Ocean Spray, cranberry growers face uncertainty

Naomi Aoki

Tuesday, June 1, 2004 | 10:55 a.m.

CARVER, Mass. -- The way Ben Gilmore sees it, joining forces with PepsiCo Inc. doesn't just threaten the survival of Ocean Spray Inc. It threatens to destroy a way of life that dates to 1816, when Captain Henry Hall first cultivated cranberries on Cape Cod.

Since then, cranberry farming has largely been a family operation with bogs handed down from one generation to the next. But now a mixture of misfortune, mismanagement, and market pressures is forcing Ocean Spray growers to make a choice: Stay independent or enter into a deal with Pepsi that hands control of the juice maker over to the New York giant.

The 925 growers who own Ocean Spray must cast their ballots by Friday. Ocean Spray is the No. 1 brand of canned and bottled juice drinks in the United States, and its cooperative handles about 65 percent of the nation's cranberry crop, producing juice drinks, dried cranberry snacks, and ingredients for other foods.

Those in favor of the deal say Ocean Spray can't survive on its own against beverage behemoths like Pepsi and Coca-Cola Co. Those against it argue that the joint venture will cap cranberry prices for Ocean Spray growers, destroy the cooperative, and jeopardize the survival of the state's cranberry farmers. At stake are also about 500 jobs at Ocean Spray's Lakeville headquarters that would be cut if a deal is approved.

"If the joint venture should pass, I'd get out of the cranberry business," said Gilmore who owns 75 acres and manages another 50 acres of bogs. "The Ocean Spray brand might survive, but the cooperative wouldn't. And without the cooperative, I don't see any future as a grower."

Massachusetts reigned as the cranberry capital of the world until 1995 when Wisconsin surpassed the Bay State as the biggest producer of the tart red berries. Ocean Spray growers hail from a variety of cranberry-producing regions including Massachusetts, Wisconsin, New Jersey and British Columbia, Canada. But the demise of Ocean Spray would disproportionately hurt Massachusetts growers.

If Pepsi caps prices, as the deal proposes, some growers fear that could dissolve the cooperative because cranberry farmers might believe they could do better on their own. Without the cooperative, cranberries become a true commodity, said Richard Sexton, a professor in the department of agricultural and resource economics at the University of California at Davis.

In a scenario where price is the only consideration, Massachusetts loses. The state's older bogs don't produce as many cranberries per acre as Wisconsin's, making it possible for Wisconsin growers to undercut Massachusetts growers on price and still turn a profit.

"You would see fewer growers, larger growers, and a relocation of the industry to the most productive growing regions, which is not Massachusetts," Sexton said.

Growers will learn the outcome of the referendum in early June. A majority vote will be needed. Though a "yes" vote for the joint venture with Pepsi only releases Ocean Spray's board of directors to pursue negotiations, many growers say that once the deal is set in motion it can no longer be undone. If some growers disagree with a decision to work with Pepsi, they will still have to go along with it or leave the cooperative.

Ocean Spray board members have tried to keep the details of the deal quiet. Two board members declined to comment. Several others did not return phone calls. The board also ordered Ocean Spray's management to keep mum and told growers not to share the proposal with anyone outside Ocean Spray. Pepsi also declined to comment for this story.

According to growers who described the deal, Ocean Spray and Pepsi would share ownership of the joint venture, but it would be managed by Pepsi. Growers would sell most of their crop to the joint venture for no more than $30 a barrel, and less than that if market prices drop. Over the past decade, cranberry prices have fluctuated between $13 and $65 a barrel. Growers would get additional money for Ocean Spray's assets as well as dividends from shares in the joint venture.

Ocean Spray's board told growers Thursday it would extend the voting deadline by a week and send an updated proposal from Pepsi. The revised deal, according to one cooperative member, offers growers more money for their assets earlier in the venture than under the previous proposal.

"It's nice to maintain control," said Cape Cod cranberry grower David Ross, who is in favor of the venture with Pepsi. "But control alone doesn't put food on the table. The cooperative worked well in the past, but the past is gone. We have to do something that will work well in the future."

Three cranberry growers founded Ocean Spray in 1930 as a way expand the market for their crops. That year, the cooperative introduced its cranberry juice cocktail, becoming the nation's first cranberry juice maker. Cooperatives such as Ocean Spray, Blue Diamond almonds, and Sun-Maid raisins were formed to protect growers' interests.

Ocean Spray cranberry growers own the cooperative and share in the profits. The cooperative turns cranberries into products before selling them, adding value -- which has kept cranberries from turning into a pure commodity market. While profit margins may be fatter for grower-owners, the structure can be cumbersome. At Ocean Spray, for example, all major decisions, such as the Pepsi deal, must be put to a vote of all growers.

But the world in which Ocean Spray competes today makes it difficult for it to thrive, say Ross and other growers in favor of joining forces with Pepsi. Ocean Spray, they argue, doesn't have the clout or financial resources to go it alone.

Large grocery chains like Stop & Shop, Shaw's, and Star Market would rather deal with industry titans like Coca-Cola and Pepsi that can offer them to an array of products than with a smaller beverage company with limited offerings. And Ocean Spray doesn't have the distribution network to get its products on the shelves of convenience stores, in vending machines, and in cafeterias, in addition to grocery chains.

The heyday of the 1990s, when a barrel of cranberries could bring in as much as $65, attracted newcomers to cranberry farming and enticed existing farmers to expand their bogs. But the rash of new bogs lead to a glut of cranberries that caused prices to crash in 1999. The poor returns lead to infighting within Ocean Spray. One faction felt it was time to explore selling the brand; the other was adamant that Ocean Spray stay independent.

A year ago, the outcome of the vote might have been a foregone conclusion. The majority of Ocean Spray growers chose to oust the group's board of directors and replace it with a new board that promised to explore various options, including the sale of the Ocean Spray beverage business. But today the outcome isn't as clear. Thanks to new products, increased advertising, and lower costs, Ocean Spray's profits are up. Returns for growers jumped to $35 a barrel for the 2002 harvest, up from less than $13 in 1999.

Though harvest doesn't come until fall, cranberry growers still work from sun up to sundown during the spring. "We do it because we love it," said Susan Gilmore, Ben's wife. "It's in our blood."