Ecuador: banana export volume to be regulated by law

In an attempt to stabilize global banana markets, end the current unrest and prevent further banana strikes (there have been 15 in the last 8 years) the new Ecuadorian Government has accepted a joint proposal from its banana producers and exporters to regulate by law the volume of bananas leaving the country. The Minister of Agriculture has signed a 12-point decree outlining the policy and mechanism by which it is to be implemented.

As well as regulating the volume of exports, the decree stipulates that the bananas cannot come from non-registered plantations: it also forms the basis for a full census and initiates a plan for the conversion of plantations. While it mentions a reduction co-efficient, the decree does not give a volume reduction target.

It appears that the new system is a mirror image of the EU’s licence-based quota system: exporters are to be granted a licence to export based on historical performance over 2003 and 2004. Those new entrants are to be granted a licence equivalent to 60% of the volume exported between weeks 1-18 this year. Exporters will also have to prove they are in business for 12 months of the year. The quota does not apply to organic bananas.

The government also intends to establish a commission to monitor implementation of the decree: Reefer Trends understands that there are to be 11 members: Eduardo Ledesma from AEBE, Antonio Noboa, Vicente Wong (Reybanpac) Renato Acuna (Dole), Gonzalo Escobar (Le Fruit) plus 4 producers and the Minister of Agriculture. In theory the commission is to meet every week to decide whether there should be a reduction in volumes exported – in the high season no reduction may be necessary but when there is excess production such as now, the system will kick in.

Reaction to the announcement has been mixed: in Ecuador the producers have gone back to work with the promise of US$3 per box – both Guayaquil and Puerto Bolivar are now fully operational again. The Ecuadorian government has the assurance that the exporters will respect the US$3 per box minimum reference price and the exporters are happy because they believe that the measures adopted will lead to genuine stability in Ecuador but also in the historically volatile Med and Russian banana markets.

In global banana marketing Ecuador is very much the Joker in the pack: it is the fluctuations in the supply and cost of bananas in the world’s largest banana exporter that are the principal demand drivers for the reefer charter market and therefore the biggest influence on CIF banana pricing in non-regulated markets. The implications of regulated banana supply, if it actually works, for both the reefer charter market and banana pricing should not be underestimated, especially if it is true that the new commission is to reduce the volume of exports by 20% (1m boxes) per week to 4.6m boxes in order to boost banana markets.

The new decree will shift the balance of power firstly between the producer and the exporter and then between the exporter and the charterer. Those charterers who previously bought FOB will be competing amongst themselves for a reduced pot of fruit. Given the requirement for weekly volume exports, the exporter sector is likely to consolidate in order to be able to provide critical mass for charterers.

A 1m-box per week drop would mostly affect deliveries to the Russian and Med markets, with the relatively new ‘Spot’ players such as Optifood, Fruit Brothers, Foxfruta and Thetis likely to be more vulnerable than the established players. While Palmar and Sorus have been present in Ecuador with their own operations well before 2003 JFC, Sunway, Banana Exchange and Vemey are comparatively new players: in theory they would also need to battle to secure volumes additional to their allocated quota. Those charterers who have longstanding relationships or who can demonstrate 12-month contracts such as Adriafruit and Joud are likely to be more secure. Excelban may find itself having to negotiate with a new set of exporters. The EU and US markets would not be affected by the measure.

Reefer owners and operators stand to lose out if the decree is successful – 1m boxes per week is equivalent to 4 big ships per week and unless those banana traders can find sufficient replacement fruit elsewhere the Spot market will remain over-tonnaged. Even in the short term this could lead to increased scrapping activity, particularly as US$400 per ldwt is still reportedly achievable.

In the short to medium term Ecuador’s producers and exporters will benefit, none more so that Le Fruit/CoMaCo whose competition in the Med will shrink and those that remain will be buying more expensive fruit FOB and chartering vessels at higher values. Reybanpac may also find it that much easier to extract volume commitments from Chiquita for its six-monthly 350K box per week contract. Banana exporters from other countries such as Mexico could also expect to take advantage of the reduction in competitive volumes.

In the longer term however Ecuador could find itself losing market share to other countries as charterers look to source elsewhere. Colombia for example would be able to respond relatively quickly to increased demand. However in the free-for-all following the switch to a TO system in the EU, Ecuador and its producers and exporters could find itself marginalised if the country continued to regulate unilaterally. If on the other hand it could persuade other banana nations to come on board to form a multi-lateral supply platform…the arguments are well documented! However even more importantly, a unified position could also be used by the Dollar nations in their arguments to persuade the EU and WTO to adopt a low tariff. If the Dollar nations could prove that they could restrict supply to maintain a market level that would sustain global banana production (including the Caribbean), their case would be more powerful.

In the medium term the vessel scrapping caused as a direct result of the Ecuadorian position would return to haunt the country: a new equilibrium would eventually be established and H1/peak season rates would rise even higher than this year. On the other hand, the formation of an Organisation of Banana Exporting Countries would give the reefer business the confidence to invest in new tonnage, which in the medium to long term would keep rates pegged at a ‘reasonable’ level.

All of the above of course is conditional on the regulatory system functioning as designed: however there is well-educated scepticism that the system may not last a fortnight!

Source: Reefertrends.com