Five Things You Need To Know About Avocados, Free Trade and the Krueger Farm
The free markets and its prices are the only clues you need to show soaring demand and limited supplies.
The Super Bowl will be played in Florida on Sunday, and among other indulgences, Americans will celebrate by slicing approximately 50 million pounds of avocados. Those of us in favor of higher quality, lower pricing and who are fans of the game of free trade will celebrate the arrival of Mexican avocados into Florida for the first time in 94 years, just in time for kickoff.
The remarkable story of this fruit began in central Mexico, likely around 500 B.C. Archaeologists in Peru found domesticated avocado seeds buried with Incan mummies dating back to 750 B.C. Originally believed to be a sexual stimulant, Aztec families would lock up their virgin daughters during harvesting season and they were not allowed outside.
Ever since it has been a centerpiece on the table of a historic debate on free trade between the United States and Mexico that should have been solved long ago, but that it wasn't offers clues to our future I believe, and trades to a money manager.
1. Seeds of Discontent
- In 1871, Judge R.B. Ord of Santa Barbara secured a number of avocado trees from Mexico and successfully transplanted them, starting the first commercial production of avocados in California.
- Around the turn of the century it is said that Carl Schmidt was sent from California to Atlixco, Mexico in search of avocado varieties of the highest quality. He found what he was looking for, and smuggled several seeds back home where he planted them.
- In 1913, a great freeze struck California farmers. Few avocado trees survived, including the trees Schmidt brought back from Mexico. It is reported that there was one exception, the surviving variety was called "Fuerte" - Spanish for vigorous and came from Schmidt's seeds taken from Mexico which provided California a tree that could survive the local climate and an industry was born.
2. Fruit Flies and Cute Lies
- In 1914 the U.S. banned all imports from Mexico, claiming a fruit fly was a risk to California crops. The risk was better avocados at lower prices. It has been alleged that the only place this strain of fly did any damage was in a laboratory.
- A mailman named Rudolph Hass purchased a tree as a seedling in California in 1926 and planted it in his front yard. All Hass avocado trees are related to this single "mother tree" in La Habra Heights, California. Hass patented the tree in 1935. All Hass avocados can be traced back to grafts made from that one tree which finally died in 2002.
- Over the past several decades Mexico has proposed countless remedies requesting we open up our markets, each time shot down despite the fact that their quality was higher and prices were more than three times lower.
3. Free Trade, on our Terms
- It wasn't until 1997 that the U.S. allowed the importation of Hass avocados from Mexico into 19 northeastern states from November through February.
- NAFTA resulted in various trade barriers being removed between the U.S. and Mexico and led to conflict between Southern California avocado farmers who wanted to be protected and Northern cherry growers who wanted access to the Mexican market.
- In 1997, the U.S. agreed to partially lift the ban on Mexican Hass avocados, if Mexico would allow U.S. cherries into its country.
- It was not until 2006 that Mexico could export into 47 U.S. states, the exceptions were California, Florida and Hawaii.
4. Breaking the Law, of Comparative Advantage
- At the moment U.S. consumers pay as much as $2 for a single Hass avocado. In Mexico, you can purchase two kilos for the same price.
- As Mexican importation flourishes, U.S. prices will fall. The U.S. still clings tightly to a tradition of protecting farmers in this country. Even with the new rules don't assume just because you buy a Mexican avocado at the store there is truly free trade. The U.S. adds another dimple to each avocado with something called the "Hass Avocado Promotion and Research Order" that assesses a 2.5 cent fee to each pound, to help marketing and awareness in the U.S. Demand is soaring, supply couldn't keep up – what kind of marketing firm needs to be hired for this project?
- The U.S. would do better to simply follow the economic Law of Comparative Advantage which practically sets forth that we should import from low cost efficient producers – whatever another country can do best - while we export what we do best, in return. Yes, as a consequence it ends jobs, but in the history of the U.S., we have proven only one consistent byproduct – the freedom born to create a new job never done before.
- The U.S. needs to follow this law. Why? For one of thousands of reasons let's look at Southern California where all of the avocado crops that we are trying to protect grow. I would suggest we have outgrown this asset and face a larger crop of liabilities.
- When I was out there last year, Santa Barbara's city council was considering subsidizing a low-income housing project called Los Portales for families earning less than $160,000. Head of the economic forecast project said, "In this city where the median home price is $1.2 mln, that person needs help." This is what happens when you get down to your last vacant lot. A councilwoman said, "Some of the people who are going to buy the units are doctors and lawyers." On the open market the units would go for $1 mln, but the proposal would be to sell them for half for those with "low incomes" of deep into six figures.
- "We are developing almost 50,000 acres of California farmland every year," said Al Sokolow, a recently retired UC Davis Cooperative Extension specialist who has studied land-use change in California for 20 years.
- If the U.S. wants to grow like this, there is a tradeoff. We need to hire people for some of the jobs we used to do well, while we create new jobs that they will pay us more for and we can do even better.
- Californians should know about this trade. After all, Silicon Valley used to be fruit orchards.
5. Disclosing My Bias
Easy for me to say, as a money manager right? We owe much of our past to farmers, right? Yes and yes. It is easy for me to say but my bias is actually born on a family farm. The dirt-poor Kruegers raised corn in central Texas. I first learned about messing with free-trade from my grandpa who explained subsidies provided to farmers to NOT plant certain crops – to help others keep their prices up. He hated it, despite getting paid. He wanted his work to determine his success and that's what he taught his son, my dad.
He knew what this country was built on because he did part of the building, in a war and then in the fields. Determination and innovation were his only ingredients. He was the first to teach other farmers around him about rotating crops to enhance yields year-around. More importantly he saw the end. He saw the limits of his life and he taught his son about each of them after he was old enough to have only assumed hard-work was the answer (a neat trick he pulled off marvelously). It was only then that my dad learned using his mind could take him farther than a field. My grandpa was the best farmer in Miles, Texas I was later told by many who would know. But his best lesson was teaching my dad how to not be a farmer. He decided to work his tail off to become a doctor instead. He has helped people from many countries as a result. And he gets to enjoy an occasional Mexican avocado. Comparative advantage at its finest.
He still has that little Krueger farm. For the first time in decades, there was more revenue from crops three years ago, than from government subsidies. At that time I began to do more and more work researching agricultural commodities. I have invested and traded both futures contracts and in the equity markets for businesses surrounding this industry as a result of what I have found. I believe the headlines in less than ten years will not explain how we are running out of oil, I think they will look more like this: "How do we feed these people?" The free markets and its prices are the only clues you need to show soaring demand and limited supplies. I owe my past to farming, but my future will be determined by my mind – a lesson I learned from my favorite farmer. I never would have imagined wanting to go back to the farm, but I think it will be one of my best trades.
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