Publication Date - July 2006
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Chapter Five / Table of Contents / Exhibit A
Tax Code, Regulations and Official Guidance Search
Chapter Six - Raisin Grapes
Overview of Industry
Sources of Information
The following general information has been secured through interviews with the Raisin Bargaining Association (RBA), the Raisin Administrative Committee (RAC), several raisin packers and growers, newspaper and magazine articles, RBA’s contract with signatory packers, individual contracts between growers and packers, and statistics from the RAC.
Other than government agencies, the major stakeholders on the supply side of this industry include 1) the large single Cooperative packer and its member growers 2) RBA member packers 3) Non-RBA packers 4) RBA member-growers and 5) Independent growers.
The scope of this chapter does not include a discussion of the Cooperative and its member growers, Non-RBA growers, and Non-RBA packers. However, the majority of this chapter would apply to them.
The Cooperative is a RBA signatory packer, and RBA growers can deliver their raisins to the Cooperative. These growers do not become members of the Cooperative, and the Cooperative members are not bound by the field price established by the RBA/packer negotiations.
Grape Use, Raisin Production, and Raisin Varieties
Raisins are essentially produced from raisin variety grapes. A raisin variety grape grower may contract to sell these same grapes to a wine or juice processor, or to a table (fresh) grape packer. This would be the personal decision of the grower, mostly based on price, but on other business factors, too. In the 1990’s, California’s total annual grape production use averaged as follows: Raisins (45%), Wine (43%), and Table (12%). Three California counties, Fresno, Madera, and Tulare, produced nearly 100% of the nation’s supply of raisin grapes and 40-45% of the world’s supply.
Natural Seedless, Dipped Seedless, and Golden Seedless raisins are virtually all produced from Thompson Seedless grapes. For the 1995 crop, these three varieties of raisins accounted for 98.3% of the domestic raisin production. Both Dipped Seedless and Golden Seedless are “dehydrator” dried, whereas Natural Seedless are field or sun-dried.
In the 1960's and 1970's, California produced an average 260,000 annual tons. In the 1980's, domestic production ballooned to almost 400,000 annual tons, but raisin demand lagged far behind. These conditions culminated in the disastrous 2000 crop year of 439,531 tons with oversupply and low demand that hurt and depressed the raisin industry until the 2004 year recovery with lower supply and higher prices.
The Industry Stakeholders
RAC: The raisin industry has been based on a federal marketing order system since 1949. The marketing order for raisins has been fairly successful. The Raisin Administrative Committee (RAC) is overseen by the Agriculture Market Service of the United States Department of Agriculture. The RAC does not get involved in price establishment for the domestic market. The marketing order gets involved in market allocation (free and reserve tonnages), and blended raw product for export. With the addition of freight and import duties, the foreign consumers pay prices for California raisins that are quite comparable to our domestic consumers.
The free tonnage quantity must meet the domestic market demand and a major portion of the export demand. A new program implemented with the harvested 1995 crop required the entire domestic and export demand to be supplied with free tonnage. Income derived from the sale of reserve tonnage for free tonnage use is utilized under a cash adjustment program to keep our packers competitive in export markets.
The RAC never technically “owns” reserve tonnage. The reserve tonnage is maintained by the packers under the custodianship of the RAC. The marketing order dictates how reserve tonnage can be disposed and how the income derived from its disposition is disbursed to the grower equity holders. The reserve tonnage, in essence, becomes a mandatory industry co-op under the custodianship of the RAC.
The raisin trade demand is computed and announced on or before August 15th of each year. It is never estimated. It is established by a set formula, and since the formula was adopted, has never been changed once it has been computed and announced.
During the first week of October, the RAC sets the preliminary free tonnage percentage. The reason the figure is preliminary is because the final size of the crop has not and will not be determined until February of the next calendar year. This percentage is based on the trade demand; the preliminary free tonnage percentage is set conservatively. Normally, the final crop estimate and final free tonnage percentage is set by February 15th, following the harvest year.
Under the marketing order agreement, the signatory packers must report grower deliveries weekly to the RAC. The RAC billings to the packers for assessments are due to the RAC within ten business days of invoice date.
The RAC does not get involved in the terms and conditions of the sale of free tonnage raisins by growers to packers. No RAC actions will accelerate or delay payments between the growers and their respective packers for the sale of free tonnage raisins.
RBA: The RBA is a non-profit cooperative association established in 1966. It has approximately 2,000 raisin grower members (40% of the total raisin growers).
The benefits of membership for growers is a unified representative body. The cost of RBA membership to growers is 1% of the grower’s crop proceeds payable by the packers from the grower’s funds. The RBA returns these funds to the growers six months later.
When the RBA was formed, the original founding members felt it would be most prudent to execute a Master Contract with processors (packers) on behalf of the Association’s grower members. These processors were deemed signatory packers. The Master Contract provided the foundation for price negotiations for members of the Association. The elimination of open price contracts was the primary catalyst responsible for the formation of the RBA.
This Master Contract is more formally called the “Raisin Bargaining Association, Inc. - Contract of Sale.” It is for the mutual benefit of all and outlines the duties and responsibilities of member growers and signatory packers. There is a two-year contract for “Thompson Seedless” raisins between the RBA and the signatory packers. Under this Contract, a raisin “season” is defined as “that period of time commencing with September 1 of one calendar year and ending with August 31 of the following calendar year.”
RBA members are required to complete Individual Agreements which set forth a number of key elements including, but not limited to, the name of the grower, the number of tons to be delivered, the number of containers required, and terms of payment. Most growers and their respective packers enter into these written Individual Agreements prior to harvest and delivery. The RBA supplies its signatory packers with Individual Agreement forms they can use with their respective growers.
However, a large number of growers continue the practice of setting payment terms through a handshake agreement, often by telephone. This handshake agreement is inconsistent with the requirement of the Master Contract to execute an Individual Agreement. Unfortunately, the practice was allowed for years to the point where it became quite routine between some packers and growers. The RBA has advised certain packers and member growers that this practice of using an oral agreement for payment terms is outdated. The number of verbal agreements has declined over the years.
Independent Packers: All packers other than the Cooperative. These are the signatory packers under the RBA contract. The terms “packer,” “packing house” and “processor” are used interchangeably in the industry. “Processor” is the more correct term. The raisins pass through a manufacturing or improving process that transforms them from an inedible raw material to a finished consumable food product.
RBA Growers: Member growers, the 2,000 raisin growers discussed above.
Non-RBA Packers: Other than the Cooperative, there are a few small packers that are not members of the RBA. Together, they produce a small fraction of 1% of the total finished raisin products.
Independent Growers: All growers other than RBA member growers and Cooperative growers.
Raisin Grower/Packer Contract for Raisin Delivery
Sometime before September 25th (RBA required date), a RBA grower ”may” enter into an individual written agreement with a packer to deliver his raisins for sale and processing to an RBA member raisin packer. The word “may” is used because some times this agreement is verbal. The relationship between a grower and his packer is usually a long-term one. It is based on the quality of service, trust, and fairness, rather than price.
Raisins are normally harvested in September, then field dried for 11 to 21 days. The raisins are normally delivered to the raisin packers in October and November, but some may be delivered as early as the last week of September or as late as December. The packing house buys the “free tonnage” raisins from the grower when they are delivered and pass USDA inspection. They are also graded at delivery for quality and moisture; where growers can earn bonuses. This “free tonnage” price is bargained for between the RBA, its member growers, and the signatory packers. See discussion of “Free Tonnage” to follow:
The Packer shall acquire legal title to said raisins, subject to this Agreement, upon establishment of a reasonable price as provided under Paragraph 14. [Raisin Bargaining Association, Inc. - Contract of Sale, Para 14(g)(3)]
Said “reasonable price” shall be ascertained in the following manner: The Association shall announce an opening price or prices which the Association believes to be a “reasonable price” for each variety and grade or grades for any season on or before October 6th of such season. Such announcement shall be made upon the basis of consultations with individual packers and an examination by the Association of all available economic and supply data which influence the sale and purchase price of raisins. [Raisin Bargaining Association, Inc. - contract of Sale, Para 14(b)].
Concept of “Free Tonnage”
There are really two raisin businesses: domestic and export. The domestic price applies to the United States, Canada, and Mexico. The domestic price is kept high by the packer/grower price negotiations to protect our domestic raisin industry. If a packer chooses to sell raisins in the domestic market, he must do so at a price which will return his raw product, processing cost, and any profits the packer sets for himself. A packer may sell all of his free tonnage in the domestic market, export market, or a combination of both. Historically, roughly 70% of our annual raisin sales are domestic and 30% are export; however, some packers are much heavier in one market or another.
To compete on the world market where some foreign governments subsidize their raisin industry and production costs are lower, our United States sellers must enter the foreign market place with a much lower price to be competitive.
The RAC establishes a “free tonnage” quantity of raisins that it feels the industry can sell worldwide. As stated above, the preliminary free tonnage percentage is established during the first week of October, and the final free tonnage percentage is established by February 15th.
All raisins not designated as “free tonnage” are known as “reserves” or “reserve pool.” No packer secures permission from the RAC to sell any raisins in any outlet. Under the terms of reserve tonnage, offers are recommended by the RAC and approved by the Secretary. If packers choose to sell some of their free tonnage into the export market, they have no price regulations from the RAC. If they choose to sell into a specific export market, they can do so, and if they submit proof of export by providing the RAC with a copy of their ocean-on-board bill of lading, the RAC will pay them a cash adjustment amount which results in a blended raw product price. However, the RAC does not get involved in the price at which packers sell their raisins, either domestic or export.
The USDA Secretary must establish the free and reserve percentages. They become effective when published in the Federal Register.
The preliminary and final free tonnage percentages, as established by the RAC can be found at www.raisins.org and selecting Marketing Policy, then going to Part II - Pooling Operations Under The Raisin Program, #12, Reserve Pool Percentages, Natural Raisins, 1987-2001. The 2002 to 2004 figures were provided by fax.
Free Tonnage Percentage
Crop Year
|
Preliminary
|
Final
|
Date Established
|
1997
|
61
|
66
|
07-01-98
|
1998
|
85
|
100
|
01-15-99
|
1999
|
73
|
85
|
06-23-00
|
2000
|
35
|
53
|
08-01-01
|
2001
|
56
|
63
|
07-19-02
|
2002
|
45
|
53
|
04-02-03
|
2003
|
65
|
70
|
04-22-04
|
2004
|
100
|
100
|
10-15-04
|
This “free tonnage” is the amount the packers must purchase from their growers as established by RBA-Packer Contract. This Contract states the “Packer shall make an initial payment for raisins under this Agreement which are of standard quality and grade as herein described, excluding those raisins that have failed incoming inspection, on the basis of the preliminary free tonnage percentage recommended by the Raisin Administrative Committee... No part of such payment shall be refundable.”
For example, “free tonnage” works this way: let’s assume a grower with 100 tons delivers it all to his packer by November 1, 1999 under an established free tonnage price of $1,425 per ton. Also, the preliminary free tonnage percentage announced in October of 1999 is 73%, and the final free tonnage percentage announced on February 15, 2000 is 85% (an additional 12%). Without consideration of any specifics in an individual contract with a packer regarding crop payment dates, the grower’s entitlement to receive proceeds for the 1999 crop would be as follows:
Number of Tons |
100 |
100 X’s Final Free Tonnage Percentage |
85% |
“Free Tonnage” Tons |
85 |
X’s Price Per Ton |
$1,425 |
Crop Proceeds Established Earned (E/E) |
121,125 |
Less: Crop Proceeds Previously E/E (73 x1,425) |
104,025 |
Additional Proceeds Established/Earned |
$17,100 |
Concept of “Price Per Ton”
As stated above, the “free tonnage” price is bargained for between the RBA, its member growers, and the signatory packers. Also, it was stated that there are really two raisin businesses; domestic and export. To give an idea of the disparity in price between “free tonnage” and “reserves” for recent years, examine the following which is found at www.raisins.org, select Raisin Industry News & Reports, then 2001-2002 Annual Report Statistical Tables, then Table 10:
Crop Year
|
Free Tonnage
|
Reserves Weighted
|
Average
|
1997
|
66% @ $1,250
|
34% @ $357.00
|
$946.38
|
1998
|
100% @ $1,290
|
0% @ $0
|
$1,290.00
|
1999
|
85% @ $1,425
|
15% @ $0
|
$1,211.25
|
2000
|
53% @ $877.50
|
47% @ $294.00
|
$603.00
|
2001
|
63% @ $880
|
37% @ $261.00
|
$651.00
|
2002
|
53% @ $745
|
47% @ $205.00 As of 7/04
|
As of 7/04 $490.00
|
2003
|
70% @ $810
|
30% @ $0.00 Not Final
|
As of 7/04 $567.00
|
2004
|
100% @ $1,210
|
0% @$0
|
Not Final $1,210.00
|
Current amounts sometimes need to be obtained by contacting the RAC, which was done for the 2002, 2003 and 2004 amounts.
Reserve pools remain “open” until all of the tonnage in that pool is sold, income received, and expenses paid. Each pool stands on its own. All pools are audited by a public CPA firm, and following this final audit, the income in each pool is paid to equity holders. As income is received, the RAC makes progress payments, but each pool remains “open” until the final audit and final payment to equity holders is completed. Payments to equity holders (growers) in a reserve pool have no requirements schedule, but as a practice are made as sufficient funds are accumulated.
Note: The RAC does not accept deferred payment requests from growers for the reserve pool payments.
Interplay of Grower Receipt Requirements Under the RBA-Grower Contract and “Real World” Considerations
The Contract states, “Packer shall pay that portion of such payment (referring to payments based on the preliminary free tonnage percentage) to be paid to each grower-member of the Association (RBA) who delivers such raisins to Packer immediately after full delivery by such grower/member, provided that grower-member and Packer may defer such payment by mutual agreement in accordance with the Raisin Bargaining Association - Individual Agreement.”
The RBA’s meaning of “immediately” within the context of Para #17 is that it would be difficult for packers to make payment immediately upon the completion of delivery. The USDA work is not immediately available, and the raisins may require reconditioning. Additionally, since packers borrow money from banks to finance operations, their lenders would have to be contacted to make funds available for payment potentially every day. These factors alone would make it difficult to make such a prompt payment as suggested. If a packer and its grower could arrive at such unusual payment terms, the practice would be allowed under the Master Contract. However, if such a practice is taking place, it would be the absolute exception.
Further, in the Master Contract in Para #17, payment based on the final free tonnage is discussed: “Packer shall pay additional payments for such raisins to such grower-members and to the Association (RBA) on the basis of the difference between such final free tonnage percentage and such preliminary free tonnage percentage recommended by the Raisin Administration Committee no later than ten (10) working days after such final free tonnage percentage is published in the Federal Register.”
This recordation in the Federal Register usually takes place in the summer or as late as the fall of the year following the harvest year.
A grower member of the RBA has a 2 years bargained for price Master Contract that is used in the individual written agreements with RBA member packers. Membership in the RBA costs member growers 1% of their gross raisin proceeds, netted from the checks paid by the packers. The RBA returns these funds to the grower after holding and using them for six months. The RAC makes progress payments from each raisin pool to the respective growers who earned them. Non-RBA growers will have to negotiate their raisins’ price with packers, many of which have been doing business together for decades.
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