The Banana Saga (Part 111)

by Edwin Laurent

Last week, I reviewed the history of the banana dispute. In this article, I examine the current workings of the European Union market that determine the prices obtained by farmers as well as the security of their trade.{{more}}

Although the European Union (EU) is made up of twenty-five Members, they do not each have their distinct national market. There is just one Europe-wide market with a common system for the importation of goods that can subsequently circulate freely within the EU once they have crossed the border of any of the Member States. Also, import policy is no longer made by the national governments, but by the EU itself. The European Commission formulates and manages trade policy under the overall direction of the Council of Ministers, which is made up of a representative of each of the Member States

The importation of bananas is governed by special rules, the Common Organisation of the Market (COM) enshrined in EC Regulation 404/93, which has since been amended and been supplemented by various other Regulations.

The European market is supplied with imported and domestic bananas. The latter, roughly 850,000 tonnes yearly, are grown in the Canary Islands, Martinique, Guadeloupe, Madeira, Crete and Cyprus. There is no limitation on production but income support or subsidies are paid to producers only up to the 850,000 tonnes limit. Not surprisingly growers do not produce more since they will not receive support.

Bananas are also imported under various quotas. The one that is reserved exclusively for ACP bananas is 750,000 tonnes, the main suppliers being Cameroon, Ivory Coast, the Windward Islands, Jamaica, Dominican Republic, Belize and Surinam. Other quotas, totalling just over 3 million tonnes, are available for bananas imported from all origins. Access, though, is highly competitive and dominated by low-cost suppliers, principally Ecuador, Colombia, Costa Rica and Panama, with smaller volumes coming from Honduras, Guatemala, Nicaragua, Venezuela, Brazil and Mexico. Banana imports within the quotas pay a customs duty of 75 euros except for ACP bananas that enter duty-free. Bananas can nonetheless be imported beyond the quota, but would attract a punitive duty of 300 euros if coming from the ACP or 680 euros if coming from other sources. The result of such high tariffs is to make the surplus bananas unsaleable, so there is no significant trade beyond the quota limits.

The effective restriction of volume ensures that the market is not oversupplied. This is of critical importance because the EU banana market is what economists classify as “inelastic.” In Europe, the banana is a basic and low-cost food item, and shoppers decide on the amount of bananas that they will buy according to their tastes and habits. If banana supplies increase the public will not automatically eat more. Consequently, suppliers will force prices down as they compete with each other to dispose of their stocks. If the EU market is even minimally oversupplied, it becomes a buyers market with the resulting decrease in price disproportionately large vis-à-vis the increase in supply. This is no theoretical conjecture but has been borne out by actual experience. In the past, whenever there has been even modest oversupply, actual prices have declined substantially. Hence, the quotas have been essential for market balance and for securing remunerative prices for producers. I remember many years ago when Geest marketed our bananas, on occasion some bananas would be “left back” and dumped or given away. This seemed wasteful but the company was seeking to avoid oversupply because sacrificing the proceeds from the sale of a few tonnes of bananas was overall less costly than permitting the market to be even minimally over supplied, since the resulting price drop affecting all bananas would have had a greater net impact on total earnings.

The regulated EU market is in stark contrast with the unrestricted world market where wholesale prices are 40% lower. Access to this relatively lucrative market of the EU is not on a free-for-all basis, but is rather controlled by licences for which only registered operators are eligible. The operators are classified as traditional or non-traditional. The traditional are those who had been engaged in the banana trade since the mid-1990s and the others are the newcomers. The traditional operators are assigned 83% of the licences based on their trade during the three-year period 1994-1996. The decision as to sourcing of bananas is entirely that of the operator, who being in business to make profit, will choose the most lucrative sources.

Fortunately for the Windward Islands, the operator that handles their bananas, WIBDECO, is a wholly-owned Windward Island company that has been importing bananas from the early 1990s, and therefore qualifies for licences as a traditional operator. Other suppliers, however, are at the complete mercy of operators who can choose whichever country from which they will source their bananas and can play one producer off against another.

Among ACP suppliers it is only the Windward Islands and Jamaica that are in this fortuitous situation of having “national” companies importing their fruit into Europe. This provides them with security of access and possibilities for profit sharing that would not have existed otherwise. It is no exaggeration that without WIBDECO and its established rights and position as a registered importer and banana operator in the EU, the prospects of our industry, given our high costs and consequent unattractiveness would have been bleak indeed.

It is quite true that those farmers who can get their bananas to the market, enjoy a relatively secure position, but that comes at a price since food standards in Europe are very high and rising. Supermarkets wield tremendous power and have been in the forefront of developing the exacting Eurogap standards that farmers are being forced to meet. The benefits to be gained from the effort of enhancing quality are considerable, and should be made, since the supermarket business is much more lucrative than trade in the bulk market.

Safeguarding supermarket trade is crucial despite possible changes in the regulations. Of course supermarkets will, in the short term, respect agreements with suppliers. If, however, in the long term, the marketing arrangements change fundamentally, offering them more attractive profit opportunities from trading in bananas from other sources, they will invariably take them up, abandoning our business in the process. Hence the need to simultaneously seek to secure an appropriate market access regulatory framework that will minimise the relative cost disadvantage of our bananas. There are niche market opportunities in “fair trade” and “organic” bananas. These bananas are sold at a premium, much higher in case of “organic,” but require additional effort, organisational changes and possible investment.

Yes the EU banana market is relatively good and, for the time being, secure. But, staying in it and making a profit will demand considerable and on-going effort, creativity and investment.