreage each purchased. Thus, con- trol data were available for the acreage contracted by each firm, and a corre- sponding sample figure was obtained from the large grower-sample. Once again, the proportion of the true acreage included in the sample varied widely from firm to firm, ranging from 13.0 per cent to 73.6 per cent. The distance from each sample grow- er's acreage to the plant of its destination was certainly a reliable figure. (For multiplant firms, enough information was obtained through processor inter- views so that a reasonable allocation of the sample acreage could be made among individual plants.) However, any calcu- lation of average distances either for groups of plants or for combinations of production areas would have to be weighted by acreage, and if the sample acreage were used without refinement, the results would be affected by the dis- crepancies described above. No simple weighting of sample distances by the true i!l Throughout this report, reference is made to the purchase of acreage by processors. It should be noted that this does not imply outright purchase of land by canners but rather their contracting to buy tomatoes grown on that acreage. This terminology is widely used in the industry since to- mato contracts are not usually written on a tonnage basis but in terms of acreage. [63 area or company totals would suffice to compensate for these variations because the relative importance of each company was not constant from one area to another. This was made clear in the processor interviews as a few firms sup- plied detailed data not only on their total purchases but also on their contracting patterns within specific areas. Nor was it possible to expand the sample acreage figures in an "across the board" fashion based, for example, on the proportion by which each sample area total fell short of its actual area total because this ex- pansion usually violated the plant or company totals. Similarly, if the "correc- tion factor" were applied on a plant or company basis, area totals would be upset. To illustrate this problem, a sim- plified numerical example is presented in Appendix Table 1. If the sample acreage data shown in the table are expanded by rows to cor- rect for plant discrepancies (for example, the factor for the first row, Plant A, is 25/16 = 1.5625), a new problem results as shown in Appendix Table 2. Note in this table that although the totals for plants now agree with the actual plant totals, new discrepancies have arisen in the area totals. When the sample acreage data are expanded by columns to correct for area discrepancies (for example, the factor for the first column, Area 1, is 25/17 = 1.4705), the opposite result oc- curs; area totals are in agreement, but plant totals are in error as shown in Ap- pendix Table 3. Since the actual acreage contracted by each plant within each area was un- known, what was needed was some method by which the sample acreages could be expanded to estimates of these unknown universe figures. This would have to be accomplished without vio- lating either known plant totals or known area totals; that is, no discrepancies should remain in either row or column totals. The method chosen was linear pro- gramming with certain minor modifica- tions. For a few plants, there was definite knowledge that all their acreage was ob- tained from one production area; this was especially true for very small firms. Acreages destined for these plants were expanded to control totals inmmediately, and only the remaining plants — those for which there was a real choice of alloca- tions — were included in the program- ming problem. The dimensions of the problem were thus reduced from 10 areas and 49 plants to 9 areas and 45 plants. An infinite number of solutions can be found for linear programming problems; some criterion must be used to select the best one. In our particular problem, two solutions were obtained according to two alternative criteria. One was to assign the residual acreage in such a way as to minimize the over-all weighted distance from grower's field to plant; the other allocation maximized this distance. These solutions provided rough upper and lower limits on the variation in acreage patterns that might be present in the uni- verse. Consider as an example the simplified model previously presented for four areas and six plants. Here, the problem is to assign the residual acreage to indi- vidual cells in Appendix Table 4. Corre- sponding to that table is another one, Appendix Table 5, which shows the dis- tance from each area to each plant. If Appendix Table 4 is to have indi- vidual cell entries, Xij, where the i sub- script refers to plants and the j subscript to areas, and Appendix Table 5 has en- tries, Aij, with subscripts similarly de- fined, the problem then is to specify the Xij such that: (1) ±LJ=1 6 4 /=1 3=1 is a minimum and [64] (2) i=i ;=i 6 4 is a maximum, subject, of course, to the constraints: (the given total for the ith plant (the given total for the jth area) I« ^ i: x, = t x 3 . 4 ° t-l 7=1 In this hypothetical example, the resid- ual acreage allocations turned out to be those shown in Appendix Table 6. When the allocations shown in Appen- dix Table 6 are combined with the orig- inal sample data, we obtain as the two (maximum and minimum) estimates of universe values those shown in Appendix Table 7. In this example, the over-all average weighted distance from grower's field to plant is 40.06 miles under the minimum acreage estimates and 47.85 using the maximum estimates. By comparison, in our actual problem, the minimum and maximum distances were 29.93 and 37.86 miles, respectively. These alternate solutions, which pro- vided rough upper and lower limits on the variation in acreage patterns that might be present in the universe, were not intended to represent the most ex- 40 For an exposition of the particular method Solving the Transportation Problem (The Rand P-895.) treme and unrealistic possibilities; rather, they were meant to be reasonable bounds on the probable variation. For this reason, the programming model was not permitted to assign residual acreage to all cells with complete freedom. Cer- tain cells or extremely unlikely alloca- tions were ruled out on the basis of in- formation obtained from the processor sample. For example, Stockton firms do not purchase tomatoes in the San Jose area, and to have permitted them to do so in the program would have introduced unreal and unnecessary variation. This restriction was reflected in the hypotheti- cal example just treated where, under the maximum allocation, Area 4 was arbi- trarily excluded as a possible source of supply for Plants A, B, and C. This ex- clusion was not necessary under the mini- mum program because these particular cells represent such inefficient purchasing patterns that they are not used anyway. All distances referred to in this report reflect the actual location of growers' acreage as observed in the large sample. Calculations of average distances, how- ever, were weighted by acreage; and in all these instances, three estimates were made. One used the allocation of acreage as determined by the "minimum dis- tance" program. Another used the acre- age assignment given by the "maximum distance" program. A third distribution of acreage was selected as an intermedi- ate estimate on a somewhat arbitrary basis. This would perhaps come closest to approximating the true situation in the industry, and it incorporates infor- mation from many sources — chief among them the processor interviews. This esti- mate is generally much closer to the minimum than to the maximum, which is what we should intuitively expect. In general, where only one distance figure is quoted in this report, it is this inter- mediate figure. When a range is shown in used, see Ford, L. R., Jr., and D. R. Fulkerson, Corporation: June. 1956). 15p. Processed. (Paper I 65 1 parentheses following this figure, the limits refer to the estimates derived from the minimum and maximum acreage programs. Any statements referring to differences between areas or groups of plants have been based not only on the intermediate but on the extreme calcula- tions as well. That is to say, a difference was not considered significant unless it was apparent in all three sets of estimates. TABLES FOR APPENDIX A Appendix Table 1 Areas Sample total Actual total Dis- Plants 1 2 3 4 crepancy: actual minus Sample acreage sample A 5 3 4 1 3 1 9 8 3 2 7 6 2 8 6 6 9 9 4 4 6 16 19 13 13 23 22 25 30 40 30 50 35 9 B 11 C 27 D 17 E 27 F 13 Sample total 17 35 40 14 106 210 Actual total 25 80 65 40 Discrepancy : actual minus sample 8 45 25 26 104 Appendix Table 2 Areas Adjusted total Actual total Dis- Plants 1 2 3 4 crepancy : actual minus Adjusted acreage (plant basis) adjusted A 8 4 12 2 6 1 14 13 9 5 15 10 3 13 19 14 20 14 9 9 10 25 30 40 30 50 35 25 30 40 30 50 35 o B o C o D o E o F o Adjusted total 33 66 83 28 210 Actual total 25 80 65 40 oin Discrepancy : actual minus adjusted -8 14 -18 12 [66] i Append ix Table 3 Areas Adjusted total Actual total Dis- Plants 1 2 3 4 crepancy: actual minus Adjusted acreage (area basis) adjusted A 7 4 6 2 4 2 21 18 7 4 16 14 3 12 10 10 15 15 11 11 18 31 34 23 27 46 49 25 30 40 30 50 35 -6 B -4 C D E F 17 3 4 -14 Adjusted total 25 80 65 40 210 210 Actual total 25 80 65 40 Discrepancy : actual minus adjusted Appendix Table 4 Plants Areas Residual acreage 1 2 3 4 to be assigned A 9 B 11 C 27 D 17 E 27 F 13 Residual acreage to be assigned 8 45 25 26 104 Appendix Table 5 Areas Plants 1 2 3 4 Distance (miles) A 42 50 70 100 110 125 16 35 40 70 80 95 25 10 20 25 50 50 95 B 70 C 25 D E F 45 30 20 [67] Appendix Table 6 Areas Total Areas Plants 1 2 3 4 1 2 3 4 Total Allocation of acreage (minimum basis) Allocation of acreage (maximum basis) A 8 9 3 27 6 17 8 13 13 9 11 27 17 27 13 3 5 11 11 15 8 9 16 17 9 9 B 11 c 27 D 17 E F 27 13 Total 8 45 25 26 104 8 45 25 26 104 Appendix Table 7 Areas Total Areas Plants 1 2 3 4 1 2 3 4 Total Acreage estimates (minimum) Acreage estimates (maximum) A 5 11 4 1 3 1 18 11 30 2 13 6 2 8 6 23 17 9 4 17 19 25 30 40 30 50 35 5 3 4 1 6 6 9 19 14 2 22 14 11 8 22 6 9 9 21 13 6 25 B 30 C 40 D 30 E 50 35 F Total 25 80 65 40 210 25 80 65 40 210 [68] APPENDIX B PRODUCTION AREAS The major producing regions for can- ning tomatoes in northern California are shown in detail on the following maps. For each area, there is a pair of maps, one indicating the state inspection dis- trict and the other showing the corre- sponding production area (or combina- tion of areas) as used in this study. The production areas were determined by the location of the large-sample growers' acreage. Each state district is comprised of several inspection stations as indicated on the maps. The tomatoes inspected at each station are usually grown on nearby acreage. In some instances, the state dis- trict is larger than the corresponding production area because it includes in- spection stations located in counties that were excluded from this study. These counties are indicated by a dotted line while the 12 counties included in the study are circumscribed by solid lines. The production areas are shown in the form of dot maps, each dot representing 100 acres of canning tomatoes. The dis- tribution of these dots (i.e., the location pattern of the acreage) is based on infor- mation from the large grower-sample and should be considered approximate. How- ever, the number of dots (i.e., the actual acreage) is not a sample figure but an estimate of the true acreage in each area based on the 1956 county acreages pub- lished by the California Crop and Live- stock Reporting Service (Table 17). There follows a brief description of each production area, a list of the inspection points for the corresponding state dis- trict, and their maps. 69 Production Area 1 (Marysville). This area is a strip of land ranging north-south along the Feather River about 30 miles in length and 7 miles in width. It extends from Live Oak on the north down to the "peach bowl" region of Marysville and Yuba City and on past Nicolaus to Verona. All the large-sample growers in Yuba and Sutter counties were included in this production area. The corresponding state district in- cludes inspection points at: Marysville, Conant Corners, Wheatland, Oroville, Sasaki, Yuba City, Oswald, Tudor, Gridley, Nicolaus, Robbins, and Rio Oso. STATE DISTRICT BUTTE Wheatland Conant Corners ,RobbinsJf Ri ? 0so Nicolaus PRODUCTION AREA Production Area 1 (Marysville) [70] Production Area 2 (Napa). This area is a narrow strip of land about 4 miles wide and 15 miles long which extends along the Napa River in its northwest-southeast course between St. Helena and Napa. All the large-sample growers in Napa County were included in this production area. Production Area 3. (Sacramento). This area includes all producing re- gions in Yolo County except for the one along the Sacramento River in the vicinity of Clarksburg; that is, it em- braces the Woodland, Esparto, Win- ters, and Davis regions. It also in- cludes the Dixon region of Solano County. In addition, it contains all producing regions in Sacramento County except for the Sacramento River area; that is, it includes the Elk Grove region along the Cosumnes River as well as the Natomas region just north of the city of Sacramento and a region called the "pocket" just south of the city. At its extremes, this large production area ranges 50 miles from east to west and 30 miles from north to south although the latter nar- rows considerably in and around Sac- ramento. The state district corresponding to Production Areas 2 and 3 includes in- spection points at: Sacramento, Elk- horn, Woodland, Madison, Knights Landing, Dixon, and Napa. PRODUCTION AREA STATE DISTRICT Production Areas 2 and 3 (Napa and Sacramento) [71] Production Area 4 (River). This is a crescent-shaped area about 20 miles wide and 35 miles long extending northeast to southwest along the Sac- ramento River. It includes the Sacra- mento River region of Sacramento County from Freeport southwest to Antioch. It also includes the Yolo County producing region along the Sacramento River in the vicinity of Clarksburg. In addition, it contains the Rio Vista (or Liberty Island) region of Solano County and the Thornton region of San Joaquin County. The corresponding state district in- cludes inspection points at: Walnut Grove, Clarksburg, Courtland, Liberty Island, Hastings, Thornton, Staten Island, Montezuma, Antioch, Bridge- head, and Isleton. STATE DISTRICT PRODUCTION AREA Production Area 4 (River) 72 | Production Area 5 (Stockton). This area, which extends about 30 miles from north to south and 25 miles east to west, contains all producing regions within San Joaquin County ex- cept those around Thornton and Tracy; that is, it includes the land around Lodi, Roberts Island, Stockton, Linden, Manteca, and Ripon. The corresponding state district in- cludes inspection points at: Stockton, Linden, Manteca, and Lodi. STATE DISTRICT PRODUCTION AREA SAN »Manteca JOAQUIN Production Area 5 (Stockton) [73 Production Area 6 (Tracy). This area includes the Tracy and Union Island producing regions of San Joa- quin County. It extends for about 20 miles north-south and 15 miles east- west. The corresponding state district in- cludes inspection points at: Tracy, Union Island, Alves, Banta, and Brent- wood. STATE DISTRICT PRODUCTION AREA Brentwood CONTRA COSTA Alves* m •Banta Tracy Production Area 6 (Tracy) [74 Production Area 7 (Westside). All the large-sample growers in Stanislaus County were included in this produc- tion area. Most of them are located on a narrow strip of land about 7 miles wide which extends about 25 miles from northwest to southeast along Highway 33 (the Westside Highway) between Vernalis and Newman. It is bounded on the west by the Delta Mendota Canal and on the east by the San Joaquin River. There are also a few scattered growers in the eastern part of Stanislaus County who are in- cluded in this production area. The corresponding state district in- cludes inspections points at : Westside, Patterson, Rhodes, Westley, Gustine, Modesto, McHenry, Escalon, Oakdale, and Riverbank. STATE DISTRICT PRODUCTION AREA \ ...} Production Area 7 (Westside) [75 Production Area 8 (Oakland-San Jose). This area is in the southern part of Alameda County and northern Santa Clara County. It extends about 25 miles north-south and 15 miles east- west. It includes all producing regions of Alameda County; that is, the area around Pleasanton, Centerville, Mt. Eden, and Warm Springs. It also in- cludes the producing region around San Jose in northern Santa Clara County. Production Area 9 (Gilroy-Hollis- ter). This area includes the Gilroy producing region of Santa Clara County and all of San Benito County. There are three producing regions in San Benito, all in the northern part of the county in the vicinity of Hollister, namely, Paicines, San Juan Bautista, and the Bolsa. This production area extends 20 miles from north to south and 15 miles from east to west. The state district corresponding to Production Areas 8 and 9 includes in- spection points at: Oakland, Berkeley, Dublin, Centerville, Cupertino, Decoto, Fruitvale, Martinez, Hayward, Walnut Creek, San Jose, Sunnyvale, Santa Clara, Hollister, and Gilroy. fH j" Martinez . *-...., Walnut Creek \ Berkeley'C?S. * / Oakland/.^ CONTRA COSTA Fruitvale • Hayward • Decoto • Centerville • STATE DISTRICT PRODUCTION AREA Production Areas 8 and 9 (Oakland-San Jose and Gilroy-Hollister) 76] Production Area 10 (Monterey). This production area is a narrow strip of land about 6 miles wide which ex- tends about 45 miles from Salinas to below King City following the course of the Salinas River. All large-sample growers in Monterey County were in- cluded in this area. The corresponding state district in- cludes inspection points at: Salinas, King City, Soledad, and Watsonville. STATE DISTRICT PRODUCTION AREA SANTA *•••• s CRUZ Watsonville\ Production Area 10 (Monterey) iJm-10 f '59(A268)JF CONTENTS Page I. Nature and scope of the study 4 What is grower-processor integration? 4 Purpose of study 4 Theoretical bases of vertical integration 5 Sources of information 8 II. Structural characteristics of the California tomato canning industry 9 Characteristics of the demand structure for California canning tomatoes 10 Market outlets for processed products 10 Nature of the processing segment of the industry 13 Demand for processing tomatoes at the farm level 23 Characteristics of the supply structure for California canning tomatoes 25 Production of tomatoes for processing 27 Characteristics of the growing enterprise for California canning tomatoes .... 29 III. Grower-processor relationships 41 Factors affecting interdependence of grower and processor income positions. . . 41 Total quantity of raw product 41 Location of supply 43 Right kind of product 45 Timing of deliveries 46 Grower-processor integration 47 The role of forward buying 47 Experience with forward buying 48 Processor integration through ownership 53 Pricing policy in procuring tomatoes 54 The policy of price leadership 54 Factors conducive to price leadership policy 55 The theory of price leadership 56 IV. Concluding observations on grower-processor integration 60 Distribution of income between processors and growers 60 Increased integration versus disintegration 61 Vertical integration and production stability 61 Appendix A: Calculation of average field-to-plant distances 63 Appendix B: Production areas 69 You* Consider"*^ Future in Agricultural Economics Agricultural economics applies SCIENCE to the BUSINESS OF FARMING ... to the marketing of farm products, to the use of agri- cultural and range resources. If agriculture is to continue as an important segment of our na- tional economy, farmers must be adequately trained in the business of farming. The University of California's course of study in agricul- tural economics is a step toward that goal. The curriculum . . . presented on the Davis campus, places major emphasis on Farm Management . . . but also provides instruction in Marketing, Co-operative Marketing, Agricultural Finance, Policy, and related subjects. Supplementary work may also be taken in such branches of agriculture as Agronomy, Animal Husbandry, Pomology, Agricultural Engineering, and the like. The faculty ... is comprised of trained, experienced economists, many with national and international reputations in their fields. The staff is active in service and research work in all of the Western States. Job opportunities . . . can best be understood by pointing to positions now occupied by graduates. The largest percentage are farmers. Other lines of endeavor include: Farm Managers ■ Credit work • Farmer Organizations Marketing Organizations • Agricultural Extension work State and Federal Departments of Agriculture work College teaching and research • High school teaching For more it if ormdtion: Write to the Department of Agricultural Economics, University of California, Davis. or: See your University of California Farm Advisor for college entrance requirements.