 Roberta Cook |
 Linda Calvin |
Economic Outlook
North American Greenhouse tomatoes Emerge as a Major Market Force
The Tomato Magazine
June 2005
By Linda Calvin and Roberta Cook
The rapidly growing greenhouse tomato industry
has become an important part of the North American fresh
tomato industry. Greenhouse tomatoes now represent an estimated 17 percent
of United States fresh tomato supply. Even though greenhouse tomatoes still
constitute a minority share of the U.S. fresh tomato market, their influence
is concentrated and growing in retail channels, which represent about half
of U.S. tomato consumption. Around 37 percent of all fresh tomatoes sold in
U.S. retail stores are now greenhouse, compared with negligible amounts in
the early 1990s.
Greenhouse tomatoes can be seen as just one more development in a trend toward
more differentiated fresh tomato offerings, including more variety in field-grown
tomatoes. New types of tomatoes, improved varieties and handling, and positive
health benefits associated with eating tomatoes have all contributed to a 30-percent
rise in U.S. consumption of fresh tomatoes since 1985, with estimated 2003
annual per capita consumption levels around 8.8 kilograms (19.4 pounds).
Growth in the greenhouse industry has challenged growers of fresh field tomatoes.
With rising consumption of all tomatoes, field tomato sales in the U.S. retail
market increased through 2001, in part due to new fresh field products, such
as grape tomatoes. But in 2002, the combined retail sales volume of all field
tomato types began to slip. Field tomatoes still dominate the growing foodservice
market (restaurants, schools, hospitals, etc.) where greenhouse tomatoes are
scarce. Foodservice sales are increasingly essential to the health of the field
tomato industry.
While greenhouse tomatoes have higher per unit costs of production and generally
higher retail prices than field tomatoes, several other characteristics have
contributed to the growth in this sector. Since they are protected from weather
and other conditions affecting open field production, greenhouse tomatoes generally
have a much more uniform appearance than field tomatoes. They are also less
prone to swings in production volumes. These factors lead to greater consistency
in quality, volumes, and pricing—issues of particular concern to the
retail and foodservice industries.
The U.S., Canada, and Mexico have all developed major greenhouse industries.
The U.S. is the largest North American market for greenhouse tomatoes, and
U.S. imports from Canada and Mexico are larger than domestic production. In
recent years, the growth in U.S. imports has exceeded the growth in U.S. production.
In 2003, Canada accounted for an estimated 46 percent of U.S. imports of greenhouse
tomatoes. Mexico’s share was 45 percent. As the greenhouse tomato industry
has transitioned from niche to mainstream status, it has become part of a more
integrated North American market, following the pattern established by the
field tomato industry.
The greenhouse industry is facing growing pains. With rapid growth in Canada
and the U.S. during the 1990s, greenhouse tomato prices declined, causing financial
problems for some growers. More recently, as the industry has expanded in Mexico,
heterogeneity in production methods has increased. Growers in the U.S. and
Canada, and some Mexican growers, have high-technology and high-cost greenhouses.
Many of these growers view the growth of lower technology greenhouses and shade
houses in Mexico with some alarm. This has led to a debate in the industry
about how to define a greenhouse tomato (see box, “What Is a Greenhouse
Tomato?”). Regardless of how this issue is resolved, higher expected
year-round production volumes in Mexico portend greater competition in all
seasons and continued downward pressure on prices.
Seasonality Drives Market Integration
Seasonality is a major factor shaping the North American fresh tomato
industry. Consumers increasingly demand a steady year-round supply
of an ever greater variety of tomato products. The greenhouse industry
has seasonal production patterns similar to the fresh field industry,
despite the fact that greenhouse production takes place indoors. Greenhouse
supplies vary over time and across geographical regions, and marketers
often try to extend their seasons to periods typically marked by lower
tomato production and higher prices, sometimes by sourcing from more
than one location. The result has been the development of an integrated
North American greenhouse tomato industry that can provide the variety
of tomato products that consumers demand throughout the year. While
there is some overlap, Mexico is the primary foreign winter supplier
to the U.S. market and Canada the primary foreign summer supplier.
In 2003, total production of North American greenhouse tomatoes was
estimated at 528,078 metric tons. Canada’s share of this total was 42 percent,
followed by the U.S. with 30 percent and Mexico with 28 percent. Though
greenhouse tomato production soared in all three countries from the early
1990s, it has been stabilizing in the U.S. and Canada. In Mexico, the
industry is still growing rapidly. Mexico’s growing area exceeds
the combined total area of U.S. and Canadian greenhouses, but with many
Mexican growers using extensive production methods with relatively simple
low-yielding technology, output is lower than in the other two countries.
Canada was the first big greenhouse tomato producer in North America
and still has the highest yields and total production. The Canadian industry
is centered in southern British Columbia and Ontario. Long, relatively
mild, summer days in these regions generate high yields. During the March
to December period, Canadian production is a market force. U.S. and Mexican
tomato producers, both field and greenhouse, have to compete with the
high Canadian summer volume.
The Achilles heel of the Canadian greenhouse tomato industry is its lack
of winter supply. As greenhouse tomatoes have become a mainline commodity,
retailers are increasingly demanding consistent year-round volumes from
their suppliers. Given current greenhouse prices, it is uneconomical
for most Canadian producers to provide light and heat for winter production.
To better serve their customers, Canadian marketers supplement their
winter supply by sourcing from U.S. and Mexican producers. But this pattern
could change. More Mexican producers may become year-round suppliers
and decide to market their tomatoes independently. Foreign direct investment
in growing operations could become more common as a strategy for controlling
supply. For example, one large British Columbia grower built a greenhouse
in California to help supplement winter supplies.
Much of the U.S. greenhouse tomato industry began in the northeast in
the early 1990s, with production in the same months as Canadian producers.
Eventually, several producers moved west and south, lured by the prospect
of producing tomatoes year-round and capturing a slice of the high-priced
winter market. The four largest greenhouse tomato firms in the U.S. are
now located in Arizona, Texas, Colorado and coastal southern California
and account for 67 percent of domestic production. Smaller greenhouses
are located throughout the U.S., but these are frequently seasonal producers
and local marketers. The profitable winter market helps the year-round
U.S. producers withstand the very low prices during the summer season
when Canadian volume inflates supplies. However, southwestern greenhouses
face special challenges posed by the summer heat and often need expensive
cooling systems to produce high-quality tomatoes. Furthermore, expanding
winter production in Mexico will likely reduce greenhouse tomato prices
and increase competitive pressure on year-round U.S. growers.
The Mexican greenhouse tomato industry is the fastest growing in North
America and the most varied. In Mexico, large field tomato grower-exporters
in Sinaloa on the northwest coast and the Baja California peninsula are
experimenting with protected culture, either shade houses or greenhouses,
near their field operations. In contrast, U.S. field tomato growers usually
have no connections to the greenhouse industry. This gives Mexican growers
a foot in both camps and potentially reduces market and other types of
risk. Because of its hot, humid summers, Sinaloa, the principal fresh
field tomato-exporting region in Mexico and a leading greenhouse exporter,
is a winter producer only. Growers there have less incentive to invest
in the highest technology greenhouses because the limited shipping season
reduces the return on investment. Nevertheless, the technology levels
and yields in coastal areas are improving, with more growers moving into
midlevel technology systems to improve yields, quality, and marketing.
Several clusters of greenhouses are also emerging in temperate, higher
altitude areas in central and north central Mexico, and in Imuris in
northern Sonora, near the U.S. border. With the exception of those in
Imuris, most of these firms are new entrants to agriculture and have
no connection with field tomato growers. Their advantage is the ability
to produce year-round, in some cases with investment in summer cooling
required. As a result, more growers in these areas are investing in high
technology greenhouses similar to those in Canada and the U.S. As greenhouse
production in temperate, noncoastal areas expands, Mexico will become
more of a competitive force in all seasons.
The Mexican greenhouse tomato industry has both advantages and disadvantages
over the U.S. and Canadian industries. Mexico’s major
advantage is its ability to produce during the winter months—the
same edge it holds in field tomato production. Its major disadvantage
is the much higher cost of capital, a problem given the capital-intensive
nature of greenhouse production. As a result, many growers find it difficult
to invest in technologies that generate the best yields and consistent
quality. Mexico is also hampered by lack of local greenhouse input industries,
public research and experienced management. High heating costs in many
temperate locations are also a problem. Although hourly labor rates are
much lower in Mexico, typically lower labor productivity means that total
labor cost savings are less that the differential in labor rates. Overall,
at this state, Mexico’s greenhouse tomato industry does not appear
to have a clear advantage in unit cost.
Greenhouse Tomato Prices Falling
Despite rising demand for greenhouse tomatoes, the industry is facing
downward price pressures, as demand growth has sometimes been outpaced
by expanding supply. Two periods of very low producer prices had significant
effects on the industry. In 1999, low grower prices for beefsteak tomatoes
(a large, round, red tomato and the leading greenhouse product at the
time) stung growers who had invested in greenhouses when prices were
much higher. In response, greenhouse expansion faltered and some less
profitable greenhouses were closed.
Growers diversified their product mix by shifting to more tomatoes-on-the-vine,
or cluster tomatoes. Between 1999 and 2003, the share of beefsteak tomatoes
in the total retail quantity sold of fresh tomatoes fell from 18 to 13
percent, while the share of cluster tomatoes rose from 13 to 24 percent.
But the rapid growth of cluster tomatoes led to overproduction in this
segment and extremely low prices by the summer of 2004. The price drop
is slowing further expansion in cluster tomatoes.
Production of the leading greenhouse tomato products—beefsteak
and cluster—has now grown to the point where they are becoming
mainstream commodities. For specialty niche products with limited supply,
it is generally easier to command consistently high prices, in part because
buyers place less emphasis on aggressive price negotiations for products
that are not major contributors to the bottom line. But sales of greenhouse
tomatoes are now critical to the profitability of overall retail tomato
sales, and prices play a more influential role in purchasing transactions.
Increasing competition drives down grower margins.
As the industry matures, greenhouse tomato growers strive for continual product
innovation as a strategy for adding value, stimulating consumer interest, and
maintaining margins and profitability. The expanding product line currently
consists of smaller cluster tomatoes (such as cocktail tomatoes, including
Campari), roma and mini roma cluster tomatoes, heirloom, and different-colored
tomatoes. Greenhouse tomato producers tend to be closer to the pulse of consumers
because they market a retail- and consumer-ready product. In addition, they
increasingly market directly to retailers, rather than through intermediaries,
such as repackers and wholesalers, as is the case for most field tomato shippers.
Impacts on Field Tomatoes Mixed
Competition from greenhouse tomatoes has brought major changes in the
quantity and composition of field tomato sales. While total retail
quantity sold of all fresh tomatoes increased from 1999 to 2003, the
volume of field tomatoes declined after 2001, with the share falling
from 69 to 63 percent. Over the same years, the share of all round
tomatoes (mature green and vine ripe) declined from 43 to 31 percent
(see box, “Field Tomato Variety Expands”). The roma share
fell from 23 to 19 percent, but the grape and cherry category grew
from 3 to 13 percent. Most grape and cherry tomatoes are field grown,
mitigating the impact of greenhouse tomatoes on the field-grown category.
Within the declining round category, the share of mature green tomatoes
fell from 78 to 39 percent, with vine ripe tomatoes benefiting.
While mature green tomatoes are being forced out of the retail market
by competition from both greenhouse and other field tomato types, they
still dominate the expanding foodservice market, which represents about
half of U.S. tomato consumption. With declining retail sales, the mature
green industry is increasingly dependent on the foodservice market, where
greenhouse tomatoes have not yet made significant inroads. However, this
could change since some greenhouse firms have recently begun to experiment
with developing an acceptable product for foodservice users.
If foodservice demand falters, mature green tomato growers would need
to consider other alternatives, with serious industry structural adjustments
likely. Growers could continue to attempt to reposition field tomatoes
through new varieties, products, and packaging with more commercial appeal.
Alternatively, the industry could diversify into the greenhouse industry,
either through alliances with existing producers or through direct investment.
However, greenhouse tomato production is very capital-and technology-intensive,
creating barriers to entry. In addition, the rapid greenhouse expansion
in the United States was accompanied by mixed profitability results;
thus, most field tomato growers did not consider the greenhouse industry
an attractive alternative. But recent profitability in the California
field industry caused by weather-induced high prices may provide the
financial wherewithal for some field growers to explore greenhouse production.
If they were to invest, they would be new entrants in a maturing industry.
Greenhouse and Field Tomato Market Interactions Increase
In the early days of the evolution of greenhouse tomatoes, the greenhouse
and field tomato sectors operated on a relatively independent basis.
Now that they are a major market force, greenhouse tomatoes are increasingly
influenced by supply and demand trends in the fresh field tomato industry,
and vice versa.
In fall 2004, a weather-induced period of short supplies of fresh field
tomatoes enabled greenhouse producers to benefit from a brief period
of extraordinarily high prices as buyers substituted greenhouse for field
tomatoes, where possible. In contrast, earlier in summer 2004, a record-high
supply of greenhouse tomatoes caused greenhouse prices to decline, making
them even more attractive to retail buyers, and placing a damper on demand
for fresh field tomatoes. With greater supply has come an increased willingness
on the part of consumers, retailers, and foodservice users to experiment
with tomato types.
Developments in Mexico Will Shape the Future
Notwithstanding brief periods of abnormally high prices, average grower
prices for greenhouse tomatoes have been trending downward. If this
trend continues, some parts of the North American greenhouse tomato
industry may become less viable. Growers will continue to seek the
lowest cost production regions and form marketing alliances to build
year-round supply. Greater competition means that new entrants have
less room for error; the learning curve is shorter than in the 1990s,
when the industry was in its infancy and average prices were higher.
The greatest source of uncertainty for the future of the North American
greenhouse tomato industry will be the changing structure of the Mexican
industry, which is still seeking out the best locations, technology
packages, and management practices.
U.S. and Canadian growers will be following developments in Mexico closely
when making their future investment and marketing decisions.
This article is reprinted with permission from . . .“Greenhouse Tomatoes Change the Dynamics of the North American Fresh Tomato Industry,” by Roberta Cook and Linda Calvin ERR-2, USDA/ERS, April 2005, available at: www.ers.usda.gov/publications/err2/. Calvin can be contacted at lcalvin@ers.usda.gov, while Cook can be reached at cook@primal.ucdavis.edu.
© 2005 Columbia Publishing
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