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"The ramifications of these current issues are going to last years": Q&A with Vanguard Direct President on grape business

Few produce categories have undergone such sudden and significant change over recent years as table grapes. Myriad long-term factors are now converging with unprecedented challenges related to the Covid-19 pandemic, supply chain logjams, and soaring costs. The Grape Reporter recently caught up with Dirk Winkelmann, President at Vanguard Direct, one of the world's leading grape suppliers, to hear some of his thoughts on where the industry is heading, the 2021-22 season, and the significant disruption that lies ahead.

The following interview has been edited for brevity and clarity.


What do you see as some of the biggest and most recent changes impacting the table grape industry?

 

We've had a very unique set of factors that have been rocking our world over the course of the last two years. These aren't issues that started five or six years ago - these are much more recent events, many of which were generated by Covid and the resulting actions taken by world governments, that will have a far-reaching effect on our industry, and I think on many industries within the fresh produce sector.

The most significant challenge we are facing this year is logistics, specifically container shortages, vessel disruptions, port congestion, truck and driver shortages, and dramatically increasing costs in all these areas. This is going to wreak havoc on our industry, and we do believe that despite the information coming from exporting countries about the size of the crop, the industry is not going to be able to execute the export and successful sales of their entire crop due to these logistics challenges.

This goes beyond just container equipment and vessels - it's materials too. It used to be that the lead time for ordering materials was three months. Now essentially it is six months. For us to estimate materials six months in advance is a complete shot in the dark. There is not one program that we lock down six months in advance of harvest, and there are only a handful of retailers in North America that give you advanced programs three months in advance. So essentially you are betting on what you hope are going to be your material requirements in six months – this is difficult for any grower, but even more so for small to mid-size growers that lack access to those advanced retail programs. That will ricochet into what growers are able to pack and ship.

This big impact on the industry may seem that it is just something we are facing now but, the ramifications of these issues are going to last years. This is not just going to be a one-off year, the shipping issue is not going to be resolved in the next few months. They're estimating that there is not going to be any kind of normalization for at least another year if not longer.

How do you see conditions in the U.S. market over the coming months?

 

There are a lot of unknowns out there such as logistics and the status of the competing production areas that you must always take into account. For example, we know that California is three to four weeks advanced in their harvest. And we know because of the weather conditions, the condition of the fruit is not optimal for holding long-term. That is going to impact their ability to hit that later market, which for California is December and even creeping into January.

There are always exceptions, but most likely they're only going to be able to last until Thanksgiving, although there are always grower-packers that have some lots that are strong and they supply their key retail customers well into December. But there is going to be a shortage of supply and that should create an invigorated market in December and January.

There is always the question of how long that stronger early market window will last and that depends on how much volume goes into North America. Everybody always chases the more lucrative markets, those being primarily the early US market and Asia in general.  For Asia the strong demand is on the new green varieties, not so much on the reds. So we do believe it is greens that will stay tight for the majority of the season in the U.S., and on the reds there will be the traditional oversupply starting by the middle to end of February.

Then there are costs. We're seeing an increase of 20-30% in costs of key items such as materials, labor, chemical inputs, and delivery costs - this is huge for any grower-packer.

Growers and marketers are trying to push these cost increases up through the market to the buyer and of course, as you can well imagine, there's a lot of resistance. The last thing a retailer wants to do is increase the price point at retail which can affect their flow and demand at the consumer level.

On the other hand, there are growers who are already finding themselves with their heads barely above water with some of the contract prices that are being discussed. For growers with traditional varieties, it is hard to digest signing a contract that you know is at best break-even and in some cases may even create a loss.

So that is going to create a lot of uncertainty as to how growers are going to position themselves on these contracts, and these contracts are essential because they take away volume from the spot market, and the spot market is always what creates the most volatility. So, if we find that more fruit goes into the open market it can be chaotic, especially on reds.

These are all things that we don't know about at this time, we can only speculate. But those are the kind of issues that we are facing this year. I can tell you that this is probably the most complicated year I have ever seen in my career. Now, I would have told you the same thing last year, but I can honestly say I would take last year any day over what we are facing this year.

What changes do you see taking place in terms of grape packaging at U.S. retail?

 

Packaging is interesting. We've seen a big push over many years towards value-added packaging, whether it's clamshells or fixed weight bags, and it's important to note that the cost of doing that kind of value-added packaging has been successfully negotiated from the grower-packers' perspective with retailers in the U.S. - that's a positive.

The negative is that while we can dial in all of our costs up to an FOB port of departure basis, we now have the crazy volatility and unknowns of two large cost components - ocean freight rates to North America and trucking rates within the U.S. Trucking rates have gone up three-fold and finding trucks and drivers is a daily full-time task. So, providing delivered pricing on contracted value-added product given those unknown costs is unsettling to say the least. 

So, packaging has been a key issue in the past from a grower-packer perspective. We are actually trying to limit what we do now in value-added packaging this season because of the heightened risk in delivered costs of that particular packing. That is a real shame, because we should be going in the exact opposite direction. We should be going as an industry more towards that type of packaging to add stability to pricing and movement.

And what about U.S. retail purchasing trends?

 

Probably one of the most significant changes - aside from more direct contracting and retailer interest in new varieties - is the way retailers do their business. We are seeing customers more interested in moving toward a willingness to do volume commitments and appointments of distribution centers, which is good for a grower-packer to at least be able to know that a specific volume has a specified home and that it is going to be at the market price. So that is a positive trend.

We are also seeing more retailers moving to contracting volumes and pricing much earlier in advance of the harvest than before.  This is to assure supply security, again a positive development.

Do you see the explosion of new grape varieties on to the market over recent years as really driving sales, or is it the case that they are helping the category to hold its ground amid rising competition from other fruit categories?

 

That is a great, great question. I would tell you that's yet to be seen. Here's a general feeling that we have: it is keeping the grape category alive, because the grape category had lost a lot of ground with these old varieties. All around us in the produce section we saw all these other categories coming out with very edible, very cool new varieties. Whether it was easy peelers, apples, berries, there was a plethora of competition hovering all around us while we were still selling Flames, Crimsons, and Thompsons. We were so stuck in our world that we lost significant competitive ground.

These new grape varieties are keeping us in the game. What we are seeing within the grape category by color is a reinvigoration - or an increase and interest - in the green varieties. Traditionally in the U.S. it was more or less a 2:1 ratio of reds to greens - because reds were just better - they had fewer visual problems, they always tasted good whether it was Flames, Crimsons, etcetera. These new green varieties such as the Ivory, the Autumncrisp ®, the Sweet Globe ™- they are providing a whole new eating experience and we are seeing a marked move in retail in the U.S. towards a re-balancing of demand between green and red varieties.

Now instead of 2:1, I will tell you that with 99% of the retailers we are dealing with it is a 1:1 ratio, which is a clear indication of how well these new varieties are doing. And this is not just in North America - the demand in Asia is nothing short of phenomenal for these new green varieties.

So, the new varieties are injecting a lot of new blood into the system keeping the grape category alive and reinvigorating consumer interest. Some retailers are keeping very good statistics on these new varieties and they could tell you exactly what the impact is on their same store sales.

With all these new varieties, production regions and a changing climate, there is an increasing amount of competition between supply regions in markets. Do you see this becoming potentially problematic?

 

No. I would love to be able to control every market without having anybody else involved in it, but competition between growing regions is inevitable, more so in some markets than in others. Growers are always going to look for those edges of the market in terms of timing, location, or destination that gives them a competitive edge or provides them the best possible return to the ranch – this will never change.

You're always going to see these different production regions whether it's Chile, Peru, Brazil or South Africa, India, Namibia, and so on - they are all going to continue to search for how to extend their season into their most profitable time frame.

So, seeing the overlap whether it is South Africa coming into the U.S., a market traditionally dominated by Chile and Peru, or going to Asia - that is inevitable, and it will continue - that's just natural global market competition and economics.

What could the disrupters be? Political strife, increasing social-economic imbalances, major currency moves, and of course logistics to name a few. We saw in the last few months the challenges South Africa faced in executing the exports of their citrus crop, and that opened opportunities for other production areas in the world.

Given all these moving parts, what is your overarching outlook for the future of the grape industry?

 

There are so many high-impact variables, but I think the good news is that the industry is moving toward taste and flavor and giving the consumer a great eating experience, and that will do more to increase consumption than anything else that we could do as an industry.  And we have seen people looking at food and health in a way that they really haven't in the past.  These are good reasons to be optimistic.

An organization needs to have a lot of financial fortitude to get through this next difficult year. While I am generally optimistic, I do think you're going to see a lot of big changes in terms of who can survive this. It is going to be survival of the few and the fittest. Those companies that are well-financed, that take an aggressive position on the replanting into new varieties - whether it's because of consumer acceptability and interest in these new varieties and/or simply because of yields, lower costs, etcetera - will come out on top.

I think we're going to see a significant winnowing of the playing field, especially after a year like this. We are going to see costs increase in a manner that we have never seen before in the history of our industry, to the point where I would expect to see several growers close shop this year. They are going to be so far underwater because the price in the market is probably not going to change much if at all, but their costs are going to escalate way beyond what they can absorb.

The banks will be much more selective in who they will finance, and importers will be much more conservative as to which growers they will provide advances to finance the crop - they're not going to take the same risks they took before. There is going to be a severe winnowing of the field and there's going to be a lot of blood in the streets in the next year or two.

 

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