Regional Trade Patterns: The Impact of Voluntary Food Safety Standards

Regional Trade Patterns: The Impact of VoluntaryFood Safety Standards

Mollie Woods,1 Suzanne Thornsbury,2 Kellie Curry Raper3

and Richard N. Weldon4

1Research Specialist, 211A Agriculture Hall, Department of AgriculturalEconomics, Michigan State University, East Lansing, Michigan 48824

(phone: 517-353-4380; e-mail: [email protected]).2Assistant Professor, Department of Agricultural Economics,

Michigan State University, Michigan.3Assistant Professor, Department of Agricultural Economics,

Michigan State University, Michigan.4Associate Professor, International Agricultural Trade and Policy Center, Department

of Food and Resource Economics, University of Florida, Florida.

Good Agricultural Practices (GAPs) are aimed at reducing farm level microbial contamination of freshproduce and include both fixed and variable cost components. We empirically analyze three scenariosof voluntary food safety practice adoption and third-party certification in the North American freshstrawberry market using a spatial equilibrium model. The model incorporates GAPs adoption acrossproduction regions and across farm size. Transportation and product shrinkage, which are criticalfactors in inter-regional trade of perishable products, are also included. Regional trade pattern impactsare assessed and used to draw inferences for pressure on market structure. Results indicate thatcompetitive pressures are greatest on those regions with mid-size volumes that are not able to takeadvantage of close market proximity, yet still must absorb additional costs. This suggests that adoptionof food safety practices, even if voluntary, is likely to accelerate what is already a bi-modal structurefor this industry.

Les bonnes pratiques agricoles (BPA) visent a reduire la contamination microbienne des produits fraisa la ferme et comprennent des couts fixes et des couts variables. Nous avons effectue, a l’aide d’unmodele d’equilibre spatial, l’analyse empirique de trois scenarios d’adoption volontaire de pratiques desecurite alimentaire et de certification par un tiers dans le marche nord-americain des fraises fraıches.Le modele integre l’adoption de BPA dans toutes les regions productrices et les fermes de toute taille.Le transport et le fletrissement, qui constituent des facteurs critiques dans le commerce interregionaldes denrees perissables, ont aussi ete inclus. Nous avons evalue les repercussions de la structure decommerce regional et les avons utilisees pour tirer des conclusions sur la pression exercee sur la structurede marche. Les resultats ont indique que les pressions concurrentielles etaient plus importantes sur lesregions qui produisent des volumes moyens, qui ne peuvent tirer profit des marches de proximite, maisqui doivent pourtant absorber des couts additionnels. Ces resultats autorisent a penser que l’adoption,meme volontaire, de pratiques de securite alimentaire contribuera probablement a accelerer ce que estdeja une structure bimodale de l’industrie.

INTRODUCTION

Food safety has become an ever-present issue in fresh produce supply chains, due inpart to increasing consumer awareness. Retail produce buyers ranked food safety as the

Canadian Journal of Agricultural Economics 54 (2006) 531–553

531

532 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

third most important industry challenge, placing it above both attracting shoppers toproduce and quality of the product being sold (Heller 2002). Heightened awareness offood safety issues at every link in the supply chain has created pressure to innovate.Much of the previous literature has focused on technological innovations, such as UPCor RFID use in the linkages between shipping, wholesale, and retail (e.g., Hooker et al1999). Technology has also evolved at the producer level, where growers have adoptednew practices and equipment to limit potential microbial contamination.

We examine adoption of voluntary (i.e., not legislatively mandated) food safety prac-tices by growers in the North American fresh strawberry market. Specifically, we examinethe implications for trading patterns and, ultimately, for market structure as firms absorbthe cost of adoption. Fresh strawberries are widely grown in North America by a mix oflarge and small farms and are often consumed with minimal processing. Thus, they aremore susceptible to transmitting contamination at the farm or first handler level com-pared with produce that is processed (Primuslabs 1998; Richards and Patterson 1999). Infact, fresh strawberries have been implicated in several cases of foodborne illness in recentyears, resulting in relationship changes between producers and retailers. The strawberryproduction sector is currently bimodal in structure with California, Florida, and BajaMexico as high volume production regions dominated by large producers. Numerousother regions supply fresh strawberries, but with lower overall volumes predominantlyproduced by smaller firms. We use a spatial equilibrium model of the North Americanfresh strawberry market to empirically analyze three different scenarios of food safetypractice adoption and third-party certification. Empirical results are used to examineeach scenario’s impact on regional trade patterns, drawing inferences for pressure onmarket structure.

In each scenario, all fresh strawberry producers adopt Good Agricultural Practices(GAPs). Costs incurred by individual firms include fixed and variable components asso-ciated with the adoption of specific practices. While large and small firms will both incurthese costs, GAPs will be relatively more expensive for small firms to adopt since the fixedcost component is spread over fewer units. Thus, we anticipate that high volume pro-duction regions will become relatively more competitive than small volume productionregions. Scenario 1 results are driven by the assumption that per pound costs of adoptionare higher for smaller firms.

Third-party certification of food safety practices is one way firms can signal adop-tion of new practices to their buyers. In Scenario 2, both large and small producers havethe opportunity for third-party certification of on-farm food safety practices, but onlyproducers in the high volume production regions of California, Florida, and Baja canafford the additional cost to do so. Since certification provides a signal of productionpractices to consumers, demand in this scenario relaxes the assumption of consumer ho-mogeneity, allowing differentiation between certified and noncertified fresh strawberries,with 30% of all consumers purchasing only certified product. The market for fresh straw-berries then becomes segmented with separate markets for noncertified strawberries andcertified strawberries. We expect that as large-volume regions exclusively supply certifiedberries to all types of consumers, shifts in trade patterns will occur, especially among thehighest cost producers of certified berries.

Recognizing that the distribution of large and small firms is not perfectly correlatedwith high and low volume production regions, Scenario 3 allows certification of some firmsto occur across production regions. In low volume production regions, some producers

REGIONAL TRADE PATTERNS 533

may become certified, while in high volume production regions, not all producers willchoose to become certified. Scenario 3 distinguishes between demand for certified andnoncertified fresh strawberries, as does Scenario 2. We anticipate that location advantageswill allow some of the low volume production regions to now increase supply to nearbygeographic regions, despite cost of certification.

FOOD SAFETY STANDARDS

The plethora of food safety standards facing fresh produce growers is complex andoften bewildering. A mixture of public, private, mandatory, and voluntary rules provideoverlapping, and sometimes conflicting, guidelines. An individual grower’s incentivesto adopt any set of standards arises from a combination of regulatory and market-driven forces (Segerson 1999). Both positive incentives (e.g., market share gain, decreasedliability) and negative incentives (e.g., threat of lawsuit, loss of market share) exist inthis system. Similar motivators are identified for grocery retailers, including capture ofincreased profit margins, stopping the erosion of margins (especially when due to a specificoutbreak), and the fear of or response to legal challenge (Henson and Caswell 1999).

When food safety guidelines are mandatory, firm decision-making implies that com-pliance results in favorable cost-benefit trade-offs or the firm exits the industry.1 Hookeret al (2002) identified economies of both scale and scope in Hazard Analysis and CriticalControl Point (HACCP) adoption with higher compliance costs for small firms. Muth etal (2004) found economies of scale in HACCP adoption in U.S. meat slaughter but notin meat processing. Though HACCP adoption is not mandatory in the EU, it is oftenstrongly encouraged. Henson and Holt (2000) found determinants of voluntary HACCPadoption in U.K.’s dairy sector to be correlated with firm size, market orientation orproduct type, internal efficiency and good practice in the firm.

The U.S. National Good Agricultural Practices program was developed in 1999 asa set of voluntary standards to reduce the potential for microbial contamination at theproducer and first-handler level. GAPs are firm-level process standards which addresson-farm food safety issues through a set of practices developed by USDA. Some examplesinclude: providing a clean, pest-free area for container storage from year to year; providingbathroom facilities for farm workers or consumers who visit the farm; and obtaining asafe, clean water source for overhead irrigation.

An increasing number of food retailers feel that public food safety standards, whethermandatory or voluntary, fail to provide the level of assurance demanded by their cus-tomers; thus, many turn to private standards (Henson and Traill 1993). Following theU.K.’s BSE outbreak, nearly all food retailers developed mandatory guidelines whichbuilt onto the voluntary guidelines most producers were already following (Bredahl andNormile 2001). Thus, for U.K. meat producers, compliance with private retail standards isrequired for market participation. Often, specific standards and private standard compli-ance costs are not public information. Disparate or exceptionally high compliance costswould prohibit some firms from entering the marketplace and would cause still others toexit.

At least partially as a result of foodborne illness outbreaks and resultant litiga-tion, many retail buyers demand certification of production and handling practices fromfresh produce suppliers. Third-party certification schemes can be included as assuranceof compliance with mandatory, voluntary, public, or private requirements. In North


America, private companies have evolved to serve as fee-based certifiers of firm-levelfood safety activities, though there is yet to be standardization of certification methodsused by different firms. Such companies inspect farms, provide consultation on reducingthe likelihood of microbial contamination, and produce reports or scores that can beprovided to potential buyers.

The spectrum of strategies available to a produce supply firm under voluntary stan-dards is much broader than that for legislatively mandated standards. The firm mustchoose a food safety strategy considering market incentives as well as regulatory in-centives. Will compliance (or noncompliance) influence market share? Will competitorscomply? Is there a first-mover advantage? The firm’s ability to comply with food safetyguidelines impacts competitiveness through changes in direct costs and transaction costs.Firm competitiveness in the face of food safety and quality assurance schemes is influ-enced by firms’ willingness and abilities to meet these requirements; small firms may haveto allocate proportionately more resources for implementation than large firms (Holleranet al 1999).

NORTH AMERICAN FRESH STRAWBERRY MARKET

The North American fresh strawberry market is an example of a produce industry wherefirms are faced with critical decisions regarding the adoption of food safety technologies.Strawberries are ubiquitous and are illustrative of the potential impacts of public andprivate food safety standards on minimally processed fresh produce. This case illustratespotential impacts of technology requirements on firm behavior and industry structurethrough changes in regional trade patterns. North American fresh strawberry productionhas a distinctly bi-modal structure. Relatively fewer large firms produce primarily for tra-ditional retail grocery markets while multiple smaller firms produce for farmers markets,roadside stands, and u-pick operations. These two types of strawberry firms are furtherdistinguished by growing system choice, production cost level, and yields per acre.

Table 1 shows that California dwarfs other North American regions in fresh straw-berry production as measured by both farm size and average yields. Though Florida isa distant second, average farm size and average yields are still far above that of the re-maining regions. In 2003, the average strawberry acreage among farms in California andFlorida was 47 and 30 acres, respectively. Higher per acre yields in these two states aredriven by a longer growing season relative to other regions. For many of the remainingregions, the production season is limited by cold weather. Of these remaining regions,Washington and Oregon have larger average farm size (9 acres) but also have produc-tion targeted primarily toward the processing market. Of course, there is considerablein-state variation among strawberry farms. Detailed agricultural census data is availablefor California where 14% of farms averaged less than 1.0 acre and 29% averaged over 50acres in 2002. Anecdotal evidence for the Baja region of Mexico suggests that farm sizemirrors that of California, and indeed, some large strawberry growers in California haveexpanded to produce in both regions.

Large growers in California, Florida, and Baja typically produce fresh strawberriesusing a plasticulture system. Strawberries are transplanted into plastic sheeting laid ontop of raised rows, allowing soil fumigation and drip irrigation. Plasticulture is an annualsystem. Plants are removed after harvest and often replaced with some other rotationalcrop. Per acre costs are high at $26,300 and $31,065 in Florida and California, respec-tively; but yields are also high with an average of 25,500 pounds in Florida and 56,500


Table 1. Number of farms, acres, average farm size, and yield per acre for strawberry farms inNorth America

# of Total Average farm Average yieldfarms acreage size (acres) per acre (lbs)

United StatesCA 684 32,183 47 56,500FL 217 6,595 30 25,500OR 328 3,013 9 11,500WA 226 1,953 9 9,000PA 685 1,264 2 5,600MI 312 1,224 4 4,700NY 488 1,406 3 4,500NC 279 991 4 12,500WI 341 886 3 4,800OH 413 659 2 3,500

CanadaOntario 829 4,104 5 4,520Quebec 630 3,846 6 4,520British Columbia 407 1,590 4 4,510Nova Scotia 777 131 6 4,510

MexicoBajaa 5,750 13,890

Sources: Statistics Canada 2001; US Department of Agriculture-National Agricultural StatisticsService (USDA-NASS) 2003.aData on the number of farms in the Baja, Mexico region and average size are not available.

pounds in California (Klonsky and Moura 2001; Institute of Food and AgriculturalSciences-University of Florida [IFAS] 2003). Smaller strawberry producers typically usea matted row system with raised bare beds and mulch. This system requires one year forplant establishment and remains in production for 2–4 subsequent years. Production costestimates for this system are typically $6,000–$6,500 per acre with average yields rangingfrom approximately 4,500 pounds in the Midwest to 10,000 pounds in the Northwest andMid-Atlantic states (The Ohio State University Extension Service 1999; Pritts 2000; USDepartment of Agriculture (USDA) 2002). Production systems and average yields in thefour Canadian provinces are similar to those in the Midwestern United States.

Canada imports nearly twice its domestic production of fresh strawberries, 96% ofwhich come from the United States. In 2000, Mexican strawberry production was forecastto be 140,000 tons, 32% of which was exported to the United States. Canada is the largestinternational customer for U.S. fresh strawberries (USDA 2002). The North Americansupply chain for both large and small fresh strawberry producers is short, as is commonfor most fresh produce. Strawberries are usually field-packed by farm workers or owners,or by customers visiting a u-pick operation. They are typically eaten within a few daysafter harvest. Farm-level microbial contamination is of particular concern because of thepotential for consumer illness and product spoilage.

Compliance with food safety standards to maintain retail relationships can be ex-pensive and may include high fixed costs that make compliance prohibitive for some small


firms. In addition, fee-based certification systems may exclude additional small growersfrom the market as system fees can be as high as $20,000 in the first year (McCluskey andO’Rourke 2000). It is plausible that adoption of new food safety technologies might fur-ther accelerate the already bi-modal market structure in the NAFTA strawberry industry.Yet, such an outcome is not certain. In some cases, small firms can adjust productionmore quickly to suit changing consumer preferences and to convey product informationto consumers (You 1995). Voluntary food safety practices, whether requested by retailcustomers or developed through grower-led initiatives and USDA, have potentially signif-icant and differential consequences for large and small North American fresh strawberryfarms.

SPATIAL EQUILIBRIUM ANALYSIS AND DATA

We construct a base model of current strawberry supply and demand to analyze shiftsin fresh strawberry movement in North America under the three food safety adoptionscenarios introduced previously. The base model depicts the current strawberry industryabsent of any food safety outbreaks or additional efforts to mitigate contamination at thefarm level. Data includes supply2 and demand3 levels for fresh strawberries in 17 supplyand 72 demand regions, per unit transportation costs between supply and demand regions,and per unit production costs in each region. The model incorporates both transportationcost and product shrinkage which are critical factors in inter-regional trade of perishableproducts. Results indicate the least cost route and production region to meet demand ineach region.

The baseline spatial equilibrium model takes the following form:

minimize∑

i

∑

j

(ci j+si j+pi )xi j (1)

subject to:∑

j

xi j ≤ ai for all i (supply limit in region i ) (2)

∑

i

xi j ≥ b j for all j (satisfy demand in region j ) (3)

where i is fresh strawberry supply regions, j is fresh strawberry demand regions, cij isper unit transportation costs between region i and region j, sij is per unit shrinkage as anonlinear function of distance between region i and region j, pi is the per unit productioncosts for fresh strawberries in region i, xij is the amount of fresh strawberries shippedfrom region i to region j, where xij ≥ 0, for all i, j, ai is supply of fresh strawberries inregion i, and bj is the demand for fresh strawberries in region j.

Per capita consumption is combined with population information to determine totaldemand for fresh strawberries in each of the regions. U.S. per capita consumption of freshstrawberries in 2003 was 4.9 pounds while Canadian per capita consumption of freshstrawberries in 2002 was 5.5 pounds.

Transportation distances in miles are collected for each supply demand pair. Forexample, transportation distances are collected from the Oxnard Plain supply region inCalifornia to each of the 72 demand regions. Supply points within each of the production


regions are identified as the largest cities within the most productive county or agriculturalregion.

Transportation rates are calculated based on the Fruit and Vegetable Truck RateReport published weekly by the USDA Agricultural Marketing Service (AMS) and frominterviews with industry experts. Trucking rates between the San Joaquin Valley in Cal-ifornia and five large destination markets are used to calculate an average trucking rateof $1.66 per mile for a load of strawberries. Strawberries are shipped in crates weighing10–12 pounds with approximately 2,600 crates in a semi-load of strawberries. Using an11 pound average, the transportation cost for strawberries is $0.00005/lb/mile.

Fresh strawberries are highly perishable, and as such, product losses may occur onfarm, in storage, and en route to market. In a study by Perosio et al (2001), produce retailersand grower/shippers estimated shrinkage in the supply chain to be 7% of produce sales.We incorporate shrinkage in the model as a continuous nonlinear function of shippingdistance following Bressler and King (1978). Eq. (4) calculates shrinkage cost (in $/lb) asa function of distance between supply point i and demand point j and of that distancevalue squared:

s(i , j ) = 0.000001 ∗ d(i , j ) + 0.00000003 ∗ d(i , j )2 (4)

where s (i, j) is per unit shrinkage and d (i, j) is the distance between region i and region j.Modeling shrinkage in this way captures the perishability of fresh strawberries by

assuming that the likelihood of shrinkage loss increases with distance traveled. The pa-rameter value s (i, j) is different for each supply-demand pair and results in overall productshrinkage in the range of Perosio et al’s estimate.

Reported cost of fresh strawberry production ranges from $0.32 to $1.43 per poundin Canada and the United States (Table 2). Estimated cost for Baja is much lower at$0.05 per pound. Date of publication for cost information varies, so all costs are adjustedto 2004 values using the Producer Price Index estimate for all commodities. Canadianproduction cost estimates are converted to U.S. dollars using exchange rates for datescorresponding to the respective publication month from the Bank of Canada (2005).Adjusted production costs range from $0.35 per pound in British Columbia to $1.69 perpound in New York. With the exception of Oregon, Washington, and British Columbia,per pound production costs are higher in the low volume production regions. Oregon,Washington, and British Columbia production cost estimates are heavily influenced bythe large amount of processing strawberries sold in these three regions.

GAPs ADOPTION COST

GAPs include any number of practices aimed at reducing microbial contamination of freshproduce at the farm level. Modeling the three scenarios first requires assigning adoptioncosts to the production regions. Five common GAPs practices are used to representfirst stage adoption of a food safety management program for a typical fresh strawberrygrower. Since GAPs adoption costs include both variable and fixed components, theyare reported separately for small growers producing for direct market or u-pick and forlarge growers producing for the grocery trade (Table 3). Adequate estimates of GAPsadoption must recognize the disparity in fresh strawberry production seasons across theUnited States, Canada, and Mexico. Florida and Baja typically produce for the freshmarket during 5 months of the year while California produces for 11 months of the year.


Table 2. Fresh strawberry yields and production costs

Yieldb Costs/lbState or regiona (lbs/acre) Cost/acre ($) Cost/lb ($) (2004 U.S. $)

United StatesCA-Oxnard Plain 57,000 $31,400 0.55 0.55CA-Santa Maria Valley 51,592 $29,053 0.56 0.56CA-Central Coast 50,200 $31,846 0.63 0.63Florida 25,200 $21,187 0.84 0.94North Carolina 15,000 $16,778 1.11 1.24Oregon 12,000 $4,828 0.40 0.50Washington 12,000 $4,828 0.40 0.50Pennsylvania 6,400 $6,221 0.97 1.09Michigan 5,300 $4,739 0.89 1.05Wisconsin 5,000 $4,739 0.95 1.12Ohio 7,000 $5,250 0.75 0.88New York 3,300 $4,739 1.43 1.69

CanadaNova Scotia, Ontario, 7,500 $3,760 0.50 0.58

and QuebecBritish Columbia 10,000 $3,240 0.32 0.35

aData sources by production region include: Daugovish et al (2004)—CA Oxnard Plain; Bendixenet al (2004)—CA Santa Maria Valley; Bolda et al (2004)—CA Central Coast; Institute of Food andAgricultural Sciences-University of Florida [IFAS] (2003)—Florida; Fonsah et al (2002)—NorthCarolina; Cross et al (1991)—Oregon, Washington; Bowling et al (2002)—Pennsylvania; NortheastRegional Agricultural Engineering Service (NRAES) (1998)—Michigan; Wisconsin, New York;The Ohio State University Extension Service (1999)—Ohio; Combe and Fisher (1999)—NovaScotia, Ontario, Quebec; British Columbia Ministry of Agriculture, Food and Fisheries (2001)—British Columbia.bYields per acre for all states, except Michigan, Wisconsin, and New York, are from the cost ofproduction publications. For the remaining three, estimates are from USDA-NASS (2003).

Producers in the low volume production regions of United States and Canada generallyproduce fresh strawberries for one month or less each year.

Costs incurred by individual firms from adoption of new practices may include fixedcosts, such as the purchase of portable restroom facilities or digging a new irrigation pond,and variable costs, such as maintaining restroom facilities or buying new single-use trays.4

Following adoption of GAPs, the magnitude of supply shifts are a function of firms’ abilityto allocate total costs across production volume. Transaction costs also play a significantrole in the impacts of adoption on a firm. Examples include the risks associated withadopting a new production system and the time spent collecting and implementing newfood safety knowledge. While large and small firms will both incur adoption costs andthe associated transaction costs, GAPs will be relatively more expensive for small firmsto adopt. Large firms are likely to be better able to handle transaction costs, due toeconomies of scale and their ability to absorb risk.


Table 3. Total and per acre costs (U.S. $) of GAPs used in the Empirical Model

GAP Small u-picks Florida and Baja California

Average farm size (acres) 4.8 30 47Season length (months) 1 5 11

Total cost Cost/Acre Total cost Cost/Acre Total cost Cost/Acre

Toilet and handwashingfacilities

$220.00 $46.00 $3,375.00 $113.00 $5,288.00a $113.00

Training on hygiene 58.00 12.00 691.00 23.00 1,056.00 47.00Packing shed or cooling

pad sanitation andsingle use trays foru-picks

400.00 83.00 464.00 15.00 1,022.00 22.00

Monitoring irrigationwater

32.00 7.00 149.00 5.00 149.00 3.00

Developing a crisismanagement plan

670.00 139.00 721.00 24.00 721.00 15.00

Total $1,380.00 $287.00 $5,400.00 $180.00 $2,948.00 $200.00

This list of practices was developed with the help of GAPs expert Elizabeth Bihn (CornellUniversity), through discussions with strawberry growers, and by reviewing private and publicthird party certification. Detailed calculations are available in Woods and Thornsbury (2005).aDropped from total since this cost is already included in the cost of production estimates fromCalifornia.

THREE FOOD SAFETY SCENARIOS

Regional trade pattern results from the base model are shown in Table 4. We combine the72 disaggregate demand regions in the model into 10 larger geographical demand regionsfor brevity in discussion of results. In general, production regions typified by larger firms(Baja, Oxnard, Plant City, Santa Barbara, Santa Cruz) ship fresh strawberries greaterdistances. As expected, lower production costs allow these regions to absorb highertransportation costs and move product over greater distance. For example, Baja is thelowest cost producing region and is able to supply product to the geographically distantNew England demand region. Smaller production regions typically supply markets thatare geographically close. For example, the Toronto, Montreal, and Halifax supply regionsship strawberries to East Canada. Western Canada is partially supplied by Bellingham,WA, Salem, OR, and Vancouver. The Akron, OH region ships to New England. Sincethere is excess supply in the model, there are several of the small, very high-cost regionsthat do not enter the solution. Often production in these areas is traded informally withoutentering commercial supply chains. For ease of comparison, supply regions that do notenter the solution are not shown in subsequent results tables.

The next three sections develop distinct scenarios of GAPs adoption and consumerbehavior patterns. In each scenario, described in more detail below, changes are madeto either supply conditions (by adjusting p among the i regions) or demand conditions(by segmenting b within the j regions) or both (Table 5). Model results provide staticcomparisons of short-run adjustments in regional production and transportation patterns


Tab

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Res

ults

from

base

mod

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Dem

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regi

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New

Mid

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Nor

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Akr

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800

3,80

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MX

4,99

470

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4,59

879

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63,

506

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17,3

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A2,

22,0

9737

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1,34

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2,31

,965

626,

222

Pla

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FL

69,0

7768

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18,9

9415

6,20

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Sale

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000

2,00

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13,1

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25,6

5634

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70,7

0624

3,71

1Sa

nta

Cru

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A55

,156

80,2

3140

,147

1,40

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26,6

7911

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354,

139

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05,8

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87,1

212,

10,4

8640

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1,74

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30,6

7911

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1,17

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15,1

4,53

6


with implications for longer run adjustments in structure of the North American freshstrawberry market.

Scenario 1: All Firms Adopt New Standards—No DifferentiationIn this scenario, all fresh strawberry growers adopt the voluntary GAPs practices de-scribed above without changes in advertising or promotional activities. Since all growersadopt the new technology, there are limited opportunities to capture market advantageby a single firm. This scenario is representative of current retailer practices for promotingfresh strawberries and other produce. Many retailers promote their entire operation as asource of high quality, safe products and see no need to adjust the message to highlightindividual items; either because the adoption of new practices increases the probabilitythat existing claims are not accurate or to avoid the implication that nonhighlighted itemsare not safe. Even if the product is direct marketed, suppliers (in this case the growersthemselves) may see promotion of food safety practices as unnecessarily emphasizing anegative issue.

At the same time, safe food can be viewed as an entitlement by consumers whoexpect food suppliers to be compliant without efforts to differentiate firms. General publicinformation about food safety has only a small impact on consumer demand even whenmentioned in conjunction with a specific product (Piggott and Marsh 2004). Dahlgranand Fairchild (2002) found that general information about food safety in poultry had lessthan a 1% impact on demand. Price effects still dominate consumer choice if firms donot differentiate. Adoption of food safety standards without differentiation is unlikely togenerate a large price premium from consumers (Loader and Hobbs 1999).

As already noted, although GAPs adoption includes primarily variable costs thereare some fixed costs included. Thus, minor shifts in regional trading patterns occur whenall firms adopt (Table 6). Both Plant City and Santa Cruz represent regions with relativelylarge farms, although Plant City has higher per pound costs prior to GAPs adoption. Inthe base model, Plant City ships its entire supply. Once GAPs are adopted by both regions,additional costs shift approximately 72 million pounds of production from Plant City tothe Santa Cruz region. Similar to the base model, 10 other regions remain in productionat their maximum supply levels. Increasingly negative shadow prices, as compared tobase model results, indicate the Oxnard and Santa Barbara regions have become morecompetitive (Table 7). If extra production in these regions, typified by larger firms, wasavailable, overall costs would be reduced by a greater amount after GAPs adoption.Other regions see increased (less negative) shadow prices when compared with basemodel results, indicating a loss in relative competitiveness. If shipments were forced fromthese regions, they would increase overall cost to the market by relatively more now thatall firms have adopted GAPs.

The adoption of new food safety technologies by all firms, even if not legislativelymandated, continues to promote a bi-modal structure of fresh strawberry production.Without a mechanism to influence consumers, high volume production regions becomerelatively more competitive in this scenario and those firms that cannot bear increasedcosts at their current size will either exit the industry or get larger in an attempt tospread fixed costs over greater volume. Ultimately, the own-price elasticity of strawberrydemand will influence how costs are allocated between producers and consumers. Own-price demand elasticity estimates for strawberries include Ferguson and Padula (1994)


Tab

le5.

Mod

elas

sum

ptio

nsfo

rth

ree

scen

ario

sof

GA

Ps

adop

tion

amon

gN

AF

TA

fres

hst

raw

berr

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ower

s

Mod

el/A

ssum

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ase

Scen

ario

ISc

enar

ioII

Scen

ario

III

Foo

dsa

fety

prac

tice

adop

tion

No

GA

Ps

adop

tion

All

prod

ucer

sad

opt

GA

Psa

All

prod

ucer

sad

opt

GA

Ps

and

larg

epr

oduc

ers

beco

me

thir

d-pa

rty

cert

ifie

db

All

prod

ucer

sad

opt

GA

Ps

and

larg

epr

oduc

ers

beco

me

thir

d-pa

rty

cert

ifie

dP

rodu

cers

Hom

ogen

eous

firm

size

wit

hin

stat

esba

sed

onav

erag

efa

rmsi

ze

Hom

ogen

eous

firm

size

wit

hin

stat

esba

sed

onav

erag

efa

rmsi

ze

Hom

ogen

eous

firm

size

wit

hin

stat

esba

sed

onav

erag

efa

rmsi

ze

Het

erog

eneo

usfi

rmsi

zew

ithi

nst

ates

c

Con

sum

ers

Hom

ogen

eous

cons

umer

sdr

iven

bylo

wpr

ice

Hom

ogen

eous

cons

umer

sdr

iven

bylo

wpr

ice

Som

eco

nsum

ers

dist

ingu

ish

cert

ifie

dbe

rrie

sd

Som

eco

nsum

ers

dist

ingu

ish

cert

ifie

dbe

rrie

sd

Tra

nspo

rtat

ion

Fla

tpe

rm

iletr

ansp

ort

char

gead

just

edfo

rsh

rink

age

Fla

tpe

rm

iletr

ansp

ort

char

gead

just

edfo

rsh

rink

age

Fla

tpe

rm

iletr

ansp

ort

char

gead

just

edfo

rsh

rink

age

Fla

tpe

rm

iletr

ansp

ort

char

gead

just

edfo

rsh

rink

age

aC

osts

incu

rred

byfi

rms

wit

hin

each

stat

efr

omG

AP

sad

opti

onin

clud

efi

xed

and

vari

able

cost

sas

soci

ated

wit

hth

ead

opti

onof

spec

ific

prac

tice

ssh

own

inT

able

3.T

hese

cost

sin

clud

ebo

thva

riab

lean

dfi

xed

com

pone

nts

spre

adov

erav

erag

epr

oduc

tion

volu

mes

.bE

stim

ated

thir

d-pa

rty

cert

ific

atio

nch

arge

sar

ese

tat

$8,0

00ba

sed

onco

nsen

sus

opin

ion

ofN

atio

nal

GA

Ps

food

-saf

ety

spec

ialis

ts(J

anua

ry20

05)

spre

adov

erav

erag

epr

oduc

tion

volu

me

ofla

rge

firm

san

d$0

for

smal

lfir

ms

whi

chdo

not

beco

me

cert

ifie

d.c F

irm

size

vari

esw

ithi

nea

chpr

oduc

tion

regi

on.

InC

alifo

rnia

,F

lori

daan

dB

aja

whe

reth

eav

erag

efa

rmsi

zeis

larg

e,80

%of

the

firm

sar

ecl

assi

fied

as“l

arge

”an

d20

%ar

ecl

assi

fied

as“s

mal

l.”In

the

othe

rpr

oduc

tion

regi

ons

whe

reth

eav

erag

efa

rmsi

zeis

smal

l,80

%of

the

firm

sar

ecl

assi

fied

as“s

mal

l”an

d20

%ar

ecl

assi

fied

as“l

arge

.”A

sbe

fore

allf

irm

sad

opt

GA

Ps

but

only

the

larg

efi

rms

inea

chre

gion

beco

me

cert

ifie

d.P

erce

ntag

esba

sed

onva

lues

ofst

raw

berr

yfa

rm-s

ize

dist

ribu

tion

repo

rted

for

Cal

iforn

iain

the

U.S

.Cen

sus.

dIn

each

dem

and

regi

on30

%of

cons

umer

spu

rcha

seon

lyce

rtif

ied

berr

ies,

the

rem

aini

ng70

%pu

rcha

seei

ther

cert

ifie

dor

nonc

erti

fied

berr

ies

wit

hout

diff

eren

tiat

ion.

Spec

ific

data

onde

man

dfo

rce

rtif

ied

prod

uct

isno

tav

aila

ble.

Thi

rty-

perc

ent

isex

trap

olat

edfr

omlit

erat

ure

onth

ede

man

dfo

ror

gani

cpr

oduc

ts(P

hilli

psan

dP

eter

son

2001

;Tho

mps

onan

dG

lase

r20

01;E

urom

onit

orIn

tern

atio

nal2

006)

.


Tab

le6.

Res

ults

from

Scen

ario

1:st

raw

berr

ysh

ipm

ents

whe

nal

lpro

duce

rsad

opt

GA

Ps

wit

hno

diff

eren

tiat

ion

Dem

and

regi

on

New

Mid

Sout

hM

idSo

uth

Nor

thW

est

Cen

tral

Eas

tE

ngla

ndA

tlan

tic

Eas

tW

est

Wes

tW

est

Wes

tC

anad

aC

anad

aC

anad

aT

OT

AL

Shi

ppin

gre

gion

1,00

0po

unds

Shi

pmen

tsof

nond

iffe

rent

iate

dst

raw

berr

ies

tono

ndif

fere

ntia

ted

dem

and

Akr

on,O

H3,

800

3,80

0B

aja,

MX

4,99

474

,862

79,8

56B

ellin

gham

,WA

2,00

02,

000

Hal

ifax

,CN

3,50

63,

506

Mon

trea

l,C

N17

,370

17,3

70O

xnar

d,C

A2,

25,8

971,

05,8

091,

29,8

811,

64,6

356,

26,2

22P

lant

Cit

y,F

L65

,277

18,9

9484

,271

Sale

m,O

R2,

000

2,00

0Sa

nta

Bar

bara

,CA

13,1

0022

,457

1,03

,199

34,2

4970

,706

2,43

,711

Sant

aC

ruz,

CA

1,00

,029

1,07

,287

40,1

471,

40,3

8426

,679

11,5

424,

26,0

68To

ront

o,C

N18

,557

18,5

57V

anco

uver

,CN

7,17

57,

175

Tota

l2,

99,9

681,

05,8

092,

36,8

372,

87,1

212,

10,4

8640

,147

1,74

,634

37,8

5411

,542

1,10

,139

1,51

,453

6


Table 7. Shadow price from base model and Scenarios 1–3

Scenario/supply region Base I II III

Akron, OH noncert −0.151 −0.095 −0.101 −0.102certified −0.164

Baja, MX noncert −0.609 −0.605 −0.609 −0.609certified −0.609 −0.617

Bellingham, WA noncert −0.261 −0.230 −0.234 −0.234certified −0.234 −0.094

Benton Harbor, MI noncertcertified

Halifax, CN noncert −0.541 −0.507 −0.477 −0.486certified −0.660 −0.558

Montreal, CN noncert −0.498 −0.463 −0.459 −0.468certified −0.577 −0.475

Oxnard, CA noncert −0.113 −0.115 −0.117 −0.120certified −0.117 −0.117

Plant City, FL noncert −0.001 −0.012certified

Philadelphia, PA noncertcertified −0.026

Salem, OR noncert −0.226 −0.202 −0.206 −0.206certified −0.206 −0.066

Santa Barbara, CA noncert −0.089 −0.091 −0.093 −0.096certified −0.093 −0.093

Santa Cruz, CA noncert −0.004certified

Stevens Point, WI noncertcertified

Syracuse, NY noncertcertified

Toronto, CN noncert −0.474 −0.439 −0.435 −0.444certified −0.524 −0.445

Vancouver, CN noncert −0.409 −0.381 −0.385 −0.385certified −0.385 −0.380

Wilmington, NC noncertcertified

at −1.2, Carter et al (2005) at −1.9, and Richards and Patterson (1999) at −2.8. Theseestimates suggest that strawberry demand is relatively price elastic and that producerswill bear relatively more of the burden of GAPs adoption cost unless they can influenceconsumer demand.

Scenario 2: Segmenting the Market-Adoption with Differentiation in LargeProducing RegionsThird-party certification developed as a mechanism to signal adoption of food safetypractices such as GAPs to buyers and, potentially, to the legal system. More recently,


certifiers’ stamps have begun to appear on product packages in retail stores, albeit withlittle or no explanation to consumers. As produce items move away from commoditystatus and towards branded products, as is the case with strawberries, individual firmsare more likely to capture increased value from technology adoption and certification.The second scenario of the North American fresh strawberry market illustrates the effectsof third-party certification. Certification is available to all fresh strawberry growers butbecause of initial high investment, it is more heavily adopted by large firms. The freshstrawberry market thus becomes segmented among consumers who will buy any typeof fresh strawberry (nondifferentiated) and consumers who will buy only third-partycertified fresh strawberries. Similar to other credence attributes (e.g., GM products), thecost of differentiation under a voluntary labeling system is borne only by those firmstrying to capture consumer preferences for the unobservable characteristic (Fulton andGiannakas 2004; Lapan and Moschini 2004).

Though we do not explicitly model demand or price effects in the model, the demandfor certified strawberries is imposed in the system by requiring that 30% of demand in eachregion be met only with certified strawberries. This relaxes the assumption of consumerhomogeneity.5 Firms pay a flat fee of $8,000 for initial certification. We implicitly assumethat firms who certify are able to recover the costs of certification through the market.In Scenario 2, 100% of production from high-volume regions is certified, so there existsexcess supply of certified fresh strawberries that is then sold to consumers who do notdifferentiate. This is often the case in reality: a segment of buyers will look for, and bewilling to pay for extra safety assurance.6 Another segment of buyers will select the foodsafety attribute unknowingly when it is a component of the product available.

Farms in five supply regions (Baja, Oxnard, Plant City, Santa Barbara, Santa Cruz)assume the extra cost of certification in Scenario 2. Results indicate regions maintainsupply levels equivalent to Scenario 1 with the exception of Plant City and Santa Cruz(Table 8). Similar to Scenario 1 results, when the extra costs of certification are added,some supply from Plant City is again shifted to Santa Cruz. All low-volume regionsmaintain previous supply levels, but regional trade patterns shift, increasing total modelcost beyond that of certification fees. For example, Plant City loses share in New Englandbut ships fruit further to East Canada. Likewise, Montreal increases shipments to NewEngland: those consumers in Eastern Canada who are specifically demanding certifiedfruit must now purchase product from more distant regions. Shadow prices indicate that,with the exception of Baja, availability of certified fruit in Central and Eastern Canadawould have the greatest impact on decreasing overall costs. With 30% of consumers in eachdemand region purchasing only certified berries, large-volume regions maintain access topreviously supplied regions but again trade patterns are shifted. Santa Barbara capturesadditional sales of both types of berries to Canada, while sales to the Southwest decline.Santa Cruz picks up additional sales to the Midwest, which were previously supplied byOxnard and Santa Barbara. Similar to the base model, there are some low-volume regionsthat do not ship any product.

In order to influence and capture maximum benefits from consumer reactions, a suc-cessful effort must be made to educate consumers about the implications of third-partycertification for food safety through labeling and advertisement (Caves and Williamson1985). Sufficient conditions for a firm to establish differentiated products include: (1)complex attributes with some associated fixed costs of assembly and (2) a cost to buyers


Tab

le8.

Res

ults

from

Scen

ario

2:st

raw

berr

ysh

ipm

ents

wit

hla

rge

prod

ucti

onre

gion

cert

ific

atio

nan

ddi

ffer

enti

ated

dem

and

Dem

and

regi

on

New

Mid

Sout

hM

idSo

uth

Nor

thW

est

Cen

tral

Eas

tE

ngla

ndA

tlan

tic

Eas

tW

est

Wes

tW

est

Wes

tC

anad

aC

anad

aC

anad

aTo

tal

Shi

ppin

gre

gion

1,00

0po

unds

Shi

pmen

tsof

cert

ifie

dst

raw

berr

ies

for

cert

ifie

dde

man

dB

aja,

MX

1,49

813

,107

14,6

05O

xnar

d,C

A70

,738

31,7

4348

,316

47,9

031,

98,6

99P

lant

Cit

y,F

L17

,755

5,69

82,

273

25,7

26Sa

nta

Bar

bara

,CA

3,93

08,

225

28,8

6010

,275

30,7

6882

,058

Sant

aC

ruz,

CA

30,0

0934

,285

12,0

4442

,115

11,3

563,

463

1,33

,272

Tota

l89

,990

31,7

4371

,051

86,1

3663

,146

12,0

4452

,390

11,3

563,

463

33,0

424,

54,3

61S

hipm

ents

ofce

rtif

ied

orno

ncer

tifi

edst

raw

berr

ies

for

nond

iffe

rent

iate

dde

man

dA

kron

,OH

3,80

03,

800

Baj

a,M

X3,

496

61,7

5565

,251

Bel

lingh

am,W

A2,

000

2,00

0H

alif

ax,C

N3,

506

3,50

6M

ontr

eal,

CN

4,37

312

,997

17,3

70O

xnar

d,C

A1,

59,3

6374

,066

81,5

651,

12,5

284,

27,5

23P

lant

Cit

y,F

L37

,054

13,2

9650

,350

Sale

m,O

R2,

000

2,00

0Sa

nta

Bar

bara

,CA

9,17

017

,239

67,3

4123

,975

43,9

291,

61,6

53Sa

nta

Cru

z,C

A71

,217

79,9

9928

,103

98,2

6915

,323

8,07

93,

00,9

91To

ront

o,C

N1,

892

16,6

6518

,557

Van

couv

er,C

N7,

175

7,17

5

Tota

l2,

09,9

7874

,066

1,65

,786

2,00

,984

1,47

,340

28,1

031,

22,2

4426

,498

8,07

977

,097

10,6

0,17

5


of obtaining information about the complex attributes. Food safety attributes are verycomplex and difficult to discern by consumers. The cost of certification and advertisingundertaken by a strawberry firm aids consumers in moving the product’s food safetyattributes from a credence good to a search good through the presence of a brand nameor certifiers’ stamp. In many cases, consumers are willing to pay for the additional infor-mation. For example, Hu et al (2005) found that identifying bread as absent of geneticallymodified ingredients increases the value of the product. Large firms are able to undertakethe cost of certification and promotional campaigns more readily than small firms—again spreading these fixed costs over higher volumes. Our results in Scenario 2 illustratethat though costs per pound increase relative to product from those firms who do notbecome certified, the absolute cost advantage does not shift. In addition, with promotionlarger firms may capture increased prices from consumers who demand certified product.In both the short- and long-run, large firms remain dominant and incentives remain tobecome larger.

Scenario 3: Segmenting the Market—Adoption with Differentiation by a Proportion of AllProducing RegionsAs evidenced by the California farm size data, large production regions include somesmall growers who likely cannot afford or simply do not pursue third-party certification.Likewise, regions with smaller total production volumes may include a few large growerswho sell to retailers at some point in the growing season. Uncertainty about increaseddemand from retailers or end consumers, and resultant access to markets or price incen-tives, may keep some growers (large or small) from paying the additional certification fee.Census values indicate that, in California 80% of farms are larger than 50 acres. Based onthe California data, Scenario 3 allows 20% of each region’s growers to vary with respectto certification choice. Thus, each supply region provides both certified and noncertifiedberries. In high volume production regions, 20% of production is not certified, and inlow volume production regions, 20% of production is certified. As before, demand forcertification is only satisfied by certified berries but residual demand can be satisfied byeither noncertified or certified product.

Table 9 reports shipments of certified strawberries under Scenario 3. Since certi-fied berries are now available from all regions, the cost of increasing shipments fromsome of the larger, previously certified, producing regions increases relative to that inScenario 2 where large production regions were the only source of certified strawberries.As anticipated based on Scenario 2 results, Halifax, Montreal, and Toronto now supplycertified strawberries to Eastern Canada. Some of the smaller-volume regions are ableto supply certified strawberries to Western Canada when consumers do not differentiate(i.e., Bellingham, Salem, Vancouver). Even with the increased cost of certification, overallproduction costs remain low in the very large-volume regions (i.e., California, Baja). Con-sequently, some shipment patterns do not change. For example, Baja Mexico continuesto supply both consumer-types in New England with certified strawberries.

The additional cost of certification makes some regions uncompetitive in marketspreviously supplied. In additional Scenario 3 results, Akron, Ohio still does not ship anycertified strawberries and now only supplies noncertified strawberries to New England(Table 10). Again, shifts in regional trade patterns occur, even among the larger-volumeproducing regions. Neither Plant City nor Santa Cruz are constrained by the level of


Tab

le9.

Res

ults

from

Scen

ario

3:ce

rtif

ied

stra

wbe

rry

ship

men

tsfo

rce

rtif

ied

and

nond

iffe

rent

iate

dde

man

d

Dem

and

regi

on

New

Mid

Sout

hM

idSo

uth

Nor

thW

est

Cen

tral

Eas

tE

ngla

ndA

tlan

tic

Eas

tW

est

Wes

tW

est

Wes

tC

anad

aC

anad

aC

anad

aTo

tal

Shi

ppin

gre

gion

1,00

0po

unds

Shi

pmen

tsof

cert

ifie

dst

raw

berr

ies

for

cert

ifie

dde

man

dB

aja,

MX

1,49

813

,107

14,6

05H

alif

ax,C

N70

170

1M

ontr

eal,

CN

1,87

41,

600

3,47

4O

xnar

d,C

A70

,738

31,7

4348

,316

41,7

701,

92,5

67P

lant

Cit

y,F

L15

,880

5,69

821

,579

Sale

m,O

R40

040

0Sa

nta

Bar

bara

,CA

3,93

08,

225

28,8

6010

,275

27,0

2978

,319

Sant

aC

ruz,

CA

36,1

4134

,285

12,0

4442

,115

10,9

563,

463

1,39

,005

Toro

nto,

CN

3,71

13,

711

TO

TA

L89

,990

31,7

4371

,051

86,1

3663

,146

12,0

4452

,390

11,3

563,

463

33,0

424,

54,3

61S

hipm

ents

ofce

rtif

ied

stra

wbe

rrie

sfo

rno

ndif

fere

ntia

ted

dem

and

Baj

a,M

X2,

778

46,5

0149

,280

Bel

lingh

am,W

A40

040

0O

xnar

d,C

A1,

16,5

9132

,696

53,4

851,

05,6

173,

08,3

90P

lant

Cit

y,F

L5,

814

13,2

9619

,110

Sale

m,O

R1,

600

1,60

0Sa

nta

Bar

bara

,CA

18,0

2155

,505

2,39

,75

19,1

471,

16,6

48Sa

nta

Cru

z,C

A9,

338

75,3

6622

,806

70,0

6215

,723

8,07

92,

01,3

75V

anco

uver

,CN

1,43

51,

435

Tota

l1,

25,1

8345

,992

99,9

871,

32,9

771,

30,8

7122

,806

94,0

3717

,558

8,07

919

,147

6,96

,638


Tab

le10

.R

esul

tsfr

omSc

enar

io3:

nonc

erti

fied

stra

wbe

rry

ship

men

tsfo

rno

ndif

fere

ntia

ted

dem

and

Dem

and

regi

on

New

Mid

Sout

hM

idSo

uth

Nor

thW

est

Cen

tral

Eas

tE

ngla

ndA

tlan

tic

Eas

tW

est

Wes

tW

est

Wes

tC

anad

aC

anad

aC

anad

aTo

tal

Shi

ppin

gre

gion

1,00

0po

unds

Shi

pmen

tsof

nonc

erti

fied

stra

wbe

rrie

sfo

rno

ndif

fere

ntia

ted

dem

and

Akr

on,O

H3,

040

3,04

0B

aja,

MX

718

15,2

5415

,971

Bel

lingh

am,W

A1,

600

1,60

0H

alif

ax,C

N2,

805

2,80

5M

ontr

eal,

CN

1,33

312

,563

13,8

96O

xnar

d,C

A48

,464

41,3

7028

,080

7,32

51,

25,2

39P

lant

Cit

y,F

L31

,240

31,2

40Sa

lem

,OR

11,8

361,

600

1,60

0Sa

nta

Bar

bara

,CA

9,17

04,

633

27,7

3648

,742

Sant

aC

ruz,

CA

60,6

825,

297

28,2

0798

,819

Toro

nto,

CN

14,8

4514

,845

Van

couv

er,C

N5,

740

5,74

0

Tota

l84

,794

41,3

7052

,503

68,0

0716

,469

5,29

728

,207

8,94

00

57,9

503,

63,5

37


certified product they could supply: both regions decrease certified production belowmodel limits. Comparing shadow prices with base model results indicates that the large-volume regions tend to remain at least as competitive, even in noncertified strawberries,after product is differentiated. Marginal increases in noncertified production for Baja,Oxnard, Plant City, and Santa Barbara would reduce total model costs by equal, orgreater, amounts. Even so, total shipments from Plant City decline by an additional 4million pounds in Scenario 3 as they become relatively less competitive in the certifiedmarket. This suggests that competitive pressures are greatest on those mid-size regionsthat are not able to take advantage of close market proximity, yet still must absorbadditional costs. Overall, low cost producers in large regions will continue to supply themajority of the North American market; however, a limited supply of certified berries andlocation advantages increase opportunities for market participation by growers in smallregions who do become certified.

CONCLUSIONS

The North American fresh strawberry industry is already bi-modal in structure, with cleardistinctions between firm size, production method, and geographic location among retailand farm market suppliers. Regulatory and market-driven pressures for fresh producefirst-handlers to adopt more stringent food safety standards are increasing, as they arethroughout the food industry supply chain. As expected, large and small fresh strawberryproducers will incur increased costs as they adopt food safety practices in response toactual or anticipated consumer and/or retail buyer demands. Regardless of firm size andadoption of food safety practices, ultimately, certification as a “safe” strawberry produceris becoming the norm for market participation.

An empirical model of GAPs adoption, food safety certification, and consumerbehavior patterns provides static comparisons of short-run adjustments in regional pro-duction and transportation patterns with implications for longer run adjustments inmarket structure. Results from the three market scenarios indicate that in addition toGAPs adoption cost and transportation distances, the ability of firms to differentiateplays a strong role in determining the market outcome. Large firms have already capturedsignificant economies of scale as evidenced by current production patterns. When all firmsadopt voluntary (i.e., not legislatively mandated) food safety practices, with the mix ofvariable and fixed costs, expenses are relatively greater for small firms and high volumeproduction regions become more competitive. Still, distance (costs of transportation andshrinkage) influences adjustments in regional trade patterns: in our model, overall saleswere reduced only from the highest-cost, large-volume region when all firms adopt GAPs.

If firms have no way to influence consumer demand, many may be unable to bearthe costs of adopting GAPs and will exit the industry. Third-party certification of foodsafety practices is one way firms can signal adoption of new practices to their buyers,but it also represents an additional fixed cost that could further accentuate bi-modalmarket structure. As some consumers are able to differentiate certified product, the mar-ket for fresh strawberries becomes segmented and purchases of noncertified strawberriesdecrease as does quantity supplied. When only firms in the large-volume regions under-take certification, all low-volume regions maintain previous supply levels, but regionaltrade patterns shift, increasing overall costs to the system beyond just certification fees.Consumers who are demanding only certified fruit must now purchase product from more


distant regions. When a proportion of firms in all regions undertake certification, the ad-ditional cost makes some regions uncompetitive in markets previously supplied. Someof the low volume production regions are able to regain markets in nearby geographicregions, while transportation and shrinkage costs reduce sales from the more marginallarge-volume regions. Competitive pressures are greatest on those mid-size regions thatare not able to take advantage of close market proximity, yet must still absorb additionalcosts.

NOTES1An alternative strategy is noncompliance given weak or nonexistent enforcement.2Data on fresh strawberry supply are obtained from several sources, including Statistics Canada,United States Department of Agriculture-National Agricultural Statistics Service Noncitrus Fruitsand Nuts report, University of California-Davis county level production cost reports, Califor-nia County Agricultural Commissioner’s Reports, and United States Department of Agriculture-Foreign Agricultural Service. Detailed calculations are available upon request.3Demand data are calculated using per capita consumption and population totals by country andregion. Data sources include Statistics Canada and U.S. Census Bureau’s Consolidated Metropoli-tan Statistical Areas (CMSA). CMSAs are used to identify the largest population centers. Detailedcalculations are available upon request.4A recent study of the adoption costs of voluntary sanitation systems in the U.S. meat and poultryslaughter industries suggests that costs were increased by one-half percent across the industry(Ollinger and Mueller 2003).5Additional models were estimated with 50% and 10% of consumer demand for certified fruit.Results provide similar patterns in trade flow adjustment.6Empirical evidence for other products indicates certified strawberries are likely to command aprice premium in the market (Thompson and Glaser 2001).

ACKNOWLEDGMENT

This research was supported by grant #01-51110-11426 from the USDA Cooperative State Re-search, Education, and Extension Service.

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Regional Trade Patterns: The Impact of Voluntary Food Safety Standards