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Ugly fruits

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David Del Pino Rodr¨ªguez
David Del Pino Rodr¨ªguez

¡°A widespread introduction of ¡°a new segment of ugly fruit and vegetables¡± is a complete disaster for farmers in general; and especially for those who this measure leaves out of the ¡°ugly fruits¡± market.

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Regular Market Ugly Fruits Market
Current Scenario. Lets say that we currently have a fresh produce market of a total of 100kg of selected Class I products. First Effect . An over supplied market will pressure down all fresh produce prices. Regular Market First Issue: Does anybody believe that we can increase demand by 15% from one day to another? New Scenario. An over supplied market = 100kg of selected fresh produce + 15*kg of Ugly fruits. Total 115kg. Summary. There is an excess of 15kg in this new market and so there is an excess of growers that produce them. The less efficient growers that cannot life with the reduced prices will disappear. Market with Ugly Fruits *Hypothesis. 15 extra kilos of ugly fruits out of a production of 100kg currently sold. Based on own estimations of proponents of this trend (meaning that currently 10% to 15% of edible but ugly fruits are discarded).
15% of the Supply Base will disappear. We can even assume (almost impossible) that after the initial oversupply market-shock, prices of Class I fruits get back to normal. The total consumption of this new market will continue to be 100kg. (or a very modest increase due to the reduced prices; because eating habits do not change dramatically when prices get reduced but rather when prices heavily increase) Summary. So even at best possible scenario (discount price reduction of 30%), the total size of the market gets reduced by 4,5%. 100kg x 2€ (Hypothetical Retail Price) = (200 €) Size of the Regular Market Size of Regular Market (€) Size of Market with Ugly Fruits (€) *Hypothesis. Retailers estimate that Ugly Fruits are regularly sold at a discount price reduction that range from 30% to 50 85kg x 2€ (Hypothetical Retail Price) 15kg x 1,40€ (Hypothetical Retail Price -30%) Size of market with Ugly Fruits: 191 €
Following our reasoning, the size of the market is reduced by 4,5%, but we also need to address the impact on the Producers¡¯ Turnover taking into consideration all Supply Chain Costs*. Summary: Producer¡¯s Turnover gets reduced by 18% . *Hypothesis. To simplify calculation we estimate all Supply Chain Costs together. According to last available data, average gross Producers¡¯ turnover account for ? of Retail Price. Produce Turnover Regular Market Producer Turnover M. With Ugly Fruits Supply Chain Costs and margins: 200€ x ? = 150€ Producers¡¯ Turnover: 200€ x 1/4 = 50€ or 200€-150€= 50€ Supply Chain Costs and margins= 150€ (same costs and margins in the new market) Producers¡¯ Turnover: 191€ - 150 = 41€
We are told that this new product Ugly Fruits niche market maximize Growers¡¯ Turnover and Profit by selling all crop and not only the selected Class I. As previously seen (see previous slide) not only turnover does not increase but rather reach to a minimum of 18%. Now we concentrate on how profits get impacted. To review growers¡¯ profits we will estimate all farming costs at once. Growers¡¯ Profits Regular Market Grower¡¯s Profits M. with Ugly Fruits *Hypothesis. To simplify theoretical Analysis, we assume a generous 50% margin (excluding amortization, interests and unpaid family labor) To be able to sell 100kg, growers produce an excess that is discarded (Ugly/Unfit/Deficient). Kilos Grown (100+15%)= 117,64kg Growers¡¯ Profits: 50€ (Turnover)-25€ (Costs)= 25€ Unit Costs: 25€/117,64kg=0,20€ We assume growers produce no excess (use all crop) Kilos Grown 100kg We apply same Unit costs : 0,20€/kg Grower¡¯s Costs: 41€ (Turnover)-20,40€ (Costs)= 20,60€ (-17,60%)
Total Market (in €) is reduced by 4,5% Growers¡¯ Profits get trimmed by 17,60% Growers¡¯ turnover is lowered by 18% The less efficient growers representing 15% of the production are expelled from the business. The New Market with Ugly Fruits¡± ¡°A widespread introduction of a new segment of ugly fruit and vegetables¡± is a complete disaster for farmers in general; and especially for those who this measure leaves out of the ¡°ugly fruits¡± market.. This is good example on how good intentions (from institutions, retailers and NGOs) can introduce with this movement perverse incentives that hinder the improvement and progress of the efficiency of production systems.

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Ugly fruits

  • 2. Current Scenario. Lets say that we currently have a fresh produce market of a total of 100kg of selected Class I products. First Effect . An over supplied market will pressure down all fresh produce prices. Regular Market First Issue: Does anybody believe that we can increase demand by 15% from one day to another? New Scenario. An over supplied market = 100kg of selected fresh produce + 15*kg of Ugly fruits. Total 115kg. Summary. There is an excess of 15kg in this new market and so there is an excess of growers that produce them. The less efficient growers that cannot life with the reduced prices will disappear. Market with Ugly Fruits *Hypothesis. 15 extra kilos of ugly fruits out of a production of 100kg currently sold. Based on own estimations of proponents of this trend (meaning that currently 10% to 15% of edible but ugly fruits are discarded).
  • 3. 15% of the Supply Base will disappear. We can even assume (almost impossible) that after the initial oversupply market-shock, prices of Class I fruits get back to normal. The total consumption of this new market will continue to be 100kg. (or a very modest increase due to the reduced prices; because eating habits do not change dramatically when prices get reduced but rather when prices heavily increase) Summary. So even at best possible scenario (discount price reduction of 30%), the total size of the market gets reduced by 4,5%. 100kg x 2€ (Hypothetical Retail Price) = (200 €) Size of the Regular Market Size of Regular Market (€) Size of Market with Ugly Fruits (€) *Hypothesis. Retailers estimate that Ugly Fruits are regularly sold at a discount price reduction that range from 30% to 50 85kg x 2€ (Hypothetical Retail Price) 15kg x 1,40€ (Hypothetical Retail Price -30%) Size of market with Ugly Fruits: 191 €
  • 4. Following our reasoning, the size of the market is reduced by 4,5%, but we also need to address the impact on the Producers¡¯ Turnover taking into consideration all Supply Chain Costs*. Summary: Producer¡¯s Turnover gets reduced by 18% . *Hypothesis. To simplify calculation we estimate all Supply Chain Costs together. According to last available data, average gross Producers¡¯ turnover account for ? of Retail Price. Produce Turnover Regular Market Producer Turnover M. With Ugly Fruits Supply Chain Costs and margins: 200€ x ? = 150€ Producers¡¯ Turnover: 200€ x 1/4 = 50€ or 200€-150€= 50€ Supply Chain Costs and margins= 150€ (same costs and margins in the new market) Producers¡¯ Turnover: 191€ - 150 = 41€
  • 5. We are told that this new product Ugly Fruits niche market maximize Growers¡¯ Turnover and Profit by selling all crop and not only the selected Class I. As previously seen (see previous slide) not only turnover does not increase but rather reach to a minimum of 18%. Now we concentrate on how profits get impacted. To review growers¡¯ profits we will estimate all farming costs at once. Growers¡¯ Profits Regular Market Grower¡¯s Profits M. with Ugly Fruits *Hypothesis. To simplify theoretical Analysis, we assume a generous 50% margin (excluding amortization, interests and unpaid family labor) To be able to sell 100kg, growers produce an excess that is discarded (Ugly/Unfit/Deficient). Kilos Grown (100+15%)= 117,64kg Growers¡¯ Profits: 50€ (Turnover)-25€ (Costs)= 25€ Unit Costs: 25€/117,64kg=0,20€ We assume growers produce no excess (use all crop) Kilos Grown 100kg We apply same Unit costs : 0,20€/kg Grower¡¯s Costs: 41€ (Turnover)-20,40€ (Costs)= 20,60€ (-17,60%)
  • 6. Total Market (in €) is reduced by 4,5% Growers¡¯ Profits get trimmed by 17,60% Growers¡¯ turnover is lowered by 18% The less efficient growers representing 15% of the production are expelled from the business. The New Market with Ugly Fruits¡± ¡°A widespread introduction of a new segment of ugly fruit and vegetables¡± is a complete disaster for farmers in general; and especially for those who this measure leaves out of the ¡°ugly fruits¡± market.. This is good example on how good intentions (from institutions, retailers and NGOs) can introduce with this movement perverse incentives that hinder the improvement and progress of the efficiency of production systems.