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