November 1, 2006

Dear Tomato Grower: 

In the current Tomato Bulletin: 

• 2006 harvest continues and likely to just top 10,000,000.
• Worldwide tomato production off 2.5 million metric tons in 2006 vs. 2005 and available for sale paste is non-existent.
• 2007 pricing discussion to begin with processors now that harvest is winding down.
• Del Monte and ConAgra on board for the Tomato Wellness Products Council leaving only San Benito/Tomatek and Stanislaus from the California processors.

2006 Harvest Update (source PTAB):

Harvest volume at 9.9 million tons through Oct 28: 

• PTAB projects 10,050,000 tons to be delivered through Nov 4 which equates to 36 ton yield.
• Quality deteriorating with 10.7% for average deduction for week ending 10/21 and year to date at 6.5% vs. 4.3 for previous 5 yr average.
• Value of insurance debatable since processors are able to run any quality with only limited exception.

Impact of 10 million ton crop: 

•  Demand is the average of the past 3 yrs which is 200,000 below 2005 & 600,000 below 2004

• Ending inventory is likely to rival1998 with the potential to be lowest in more than 10 yrs
• As a reminder, the last time the industry saw inventories this tight was following the 1998 crop. The 1999 price adjusted to inflation equates to $72.83.

World Processing Tomato Council (WPTC) projects 30.1 million metric ton crop: 

At last week’s meeting the following crop projection was made: 

Demand is projected at 33.5 – 34 million so we’ll see a significant draw down in stocks in Europe where excess inventories have suppressed pricing. The impact of the smaller crop has translated into a sharp increase in paste prices and reports of Chinese contract defaults. 

Besides China, other key countries showing a more major swing were Italy at 4.2 million vs. 5.2 in ’05 and Spain at 1.6 vs. 2.9 in ’05. 

Canada had another excellent crop with an average paid yield of 41.6 tons/acre which surpasses California’s ’04 record of 41.5 tons. Who said the Canucks don’t know how to grow tomatoes? 

Bottom line – Imports will not materially bail out California’s short crop. 

2007 Tomato Pricing: 

Now that harvest is finally coming to a close serious discussions for 2007 can begin. Across the state there is a consensus among growers that the 2007 price needs to be a minimum of $65/ton. Most processors, however, feel that $65 is too high. They’re wrong.

• The average fully loaded cost for growing tomatoes is between $2200 - $2300/acre. During 2006 costs were likely higher due to additional sprays, seed, labor, fuel, increased harvest and diesel expenses. Let’s call it $2250 for simplicity sake.
• The average yield for the past 5 yrs is 37.1 with a standard deviation of 2.9 tons per acre. (The 10 year average is 36.2 with a standard deviation of 2.7)
• Assuming an average yield of 37.1 and $65/ton the gross revenue will be $2411 or a whopping 7% return. (CD’s are paying 5.5% with no risk…)
• Looking at 3 out the past 5 years with yields below 37.1 it’s important to consider the consequences of a below average year.
• Beyond the yield and cost equation, market conditions support the opportunity to get paid at a level where profitability is a reasonable assumption. Too many years, 2006 included, it took above average results to make any profit. No wonder why so many growers exited the business.

So, what stands in the way of achieving $65?            

Fear: Many growers fear that they will lose their tomato contracts or face retaliation if they ask for something other than a “to be defined” market price. This risk is overrated for the following reasons: 

• Three out of the past four years the crop failed to meet processor expectations so processors need to maximize acreage in order to meet customer demand.
• Most growers have set rotations and are loathe to change processors
• Few growers that left the business are eager to get back into to tomatoes
• Unlike previous years growers have reasonable alternatives.

Bottom line: In 2007 your processor needs you more than you need him. 

Ignorance:  Too many critical decisions are made without analyzing relevant market data. 

• Last year some growers accepted contracts at well below the industry average of $58 or didn’t receive late season premiums.
• Too many growers do not have a good handle on their fully loaded costs. Last year Colusa growers met and compared costs. When they were finished they were stunned at how expensive it is to grow tomatoes and how the returns didn’t compensate for the risk. There was also discussion on true paid yields as opposed to coffee shop boasts.
• Too many growers are unwilling to work with their neighbors or other growers in their specific region to achieve common goals.
• Growers typically don’t recognize the fact that they have options whereas processors have to buy tomatoes. This translates into market power.

The CTGA offers growers the ability to work as a group, but have the flexibility to cut their own deal with the benefit of current market data. 

Tomato Products Wellness Council (TPWC): 

At last week’s World Processing Tomato Council meeting the Wellness Council program was presented to the international tomato processing community. The response was very favorable especially from Australia, Canada, and Italy. The Canadians, through the Ontario Processed Vegetable Growers, applied for a $45,000 grant which will represent a 6 year membership to the council. Approval of the grant will be known by mid November. 

Learn more about the Wellness Council. It will be the focus of our Annual Meeting on January 24, 2007. 

Questions or comments please call (209) 478-1761. 

Ross Siragusa

President/CEO

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