ECUADOR'S CUT FLOWER INDUSTRY FACES CHALLENGES

UNCLAS QUITO 000995 SENSITIVE SIPDIS TREASURY FOR MEWENS USTR FOR BENNETT HARMAN E.O. 12958: N/A TAGS: ECON ETRD EAGR EC SUBJECT: ECUADOR'S CUT FLOWER INDUSTRY FACES CHALLENGES REFTEL A: Quito 442 B: Quito 409 C: Quito 601 D: Quito 225 ¶1. (U) Summary: Ecuador's flower sector has boomed with ATPA benefits and has recently been targeted by the GOE as a "productive sector" warranting increased government support. However, climate issues, increased labor and production costs, foreign competition, and uncertainty over ATPA renewal have challenged the sector in the first two-thirds of 2008. Growers responded by expanding exports to the European market. Given the economic slow-down and possible recession in both the United States and Europe, the industry may be facing weakening demand in its two major markets. End Summary Flower Export Sector Strong... -------------- ¶2. (U) Cut flowers are one of Ecuador's largest exports under the Andean Trade Preferences Act (ATPA),which provides duty free access to the U.S. for many goods from Ecuador and other Andean countries. The flower industry has significantly expanded in Ecuador due to ATPA. Ecuador's Export and Investment Promotion Corporation maintains that ATPA has led to 70,000 direct jobs in this labor-intensive industry. The industry has also attracted FDI from Colombia and the U.S. The flower sector has been particularly successful in providing jobs to women, often in indigenous communities, who frequently do not have other good options for cash employment. In June, Ecuador's cut flower industry was identified as a "productive sector" by the GOE (ref A). This means that flowers and agriculture, along with nine other business sectors in Ecuador, will be supported with $16 million over the next three years through the GOE's Plan for Productive Development. The funds will be used to attract new investment into flowers and other agricultural industries. But Faces Challenges... -------------- ¶3. (U) Ecuador's flower industry has faced challenges in 2008. A difficult rainy season in Ecuador affected the flower sector -- cooler temperatures and increased cloud cover kept some roses from blooming, leading to reduced production. In addition, tax and labor laws, uncertainty over ATPA extension, and increased competition from other countries affected the sector. ¶4. (U) According to the Association of Flower Producers and Exporters of Ecuador (EXPOFLORES),Ecuador's new tax law requires companies to pay taxes on their property even if it does not return a profit, adding to costs. The new labor law prevents flower farmers from hiring workers on an hourly basis, a major disadvantage as hourly workers have always been an important addition during peak harvest season (ref B). As a result of the new labor law, EXPOFLORES believes that 15,000 jobs have been lost in the sector. EXPOFLORES also states that uncertainty over ATPA renewal has hurt the sector. While it welcomes the multiple extensions since 2006, it notes that the short-term extensions complicate long-term planning. Increased Foreign Competition -------------- ¶5. (U) Ecuadorian flower exporters are also facing increased competition from Ethiopia and Asia. Ethiopia's industry in particular has expanded rapidly; in the past seven years the industry has grown from zero companies to 135 businesses with 1105 hectares under cultivation. According to one Ecuadorian grower, Ethiopian and other Asian firms now have a "dominant" position in Europe and have made inroads penetrating the low-end U.S. market due to low production and labor costs. The grower noted, however, that Ethiopia and Asia are currently unable to produce higher quality flowers to compete with Ecuador's. Another grower commented that some Ecuadorian firms have responded by purchasing land and investing in Ethiopia's flower industry, diversifying abroad in response to increased competition. Exporters Seek European Opportunities -------------- ¶6. (U) The primary market for Ecuadorian flower exports is the United States. According to U.S. Department of Commerce data, however, flower exports to the U.S. fell by 11% in the first six months of 2008, and flower companies anticipate a further decline due to depressed prices, a likely U.S. recession, and concerns over the long-term status of ATPA. The share of Ecuadorian flower exports to the US fell from 74% in 2004 to 67% in 2007. ¶7. (U) As the U.S. market grows more difficult, many Ecuadorian flower producers are expanding into Europe. EXPOFLORES claims that a stronger euro has more than compensated for higher European transportation costs vis-a-vis the U.S., and in 2007 flower exports to Europe increased by 37%, with increased exports to Russia accounting for 41% of that growth. According to EXPOFLORES, Ecuadorian growers earn 60 cents for each higher quality rose they sell in Russia, versus 25 cents for a typical rose sold in the United States. This has led many rose growers within the sector to focus on varieties for the European and Russian markets (ref C). Vulnerable to Global Economic Downturn -------------- ¶8. (SBU) Ecuadorian economists and industry insiders have expressed concern that global financial market turmoil and apparent economic slowdown in the United States and Europe could be harmful for the Ecuadorian flower industry, since flower purchases will likely drop in a recession. In addition, since Ecuador is dollarized, as the U.S. dollar rises against the Euro and the Colombian peso, Ecuadorian flower exporters could lose competitiveness in their second most important export market and against one of their closest competitors. Comment -------------- ¶9. (U) Ecuadorian flower exports grew rapidly after the introduction of ATPA in 1992 (?),providing a catalyst for an industry that is now one of Ecuador's leading exporters and employers. With that initial boost, Ecuador was able to take advantage of its natural climatic advantage and become a leader in the cut flower industry. The industry has been able to adjust to uncertainty about ATPA by diversifying its market. However, it is now facing additional pressure from domestic policy changes (particularly large wage increases),a probable economic downturn in its two most important markets, as well as new competitors. HODGES