CHARACTERIZATION OF APPLE PRODUCTION IN THE NORTH INTERIOR OF PORTUGAL: A Microeconomic Perspective[1]
João Rebelo[2]
Abstract
The aim of this paper was to characterise in microeconomic terms apple production in the north interior of Portugal (region of Trás-os-Montes e Alto Douro) so that the indicators presented can be compared with those verified in other situations. Taking into account the complexity of the fruit cluster, where various conditioning factors intervene, we presented the framework of apple production (general aspects, typology of the fruit farms and the marketing chain) and evaluated, from a financial perspective, the feasibility of setting up apple orchards with 4, 8 and 12 ha respectively. In order to do so, we described and quantified in some detail the investment, current benefits and costs, cash-flows and net benefits involved and considered the optimal dimensions. Furthermore, we also described the costs of investment and storage/packing associated with the predominant systems of conservation (refrigeration), normalisation and packing existing in the region.
1. Introduction
The aim of this paper is to characterise and evaluate in microeconomic terms the activity of apple production in the north interior of Portugal of which the standard results presented may be used as basis for a comparison/extrapolation (benchmarking) in other contexts, in particular those regions of Romania that present identical/similar characteristics.
Naturally competitive advantage in fruit growing, as in of any other sector/activity, is dependent on the capacity to manage and retain the value added within its own filière. Figure 1, adapted from Porter (1990), summarises the determinants (elements and relations) which should be considered in the assessing of the competitive advantages of the fruit cluster, as a means of detecting the strengths, weaknesses, threats and opportunities and on the basis of which one can stipulate the most appropriate strategies and tactics for competitive success.
Figure 2 illustrates the typical market flow for apple production. While conscious that for clear appreciation of the whole sector the systemic approach included in figure 1 should be adopted, as well as the various activities of the filière inherent in the production and commercialisation of apples, in this paper we restrict the analysis to the third and fourth rectangle of figure 2, with special emphasis on the economic conditions of apple production. To this end, we present the indicators related to the framework of the production activity in the north interior of Portugal (general aspects, typology of apple farms and the marketing chain), to the financial and economic evaluation of the apple orchards (investment, farm costs and benefits, net benefits and cash-flows and optimal dimension) as well the description of conservation, normalisation and packing plants (investment associated with the dominant type of plants and the costs of conservation, normalisation and packing). We conclude with some final remarks.
2. Framework of the apple production activity in the north interior of Portugal
2.1. General aspects
Portugal is a country with a population of roughly 9.9 million distributed over an area of 91,950 km2 with extremely varied horographic and climatic conditions. Typically it has mild Mediterranean climate which is moderated by the influence of the Atlantic Ocean. The summers are hot and dry, whereas the winters are relatively mild with the exception of a few days where the temperatures can fall to below zero. The north interior is a mountainous region with a wider temperature range than the rest of the country.
On a national scale the main fruit crops[3] are oranges (20,383 ha), apples (23,967 ha), pears (13,087 ha), peaches (10,977 ha), figs (8,403 ha), grapes (7,518 ha) cherries (3,656 ha) and kiwis (1,117 ha).
As is the case with most farm products, Portugal is a net importer of fresh fruit. In the 1996/97 season its degree of a self-sufficiency degree was 69.3% against a consumption of 104 kg/per-capita (table 1). The apple production met only 81.4% of internal demand[4], the annual consumption per-capita[5] being 27 kg. Portugal imports primarily from Spain, France, Argentina and Chile, 36%, 32%, 14% and 8% respectively. The Golden Delicious variety made up 35% of the total imports. It exports mainly to Spain (about 65% total) and 18% of the total apples exported are used as rejects/seconds consumed in the manufacturing of cider.
Table 1 - Supply balance of fresh fruit in 1996/97(tons)
Production (tons) / Imports (tons) / Exports(tons) / Human consumption per-capita (kg) / Self-sufficiency (%)
Fresh fruit / 818,000 / 430,000 / 86,000 / 104 / 69,3
Apple / 236,000 / 67,000 / 13,000 / 27 / 81,4
Source: Planning and Agri- food Policy Division; Ministry of Agriculture, Rural Development and Fisheries
In the last decade there has been a gradual process of converting apple orchards[6] with the uprooting of the obsolete trees and the planting of new ones; effects which will be felt in a near future. From this arises the expectation that Portugal will be able to reach a degree of apple self-sufficiency of over 100%, without increasing the cultivated area, that is, via an increase in productivity.
Although apple orchards are geographically spread out practically throughout the country, they are most prominent in the north interior of Portugal (counties of Lamego, Tarouca, Armamar, Moimenta da Beira and Carrazeda de Ansiães), making up about 20% of the total area of the country and 40% of the national production.
Due to the climatic conditions, namely the occasional late frosts, annual production is subject to strong variations. In order to reduce the risks linked to these climatic variations and to reduce the negative impact of the incomes of fruit growers, the Portuguese government has set up an insurance scheme for apple trees from the third year of plantation onwards, and subsidises about 60% of the insurance premium. Most of the fruit growers take out this insurance policy.
2.2. Typology of apple farms
The apple farms are exclusively private almost all carry out their activity in own rustic property.
The area of farms producing of apples varies considerably, between 0.3 ha and 50 ha with the most frequent being between 2 and 4 ha.
Even though the apple tree is the main crop, most of the farmers also grow grapes and vegetables for household consumption, other fruit (cherries, peaches and dried fruit) and even raise cattle (cows and sheep). Although this type of farming does not allow the maximum benefit from the economies of scale associated with large scale of mono-production, it does allow for pooling of risks associated with the climatic factors, market conditions and even the scope economies (synergy) in the use of resources, for example, use of year-long permanently available labour.
Apple production is made up of the Golden Group (about 30%), Red Delicious (about 40%) and the rest, varieties like Granny Smith, Bravo Esmolfe (a specific Portuguese variety) and Reineta. Recently, although on a small scale, Galaxy and Fuji orchards have been set up. A few years ago seasonal varieties like Vista Bella, Jersey Mac and Summered were tried out, but these were not commercially successful. The market has also not been totally receptive to the Jonagold and Jonagored varieties.
Regarding management, there are family-owned farms as well as firm-run farms, with the former being more prominent. A farm is classified as family owned if it meets the following requirements:
- 50% of the labour is carried out by the household members who benefit from at least 50% of the total income.
- The labour does not exceed two workman units (WMU), where 1 WMU equals 240 days (1,920 hours) of work/year.
Firm-run farms are those which do not meet these requirements.
Taking into account the income and the labour time involved in the farming activity by the farmers, there are both full-time farmers (person whose income derived from farming is equal or superior to 50% of their global income and who spends more than 50% of their total labour time on the same farm) and part-time farmers (person who does not fulfil the former conditions), the former being the dominant category.
In conclusion, there are various types of farms and farmers, who generally fit into the following categories:
- Part-time farmers with multiple activities, where farming only complements the income and activity of other occupations in which they are either employer or employee. Generally these farms are small.
- Full-time farmers have farms with areas between 4 and 40 ha.
2.3. Marketing chain
Typically there are five systems for conservation, normalisation, packing and commercialisation of the fruit.
a) Direct marketing to the intermediary/fruit dealer (spot market). In this case the farmers sell the produce during/after the harvesting season to intermediaries[7], thus investing only in the production sector. In the ever-increasing concentration of distribution of agri-food products this type of commercialisation has been losing importance to alternatives approaches.
b) Downstream vertical integration, with sales to intermediaries (incomplete vertical integration). In this case the farm invests only in conservation (refrigeration) equipment and in some cases in small grading systems, selling the fruit to intermediaries. This option is more frequent in farms of average size (between 5 and 10 ha). Oversee these fruit growers have the capacity to refrigerate 27,000 tons (an average of 200 tons per fruit grower).
c) Downstream vertical integration on the part of the fruit grower, with direct sales in the consumer market (complete vertical integration). This system is adopted by bigger farms (generally with an area of over 20 ha), those which usually sell the apples essentially to the wholesalers, supermarkets and hypermarkets. This alternative implies investing in refrigeration, normalisation, packing and distribution equipment. As a whole, these fruit growers have the capacity to refrigerate 16,000 tons (an average of 800 tons/fruit grower).
d) Co-operatives (formal co-operation). There are two fruit co-operatives in the region capable of refrigerating 8,000 tons (about 60% controlled atmosphere and 40% normal atmosphere). Despite subsequent technological changes, these units were first installed in the late 1960's and early 1970's as a result of the first boom in apple tree plantation and to meet the demands of the farmers. These organisations whose aim is to associate small-scale farmers, have had difficulties in penetrating key markets, mostly due to the organisational complexity and the type of management inherent in the legal status of the co-operative firms (Vitaliano, 1983) and to the free-rider problem on the part of the associates (leaving the co-operative when production is low and prices are better through other means of commercialisation).
e) Producer firms (informal co-operation). These are private companies run by farmers who co-ordinate their commercial activity horizontally, installing a unit which stores (refrigerates), packs and normalises the fruit of its associates who, as in the co-operative, are autonomous in the regarding management decisions. Essentially the difference between this and a co-operative is the legal form and the concomitant differences in organisational and management. In the last decade this has been the preferred option. Four units with the capacity to refrigerate 15,000 tons (60% controlled atmosphere and 40% normal atmosphere) have been constituted in the region. Regarding forward individual integration, these units allow simultaneous economies of scale to be reached, namely in transaction costs and the capacity to negotiate with firms involved in the final distribution (supermarkets and hyper-markets) which is ever and more concentrated and absorbs an increasing share of the market (over to 50%).
The option to sell the fruit via one the above means is a strategic choice where various factors are involved, both at the level of capital/risk and management. Peterson and Wysocki (1998) suggest some factors to take into consideration when deciding to opt for the strategy of co-ordination/vertical integration.
In point 4 we will summarise the investment and respective exploitation costs associated with the systems referred to in b), c) and e).
3. Financial and economic evaluation of the apple orchards
In this section we present a set of indicators relevant to the investment, costs and gross benefits of exploitation which allow us to calculate the associated net benefit of alternative orchards with 4, 8 and 12 ha. Underlying the choice of these three options was, essentially, the possibility of mechanisation using either a hired or self-owned tractors and also the fact that, in region’s case, 4 ha is considered to be the minimum size for the farm to be placed in the category of full-time farmer. The monetary values are all given in US dollars ($).
3.1. Investment
The investment associated with the setting up of orchards varies naturally with the concrete conditions of each farm. In the region, besides the direct investment in plantations (preparation of the ground, correction of soil conditions, fertilisation, plants, supports, wire and labour) there is also the need to trap water supplies, store water and install of watering systems. The latter two are important because the availability of water is more and more one of the critical factors to consider when deciding on investment in plantations.
a) Investment in plantations (cost/hectare and global).
In order to calculate the investment per hectare, we consider the following assumptions:
- Three types of soil exist, which influence the preparation of the ground for plantation: Deep soils only need deep ploughing; soils on flat land need deep digging and levelling; half slopes soils need terracing, deep digging and levelling.
- All soils in the region are acidic and poor in organic matter, therefore, in need of organic matter and fertilisers (phosphorous and potassium).
- Apple trees are planted at intervals of 4.5x1.5m2 (1,400 units/ha), on a central axis and using M9 rootstocks.
- The irrigation is carried out using drip irrigation. The droppers are at distance of 1.25 m from each other, that is, 1,680 droppers/ha (1,400x1.5m /1.25m), each of them with a capacity of 4 litres/hour. There is a total consumption of 1,512m3/season/ha in an average annual period of watering for 3 months and 2.5 hours/day.
- The average investment in water accessing and storage (bore holes, wells, ponds, tanks, etc.) is of about $2,000/ha.
- The average cost of drip irrigation is $2,600/ha.
In table 2, we summarise the investment in the various components of plantation sizes, for the three types of soils and areas, including the access and storage of water and drip irrigation. Naturally, besides the monetary economies (for example, low prices associated with greater volumes of purchases and/or services), if the plantations are established in a single block it is possible to obtain technical economies (less consumption of some parts of the investment), therefore, some scale economies. Nevertheless, besides the difficulty of quantifying these savings they are not considered relevant, so we have not included them in our analysis.