MINDANAO BANANA PROFITS SLIP

UNCLAS SECTION 01 OF 02 MANILA 001236

SIPDIS

SIPDIS

DEPT FOR EAP/MTS
STATE PASS TO USTR FOR BWEISEL AND DKATZ
$OC FOR 4430/ITA/MAC/DBISBEE AND SBERLINGUETTE

E.O. 12958: N/A
TAGS: ETRD EAGR EINV RP
SUBJECT: MINDANAO BANANA PROFITS SLIP


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SUMMARY
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1. U.S. banana growers in Davao City reported that profits
fell by as much as 40 percent in 2005. They attribute the
decline to overproduction, along with increasing operation
costs. The Philippines supplies over 95 percent of the
total Asian banana market, with exports going primarily to
Japan, Korea and the Middle East. U.S. companies Del Monte
Fresh, Marsman-Drysdale, and Dole/Stanfilco Philippines
produce over half of the total industry and reported
combined gross revenues of $322 million for 2005. The three
companies alone directly employ over 16,000 people in
Mindanao, and contract services employ at least another
20,000 there. Declining profits and possible competition,
particularly from India, raise concerns about long-term
growth prospects. The industry is backing off from
expansion plans. Even so, these "banana powerhouses" are
developing strategies to diversify while maintaining their
market advantage.

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REGIONAL BANANA PRICES PLUMMET
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2. Meetings with three leading U.S. banana exporters on
February 23 and 24 in Davao City revealed that the typically
profitable banana export business brought net profit losses
for most major U.S. producers in 2005, a trend that is
expected to continue in 2006. One company reported as much
as a 40 percent decline in net profits in 2005, compared to
2004, which it attributed to a 15 percent increase in fuel
costs, a 15 percent increase in salary costs, and increasing
contract costs due to the strong peso. In addition, a
record number of banana producers resulted in overproduction
and market flooding, which caused prices to collapse. Ten
years ago, there were about five or six producers, which
grew to between ten and twelve in 2005. In Japan, which is
the most profitable export market for most U.S. companies,
bananas can sell for anywhere between about $5.00 and $12.00
a box, depending on the season, with an average sale price
of about $7.00 a box. Companies reported that prices in
Japan fell to as little as $1.50 a box in 2005.

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PHILIPPINES IS ASIA'S BANANA PLANTATION
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3. U.S. companies produced well over half the industry
total of 164 million boxes of bananas exported in 2005. Del
Monte Fresh, Marsman Drysdale, and Dole/Stanfilco reported
combined 2005 gross revenues of $322 million. The
Philippines supplies over 95 percent of total banana imports
to other countries in Asia, and the vast majority of these
bananas are grown in Mindanao. Primary export markets are
Japan, Korea and the Middle East. Thailand, Taiwan, and
Malaysia produce some bananas, but offer little competition.
India has the potential to compete heavily, particularly for
the Middle Eastern market due to its proximity, but so far
is producing for domestic consumption only. U.S. companies
said that if India wanted to start exporting, it could do so
"in a heartbeat." Del Monte Fresh and Marsman Drysdale are
particularly concerned about India since they export 40
percent and 60 percent of their bananas, respectively, to
the Middle East. However, Dole/Stanfilco said that while
India has the plantations in place, Indian growers would
have to improve their quality to export.


4. All three companies grow other fresh produce such as
mangoes, pineapples, and asparagus, together less than five
percent of total production for Marsman Drysdale and
Dole/Stanfilco and about 20 percent for Del Monte Fresh.
The majority of pineapple production is handled by sister
companies that produce juices and canned fruits, which are
among the top three Philippine agricultural exports.

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FRUITS OF LABOR
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5. The three companies employ a combined total of over
16,000 people on Mindanao Island, including a small number
of casual laborers during peak seasons. Dole/Stanfilco
reported an additional 20,000 employed through contract
services. Companies did not report any major labor issues.
Dole/Stanfilco added that employment opportunities have
brought visible improvements to the quality of life for many
people. Many of Dole's plantations are surrounded by

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"bandits," but Dole said that the company's employment
opportunities are recognized as benefits for the surrounding
community and mitigate any potential security problems.

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LAND OWNERSHIP DISPUTES HAMPER BANANA BUSINESS
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6. The biggest investment challenge facing U.S. banana
growers is land ownership. Some properties may have two or
three different titles or no title at all. In addition,
land is often owned in small acreage, necessitating a
"piecemeal" acquisition strategy. Since U.S. companies
cannot own land, they sign long-term lease agreements. Most
companies lease and operate about half their production land
and then subcontract with individual growers for the
balance. Dole/Stanfilco reported a case that has been
ongoing for more than five years. The company has a lease
agreement for 90 hectares of land, but the ownership is
heavily disputed. Dole's position is that it does not
matter to them who owns the land. They just need the issue
resolved so they can resume production. The 90 hectares can
produce about 2.7 million boxes of bananas, or about 8
percent of total 2005 production, which they have omitted
from company projections. Dole has been talking to the
Department of Agrarian Reform, but has seen no result yet.

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SOME GROWERS PEEL BACK INVESTMENT
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7. Given the poor performance of banana sales in 2005, most
companies do not have any immediate plans for additional
investment. Dole/Stanfilco said that the company had a
three-year investment plan in place, but 2005 results
brought investment to a halt. However, Del Monte Fresh is
proceeding with expansion plans to develop 800 hectares for
pineapple production and 2,200 hectares for banana
production. Total investment is valued at $3 million. Del
Monte's representative said that the investment decision was
made at corporate headquarters, but may not be well advised
given market conditions.

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COMMENT
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8. The banana industry provides a significant number of
jobs on Mindanao. Declining profits could result in job
losses, which could in turn affect economic stability in
Mindanao. U.S. companies are disappointed with 2005
financial results, but these companies are some of the
biggest players in the market and are best situated to
weather challenging economic conditions. Despite the
general pessimism, U.S. companies are developing strategies
to maintain their market edge, including expanding more into
the Middle East market, devoting more resources to other
produce such as pineapples and mangoes, developing organic
products to fit niche markets, and competing on the basis of
quality. These companies have been in the banana production
business in Mindanao for over 20 years, and it is unlikely
that a few bad years will have much of an effect on their
long-term profitability. However, potential competition
from Indian growers could present a more difficult challenge
to Philippines-based U.S. companies, forcing them to
reevaluate market and production strategies.

KENNEY