The Washington Apple Industry August 29, 2012 Contributions to the State Economy and the Important Role of Exports By Globalwise Inc., Vancouver, WA In Association with Belrose Inc., Pullman, WA Washington s apple industry is a mainstay of the state s agriculture. It also holds a very prominent place in the state economy. The apple industry is growing and becoming more reliant on export markets. Sustaining that growth will be critical in maintaining state jobs, incomes and tax revenues.
Acknowledgements This project was funded by the Washington Apple Commission. The WAC and its President, Todd Fryhover, provided extensive support though out the study. In particular, Todd contacted companies in the industry to encourage their participation and address their questions as the project moved ahead. This was important to get the high response from growers, packers, processors and others who provided detailed information and data that served as the basis for this analysis. Over 20 firms provided detailed survey information. Most of these firms met with the report authors and answered detailed questions. Executives and managers from many firms also answered numerous follow-up questions by telephone and e-mail. Guidance and support from all of these individuals has made this report possible, and their contributions are greatly appreciated. Several people in the fruit industry also contributed their knowledge and data for this analysis. Special thanks to Charles Pomianek of the Wenatchee Valley Traffic Association, Jon DeVaney of the Yakima Valley Growers-Shippers Association, Kirk Mayer of the Washington Growers Clearing House Association and Bruce Grim of the Washington State Horticultural Association. Photos of the Washington apple industry used in this report were provided by the WAC.
Table of Contents Executive Summary... 1 Major Findings... 1 Introduction... 3 Apple Industry Background... 4 A Record of Growth... 4 Rapid Modernization... 5 Increasing Returns to Growers... 5 Industry Improvements Generate Higher Prices... 6 Impact of Storage Technology... 8 Outstanding Record of Progressiveness... 10 Challenges to the Industry... 11 Economic Contributions of the Washington Apple Industry... 12 Impacts on the Washington Economy... 12 Value of Output... 12 Employment... 13 Employee Compensation... 13 Proprietor s Income... 15 Tax and Related Revenues... 15 Key Related Business Sectors... 17 The Role of Export Markets... 18 Exports Fuel Market Growth... 18 Impact of Export Market Losses on the Washington Economy... 21 Other Positive Impacts on the State... 23 Conclusions... 25 Appendix A... 26 Brief Description of the Economic Impact Model Framework... 26 globalwiseinc. & Belrose Inc. page i
Tables and Charts Table ES-1: Total Direct, Indirect and Induced Economic Activity in the Washington State Apple Industry... 2 Chart 1: Washington State: Utilized Apple Production by Decade, 1941-2010 (million pounds)... 5 Chart 2: Washington State: Value of Utilized Apple Production by Decade, 1941-2010 ($ million)... 6 Chart 3: Washington State: Average Prices Received by Apple Producers by Decade, 1941-2010... 7 Chart 4: Washington State: Average FOB Shipping Point Prices and Estimated Average Returns to Growers... 8 Chart 5: Apple Storage Capacity in Washington State, 1971-2009 (million bushels)... 9 Table 1: Washington State: Fresh Apple Pack, by Major Varieties,1990, 2000 and 2010... 11 Table 2: Value of Output Generated by the Washington State Apple Industry (2010-2011)... 12 Table 3: Employment Contributions of the Washington State Apple Industry (2010-2011)... 13 Chart 6: Washington State: Total Wages Including Benefits for Orchard Workers... 14 Table 4: Employee Compensation Contributed by the Washington State Apple Industry (2010-2011)... 14 Table 5: Proprietor s Income Generated by the Washington State Apple Industry (2010-2011)... 15 Table 6: State and Local Tax Payments Generated by the Washington State Apple Industry (2010-2011)... 16 Table 7: Federal Tax Payments Generated by the Washington State Apple Industry (2010-2011)... 17 Table 8: Main Sectors Selling to the Washington State Apple Industry with Associated Job Impacts... 18 Chart 7: Washington State Exports of Fresh Apples (1970-71 to 2010-2011)... 19 Chart 8: Washington State: Domestic and Export Sales of Fresh Apples, 2004-05 to 2010-2011... 20 Table 9: Change in Value of Shipments at the FOB level and at the Grower Level... 21 Table 10: Economic Impacts of Reduced Export Sales by 5,000 Carlots on the Washington State Economy... 22 Table 11: Economic Impacts of Reduced Export Sales on the Washington State Economy... 22 globalwiseinc. & Belrose Inc. page ii
Executive Summary Major Findings Washington s apple industry is a major contributor of income, employment and tax revenues to the state s economy. The industry boosted the Washington economy by an estimated $7.02 billion in direct, indirect and induced economic activity in 2010-2011. This sector also accounted for an estimated 59,650 jobs and total annual employee compensation of $1.95 billion. Business owners income in the state totaled $837.6 million as a result of the apple industry economic activity. The tax revenue contributions of the industry were also very sizable. At the state and local level, the total tax revenues generated by the Washington apple industry were $188.7 million. Federal tax revenues contributions were estimated to be $300.3 million. Apple exports are a key element of future economic prosperity for the industry and for the prosperity of the Washington state economy. About one third of total fresh apple production is exported. Growers have been expanding high density tree plantings and adopting new varieties while packers have been investing in new packing and storage facilities. If exports falter, grower income is at risk. This analysis shows that if 5,000 carlots of fresh apples (a carlot is 1,000 40 pound boxes) destined for export were instead added to domestic markets, the income loss to growers would be about $55.17 million. This in turn would negatively impact the Washington economy with a decline of 925 jobs, loss of employee compensation of $37.0 million, loss of state and local tax revenue of $7.34 million and loss of federal tax revenue of $9.48 million. Washington s apple industry boosted the state economy by over $7 billion in 2010-2011. Apple exports are a key element of future economic prosperity for the industry and Washington state. This analysis was based on the best available data and information for the marketing year September 2010 to August 2011. Effort was made to separate apple production, packing, processing and marketing and research activities from all other tree fruit crops. However, apples account for about 80 percent of tree fruit production in the state and most growers and packers also grow or pack sweet cherries, pears or other tree fruits. This study does not account for the economic impacts of these closely related fruit sectors, but it should be pointed out that these tree fruits are synergistic and highly integrated with the dominant apple business. Table ES-1 presents the summary analysis for the output and employment impacts. Washington s apple industry includes apple orchard production, fresh apple packing, apple processing into food and beverage products, sales and marketing functions, as well as research and development. The R & D is evaluated in terms of Washington State University (WSU) and U.S. Department of Agriculture (USDA) research and extension activities. Washington s apple industry is a major source of employment for the state s workforce. About 38,000 people were directly employed in the apple industry in 2010-2011. Most of these jobs were in the growing and fresh packing sectors of the industry. Total employment in this sector which included direct, indirect and globalwiseinc. & Belrose Inc. page 1
induced employment totaled 59,650 jobs. The jobs were principally spread across Eastern Washington, where job opportunities are more limited than in the urban centers of the state. Sector Table ES-1: Total Direct, Indirect and Induced Economic Activity in the Washington State Apple Industry (2010-2011) Direct Value of Output Impact (Million $) Indirect & Induced Total Direct Employment Indirect & Induced Orchard Production * $1,372.6 $1,372.6 24,135 7,445 31,580 Fresh Apple Packing $3,044.0 $2,183.4 $5,227.4 11,365 11,520 22,885 Apple Processing $308.0 $76.5 $384.5 1,380 1,725 3,105 Apple Marketing -- $37.1 $37.1 1,070 920 1,990 Total Apple Research (WSU/USDA) -- $3.6 $3.6 60 30 90 Totals $3,352.0 $3,673.2 $7,025.2 38,010 21,640 59,650 * Included with apple packing and processing. Several other sectors of the Washington economy are particularly large beneficiaries of the apple industry. These include the paperboard carton suppliers, truck transportation, cold storage/warehousing, construction and building maintenance, tree nurseries and banking. Each of these sectors had over 300 jobs that depended on the apple industry. In the top 15 sectors of the state economy that sold goods and services to the apple industry in 2010-2011, they benefitted with sales of approximately $919.4 million to the apple industry which boosted state employment by about 3, 677 jobs. The businesses at all levels of the Washington apple industry remain in the control of families that have been in the state s fruit industry for many generations. They show a strong desire to reinvest within the state in their businesses and boost their communities. The industry supports Washington communities in many ways, such as backing of public education with a foundation that awards student scholarships and school grants in K-12 schools, contributing to food drives for the less fortunate, providing employee meals at discounted prices, building worker housing and making donations to hospitals and clinics for community health care. Growers, packers, processors, and marketers of Washington apples are optimistic and growth oriented. Their contributions to the Washington economy are very significant. Future prosperity very much depends on continued industry competitiveness in both domestic and global markets. However, there are persistent obstacles such as shortages of labor and higher regulatory costs that could restrict future business growth. Supportive government policies will be invaluable to keeping the Washington apple industry on an upward growth path. globalwiseinc. & Belrose Inc. page 2
The Washington Apple Industry CONTRIBUTIONS TO THE STATE ECONOMY AND THE ROLE OF EXPORTS Introduction The Washington apple industry is well known for its leading position in the nation s fruit industry. The industry continues a long history of growth and adaption to change. This report addresses the current conditions in the industry in terms of economic contributions to the Washington state economy and the support role of apple exports. The Washington Apple Commission funded this study. Twenty firms in the apple industry cooperated by disclosing confidential business and financial information for the analysis. Complete confidentiality was assured for each firm that was surveyed. For that reason, individual companies are not identified in this report. Data was collected for the fall of 2010 through the summer of 2011. This coincides with a full cycle of fruit season production and marketing and it covers the last full year that data is available. The analysis was jointly conducted by Globalwise Inc., located in Vancouver Washington and Belrose, Inc., in Pullman Washington. Both firms conduct a broad array of economic research and analysis services. A traditional economic impact approach was used in this analysis. In the course of operating their businesses, apple industry firms generate what are called direct economic impacts. These direct economic impacts include production (also referred to as output), employment, wages, proprietor s income, tax revenue and other economic benefits to an economy. In this study, data for those direct impacts were collected from firms that participated in the project survey. Those direct impacts were extended to estimates for the entire Washington apple industry. These direct impacts were then used to estimate further economic impacts within the state. The next step in the process was to relate these direct impacts to so-called indirect and induced economic impacts. Throughout the discussion of impacts in this report, reference is made to indirect and induced effects on output, employment and other economic indicators. The indirect effects for the apple industry result when the apple industry buys goods and services from other industries in Washington and this in turn supports more economic activity. The induced effects result from the re-spending of income within the state, which is initiated by households whose income is earned from direct employment in the apple industry. The method commonly used to make these related indirect and induced economic impacts is input-output modeling. Further discussion of this method to estimate these economic impacts is in Appendix A. Essentially the analysis evaluates how an industry that produces products demanded by society (here, apples in all product forms) affects: other businesses who sell goods and services to the industry being analyzed and themselves have employees and purchase goods and services; households that earn income from all industry sectors and spend it in the economy; business owners who gain income and spend or invest it in the economy; and taxpayers of all types who make tax payments in the economy under study. globalwiseinc. & Belrose Inc. page 3
This report focuses on the apple industry as a distinct sector apart from the other segments of the state s tree fruit network, especially pear, sweet cherry and other soft fruits. The apple industry is the driver of these other segments because the apple industry accounts for about 80 percent of Washington s total tree fruit production and acreage. At all levels of the apple industry growing, packing, processing and sales the business activities associated with all major tree fruit crops are intricately connected. Apple growers typically also grow other tree fruits, and apple packers have associated operations for packing pears and sweet cherries, and so forth. The fruit industry infrastructure of controlled atmosphere storage, other warehousing, packaging, transportation, field services, marketing, and other functions are built around the apple side of the business. The labor force analyzed in this study predominantly earns income from apple-related work, but also realizes income in sweet cherry and other tree fruit work. The apple industry can legitimately claim to extend its economic reach beyond its specific activities in the tree fruit industry of Washington. This extension was not made in the analysis of this report. In all cases, the survey respondents had non-apple tree fruit activity as part of their operations. They were asked to isolate and report their activity only for the apple side of their business. In consideration of this, the analysis is a conservative estimate of the economic impacts and contributions of the state s apple industry. Apple Industry Background A Record of Growth The apple industry has been the growth engine for the economies of Central Washington. Chart 1 shows how apple production has grown dramatically in the last 40 years. Utilized production is used because it includes all apples marketed in either fresh or processed form. In most years, actual production is identical to utilized production. Utilized production of apples in Washington State remained relatively static for the decade after the end of World War II. Prices had fallen after the war ended, and it took some time for spending patterns to recover. The introduction of newer Red Delicious and Golden Delicious strains, and advances in transportation and storage, allowed Washington State to market its apples for a much longer season and at greater distances in the U.S. and overseas. This was the basis for long-term expansion. The industry continued to grow rapidly in the 1970s, 1980s and 1990s as large new markets were found in East Asia, the Middle East, Mexico and Latin America. The addition of new varieties; such as Granny Smith, Gala, Fuji and Braeburn; enabled the industry to appeal to a much wider spectrum of consumers domestically and internationally. Apple orchards create a green landscape in many parts of Eastern Washington. There are about 167,000 planted acres in the state. globalwiseinc. & Belrose Inc. page 4
Chart 1: Washington State: Utilized Apple Production by Decade, 1941-2010 (million pounds utilized) 6000 5000 4000 3000 2000 1000 0 1941-50 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10 Source: Washington Agricultural Statistics Service website. Rapid Modernization The setbacks from the Asian financial crisis that began in 1997 and the emergence of China as a major competitor subsequently led many growers, packers and marketers to exit the industry. The remaining farms and agribusinesses grew bigger to gain economies of scale, formed marketing consortiums to deal more effectively with mega-retailers, and introduced many new technologies to innovate, increase productivity and improve quality. As a result of these changes, the Washington State apple industry is now poised for a further period of growth. As apples move along the packing lines the Increasing Returns to Growers quality and size are continuously monitored The Washington State apple industry has generated an and recorded. increasing stream of income to apple growers in the last forty years (Chart 2). Returns to Washington apple growers were temporarily inflated by higher prices during World War II. They fell almost 20 percent below the 1941-50 average in 1951-60, and averaged only 8 percent above the 1941-50 level in 1961-70, so there was limited incentive to expand acreage and production. However, returns to growers tripled in the 1970s, due to rapid expansion of late season and export sales. They doubled again in the 1980s, and again in the 1990s, although much of the increase was due to inflation. Increasing returns provided growers with positive signals to expand production. globalwiseinc. & Belrose Inc. page 5
Chart 2: Washington State: Value of Utilized Apple Production by Decade, 1941-2010 ($ million) 1400 1200 1000 800 600 400 200 0 1941-50 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10 Source: Washington Agricultural Statistics Service website. In the aftermath of the Asian crisis, the rate of growth in returns to growers slowed to 46 percent in the 2001-2010 period. Most of that increase came in the second half of the decade when a world food shortage drove up the price of all foods. Returns to apple growers averaged close to $1.5 billion per year. Industry Improvements Generate Higher Prices Chart 3 shows average prices received by growers for all apples for each of the last seven decades. Prices in the 1950s averaged 22.6 percent below those in the 1940s, and were still 13.3 percent below the level of the 1940s in the 1960s. Prices almost doubled in the 1970s but the rate of growth slowed in the 1980s and 1990s. Prices fell below 12.5 cents per pound in the 1998, 2000 and 2004 seasons. However, prices surged strongly in the second half of the decade, so the overall average for the 2001-10 decade was 41.6 percent above the level of the 1990s. globalwiseinc. & Belrose Inc. page 6
Chart 3: Washington State: Average Prices Received by Apple Producers by Decade, 1941-2010 (cents per pound) 25 22.39 20 15 11.89 15.81 10 9.61 5 5.35 4.14 4.64 0 1941-50 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10 Source: Washington Agricultural Statistics Service website. Rising prices have been due to improvements at every level of the industry, from the orchards, to packing sheds, storage facilities and marketing methods. The industry has invested heavily in new technology to lower unit costs and improve quality. One of the largest investments has been in controlled atmosphere storage. Chart 4 shows the average annual FOB shipping point price per 40-lb packed box for the seasons from 1998-99 to 2010-11, separated into estimated charges to the grower (for packing, storage, marketing, industry fees, etc.) and estimated returns to the grower. Note that from these returns the grower must cover all costs of orchard operations including capital costs for orchard development and periodic replanting. The total FOB price has been quite volatile in response to broader market forces, ranging from a low of $11.29 in 1998-99 to a high of $21.40 in 2007-08. However, total charges to the grower tend to be stable and change slowly over time. As a result, grower returns have been even more volatile, ranging from a low of $4.29 in 1998-99 to a high of $13.42 in 2007-08. In every season, FOB price was sufficient to cover all postharvest packing, marketing and other costs charged to the grower. However, since orchard costs tend to be relatively fixed in the short run, the amount returned to growers in some years would not have been sufficient to cover all orchard costs. Because of these market forces, growers can rapidly swing from profits to losses in any year. In the longer run, due to steadily increasing costs, regulatory pressures and increased competition, Washington State apple growers are continuously investing in the adoption of state of the art technology and cultural practices that enable them to better compete in world markets by producing more high quality fruit per acre and meeting the constantly rising standards of retailers and consumers. globalwiseinc. & Belrose Inc. page 7
Chart 4: Washington State: Average FOB Shipping Point Prices and Estimated Average Returns to Growers, 1988-89 to 2010-11 ($ per 40-lb box) 25 20 15 10 Grower Returns Charges 5 0 Source: Washington Growers Clearing House, Annual Apple Price Summary, miscellaneous issues. Impact of Storage Technology The Washington State apple industry has invested heavily in new storage technology, in particular with the dramatic expansion of controlled atmosphere (CA) storage in the last 40 years. Chart 5 shows expansion of apple storage capacity since 1971. Improved CA storage has enabled the industry to maintain the quality of apples for extended periods and spread sales across twelve months or more after harvest. The industry has continually invested in modernization of its packing and handling operations to ensure that apples can be delivered to customers in top condition throughout the year. Another major contributor to extended storage and improved quality has been the introduction of SmartFresh by AgroFresh for use on stored apples in 2004. The active ingredient in SmartFresh is 1-methylcyclopropene (1-MCP). When introduced into sealed storage rooms, 1-MCP interacts with the ethylene receptors of fruits to delay ripening. This helps retain the firmness and juiciness of many apple varieties, and prolongs storage life, giving operators greater flexibility to market fresh apples over a longer season and consumers a satisfying eating experience. It has been particularly valuable in expanding sales of the Gala variety. Because the effectiveness of SmartFresh is heavily influenced by the quality of the apples entering storage, it has motivated packers to much more precisely measure the condition of the apples they receive and has led to upstream improvements in growing and harvesting practices to better exploit the beneficial effects of SmartFresh. globalwiseinc. & Belrose Inc. page 8
Chart 5: Apple Storage Capacity in Washington State, 1971-2009 (million bushels) 200 180 160 140 120 100 80 C.A Regular 60 40 20 0 Source: USDA National Agricultural Statistics Service. Capacity of Refrigerated Warehouses (biennial) While expanded storage facilities have provided the industry with greater marketing flexibility, they have also had major impacts on the communities where apples are stored, packed and processed. Apples can be packed from storage for twelve months a year which provides yearround, full-time employment for thousands of workers in the storage, packing and processing facilities. This, in turn, has brought greater stability to the families and communities in central Washington, and to the businesses, services, public schools, hospitals and other public facilities that their incomes support. There has been increased consolidation in refrigerated warehousing and older storages have been decommissioned which has improved productivity and industry efficiency. Bins of apples are moved quickly from the orchard to refrigerated warehouses. Construction of storage and packing facilities has also provided substantial boosts for the local economies since the 1970s. USDA data show that apple storage capacity in Washington State rose from 132.2 million cubic feet in 1971 to a peak of 492.3 million cubic feet in 2003. Storage capacity has been reduced in recent years as older facilities have been phased out and newer, more efficient facilities have come on line, but recently observed new construction indicates that total apple storage capacity since 2009 is likely increasing to handle the expected increases in apple production. No comparable data are available on construction of apple packing and handling facilities. However, modernization of these facilities has kept pace with the expansion of storage capacity. globalwiseinc. & Belrose Inc. page 9
Outstanding Record of Progressiveness The Washington State apple industry has also built an enviable reputation around the world for its progressiveness. The Washington Apple Commission (WAC) has been in the vanguard of efforts to popularize Washington apples in many countries. Its logo is one of the most recognized in the world produce business. The Washington Tree Fruit Research Commission (WTFRC) was set up in 1969 to provide industry funds in support of research to improve the efficiency and quality of Washington apple production and to find solutions to challenges like weather, insects, viruses, diseases and regulatory requirements faced by growers and packers. It was the lead organization in winning Congressional approval for the Tree Fruit Technology Roadmap, a project, to develop, adapt and apply the best available technology from disciplines as diverse as computer science, genomics, engineering and robotics. The WTFRC works closely with dedicated teams of research and extension scientists from the USDA and WSU, both in finding solutions for industry priorities and in rapidly disseminating the results to the orchard and packing house level. Both USDA and WSU maintain research centers in Wenatchee and Prosser to support tree fruit research and extension. The industry is also very forward-looking. For example, in anticipation of increased demands for safe and sustainable practices from retail customers and from state and federal laws, the Washington State Horticultural Association has sponsored a series of training programs for growers, called GRAS 2 P, focusing on audit readiness, food safety operating procedures, establishment of standards for sustainable practices, traceability from market back to farm and continued use of good agricultural practices in orchards. One outstanding example of the progressiveness of the industry is dynamic adoption and marketing of new varieties to meet demands of consumers in domestic and international markets. In 1990, just three varieties, Red Delicious, Golden Delicious and Granny Smith, accounted for almost 96 percent of all fresh apples sold by Washington State. That share had fallen to 70 percent by 2000 and 53.3 percent in 2010. In 20 years, fresh shipments of Red Delicious had fallen by one-third, and its share of total shipments had dropped by more than half. The decline of another traditional variety, Rome, was even more precipitous. Gala and Fuji shipments had grown from less than one percent in 1990 to second and third rank after Red Delicious in both volume and market share in 2010. Braeburn, Cameo and Cripps Pink had gone from negligible shipments in 1990 to almost 7,000 carlots in 2010. Adoption of the Honeycrisp variety was even more rapid. It went from zero shipments in 2000 to 2,821 carlots in 2010. Introduction of newer Chinese in-store display of Washington apples in special gift packs. varieties has now become part of the long-term strategy of every major grower, packer and marketer. Further, these varieties are established in high-density plantings that make more efficient use of land and water resources as well as providing year-round employment opportunities and a safer and more productive workplace. Such plantings have permitted greatly expanded apple production while reducing the overall planted acres. globalwiseinc. & Belrose Inc. page 10
Table 1: Washington State: Fresh Apple Pack, by Major Varieties,1990, 2000 and 2010 (carlots* and percent) Variety 1990 1990 2000 2000 2010 2010 Red Delicious 51,116 69.5 45,192 46.0 34,209 31.3 Golden Delicious 13,809 18.8 15,109 15.4 11,041 10.1 Granny Smith 5,560 7.6 8,453 8.6 13,004 11.9 Gala 677 0.9 9,920 10.1 22,230 20.3 Fuji 36 0.0 12,894 13.1 15,196 13.9 Jonagold 150 0.2 1,015 1.0 1,067 1.0 Braeburn 1 0.0 2,752 2.8 3,277 3.0 Cameo 0 0.0 530 0.5 819 0.7 Cripps Pink 0 0.0 618 0.6 2,897 2.6 Honeycrisp 0 0.0 0 0.0 2,821 2.6 Jazz 0 0.0 0 0.0 501 0.5 Ambrosia 0 0.0 0 0.0 324 0.3 Rome 917 1.2 500 0.5 218 0.2 All Others 1,278 1.7 1,352 1.4 1,858 1.7 Totals 73,544 100.0 98,335 100.0 109,462 100.0 * Carlots are defined in the apple industry as 1,000 40-lb packed boxes of fresh apples. Source: Wenatchee Valley Traffic Association: "A Statistical Review, Washington State Fresh Apple Crops, 2003-04 through 2010-11 and Washington Growers Clearing House, Annual Price Summaries, selected years. Challenges to the Industry The apple industry is challenged in several significant ways. An adequate supply of harvest labor ranks very high among necessities for this industry to grow and prosper. Apple harvest is not mechanized so growers rely on a major influx of seasonal workers for hand picking. As annual production increases, it has become more difficult for Washington growers to secure enough qualified workers. Federal policy regarding immigration has not yielded a viable solution for growers to attract the workforce that is needed. Another looming challenge is food safety regulations. The Federal Drug Administration is charged with designing regulations to increase food safety of fruits and other food products in legislation that passed Congress and was signed into law in early 2011. New Produce Safety rules were called for by January 2012 in this legislation but as yet they have not been published for public comment. If these are not practical and flexible in their application, the apple industry could see its food safety compliance costs rise sharply. The apple industry is also an intensive user of water, energy, and transportation. There are many competing claims on these services. It will be a continual challenge to secure adequate supplies of these services at affordable prices. globalwiseinc. & Belrose Inc. page 11
Economic Contributions of the Washington Apple Industry Impacts on the Washington Economy VALUE OF OUTPUT Output measures the value of an industry s total production. In the apple industry, it is appropriate to measure the value of output for fresh apple packing and processed apple production as the direct industry value of output. The value of the fruit at the grower s level is included in the value of fresh and processed production. As with employment, employee compensation and proprietor s income, the value of output that is indirectly created and induced by the apple industry is also estimated. The economic activity of growers, apple marketing agencies, and research also generate indirect and induced output. Recall that indirect and induced impacts arise from the apple industry purchasing goods and services from other sectors of the economy and from household spending that is initiated from employee compensation and proprietor s income generated by the apple industry. At an estimated production level of about 110 million boxes in 2010-2011, the packing industry generated $3.04 billion of value for fresh apples at the warehouse level as shown in Table 2. Our estimate is that processed apple products, which included fresh sliced apples, apple juice and ciders, dehydrated apple products, and frozen apple products, added another $308 million in output value. Including the indirect and induced effects, the entire Washington economy realized a total value of output of $7.02 billion from the economic activities of the apple industry. Table 2: Value of Output Generated by the Washington State Apple Industry (2010-2011) Sector Direct Apple Industry Value of Output Indirect & Induced Value of Output Total Value of Output Orchard Production * $1,372,607,000 $1,372,607,000 Fresh Apple Packing $3,044,000,000 $2,183,415,000 $5,227,415,000 Apple Processing $308,000,000 $76,470,000 $384,470,000 Apple Marketing -- $37,142,000 $37,142,000 Apple Research (WSU/USDA) -- $3,569,000 $3,569,000 Totals $3,352,000,000 $3,673,203 $7,025,203,000 * Value of orchard production is included with fresh packing and processing. Sources: Survey of Industry, data analysis and IMPLAN economic impact analysis. globalwiseinc. & Belrose Inc. page 12
EMPLOYMENT The Washington apple industry is a major employer in the state and especially supports rural communities across Eastern Washington. Table 3 shows the employment profile of the industry in terms of jobs directly contributed by various levels of the industry. It also shows added jobs in the category of indirect and induced employment. The job estimates include both full-time and part-time employment. The industry directly employs about 38,000 workers statewide. After adding the indirect and induced effects the total employment impact is 59,650 jobs. The skill requirements and pay range varies widely. The greatest amount of part-time employment is the seasonal workforce in orchards for such tasks as thinning and harvesting. However, due to the many apple varieties with maturities that span several months and the complementary timing of harvesting other fruits such as sweet cherries, employment is extended for large numbers of seasonal workers. Washington Employment Security wage data (wages subject to UI tax) indicates the average wage of $11.90 per hour in 2010 for those that worked in apples. This translates to an annual wage of $24,752 if they worked full time. However, a significant number of workers are seasonal or part time employees. Using Employment Security s average annual earnings and adding benefits of 8.7 percent determined by the survey of growers in this study, average annual wages are $19,220 for apple orchard workers. This study s estimate of average wages with benefits in the 2010-2011 marketing year is $29,245 for workers in fresh apple packing, $60,275 in the apple processing sector and $71,420 in the marketing sector. Table 3: Employment Contributions of the Washington State Apple Industry (2010-2011) Sector Direct Employment Indirect & Induced Jobs Apple pickers are employed from August to November. With sweet cherry harvest in June and July pickers have 6 months of steady employment. Total Jobs Orchard Production 24,135 7,445 31,580 Fresh Apple Packing 11,365 11,520 22,885 Apple Processing 1,380 1,725 3,105 Apple Marketing 1,070 920 1,990 Apple Research (WSU/USDA) 60 30 90 Totals 38,010 21,640 59,650 Sources: Washington Employment Security, Survey of Industry and IMPLAN economic impact analysis. EMPLOYEE COMPENSATION The state of Washington Department of Employment Security tracks employment at the apple orchard level. The total wages paid to workers has risen annually from 2005 to 2011. In 2005 wages totaled $306.26 million and they have steadily risen to $426.7 million in 2010. The increase of over $120 million in the six year period is a compounded annual increase of 5.7 percent. The annual data is shown in Chart 6. globalwiseinc. & Belrose Inc. page 13
Chart 6: Washington State: Total Wages Including Benefits for Orchard Workers Covered by Unemployment Insurance, 2005-2011 * (Total Wages $ million) 500 450 400 350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011p * Data for NAICS code 111331, Apple Orchards Source: Washington Department of Employment Security, Quarterly Census of Employment and Wages Employee compensation which includes benefits for jobs in the apple industry gives a major economic boost to the state economy. Table 4 shows the compensation generated directly by the apple industry labor force totaled $959,151,000. When the contributions to the economy of indirect and induced compensation are added, the total impact reached $1.95 billion. This does not include proprietor s income generated by the owners of the orchards, packing houses, food processing facilities and sales agencies. That is shown in Table 5. Table 4: Employee Compensation Contributed by the Washington State Apple Industry (2010-2011) Sector Direct Employee Compensation Indirect & Induced Employee Compensation Total Employee Compensation Orchard Production $463,830,000* $326,955,000 $790,785,000 Fresh Apple Packing $332,370,000 $544,537,000 $876,907,000 Apple Processing $83,143,000 $76,471,000 $159,614,000 Apple Marketing $76,426,000 $37,142,000 $113,568,000 Apple Research (WSU/USDA) $3,382,000 $1,133,000 $4,515,000 Totals $959,151,000 $986,238,000 $1,945,389,000 * This estimate includes benefits paid to orchard workers estimated from the survey of growers. Sources: Washington Employment Security, Survey of Industry and IMPLAN economic impact analysis. globalwiseinc. & Belrose Inc. page 14
PROPRIETOR S INCOME Proprietor s income is the income received by self-employed persons and private business owners. The survey of apple industry growers, packers, processors and sales agencies obtained data on proprietor s income. This was then estimated at the state level and is shown in Table 5. For 2010-2011 proprietor s income for the apple industry was estimated to total $679,200,000. With the inclusion of proprietor s income earned from indirect and induced economic activity across the state the total was $837,665,000. Considering employee compensation and proprietor s income together, the apple industry in 2010-2011 created about $2.78 billion of income to Washington wage and salary earners and business owners (data from Tables 4 and 5). An example of indirect proprietor s income is the self-employment income generated by construction companies that realize income from building controlled atmosphere apple storages. An example of induced proprietor s income is the added income of self-employed persons such as gas station owners due to greater household consumption expenditures at these businesses due to apple industry wage earnings. Sector Table 5: Proprietor s Income Generated by the Washington State Apple Industry (2010-2011) Direct Proprietor s Income Indirect & Induced Proprietor s Income Total Proprietor s Income Orchard Production $260,000,000 $58,934,000 $318,934,000 Fresh Apple Packing $330,000,000 $81,520,000 $411,520,000 Apple Processing $34,200,000 $11,348,000 $45,548,000 Apple Marketing $55,000,000 $6,493,000 $61,493,000 Apple Research (WSU/USDA) -- $170,000 $170,000 Totals $679,200,000 $158,465,000 $837,665,000 Sources: Survey of Industry, data analysis and IMPLAN economic impact analysis. TAX AND RELATED REVENUES The apple industry contributes very significantly to the tax base in Washington. The industry survey respondents indicated their tax payments for 2010-2011 in the main tax categories. These estimates were then summed and estimated for the total industry. These broad categories of taxes were included: real and personal property taxes, sales and excise taxes, B&O taxes, motor vehicle licenses, customs duties, severance taxes, other taxes and special assessments. The industry directly paid an estimated $58.9 million in taxes to state and local governments as shown in Table 6. When the associated economic activities are added, the indirect and induced tax payments in the state added another $129.8 million to the coffers of government. In total, the tax contributions were $188.7 million. globalwiseinc. & Belrose Inc. page 15
Table 6: State and Local Tax Payments Generated by the Washington State Apple Industry (2010-2011) Sector Direct State & Local Tax Payments Indirect & Induced State & Local Tax Payments Total State & Local Tax Payments Orchard Production $24,900,000 $47,600,000 $72,500,000 Fresh Apple Packing $17,600,000 $66,900,000 $84,500,000 Apple Processing $12,500,000 $9,500,000 $22,000,000 Apple Marketing $3,900,000 $5,600,000 $9,500,000 Apple Research (WSU/USDA) -- $200,000 $200,000 Totals $58,900,000 $129,800,000 $188,700,000 Sources: Survey of Industry, data analysis and IMPLAN economic impact analysis. A number of public entities in Washington also receive benefits from payments made by apple growers who lease state land for orchard production. The lands are managed by the Washington Department of Natural Resources. In 2011, growers paid a total of $2.1 million in lease payments and leasehold taxes. The lease payments are disbursed to trusts that benefit K-12 public schools, WSU, Western, Central, and Eastern Washington Universities and the Evergreen State College. The leasehold taxes are apportioned to the state s General Fund and to the counties where the orchards are located. The six counties that benefit from these lease revenues are Benton, Franklin, Grant, Okanogan, Walla Walla and Yakima. In the survey of growers it was also determined that federal land managed by the Bureau of Indian Affairs is also leased to apple growers. Data was not available on the amount of lease payments made to this agency. Estimates of federal taxes generated by the economic activity of the apple industry are given in Table 7. It is estimated that the apple industry directly pays about $57,000,000 in federal taxes. The 2010-2011 year estimate given here may understate the more typical tax payments by the industry because major capital projects such as controlled atmosphere storage and packing line equipment upgrade projects were completed or underway, and tax breaks for these capital projects reduce tax payments. New controlled atmosphere apple storage rooms boost the Washington construction industry. globalwiseinc. & Belrose Inc. page 16
Table 7: Federal Tax Payments Generated by the Washington State Apple Industry (2010-2011) Sector Direct State & Local Tax Payments Indirect & Induced State & Local Tax Payments Total State & Local Tax Payments Orchard Production $44,400,000 $82,800,000 $127,200,000 Fresh Apple Packing $8,200,000 $132,100,000 $140,300,000 Apple Processing $4,400,000 $18,800,000 $23,200,000 Apple Marketing n.a.* $9,300,000 $9,300,000 Apple Research (WSU/USDA) -- $300,000 $300,000 Totals $57,000,000 $243,300,000 $300,300,000 * Insufficient data was provided by the sales agencies to make this estimate. Sources: Survey of Industry, data analysis and IMPLAN economic impact analysis. KEY RELATED BUSINESS SECTORS As a result of the apple industry purchases across a broad spectrum of industries in Washington, there was a very significant amount of added economic benefits that accrued in the state economy. Table 3 shows the total number of indirect and induced jobs that spun-off from the apple industry. In Table 8, the purchases by the apple industry for major categories are displayed along with the associated indirect and induced jobs that resulted from the apple industry expenditures in the identified sector. The number of jobs created in relation to sales varied widely among business sectors. Several factors caused differences, such as the proportion of sales that came from in-state vendors versus out-of-state suppliers and the proportion of sales revenue that circulated in the economy as wages versus other types of expenditures. The paperboard container and agricultural chemicals sectors lead in sales to the apple industry with each having sales that exceeded $100 million annually to the apple industry. The state economy gets a major boost from paperboard industry sales to the apple packers. Using jobs generated as a guide, truck transportation, cold storage/warehousing, construction and building maintenance, the nursery industry and banking also received a major positive impact and in turn this added significantly to the state economy. globalwiseinc. & Belrose Inc. page 17
Table 8: Main Sectors Selling to the Washington State Apple Industry with Associated Job Impacts (2010-2011) Business Sector Selling to the Apple Industry Value of Sales Number of Indirect & Induced Jobs Paperboard Container $261,200,000 764 Agricultural Chemicals $120,000,000 68 Banking (Loan Interest & Finance) $91,300,000 338 Packaging & Material Handling Machinery $86,500,000 283 Other Industrial Machinery & Parts $73,200,000 22 Fertilizer $35,400,000 24 Truck Transportation Services $35,300,000 486 Cold Storage Equipment $35,300,000 74 Cold Storage & Warehousing Services $33,400,000 431 Advertising and Related Services $32,700,000 168 Nursery Products $31,200,000 376 Wood Containers, Pallets and Other Wood Products $27,200,000 183 Farm machinery & Equipment $26,600,000 51 Maintained and repaired nonresidential structures $16,700,000 377 Pumps & Related Equipment $13,400,000 32 Totals $919,400,000 3,677 Source: IMPLAN economic impact analysis based on survey of apple industry firms The Role of Export Markets Exports Fuel Market Growth From its earliest days, the Washington State apple industry has produced more apples than could be consumed within the state. As its production grew, it had to find markets in the Midwest, south and east of the United States, in Canada and Mexico, and eventually in markets around the world. Demand within the U.S. has tended to be relatively stable. In contrast, while markets outside U.S. borders are broadly characterized as export markets, such markets are extremely diverse in their incomes, tastes, size and variety preferences and prices they are willing to pay. Demand for Washington apple exports is susceptible to multinational and regional trade agreements, political or economic disruptions, changes in tariffs, quotas or exchange rates, phytosanitary regulations and other unpredictable events. The profile of export markets is constantly changing, and the Washington State apple industry has had to be extremely flexible, even within the same season, in tapping export markets. globalwiseinc. & Belrose Inc. page 18
Chart 7 illustrates the volatile upward trending trajectory for exports of Washington fresh apples between 1970-71 and 2010-11. During the 1970s, a weak U.S. dollar, and the opening of major markets in Saudi Arabia and Taiwan, led to a dramatic surge in both the volume and share of shipments exported. A very strong dollar in the first half of the 1980s led to a sharp reversal in both carlots shipped and the percent of total shipments exported. As the U.S. dollar weakened in the second half of the 1980s, and new markets in Southeast Asia opened up, both the volume and share of total shipments exported rose strongly. However, for much of the last twenty years, the average share of shipments exported has hovered around 30 percent as competition in world markets from major suppliers like China and Chile has intensified. Chart 7: Washington State Exports of Fresh Apples (1970-71 to 2010-2011) (thousand carlots exported, and percent of total shipments exported) 40 35 30 25 20 15 Carlots Percent 10 5 0 Sources: Wenatchee Valley Traffic Association: "A Statistical Review, Washington State Fresh Apple Crops, 2003-04 through 2010-11 and Yakima Valley Grower'-Shippers' Association: A Statistical Overview of Washington State Apple Crops, selected years. While the history of the expansion of Washington State apple exports is interesting, the problems going forward are different. Chart 8 shows that despite a global recession, while domestic sales of Washington State apples have stalled, exports have continued to grow. globalwiseinc. & Belrose Inc. page 19
Chart 8: Washington State: Domestic and Export Sales of Fresh Apples, 2004-05 to 2010-2011 (thousand carlots) 80 70 60 50 40 30 Domestic Export 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Source: Wenatchee Valley Traffic Association: "A Statistical Review, Washington State Fresh Apple Crops, 2003-04 through 2010-11. Increasing exports has become critical to the economic viability of the Washington State apple industry, now more than ever as new plantings and ever improving production practices portend greater future production. An analysis conducted by the authors for the 1990-91 to 2010-2011 seasons indicated that a one percent increase in domestic apple shipments reduced average Washington FOB price by 0.93%, while a one percent increase in export shipments reduced price by only 0.25%. Table 9 presents one alternative to the actual domestic/export market situation for 2010-2011. The alternative shows the impact on revenues at the FOB level and at the grower level if exports had been lower by 5,000 carlots and that volume was added to domestic sales. The total volume sold of 109,462 remains the same in both cases. With the domestic market price for apples being more sensitive to the volume offered than prices in export markets, the added sales in the U.S. leads to the FOB shipping point revenue decline of $55.169 million. This revenue loss directly translates to a loss of proprietor s income at the grower level of the same amount. globalwiseinc. & Belrose Inc. page 20
Table 9: Change in Value of Shipments at the FOB level and at the Grower Level For Different Shipment Allocations between Domestic and Export Markets, under 2010-2011 Conditions Market Level Actual Situation Domestic 72,831 cars Export 36,631 cars Alternative Scenario Domestic 77,831 cars Export 31,631 cars FOB Shipping Point Baseline -$55,169,000 Grower Level Baseline -$55,169,000 Source: Estimates by Belrose, Inc. and Globalwise Inc. It is assumed that no change in packing or marketing costs would be incurred as a result of the change in sales between domestic and export markets. This situation would be true over a relatively short period such as one or two years, but would not be true if the loss of sales to export markets persisted over a longer time period. If export markets were more permanently lost, the industry would make adjustments as orchardists, packers, processors and sales agencies would look to reduce employment, wage rates, new plantings and otherwise cut costs as they have time to adjust to the lowered revenue outlook. Another factor that would compound the adjustment is if the Washington crop continues to increase. Because new plantings are in the ground, there is a likely trend in the next 10 years for production to continue to rise. If this occurs while the export market declines, the price impact could be more severe than estimated here. Impact of Export Market Losses on the Washington Economy If Washington growers absorb a loss of $55.169 million in income due to reduced sales of 5,000 carlots in export markets, how will the Washington economy be impacted? That question is analyzed here. The impact model analysis shows how this income loss flows through the state economy. This is illustrated in Table 10. The changes in output, employee compensation, proprietor s income, and tax revenues at the local, state and federal levels are very significant. It is important to note that these impacts are associated with a loss of just fewer than 14 percent of the export market share in 2010-2011. High density orchards are common for new plantings and are very capital intensive to develop. globalwiseinc. & Belrose Inc. page 21