Lemonomics

So why is it OK for 25 to 45% of Ventura County lemons not to be sold as fresh fruit? The first thing to know is that demand for lemons is pretty inelastic. Simply put, consumers know how many lemons they are going to buy, and changes in price don’t tend to influence buyer behavior very significantly.

On the one hand, this is great. Even a relatively small shortfall in lemon supply tends to make for very good prices. Unfortunately the reverse is also true: small surpluses drive prices into the toilet.

 The industry’s safety valve is the market for processed lemon products: Lemon juice, lemon oil and citric acid. These lemon products have a great range of uses, but it would never make sense to grow lemons just for this market. The prices are horrible. But for fruit that would otherwise be culled, it makes perfect sense. Fruit that is damaged, scarred, deformed or off size can be sold and utilized, recapturing a few pennies for the grower from what otherwise would be waste. Processors very readily will absorb more fruit with even slight pricing adjustments.

At a certain point is became clear that surpluses of better quality fruit could be diverted to these markets as well, helping to manage inventory levels of fresh fruit.  A quick (and very simple) example:

Let’s say you have two tons of lemons: You can sell one fresh for $500/ton, and one for products at $10/ton. Obviously, it is vastly preferable to sell it all fresh. But let’s suppose that this isn’t one grower’s harvest of lemons but the whole industry. If you sell one ton each for fresh and products, you get $510. But what if you try to sell it all fresh? The price is forced down. In the exampe, lets assume that it hits $250/ton. Selling both tons fresh yields $500, not $510. But if you withold a quarter ton from the  fresh market, and sell .75 tons fresh, and 1.25 tons for product, price rises of $800 a ton. You would gross $606.25, even if the product fruit dropped by 50%.

The numbers above are approximate, and this is a market that fluctuates constantly based on weather and several points in the globe, exhange rates, energy prices, consumer confidence and many other factors. But the bottom line is this: in lemons it pays to overproduce and use the product market to modulate inventories of fresh fruit. At the February 2009 AFA discussion of economics the number was thrown out of 55% fresh. My experience is that the fresh percentage is typically closer to 70%, even though I used 50% in my example above.

A final note on the topic. Overproduction of lemons is not subsidized by the taxpayers in any way. It is simply a market based solution to meeting the demands of two very different customer bases: the consumer who wants consistently beautiful yellow fruit year round (which Ventura County is able to provide), and the processor who needs a cheap source of raw materials. The grower, while always grumbling about the crappy product prices, enjoys a relatively stable market and pricing structure for the fresh fruit that is their bread and butter. Were inventories allowed to flucuate as much as they would without the outlet for surplus fruit, a single bumper crop could drive a lemon grower to insolvency.

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