Executive Summary

basket_of_tomatoes_lg_clrThe greenhouse vegetable production sector is one of the greatest success stories of Canadian agriculture over the past twenty-five years. The sector has expanded to the point where it now exports annually over $600 million of greenhouse vegetable products (tomatoes, peppers, cucumber, and lettuce) primarily to the US. At the same time that the Canadian sector has been expanding, high tech vegetable greenhouse capacity has expanded in Mexico at an even faster pace, putting Mexico in the position of a formidable competitor for market share in the US market. Mexico is closer in proximity to about half of the US population than Canadian exporters, and for the other
half of the population, Canadian exporters have shorter supply lines. The Canadian and Mexican competition is counter-seasonal, as Mexico is in peak production during the November to March "shoulder months" of winter in the northern hemisphere. Canada is in peak production from April to October when higher temperatures in Mexico take their toll on product yield and quality. Mexican production of greenhouse grown peppers and mini-cukes is not as advanced or developed as Canada's. The competition is most direct in the tomato and English cucumber categories.

The greenhouse vegetable production sector has only become formally organized at the national level in Canada over the past three years through the good offices of the Canadian Horticultural Council (CHC). Prior to the formation of the CHC Greenhouse Committee in 2009, which brings five provinces and regions together to provide a national forum, the greenhouse vegetable sector developed through provincial grower organizations and had only informal contact with each other. The CHC Greenhouse Committee is active in meeting to address sector issues and share information but it does not have any significant financial resources or permanent or dedicated staff. The greenhouse vegetable sector's export growth is a result of the fiercely independent, entrepreneurial character of the sector. Individual marketers, representing and supplied by growers with varying degrees of vertical integration, have developed their own customer relationships and brand identities in the US market. There has been relatively little coordinated marketing action in the US market apart from joint exhibits supported by grower organizations at the Produce Marketing Association (PMA) annual trade show in October. In recent years, more marketers have chosen to exhibit at the PMA in their own independent booths. Thus, the sector has been characterized by independence and inter-marketer competitive rivalry.

As the sector has grown and responded to competitive opportunities and challenges - not the least of which has been the escalation in the value of the Canadian dollar over the past decade - two divergent business models have emerged. At the marketer level, the business model has been to form global supply arrangements, either through alliances or by buying or building production capacity in other regions like Mexico and the US Southwest, in order to be able to provide continuous supply to customers throughout the year. At the grower level, the business model has been to look for ways to extend production through the darker months of winter by using artificial lighting to supplement sunlight, and therefore be able to continuously supply product. While these business models share a common goal around the recognition of the value of providing year-round supply, the strategies to achieve that goal are different and can be in conflict. To the marketers that have developed international supply arrangements, Canada is one, but not exclusive, primary source of supply, especially during the April to October period. To the growers, the marketers represent their only exclusive marketing arrangement and therefore they depend on the marketers to move whatever product they are able to produce. Conflict can arise when marketers are simultaneously marketing product from Canadian greenhouses and product which they have sourced from other parts of the world. This is a practice that is referred to by the sector as "co-mingling." Co-mingling inhibits the ability to apply the Canada brand, since the product is not exclusively Canadian in origin, and may also increase phytosanitary and food safety risks.

Among other considerations, product arriving in the packing plants from other parts of the world for repacking may introduce foreign pests into Canadian greenhouses that were not previously detected here. If those same potential pests are found on product for re-export to the US, their presence may unfairly be attributed to Canadian grown product. This risk could have serious negative implications that could cause difficulties for continuing open border access to the US market. Therefore, there is a strong need by growers to see foreign product repacked for export strictly segregated from Canadian product and correctly labeled so that there is neither deliberate, nor inadvertent "passing off," of foreign product as Canadian.

The Canadian greenhouse vegetable sector has successfully weathered the rise in the value of the Canadian dollar vis-à-vis its US counterpart, as well as continued to expand export volumes and values. The sector has obtained a measure of relief on its cost structure by the decline in natural gas prices and the prospect of long-term, abundant supplies of natural gas in most parts of Canada. This supply prospect comes from technological innovation and discovery in connection with shale gas.

The strategy development for this sector was undertaken through extensive consultation with growers and marketers in the sector, as well as reviewing data for trends that enable reasonable estimates of future growth of the US market. The data conveys optimism for the future. Although more specific consumer research could be done, this report draws on extensive consumer research done by Ipsos Reid in the Ontario market for the Ontario Greenhouse Vegetable Growers (cited by permission), and by trends identified in The Packer's 2011 Fresh Trends report, including customized analysis of purchased data not otherwise published. Key findings in this report are:

• The USDA, in its Long Term Forecast issued in February 2011, projects that imports of
fresh fruits and vegetables will rise from $10.3 billion in 2009 to $20.2 billion in 2020. While this forecast is not disaggregated for greenhouse vegetable products specifically, it shows that the consumer demand in the US for fresh fruits and vegetables will continue to grow and that a significant portion of the demand will be met by imported produce. Thus, the greenhouse vegetable sector's focus on the US market is astute given that it is forecast to be an attractive growth market.

• Within the fresh vegetable category, one of the striking differences between US and
Canadian consumers is the differential higher consumption rate of cucumbers by Canadians, almost 50% higher, at 9.7 pounds per capita in Canada, and 6.2 pounds per capita in the US (2009). This difference is attributed to the higher consumption of greenhouse English cucumbers in Canada, a product which many American consumers are unaware of and which they cannot purchase. The opportunity to close this gap by introducing more American consumers to greenhouse English cucumbers and opening more distribution channels for them is immense. In this strategy, the strategic goal of doubling Canada's greenhouse cucumber exports to the US in three to five years is proposed, together with specific tactics that are intended to achieve it.

• The USDA Long Term Forecast projects that ‘food away from home' will overtake ‘food at home' by the mid-point of the current decade. The US recession temporarily interrupted this long term trend as consumers slightly shifted to more ‘food at home'. Given the expected rise in demand for ‘food away from home', it is strategically astute to work towards developing a greater share for greenhouse vegetables in the food service market. That goal is one of the areas of focus for the strategy developed in this report.

• To provide differentiation from basic commodity forms of tomatoes, peppers and
cucumbers, and the lower prices associated with field-grown and shade house product, it is essential for the sector to position greenhouse-grown product:
- to be at the forefront of product innovation,
- to bring new offerings to market that build customer relationships,
- to provide meaningful differentiation from competitors emphasizing the
superior quality of genuine greenhouse-grown product, and
- to allow higher margins to be earned for retailers, marketers and growers
than is possible from head-to-head straight commodity competition.

Accordingly, a goal of this strategy is not only to foster product innovation but to shorten
cycle times for bringing new products to test markets. By encouraging more experimentation and testing by growers (aligned with marketers), the goal is to reduce market risk associated with the failure of new product introductions. That risk can be mitigated by validating consumer acceptance with a limited test market and then ramping up to have sufficient supply for the roll-out of the new product introduction on a larger scale.

• The need for vigilance in ensuring ongoing access to the US market has been identified as a strategic imperative. Food safety and traceability can be an important defensive tool in that task. Outstanding food safety practices and traceability technology can also serve to confer a competitive advantage for Canadian grown greenhouse product.

• While it is not a major focus of the strategy developed in this report, there is a need to
constantly probe markets other than the US for opportunities to develop relationships there. This is especially true for niche products that are able to bear the higher cost of
transportation. Mexico, China and Japan have been identified as markets particularly
worthy of further probing.

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