Reference no: EM132152692
NAFTA Arrives at Maxwell Tomato Farms Maxwell Farms, Inc. is a fifth-generation family business located just outside Valdosta, Georgia. The original cotton plantation was changed to citrus fruits and, when John Maxwell was a small child, his father, grandfather and uncles replaced most of the citrus groves with tomatoes. With a prominent cannery in the area, and more recently modern transgenic high yield tomato plants that are disease resistant and drought tolerant, Maxwell Farms has achieved record profitability.
Fresh tomatoes are expensive to transport. Americans eat an average of 88 pounds of tomatoes a year, about one-fifth of them fresh. Maxwell Farms was able to dominate the market for fresh tomatoes throughout the southeastern United States while also selling 60% of their production to a cannery in Valdosta that is owned and operated by Del Monte Food Company, a multinational producer of packaged foods with annual sales in excess of $3 billion.
The eight Maxwell family members who control the business were aware of the proposals that eventually led to U.S. passage of the North American Free Trade Agreement (NAFTA). Some of the farmers and textile plant operators in the area had been lobbying their congressmen in opposition of NAFTA. However the perishability of tomatoes, close personal ties with management of the Del Monte cannery and the superior quality of their produce had insulated the Maxwell's from NAFTA issues. That's what they thought! Maxwell's labor rate for picking tomatoes is $20.00 per day, or $1.25 per bushel. In Mexico it is $4.00 per day, or $0.25 per bushel. The cost of capital needed to purchase seeds, fertilizer and equipment, and maintain the farm translates to the equivalent of $0.30 per bushel for Maxwell Farms. The comparable costs for the Coahuila District Farmers Cooperative in northeastern Mexico are $0.50 per bushel. Tariffs on Mexican produce coming into the U.S. had been eliminated by NAFTA, and that put pressure on Maxwell's profit, an effect mitigated by the cost for transporting tomatoes (about $0.75 per bushel) over a distance of 2000 kilometers. Because of the nature of tomato farming and their expertise built up through years of experience, the Maxwells had survived very nicely despite all of the warnings about the eventual effects of NAFTA on American farmers, particularly the smaller operations with labor-intensive crops.
On November 23, 2007 Charley Powers, Vice-President of Operations at the Del Monte cannery (and also a cousin by marriage of one of the Maxwells) arrived at Maxwell Farms for a meeting with John and David Maxwell. Charley explained that Del Monte had taken a minority financial interest in a large farmers cooperative in the Coahuila Province in Mexico. Effective February 1, 2008 Del Monte would start reducing their purchases of tomatoes from Maxwell Farms, replacing them with lower cost imports of similar quality from Coahuila. With lower production costs, longer growing seasons, use of recently introduced GM seeds, together with the elimination of tariffs, the cost of Mexican grown tomatoes was now substantially below Maxwell's costs. Charley also explained that within 5 years Del Monte would have their own cannery in Coahuila so his challenge was to replace processing of tomatoes with canning of other crops. However John and David Maxwell didn't really hear that part. They were furious!
A meeting of the Maxwell clan was held late that afternoon to discuss the crisis situation. John, Sr. insisted that the quality of Mexican tomatoes would be inferior, especially after transport to Valdosta, and this whole thing would blow over. Doug Maxwell reminded the others of his plan to shift their focus toward the nursery business to supply shrubs, trees and other plants to the growing retirement communities in the southeast. Michael reminded him of several failed attempts by other local farmers to shift into nurseries. Tom recommended active promotion of their fresh tomatoes, including a "Grown in America" label, which would allow them to charge a higher price. The discussion deteriorated into an angry shouting session, with accusations that this should have been anticipated several years earlier and suggestions that they could cut overheads and downsize the business if the less competent family members would get out of day-to-day operations. Mark stated that one of his children was taking courses in International Business at Olin Business School at Washington University in St. Louis.
With the approaching spring break, they could ask for advice at that time. Issues to discuss:
1. Could the Maxwells have anticipated such a development?
2. Do you believe that NAFTA is unfair to American farmers?
3. Evaluate the proposals made by John, Sr., Doug and Tom.
4. You are the child of Mark Maxwell and have been asked to provide your recommendation for the future of this substantial family business.