EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR AGRICULTURE AND RURAL DEVELOPMENT. Bananas - Market report 2006

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1 EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR AGRICULTURE AND RURAL DEVELOPMENT Directorate C. Economics of agricultural markets (and CMO) C.2. Olive oil, Horticultural products Brussels, FR/cg D(2007) Bananas - Market report Summary In 2006 overall banana imports into the E.U. increased by 12.3%: MFN imports rose by 10.7 % (from to tonnes) and ACP by 18.6 % (from to tonnes), respectively, in comparison with Wholesale yellow prices for all the origins, EU, MFN and ACP bananas, were lower than in 2005 (when they were exceptionally high) respectively by 13%,17% and 19%. These prices are comparable to 2004, which was a "normal" year. Aldi's price, which is considered the benchmark price by the industry, in 2006 it was 18.5% lower than in 2005 (an exceptional year). Compared to the previous years 2004, 2003 and 2002, in 2006 it has been, respectively, 6.5%, 13.1% and 3.6% higher. On 22 February Chiquita International and on 27 February Fresh Del Monte, two of the leading global producers and distributors in the banana business 1, reported financial and operating results for the fourth quarter and the whole year of Both companies have reported an important operating loss ($ 96 million for Chiquita and $ 145 million for Del Monte) mostly due to lower banana selling prices and higher fruit, fuel and shipping costs. 2. Banana market during the second semester of During the summer period banana production in Central America countries and Colombia was back on the market and this has had a major impact on EU imports notably from MFN countries, whose increment of imports has been higher than that of ACP countries in the third quarter for the first time since the beginning of the year, 15% for MFN compared to 11.8% for ACP exports to the EU. 1 Fyffes has not yet reported on year year 2006, while Dole Food Company and Noboa group, the other two leading global producers and distributors of bananas, do not report because they are privately owned. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) Office: L130 7/81. Telephone: direct line (32-2) Fax: (32-2) felice.romano@cec.eu.int G:\1. BANANE\2. GENERALITES\3. CONTACTS EXTERNES\Notes et fax\notes 2006\00855-FR markt analysis.def.doc

2 This trend surged even more in September with EU imports from MFN countries increased by 12.1%, and ACP by 3%! In the fourth quarter of 2006, overall volumes of bananas imported into the E.U. were tonnes, compared to in the same period in 2005, which represents an increase of 17.8%. MFN countries exports into the E.U. rose by 15.3 % in comparison with the same period of 2005, from to tonnes (see table 3); while imports from ACP countries were 26% higher than in 2005, from to tonnes (see table 4). During the fourth quarter 2006 some countries, MFN and ACP, had impressive results with very important increases of bananas exported to the EU compared to the same period of 2005, as follows: 2.1. MFN Honduras %, Perú %, Costa Rica +50.4%, Panama +32% and Brasil +49.8% (see table 3). On the contrary, Ecuador exports declined by 14.8% and Guatemala, the success story of the second and third quarter, also declined by 95.1% 2.2. ACP Ghana %, Jamaica %, Suriname +87.8%, Ivory Coast +28.1% and Cameroon +17.3% (see table 4). Belize and St. Vincent exports were, respectively, % and -11.5% Bananas imports in the USA. During the third quarter 2006, total banana imports in the USA declined by 0.9 % in relation to the same period in The figures according to origin are as follows: Ecuador, Costa Rica and Honduras exported, respectively, 5%, 10.1% and 8.7% more fruit, Colombia, Nicaragua and Guatemala reductions were, respectively:-20%, -25%, and -6.1%. During the fourth quarter 2006, banana imports in the USA grew by 3.8% in relation to the same period in 2005, as follows: Ecuador, Guatemala, Colombia and Honduras exported, respectively, 2.4%, 8.6%, 0.1% and 10% more fruit, Costa Rica, Nicaragua and Peru reductions were, respectively: -0.4%, -5.5%, and %. 2

3 The Guatemala and Honduras results in the fourth quarter are notably remarkable, after very poor exports in the first half year. In the year as whole, Guatemala exports to the USA decreased by 12.8%, going down from first USA supplier in 2005 to the third place in 2006, behind Ecuador and Costa Rica. 3. Banana market during the year Volumes In 2006, overall volumes of bananas imported into the EU were tonnes (see table 1), compared to in 2005, which represents an increase of 12.3%. MFN countries exports to the E.U. rose by 10.7 % in comparison with 2005 (from to tonnes), while imports from ACP countries were 18.6 % higher than in 2005 (from to tonnes). The MFN performance is particularly noteworthy because in the beginning of the year there was a relative shortage of bananas in the main production areas due to several storms at the end of 2005 in Central America (notably Hurricane Stan and Tropical Storm Gamma) which destroyed some plantations in that area, and drought in the end of 2005 and heavy rain in the beginning of the year in Ecuador. The situation of relative equilibrium in the beginning of the year due to the relative shortage of bananas has rapidly changed during the second part of the year, when the MFN production has increased due to the rehabilitation of banana production in Central America and Colombia Prices Particularly during the summer period, over-supply of bananas coupled with more competition from other fruits, has led to much lower prices than last year. Wholesale prices of yellow MFN (see graph 12) bananas have been constantly lower this year in comparison to 2005, about 20% lower during the period but further deteriorating in July and August. In the end of July and in the beginning of August Aldi's price (see graph 15), which is fixed weekly and is considered by the industry as a reference price on which others prices are determined, was at its lowest level since 2002 for this period of the year. During the year as a whole, Aldi's average price has been higher than in previous years (excepting 2005) in the range 3.6% to 13.1%. Wholesale EU (graph 13) and ACP (graph 14) yellow bananas prices were respectively about -10% and -20%, lower than in the same period of 2005, but at a similar level to Chiquita earning conference call, 22 February Chiquita reported that the operating results of the fourth quarter of 2006 declined compared to the same period last year. This was primarily due to: European banana price substantially lower than estimated, minus 14% compared to same period of last year; Significant excess of supply of bananas during August and September, with an increase in volumes of 8%; 3

4 Higher industry costs for fuel, fruit purchases and shipping A non-cash goodwill impairment charge related to Atlanta, Chiquita German distributor Chiquita's bananas worldwide net sales of bananas in 2006 were $ million, down by 0.9 % from $ million in 2005, and the operating loss for the sector of bananas was $ 20.6 million, compared to a profit of $ 182 million the previous year. Mr. Aguirre, Chairman and Chief Executive Officer of Chiquita International declared: "Our third quarter results were disappointing and worse than expected for several reasons like price pressure in Europe, high temperatures and excess of supply. The new banana import regime has presented us with challenges in Europe this year, particularly when compared to the pricing we achieved in that market in However we continue to sustain our premium versus the competition as we attempt to pass through higher tariffs and industry-related cost increase". He added "We believe certain small non traditional exporters from countries such as Guatemala and Ecuador that are trying to compete in Europe today will ultimately not be successful and will exit the market". During the year Chiquita reported that their average banana prices decreased by 10 % on a local currency basis on the European market 2, and volume was flat versus the same period in 2005 as the company sold less lower-margin second label fruit. On the North American market prices were 5 % higher than those of the year 2005, but volumes were 3 % lower. In the other European and Mediterranean countries their market prices were 4 % lower than those of the year 2005, but volumes were 81 % higher. The return of Central America fruit to the market after hurricane damage in the autumn of 2005 had worsened the situation. According to Chiquita, the company made all efforts to find alternative markets to the fruit, selling excess bananas in non traditional markets like Russia and the Mediterranean countries, even though these markets were also depressed. During August, in Panama, Chiquita paid also Good Fruit Not Shipped penalty, which is spelled out by contracts with local producers. Chiquita had a lot of fruit which had not been sold yet during the summer, and these large volumes of unsold bananas pressed prices down in all the markets. In Northern Europe the market did not have a price for the fruit at that moment, meaning that there was no interest for buying bananas and traders were selling for as much as they could get. Low prices are usual during this time of the year because sales become more difficult as people go on holiday, which shrinks the demand and local fruit consumption increases. 2 EU-25 plus Switzerland, Norway and Iceland. 4

5 Banana selling prices in the Mediterranean were not the exception and, during the third quarter they continued dropping, reaching levels of $ 6.00 CIF per box on average with very difficult sales. Some local traders were really worried with the market developments because there was hardly any demand, and they sold the fruit cheaper in order to be able to recover some of their costs. Therefore, sales were depressed all summer long, due to the low demand for bananas. Prices dropped even further in August, when Chiquita was obliged to discharge tonnes, coming from northern European ports, in a Baltic port. 5. Fresh Del Monte earning conference call, 27 February Fresh Del Monte reported a year loss of $ million, compared to a net profit of $ million a year earlier. The company said losses were due to poor sales of fresh vegetables, a shutdown of its operations in Hawaii and Kenya, and a surplus in the European banana market. Sales of the group for the fourth quarter were slightly lower than in 2005, $ million compared to $ million in the same period of the previous year. Mr. Abu-Ghazaleh, Chairman and Chief Executive Officer of Fresh Del Monte said "Our year results are clearly disappointing but we have initiated a major turnaround effort which involves a general reorganisation of the company". 6. Fyffes Irish fruit distributor Fyffes reported on first six months results to the Stock Exchange on 7 September 2006: the adjusted profit before tax for the first six months was 39.6 million, while in the same period of the previous year it was 76.1 million, which represents a reduction of 48%. Commenting on the results, Carl McCann, Chairman, said:" Fyffes' trading performance for the first six months of the year reflects the impact which the changes in the EU's banana import regulations, combined with significant cost inflation, are having on the industry". As a consequence of the negative financial results, shares of all three companies are lower than their levels of January 2006 (see graph 16). Chiquita's and Del Monte's shares are, respectively, 20% and 30% lower than the beginning of the year. Fyffes' share was at much lower level of 1 st January 2006, -50%, due to worse financial performance and the de-merger of the property assets, as an initiative to enhance and unlock shareholder value. 5

6 7. MFN imports 7.1. Ecuador One year after the new European banana import regime became effective, Ecuadorean banana exports seemed to have experienced a relatively stable period. According to the Ecuadorean Central Bank, during 2006 banana exports worldwide have increased by 3% in comparison with the same period in 2005, from tonnes to tonnes. Exports to the EU in 2006 have been 3.6% lower than in 2005: tonnes vs tonnes (see table 1). During the same period, Ecuador exports to the USA have increased by 9.96 %, growing from to tonnes (see table 2) Volumes The volume of bananas available in Ecuador during the third quarter was flat due, notably, to the following: the cooler temperatures during the summer months, which is typical for this season of the year there the eruption of the volcano Tungurahua the decree of the government on the payment of the official price and on the checks of the bananas, which have created problems with some exporters. According to Aprobanec, the Association of Banana growers based in Quevedo, one of the main banana producing regions in Ecuador, the eruption of the Tungurahua volcano on 16 August created considerable damage to close to 35% of the bananas plantations in the Los Rios province, which produces about 30% of all Ecuadorian bananas. The Association of German Fruit Importers on August 15 sent a letter to M. Rizzo, Minister of Agriculture in Ecuador, in which they express their discontent about the decree to inspect the fruit only at the plantation and not at the port. Following this letter, it seems that some of the German banana importers, who usually source in Ecuador, sent their vessels to Colombia or other Central America countries, where the price for bananas was very competitive due to the large excess of volumes available there Prices In order to oblige exporters to respect the minimum official price of $ 3.25 per box, in August the Minister of Agriculture of Ecuador adopted a decree which obliged exporters to pay producers via the national Central Bank! According to a press release issued by the Ministry of Agriculture, the decree number 1692 of July 27, 2006 signed by the President of the Republic Alfredo Palacio, was introduced in order to oblige companies to comply with the official price by making the payments for bananas through the Central Bank! 6

7 The measures to pay the growers through the Central Bank and to check bananas in the plantations, according to industry sources, was necessary in order to avoid large disposal of export bananas and because the minimum price of $ 3.25 per box fixed by the government was not always paid. These two elements started to create strong negative effects in international markets. FOB prices for the fruit in Ecuador have remained low in July and August, although there was not much fruit available in that market due to quality problems linked to bad weather and volcano ashes, above mentioned. Furthermore, some exporting companies reduced their shipments due to the bad economic terms at the international destination markets and to the national decree. On the other hand, Ecuadorian producers threatened with calling a strike if they did not get paid the official price of $ 3.25 per box set by the government. Some exporting companies have decreased their exporting volumes waiting for better conditions. Due to the difficulties in most of the selling markets, banana prices went under further pressure in the Ecuadorian spot market reaching in some cases levels of $ 1.00 per box to the growers, according to the local press. Nevertheless during the second half of the year, due to the increase of production in Central America countries and Colombia, prices were at their lowest level, down to $ 1.00 per box during some weeks in the summer period. During the year 2006 the price paid to producers has fluctuated a lot, in accordance with the supply and international demand. It reached a historically high level in the beginning of the year, when supply was relatively short, up to 12 dollars per box compared to an official price of 3.25 dollars per box, and in some weeks supply became a real problem. Conversely, during the third quarter, although there was a relative shortage of fruit, prices dropped to $ 1.00 per box. According to AEBE, the Ecuadorean Association of Banana Exporters, during 2006 the average price paid to producers was $ 4.25, higher than the official price which was $ Costa Rica According to Mr. Zúñiga, general manager of Procomer, the Costa Rican export promotion organisation, in 2006 the value of banana exports worldwide increased by 27,8% compared with 2005, due to increases of both prices and volumes of the fruit exported. He added that the bad climatic conditions in Ecuador also favoured Costa Rica exports. The exports of bananas from Costa Rica worldwide reached a total of tonnes. This is an increase of tonnes compared to the previous year, making Costa Rica the third largest banana exporter in the world. 7

8 The export turnover amounted to a total of 603 million dollar, according to the figures of the national banana corporation Corbana reported on the press. These figures make 2006 the best export year of the past 10 years. Exports for 2006 were a full 10% higher than average export levels for the period The major markets were Europe, to which 50% of the fruit was shipped, and the USA with 49%. The increase of the volume of bananas exported to the EU was 31.7 %, tonnes compared to tonnes in 2005 (see table 1). In 2006, Costa Rica exports to the USA increased by 12.7 %, compared to in 2005 (see table 2). On 8 August 2006 Costa Rica Minister of Commerce Marco Vinicio Ruiz declared that" He was satisfied with the replacement of the quota licence system with the Tariff Only because they have been able to maintain their share of market and the European market has experienced a better flow with this new import system". He added "Costa Rica banana exports have grown this year due to the high quality of their production. The E.U. duty of 176 per tonne is high, but Costa Rica supports a gradual reduction of it in order to avoid flooding the E.U. market with cheap and lower quality bananas". "Costa Rica has had a tremendous year in 2006, the best in ten years", said Romano Orlich, President of Corbana. "Our revenues have grown strongly and Europe is now our largest exporter market, fuelled by strong gains in our core markets. Export levels to USA are also the highest in four years. In 2006 we demonstrated why we are the third largest exporter of bananas in the world". Productivity has been another powerful driver in Costa Rica's rebound: levels of banana production in 2006 were the highest in the world. Corbana reported that producers were able to yield tonnes per hectare per year, compared to in Colombia and in Ecuador Colombia According to DANE, Departamento Administrativo Nacional de Estadistica of Colombia, during the year 2006 the volume of banana exported worldwide decreased by 3.4% compared with 2005, from tonnes to tonnes. Notwithstanding the reduction of the fruit exported, the value of bananas increased by 3.7%, from $ to $ , due to the higher price paid at producers' level. The exports of bananas from Colombia into the EU during 2006 were tonnes compared to tonnes in 2005, plus 7.6 % (see table 1). Colombia exports of bananas to the EU have grown since May 2006, when the production was back on the market, with a further boost of exports in July and August, when the 8

9 imports of bananas into the EU increased, respectively, by 18.3% and 10.2% compared to same months in During the year 2006, Colombia exports to the USA decreased by 7.8 %, from tonnes in 2005 to tonnes in 2006 (see table 2). The sale price paid to Colombian producers of bananas in the beginning of the year increased as a consequence of the shortage of fruit from Central America, caused by the climatologic problems there at the end of This boosted overall prices for most of the first half of the year. According to Vice Minister of Trade, Mr. Muñoz, "Price paid to producers had increased by $ 3 per box, up to $ 10 per box instead of $ 7 per box as is normal in the first part of the year, notwithstanding the producers' difficult economic situation due to the re-evaluation of the Colombian peso against the US dollar Honduras, Panama and Nicaragua Panama exports of bananas in 2006 to the EU were tonnes compared to tonnes in 2005, which represents an increase of 10.2% (see table 1). Panamanian banana exports worldwide reached a value of $ million during the year, 14.4 % higher than the previous year, according to the local press. This Central America banana producer country has reversed a declining trend with export volumes and values showing double-digit growth in On the contrary, in 2006 Honduras exports of bananas to the EU were tonnes compared to tonnes in 2005, down by 5.4% (see table 1), due to a lack of fruit. It has to be borne in mind that there was a severe shortage of bananas in these countries during the first six months of the year caused by the destructions provoked by hurricanes in October/November 2005 and by the social instability in Panama plantations during the period April to August The export of bananas from Panama reached a total of tonnes. Especially the exports from the Atlantic coast recovered strongly, with an increase of 26% in relation to the previous year. Operators stated that this does not reflect a real increase, but a recovery of the production that had been affected in previous years by the Sigatoga plague, floods and social unrest in the plantations. In April 2006 the cooperative Sitrachilco, one of the main independent banana producers in Panama, authorised its management to find new contracts in Europe and to break their long term contract with Chiquita, because it was economically not viable (the cooperative lost $ 1.00 per box of bananas sold to Chiquita). The present contract between Chiquita and the Panama producers does not allow Sitrachilco to sell theirs bananas to other operators; while Chiquita is allowed to suspend its purchases unilaterally. 9

10 Chiquita continued all summer long its battle with the independent producers of Panama, with no solution in sight, creating major political problems to the Panamanian government. Furthermore, due to a saturation of the E.U. market in July and August Chiquita reduced its purchase from independent banana growers in Panama. It has to be borne in mind that Chiquita exports nearly 90% of bananas from Panama. Chiquita announced on 7 August 2006 a new cut of 30% on purchases in Panama, on allegations of saturation in the European market. Between the end of July and the beginning of September, Chiquita drastically reduced bananas purchased from independent producers in Panama and, some of them, by contract cannot sell the excess fruit to competitors. Honduras banana exports worldwide have continued to decline in 2006 according to the Central Bank of the country. The volume exported during the year has decreased by 4.6% compared to 2005, from tonnes in 2005 to tonnes in The Central Bank blames the decrease on the slow recovery from the floods caused by the tropical storm Gamma which affected hectares of banana plantations belonging to Chiquita plus 489 hectares belonging to independent producers. Honduras banana exports into the USA during 2006 had declined by 6.7% compared to 2005, from tonnes in 2005 to tonnes in 2006 (see table 2). On the contrary, according to the Central Bank of Honduras the average FOB price during 2006 has been $ 9.54 per box, compared to $ 9.17 in 2005, which represents an increase of 4%. Nicaragua has not supplied the E.U. market since New players in the E.U. banana market: Brazil, Guatemala, Mexico, Bolivia The first shipments of bananas from Guatemala, Mexico and Bolivia arrived in the E.U. between March and April These new arrivals expand considerably the number of countries which supply the EU banana market which, before the new import regime, did not have access to the E.U. market. Brazil, Guatemala and Peru banana exports into the EU have increased, during the year 2006, respectively by 50.1%, 810.9% and 94.7% (see table 2). Guatemalan bananas shipped every week to Northern Europe have also been introduced in the Mediterranean contributing to the price collapse during the summer period. Following the first shipment of Guatemalan bananas, which arrived in Rotterdam on April 6 and which was part of a new weekly shipment of bananas from this country, imports from this origin have increased dramatically during the year 2006, by 810.9%! 10

11 Enrique Lacs, Guatemalan vice Minister of Foreign Trade, expressed satisfaction for the tariff Only import system implemented by the E.U. since January 2006, which has allowed Guatemala to export tonnes in 2006 compared to tonnes the previous year. Exceeding volumes from Guatemala and Colombia contributed to create the banana glut during the third quarter. Chiquita's decision to fight for market share put considerable pressure on some Ecuadorian exporters and the Guatemalan exporter who, during the third quarter, was obliged to export some of the fruit to Libya. As a consequence, Guatemala exports in September to the E.U. were only 643 tonnes, compared to an average tonnes per month during the second quarter. This trend continued during the fourth quarter 2006, when the Guatemalan exporter decided to stop exporting directly to the EU, due the heavy financial losses, and to start to sell again through the multinationals. Total banana exports from Guatemala in 2006 were tonnes, compared to tonnes the previous year, which represents a reduction of 6.1%. Guatemala banana exports to the USA during 2006 had declined by 11.3% compared to 2005, from tonnes in 2005 to tonnes in 2006 (see table 2). 8. ACP exports During the year 2006 overall exports of ACP bananas to the EU rose by 18.6 % (see table 1). Compared to the previous year, shipments of bananas from ACP countries into the EU expanded for all the ACP countries, except Belize: The Ivory Coast by 24.3%, the Dominican Republic 22.2 %, Surinam 28.1 %, Jamaica 173.4%, the Windward Islands by 15.3%, and Cameroon by 2.4%. Belize exports to the E.U., on the contrary, have decreased by 1.3%. 9. Conclusions has been the best year ever for the imports and consumption of bananas in the E.U.25, notwithstanding a poor year for the E.U. production. For the first time, overall imports (Latin America plus ACP bananas) went beyond the ceiling of tonnes, up to tonnes, of which tonnes from Latin America countries (+10.7% compared to 2005) and tonnes from ACP (+18.6% compared to the previous year). During the year 2006 all the signals showed that the banana market reacted positively to the E.U. change in its import regime. It seems that it was due, notably in the first half of 11

12 the year, to a shortage of product which kept producers prices at very high levels, but this additional cost was not transferred to consumers due to more competition for market share among companies. This implied that traders' companies fought hard in order to maintain their market shares to the detriment of their profits, as shown above, on the basis of multinationals financial reports. As forecasted in the previous report, since June international banana markets were oversupplied, when most of the Central America production came back on the market and competition with other fruits increased. The oversupply of bananas from Colombia, Costa Rica, Guatemala and Honduras was expected; nevertheless this pushed overall prices down all over the world and particularly in the E.U., due to a saturation of markets. Operators loaded excess bananas onto all markets creating an intensive demand at the source in the producing countries and a downward pressure on the prices on the consumer market. Chiquita's oversupply of fruit, even with the cancellation of theirs purchases of bananas with the independent producers of Panama during six weeks in the third quarter, flooded not only the E.U. market but the Mediterranean market also. During August some of their vessels were reported waiting up to 15 days before discharging in different Northern African ports. On the shipping side the rates began an upward trend with few vessels waiting for business, most of the contracts have been generated to transport excess fruit from Costa Rica, Colombia, Guatemala and Honduras. High cost of fuel continues to be the pressing issue on the continued increase of rates that does not seem to cool down. As a consequence, according to Corbana, the trade association of banana producers of Costa Rica, since July exporters have not purchased more than tonnes of bananas there per week and they were obliged to sell their products in Eastern Europe, where prices are still lower. The same has happened to fruits from Guatemala, where some vessels were redirected to South Mediterranean countries and banana quantities arriving from Panama were much lower than their available production, due to Chiquita's decision to reduce bananas exported from this country. This would suggest that the rate (import charge) of 176 per tonnes, which was intended to at least maintain market access at traditional levels, is turning out to be relatively low and does not hinder imports. On the contrary, compared to past references, it would appear to be facilitating imports, although it is too early at this stage to draw any definitive conclusions on the basis of one year of operation of the Tariff Only import system, during which a trade war for market share initiated by Chiquita has been fought, with heavy losses for operators and the consequent decision of the main Guatemalan exporter to renounce to export directly to the E.U.. 12

13 During the year market developments were closely monitored up to September under the monitoring and review mechanism under the good offices of Norwegian Minister Støre, with a view to completing the GATT article XXVIII procedure for the rebinding of the tariff. Since the decision of Ecuador, last autumn, to go for litigation at WTO in Geneva, the Støre process has been in hibernation. 13