Wageningen University - Department of Social Sciences
Agricultural Economics and Rural Policy Group
Compensation Schemes and Tomato
Boycotts: An Emotional Hot Sauce
Marie Groenhof
Master Thesis
February 2015
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Compensation Schemes and Tomato
Boycotts: An Emotional Hot Sauce
Marie Groenhof
Master Thesis
Supervisor: Dr. Ir. Jack Peerlings
Msc International Development
Examiner: Dr. Ir. Koos Gardebroek
Economics specialisation
Thesis code: AEP 80433
Source cover page illustration: http://www.hortidaily.com/images/2013/0702/nunh2.jpg
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Abstract
Geopolitical unrest has led Russia to boycott European fruits and vegetables from August 2014. The
objective of this research is to explore to what extent compensation mechanisms introduced by the
government are effective and necessary in countering the effects of the Russian boycott. This
research will focus on the Dutch tomato sector and will crosscheck results with the EHEC crisis.
Multiple research methods were used to answer the research objective.
Literature study provided a theoretical framework on boycotts and compensation mechanisms. The
effect of a boycott is that the balance between supply and demand is disturbed due to a sudden loss
of access to a certain part of the market. The consequence is that the supply of a product exceeds
demand and most probably that prices fall. Because scientist are all but sure of the effectiveness of a
boycott, both a checklist and a formula set are created to provide a means to trace back what the
effect of a boycott was in reality. A compensation scheme is a pre-established method that is used to
calculate the monetary value of the losses of producers incurred by the boycott in order to reimburse
those producers for that loss.
Semi structured interviews showed that when a crisis is perceived to be the government’s fault,
farmers ask for compensation. Both in the EHEC crisis and the Russian boycott, the government had a
stake in how the crisis emerged and evolved. The sector feels they were disproportionally hit by
actions outside their entrepreneurial reach. Compensation offered by the government did not cover
the losses of the sector. The Dutch government stated that the goal of compensation was never to
compensate but to appease the market.
The quantitative framework created was of little use in practice due to a lack of available data.
Therefore a trend analysis of price and export was made. It is apparent that the Russian boycott did
not breach any price or export trend in the Dutch tomato sector. Therefore it was concluded that the
crisis in the tomato sector is projected on but not stemming from the Russian boycott.
When assessing the extent to which compensation mechanisms are effective and necessary in
countering the effect of the boycott on Dutch tomatoes, only one conclusion can be drawn: the
boycott had no effect on Dutch tomato prices and export in 2014. Therefore the compensation
mechanism, although directed towards appeasing the market, was not necessary. Obviously, as no
two crises are alike, this does not mean that compensation is never warranted. The EHEC crisis did
result in a negative price effect that would justify compensation.
The conclusion that compensation in the case of the Russian boycott was not necessary nor effective,
should not lead away from the reality that the Dutch tomato sector is indeed in crisis.
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Acknowledgement
With this thesis, there comes an end to an exciting time of studying, learning and discovering the
world. I would like to express my deepest appreciation to all who taught me the important stuff,
discussed with me and straightened me out. Thank you for helping me make this journey. Without
you, I would not have become the person I am today.
Also, I’d like to thank my supervisor Jack Peerlings for his encouragements. He challenged and
encouraged me during the different phases of doing research. Thank you for leading me to
rediscover my research again and again.
Last but certainly not least, a special thanks to all informants, interviewees, advice givers and helpers
who will remain anonymous throughout the report. Thank you for making me feel relevant from the
start, for all the openness you expressed and for all the valuable information you were willing to
share, regardless of the possible consequences. Without you, this thesis would have no ground to
stand on.
Marie Groenhof
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Table of Content
1. Introduction ......................................................................................................................................... 6
2. Into the situation at hand .................................................................................................................... 8
2.1 The Dutch tomato sector............................................................................................................... 8
2.2 The Russian boycott .................................................................................................................... 10
3. Into the theory .................................................................................................................................. 11
3.1 Regulation on boycotts and their effects .................................................................................... 11
3.2 Compensation schemes .............................................................................................................. 12
3.3 Checklist and formula set ............................................................................................................ 15
4. Dutch tomato farmers and the Russian boycott ............................................................................... 20
4.1 Hypotheses, method and sampling ............................................................................................. 20
4.2 Interview analysis ........................................................................................................................ 21
4.3 What the EU did since August 2014 ............................................................................................ 24
4.4 Quantitative analysis of the Russian boycott .............................................................................. 25
5. The other crisis: EHEC 2011 ............................................................................................................... 28
6. Conclusion & Discussion .................................................................................................................... 31
6.1 Conclusion ................................................................................................................................... 31
6.2 Discussion .................................................................................................................................... 32
References ............................................................................................................................................. 34
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1. Introduction
Geopolitical unrest has recently caused Europe and Russia to place sanctions on one another. On
August 6th 2014 Russia imposed a one-year ban on agricultural produce, foodstuffs and raw materials
from countries that had sanctioned Russia (Kremlin, 2014). Agricultural produce from the
Netherlands was among the items banned. As fruit and vegetable exports from the Netherlands to
Russia account for about 185 million a year in 2013 (CBS, 2014) an immediate outcry for
compensation of lost revenue for farmers followed (LTO, 2014).
Boycotts are as old as human nature (Burnett, 1891). The term ‘boycott’ gained popularity in 1880
when Irish tenants protested against Charles Boycott for having to pay too high a rent to their British
Landlord (Encyclopedia Britannica, 2014). As this story suggests, boycotts are used to protest against
practices that are deemed unfair. Its objective is to intimidate its victims with a threat of monetary or
social loss (Burnett, 1891). Boycotts can therefore be economic, political or social in character
(Encyclopedia Britannica, 2014). The most common form of a social boycott is the boycott from
heaven, better known as excommunication by the Catholic Church (Burnett, 1891). Economic
boycotts are often shaped in the form of labour strikes to get higher wages. Political boycotts mostly
are trade boycotts in which exports of another country are banned.
The current Russian boycott is a classical situation in which a ban has been invoked to protest the
policies of another country. In recent history boycotts have proved to be a common means of
economic warfare and protest, and are perceived as a legitimate alternative to military action (Miller,
1980). For example, during the apartheid in South-Africa, there was a ban on all the export from the
country (Lundahl, 1984). And in 2008 people unsuccessfully called for a boycott of the Olympic
Games in Beijing, China because of human rights violations by the Chinese government (Zegel, 2008).
Often, victims of a political boycott request compensation of their losses from their governments. In
the case of farmers, this is partly because of the scarce agricultural risk markets to otherwise deal
with price and production risks (Meuwissen, Huirne, & Skees, 2008). Although a cry for compensation
makes sense from an emotional point of view, it is questionable if compensation mechanisms have
the hoped for effect. Pay-out rules often badly apply to individual situations. Also, creating a
compensation scheme takes time and that delay may cause it to work pro-cyclical instead of countercyclical (Collier, 2002).
An alternative could be private compensation. French livestock farmers have created such a system.
Their compensation fund paid out to be a success during an incidence of Foot and Mouth disease in
2001 (Cassagne, 2002). This aligns with European Union (EU) policy: although governments have
compensated losses in the past, they now urge farmers to seek for private market solutions
(Meuwissen, Huirne, & Skees, 2008).
Apart from the effect of compensation, it is questionable to what extent the farmers are objectively
(as opposed to emotionally) hit. For example: which part of their yield was already secured in
forward or future contracts and which part was to be sold at day prices?
Even if compensation mechanisms are put in place, it is valuable to look at how market prices evolve.
How soon have prices recovered? Is the net effect of a shock visible on a year’s income? As demand
for agricultural products is known to be inelastic, prices may even recover more than proportional.
Similarly, huge price drops may occur.
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Therefore, the objective of this research is to explore to what extent compensation mechanisms are
effective and necessary in countering the effect of the boycott on Dutch tomatoes by Russia. This
research will focus on the Dutch tomato sector and will crosscheck results with the EHEC crisis.
To come to a conclusion, several research questions have been created: (1) What are the theoretical
effects of a boycott? (2) What are the effects of compensation schemes? (3) Why do farmers want
compensation from their governments? (4) What evidence on boycotts and compensation schemes
can be found in cases from the past? (5) What are the expectations towards the effects of the
current Russian boycott of tomatoes and used compensation scheme?
This research is conducted through a literature review (Research question 1, 2, 4, 5). Interviews will
be held with people within various domains: farmers, POs, industry associations and government
officials (Research Question 3-5). The objective of interviewing is to gain insight in the beliefs and
attitudes of respondents towards the boycott and the practical effects of compensation mechanisms.
Semi structured interviews provide most space for respondents to air those attitudes and beliefs.
Last, a quantitative analysis is conducted on the effectiveness of the compensation scheme currently
used (Research Question 5) and on the evolvement of prices before, during and after a shock like a
boycott (Research Question 5).
After the introduction, in chapter 2 the situation at hand will be explained. Subsequently the
theoretical effects of a boycott and of compensation schemes will be described. Chapter 4 will shed
light on the beliefs and attitudes of farmers regarding crisis compensation in the current Russian
boycott. As chapter 4 includes an analysis of the interviews, it will also include the quantitative
analysis. In chapter 5, the theory from chapter 3 and 4 will be applied to the practice of another case:
the EHEC crisis of 2011. The gained insights on theory, the analysis of both cases, and quantitative
analysis will then be used in chapter 6 for a general discussion and conclusion.
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2. Into the situation at hand
This chapter will dig deeper into the situation at hand. Section 2.1 will shed light on the Dutch
tomato sector and this thesis’s choice for tomatoes. Section 2.2 will discuss the background of the
current Russian ban. These themes are the foundation on which the thesis will build and therefore
some groundwork is necessary for a comprehensive analysis of the situation later on.
2.1 The Dutch tomato sector
Although Russia banned all fruits and vegetables from all EU countries, this thesis will only discuss
tomatoes from The Netherlands. The focus on one product from one country is mainly for reasons of
time and space. The focus on The Netherlands is purely practical: it makes interviewing a lot easier if
it can be done in the country the researcher lives in. But there is more to the Dutch tomato sector
than mere practicalities. When the boycott hit in August 2014, I suspected the Dutch media to
disproportionally focus its reports on the alleged consequences of the ban to the tomato sector (AD,
2014; NRC, 2014). Industry associations asked for a lot of attention for their tomato branch and the
tomato farmers appeared to be in grave distress (Trouw, 2014; LTO, 2014). This made me curious.
This curiosity resulted in some easy questions that I tried to answer with the help of Google. But the
more I tried the less I got answered. While other banned fruits and vegetables were forthcoming
with information on prices, quantities, area etcetera, the tomato sector held back this information.
As I was drawn to this ‘black box’ I decided to write my thesis on the topic. Half expecting that the
crisis in the tomato sector was projected on but not stemming from the Russian ban, I started my
research. The Dutch tomato sector indeed proved to be an interesting subject, with so many sides to
it that I use this section to provide a description of the sector.
To introduce the sector, graph 1. provides some basic statistics. As can be seen, the Dutch tomato
sector has grown substantially during the last decade. The y-axis represents both hectares; millions
of kg and number. While the number of tomato farms has dropped with more than 50%, both the
area and yield have grown at similar pace. In 2000, 520 million kg tomatoes were supplied to the
market and by 2013 this had grown to 855 million kg. This is a 64% rise between 2000 and 2014. The
area used for tomato cultivation counted 1,133 hectare in 2000 and grew with 57% to 1,780 hectare
in 2014. Also, the yield per hectare grew with 5.4% during that period (CBS, 2015; CBS, 2015).
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Tomato area in hectare
Tomato yield in million kg
Year
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Number of farms
2000
Quantity
Graph 1. Dutch Tomato Sector
Source: CBS, 2015
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When engaging in a stakeholder analysis, the sector makes a well organised impression. As can be
seen in figure 1., there are seven major stakeholders in the tomato sector (Respondents All,
2014/2015).
Figure 1. Stakeholder analysis Dutch tomato sector
Source: M. Groenhof, Respondents All, 2014
Figure 1, starts with farmers. They are specialists at growing tomatoes but are (on average) less
capable at marketing their product. The majority of farmers is therefore member of a producer
organisation (PO). These cooperatives are established to market produce on behalf of its members.
Members receive the average week price of the produce they sell together, in order to share price
risks (Respondents All, 2014/2015).
The PO in figure 1, gather the produce and sell it to retailers. This used to be a matter of auctioning
the produce, but nowadays most sales are in the form of short term negotiated contracts. This is
more convenient for retailers as they now are able to plan product discounts two weeks ahead. POs
have a special position within the common market organisation of the EU as they can intervene in
the market on behalf of their cooperation (LTO Glaskracht, 2014). As long as POs comply with anticartel rules, they are allowed to decide on the amount of marketed goods (Respondents 7, 8, 9,
2014/2015). Also, when the government issues an intervention policy, say, green harvesting where
unripe produce is withdrawn from the market, POs facilitate the policy, say, provide farmers with air
tight containers to deposit their harvest in. The PO weighs, labels and monitors the destruction of
such a product1 (Respondents All, 2014/2015).
Farmers and POs have united themselves in separate industry associations; the Agri- and
Horticultural Organisation (LTO) and Dutch Produce Association (DPA) respectively. These
1
N.B. When a farm is infected with a quarantine disease, producer organizations do not receive delegated
responsibility. Then, the Dutch Food & Safety Authority deals with containing the disease and the destruction
of infected products, whether it be animal or plant matter.
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cooperatives perform the role of branch spokesmen in negotiations with the government and their
members.
In The Netherlands, the Ministry of Economic Affairs decides about agricultural policy. They try to
balance their roles of controllers and supporters, but tend to be most involved in farms and least in
retailers (Respondent 9, 2014/2015). There used to be another stakeholder: the product board
horticulture (Productschap Tuinbouw). This group of experts on horticulture advised the state
secretary, interacted with the branch organisations and served as an executive body for parts of
government policy. But since 2014, this board has been abolished.
Logistics, exporters and service providers operate in between the POs and the retail sector. They
make sure the tomatoes are packaged in the right containers and delivered in time at, for example, a
supermarket (Respondents All, 2014/2015).
Both the sector’s growth visible in graph 1, and the sector’s structure portrayed in figure 1, appear
fairly solid. But when interviewing experts in the sector, they portrayed an image of crisis. This will be
further explained in chapter 4.
2.2 The Russian boycott
The second theme central to this thesis is the Russian Ban on fruits and vegetables. The origin of the
current Russian-Dutch trade dispute lies in Ukraine. In 1991, Ukraine declared independence upon
the disintegration of the USSR. Situated between the east and the west (Scott, 2011), ever since its
independence, the east of Ukraine has closer ties with Russia, while the west is more oriented
towards the EU (Zhurzhenko, 2010). In November 2013 this has led to a conflict as Russia pressured
Ukraine not to sign a trade and cooperation agreement with the EU. For three months Kiev’s central
square was occupied by protesters after which President Yanukovych’s government violently broke
up their camp in February 2014. As the world condemned his actions, Yanukovych fled to Russia and
an interim government scheduled elections for May 25th 2014 (CIA, 2014).
Early March 2014, Putin invaded the Crimean peninsula stating he needed to protect the ethnic
Russians living there. A referendum (illegitimate according to the EU, US and UN) resulted in the
annexation of Crimea by Russia (CIA, 2014). The unrest in Crimea spread to the eastern Ukrainian
regions of Mariupol, Donetsk and Luhansk. Ethnic Russians fought the Ukrainian army with the aim of
becoming part of Russia. Rumours went, that Russia secretly provided the rebels with arms and
manpower. On March 17th 2014 the EU placed sanctions on Russia because of Russia’s actions in
undermining and/or threatening the territorial independence, sovereignty and integrity of Ukraine
(European Commission, 2014).
Then, on July 17th 2014, Malaysian Airline flight MH17 crashed near Donetsk, Ukraine. All 298 people
on board died, 196 of which were Dutch (Rijksoverheid, 2014). Dutch diplomats immediately tried to
gain access to the crash site in order to retrieve the victims and investigate the crash’s cause.
Rumours went that the plane was hit by a rebel missile provided by Russia. Fact was that the rebels
denied diplomats and aid workers all access to the crash site (NOS, 2014). Putin’s reluctant attitude
to assist and/or provide evidence in this situation, led the EU to place economic sanctions on Russia
(European Commission, 2014). This provoked Russia to ban all fruits and vegetables from the EU for a
year, starting on August 6th 2014 (Kremlin, 2014).
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3. Into the theory
As chapter 2 introduced the central themes, chapter 3 will cover the theory relevant to this thesis.
Section 3.1 will present an overview of the regulations on boycotts and theory regarding its effects.
Subsequently, 3.2 will provide insight in the theory on compensation schemes. The chapter will end
with a checklist and a formula set that can be used when theory and practice meet in a later chapter.
3.1 Regulation on boycotts and their effects
Anno 2014, the power in creating binding rules and regulations regarding market organisation lies
with the World Trade Organisation (WTO). Ever since the establishment of its predecessor the GATT,
the WTO aspires greater welfare through market liberalization. Subsidies, tariffs and other barriers
limit free trade and are therefore under scrutiny by the WTO. The most favoured nation principle
(MFN) plays a large role in this. This principle states that countries cannot discriminate between
trading partners: countries have to treat all trading partners the same as they do their most favoured
nation (WTO, 2014). The WTO does not allow economic sanctions because they infringe upon the
advantages of free trade and because of this MFN principle. In case of a trade dispute WTO members
should let their Dispute Settlement Body get to work.
From the MNF perspective, the Russian boycott is not in line with WTO rules. But the WTO has
described a few exceptions to their rules. Most relevant for this thesis is the general exception that
members are not kept from adopting measures that are necessary to protect human, animal or plant
life or health (GATT, 2014). Second, the WTO describes the security exception that members are not
prevented to take action to protect its security interests in time of war or other emergency in
international relations (GATT, 2014). These exceptions are often used when countries are justifying
the imposition of economic sanctions like boycotts. But what actually is a boycott?
A boycott is a situation in which one party, for some reason, decides to not buy something from
another party anymore (Van Dale, 2014). The effect of a boycott is that the balance between supply
and demand is disturbed. As part of the market is suddenly unavailable, a surplus of supply emerges.
Because supply exceeds demand, the price of the product will start falling. The amount by which the
price falls depends on the price elasticity of the product and the substitution effect of the product to
consumers. The result is that producers will lose twice: first, they will not be able to sell a part of
their produce to the usual market; second, the part they can sell will be sold at a lower price. How
much they lose also depends on their ability to stockpile their excess supply awaiting better prices.
Producers will probably ask their government for compensation of their losses. This is mainly
because in the short term it is difficult for producers to adjust to a boycott situation. For example:
farmers cannot scale down mid season unless they destroy part of what already grows on the land
(which is quite a common thing to do in this situation). But in the long term, producers will adjust the
amount of labour and capital employed. For example: a farmer can fire the farmhands to reduce
costs and leave part of the land fallow to reduce supply to the market.
In case a country boycotts products from another country, like in the current Russian situation, both
the sending and the targeted country will lose welfare. Graph 2 shows the loss of welfare to The
Netherlands: the excess supply causes the price to drop to Pworld’, and therefore a loss of welfare
sized A+B. The loss of welfare might seem daunting, but there is a common understanding among
scientist that economic sanctions, like boycotts, hardly ever hit their intended target (Zegel, 2008;
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Sears, 1919; Kim, 2013; Allen & Lektzian, 2012; Webb, Figuerora, Wecker, & McCalla, 1989; Miller,
1980; Hufbauer, Schott, & Elliot, 1990; Pape, 1997). While in theory the effect of a boycott is as
explained, in practice a boycott is only successful when certain conditions are met (Burnett, 1891;
Hufbauer, Schott, & Elliot, 1990; Hovi, Huseby, & Sprinz, 2005). Hufbauer, Schott and Elliot (1990)
conclude that economic sanctions have the highest chance of success when: (1) the sender has
limited goals; (2) the target is experiencing economic difficulties before sanctions are placed; (3)
there normally is a friendly relation between sender and target countries; (4) sanctions are forcefully
implemented in a single step; (5) sanctions entail high costs for the target; (6) the costs for the
sender countries are small; (7) the sanctions are not accompanied by covert action or military
operations and (8) few countries are needed to implement the sanctions. Meeting these conditions is
easier said than done. Also, concluding that a loss of welfare is the direct effect of an economic
sanction is a bold statement when made without further explanation. The challenge at hand is: are
the changes in the tomato market since August 6th 2014 caused by the Russian boycott.
3.2 Compensation schemes
Earlier, I stated that producers often ask for compensation of their government when they are
negatively influenced by an economic sanction. But what is it they are actually asking for? This
section will discuss what compensation schemes are, including the rules and regulations of the EU
and the role of POs.
So, what are compensation schemes? Since available literature does not provide a satisfying answer
to this question, a definition will be created in this thesis. Compensation has different meanings
originating in the domains of physiology, psychology or economics. Physiologist use the term to
explain a phenomenon in which the human body makes adjustments by itself, in order to maintain
balance. Psychologist use compensation in terms of making amends. Although these definitions are
interesting for research in those domains, this thesis will focus on the economic meaning of
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compensation. Economists use compensation in a more reciprocal kind of way and include some
exchange of value. For example, compensation is the payment to the victim of a car accident to
compensate him for his losses. This economic notion of compensation is particularly attractive
because it expresses the value of a certain object in monetary terms and uses that value to
reimburse for the loss of that object at someone else than the owner’s fault.
In light of this thesis a compensation scheme will be defined as: the pre-established method to
reimburse (part of) the monetary losses of producers induced by the boycott. Because the
perception is that producers are not responsible for the loss of value, compensation made by the
party who did cause the decrease is warranted. Here, that party would be the government and they
have rules on compensation.
Ever since the early 1960’s the EU has regulation to deal with agricultural trade. Back then,
agriculture was more important economically than it is nowadays. To deal with negative effects of
becoming an economically unified area, the Common Agricultural Policy (CAP) was introduced
(Baldwin & Wyplosz, 2012). In its early days, the CAP had the aim of keeping prices for agricultural
products high and stable. The EU set price floors for many products, enforcing them with tariffs and
(when needed) unlimited direct purchases (Baldwin & Wyplosz, 2012). This policy triggered a series
of complex reforms that last to this very day, as withdrawing large amounts of produce from the
market became too expensive and resulted in surpluses. Also, the WTO aims of free trade and
liberalisation conflicted with the CAP policies (Baldwin & Wyplosz, 2012).
Today, the Treaty of the European Union is very clear on governmental compensation: any aid or
support provided by a Member State which distorts or may distort competition and/or affect trade
between Member States, is incompatible with the internal market, except for three situations.
According to this rule, aid is compatible when, first, social in character and, second, when granted to
affected areas of the division of Germany. Third, and relevant to this thesis, is that Member States
may provide aid to make good the damage caused by natural disasters or exceptional occurrences,
but these two terms must be interpreted restrictively (European Union, 2014; European Union,
2012).
Any intention to give government support has to be noted to the European Commission. The
Commission evaluates requests on a case by case basis, while respecting its previous rulings. In case
an occurrence is ruled to be exceptional, aid must be paid directly to the undertaking concerned, or
to the group of which the undertaking is a member (European Union, 2014).
Although general compensation is not allowed, the EU does have funds available for crisis prevention
and market management measures in order to reduce the fluctuations in producer income that are
caused by a crisis. These funds consist of six schemes that may be implemented by states and
producer organizations in their operational programs (European Commission, 2014). These
instruments are discussed below.
General criteria for a good policy are: effectiveness, efficiency, acceptability and enforceability
(Peerlings, 2014). As both effectiveness and efficiency of monetary intervention by governments are
under discussion, two alternatives to governmental compensation have been researched as well.
These alternatives are: agricultural insurance programs and farmers’ funds and are discussed as 7 th
and 8th instrument.
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1. Market withdrawal
Market withdrawal is “not putting a product up for sale”. Predetermined maximum amounts of
support are set out for 16 products in regulation 1580/2007 Annex X2 (European Commission, 2007).
Market withdrawals can never exceed 5% of the production volume marketed by a PO, excluding
volumes for free distribution. How withdrawn products are used is up to national authorities, but
free distribution must be an option. Growers receive most compensation if they distribute their
produce free of charge to recognized penal institutions, schools, children’s holiday camps, hospitals
and retirement homes. The produce these charities receive has to be additional to what they usually
buy. Pay out under free distribution consists of 100% of the compensation amount plus a flat-rate for
transport, sorting and packing costs. Other usage of withdrawn produce is funded for about 50%
(European Commission, 2014). Usage in the processing industry is allowed as long as this does not
distort competition for the industries concerned both in- and outside the EU (European Commission,
2014).
2. Green- or non harvesting (GNH)
Green harvesting is defined by the European Commission as: “harvesting non-marketable but not
damaged products on a given cultivated area, before the normal harvest” (European Commission,
2014). Non harvesting is defined as: “not taking any commercial production from the cultivated area
during the normal production cycle” (European Commission, 2014).
Using GNH needs to be additional to and different from the normal cultivation practice and cannot
be used for the same product and/or area in any given two consecutive years. GNH are not allowed
to have an environmental or phytosanitary impact. Compensation amounts have to be set per
hectare to cover either the additional cost generated by the harvesting or not exceed 90% of the
maximum support level for withdrawal. Damaged or destroyed products due to a climatic event or
disease are excluded (European Commission, 2014).
3. Promotion/communication & 4.training measures
Member states that use promotion, communication and training must adopt detailed rules on their
implementation. Also, activity under these measures must be additional to any ongoing promotion,
communication and training activity applied by the POs concerned (European Commission, 2014).
5. Government sponsored harvest insurance
The EU has funds available for a harvest insurance, managed by POs, to help safeguard the income of
PO members as well as cover market losses caused by pests, diseases, natural disasters, and climatic
events. Member states may contribute additional financing but must make sure that their support
does not distort the insurance market. Also, the total public support (EU + national) cannot exceed
80% of the premium for insurance against losses due to natural disasters or 50% of the premium for
insurance against losses due to pests/disease. The harvest insurance may never compensate for
more than 100% of the income loss (European Commission, 2014).
The Netherlands have one government subsidized insurance, called ‘brede weersverzekering’ for
farmers with open cultivation (n.a. to horticulture). The government pays a maximum of 65% of the
premium of this insurance against unfavourable weather circumstances (RVO, 2014). There are plans
for a horticulture applicable plant-health-fund, but those are still under discussion (Boerderij, 2014).
2
Within this regulation, tomatoes are supported with a maximum of €7,27 per 100kg.
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6. Support for the administrative costs of setting up farmer-owned stabilization funds
In the first three years of an operational ‘mutual fund’, the EU funds a decreasing percentage of the
administrative costs. This is 10%, 8% and 4% for countries joining the EU after 2003 and 5%, 4%, and
2% for other EU countries. Member states must adopt rules for implementation and are allowed to
fix ceilings for the amounts received by a PO (European Commission, 2014).
7. Private agricultural insurance programs
Private insurance companies have started to offer crop, equipment and income insurances. From a
farmer’s point of view, insuring his entire income is most attractive, while from an insurer’s
perspective, this is a lot less attractive due to problems of asymmetric information (Meuwissen,
Huirne, & Skees, 2003). Most crop insurances therefore have the character of a single risk insurance
(European Commission, 2006). Insurability depends on asymmetric information and the correlation
of risks within the portfolio. Asymmetric information is when the insured has different information
than the insurer about a certain risk. This may lead to moral hazard and adverse selection and is the
reason why insurers usually only insure accidental losses that are unintentional, measurable and
determinable. The correlation of risks is where insurances make a difference between idiosyncratic
and systemic shocks. The basic difference; with an idiosyncratic shock, you are the only one in need
of compensation while in case of a systematic shock, a whole system needs help. Private insurers
mainly offer coverage of idiosyncratic risk (Horst, Meuwissen, Smak, & Van der Meijs, 1999; Balut,
Schnapp, & Collins, 2011).
Even though insurance has its up- and downsides, it is not widely used by farmers. Meuwissen et al.
(2003) state this is because governments still are too much involved in agricultural risk management
and disaster relief: if a farmer can get compensation for free, why would he pay for insurance?
8. Farmers’ funds
Another alternative to government aid is a farmer owned compensation fund. In France, a group of
livestock farmers has set up a compensation fund to deal with their stock’s health issues. While in
case of an epidemic, the animals were compensated by the government, further economic losses
were not (Cassagne, 2002). To cope with these losses, farmers created a fund that would provide
lump sum compensation based on a mutual benefit society, in case such losses would occur. This
system of private compensation, with decentralised management and timely implementation, has
proved its value during an incidence of foot and mouth disease (Cassagne, 2002). A similar Animal
Health Fund exists in The Netherlands but is currently being revised (Horst, Meuwissen, Smak, & Van
der Meijs, 1999; Vleesmagazine, 2015).
3.3 Checklist and formula set
Section 3.1 and 3.2 provided several terms and theories on boycotts and compensation schemes.
Before those can be used in analysing the effects of a boycott, they need to be made operational.
The final lines of this chapter are therefore used to create a checklist and a set of formulas that can
be used to confront theory with reality at a later stage. Both the checklist in table 1. and the set of
formulas below, can, with the insertion of specific data, provide qualitative support and quantitative
evidence of the effects of a boycott.
15
Table 1. Checklist of a boycott’s theoretical effects
Media
Market sentiment
Government action
Price
Elasticity
Substitution effect
Quantity sold
Stockpiling
In case of a boycott one expects the media to report on it. This gives an
indication into the direction of the effects of a boycott. Though far from
quantitative, this data does provide supportive evidence of the theoretical
effects of a boycott.
One would expect a change in market sentiment whenever an economic
sanction like a boycott takes place. Though far from quantitative, this data
does provide supportive evidence of the theoretical effects of a boycott.
In most cases of an economic sanction, the targeted government is asked to
take action. Both the call for action and policy created provide information on
the reason behind the sanction and the seriousness of the crisis at hand. Did
the government or any other party intervene in the market or provide any
party with a compensation of their losses? This data, again, provides
supportive evidence of the theoretical effects of a boycott..
During a boycott one expects a visible effect on the price of a product. As part
of the market is suddenly unavailable, a surplus of supply emerges. Because
supply exceeds demand, the price of the product will start falling or, ascend
more slowly.
The price elasticities of supply and demand are measures of responsiveness to
changes in price.
The amount by which the price falls depends on the substitution possibilities
for demanders of the product (i.e. substitution effect).
The effect of a boycott is that the balance between supply and demand is
disturbed. Producers will not be able to sell a part of their produce to the
usual market. Which share of the market is inaccessible? Will sales drop? Or is
a new market easily found?
Is it possible to stockpile the product’s excess supply to await better prices?
Source: M. Groenhof, 2014
When turning towards a quantitative research method, some characteristics of table 1. can be caught
into a set of formulas (model) to illustrate the effect of the boycott. Here profit in different stages of
the boycott will be discussed just as a model on how optimal supply and profit changes can be
derived.
Profit
To illustrate the effect of the boycott one needs to distinguish a couple of different situations: the
situation before versus during the boycott; the difference between the short and the long term and
the situation with and without compensation.
The situation before the boycott can be perceived as the base-line situation. Assuming that the
farmer plans to stick to growing tomatoes and the price and cost remain constant both in the short
and long term, formula 1. presents the farmers’ profit in period t:
Where:
: profit in period t in case of no boycott,
: price in period t in case of no boycott,
: quantity in period t in case of no boycott,
: cost in period t in case of no boycott.
16
In the short term during a boycott, one expects the farmer’s revenue to change. The price changes,
but quantity remains unchanged. Because one can hardly make any changes in the short term, costs
will remain constant as well. Formula 2. shows this situation:
Where:
: profit in period t in the short term during a boycott,
short term during of a boycott.
: price in period t in the
In case a boycott takes longer, farmers can decide to adjust their production. This will influence costs
and maybe also the price of the product. Profit then becomes:
Where:
: profit in period t in the long term during a boycott,
: price in period t in the long
term during a boycott,
: quantity produced in period t in the long term during a boycott,
:
cost in period t in the long term during a boycott,
: change in profit of other products in
period t.
When the losses of the boycott are going to be compensated, the formulas change again. Formulas 2.
and 3. are then extended by an extra term, depicting the compensation. Formula 4. and 5. present
the profit in the short and longer term during a boycott respectively, including compensation.
Where:
: profit in period t in the short term during a boycott including compensation,
: profit in period t the long term during a boycott and compensation,
paid in period t.
: compensation
An indication of how prices respond to changing quantity and of how quantities respond to changing
prices are given by price flexibilities and prices elasticities respectively. Price flexibilities and price
elasticities can be calculated both for demand and supply. The smaller they are the fewer prices and
quantities react to a change in quantities en prices respectively.
Where: : price elasticity, : price flexibility, : price, : quantity.
There are three factors that influence the price elasticity of demand: availability of close substitutes
(elasticity low if no substitutes); a good being a luxurious or a necessity good (elasticity low if a
necessity); time passed since the price change (elasticity low in the short-term).
17
Deriving optimal profit, supply, demand and cost
In the previous section optimal supply, demand, profit and cost have been assumed. These can be
derived using the concept of a profit function being the outcome of profit maximisation. From the
profit function we can derive supply functions, input demand functions and shadow price equations.
From a supply function, changes in profit and cost can be derived in case prices changes due to a
boycott.
Short term profit is the difference between revenue and variable costs.
Where
: short term profit, : price of output i, : the price of variable input j, : quantity
of fixed factor input k,
; technology set,
: vector of variable inputs, outputs and fixed
factor inputs respectively,
: vector of prices of variable inputs and outputs respectively.
The supply function is the first order derivative of the profit function with respect to output price.
Where : supply of output i.
The demand function is minus the first order derivative of the profit function with respect to the
input price. Where : demand of input j.
The shadow price equation is the first order derivative of the profit function with respect to the
quantity of a fixed input. Where : shadow price of factor input k.
And the inverse of the shadow price equation is the demand function for the fixed input:
The shadow price of a factor input, gives the extra profit if there would be one extra unit of fixed
factor input available. It is therefore also the maximum price a producer would be willing to pay for
an extra unit of fixed factor input (maximum bid price). In this thesis, it would be more relevant to
use that same price and see what would happen if one unit of fixed factor input less would be used.
Taking the integral of a supply function over a price range, gives the change in profit over this range:
18
Where:
price
: difference in short term profits between the new price
,
and the old
: supply equation
And taking minus the integral of a demand function over a price range gives the profit over this
range:
Where:
,
: difference in short term profits between the new price
and the old price
: input demand function
The changes in variable costs might be relevant too. Some respondents, for example, explained that
the only way to cut costs is to leave the plants untendered until the season is over.
When rewriting the profit maximization, where C: costs.
The first order condition is:
so marginal costs equal price
And the inverse supply function equals marginal cost:
Then I can take the integral over the inverse supply function over the range of the quantities before
and after the boycott in order to find the difference in variable costs between both quantities.
19
4. Dutch tomato farmers and the Russian boycott
Whether it is French farmers herding their sheep into the Louvre or Dutch farmers driving their
tractors to Brussels, farmers are known to publicly ask for attention for their crises. They often ask
their governments for compensation of their losses. But why? This question will be among the ones
discussed in this fourth chapter. As little to none reliable literature is available on the ‘why’ question,
semi-structured interviews will be used to support this discussion. Section 4.1 will start with some
hypotheses, method and sampling for the interviews. Section 4.2 analyses the interviews. To present
all sides of the matter, section 4.3 will present what the EU did when the boycott struck and section
4.4 uses the checklist and formula set from chapter 3, to analyse the Russian boycott in a
quantitative manner.
4.1 Hypotheses, method and sampling
As hardly any reliable literature can be found on why farmers want compensation from their
governments, the best way to answer this question is to ask them to farmers and farmer related
organisations themselves. Semi-structured interviews were conducted around six themes: crisis &
entrepreneurial risk; the right to compensation; the role of the government; satisfaction with
compensation; the need for compensation and the Russian boycott. The goal of the interviews was
not to get confirmation of an existing theory but to form conclusions based on observations and
interviews. In other words: the objective was to understand and to gain insight in the beliefs and
attitudes of respondents towards the boycott in general and compensation mechanisms in particular.
Semi-structured interviewing provides respondents with the freedom to speak their mind and the
interviewer the chance to follow a respondent’s line of thinking. Besides this apparent freedom,
semi-structured interviewing is led by a general list of topics or a rough script (Bernard, 2011).
Because I generally would get only one chance to ask questions, it gives more certainty in getting
questions answered than for example unstructured interviewing. This makes semi-structured
interviews the right method of interviewing in this thesis.
An appropriate sampling method for deciding who to interview depends largely on which standard is
followed. The semi-structured interviews I will conduct are a classical form of qualitative research. As
I am not necessarily interested in the attributes, thoughts and beliefs of individual tomato farmers
but much more in beliefs that are shared among the population of tomato farmers I will use nonprobability sampling (Bernard, 2011). Now the entities within the population do not have an equal
chance to be selected for this study. But because the call for compensation could be seen as a
cultural fact and cultural facts are shared, I am better off with non-probability sampling.
The questions that remain: who should be interviewed, and how many interviews are needed? To
start with the first question; non-probability sampling requires experts (Bernard, 2011). In this case
experts on the tomato sector in the Netherlands. Experts in this field are tomato farmers themselves,
producer organizations, industry associations and the Dutch ministry of Economic Affairs. The second
question regards the amount of interviews that are needed to draw scientifically sound conclusions.
According to Bernard (2011) evidence shows that interviewing ten people is enough to uncover the
core of a qualitative situation at hand. Others, for example Morse (1994), Denzin and Lincoln (2011)
state that six interviews should be enough. Because of the size of the sector at hand, nine interviews
seem nicely conservative.
20
4.2 Interview analysis
Analysing qualitative data is definitely not an exact science and scientists have very different opinions
about it. As Basit (2003) states: “It is a dynamic, intuitive and creative process of inductive reasoning,
thinking and theorizing.” The interviews here are a mix of understanding and explaining how
respondents experience the situation in this specific context (Starks & Brown Trinidad, 2007).
As the majority of respondents requested anonymity, analysis will focus on arguments and not on
who said what. Reasons for anonymity differed from fear of fining to fear of loss of face and from
endangering cooperation to fear of misinterpretation.
Because both knowledge of and outlook on the Dutch tomato sector differed between the different
respondents, I asked each respondent to draw the sector to the best of their knowledge. By putting
all these drawings together, figure 1 in chapter 2 was designed. It struck me that some farmers’
knowledge of the sector was restricted to their own activity. I was told that they were good at
growing tomatoes but selling them was not their forte. As long as the prices they received from their
PO were ok, they were not interested in the rest of the sector (Respondents 1, 3, 5, 6, 7, 2014/2015).
The respondents with an extensive insight in the sector explained their outlook on the sector. They
provided me with an image less stable than my first impression. They explained: almost all growers
are a member of the 15 Dutch POs. The POs request a 14 day advance notice of kilos to be harvested
from their growers, so they know how much they need to sell. As most sales are made through
mediation3, the POs offer their produce to all (about 8) available retailers. If, for example, all 15 POs
have 1 ton to sell, the retailers as a whole gets offered 120 tons (15x8). These sales through
mediation are called: ‘sales under contract’ but are in fact oral agreements confirmed via e-mail,
encompassing only price, quantity and delivery date/time. Terms are equal to those in the first
contract or according to the PO’s regulation handbook. According to the respondents, this system
empowers retailers and dampens the price because of two reasons. First, there exists a continuous
overestimation of supply in the market. Second, where an auction is relatively distant, with
mediation a relation of favours is established. In this relation it is difficult to bargain a higher price
without the risk of losing future sales (Respondents 2, 5, 6, 7, 8, 2014/2015).
Because price is under pressure, POs and branch organisations try to redirect the sector’s focus on
price towards quality and branding (Respondents 2, 3, 4, 5, 6, 2014/2015). But the stress surrounding
the volatile tomato prices of the last years was apparent in all interviews.
The first theme discussed during the interviews was if a systemic crisis (as opposed to an
idiosyncratic risk) is part of entrepreneurial risk or not. To summarize the answers: “yes but no”. All
respondents confirm that a crisis is part of entrepreneurial risk. Respondents say that crises are not
rare and sometimes even advantageous to the firm. But when we discussed specific crises, examples
are considered as exceptions to the rule because respondents did not cause the crisis. The
(un)fairness was a recurring theme: “someone in politics says something, and now we have to bear
the consequences”. The ministry of Economic Affairs stated that government action implies that a
situation is not a part of entrepreneurial risk. Therefore, the current Russian boycott and the EHEC
crisis were considered outside of entrepreneurial risk.
3
One might expect the term negotiation instead of mediation but respondents explicitly used mediation
(bemiddeling in Dutch) in their language.
21
Illustrative of this theme was the line of arguing that the low tomato prices were caused by the
Russian boycott: low priced tomatoes, destined for Russia, now flood the European market and
suppress the market price (Respondents 3, 4, 5, 6, 7, 8, 2014/2015). But to me, it is questionable if
the flooding happens and if the low tomato prices are indeed caused by the Russian boycott.
There are several reasons for questioning the link made by respondents. First, the Russian market is
mostly served from February until July. So when the boycott started in August, few tomatoes would
have gone to Russia anyway. At least: the drop in export volume from August to October 2014
followed the pattern of previous years (Van Berkum & Jukema, 2014). Van Berkum & Jukema (2014)
conclude that the Russian boycott did not influence total tomato export from the Netherlands in
2014. Second, respondents themselves, found that a reordering of trade partners was taking place:
as The Netherlands used to serve Russia and Turkey the eastern part of Europe, now Turkish
tomatoes were going to Russia and Dutch tomatoes to Eastern Europe. Also, as more crates than
labels were shipped to Turkey, some therefore say tomatoes are finding their way to Russia via
alternative routing. Third, one could argue that the equal export volume came at the cost of lower
prices, but there is neither quantitative nor qualitative evidence to support this. The respondents
acknowledge a surplus in tomato area in The Netherlands as being one of the causes of the low
prices of the last couple of years. They all state that they themselves are oversupplying the market,
causing a low price. At the same time Dutch glass tomatoes are consistently more expensive than, for
example, Spanish plastic tunnel tomatoes. The lower quality segment of Dutch tomatoes will
therefore find it more and more difficult to stay viable. I was told many times: “This battle can only
be won on quality”. This qualitative evidence is supported by quantitative data stating that the
tomato market shows signs of saturation and that the price trend in 2014 is in accordance with
previous years (Van Berkum & Jukema, 2014).
So, to state that the Russian boycott causes low tomato price is difficult to defend. Some
respondents even stated that the market has only improved since August (Respondents 3, 4, 5,
2014/2015). This is supported by graph 3 and 4 in section 4.4.
Resulting from the first reason for a questionable link between the boycott and bad prices, is the
argument that the real problems caused by the boycott will only arise in the first half of 2015,
especially from week 18 as Poland’s harvest for Russia then starts to enter the Western European
markets. Even though this is true, the sector could chose to prevent this. All actors know that the
boycott will last at least a year. In August 2014, the plants for 2015 were not yet planted. If the sector
foresees a surplus of 300 ha., they could choose not to plant in order to prevent oversupplying the
market in spring 2015 (respondents 1-9, 2014/2015).
Continuing with the next theme, the sector believes compensation is a means to make amends for an
unfair situation. The current Russian boycott is perceived to be caused by the government. It is
deemed only fair that they pay for the consequential costs. None of the respondents would call
compensation a right, but just and only fair.
Most respondents were not satisfied with the compensation package at the table. The sector prefers
destruction/free distribution of all tomatoes that used to go to Russia and full compensation of their
cost price plus the price of destruction/distribution to the current compensation scheme. Market
withdrawal would be the preferred way of achieving a calmer market and stable high prices. The
compensation currently offered is only a fraction of the cost price and therefore far from sufficient
22
according to the respondents. Another option would be, what the media calls, a crisis cartel. In policy
terms this is called an exemption from competition. Under this rule, POs can decide to stop
producing the 8% that went to Russia before.
Surprisingly, when confronting the ministry of Economic Affairs with the sector’s grievances, they
stated that the Russian Boycott is not a crisis and that the compensation mechanism was not meant
to compensate. According to the ministry (2014/2015), “a crisis is a situation in which the (national)
security is at risk because one or more vital interests are being affected and the regular structures
and means are not sufficient to maintain stability. Vital interest can be perceived as economic,
ecologic, and physical safety, and social and political stability. The term ‘safety’ is the umbrella term
for all these interests”. By this definition the Russian boycott was not a crisis. And while both the
government, the sector and the media uses the word ‘compensation’ its goal, according to the
ministry of Economic Affairs, is not to compensate. The real goal of the mechanism is to appease the
market and to create a temporary price floor. During the interviews, some respondents
acknowledged that the mechanism has helped with market sentiment. They stated the publication of
compensation prices probably pacified the market as the price forms a bottom line which does not
need to be crossed during the contract negotiations and concluding with retailers (Respondents 2, 4,
5, 7, 2014/2015). Regarding the crisis cartel, the ministry states that the state secretary did her very
best to arrange this, but the European Commission simply would not allow it.
A point of critique during the interviews, is the role of the government. The most heard comment is
that the mechanisms are slow and indecipherable. After a very slow start in realising a
comprehensive scheme in August 2014, it changed countless times. It is unclear what rules need to
be complied with, when pay-out will be realised and who can answer any questions. Also, the
elaborate control mechanism attached to it, makes it too expensive for the prospective beneficiaries
of compensation. Respondents agree that fraud should be avoided and controls are a necessary evil,
but the thoroughness with which the Dutch government checks whether its support is warranted, is
both very expensive and unnecessary. Several respondents advise to take a look at this infrastructure
for control, as it eats away from the already meagre compensation (Respondent 4, 7, 8, 2014/2015).
Also, there is a perception that since the abolishment of the horticultural board, adequate
knowledge is too scattered within the governmental bodies with decisive power. Even though a
compensation mechanism is there to take on some of the risk, the government is perceived to act
risk evasive. The ministry of Economic Affairs itself agrees with the fact that the whole process of
implementing the compensation scheme was rather messy.
A final theme in the interviews was the necessity of compensation. Unexpectedly, the respondents
explained that the compensation scheme at hand may place a floor in the market but is otherwise
unnecessary if its goal is to help farmers. Market prices are higher than the compensation rate and
the administration attached to filing for compensation is too elaborate. Stories were told about
people who, a year after applying for compensation and discarding their produce, were deemed ineligible and did not receive the compensation but a fine instead. The elusiveness of the rules of the
game frightens beneficiaries too much to make use of compensation.
As the Russian boycott is not a crisis according to the Dutch government, and farmers do not need
the compensation scheme, it is an easy question to ask if the sector is in crisis at all. Although the
answer seems no, I think there is a crisis, and will come back to that later.
23
4.3 What the EU did since August 2014
Even though the price floors of the 20th century do not apply anymore and a boycott is not a
standard exceptional occurrence under the Treaty of the European Union, the EU did not sit on its
hands when Russia closed its borders. The European Commission regarded the Russian ban of August
7th 2014 as a serious threat of market disturbance caused by price falls, due to the sudden
unavailability of an export market. The threat was considered most relevant for the fruit and
vegetable sector as they harvest large amounts of perishable goods in August. Therefore the
Commission found it necessary to provide exceptional support measures for producers of tomatoes,
cauliflowers, carrots, cabbages, sweet peppers, headed broccoli, cucumbers & gherkins, mushrooms,
plums, soft fruit, apples, pears and table grapes (RVO, 2014). The EU established a maximum support
price, a support ceiling of €125 million and a support period of three months (European Union,
2014). From here, Member States could use the six instruments of section 3.2 to intervene in the
market.
The ceiling was reached within two weeks. A couple of days later, the entire compensation scheme
was put on hold as one country had declared about their entire export in damages. On September
29th a new compensation scheme was launched in which this extra-proportional declaration was not
possible anymore (European Commission, 2014). Tomatoes attracted a lot of attention too as the EU
had initially published the wrong support prices. In the new scheme, green- and non harvesting of
tomatoes is encouraged over free distribution. Therefore a weekly changing price per hectare was
introduced in October 2014 (Staatssecretaris van Economische Zaken, 2014). These amounts can be
found in table 2 listed under 2014.
Since the start of this research, many different schemes and regulations have been presented. As of
January 2015, the RVO (Dutch government service for entrepreneurs), uses the support prices in
table 2 (RVO, 2015). Now, market withdrawal is listed as the preferred method of intervention again.
A little problematic is that the institutions eligible for free distribution need very limited amounts of
tomatoes: they need crates full not trucks full.
The percentages in the columns under EU contribution and PO contribution need some explaining. In
every compensation mechanism, the EU only contributes a percentage of the amounts published.
The other share has to be realized by the POs themselves. If a farmer is not a member of a PO, the
percentages are different. For non PO members, green harvesting/non harvesting is not allowed.
Market withdrawal for feed is contributed with 50% and for free distribution for 100%. Transport
costs, sorting and packaging costs can count on 100% EU contribution as well (RVO, 2015).
Based on qualitative data, I expect that very few tomato farmers have made use of the offered
compensation scheme, as market price were consistently higher than the compensation rate.
Unfortunately the agency within the government that can provide me with the quantitative data
(RVO), chose not to help me (Groenhof, 2015). Therefore I cannot state how many Dutch tomatoes
were filed under this compensation scheme.
24
Table 2. Tomato Support under RVO
Market withdrawal
Compensation
Per 100 kg
Destruction/feed € 18.30
Free distribution
€ 27.45
Green harvesting/Non harvesting
Week
Compensation
Per hectare
per week
2014 – 36
€ 3,048
2014 – 37 t/m 40 € 2,429
2014 – 41 t/m 44 € 1,539
2014 – 45 t/m 48 € 1,515
2014 – 49 t/m 52 € 88
2015 – 1 t/m 4
€ 162
2015 – 5 t/m 8
€ 198
2015 – 9 t/m 12
€ 1,168
2015 – 13 t/m 16 € 2,237
2015 – 17 t/m 20 € 2,924
2015 – 21 t/m 24 € 3,412
2015 – 25 t/m 26 € 3,337
Transport costs
Distance in km
Max
compensation
per 1000 kg
0-25
€ 18.20
25-200
€ 41.40
200-350
€ 53.30
350-500
€ 72.60
500-750
€ 95.30
750 - more
€ 108.30
Sorting and packaging costs
Max
compensation
per 1000 kg
tomatoes
€ 201.10
EU contribution
PO contribution
75%
100%
25%
n.a.
EU contribution
PO contribution
75%
75%
75%
75%
75%
75%
75%
75%
75%
75%
75%
75%
25%
25%
25%
25%
25%
25%
25%
25%
25%
25%
25%
25%
EU contribution
PO contribution
100%
100%
100%
100%
100%
100%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
EU contribution
PO contribution
100%
n.a.
Source: RVO, 2014
4.4 Quantitative analysis of the Russian boycott
This last section of chapter 4 will analyse the Russian boycott in a quantitative manner, based on the
framework created in chapter 3. The model depicted in section 3.3 is theoretically sound. However
due to a lack of relevant data this section can only give an approximation. But let us first discuss
media, market sentiment, government action, price, elasticity, substitution effect, quantity sold and
stockpiling during the Russian boycott.
As with most international disputes, the media covered the Russian boycott extensively. Although
media coverage is expected, the extensiveness may have been influenced by the timing of the
25
boycott. August is a slow month when it comes to reporting the news, so there was ample space to
report on the Russian situation. Whether on paper, TV or digitally, the news headlined with the
boycott. According to some respondents, farmers make a pretty picture. It was even suggested that
tomatoes were in the news so much, simply because of their colour (Respondents 3, 7, 2014/2015).
Market sentiment was quite negative, especially in the first days after the boycott. Prices at auctions
dropped and in mediation, the retailers had a strong position (NOS, 2014). Fierce negotiation was
going on. Retailers suggested to POs they should drop their products off for free or, if they wanted to
sell product A, the price of product B should be lowered as well (Respondents, 2, 6, 7, 2014/2015).
As soon as the Russian borders were closed, the European government started to discuss
compensation. Because stockpiling is hardly possible with tomatoes, swift action was called for.
When trying to await better prices, quality decreases at such high pace that the value of the tomato
drops too much. The discussion on compensational policy took some time and the outcome was
changed often, but in the end a compensation mechanism was provided. Table 2 in section 4.3 shows
the amounts of support as of January 2015.
When looking at graph 3. it is difficult to conclude a negative price effect caused by the boycott. As a
matter of fact: all tomato prices were at an all year low right before the boycott (week 33), after
which they started a slow ascent. Vine Cherry tomatoes got in trouble around week 42, but before
conclusions are drawn based on that descend, let us compare 2014’s data to 2013.
Graph 3. Tomato Prices 2014
4
3,5
3
Cocktail Vine Tomato
Price
2,5
Plum Tomato
2
Single Tomatoes
1,5
Vine Cherry Tomato
1
Vine Tomato
0,5
Round Tomato
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Week
Source: Anonymous, 2015
When compared to the year 2013 (Graph 4.), prices follow a similar pattern with an all year low
around week 33, followed by a slow ascend towards the end of the year. Off course respondents say:
“but I know for sure they would have been higher if the Russian border was not closed”. But such
arguments are speculative. Aside from these anonymous data, Van Berkum and Jukema (2014)
confirm that 2014 does not break with any price trends in previous years as discussed in section 4.2.
26
Graph 4. Tomato Prices 2013
4
3,5
3
Cocktail Vine Tomato
Price
2,5
Plum Tomato
2
Single Tomato
1,5
Vine Cherry Tomato
1
Vine Tomato
0,5
Round Tomato
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Week
Source: Anonymous, 2015
An indication of how prices respond to changing quantity and of how quantities respond to changing
prices are given by price flexibilities and -elasticities. The smaller they are, the less prices and
quantities react to a change in quantities and prices respectively. Because quantities are unknown,
an honest reflexion of elasticities cannot be provided. Seale et al. (2013) did calculate a Slutsky
compensated price elasticity for fresh tomatoes from The Netherlands. Their result of -0.44 suggests
(as expected) only a small increase in demand, when the price of tomatoes falls. But, the tomato
does not exist. High value tomatoes may have a different elasticity than low value ‘soup’ tomatoes.
Another valuable element is the quantity sold. After all: if prices remain stable but quantity sold
drops, financial viability is under pressure as well. Unfortunately this data is not (made) available. The
LEI (Dutch agricultural economic institute) does not own this kind of data and my anonymous source
wishes not to share these (LEI, 2015; Anonymous, 2015). The relative inelasticity calculated by Seale
et al. (2013) suggests that quantity demanded hardly changes under a changing price. Stockpiling
tomatoes is not possible as quality decreases too fast over time. This perishability has one advantage:
price recovery will not be hampered by stocks flooding the market.
The goal of the formulas in section 3.3 was to provide a theoretical basis for collecting quantitative
evidence on the effects of the Russian boycott on Dutch tomatoes, based on price, quantity and cost
information. Left with only price information and elasticity, the formula set is of no empirical use.
Costs however, have not yet been explored. Agricultural organisations find it difficult to link costs to
a unit of product (LEI & Universiteit Utrecht, 2014). But the KWIN (Institution that provides
quantitative information on e.g. horticulture), reports that a 4 hectare sized farm will experience
about €56 of costs per m2. My anonymous source states that tomato farmers need a turnover of at
least €41 per m2 to cover their costs (2015).
The Dutch market is actually a part of the European market that is influenced by more than the
boycott (Van Berkum & Jukema, 2014). Therefore, and because of the lack of data, the only
quantitative evidence that can be provided is a trend analysis of Dutch tomato prices and Dutch
tomato export. As discussed in this chapter: price nor export trends provide evidence of a negative
effect of the Russian boycott on Dutch tomatoes. This might change in spring 2015, as Spanish
production is then on full throttle and Dutch production starts off again.
27
5. The other crisis: EHEC 2011
In order to see how bans played out in recent history, this chapter will discuss a case from the past.
In May 2011 an 83-year old women from Niedersachsen, Germany died of Haemolytic Uremic
Syndrome (HUS), caused by an infection with a new E-coli strain: EHECO104:H4. At the time of her
death, already 45 people had gotten ill. The number of infected people would rise to 4,321 over the
next two months and take 52 lives in total (NOS, 2011). The fact that this bacterial infection was
resistant to antibiotics made the infection difficult to treat. Therefore German government agencies
like the Robert Koch Institute, started to look for the source of the bacteria.
The investigation first accused Spanish cucumbers from distributors Frunet Bio and Hortofruticola
(Fruitnet, 2011). But evidence was never found. Then, focus shifted to Dutch cucumbers, lettuce,
sweet peppers and tomatoes. Consumer confidence, demand and prices plummeted but the same
problem emerged: there was no prove that people got sick from those vegetables (Elsevier, 2011).
Just as well, on June 2nd 2011 Russia banned all raw European vegetables to prevent importing the Ecoli strain to Russia (NRC, 2011; RIA Novosti, 2011).
Then on June 4th news got out that a lot of infected people got sick after having eaten in the same
restaurant: the Kartoffelkeller in Lübeck. On June 5th, the ‘real’ source of contamination was found:
sprouts farm Gärtnerhof in Uezeln. Again: none of the hundreds of samples taken at the firms under
investigation, confirmed that the EHECO104:H4 came from these organizations (Bild, 2011).
One month later, on July 5th, the European Food and Safety Authority (EFSA) came with a concluding
report, stating fenugreek seeds from Egypt were the source of it all (EFSA, 2011). Yet again, no
sample tested positive. EFSA says in their report: “In this regard, the thus far negative test results
from the microbiological tests carried out on seeds cannot be interpreted as proof that a batch is not
contaminated with STEC O104:H4 since these results depend on and may be limited by both the
analytical and diagnostic performance characteristics as well as by the nature of the sampling plan.
(EFSA, 2011)”. In response to this report, the European Commission closed the borders to all
Egyptian fenugreek and other seeds from July 6th 2011 (European Commision, 2011). The ban would
last for nine months (European Commission, 2011; European Commission, 2011).
Egyptian fenugreek was the last victim of EHECO104:H4 as investigations were closed after EFSA’s
report. To this day, nobody knows for sure what caused the outbreak as not a single sample, whether
it be cucumbers, tomatoes, sweet peppers, lettuce, bean sprouts or fenugreek, tested positive.
At the end of it all, farmers in Germany and the Netherlands had suffered great losses. According to
estimations in the sector, the damage of the Dutch fruit and vegetable sector was around € 157
million and the damages of the retailers € 87 million (Bleeker, 2011; Productschap Tuinbouw, 2011).
The Dutch government first ruled the situation a calamity, which allowed employers to reduce the
work-hours of their employees. Next, the government postponed the due date of certain loans by a
year and the Dutch IRS would pay out tax-returns at a faster rate and be lenient towards requests for
payment arrangements. But further support, outside of the common market organization, was not
allowed by the EU (Bleeker, 2011).
The European Commission ruled that the precautionary attitude of consumers caused a significant
disturbance of the market for fruit and vegetables. The Commission stated that crisis management
28
and market support measures were appropriate to support the POs. The Commission made € 227
million available, paid for by the European Agricultural Guarantee Fund (EAGF) for seven products
among which tomatoes (European Commission, 2011; European Commission, 2011). Usually this
money can only reach farmers through their POs membership. With EHEC, this rule was partly
withdrawn as the common market organization provided an intervention measure for members of
producer organizations and the EU provided an emergency fund for all producers.
Although the main focus lay on market withdrawal, green- and not harvesting, free distribution was
an option (European Commission, 2011). New was the €15 million for promotional activities that was
guaranteed in order to restore consumer confidence in fruits and vegetables (Bleeker, 2011).
When confronting the Russian ban of European fruits and vegetables in June 2011 with the checklist
created in chapter 3, the following can be presented. The media were on top of the EHEC story. From
their perspective it was a good story. A lot of people got very sick, even died, and every couple of
days something else had caused the tragedy. Russia’s choice to close its borders was one of many
news moments. The goal of their sanction was for EHECO104:H4 not to spread into Russia (BBC,
2011). This ban was called disproportionate by the EU. So there was some controversy as well which
makes it an attractive story for the media.
The market sentiment during the EHEC crisis was basically total panic. As long as no one knew the
product that caused EHEC, all fruits and vegetables were under suspicion by the public. Consumer
confidence in Germany (the largest Dutch export market) was at an all time low. Dutch growers had
little demand for their product in Germany and the Russian ban that followed, closed off all access to
their third export market (LTO, 2011). Even though the Dutch and European government took action,
compensation was meagre compared to the damages (LTO, 2011).
EHEC losses were compensated by the European government. Market withdrawal and green
harvesting were the main intervention mechanisms used for which a total of €227 million was made
available (European Commission, 2011). €27 million was destined for Dutch damages (Bleeker, 2011).
Tomatoes were compensated with a maximum of €33,20 per 100 kg (European Commission, 2011).
Many respondents heralded the Dutch government for their swift intervention in the EHEC crisis. The
German government did not receive similar positivity. Their actions were deemed very destructive.
Even though political pressure must be have been high, they endangered the livelihood of a lot of
farmers by speculating on possible sources of EHEC (Respondents 3, 5, 7, 8, 2014/2015).
As can be seen in graph 5, prices dropped as expected. As part of the market is suddenly unavailable,
a surplus of supply emerges. Now supply exceeds demand and prices start falling to the point of
market withdrawal in June. Also, quantities sold are also expected to drop but this data is not
available. To assign this price change solely to the Russian ban would be unfair. Germans did not
trust any fruit or vegetable under suspicion for quite some time. The horticultural sector was already
hit by the loss in consumer confidence due to the epidemic. Losing part of the market was an extra
shock. To make a distinction between the two effects would be outside the scope of this thesis.
The shelf life of tomatoes, although dependant on treatment and packaging (Nasrin et al., 2008), is
very limited. Awaiting better prices is only possible for a short amount of time but as quality reduces
over time, so do prices. This trade off will only be profitable in specific situations and can be all but
29
counted on. During the EHEC crisis, the low consumer confidence caused part of the price effect. As
consumer confidence takes time to restore, a rapid resolution for the low prices was not realistic and
stockpiling in order to await better prices was not either.
Graph 5. Tomato Prices 2011
3,5
3
Price
2,5
Cocktail Vine Tomato
2
Plum Tomato
Single Tomato
1,5
Vine Cherry Tomato
1
Vine Tomato
0,5
Round Tomato
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Week
Source: Anonymous, 2015
During the EHEC crisis, Dutch tomatoes were allowed to be withdrawn from the market. Although I
cannot support this with quantitative data, many respondents told me that they applied for the EHEC
compensation scheme (Respondents 2, 3, 4, 5, 7, 8, 2014/2015; Anonymous, 2015).
Because the lack of data, again, the formulas in 3.3 cannot be used. The goal of these formulas was
to provide quantitative evidence on the effects of the EHEC crisis on Dutch Tomatoes. The only
quantitative evidence that can be provided here is a trend analysis of Dutch tomato prices and Dutch
tomato export. As can be seen in graph 5, the price data shows a breach of trend compared to 2012,
2013 and 2014 in graph 6, 3 and 4 respectively. Clearly EHEC had an impact on the market price. In
this case, compensation does seem to be necessary and effective.
Price
Graph 6. Tomato Prices 2012
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
Cocktail Vine Tomato
Plum Tomato
Single Tomato
Vine Cherry Tomato
Vine Tomato
Round Tomato
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Week
Source: Anonymous, 2015
30
6. Conclusion & Discussion
This last chapter will provide an answer to the research questions in section 6.1. Subsequently, 6.2
will discuss those conclusions and make recommendations for further research.
6.1 Conclusion
This section answers the question to which extent compensation mechanisms are effective and
necessary in countering the effect of the Russian boycott on Dutch tomatoes. The first research
questions were on the theoretical effects of boycotts and compensation schemes. Chapter 3
explained that the effect of a boycott is that the balance between supply and demand is disturbed
due to a sudden loss of access to a certain part of the market. The consequence is that the supply of
a product exceeds demand and most probably that prices fall. Because scientist are all but sure of
the effectiveness of a boycott, a checklist and a formula set provided a means to trace back the
effect of a boycott in reality. Compensation schemes were defined as a pre-established method that
is used to calculate the monetary value of the losses of producers incurred by the boycott in order to
reimburse those producers for that loss. The effect of the scheme should therefore be that farmers
are properly reimbursed by the government or any viable alternative.
The third research question asked why farmers want compensation from their governments. Chapter
4 provided an answer with the help of semi-structured interviews. The conclusion; when a crisis is
perceived to be the government’s fault, farmers ask for compensation. Both in the EHEC crisis and
the Russian boycott, the government had a stake in how the crisis evolved. The sector feels they
were disproportionally hit by actions outside their entrepreneurial reach. Although the sector calls
both occasions a crisis, the government does not. Because they offer to compensate, they do
perceive EHEC and the Russian boycott as beyond entrepreneurial risk.
Several things can be noted on boycotts and compensation schemes from cases from the past. First,
from the perspective of a government, a good scheme should be official and bureaucratic to make
control possible. This is opposite of the beneficiaries’ needs. Red tape is the last thing they need, as
this slows the process down and eats away (part of) the compensation. Second, there is no clarity on
how the intervention prices are created. This does not add to the acceptance of the policy. Third, the
Dutch government seems to have some standard gestures. One of these is allowing reduction of
worked time. The government should realise that this is of little use to the horticultural sector. It will
reduce labour costs but the plants are growing and need care anyway. If growers choose to send
their employees home, they ruin their season. This is a large risk to take.
The last research question was on the expectations towards the effects of the current Russian
boycott and used compensation scheme. Based on this research I cannot say that the Russian
boycott has had a strong negative effect on the Dutch tomato sector as a whole in 2014. Individual
organisations have gone bankrupt but also in those situations, the Russian situation added to the
existing malaise. Similarly, the compensation scheme could not have helped those individuals.
In the second chapter of this thesis, I suspected the crisis in the tomato sector to be projected on but
not stemming from the Russian boycott. That seems to be quite accurate. This conclusion should not
lead us away from the reality that there is indeed a crisis. Prices in horticulture have been low for
years and threaten the viability of many farms. I will come back to that in section 6.2.
31
When assessing the extent to which compensation mechanisms are effective and necessary in
countering the effect of the boycott on Dutch tomatoes by Russia, only one conclusion can be drawn:
The boycott has had no visible effect on Dutch prices and export in 2014. Therefore the
compensation mechanism, although not intended to compensate but directed towards appeasing
the market, was not necessary. Obviously, this does not mean that compensation is never warranted.
As can be seen from the EHEC case, two crises are hardly ever alike. Compensation during the EHEC
crisis did seem justified based on the trend analysis done in this thesis.
6.2 Discussion
This final section will discuss the conclusions drawn and the thesis as a whole. Let me start with the
reach of this research. The results of this research are of use to the sector but would be more so if
the sector would provide scientists with the necessary data. I wonder to whom the sector’s secrecy is
advantageous. For example: all POs are bound to know how much quantity they have sold. They
even share this information ‘anonymously’ with an organization who resells this information to the
sector in order for them to compare prices and quantities. So why not provide this data upon
request? Or: the sector ordered McKinsey to analyze the horticultural sector and make
recommendations on an improvement strategy. The report was presented in December 2014, but is
still (February 2015) unavailable to interested readers. Or last: the Dutch government says it is
spending money on supporting the tomato sector, but when they are asked to show how many
tomato farmers are using the money, they will not provide the information. All these examples show
how difficult it is for scientists, who by the way have the smallest stake in a certain outcome, to get
their hands on relevant data. This makes scientific conclusions, like the ones in this thesis, less strong.
Further research should consider the benefits of the sector’s secrecy and if it is indeed beneficial.
The qualitative research in this thesis showed that the majority of respondents does not see the need
of the current compensation mechanism. An easy question would be to wonder if the tomato sector
is in a crisis situation at all. I believe it is. The current Russian boycott added to the instability of the
sector. The emotion, with which respondents spoke, is in my perception, a fear of the Russian
boycott being the straw that breaks the camel’s back. I want to use the remainder of this chapter to
discuss the causes of that crisis and some recommendations towards a solution.
Considering all the alternatives, let us remember that income from farming has always been volatile
as it depends on many ‘random’ factors that influence production and price. Tomato farmers have a
limited number of options to deal with price and income uncertainty. Price risks can, to some extent,
be managed by short term forward contracting. For larger shocks, farmers turn to their government.
This is perceived to be an unhealthy situation but I find it questionable if it is feasible for the private
sector to cope with shocks like the current boycott.
If we stop fighting symptoms for a moment and start looking at causes, Dutch tomato farmers seem
to currently be unable to cope with shocks. My question for further research is: where does this lack
of resilience come from and how large a shock should a farmer entrepreneur be able to withstand?
I believe the crisis in the Dutch tomato sector is partly caused by the rapid expansion of the sector.
The consistent oversupply has a negative effect on price and the current Russian boycott only
stresses how much the European market for tomatoes is satiated.
32
The chain responsibility for this satiety starts with the farmer and ends at the consumer.
Understanding your product starts with understanding what the consumer wants. And therefore
understanding the production chain is crucial. Many farmers focus on price but those farmers that
focus on marketing and add value by branding their tomatoes appear to be more successful. As
Dutch glasshouse tomatoes are relatively expensive compared to Spanish tunnel tomatoes, the
sector needs to become a leader in something other than price. In other words: focus on product
leadership instead of cost leadership. Further research could explore if adding value adds to the
success of a business in the tomato sector.
Inherent in this, is the use of mediation versus the use of the auction clock. Commodities without any
added value in terms of branding are very suitable for auctioning. I believe this might improve the
price level of these products. Mediation should be used for products that have a ‘personality’. This
levels out the relation between retailers and POs. Further research could track down the benefits of
differentiating sales strategies and investigate the effect on power relations between retail and POs.
The sector could also improve in framing. Graph 1 frames the sector as one entity. But that is not the
reality. The tomato does not exist. In The Netherlands, farmers grow many different species of
tomatoes. Both cost and sales prices differ tremendously between them. So to present the sector as
one is untrue. This is where the sector could improve its competitiveness.
Last, the evidence from EHEC and the Russian boycott shows that the Dutch government could do
with some soul searching. Do the decisive bodies really have the necessary capacity? Can policy be
adjoined to healthy entrepreneurship? Are policies as efficient as can be? Maybe the government
could try to stand in the beneficiaries shoes; make it personal. For example: if free distribution is the
preferred policy, facilitate it accurately. Transport, 4 documents, a six months delay in payments and
the fear of fines, will not bring much crates of tomatoes to food banks. In other words: gauge the
balance between the government as control mechanism and the government as support system.
When thinking of recommending further research, I would stress the need of finding out who
benefits from the secrecy and the commercialization of data from the sector. Second, research is
needed to provide the Dutch tomato sector with a focus for improvement. Judging the media
coverage lately, this is exactly what McKinsey is currently working on (Rabobank, 2015). An article on
the McKinsey report presentation speaks volumes: 50% of growers in Dutch horticulture were unable
to repay their loans let alone pay interest between 2011 and 2014. 15% could repay but had no
money left to invest in their businesses. The other 35% will get into trouble if the situation remains
unchanged (AGF, 2015). Apparently the sector was not aware that the situation is as such. This leads
me to, again, stress the need for a reduction of black boxes and other secrecy. In other words: the
Dutch tomato sector could do with an unveiling.
33
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