Under marketing orders instituted during the 1930’s and administered by the U.S. Department of Agriculture, orange growers in California and Arizona have been successful in behaving as a cartel in the fresh orange market. Despite the ability of California and Arizona growers to rely on marketing orders to cartelize the fresh fruit market, explain why, from a general equilibrium perspective, marketing orders have had only a limited effect on grower profits because of the fact that fruit can be diverted to secondary, processed food markets such as orange juice concentrate.
A cartel profits by limiting supply, and thus driving up the price. For a cartel to survive, It must 1) keep out new entries of producers, and 2) keep its own members from cheating and over-producing. The problem, however with fresh oranges is that there are too many close substitutes. Orange juice is a close substitute for oranges. Strawberries are also a substitute. The presence of close substitutes makes the demand of oranges quite inelastic, which limits the price increase that occurs by limiting supply.
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From a general equilibrium perspective, marketing orders have had only a limited effect on grower profits due to the possibility of diverting fruit to secondary markets such as orange juice concentrate. Here's an explanation of why this is the case:
First, let's understand what marketing orders are. Marketing orders are policies instituted by the U.S. Department of Agriculture that regulate the production, distribution, and sale of certain agricultural products. These orders aim to stabilize and promote the market for these products by controlling supply, establishing quality standards, and coordinating marketing efforts.
In the case of orange growers in California and Arizona, marketing orders have allowed them to act as a cartel in the fresh orange market. By collectively setting prices, regulating supply, and coordinating marketing strategies, growers could exert influence over the market and potentially increase their profits.
However, from a general equilibrium perspective, the limited effect on grower profits stems from the fact that oranges can also be diverted to secondary markets, specifically, the processed food market such as orange juice concentrate.
The diversion to secondary markets is driven by the law of supply and demand. When marketing orders result in increased prices in the fresh orange market, it becomes more profitable for some growers to divert their oranges to the production of orange juice concentrate. This creates an alternative market for oranges and helps to alleviate the pricing pressure in the fresh orange market.
As a result, the increased supply of oranges to the secondary market can offset the restrictive effects of the marketing orders on the fresh orange market. With more oranges available for orange juice concentrate production, competition in this market may intensify, leading to lower prices and reduced profitability for growers.
Furthermore, the presence of alternative markets for fruit also introduces a competitive pressure on the fresh orange market. If growers feel that the profits in the fresh fruit market are limited due to marketing orders, they may reduce their supply to that market and focus more on producing for the secondary market, where profits may be higher.
In summary, marketing orders have only had a limited effect on grower profits because orange growers in California and Arizona can divert their fruit to secondary markets, such as orange juice concentrate production. This diversification of market options allows for increased competition and can offset the pricing pressure created by marketing orders in the fresh orange market.