Economic Issues for RaisinsJanuary 10, 2018

Fresno, California

Prepared by Daniel A. Sumner William A. Matthews and Donald Stewart

University of California Agricultural Issues Center

Presented by William Matthews and Donald Stewart

UC Agricultural Issues Center

AIC is a UC ANR statewide program,

based at UC Davis for 30 years

• Areas of Research:– International markets– Pests and diseases– Research and innovation – Resource, including water pressures– Environmental concerns – Climate change adaptation and policy– Farm and rural incomes– Commodity and food demand and

markets– Farm supply and costs– Food security

• Website:www.http://aic.ucdavis.edu/

AIC MissionThe University of California (UC) Agricultural Issues Center (AIC) conducts objective applied research to foster more informed decisions on vital agricultural issues of importance to California.

The issues are often global, but we emphasize agriculture, food and resource implications for California.

The audience for AIC research and outreach includes decision makers in agriculture the food system and government, scholars and students, journalists and the general public.

AIC just recently started administering the UC Cost and Returns Study Program

Farm Costs and Return Studies

• Archived Cost and Return Studies go back to early 20th

Century• Dr. Karen Klonsky directed cost and return study program

for 30 years.• Cost and return study program joined the UC AIC in 2015

Website: https://coststudies.ucdavis.edu

Cost Studies Website: http://coststudies.ucdavis.edu/

SAMPLE COSTS TO ESTABLISH A VINEYARD AND PRODUCE DRY-ON-VINE RAISINS

OPEN GABLE TRELLIS SYSTEMMain Authors

Matthew Fidelibus UCCE Viticulture Specialist, Kearney Agricultural Center, Parlier, CA.Allison Ferry UCCE Farm Advisor, Viticulture, Tulare CountyLindsay Jordan UCCE Farm Advisor, Viticulture, Madera, Merced and Mariposa CountiesGeorge Zhuang UCCE Farm Advisor, Viticulture, Fresno County

Users of Cost Studies

• Growers, Farm Management Companies • Crop Commissions/Associations/Cooperatives• Industry Representatives (Chemical Companies, Manufacturers)• Lending Agencies• University Staff and Students• Government Agencies• Worldwide Interest

• Cost Studies Website: 1.3 Million downloads in 2016

Contributing Cooperators

• UC Cooperative Extension Advisors and Specialists (main authors)• Growers and Processors• Industry Representatives

– Agricultural Lenders– Chemical Companies– Equipment Manufacturers– Labor Contractors, Farm Management Companies– Custom Services Providers (i.e. Harvesting Companies)

DOV-Raisin Cost ComparisonOverhead Trellis System Across Years

Non-machine labor $/hour-2003 11.02 Yield tons/acre 5.0Non-machine labor $/hour-2016 16.68 Yield tons/acre 5.0

2003 2016Operations-Non-Machine Labor $/acre Hrs/acre $/acre Hrs/acrePrune 193 17.5 400 24.0Tie Canes 88 8.0 234 14.0Shoot Thin/Trunk Sucker 99 9.0 200 12.0Shoot Positioning 77 7.0 167 10.0Total Labor Non-Machine 586 53.2 1,240 74.3

DOV-Raisin ComparisonVineyard Establishment

Costs Per Acre

Annual Capital

RecoveryTotal for 80 Acres

Vineyard Establishment-OHTS 13,994 833 1,119,520

Vineyard Establishment-OGTS 13,412 798 1,072,960

DOV-Raisin Cost ComparisonVineyard Yield Across Trellis Systems

Yield(tons/acre)

Yield ($/acre)

Vineyard-OHTS 5.00 8,000

Vineyard-OGTS 4.00 6,400

DOV-Raisin Ranging AnalysisRange of Returns per Acre in San Joaquin Valley-

Using Open Gable Trellis System-2016YIELD (tons/acre)

PRICE ($/ton) 3 3.5 4 4.5 51,150.00 -1,121 -590 -57 476* 1,0081,300.00 -671 -65 543 1,151 1,7581,450.00 -221 460 1,143 1,826 2,5081,600.00 229 985 1,743 2,501 3,2581,750.00 679* 1,510 2,343 3,176 4,0081,900.00 1,129* 2,035 2,943 3,851 4,758

*2017 Announced RBA Field Price ($/ton) 1,800

Future Regulated California Minimum Wage Rate and Overtime Rate

Minimum Wage Overtime Phase-InYear Wage (% Increase) Per Week Per Week±2017 10.5 5.0‡ 60 na2018 11 4.8 60 na2019 12 9.0 55 52020 13 8.3 50 102021 14 7.7 45 152022 15 7.1 40 20

Ref: Laura Tourte, (Lettuce, 2017)† For employers with 26 or more employees.‡ Increase in minimum wage from 2016 to 2017.± Assuming a 60-hour work week and no other adjustments.

Utilization Share of California Raisin Type Grape Production

0%10%20%30%40%50%60%70%80%90%

100%

1980 1990 2000 2016

Shar

e of

Rai

sin

Prod

uctio

n

Crushed for Wine Sold as Fresh Grapes Canned Dried

Yield per Acre and Total Production of California Raisins (Dry Basis)

0.00

0.50

1.00

1.50

2.00

2.50

0

50

100

150

200

250

300

350

400

450

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rai

sin

Yie

ld (T

ons p

er A

cre)

Rai

sin

Prod

uctio

n (1

,000

Ton

s)

Volume of Production Yields tons/acre (dry basis)

Price and Yield per Acre for California Raisins (Dry Basis)

0.00

0.50

1.00

1.50

2.00

2.50

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rai

sin

Yie

ld (T

ons p

er A

cre

dry

basi

s)

Rai

sin

Pric

e pe

r Ton

(Dry

Bas

is)

($ per ton) Yields tons/acre (dry basis)

Total Revenue and Bearing Acres for California Raisins

160

170

180

190

200

210

220

230

240

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Tota

l Bea

ring

Acr

es (i

n 1,

000

acre

s)

Tota

l Rai

sin

Rev

enue

(in

$mill

ion)

Total Revenue Bearing Acres

Share of Production of California Raisins to Domestic and Export Markets

0%10%20%30%40%50%60%70%80%90%

100%

200

7/08

200

8/09

200

9/10

201

0/11

201

1/12

201

2/13

201

3/14

201

4/15

201

5/16

201

6/17

Exports Domestic Use

Value and Volume of California Raisin Exports

90

100

110

120

130

140

150

160

170

$125

$175

$225

$275

$325

$375

$425

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Volu

me

of E

xpor

ts (i

n 1,

000

MTs

)

Valu

e of

Exp

orts

(in

$mill

ion)

Value Volume

Volume of Exports by Global Region

0

10

20

30

40

50

60

70

80

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Volu

me

of E

xpor

ts (1

,000

MTs

) EU Asia Canada and Mexico Rest of World

Volume of Exports to Top Destination Countries in Asia

0

5

10

15

20

25

2000 2006 2012 2016

Volu

me

of E

xpor

ts (1

,000

MTs

) Japan China/HK TaiwanKorea Singapore

Demand in Asia depends on economic growth driving markets, but markets are only useful for

California crops if the markets are open

Consider the Korean-U.S. Free Trade Agreement that improved access to the worlds 11th largest economyThe agreement came into force just in 2012 and is allowing US products to compete with those from the many other places that have FTAs with Korea.

KORUS-FTA access improvement for grapes

Grape Product Base Rate FTA Terms

Fresh Grapes 45% Straight line decline to duty free at year 17 (2028)

Raisins 21% Duty free year 1(Jan 1, 2012)

Wine 15% Duty free year 1(Jan 1, 2012)

Interest Rates, Credit and Labor

Year Operating Cost Interest Rate Capital Recovery Rate

2011 5.75 5.75

2016 4.75 3.75

• Low interest rates and more credit availability, means lower capital for establishment• Our cost and returns studies have documented declines in interest rates for both

operating capital and capital recovery (land prep, trees, irrigation etc. )

• The rate of return required for a good investment is lower as cost of capital is lower.• At the same time labor costs have risen, but raisins have lower shares of hired labor

costs compared to other tree and vine crops and capital intensive vegetables and labor regulations in California are driving cost higher over the next 5 years.

Source: UC AIC Cost and Returns Studies, Almond Orchard Establishment Studies

Interest Rates Have Declined Substantially Over Past 20 YearsLows in the past two years. It is hard to see rates lower, leaving only up side risk for the cost of capital. This reminds us of Paul Rhode’s explanation of the expansion of California trees and vines in the early 20th Century

0

1

2

3

4

5

6

7

8

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Inte

rest

Rat

e (P

erce

nt)

10-Year Treasury Moody's AAA Corporate Bond

Farm Bill, Commodity Subsidies and Raisin Grapes

• Leaders of Agriculture Committees in Congress say the new farm bill is coming in early 2018.

• Crop insurance and insurance-style programs have emerged as central

1. Subsidies help crops compete for land and water (still some upland cotton and lots of rice in California)

2. Crop insurance subsidy makes eligible crops more attractive to bankers3. Subsidy By increasing supply of feed crops, insurance and other subsidy causes a bit

more use in feeding rations4. Dairy does have a subsidy program that may encourage more cows, but more for

small farms in the east than big farms in the west.

Federal Farm Commodity Subsidy as a Percent of Value(Grapes less than 1% from crop insurance)

0%

10%

20%

30%

40%

50%

60%

Cotton Peanuts Rice

Vine crops used to claim little federal farm subsidy

• Trade and domestic promotion paid with taxpayer support and checkoff funds

• R&D programs• Nutrition programs, including school lunch provide demand support• Environmental cost share programs are available• But these are small in relation to size of the industry

• But now vine crops also use crop insurance subsidy extensively. These programs are much more like a production subsidy like the program grains, oilseeds and cotton

Does crop insurance subsidy affect what is grown, where and by how much? Yes, but no data yet for grapes.

• The premium subsidy has two potential impacts on area planted to a specific crop:1. Crop insurance subsidy much like any production subsidy. This

production impact occurs even with risk neutral farmers.2. Also, crop insurance subsidy stimulates more insurance and even

more of the crop with subsidized insurance.

Econometric estimation using acreage and insurance data for national field crops shows large and significant impacts of crop insurance subsidy on cropping patterns and choice across crop. (Yu, Smith Sumner (2107) Research on trees, vines, vegetables and other specialty crops is underway

Net Acres Insured(Thousands) Liability Premium

Subsidy

CAT Total ($ Millions) ($ Millions)

Almonds 257 749 3,578 81

Grapes 217 466 1,242 24Rice 51 496 507 9

Tomatoes 10 246 580 7

Calif. total 6,653 9,982 290

CA share of U.S. 2.3% 9.9% 5.0%

Source: Risk Management Agency, USDA

Crop Insurance in California: Acres Insured, Liabilities, and Premium Subsidy, 2016

Thank youaic.ucdavis.edu