Question about proper adjectives

I am confused by the example it gives:

California vegetables (from the noun "California")

It says that California is the proper noun, and I understand that.  That would make "vegetables" the proper adjective.  The problem I'm having is, isn't vegetables also a noun?  It seems to me like "vegetables" would be the subject, it's the key point of focus.  Wouldn't that make California the adjective because it's describing what kind of vegetables?

Also, why isn't this a compound noun?

You've run into a common English grammar argument here. 

In the expression California vegetables, the word California (though usually a noun) has effectively become an adjective modifying vegetables.  Your grammar book is confusing you needlessly here;  it has nothing to do with proper nouns at all and everything to do with the ability of the English language to take a noun and use it as an adjective with another noun (sometimes called a nominal adjective):

government policy

town centre

horse manure

JJM