Short communication. The influence of size, variety, destination port and month of sale in the export price of Chilean apples: a hedonic approach

This study aims at determining the marginal prices of agronomic and marketing variables for Chilean export apples. The agronomic variables are variety and size, and the marketing variables destination port and month of sale. The database corresponds to the 2002-03 and 2003-04 seasons and was obtained directly from the export bulletins of an important Chilean fruit export company. A hedonic price linear function was estimated in terms of the variables mentioned. A generalized linear model was employed and parameters were estimated via the maximum-likelihood method. Results showed that the most influential variable on the final price of apples is destination port, followed by variety, month of sale and size. Using as reference Saudi Arabian ports, Taiwan should be preferred while Rotterdam, other European ports, Philadelphia and other American ports and Latin America are worst choices than Saudi Arabia. With respect to ‘Red Chief ’, the reference variety, ‘Fuji’ and ‘Gala’ have positive marginal prices whereas ‘Granny Smith’ showed a null marginal price. Sales in March or April show negative and null marginal prices respectively, suggesting that the best choice is May. The cost of cold storage, however, can offset the advantage of a late sale. Finally the study shows that size has little significance on final price and that 28 additional points in the size index are required to justify the cost of thinning. Additional key words: hedonic price function, marginal price.

Apples (Malus sylvestris var.domestica Mill.) are the second most important tree fruit crop, after table grapes, in Chilean fresh fruit trade.Thus, of the 900 million dollars that Chile exported in fresh fruit during 2005, 333 millions (37%) were supplied by apples.Although Chile reaches many continents, approximately 40% of total exports are sold in Europe, 26% in South America, 15% in North America and the remainder in Africa and Asia.To maintain a prominent position in the trade market, the Chilean apple industry has been updating technologically its orchards, especially in what refers to cultivars.Although 'Granny Smith' and the 'Delicious' varieties are still important in the Chilean annual supply to world markets, 'Gala' has gradually gained significance, becoming as the most important variety exported in 2001 and accounting for 37% of the total annual apple exports in 2005 (ODEPA-MA, 2006).
In economic theory, consumer demand is normally derived from a utility function, a theoretical construct that defines preferences over the array of commodities placed at the consumer's disposal.These preferences are based on the ordinal utility (i.e.satisfaction) obtained from the quality attributes of each commodity, as perceived by an ordinary consumer.Thus, it can be hypothesized that prices are the value that consumers attach to the bundle of quality attributes of each commodity, given certain budget restrictions and limited commodity supplies.The determination of market values based on commodity attributes can be carried out through the estimation of a «hedonic price function».A hedonic price function relates the price of a commodity to its various attributes or characteristics.The theoretical foundations of hedonic price functions were provided by Rosen (1974), who posited that competitive markets define implicit prices for the embodied commodity attributes, and that consumers evaluate these attributes when making a purchase decision.
Size, form and the presence of visual attributes have an influence on the purchasing decision of consumers.Price premia or discounts are significant for fruit size, bruising, bitter pit, decay, misshapen apples and internal breakdown.On the contrary, commonly cited defects such as insect damage and apple scab have little or no significance on price (Harper and Greene, 1993).Consumers prefer a diameter of 7.5 cm, equivalent to a 110 to 120 size1 , and can tolerate the presence of lenticel breakdown or of stem-end russet to the limit of 1 mm or 55% of the diameter of the fruit, respectively (Hampson and Quamme, 2000).To some extent, producers can increase the size of their fruit via chemical and/or manual thinning, a common practice in industrial orchards (García, 1991;Gil, 1992).Of course, the marginal price gained by size should be compared with the additional cost incurred in thinning (chemicals, machinery, labour) plus the value of the yield sacrificed, to assess the commercial convenience of carrying out this practice.
Besides size, other characteristics that influence wholesale price are cultivar and grade, as Carew and Smith ( 2004) have shown.These researchers analysed sales data and cultivar characteristics from three large wholesalers that purchase fruit in British Columbia, Canada, and found that a signif icant price premia (Can$2.25 to 5.25 per box) were paid for specialty cultivars such as 'Gala', 'Fuji' and 'Braeburn', compared to traditional varieties as 'McIntosh', 'Red Delicious' and 'Spartan'.Smaller premia were paid for large fruit (Can$1.73 per box) and small fruit received a discount (Can$2.00per box).Apples graded Extra Fancy and BC Extra Fancy received a premium of Can$1.50 per box, over apples graded as Canada Fancy.Finally, apples kept in controlled atmosphere storage received a premium of Can$0.96 to 1.89 per box, in the months of January through June.
Although strictly speaking the port of destination and month of sale are strategic decisions taken by producers rather than intrinsic attributes of the fruit, consumer tastes vary with the different locations and seasons and hence, they bear an influence on price.Carew (2000) concluded that, besides grade, cultivar, storage and size, the marketing season explains a significant proportion of the variation in apple prices.
This research aims at determining a hedonic price function for Chilean apples in the U.S market and the marginal prices of size, variety and destination port for Chilean apples.
The data were obtained directly from the export bulletins of a reputed Chilean fruit company (Rucaray S.A) and correspond to the seasons 2003 and 2004.Each bulletin corresponds to a business deal between the company and an importer overseas and, consequently, can be considered the valuation that a specific market does of the quality of a particular shipment of apples.A total of 7,693 bulletins were obtained from the company but after screening for outliers, a final database of 7,502 observations were analysed.Each bulletin included the following variables: -Free-on-Board (FOB) price, in US dollars per kilogram.By definition, this is the price paid to exporters for a merchandise at the port of origin, i.e. apples ex Valparaiso or San Antonio, Chile, in this case.Note that because all prices are quoted at the port of origin, the different markets are comparable regardless of the distance between Chile and the port of destination.
-Size, measured as the number of apples that fit in a 20-kg cardboard box.
-Month of sale: these are March, April and May, i.e. the months when apple exports from Chile occur.
Price and size are continuous variables while variety, month of sale and port are binary («dummy») variables.
Following the general hedonic functions model, it was assumed that the price of the i-th kilogram of apples, P i , is a function of the value attached by the consumer to its attributes Z ij (j = 1…m).Thus, It is also assumed that the market is in equilibrium, that is, that all consumers have made their utilitymaximising choices, given their budget constraints and knowledge of the prices and characteristics of alternative goods.Moreover, all f irms have made their profit-maximising decisions taking into account their production costs, and that the resulting prices and quantities have been set at market-clearing levels.
Initially ordinary least squares (OLS) were employed for estimation, using the following model specifications: linear, log-linear, quadratic.All the models tested showed non-normality of residuals, breaking thus the basic assumption of OLS and yielding biased parameters.To overcome this difficulty, a truncated normal distribution of residuals was assumed and a generalized linear model was adopted (Mc Cullagh and Nelder, 1989;Greene, 1999).Estimation was carried out by the maximum-likelihood method.Because the three specifications yielded similar maximum-likelihood parameters, the linear model was adopted for simplicity.In summary, the following price function was estimated: where P is FOB price and Z j and Z w represent the j-th continuous variable and the w-th dummy variable respectively.
To avoid collinearity between the dummy variables (the so-called «dummy variable trap»), reference variables were omitted in the dummy variables.These are: 'Red Chief ' for cultivars, Arabia for ports and May for month of sale.Hence, results should be interpreted as departures, in dollar terms, from the price a kilogram of Red Chief apples would obtain in an Arabian port during the month of May.
The marginal prices were estimated as the derivative of the hedonic price function [1].Thus, the marginal prices of the Z j and Z w variables are β j and β w , respectively.
Table 1 provides summary statistics of the data collected in this study.The most important varieties included in the sample are 'Royal Gala' and 'Granny Smith', although 'Red Chief ' and 'Fuji' are also present, in small proportions.Most of the trade was destined to Rotterdam and other European ports, with Philadelphia and other North American ports ranking in a significant but second place.A small percentage of the shipments were destined to Latin America, Arabia and Taiwan.Sales start in March, which concentrates 43% of the total, and continue in a descending fashion throughout April and May.In general terms, the trade pattern showed by the data coincides with the general trends of the Chilean trade of apples, as described by Troncoso and Yuri (2004).Table 1 also shows that the data represents an extensive range of FOB prices (from US$ 0.16 to 2.15, per kilogram) and sizes (from 36 to 150 apples per box).
Table 2 provides data for 'Red Chief ' apples sold in May, the reference variety used in this study.On average, a 'Red Chief ' apple sold during the month of May had a size 130 and was priced at US$ 0.37 per kilogram.
Table 3 presents the maximum-likelihood estimates for the linear price hedonic function of Chilean apples in the international market.The log likelihood function yields a likelihood ratio test in the rejection area at the 1% probability level 2 , supporting the conclusion that some or all the parameters of the price function are statistically different from zero.On closer examination, the β/SE ratios show that, with the exception of the estimates for 'Granny Smith' and «sale in April», all coefficients are significant at a 1% probability level.As stated earlier, because the function is linear, the coefficients are direct estimates of the marginal prices of each variable or attribute.The analysis concentrates now on these prices.
The first observation is that the destination port has the most significant marginal price, followed by cul-tivar, month of sale and size.Thus, the marginal prices of the destination ports range from -US$ 0.41 to 0.28, for cultivars from US$ 0.14 to 0.27 and for month of sale from -US$ 0.02 to 0.005, all of them FOB per kilogram sold.In the case of size, recalling that the index is inversely related to size, a 10-points increase in size (e.g passing from size 130 to size 120) brings about an increase in price of US$ 0.007 per kilogram, a very insignificant result compared to the previous values.Hence, an important result of this research is that strategic decisions such as destination market and/or cultivar are far more influential on the final price of apples than the month of sale and/or agronomic practices (e.g thinning) carried out to increase fruit size.
Concentrating the attention on destination ports, it is noticeable that only Taiwan has a positive marginal price, while Rotterdam, other European ports, Philadelphia, other ports of North America and Latin America, show negative signs.This means that only Taiwan should be preferred to Arabian ports and that the other traditional market places of Chilean apples are inferior choices.Adding the marginal price foregone and the negative premium attached to each choice, shipping to Latin America or to «other North American ports» instead of Taiwan imply a marginal opportunity loss of US$0.75 and 0.72 per kilogram FOB, respectively.The other ports exhibit lower marginal opportunity losses, although still significant.
Cultivar choice is the second most important decision.The preferred varieties are 'Fuji' and 'Gala', with a marginal price of US$0.27 and 0.14 per kilogram FOB, respectively.Since the estimate of 'Granny Smith' is statistically zero, the conclusion is that this variety adds no value with regard to 'Red Chief ', the reference variety.
In regard to the choice of a month of sale, the results show a negative and a nil marginal price for March and 28 J. L. Troncoso and M. Aguirre / Span J Agric Res ( 2007) 5(1), 25-30  Finally, as indicated earlier, a gain of 10 additional size points commands a marginal price of US$0.007 per kilogram FOB, a result of little significance.According to a preliminary estimate 4 , the cost of thinning varies in the proximity of US$0.02 per kilogram, a number that is only justified if the size improvement exceeds 28 additional points.This means that thinning pays itself only if the size index can be brought from the reference size of 130, to 102 or less, on average.Although this result can be achieved in practice, size remains a variable of less influence on the final price of apples than varieties and destination ports.
In conclusion, the two strategic decisions that influence final price of export apples are: (i) the choice of varieties and, (ii) once the orchard is established, the port of destination of the fruit.Size has little influence on the f inal price.This study shows that 'Fuji' and 'Gala' should be preferred to 'Granny Smith' and 'Red Chief ', but this is a question that should be addressed periodically as market preferences may vary on time.And that at the current commercial conditions, Taiwan and Arabic ports are more interesting than Latin America, European and American ports, although it is wise to diversify the commercial contacts and hence, these less appealing sale points should also be served.  According to a survey conducted by the «Centro de Pomáceas» of Talca University on 10 industrial orchards of the Maule region of Chile (Yuri et al., 2003), thinning costs about US$ 780 per hectare, including labour and agrochemicals.Dividing this number by the yield reported in the survey (between 33 to 45 t ha -1 ) the per-kilogram cost is estimated in the range between US$ 0.017 and 0.024.

Table 1 .
Data summary statistics

Table 2 .
Price and size of 'Red Chief ' apples sold in May The overall goodness-of-f it test applicable to maximum-likelihood estimates is the likelihood ratio test, which follows a chi-square distribution and can be estimated as χ 2 o = 2*(log likelihood function).The null hypothesis is that all the parameters equal zero.In this case χ 2 o = 2*5,237.75= 10,475.5which is far beyond χ 2 .99(12 d.f.) = 26.2,allowing the rejection of the null hypothesis. 2

Table 3 .
Maximum-likelihood estimates of the linear price hedonic function SD: standard deviation.SE: standard error.3Ms. Claudia Moggia, agronomist specialised in postharvest methods, staff member of the «Centro de Pomáceas» (Pomme Centre), Universidad de Talca (Chile).Contact made on September 2006.