2.7 Impacts of Change
The impacts of the change can be considered in terms of the transition, the changes in industry behaviour, the changes in industry economic performance, and the comments from industry participants in the period since Board reform.
2.7.1 The Transition
The change to the new arrangements in Israel happened abruptly and without warning (though it must be kept in mind that the previous board structure had in a sense been under continuous review due to the declining performance of the sector). The quick decision and the absence of consultation meant there was some confusion in the sector at the time. Some commentators referred to the period as oneof chaos. Certainly established trading relationships were broken and new relationships established. However, analysis of price and quantity data shows no evidence of chaos at the time and it is perhaps more accurate to characterise it as a period of both surprise and learning. The transition was perhaps both helped and harmed by many of the board staff finding employment with the new exporting agencies.
2.7.2 Changes in Industry Behaviour
The citrus industry in Israel has changed substantially during the period since reform. These changes are in both operations and institutions. As a result of the changes in the international market place for citrus fruit, the changes in the Israeli economy and the industry reforms, citrus production has declined by nearly 25% between 1991 and 1996 but exports have increased by 5%. Local market consumption has increased 14% and low value industrial use has declined 37%. Over the same period the number of pack houses has declined from 39 to 20. Cooperative firms in the industry have declined at the expense of investor owned firms. The mix of citrus fruit has changed with increased emphasis on red grapefruit and easy peel varieties of citrus. These changes are reflected in Table 4. It should be noted however that the new planting had started prior to the regulatory reform.
| Table 4 Changes in Israel Grain
and Horticultural Production between 1991 and 1996 |
|||
| Cereals Citrus Fruit Coarse Grain Fruits excluding melons Vegetables & melons Grapefruit & Pomel Lemons & limes Oranges Tangelos etc |
-40% -5% -19% -1% 25% 20% -31% -26% 28% |
||
The current exporters have increased the share of their sales that are made directly to retailers as opposed to the old regime where sales were mostly made on consignment. The new firms have reduced their stock carried at Israeli ports and abroad. Further, some sources say, nearly all growers are paid within a period of eight weeks and many at the orchard gate (Eurofruit, February 1997, p44) as opposed to the old system of end of season payments. It appears that the new exporters are paying greater attention to customizing product for retailers and this is resulting in an increased variety of packaging being used by exporters. The new exporters are also investing substantially in the upgrading of pack houses and other fruit handling facilities. One benefit of the multiple exporters appears to be greater precision in pooling. With smaller well specified pools there is a greater recognition by growers of price-quality relationships. However, it appears there is still substantial room for improvement, especially communicating expected price differentials to growers in advance.
The new exporters have been relatively successful despite entering the market in difficult times. Since 1991/92 when they were 93% dependent on Western European markets they have reduced that dependency to 76% and increased sales to Eastern Europe nearly 4 fold to 15% and nearly tripled Far East (Asian) exports to 8%. Agrexco has found the freedom to export citrus to complement its other export activity and Mehadrin likewise has exported persimmons as well as citrus. All the major exporters are considering involvement in marketing fruit from other countries. Table 5 summarizes these changes.
| Table
5 Industry Changes Since Deregulation |
|
The exporters of citrus from Israel continue to be regulated in significant ways. For instance in one season Mehadrin and Agrexco retained exclusive marketing rights to France, and sales to Italy were coordinated between the major exporters. Sales to Japan were limited to five exporters in 1995 compared to the 17 of the previous season (Eurofruit, October 1995, p65). There appears to be substantial uncertainty as to the basis for such regulation and its future pattern.
The changes in the Israeli sector have also raised several matters of concern. Firstly, there are numerous small producers of citrus fruit and it is a challenge to know what extent the industry and/or Government can or should act to assist them. Secondly, the industry owns nationally the Jaffa brand which is used by all exporters. The brand remains the intellectual property of the Citrus Marketing Board which has spent $500m on promoting since World War II (Eurofruit, October 1996, p108). Exporters appear to be uncertain as to the future of this brand and how it fits within a market with greater product differentiation. Thirdly, the future role of the Citrus Marketing Board and the Government is unclear. Whilst the Board remains it provides a ready platform for those who are committed to interventionist policies and who are keen to return to single desk selling.
It is important to note where Israel has retained joint activities. It has retained joint action via the Citrus Board for funding and managing research and promotion funds. It has retained joint action via the Ministry of Agriculture for information collection and distribution and for inspection services.
2.7.3 Changes in Economic Performance
Changes in the economic performance of the industry are difficult to determine in the short run due to the effects of changes in the international citrus market place, changes in the Israeli economy in addition to changes in the marketing institutions. A preliminary summary of indicators is presented in Table 6. These results (which must be treated with caution as they are only two point estimates) indicate a surprising degree of stability within the industry with some modest improvement in performance.
| Table 6 Citrus industry Economic
Performance Since Reform |
|||
| Indicator | 1990/1991 | 1995/96 | |
| Export Volume ('000MT) Export Value ($US/MT) Production ('000MT) Exports as % of prodn Discard % Costs as % of Fgn price |
310 $445 1094 28% 2.8% 70% |
346 $506 947 36% 1.6% 59% |
|
The significance of the production decline reported in Table 6 may not be apparent as there has been a greater production loss from older citrus areas which has been partly offset by new irrigated orchard developments elsewhere (Eurofruit, February 1994, p23). This has been beneficial for the economy as low value orchard land has moved to higher value uses and new improved orchards have been established. However there have been transitional costs for some traditional orchardists. It is hard to estimate the impact of the changes on orchard incomes but Table 7 reports changes in orchard gate citrus prices and Figure 4 presents the data in index form with the base of 100 being the 1991/92 season. Orchard prices for navel oranges have improved since the reforms whereas orchard prices for shamouti, valencia and white grapefruit have fluctuated around the base while orchard prices for minneola and red grapefruit have declined.
| Figure
4 Orchard Gate Prices Indices for Israeli Citrus
(1991/92=100) |
| Table 7 Orchard
Gate Prices for Israeli Citrus ($US/ton) |
|||||||||
| 1988/89 | 1989/90 | 1990/91 | 1991/92 | 1992/93 | 1993/94 | 1994/95 | 1995/96 | 1996/97 | |
| Navel | $163 | $145 | $126 | $94 | $92 | $118 | $125 | $165 | $150 |
| Shamouti | $136 | $148 | $156 | $117 | $95 | $120 | $150 | $175 | $135 |
| Valencia | $124 | $168 | $143 | $128 | $82 | $113 | $150 | $160 | $110 |
| W.Grapefruit | $111 | $126 | $130 | $97 | $160 | $130 | $170 | $110 | $70 |
| R. Grapefruit | $256 | $410 | $364 | $289 | $155 | $120 | $180 | $165 | $135 |
| Minneola | $218 | $302 | $454 | $423 | $185 | $140 | $200 | $195 | $175 |
2.7.4 Sectoral Comments Since Reform
Initially producers and the Citrus Marketing Board were shocked by the proposed changes. However it appears views have changed considerably in the years since. Yoram Weinberg, Managing Director of Mehadrin Export Ltd argues "there is no doubt that competition in the export sector has increased efficiency and quality and reduced costs for most citrus growers in Israel." (Eurofruit, June 1994, p18). Further he argues the changes were necessary to facilitate brand differentiation, improve communication between growers and retailers, and increase product customisation (Weinberg, 1996, p5). This view is supported by Don Shmuuli, then Chairman of the Citrus Marketing Board, who has argued the increase in citrus exports "proves without a doubt privatisation was worthwhile" (Eurofruit, February 1997, p44). Similarly, Mena Davidson, General Manager of the Citrus Marketing Board, has recently attributed the successful reconstruction of Israel's citrus sector to privatisation (Eurofruit, February 1997, p44). Further research and analysis of the views of industry participants and observers is needed but it is clear that there is currently substantial support for the current citrus marketing regime in Israel.
Despite the fact that many industry participants are happy with Israeli export arrangements there are pressures for further reforms. The major concerns are:
- the basic legislation discourages investment,
- the lack of transparency with regard to the Board,
- barriers to entry, and
- problems from State Sector involvement.
Investment is discouraged because the formal power of the Board is far reaching and widespread including rights to issue marketing programmes and regulations and engage directly in commerce. Although these powers are not used at present they have not been removed from the legislation.
Transparency is a problem in that it is not clear what principles are guiding the Board and on what basis critical decisions are made (like decisions to licence an exporter). Although the Board is no longer a single desk exporter the exporting system is seen by some analysts as a cartel whereby the dominant players can still exploit growers. Discussion is ongoing as to how to identify and minimise barriers to entry. State sector problems have largely involved the continued low profile use of subsidies. They have been presented publicly as incentives to promote risk bearing by exporters but the uncertainty associated with these funds has distracted growers and exporters from focussing on the market place.
A recurring issue throughout Israel is the role of the Jaffa brand. The critical issue is who should be able to use this brand and under what circumstances and what terms. This brand is now licenced to citrus distributors other than the Board but earning some royalties for the Board. They have alsoagreed in principle to the brand to be used on fruit grown in the Southern Hemisphere. However, it is recognised that maintaining a brand is expensive. The Jaffa brand is now used on 99% of exports but it is not promoted in all countries. Further, citrus fruit vary in flavour depending on the stage of the season and the growing locality. It does not seem appropriate for the same brand to be used for fruit from different locations at different points in the season. Certainly it is not appropriate to pool the returns from these different fruit. The Israeli Ministry of Agriculture discussed with us the possibility of alternative branding strategies. The French wine industry‘Appellation d’Origine’ rules associated with Champagne have an important branding function which benefits producers and consumers. Similarly the Dutch flower auctions have grower numbers which identify the origin of the flowers and which function as an important quality mark.
Another major issue of discussion is the role of multinational food, fruit and fibre traders. Israeli firms aspire to be successful at this level. To the extent that they have opportunities they do not wish to be constrained by rules relating to botanical classification of products or the structure of local regional economies. Most multinational traders trade in multiple products. Hence in the Israeli context there is substantial discussion about the future of Agrexco. There have been numerous reports of its imminent demise (eg Eurofruit, September, 1996 p6; and Eurofruit, February1997, p4) yet it persists. The future of this protected SOE is another important determinant of the way the Israeli citrus exporting evolves.
2.8 Conclusion
The Israeli reforms are generally regarded as an improvement on the historical situation in Israel. Israeli citrus returns have been enhanced, the industry has adapted significantly and there is the potential for a sustainable future despite strong international competition. However there is significant room for further reforms. Most current debates focuses on the changes necessary to position themselves for the future. Critical decisions remain concerning the minimisation of barriers to entry, appropriate responses to the propensity of politicians to intervene, the role of cooperation and restrictions in particular markets, the future of the Jaffa brand, and the future of the Agrexco monopoly. The response of the industry and the Israeli Government will determine if the recent success is sustained.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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