Dr. David Magana: Growing demand: Producing fruits and vegetables in today's market

The following is an edited transcript of Nicole Erwin's interview with Dr. David Magana. Click below to hear the full audio:

Nicole:           They’re among the biggest issues facing fruit and vegetable production in the 21^st century — how are the most innovative producers tackling challenges like disease and consumer demand? We have those questions and more for Dr. David Magaña, vice president and senior analyst with the Rabobank RaboResearch Food and Agribusiness Group. Thank you for joining us, Dr. Magaña.

David:             Thank you for having me.

Nicole:           The good news for fruit and vegetable producers is that the rise in global income — and the growing middle class in developing countries — is leading to increased produce consumption. However, you have identified a complex convergence of challenges with sustaining year-round growing demand. Can you elaborate on those challenges?

David:             Yes. As many people know, one of the main challenges for the global food system is to feed the world — which has a growing population. By 2050, we're going to be above nine billion people. What’s more important is that the global middle class is growing; recent projections by the Organization for Economic Co-operation and Development (OECD) show that, by 2030, more than five billion people are going to be classified as middle-class. That has an even bigger impact on the food system, as food perception and food purchases are to be modified not only by increasing population, but also by increasing price. We are faced with a challenge to be a better fit in the world. We also need to take care of the largest resources, such as water. People are asked to allocate perhaps less water to agriculture in some regions. They also want producers to deliver perfect quality in food but, at the same time, use less chemicals and less pesticides.

                        They want us to have perfect quality year-round. At the same time, they want more local product, and that is difficult to offer in some regions. We need trade to diversify the growing regions and to have year-round supplies. They want convenient products, but they want also less packaging, less garbage and less plastic in the oceans. They want to keep prices reasonable in the face of increasing labor costs and increasing regulations. That is one of the main challenges for the food system: to have more to offer the world but, at the same time, meet all these expectations.

Nicole:           There’s this really interesting, ironic twist going on here; that rising middle class in the developing world would seem like a great thing — and it is — but at the same time, it's applying pressure to the ability to meet rising demand.

David:             Yes, it is. We see this increase in [the] middle class particularly in Asia. By 2030, it’s projected that the two-thirds of the global middle class will live in the Asia-Pacific region. An interesting number is that, every year, more than 100 million people leave poverty to become middle-class. That will have a huge impact on food choices and on food perception. They normally demand inexpensive carbohydrates, but they're shifting to more animal protein, dairy and fresh products and even more organic products and functional foods.

Nicole:           People like you understand this, but do you think that the world grasps this change, that's coming fairly quickly?

David:             Well, that's a challenge because, as people increasingly live in more urban settings, many people don't understand where food is coming from. That is also a challenge — just to educate older people to know where that food is coming from and what that represents for the environment, for example.

Nicole:           Dr. Magaña, you have quite a bit of experience in understanding agricultural market integration under the North American Free Trade Agreement (NAFTA). What does your past research in fresh fruit, vegetable markets and food security tell you about how the global markets respond to free trade?

David:             When we have free trade, we are allowed to better face the year-round demand. For example, in the U.S., a few decades ago, we could only consume fresh strawberries or avocados a few weeks out of the year or, perhaps, only during the summer months. But now, given this advance in trade and logistics, we have year-round supplies because we can rely on supplies from Mexico, for example.

As a matter of fact, Mexico has become the biggest exporter of fresh vegetables in the world. The main market is obviously the U.S. So, trade is an important trend in fresh fruits and vegetables, and proximity is key, since we are dealing with perishable products.

Nicole:           What could be the consequences to agriculture of the U.S. pulling out of NAFTA?

David:             Well, that's an interesting question. We just released a piece of research in the RaboResearch group that addresses that question. NAFTA has been in place for the last 24 years, and they have been trying to reach a new agreement for the last eight months. Just remember that one of the objectives of renegotiating NAFTA was to have a more equilibrated trade between the U.S. and, especially, with Mexico. If the U.S. will settle NAFTA, we could see fewer imports from Mexico, especially in durable goods. That decrease in the level of trade would have a significant economic impact in the Mexican economy. Our macroeconomic research team expects that, if the U.S. pulls out of NAFTA, the Mexican peso could depreciate up to 20 percent.

Nicole:           Wow.

David:             With that depreciation rate, the U.S. would be charging a Most Favored Nation tariff — or MFN — that is quite low for fruits and vegetables. The U.S. market for fresh fruits and vegetables relies heavily on supplies from Mexico. The U.S. has a low MFN — just one digit.

                        Just to give an example, avocados are about 4 percent the MFN tariff that the U.S. would be imposing if NAFTA is no longer in place. For strawberries and blackberries, the tariff is close to zero. Tomatoes and peppers, cucumbers, are around 5 percent. So, we could see that the expected Mexican peso depreciation could more than compensate for that MFN tariff. In that scenario, we could actually see higher U.S. imports of fresh produce from Mexico.

                        On the other hand, U.S. exports to Mexico and Canada would be facing a double hurdle: one is the stronger dollar, since a Canadian dollar depreciation is also expected, and two, Mexican MFNs are quite high. Mexican charges to countries without a free trade agreement would be two digits. For example, for apples and pears, the MFN is 20 percent; for potatoes, up to 75 percent.

                        In the case of a NAFTA breakup, we could see an increased level of U.S. imports from Mexico and Canada — and a decreased level of exports, which would lead to even more imbalanced trade. This is kind of counterintuitive, due to the currency depreciation. Contrary to what many people expect under this scenario, we could see that big winners of this could be U.S. consumers of fresh fruits and vegetables and, also, packers and shippers that rely heavily on supplies from Mexico. Among the losers would be U.S. producers that compete seasonally with Mexico and Canada, as well as packers and shippers that rely solely on domestic supplies.

Nicole:           Jobs could be lost.

David:             Probably.

Nicole:           The U.S. has had a history of ups and downs in immigration and labor. We won’t go into the political issues, but is technology stepping in to alleviate this challenge in some ways? We hear a lot about robotics on the farm, that kind of thing.

David:             That is an increasingly challenging aspect of production, especially in the produce subsector, since they’re more labor-intensive than other crops — corn or soy beans, for example. As some players in the industry say they have made some progress in mechanizing harvesting, others say that there is still a long way to go. When we meet with our clients in Mexico, they say that one of the biggest constraints they have is with labor. If that happens in Mexico, imagine what that means in the U.S. Remember that Mexico is still a developing country. As more opportunities arise, we will see less labor availability.

                        The growth rate of the population of Mexico is expected to decrease in the next few years. For example, a few decades ago, families [there] had six or eight children; now, they have just two, similar to families in the U.S. So, we certainly expect that labor is going to continue to be an important constraint for the produce sector, and mechanization is a necessity.

Nicole:           Regarding per-capita consumption, data shows that Americans are eating more fresh produce in the fresh-cut sector of the produce industry — now the fastest-growing segment. It's not unusual to hear of outbreaks of food-borne illness associated with the consumption of fresh produce. As this market continues to grow, our processors face increased challenges of meeting demand for variety and volume while also holding to the expectation that their produce is safe to consume.

David:             Yes. That's an important challenge. One way to solve this issue is to diversify the growing regions. For example, the recent outbreak in romaine lettuce in Yuma, Arizona, had a significant impact on the consumer perception of [the] food safety of fresh products. Another important factor is where that lettuce is produced. For example, this outbreak occurred when Yuma production was already in the final stage and production was moved to the coast — to the Salinas and Watsonville area. One way to meet the challenge is to diversify the growing regions and communicate the information of where the food was produced. Also, we obviously need to have better control and make improvements in technical aspects as well as food safety.

Nicole:           It becomes a communications issue, as you mentioned. In the case of, for example, Panera Bread Company, they had to make sure their consumers understood that the romaine lettuce in their Caesar salads, for example, came from Salinas.

David:             Yes.

Nicole:           That was a big communications undertaking. I don't know how successful it was, because I imagine a lot of people just said, “Okay, I'm going to have a different kind of salad right now.” What are the most innovative producers out there doing to tackle these kinds of challenges?

David:             Well, one way to do this is to continually improve barriers that they are using and also improve all kinds of technical aspects to make sure that we have proper food security.

Nicole:           Dr. David Magaña, vice president and senior analyst with Rabobank RaboResearch Food and Agribusiness Group. Thank you so much for joining us.

David:             Thank you for the opportunity.

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