CORREA'S STATE RUN BANANA COMPANY - A GOOD IDEA OR JUST

C O N F I D E N T I A L GUAYAQUIL 000243 SIPDIS E.O. 12958: DECL: 2019/11/27 TAGS: ECON EINT AGR EC CH IR LY SUBJECT: CORREA'S STATE RUN BANANA COMPANY - A GOOD IDEA OR JUST PLAIN BANANAS? REF: 08 QUITO 1162 DERIVED FROM: DSCG 05-1 (B),(D) 1.(SBU) Summary. Details are slowly emerging on President Correa's proposal to form a state run banana company. Ministry of Agriculture representatives explained that the company would purchase excess banana production from small producers during the period of low demand in Ecuador's annual "boom and bust" banana cycle and sell this excess production on a government to government level to traditionally untapped markets such as China, Libya and Iran. The state company will also sell fertilizer to small producers at a greatly reduced price and provide technical training to increase efficiency and production. Members of the Association of Ecuadorian Banana Exporters (AEBE) say they are not opposed to creation of the state company based on their understanding of how it will operate, but are wary that it could represent unfair competition in the future. End Summary. Boom and Bust ¶2. (SBU) Ecuador is the only major banana exporter with consistent year round production. This gives the country a unique price advantage from around October to March, when global supply is low and prices are high. However, during the second and third quarter, when Central American and African production comes online, Ecuadorian banana exports drop drastically due to their high cost, while production remains constant. This leads to an annual and predictable crisis wherein Ecuadorian production far exceeds demand. In an attempt to provide stability, the government regulates the market by requiring that all producers as well as large producers, and exporters have contracts (rather than selling on the spot market) and that exporters pay the official price per box (currently $5.40). Unlike Ecuador's Central American competitors, most Ecuadorian exporters buy from local producers rather than manage their own farms. Moreover, the market is very fragmented, consisting of thousands of small producers rather than the immense banana farms seen in other countries. However, many producers still prefer to sell on the spot market (illegally), which can reach as high as $12 per box during peak season but as low as $2 per box during the low end of the cycle. ¶3. (SBU) In his October 24th weekly radio address, President Correa recently surprised the banana market by announcing that the GOE ;will form a state run company to export Ecuador's excess banana production. Ministry of Agriculture officials privately told EconOff that the government hopes to use this new company to stabilize the traditional "boom and bust" cycle of the banana market and to entice the small producers away from selling in the spot market. The state company will buy surplus production during the "bust" cycle at the official price, which is almost always higher than the spot price. According to Rafael Guerrero, Under Secretary of Agriculture, the company will sign exclusive contracts with only the smallest of the producers (one Ministry source estimates about 8% of the market) to buy 100% of their production at the official price. The GOE also plans to supply fertilizer, which accounts for about 40% of the cost of a box of bananas, at "almost cost" to farmers that contract with the government company. Lastly, as a further incentive to contract with the government, they will offer technical training to help increase production. All producers that take advantage of government contracts will be required to certify annually that they are in full compliance with the law and submit to government inspections. The government hopes that this will reduce the number of producers that use undocumented workers and avoid taxes. The theory is that the savings farmers are able to garner through the government contracts will offset the cost of legitimizing the operation. ¶4. (SBU) The obvious question is what will the GOE do with all these bananas? MinAg officials told EconOff that the government will seek "non-traditional buyers" for the fruit. When pressed for examples, they mentioned China's agreements with Costa Rica and Honduras, in which the governments directly provide China with bananas and the Chinese government pays them in appliances and machinery. They hope to sign similar agreements with China and other nations, such as Libya and Iran. In fact, the GOE recently signed a memorandum of understanding with the Libyan government to provide between 70,000 and 120,000 boxes of bananas a week. ¶5. (SBU) The MinAg officials insisted the new company would not conduct business in any existing markets and therefore would not compete with current exporters. It is still not known who will manage the company, but officials noted the company will not involve itself in shipping the product, which could pose a substantial hurdle to the company's export plans. Given the fragility of the fruit, most exporters have their own shipping lines dedicated exclusively to transporting bananas. Purchasers will likely have difficulty finding commercial shipping lines to transport the bananas outside of a regularly scheduled service. The GOE hopes the state company will also stimulate job growth by contracting with existing service providers along the supply chain (boxes, containers, plastic etc.). Reaction ¶6. (C) Eduardo Ledesma, the president of the Association of Ecuadorian Banana Exporters (AEBE) expressed mixed reactions to the new state company. According to Ledesma, it would be unfair for the government to compete with the private sector. Although the government claims this would not be the case, he is worried that the "non-traditional buyers" will not emerge and the government will be forced to either throw away fruit or sell it in competing markets. Peter Gilmore, general manager of Dole's operations in Ecuador, privately reiterated this fear. He pointed to the recently signed MOU with Libya. This will be, according to Gilmore, in direct competition with Reybanpac, an Ecuadorian-owned exporter who sells to the Libyan market. When asked if the company poses a direct threat to Dole, Gilmore expressed doubt that the company will ever "get off the ground" but said that he is nonetheless "battening down the hatches." He noted that the Libya MOU called for the first shipment of bananas to leave Ecuador between November 9 and 13, but as of November 19, no bananas have been shipped. ¶7. (C) Gilmore's bigger concern is over the falling demand for bananas. He notes that over the last year demand in Europe (traditionally Ecuador's largest market) has fallen. The only reason prices have not fallen is because Costa Rica and Colombia have had production problems due to labor disputes and natural disasters. American buyers have recently turned to the more expensive Ecuadorian market during the shortage. However, as production comes back online and demand continues to fall, Gilmore expects prices to take a hit. He doubts that the proposed state company will be able to weather the crisis. ¶8. (SBU) Although worried about government competition, Ledesma welcomed the attempt to regulate the currently chaotic banana market. The larger, more reputable exporters have long complained that they are the only ones playing by the rules. By paying the official price, they are at an unfair disadvantage when competing with other exporters who illegally buy on the spot market. He hopes (as does the GOE) that the new company will entice smaller growers to sell at the official price (albeit to the government) rather than to fly-by-night exporters who buy at the spot price. It was evident in the meeting that Ledesma, the head of the largest banana exporting association in the country, had very little knowledge of how the new company would work. He affirmed that neither he, nor any exporters he knows, has been consulted by the government. Comment ¶9. (C)The GOE appears to want to use the state-run company as a disguised banana subsidy. The new entity's primary business will be banana exportation, but the government seems to only be consulting banana producers, not exporters, in developing the business model. Moreover, the entire plan hinges on finding new buyers for the bananas, despite the fact that some of the most sophisticated banana exporters in the world have been unable to do so. Lastly, the technical training and subsidized fertilizer will indeed help the farmers' profit margins, but will also increase production, thus adding to the surplus that the government is trying to address. Fernandez