Strawberries in January: Can NAFTA renegotiations challenge Driscoll’s supply chain?

Americans enjoy berries year-round in large part due to Driscoll’s presence in Mexico. How will this change if NAFTA renegotiations lead to an increase in Mexican import prices?

Driscoll’s is the world’s largest berry producer, contributing to one third of the six-billion-dollar U.S. berry market [1]. Beginning in the early 1990s, Driscoll’s started investing in growing operations in Mexico, where they found regions with a climate that allowed growing berries in winter months. This timing coincided with the ratification of NAFTA, which went into effect in 1994 and enabled cheaper imports of Mexican-grown berries into the United States [2].

Below are Driscoll’s growing calendars for several of its primary berries, which show the impact of Mexican farms on berry availability in winter months.

Strawberries:

Raspberries:

Blackberries

[3]

Now that Trump is in office, he is seeking to fulfill one of his hallmark campaign promises to renegotiate NAFTA with an “America first” philosophy. One of the major proposed changes to NAFTA would make it easier for the U.S. to put tariffs on imported food. Currently, anti-dumping action can only be taken if farmers can prove that 1) a foreign product has been sold at an unfairly low price for three years and 2) the cheap imports are hurting the industry nationwide. Under the proposed change, the threshold for anti-dumping claims would be lowered; farmers would only need to prove foreign growers were dumping for a single season, and that this is affected just one region of the country [4].

The proposed change would benefit growers in the southeastern United States, who directly compete with Mexican growers because their harvest seasons overlap. However, it would hurt many California growers such as Driscoll’s, who operate farms in Mexico and rely on Mexican imports during the winter months. It would also hurt the many American farmers exporting to Mexico, who would be subject to the same regulation as imports from Mexico [5].

To address this threat, we’ve seen two primary responses from Driscoll’s. First, to address the short-term issue of the NAFTA negotiation, Driscoll’s has teamed up with several other major produce companies to form the Produce Coalition for NAFTA. The coalition formed in August and is working together to garner support for maintaining NAFTA in its current state [6] [7]. The coalition has also teamed up with other agricultural associations representing major exporters of agricultural products to Mexico such as dairy, corn, and soy, who also stand to lose from the proposed changes. On October 25, the associations co-authored a letter to Secretary of Commerce Wilbur Ross arguing that NAFTA withdrawal would cause “immediate, substantial harm to American food and agricultural industries and to the U.S. economy as a whole” [8].

Secondly, over the long-term Driscoll’s has made it clear that it is committed to continuing production in Mexico regardless of the outcome of the NAFTA negotiations. According to Garland Reiter, a leader at Driscoll’s, “If you look at the magnitude of the investment in Mexico, there’s no way that’s coming back to California.” He says Driscoll’s will keep growing in Mexico, in large part because it would be challenging for Americans to replace Mexican production with fresh berries from somewhere else [1].

Given that the outcome of the NAFTA negotiations will likely be determined by political forces over which Driscoll’s has limited control, the company should prepare for a scenario in which they see the cost of Mexican-grown berries increase. Under this scenario, Driscoll’s has three primary options:

  1. Pass the increased cost on to consumers, and risk volume losses
  2. Absorb the increased cost themselves, and take the hit to margins
  3. Seek operational efficiencies to generate savings and offset the tariff increase

I recommend that Driscoll’s start planning for this scenario by exploring option number three, and assess whether there is anywhere in their supply chain where they have unrealized operational efficiencies. This option would minimize the impact of the regulation by protecting both margins and volume. If they are unable to cover the costs of the tariff through supply chain efficiencies, I recommend they conduct a price elasticity study to determine the optimal pricing that will minimize volume loss and maximize unit economics. I do not recommend that Driscoll’s explore shifting production to the U.S., given that the investment required would likely not be offset any tariff mitigation.

Some questions emerge from this analysis that warrant further discussion:

Is there more that Driscoll’s can be doing to lobby the U.S. government and protect NAFTA? Is there a role for consumers, who may bear the brunt of the cost of a NAFTA rewrite, to weigh-in? Which stakeholders should the Trump administration be most concerned with as they seek to renegotiate NAFTA? Is there a scenario in which the best outcome from a political standpoint does not align with the best economic outcome for Americans?

(Word count: 776)

Sources:

[1] Dana Goodyear, “How Driscoll’s Reinvented the Strawberry,” The New Yorker, August 21, 2017, [https://www.newyorker.com/magazine/2017/08/21/how-driscolls-reinvented-the-strawberry], accessed November 2017.

[2] Dan Charles, “Why Ditching NAFTA Could Hurt America’s Farmers More Than Mexico’s,” NPR, February 16, 2017, [https://www.npr.org/sections/thesalt/2017/02/16/515380213/why-ditching-nafta-could-hurt-americas-farmers-more-than-mexicos], accessed November 2017.

[3] Driscoll’s, “Where We Grow,” https://www.driscolls.com/about/art-of-growing/where-we-grow, accessed November 2017.

[4] Patrick Gillespie, “NAFTA talks spark deep divide in American agriculture,” CNN Money, September 12, 2017 [http://money.cnn.com/2017/09/12/news/economy/nafta-agriculture/index.html], accessed November 2017

[5] Helena Bottmiller Evich and Catherine Boudreau, “U.S. produce growers deeply divided over NAFTA,” Politico, August 25, 2017, [https://www.politico.com/story/2017/08/25/nafta-us-produce-growers-242031], accessed November 2017.

[6] Ashley Nickle, “Produce Coalition for NAFTA looks to reach consumers,” The Packer, October 27, 2017 [https://www.thepacker.com/article/produce-coalition-nafta-looks-reach-consumers], accessed November 2017.

[7] “U.S., and Canadian Fruit and Vegetable Companies Unite to Support Modernization of NAFTA”, Business Wire, August 31, 2017 [http://www.businesswire.com/news/home/20170831005799/en/U.S.-Canadian-Fruit-Vegetable-Companies-Unite-Support], accessed November 2017.

[8] Food & Agriculture Letter on Importance of North American Market, sent to Secretary of Commerce Wilbur Ross on October 2, 2017, http://producecoalitionfornafta.com/wp-content/uploads/2017/10/Letter_FoodAGTrade-Ag-MarketsWithdrawal_171025.pdf.

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Student comments on Strawberries in January: Can NAFTA renegotiations challenge Driscoll’s supply chain?

  1. A NAFTA rewrite will inevitably hurt U.S berry consumers assuming that they are unable to source berries with a cheaper import duty from another neighbor, which is likely to be the case. Consumers will have to pay a higher price for their berries but they are not the only stakeholders that will suffer it seems. American dairy farmers, particularly those who rely on exports, will face the brunt of a NAFTA rewrite as Mexico is the largest buyer of U.S dairy products worldwide. Driscoll might consider partnering with farming cooperatives in the U.S such as, Dairy Farmers of America (DFA) to raise consumer awareness around the issues and costs that may result if the U.S were to abandon NAFTA. They might achieve this through an educational advertisement series that demonstrates how stakeholders across the value chain, from growers to dairy farmers to end consumers, would be impacted if the U.S were to pull out of the agreement.

  2. Thanks Sara for a great article. It is incredible that the government is still reluctant to advance in negotiations for NAFTA, specially as exports to Mexico are currently above $12 billion per year and more than 50,000 jobs in both the US agricultural and auto manufacturing sectors are at stake, according to Forbes.

    To your question on which stakeholders should Trump prioritize on, it seems that the latest talks among the White House, Canada and Mexico are not signaling an optimistic scenario for the agricultural trade anytime soon, and major consensus has been in minor and more technical sector of the pact like digital trade [1]. Other major business groups in the U.S. that warn the president about the potential disaster of his proposals are not being heard.

    I agree with TS that, for this particular case, it seems like consumers will absorb higher prices and lower product choices. With a disruption in trade especially with states that are near the borders with NAFTA members and currently hold solid commercial relationships with their neighbor countries, local economies will suffer as well.

    If nothing is achieved soon that favors all three member countries, I would question the power of negotiation of the US to define terms of trade in the future.

    [1] Parish, Nathaniel. “Have NAFTA Talks Reached A Breaking Point?”. November 30th, 2017. https://www.forbes.com/sites/nathanielparishflannery/2017/11/30/have-nafta-talks-reached-a-breaking-point/. Accessed on November 30th, 2017.

  3. Your suggestion to aim operational efficiencies makes sense and is likely more palatable to fruit-loving consumers, but I wonder whether Driscoll’s could also move in a different direction in its supply chain.

    Consider re-balancing Driscoll’s sourcing to include more domestic suppliers e.g., those southeastern growers in the U.S. whose season overlaps with Mexican berry farms. How liquid are supplier contracts for berries, so that Driscoll’s could use its scale to offer a slightly higher price to farmers, while remaining below the tariff-loaded import price and stealing cheap domestic farmers who produce better in winter away from its competitors? Perhaps the company could relax its margin requirement not from the end-consumer’s price, but from the price that it offers to the primary grower.

  4. I agree with your recommendation for Driscoll to maintain production in Mexico and invest in any incremental operational efficiencies, though up to a certain extent. I think that a price elasticity study can’t hurt but that they should pass only a portion of any residual costs to consumers and take a hit to their margins for the rest. My reasoning is that Driscoll should take a short-term margin hit, increase its focus on lobbying and wait out the duration of the Trump Administration while building support for another NAFTA-renegotiation agreement when a new Administration assumes power. Because the nature of NAFTA is only trilateral, though this example only focuses on the U.S. and Mexico, I am more bullish on a new Administration reducing the tariffs with a similar agreement in the near-future (next Administration) particularly if Driscoll and other members of the Produce Coalition and other agricultural associations demonstrate how Trump’s policy has hurt U.S. agriculture businesses. Because of this, I don’t think Driscoll should upend its existing production processes and worry that if Driscoll passes on too many costs to customers in the short-term, they may hurt their brand in the medium-term, when I assume that the U.S. lobbying machine will kick into play and unwind Trump’s policy if these powerful agricultural associations continue to object to Trump’s NAFTA’s renegotiation.

  5. I wrote about a very similar issue in my essay — but about the beer industry and how that will be affected by a potential NAFTA rewrite. I think you raise some interesting questions about what more Driscoll could be doing on the policy side, and also the role of the consumer in this issue. These questions converge for me given the number of industries / consumer products that will be affected by the rewrite. There’s an opportunity for Driscoll and the other members of the Produce Coalition to band together with, for example, the alcohol industry or the dairy industry as suggested above, to place even more pressure on politicians. I think this large consumer products coalition could and should also launch a campaign to speak to consumers about this issue. I think the vast majority of Americans don’t realize that the NAFTA rewrite could mean they are paying more for their strawberries, or their beer, or their milk. If these brands, which are so trusted and so part of our everyday lives, start talking to consumers about this issue, perhaps public pressure could rise and work with the industry pressure to push politicians to avoid a rewrite. Of course, there could be dangers to this strategy — we’ve seen that this administration can take swift action against entire industries or companies. Additionally, in such a delicate political environment in the country, would a move like this be seen as Driscoll or any other company “leaning left” on trade? And if so, how would that affect consumer loyalty?

  6. You suggestion to improve their current operational efficiency is the most beneficial – even in the absence of changes in the NAFTA – in the short term and long term. For instance, the company can look into innovative ways to increase the production and lengthen the preservation time of strawberries.
    In the event that the US exists NAFTA, passing the increased cost onto consumers can be a viable short-term solution. To understand the consumers’ reaction to the increase in price, a study price elasticity of demand would be helpful to understand ways to minimize the impact on sales. Furthermore, the company may also benefit by diversifying their growing regions – for instance, by expanding their production in the southeast United States – as a contingency plan.

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