Putting the Squeeze on Big Orange : Bitter Charges of Quota-Breaking May Kill Depression-Era Cartel

This is the most bountiful harvest in the long and colorful history of California’s sun-kissed orange groves, the kind of season whose sweetness ought to rival that of the fruit itself.

Instead, this landmark year of the orange may be best remembered for a bitter yield of juice-drenched scandal and controversy--perhaps signaling the end of the official government cartels that have protected growers of oranges, lemons and a few other farm products for more than half a century.

While California’s growers, pickers and shippers scramble to complete a record navel orange harvest estimated at 93 million cartons--more than 8 billion individual oranges--a blizzard of lawsuits has unmasked a tradition of widespread cheating on their own quotas by some of the industry’s biggest players.

The charges have deeply split the citrus world and bruised its sunny image.

Among those accused of selling too much citrus is venerable Sunkist Growers--the century-old cooperative with contracts to sell up to half the nation’s fresh oranges--along with more than half the 27 growers and shippers on its board of directors. Sunkist denies any wrongdoing.

The U.S. Justice Department has filed 19 civil suits in federal court in Fresno, alleging overshipment of lemons and oranges between 1987 and 1992.

The suits allege widespread and systematic busting of the orange and lemon quotas assigned to the state’s citrus growers and packers by an industry committee. They name 15 orange and four lemon packinghouses, as well as Sunkist itself.

Though Sunkist does not grow or ship citrus, it does fill orders for its 6,500 members, and is accused by the government of “knowingly participating or aiding” in lemon overshipments by four of its member shipping houses “by preparing documents with false dates.”

Sherman Oaks-based Sunkist says it has always told its members to abide by the quotas. But Berne Evans, one of Sunkist’s own board members and the state’s largest orange grower, charged in a separate suit against Sunkist in December that top Sunkist management knew of and condoned quota violations.

The dispute here, however, is more than intramural, and there is far more at stake than just the image of the citrus industry.

The litigation provides an instructive look at a Depression-inspired system of market controls in a narrow but divided universe of California and Arizona orange growers--most in the San Joaquin Valley--whose actions are dictated by a handful of elected peers.

Their dispute has spilled not just into the courts but onto supermarket shelves, where supplies historically have been smaller, prices higher and selection arguably narrower than they would be in a market where growers could sell as many oranges as they wanted.

The system is increasingly under attack as a quirky relic of the New Deal era that protects the incompetent and effectively keeps out newcomers--an anachronism in a world of global competition and instant communication.

Authorized by Congress in 1937, an era of low farm prices and especially brutal conditions for small farmers, the quotas were legitimized in the same populist spirit as were the farm cooperatives themselves: Only by joining forces could the little guys survive.

Advocates say the quotas ensure the “orderly marketing” of commodities by acting as a mechanism to stabilize prices and supplies, thus avoiding gluts that could force farmers out of business or severe shortages that could send retail prices skyrocketing.

The quotas are unabashedly aimed at boosting prices in the supermarket--or at least making sure oranges do not become too big a bargain. The tool is a ceiling on the number of California oranges shipped each week, a figure set at weekly meetings run by an industry committee and, until lately, rubber-stamped by the U.S. Agriculture Department.

But the notion of Uncle Sam denying fresh fruit to Americans amid a bumper crop--and the systematic cheating alleged in lawsuits by federal prosecutors--may have combined to write the final chapter at last for this U.S.-certified farm cartel.

“It’s a season of historic importance,” says James Moody, a Washington-based lawyer whose free-market passions have fueled repeated legal challenges to California’s farm cartels for more than a decade.

Even as prosecutors pursue civil penalties against the industry’s leading players, government-industry efforts are underway to persuade orange growers and shippers to phase out--or drastically limit or reform--the very quota system under which the charges were brought.

The government, dozens of orange growers and shippers and a flotilla of lawyers have been meeting for weeks in Fresno to come up with an amnesty program--including a fine of 15 cents for every illegally shipped carton--for quota violators.

The quota’s opponents hope to pair the proposed amnesty program with a separate voluntary agreement by the industry to eventually do away with quotas altogether.

U.S. Rep. Calvin Dooley (D-Visalia), a cotton farmer and House Agriculture Committee member, wants the lawsuits settled and the future of the quotas resolved. “I’d like to see a blanket settlement,” he says. “But I don’t want government dictating a solution. I want the industry to resolve this.”

It is clearly a tough sell. Talks bogged down, attorneys say, after one orange shipper scrawled an angry, profane note to another.

Agriculture Secretary Mike Espy is mulling what position to take. Although he calls volume controls “a pretty good mechanism,” he questions their use in Sunkist-style markets where one organization dominates.

“The concern enters in when you consider the number of players in the field,” he said.

This navel orange season strongly suggests that an end to quotas wouldn’t mean the end of the world.

This year’s quotas for navel oranges as well as for lemons were abruptly suspended by outgoing Agriculture Secretary Edward Madigan in December in an angry response to the industry’s sharp cut in weekly quotas amid peak seasonal demand. This opened the floodgates, dramatically boosting shipments of navel oranges to about 2.5 million cartons a week--about 600,000 above the probable quota for this time of year.

Packinghouses are working overtime and, quota critics say, California oranges are taking shelf space away from other products. Dooley even credits the flood with diverting U.S.-bound shipments of Chilean fruit to Europe.

The gush of oranges has sent wholesale prices tumbling to an average of $7.05 per carton so far this season, versus $8.29 at this time last year. The lower prices have led to higher sales of fresh oranges--shipments are up 37% from the same period last year.

But the volume has not been enough to offset the penalty that lower prices impose on growers. Orange producers are getting a net return of $1,725 an acre so far this season, down 24% from last year--the very outcome warned of by supporters of the quota system.

The effect of such deregulation over time, warns William K. Quarles Jr., Sunkist government affairs vice president, will be an industry shakeout that leaves fewer orange growers and ultimately fewer oranges and higher prices: “Surpluses are what cause farmers to go down the tubes,” he says.

But grower-packer David Roth of Orange Cove, near Fresno, says the quota system protects inefficient growers of “crappy fruit.”

“We should not be subsidizing them,” Roth says. “If I’m a better farmer, I should get a better return. We’ve proven there is demand for 2.5 million cartons a week. We’re shipping fruit that otherwise would have been lost at the end of the year.”

Cheating the arcane quota system has been an open secret for many years, growers admit, much like the overproduction of crude oil by member nations of the OPEC cartel.

(The orange system is not a classic cartel because the farmers merely fix the supply of oranges, not the price. But as a mandatory program with federal blessing, it has strong teeth in the form of financial penalties.)

In oranges, cheating has been done openly as a form of protest--giving above-quota oranges to charities to dramatize the alleged insanity of the system--and surreptitiously as a garden-variety ruse that victimized those who followed the rules.

But this season has been different. First, last August, came the lawsuits filed by the U.S. Justice Department. Then came a harvest blessed by growing conditions that promised to flood the world with California navels--good news if you want to sell a lot of oranges, bad news if you want high prices.

Something had to give, and in December it did. When the navel orange committee slashed the weekly quota from 1.8 million cartons of navels to 1.3 million to tighten supplies and boost prices, lame-duck Agriculture Secretary Madigan suspended the whole quota system for the rest of the season.

December is always a hot time for the navel orange, California’s principal orange product.

The navel harvest begins in November. And though oranges can be “stored” on the tree for months, it is December when prices are highest and the temptation to pick them is strongest. Moreover, the sooner they are picked, the less chance that something will go wrong, such as a freeze.

But if everybody picked oranges at once, the glut would cause prices to collapse, the industry has long contended. Growers would halt operations rather than pay laborers to pick fruit that wouldn’t even cover costs.

Soon, shippers--many of whom are also growers--would have nothing to ship. Grocery stores would suddenly have no oranges, filling their shelves instead with grapes.

Such problems gave rise to the system of so-called “marketing orders” created by the Agricultural Marketing Agreement Act of 1937 and subsequent legislation exempting groups of farmers from antitrust laws. Today, 43 federal marketing orders cover nearly $5 billion worth of fruits, vegetables, nuts and specialty crops--from Texas onions to New England cranberries to Hawaiian papayas.

Most of these programs are not controversial, merely letting farmers jointly research and promote their wares and set packaging standards. But several--including those covering California and Arizona lemons and navel oranges--empowered producers to set up cartels to control the flow of products to market.

This would be illegal for other products, but agriculture has long been treated differently. As Sunkist’s Quarles likes to point out, the orange quotas differ chiefly from federal wheat, corn or cotton price supports in that they cost taxpayers nothing: The programs are funded by industry fees.

The farm cartels also recognize a difference in the ability of farmers and manufacturers to respond to swings in the market. An industrialist can quickly raise or lower the production of, say, paper clips, but an orange grower’s output is circumscribed years ahead of time--and is at the mercy of nature.

Some 20,000 acres of new orange groves, planted up to six years ago, are now coming into production in California. Hoy Carman, agricultural economics chairman at UC Davis, questions whether those trees would have been planted without the security offered by the quotas.

The Agriculture Department’s weekly reviews tended to keep the quotas realistic, and higher prices over time encouraged farmers to plant more oranges, preventing prices in normal times from surging. If dissatisfied with the quotas, the growers themselves could theoretically vote them out.

Cartels in many other farm products have been phased out over the years, including grapefruit, hops, pecans and tart cherries. And those governing California Valencia oranges haven’t been used since 1986.

Some of the illogical effects of the surviving cartels might make free-marketeers out of anybody.

After all, taxpayers are subsidizing water projects that irrigate California’s orange groves, while their government is withholding those oranges from the market--and administering costly food welfare programs.

And while California shippers are parceling out oranges, Floridians and Texans--unencumbered by quotas--ship at will and grab the unoccupied grocery shelf space. Indeed, those states are among the staunchest backers of the California quotas.

The most sensational charge against the cartel system is that it routinely leaves mountains of fruit to rot in the fields as growers, intent on pumping up prices, choose to let it decay rather than accept a poor price. The charge is angrily denied by Sunkist and other advocates of the quotas.

While the quotas limit the weekly shipment of oranges, Sunkist’s Quarles says that serves to even out the distribution of oranges over a longer season.

And what of those photographs of massive piles of “rotting” oranges that have been widely publicized by dissident growers?

Carman, the UC Davis agricultural economist, says that knowledgeable industry people “just laugh” at such deception. Dissidents have admitted that the oranges in the photos were being stockpiled as cattle feed, long an outlet for poor-quality fruit.

Juicing Up the Market

After industry ceilings on domestic shipments of fresh California and Arizona navel oranges were suspended early this year, U.S. sales surged dramatically to more than 2 million cartons a week.

Nov. 5, 1992: 1.15 million cartons

Jan. 4, 1993: Quotas suspended

April 22, 1993: 2.04 million cartons

Source: Navel Orange Administrative Committee