This thread didn’t originate with me, so herewith a 10-gallon-hat tip to fellow PD blogger and food writer, Michele Anna Jordan, who posed the question in her weekend post and has talked about the high cost of lemons before.
From my perspective, as an economist, I tend not to worry overly much about the “fairness” of prices, preferring instead to think of the price of a thing as a function of market forces, in which the cost of production battles it out with consumer preferences: Too high a price, and people will buy less, companies will produce more, and prices will fall; too low, and people will buy more, companies will produce less, and prices will rise. In the case of lemons, however, I have long shared Ms Jordan’s intuitive sense that the better part of a buck for a commercial lemon just seems expensive and, like anyone over the age of 5 and not in a coma, I am painfully aware of the economic date rape perpetrated by such noteworthy offenders as high-speed cable and internet, public utilities, and – the topic at hand – large scale agri-business, which got me thinking: Is the market for lemons competitive, or just another special-interest screwing?
As a rule, agricultural prices are distorted by fiat – special-interest tariffs on international trade; a perverse system of farm subsidies and price controls; dangerously misguided food-for-fuel mandates – so when I pay a dollar for a lemon that was probably grown right in the San Joaquin Valley, I start to wonder whose wallet I’m padding. Now, you may object – not entirely unfairly – that my research is about deep and exhaustive as an online dating profile, but from what I turned up, and to my surprise, the bulk of the evidence suggests that lemon prices – as annoyingly high as they may be – are really just a function of supply and demand:
- Supply is under pressure. Domestic supply – over 90% of which comers from CA and FL – has been falling sharply for at least a decade due to fewer planted acres, possibly because producers have been reallocating their arable land to nuts. (I don’t know why this should be: possibly, nut oils have risen in value as another unintended consequence of food-for-fuel policies, or perhaps it’s something else, but it is clear that nut acreage has been increasing at the expense of citrus acreage.)
- Recent weather patterns have exacerbated the problem. Producers in CA and FL, as well as those in Chile and Argentina (both important international suppliers), have drawn the short straw on temperatures again (this happened to the domestic 07/08 crop as well), and lemons are particularly sensitive to frost.
- The supply response to rising lemon prices may be muted, at least in part, because lemons are much more sensitive to frost damage than oranges, and I’m guessing that farmers don’t like that extra volatility in their income streams. Thus, despite high lemon prices and apparently superior returns relative to oranges (c.f. recent cost and return studies from UC Davis, here and here), orange farmers may be reticent to replant their orchards with lemons.
- Demand has increased, largely because of consumer support for the food service industry, which purchases about half of all lemons consumed in the US, putting further upward pressure on prices (the deep-recession conditions of 2009/09 were particularly acute for restaurants).
- Trade distortions are minimal. Unlike, say, sugar – domestic sugar producers have been delivering a Herculean shafting to the American consumer (and, for what it’s worth, to our poorer, sugar-producing neighbors in the Caribbean) for about 200 years and counting – citrus crops receive very little trade protectionism. The typical duty on fresh citrus entering the US is 1-3%, which hardly seems sufficient to deter imports in the event that domestic US prices were high enough to represent egregious profit margins; in other words, even if the domestic citrus industry were uncompetitive, imports would (and in fact do) fill the gap.
- The supply chain favors the consumer. Even setting aside imports, domestic citrus producers face an uphill battle in setting prices because of consolidation in their retail markets (Walmart alone accounts for some 10% of all of Sunkist’s sales). Although producers certainly try to collude (they would use the term “cooperate”) when marketing their crops, mainly via the Sunkist brand, they do so in the face of a the very harsh reality: Inasmuch as there is pricing power, it favors the large grocery chains (who, taken as a whole, represent perhaps half of all citrus fruit sales).
My advice, if you’re lucky enough to be reading this at a Sonoma County address? Plant one Eureka, a couple of Meyers, and grow your own, because prices are unlikely to persist at lower levels.