Overview

Apples are by far the largest tree fruit crop in Canada. Production is concentrated in the few areas within Canada where microclimates and soils favour apple production. Major production areas across Canada include the Annapolis Valley in Nova Scotia; the Laurentides and Monteregie regions in Quebec; the Niagara, Lake Ontario, and Georgian Bay districts in Ontario; the Okanogan, Similkameen and Creston valleys in British Columbia.

Table 1: Distribution of apple orchards and production by province

Statistics Canada 2006-Cat. 22-003-XIB; Census of Agriculture 2001 Table 95F0301XIE

Total farm gate value of the Canadian apple crop in 2005 was about $130 million.

From 1996 to 2001, acreage devoted to apple production decreased by 18% mainly due to low commodity prices and retail consolidation which resulted in greater sourcing of apples from out of country suppliers. Interestingly, apple production declined in spite of new production practices and better yields per hectare. Growers have been struggling to receive an adequate return.

Canada exports approximately 50,000 tonnes of fresh apples annually, mostly to the U.S. British Columbia exports between 20-25% of its apple production. About 62% of Canadian exports are from BC, while 26% originate from Ontario. Approximately 80% of all exports occur between the months of September to February. The U.S. accounts for approximately 50% of apple exports. Other export destinations include the U.K., Mexico, Taiwan and a number of countries in Central America and the Caribbean.

In terms of imports into Canada, the majority of apples come from the U.S., with smaller amounts originating from Chile, South Africa, New Zealand, and Argentina. Apples are imported year round. The bulk of the imports arrive during the March to June period.

China is by far the world’s largest apple producer, with about 35% of global production. Chinese apple products compete mostly as juice concentrate, but their global share of the fresh market is growing. The U.S. is the next largest producing nation with about 8% of global production. The European Union in total produces about half as much as China and the U.S. combined. Recently, Chinese apple production has increased substantially and is currently about three times 1994 levels. However, in recent years, apple production has declined slightly largely due to government policies favouring economic diversification and industrialization.

Market Characteristics

In Canada, apples are mainly grown for the fresh market, but some varieties are produced specifically for processing. Processing apples are categorized as juice apples and peelers.

Peeler apples are made into sauce, baked goods, slices and other products. Juice apples are pressed into juice or cider. Peeler apples do not bring as much return as fresh (also referred to as fancy) apples, but more than juice. Apples that are not suitable for the fresh or peeler market are processed into juice.

Apple markets and marketing differ from province to province. For example, Nova Scotia does not have a marketing board. In Quebec, membership in the Federation of Quebec Apple Growers is mandatory and buyers of apples must be licensed. In Ontario, growers with more than 10 acres of orchard are required to belong to the Ontario Apple Growers Association which acts as a marketing board and single desk seller of apples.

Generally speaking, about 60% of apples are sold as fresh product. This varies by region: Ontario has a smaller proportion of fresh sales than this average; in BC where production is more oriented to high value out-of province sales, 80-85% of apples are sold in the fresh market. Juice and cider processing comprises a substantial amount of total apple production, and varies considerably from year to year. Ontario and Quebec tend to process a higher proportion of production into juice and cider accounting for as much as 35% of the total apple harvest in some years. In BC, processing is limited to the culls and cottage industry production.

Apple growing districts are concentrated and marketing channels are generally well defined. Storages, packers and juice processors tend to locate in orchard districts. Transport is rarely an issue.

The largest buyers are the large grocery retailers. Other buyers include bakers, apple product manufacturers, export brokers and juice processors. Consumers buy significant amounts of apples and apple products directly from growers. Exact numbers are difficult to obtain, but estimates are that as much as 10% of the crop is sold direct-to-consumer.

Marketing channels

Overview - apples are picked and sorted to some extent at the orchard. Juice apples are transported to juice processors as soon as they can be accommodated. Fancy and peeler apples are put into storage. Storage is an integral part of the apple business.

Storage is classified into three types: (1) Common (no control); (2) Cold (temperature and humidity control) and (3) Controlled Atmosphere (CA) where there is control of temperature, humidity, and composition of storage gases. Generally, common storages are emptied first, followed by cold storages. CA storages are used to store apples for marketing later in the crop year. A few of the largest growers have on-farm CA storage, and may offer storage services. Most growers store apples off-farm. Storages may be part of a packing business, a privately owned storage company, or a grower co-op.

Fresh apples are packed out to fill retail or export orders and shipped out by truck. Marketing of apples from storage takes place almost year-round.

Direct Sales - growers with suitable locations may operate seasonal farm-gate outlets. The on-farm retail operation requires a storage facility as well as a retail space. Cider, pies, jams, jellies and other fruits and vegetables are usually offered in addition to the orchards produce as part of an on-farm retail operation.

In apple growing districts, roadside outlets commonly supply the local and tourist trade with direct to the consumer sales of fresh fruit and vegetables. These outlets offer a sales channel for some growers. Many of the packing houses also have retail outlets.

Growers can also rent space by the day in most farmers’ markets and sell product in season. Direct sales are the preferred option for special apples such as heritage varieties, or organic apples.

Packing Companies - packing companies can be either privately or cooperatively owned. Privately owned packers are often also large growers. In Canada, most apples are marketed through grower co-ops. Their services include storing, packing and shipping. In short, packers market product on behalf of the growers. Storage and handling fees are deducted before growers are paid. Generally, each grower’s apples are marketed throughout the year, and returns are pooled within each grade and size category.

Fancy and peeler apples are usually marketed through the facilities of the packing companies. Small retailers and processors may however source directly from a single grower, or a small group of growers.

Juice - apples destined for juice and delivered directly from the orchard, or from on-farm common storage are referred to as orchard juice. Other juice apples are culls from the pack lines. In Ontario, the Ontario Apple Growers negotiate a minimum price for orchard juice. In Quebec, minimum juice prices are also negotiated. Juice plants may import apples later in the crop year as domestic supply dwindles.

Key Changes or Recent Issues

The challenge of realizing adequate returns to apple growers is a perennial challenge. Market globalization in general is affecting the apple industry. Growers face brisk direct competition from other countries, particularly Chile in off-season fresh fruit and China in juice concentrate.

Apples are produced in many parts of the world, and total world production is rising. Most countries have a significant cost advantage over Canada. Retailers have many options in sourcing apples, and many foreign suppliers are able to meet retailers’ requirements. In Canada, consumers spend less than 10% of their income on a food basket, and can well afford to be discriminating in their fruit purchases. Competition is brisk.

The competition in the overall fresh fruit market is increasing. In season domestic competition from berries and tender fruit has always meant slow apple sales in the early summer. Furthermore, competition from California, and increasingly the Southern Hemisphere has made fresh plums, nectarines and berries available year-round. Retailers seek to maximize returns from their shelf space, and apples must compete with other fruit for scarce shelf space.

Consumer variety preference is always changing. Currently, Red and Golden Delicious demand is decreasing with Gala and Fuji demand increasing. Demand for yellow rather than red apples seems to be on the increase. Trends in consumer preferences must be identified early in order to plan for changes in production, distribution and marketing.

Liberalization of trade under the WTO should help Canadian exporters continue to develop offshore markets, particularly India. However, Canada's shorter growing season limits opportunities for market expansion to some extent. Also, strong competition from earlier maturing U.S. crops tends to put Canadian exporters at a disadvantage.

Implementation of international quality standards such as Europe's Euro-Retailer Produce Working Group for Good Agricultural Practices (EUREPGAP) should increase consumer confidence in Canada and more importantly, in key export markets. Favorable reports on the health benefits of fruits and vegetables are also a positive driver for increased sales.

There is a trend to consolidate in the retail food sector. This is driving change with producers, packers and distributors as they reassess their marketing strategies.

Price Discovery

Prices for fresh apples are negotiated between the packers and major grocery retailers, and are guided by a general awareness of markets and market forces. These prices, similar to other agricultural commodities are driven mainly by supply and demand factors in the major producing districts of North America. The largest apple producing area in NA is Washington State, which alone produces about six times as much as Canada. Packers in Washington are able to fill orders for Canadian buyers for most of the year, and essentially the price for fresh apples in Canadian stores is derived from U.S. markets.

In Quebec, minimum prices for all classes of apples are negotiated by a committee of representatives from industry segments. However, the prices are still influenced by the same market forces as elsewhere in North America.

Within Ontario, where most of Canadian juice is processed, juice apples are paid the minimum price. These prices are driven by the world market supply and demand of juice apples and apple concentrate.

Key Quality Issues

Key quality factors for fresh apples are well defined by the Canadian Grading Standards.

The grading standards are detailed, and specify tolerances in the seven quality grades. Standards refer to variety (typical shape), size, quality of pack, soundness, maturity, cleanliness, colour, damage from fungi, hail, insects and other damage, etc.

Standards are set by the Canadian Food Inspection Agency (CFIA). Some provinces have their own grading standards, and grade classifications. Provincial grading standards are generally higher than those set by the CFIA.

Growers throughout Canada adhere to protocols such as the EUREPGAP protocol (used in Ontario), and the Production Fruitière Intégrée (PFI) program in Quebec. These quality protocols define the elements of best practices in the apple supply system. It includes topics such as Integrated Crop Management (ICM), Integrated Pest Management (IPM), Quality Management Systems (QMS), Hazard Analysis and Critical Control Points (HACCP), worker health, safety, welfare and environmental pollution and conservation management. Although the protocols are voluntary, participation by growers and packers is strongly encouraged, and indeed necessary for participation in certain markets.

Risk Factors

Apple producers face a variety of risks including:

• Local weather conditions - apple quantity and quality is sensitive to weather. Every grower is exposed to significant weather risk.
• Weather in major producing regions, particularly Washington State. Demand for domestic apples in the second half of the crop year is affected by the supply and price of fresh product and to some extent from the Southern Hemisphere.
• Trade conditions, i.e. non-tariff barriers to Canadian apples. Phyto-sanitary regulations can block Canadian product out of some markets. However, it is unlikely that major seasonal markets in the U.S. would be affected by non-tariff barriers.
• Dollar exchange rates.
• Supply of competing products. There is some substitution between fruits by consumers. Consumers will choose fruits that are in season, especially in the summer. There is some substitutability between apples and non-domestic imported fruit.
• Overall economic conditions.
• Consumer trends. Consumers demand some degree of novelty, and new varieties have a life cycle and an unpredictable volume curve.

Other Factors

Apples are a perishable product, much more so than grain but less than berries and tender fruit. With best efforts and care, quality can be maintained until the next crop is ready. The perishability of apples presents a marketing challenge. On the other hand, there are no carryover stocks of apples. Each crop year begins with a clean slate and a new marketing challenge.

Closing Comments

Apple production and marketing operates within a global market. Competition and supplies are on the increase. Large retailers are increasingly looking for suppliers that can operate year-round. Nevertheless, consumer demand for freshness and local availability are always strong selling features.

Competing in the apple market requires a careful planning and a clear market strategy. Large retailers require consistency of supply and large volumes. Local markets are more receptive to seasonality and local suppliers. However competition in all markets is considerable. Any new entrants will need to carefully evaluate market options and price variability before any major investments are committed.