By analysing the Melbourne wholesale prices of apples, Charley Xia explores how understanding historic price data could help growers improve returns.
The Melbourne Wholesale Fruit Vegetable and Flower Market is used by grower, wholesaler and retail businesses with more than 7,000 individuals trading on the site daily. Each week, the prices for a 12kg carton of apples and a 13kg carton of pears are collected by Fruit Growers Victoria and passed on to APAL. By analysing a historical time series of apple prices since 2008 we have looked for statistical patterns and regularities. APAL may look at pear pricing later.
Historical monthly prices exist for ‘Fuji’, ‘Golden Delicious’, ‘Granny Smith’, Pink LadyTM, ‘Red Delicious’, ‘Royal Gala’, ‘Sundowner’ and JazzTM from January 2008 to October 2014. The analysis presented here is concentrated on average prices as opposed to monthly highs or lows, which ensures better statistical properties of our estimates.
We focused on the four major apple varieties: ‘Fuji’, ‘Royal Gala’, Pink Lady and ‘Granny Smith’, which together account for 75% of Woolworths’ apple sales within any particular season. We tracked three components of interest:
- Trend: acts as an anchor around which realised prices fluctuate.
- Seasonality: is governed by the calendar month, because there are periodic patterns in price premiums and deficits depending on the month.
- Cycle: can be described as irregular patterns and cycles that can impact on short- to medium-term prices.
A word of warning is that the pricing data is from the Melbourne Market (which may not be reflective of other wholesale markets nor major supermarkets), and therefore most of the insights discussed here may only apply to that particular market. The methodology of analysing trend, season and cycle is universal, and can be applied to any pricing dataset. In this regard, the study here is a template for growers to think about maximising returns.
The trend, season and cycle of each apple is shown in Figure 1.
Some immediate features of these graphs show that realised prices fluctuate closely to the trend, while the seasonality prices have regular patterns, which are repeated every year. Cycles are very regular for ‘Fuji’ and ‘Royal Gala’, but are harder to identify for Pink Lady and ‘Granny Smith’.
Growers making new planting decisions, need to consider the cost of production, yield and potential future prices of each type of apple. The pricing trend (Figure 2) is an indicator of potential future prices, since there is a tendency for prices to revert back to a trend.
For growers supplying into the Melbourne Market, ‘Fuji’ has the longest period as the variety with the top trend price. ‘Royal Gala’s trend price in the Melbourne Market seems to fluctuate less than ‘Fuji’ and Pink Lady, with a peak realised in January 2011 at approximately $36 per carton and a trough realised in July 2012 at approximately $26 per carton. Pink Lady has the most volatile prices overall in the Melbourne Market, and this is captured in its trend component. ‘Granny Smith’ has the lowest, but most stable prices, of the four major apples in the Melbourne Market, but as growers will know, typically it has a higher yield than the other varieties.
There are regular price premiums and deficits in each calendar month, which is captured by the seasonality (Figure 3). Growers looking for a month to sell during the year will give considerations to date of harvest, cost of packing and storage, transportation costs and sales price.
In terms of patterns in monthly sales price in the Melbourne Market, seasonality affects ‘Royal Gala’ and Pink Lady the most, with premiums of up to $13 per carton in March and deficits of $7 per carton in October for Pink Lady, and a $9 per carton premium in January and a $4 per carton deficit in June for ‘Royal Gala’. Generally across the four apples, the premiums are paid at the tail-end of seasons due to supply shortages and for new seasonal harvests.
A cycle consists of an expansion phase from trough to peak plus a contraction phase from peak to trough, that is, a trough to trough measurement (Figure 4). Cycles act irregularly on prices and are a main driver of price volatility in the system. The causes of cycles are difficult to identify, but factors such as biennial bearing, foreign exchange rates, prices in competitor markets, and consumer sentiments can all contribute to pricing cycles.
From a grower’s perspective a variety with small and regular cycles means price stability and hence consistent returns in the short to medium term. A variety with large and irregular cycles have tendencies to surprise and shock.
The Melbourne Market data shows that Pink Lady has the largest cycles, while ‘Fuji’ has small price volatility. The estimated period of pricing cycles in the Melbourne Market are approximately 10 months with the exception of ‘Granny Smith’, which is much longer at 23 months. What this means is that if we currently identify a price trough in Pink Lady at the Melbourne Market, then we can expect a price peak in five months’ time and another price trough in ten months’ time.
What this all means for growers?
For apple growers supplying or looking to supply into the Melbourne Market, this study gives a historical perspective of wholesale prices by analysing the trend, season and cycle of the four major apples. For growers not supplying into the Melbourne Markets, the above analysis is a template for thinking about maximising returns through opportunities in market prices.
Growers making new planting decisions will have an array of decisions to make, one of which is potential market prices. One of the best indicators of future market prices is the historical price trend; and in the Melbourne Market, ‘Fuji’ has the best trends.
For growers looking for months of the year to sell their produce, they will have to weigh up the supplying costs against monthly prices. The seasonality identifies the best months to maximise monthly prices, which is as at the tail-end of seasons and during new harvests. The monthly premiums and deficits helps to make decisions such as: should I incur costs and store my Pink Lady apples for another month to get an extra $5 pr carton?
Identifying cycles are useful to find which types of apples have the highest price volatility, while also helping growers to prepare for pricing troughs and peaks in particular markets. For example, the length of cycles for ‘Royal Gala’ in the Melbourne Market is nine months. If we currently identify a pricing peak for ‘Royal Gala’, then it’s worth considering supplying elsewhere in the next four to five months as we can expect a contraction phase from peak to trough for ‘Royal Gala’ in the Melbourne Markets.
Studying past pricing data is an interesting exercise, but the ultimate question is always “Is this really useful for predicting the future?” To answer this question, I would like to leave you with a famous joke from a celebrated American economist Paul Samuelson:
“To prove that Wall Street is an early omen of movements still to come in Gross National Product, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.”