The negative values of the estimated net returns suggest that surplus California agricultural products may not be viable ethanol feedstocks. However, this conclusion is not satisfying when one considers that current surplus conditions generate high storage and product transformation costs. For example, the cost of storing raisins is $11.00/t per month, and there were more than 200,000 t of raisins in storage at the end of the 2001 produc­tion season. Oranges and grapes that are either surplus or culled are stored as juice or concentrate for later use in the food and beverage industry.

Storage costs reduce the net revenue received by farmers when they sell their produce in primary markets. Hence, producers might gain net revenue by selling a portion of their surplus production in a secondary market, such as that for ethanol, rather than paying substantial storage costs while waiting for the sale of their produce in a primary market. This problem can be viewed as one of determining the net revenue maximizing strategy for allocating surplus production between storage and a second­ary market. We examine this problem for the case of raisin production and marketing in California’s San Joaquin Valley. We assume that surplus pro­duction can be stored for later sale in the primary market, or sold for use in ethanol production.

Raisin production and marketing in California are conducted within the framework of a federal marketing order. Each year, the Raisin Advisory Committee determines the quantity and value of raisins that are allocated for sale in the "free market," and the quantity and value of raisins held in "reserve." Approximately 240,000 t of raisins are allocated annually to the free market, while 60,000 t are targeted for the reserve ([6]; M. Pello, per­sonal communication, 3/6/03). Between 1991 and 2000, total raisin pro­duction in California ranged between 240,000 and 437,000 t. The amount of raisins allocated to the free market remained consistent during those years, whereas the amount allocated to the reserve pool ranged from 0 t in 1998 to 205,000 t in 2001.