The impact of the multinational companies on the banana sector in Ecuador 1 Jon Hellin and Sophie Higman The impact of the multinational companies on the banana sector in Ecuador 1 Dr Jon Hellin and Sophie Higman 11 Magdalen Road Oxford OX4 1RW email@example.com The impact of the multinational companies on the banana sector in Ecuador 2 Jon Hellin and Sophie Higman The impact of the multinational companies on the banana sector in Ecuador Executive summary 1 1 Introduction 2 2 Green gold: A world commodity 2 3 The development of the banana sector in Ecuador 5 3.1 Comparative advantage 5 3.2 From banana company to independent producer 8 4 Paternalism or exploitation: The companies and producers? 9 4.1 Contract farming 9 4.2 Contract farming in practice: The company 11 4.3 Contract farming in practice: The producers and middlemen 12 5 Costs of production and sale prices 13 6 Fair trade and organic production: Contributing to sustainable livelihoods? 16 6.1 The power of the consumer 16 6.2 Strength through association: oritos producers in Cumandá 17 6.3 The Cañates and organic bananas 19 6.4 The opportunities and pitfalls of organic certification 22 6.5 Jumping on the organic bandwagon? 22 7 The transatlantic banana dispute 24 7.1 Regulation 404/93 24 7.2 Sacrificed on the altar of WTO compatibility? 27 8 Policy changes: Amending the rules of the game 29 8.1 The need for additional support 29 8.2 Thinking the unthinkable 30 8.3 Alternatives to banana production in the Caribbean? 31 8.4 Exerting pressure: The need for an enabling policy environment 33 References 35 Annex 1 - The European Union and banana imports 37 Annex 2 - Terms of reference 43 The impact of the multinational companies on the banana sector in Ecuador 3 Jon Hellin and Sophie Higman The impact of the multinational companies on the banana sector in Ecuador Executive summary Bananas are traded widely and, in terms of gross value of production, they are the world’s fourth most important crop after rice, wheat and maize. World trade is dominated by a handful of companies. Their predominant position allows them unprecedented control of the market and much political influence. Ecuador dominates world markets, exporting over 4 million tonnes per annum (35 % of world trade). The country’s comparative advantage stems from favourable natural and social conditions. Unlike Central America, production in Ecuador is almost entirely in the hands of 5,200 independent producers. Independent, however, is a relative term. Just under 90 % of Ecuador’s banana exports are controlled by the multinational companies. Almost all of them pay producers less than the legal minimum price for bananas set by the Ecuadorian government. In order to improve their livelihoods, some farmers are trying to circumvent the power of the exporting companies by forming associations and selling bananas in the European fair trade and organic markets. Farmers seeking a niche in these markets face a number of challenges: leadership qualities are needed; contacts need to be forged; negotiations carried out; capital is needed to improve plantation infrastructure; and the farmers have to produce high quality bananas. One of the biggest obstacles to overcome and one that the farmers themselves have little control over is the restrictive trading practices, particularly the rules governing the importation of bananas in Europe. The resolutions of the transatlantic banana dispute between the United States and European Union signals a modification (rather than replacement) of a complex system of licenses, tariffs and quotas. Ecuador will benefit from the new European banana regime, but (as is the case world-wide) it is the traditional banana exporting companies rather than smallholder farmer associations who will benefit most. Furthermore, farmer associations need technical and marketing assistance to secure a niche in the more equitable fair trade and organic markets. In the current political and economic climate it is unlikely that official and overt support (at the governmental or European level) for producers will be possible. Opponents consider any link between social and environmental performance and market access as a ‘protectionist trick’. In sharp contrast to the rules currently governing world trade, an enabling policy environment is needed, one in which carefully targeted assistance can be directed at smallholder farmer associations. With respect to the EU banana regime, what is needed is an institutionalisation of the principles (and practice) of fair trade. Pressure for such change is needed before the revision of the EU banana regime in 2006. The impact of the multinational companies on the banana sector in Ecuador 4 Jon Hellin and Sophie Higman 2 Introduction This report examines the structure of the banana sector in Ecuador and the power of the multinational banana exporting companies vis-à-vis the independent producers. It explores the degree to which the producers are likely to be able to secure a more equitable future for themselves and their families. Furthermore it looks at the role that western consumers, via fair trade initiatives can play in supporting farmer associations. There is much at stake: Ecuador is the largest banana producer in Latin America and supplies 35 % of world exports. Annual world trade is approximately 12 million tonnes and generates enormous profits for the banana exporting companies. Smallholder farmers reap far fewer of the benefits from this trade. The exception is those who have secured a niche in the more equitable fair trade and organic markets, especially in the European Union (EU). Following the end of the transatlantic banana dispute between the EU and the United States (US), Ecuador is well placed to exploit further the enormous European market. Policy changes and active support for smallholder farmer associations are needed to ensure that bananas contribute to the livelihoods of an increasing number of smallholder producers. 3 Green gold: A world commodity Bananas are the fruit of Musa sapientum which is the world’s largest herb. Wild bananas originated in Asia and have been grown and cultivated for over 4,000 years. Cultivation of the fruit spread westward through the Middle East and sub-Saharan Africa. Missionaries brought the banana to the island of Hispaniola in 1516, and it later spread to the rest of the Caribbean and Latin America. Bananas are produced all year round, they are a rich source of carbohydrates, phosphorus, calcium, potassium and Vitamin C, and make a significant contribution to food security in dozens of countries in the developing world. They are also traded widely and in terms of gross value of production, bananas are the world’s fourth most important crop after rice, wheat and maize (Liddell, 2000). Banana production has been increasing by around 3 % per year over the last decade (van de Kasteele, 1998). Of the 86 million tonnes of bananas and plantains produced annually, only 14 per cent are traded on the world market (Chambron, 1999). The two biggest banana- producing countries, India and Brazil, are hardly involved in the international banana trade at all. World exports of bananas almost doubled to 12 million tonnes between 1988 and 1998 and have an export value of over US$ 4 billion (van de Kasteele, 1998). Latin America accounts for over 83% of world exports, 11 % are from the Far East, 3 % from Africa and less than 2 % from the Caribbean (see Graph 1). The impact of the multinational companies on the banana sector in Ecuador 5 Jon Hellin and Sophie Higman Graph 1 World gross exports of bananas (1988-1997) Source: FAO Statistics 14000 12000 10000 Thousands of tonnes 8000 World Latin America Caribbean Far East 6000 Africa 4000 2000 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year Graph 1 World exports of bananas and proportion from different parts of the world The EU is the biggest banana importer consuming almost 35 % (4 million tonnes) of traded bananas each year (Chambron and Smith, 1998). The EU produces about 20 % of its needs from Spain, Portugal, Greece and the French overseas territories. Approximately 62 % of the bananas consumed in the EU come from Latin America, and 20 % from the traditional and non-traditional African, Caribbean and Pacific (ACP) countriesi. World trade is largely controlled by five companies: Chiquita Brands (USA owned) and Dole Food Company (USA owned) each control approximately 25 % of the world market while Del Monte Fresh Produce (UAE/Mexico owned), Noboa (Ecuador owned) and Fyffes (Irish owned) each have 8 % of the market. The world banana trade generates huge profits. The companies are vertically integrated: they own (or contract) plantations, own sea transport facilities and distribution networks in consuming countries. Their predominant position allows them unprecedented control of the market and much political influence. The companies are largely associated with Latin America where they control 60 % of production throughout the region. In the Caribbean, most producers are independent smallholder farmers. In Latin America, with the exception of Ecuador and Colombia, bananas are grown in large plantations, often controlled by the above-mentioned companies. Bananas produced in Latin America are still called ‘dollar bananas’. The companies influence in Latin America is legendary. In the 1940s and in recognition of the influence that Chiquita had over successive governments, Honduras earned the less than flattering epithet ‘The Banana Republic’. Whilst Chiquita’s political influence in Honduras The impact of the multinational companies on the banana sector in Ecuador 6 Jon Hellin and Sophie Higman had waned by the late 20th century, it still dominated banana production and continues to protect its interests. In 1990/91 Fyffes sought a niche in the Honduran banana industry and started to buy bananas from independent producers. Chiquita resented the appearance on the scene of Fyffes. A short-lived dispute featuring death threats and kidnappings, salaciously followed by the Honduran press, was eventually settled in Fyffes’ favour, although a few years later the company withdrew from Honduras. The 1990s were characterised by intense competition among the companies for world-wide market shares especially within the EU. The recently-resolved transatlantic banana dispute (see Annex 1) was largely a turf war between competing banana companies. Simultaneously, they exerted immense influence on governments to such an extent that countries from Colombia to Belize had to accept impositions with regard to tariff duties, customs preferences, duty-free exports and imports of their products, and preferential financial treatment in the banking systems of the host countries (Chambron, 1999). Whilst it is a lucrative business not all have benefited from bananas. As with the case of coffee, workers on medium and large-scale plantations and small farmers supplying the world market only get a tiny share of these benefits 1-3 % and 5-12 % respectively) and only 12 % in total of the revenues remain in the producing countries (Chambron, 1999). The remaining 88 % is shared between the banana companies, the ripeners and the retailers (Lidell, 2000). Many independent producers throughout Latin America receive less than US$ 2 per 19 kg box of bananas. This hardly covers production costs. Growing competition and a fall in prices have led producers to seek productivity gains at the cost of an increasingly negative impact on employees and the environment. Ecuador clearly illustrates both the power of the banana companies and the way that independent producers can secure a more equitable future. 4 The development of the banana sector in Ecuador 4.1 Comparative advantage If there is one thing that producers and the banana companies agree on it is that lowland Ecuador is ideal for growing bananas. Although India is the largest producer of bananas (11 million tonnes/annum), Ecuador is the largest exporter. Ecuador’s banana exports have increased over the last decade and now total approximately 4 million tonnes/year which represents 35 % of world-wide sales. It is followed by Costa Rica (2 million tonnes/year) and Colombia (1.5 million tonnes/year). However, rising banana exports per se suggest but do not prove increased competitiveness (world trade may be increasing as fast or even faster). Ecuador’s competitiveness can best be determined by looking at its banana export figures in terms of the percentage of world trade (see Graph 2). In 1988, Ecuador’s banana exports represented 22 % of world trade, the figure increased to 37 % by 1997. Ecuador’s dominant position in the world banana trade is largely The impact of the multinational companies on the banana sector in Ecuador 7 Jon Hellin and Sophie Higman due to the fact that banana production is cheaper than in Central America. Several factors contribute to this (Box 1). Box 1 Banana production and Ecuador’s comparative advantage · Ecuador’s lowland soils are fertile and banana productivity is high · Labour costs in Ecuador are low and there are sufficiently skilled workers · Historically Ecuador has not suffered from periodic hurricanes and storms such as Hurricane Mitch which devastated Honduras’ banana sector towards the end of 1998. Although in recent years, and from an economic perspective, El Niño has caused as much damage to Ecuador’s banana sector e.g. in 1997/98 as Hurricane Mitch did in Honduras. · In the lowlands there is enough water (rain and rivers) but no excess of humidity, hence there are fewer problems with diseases such as the leaf-browning fungal disease caused by Micosphaerella fijensis and known in many parts of Latin America as sigatoka negra. · In Central America, banana production peaks between October and December when the demand in Europe is low. In Ecuador production is greatest in between December and May when demand is high in Europe. World gross exports of bananas and Ecuador's percentage of world trade (1988-1997) Source: FAO Statistics 14000 40 35 12000 30 Ecuador's percentage of world trade 10000 Thousands of tonnes 25 8000 World 20 Ecuador 6000 15 4000 10 2000 5 0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year Graph 2 Ecuador’s banana exports as a percentage of world trade. The impact of the multinational companies on the banana sector in Ecuador 8 Jon Hellin and Sophie Higman There are more than 200 varieties of bananas in the world, yet world-wide farmers predominantly grow the Cavendish variety. The fruit is genetically identical and, because the plants are established in close proximity and come from the same genetic source, outbreaks of pests and diseases are often a major problem. One of the major diseases facing producers is sigatoka negra. This was first identified in the mid-1960s in the Pacific and has subsequently spread to Latin America, the Caribbean and, more recently, Africa. The Cavendish variety is very susceptible to sigatoka negra. It is the reduced incidence of sigatoka negra which is perhaps the most important factor behind Ecuador’s dominance of world markets. The fungal disease is conventionally controlled by spraying, often by plane. It is an expensive process, not to mention hazardous and polluting (see Box 2). In Central America, spraying is often carried out once per week, while in Ecuador is can be reduced to once per month. This, combined with lower labour costs, means that in Ecuador production costs can be half that in Central America. Box 2 Banana production and environmental damage in Ecuador Reports of ill health among banana producers and workers are legend and stem largely from the indiscriminate and excessive use of pesticides and fungicides etc. on banana plantations. The problem is more acute in Central America than in Ecuador largely because banana diseases, such as sigatoka negra, are more of a problem in the former and require more spraying. However, Ecuador is not exempt from the problems of chemical application. While there are fewer reports of health problems among banana producers, there has been some environmental damage. In the early 1990s, Ecuador’s shrimp industry was adversely affected by a disease known as ‘Taura Syndrome’ (Stern, 1999). Shrimps were Ecuador’s third largest export and shrimp production fell 15 per cent between 1992 and 1993. The problem was largely blamed on the banana industry (Ecuador’s number tow export earner) and specifically the use of fungicides to control sigatoka negra, especially the chemicals known as ‘Tilt’ and ‘Calixin’ (Wigglesworth, 1994). The link between ‘Taura Sydrome’ and the application of fungicides in banana plantations was never proven, partly because chemicals are widely used in agricultural sectors other than bananas and also in the petrochemical industry. In the mid-1990s, the Ecuadorian government did take some steps to reduce the use of Tilt and Calixin, although the chemicals are still widely used today. The impact of the multinational companies on the banana sector in Ecuador 9 Jon Hellin and Sophie Higman José Riofrio (pers. comm.), a banana expert working at the University in Guayaquil in Ecuador, puts it another way: Costa Rica needs to produce on average 2,500 boxes/ha/year from its banana plantations to break even while in Ecuador the figure is 1,600 boxes/ha/year. According to Riofrio, Ecuador currently exports an average of 1,800 boxes/ha/year but if there were sufficient market demand this figure could easily be increased to 3000 boxes/ha/year. The only drawback for Ecuador is that its geographical position means that bananas have to be transported through the Panama canal, an additional cost that is not incurred by Central American producers. In 1997, banana export revenues represented almost 25% of Ecuador’s total value of merchandise exports (FAO, 1999). The banana industry now employs over 300,000 people, representing just under 10 % of the economically active population (Chambron, 2000). Ecuadorian sales of bananas had fallen in the last few years because of the collapse of the economy in the former Soviet Union, but with an end to the transatlantic banana dispute (see Section 7), Ecuador is well placed to exploit the growing European market. Banana producers should in theory benefit from the growth in exports. In sharp contrast to the situation in Central America, banana production is largely in the hands of independent producers, a situation explained by the domination, decline and resurgence of the banana sector in Ecuador in the second half of the 20th century. 4.2 From banana company to independent producer Throughout the 19th and early 20th centuries Ecuador’s principal export was cocoa. This crop declined irreversibly in the 1920s due to diseases and competition from other suppliers. Ex- cocoa producers sought alternative export crops. Rice was a partial replacement during World War II but falling world prices led to its abandonment in Ecuador (Glover, 1983:356). In the mid- and later-1940s, favourable natural and social conditions helped the country convert bananas into its new lead export (Striffler, 1999; Wunder, 2000). Ecuador become the world’s largest banana producer in 1954, an expansion that continued until the mid-1960s. Several factors facilitated the growth of the Ecuadorian banana sector after World War II. Firstly, global demand rose steadily, mainly centred in the US market. Secondly, the Central American competitors faced severe banana disease problems as well as periodic devastation of their plantations by cyclones. Despite Ecuador’s greater distance from the United Stages and Europe, the country’s comparative advantage (see Box 2) helped convince companies like United Fruit (now Chiquita) and Standard Fruit (now Dole) to establish their own banana plantations as well as providing credit and technical assistance to independent Ecuadorian banana producers. Between 1957 and 1965, Ecuador lost ground to the Central American producers. The latter, dominated by the large banana companies, successfully substituted the new and more productive Cavendish banana variety for the Gros Michel variety. The Cavendish variety, being smaller, also happened to be less susceptible to cyclone damage. Within a few years, The impact of the multinational companies on the banana sector in Ecuador 10 Jon Hellin and Sophie Higman Central America increased yields and exports by two and three-fold respectively (Wunder, 2000). In Ecuador, production was dominated by medium-scale domestic producers and they switched to the Cavendish variety more slowly due to financial constraints and limited know- how. As a result, Ecuador lost its natural comparative advantage. An overvalued exchange rate added to the country’s problems. After several decades of agrarian reform, conflict and restructuring, the banana companies decided to transfer the risks associated with direct production to the producers (Striffler, 1999; Glover, 1983:360). The companies stopped producing directly and established contract farming arrangements with local producers (see Section 4) or purchased bananas on the open market. Ecuadorian banana production stagnated from the mid-1960s to the mid-1980s. During this period, Ecuador’s role was as a reserve supplier to the world markets (Glover, 1983:352). The opening of Eastern European markets after the Berlin Wall fell in 1989 helped fuel a world demand for bananas. Encouraged by the devaluation of the currency in the 1980s, and having switched entirely to the Cavendish variety, Ecuador was well placed to take advantage of increased world demand. Producers adopted a new technological package that included greater use of fertilisers, insecticides, fungicides and herbicides; regular aerial fumigation; on- farm aerial cable ways (called funiculars) for the transport of harvested bunches of bananas; and irrigation systems (Wunder, 2000). The adoption of capital-intensive mechanised technologies again made Ecuador competitive and able to dominate the world export market. 5 Paternalism or exploitation: The companies and producers? 5.1 Contract farming Andrés Arata is the director of the Corporación Nacional de Banereros (CONABAN), a banana trade union that represents approximately 240 of the larger banana producers. Arata explains that the banana sector in Ecuador is vibrant and production is almost entirely in the hands of 5,200 independent producers who are farming 150,000 ha. Approximately 60% of these producers are smallholders with less than 30 ha of bananas, 30% have 30-100 ha, and 10% have more than 100 ha. The better known banana companies such as Dole, Chiquita and Del Monte do not own plantations in Ecuador. Only two Ecuadorian-owned companies have plantations: Favorita and Noboa each own approximately 7,000 ha. They also buy bananas from some of the 5,200 independent producers. Independent producer is a relative term. The type of contract farming that has developed in Ecuador since the banana companies decided to stop growing bananas directly takes different forms (see below) but the unifying theme is that the banana companies control much of the The impact of the multinational companies on the banana sector in Ecuador 11 Jon Hellin and Sophie Higman export trade. According to Andrés Arata, just under 90 % of Ecuador’s banana exports are controlled by a handful of companies. These include Noboa (38 %), Dole (18 %), Favorita (16 %), Palmar (8 %) and Del Monte (8 %). These companies fix prices and furthermore in a vertically-integrated supply chain they have enormous influence not only on the prices paid to producers but also on many farm management decisions such as the timing of spraying against sigatoka negra. Contract farming is a way of allocating risk between producer and exporter. The former takes the risk of production and the latter the risk of marketing. Often, the farmers cover all the production costs by providing land, labour and tools. Generally, the producers are responsible for transporting harvested bananas to the port. The exporting companies retain responsibility for technical assistance and marketingii, they provide all the packing material and deal with the paperwork at the ports. Contract farming is found in other banana-exporting countriesiii and is a feature of other agricultural commodities such as coffee (Brown et al., 2001:38). In Ecuador, the companies enter into contracts with farmers, often specifying how much produce they will buy and the price they will pay for it. In some cases, the company agrees to buy all the bananas from a specified area. The main advantages of contract farming from the producer’s perspective is that there is an assured market for the produce. There are also reports that with a contract, a producer is more able to access credit, either from the banana company or from the banks, who generally accept a contract as collateral (Glover, 1983:3; Chambron and Smith, 1998). Not all farmers enter into contracts with the exporting companies, some prefer to sell on the open market. In times of high demand these farmers may secure a higher price for their produce than farmers who have entered into contracts by touting their produce around the buyers. However, there is the real danger that they will subsequently receive lower prices when demand is low. The stability provided by a guaranteed sale, albeit at a relatively low price, is a strong incentive for farmers to enter into a contract (see section 4.3). José Riofrio from the University of Guayaquil refers to this as the loyalty issue. The main disadvantages faced by the producers is that they have little influence on the prices they receive and they have to shoulder the productions risks. Andrés Arata (pers. comm.) cites a clear example of the latter: Excessive rainfall in 1997/98 caused by the weather phenomenon known as El Niño destroyed roads and bridges. The exporters buy ship-side and it was the farmers who had to resolve the problem of transporting their produce to the ports. In addition, high rainfall led to an increased problem of sigatoka negra which in turn meant that farmers faced higher fumigation costs. Some producers fell into debt. There are many advantages for the exporting companies of contract farming (Box 3). The impact of the multinational companies on the banana sector in Ecuador 12 Jon Hellin and Sophie Higman Box 3 Advantages of contract farming from the perspective of the exporting companies · Companies lessen the risks of expropriation by locating fewer of their assets in the country. · Contract farming presents a progressive image by involving local producers. · By purchasing produce rather than directly employing labour, the companies can circumvent trade unions, minimum wage laws and child labour legislation. · Because of the dependent position of smallholder producers vis-à-vis the exporters, the former are reluctant to take controversial political stands (Glover, 1983:385). There were strong banana unions until the late 1970's, but since then their influence has declined (Chambron, 2000; Striffler, 1999). CONABAN represents 240 of the larger independent banana producers but there is no union that represents the interests of the smallholders · The companies are less likely to be held responsible for any mismanagement that might lead to land degradation and environmental pollution. · The companies can still control management decisions at the farm level. Although the exporters may prefer working with larger producers because it is easier to guarantee consistency of quality, the advantage of buying from smallholder producers is that the farmers are less likely to challenge farm management decisions/recommendations made by the companies’ technicians. Exporting companies often have more than one method of obtaining supplies, for example companies such as Favorita (see below) own company farms and also contract growers. Other exporting companies will also purchase bananas on the open market. This mix of internal, contract and market purchases, gives the exporting companies a combination of control and flexibility in acquiring bananas (Glover, 1983:415). Independent smallholder producers either supply the exporting companies directly and/or sell to a middleman. There are also larger producers who supply one or more of the exporting companies and employ workers on their plantations. Contract farming in the Ecuadorian banana sector, therefore, encompasses a wide range of situations. 5.2 Contract farming in practice: The company With 16 % of the banana export market, Favorita is one of the biggest exporters in Ecuador. According to Favorita’s commercial director, Fernando Rivadeneira (pers. comm.), Favorita is the holding company and its banana exporting subsidiary is called Reybanpac. Favorita also has companies that make fertilisers, chemicals and cardboard. Another subsidiary owns two large banana plantations. Favorita exports 650,000 boxes/week. Of these, 200,000 boxes come from the company’s plantations and 450,000 boxes come from 500 independent producers. Approximately 80 % of these independent producers are smallholders with less than 30 ha, although they supply less than a fifth of the 450,000 boxes/week. The impact of the multinational companies on the banana sector in Ecuador 13 Jon Hellin and Sophie Higman Favorita is perfectly frank about its relationship with the producers. The company prefers working with smallholders as it is easier to dictate to them when aerial spraying should be carried out. Fumigation is carried out by another subsidiary called Aerovic and the farmers pay the costs. Larger producers are often less willing to relinquish control over aspects of the production process such as spraying. In November 2000, and irrespective of the size of the independent producers, Favorita paid farmers US$1.90 per box of bananas despite the fact that the legal minimum price at the time was US$2.18 per box. Favorita is not alone, according to Andrés Arata (pers. comm.) since 1999/2000 none of the exporting companies have paid the minimum priceiv. This was confirmed by both producers and exporters during interviews in November 2000v. Favorita’s argument is that the company is unable to pay producers more than the market can sustain. Trade barriers imposed by the EU are seen as the main obstacle to a growth in Ecuador’s banana exports. However, whilst Favorita does currently sell bananas to the EU (mostly Italy), it also has a marketing deal with Chiquita. Favorita’s biggest market is in the US where its bananas are sold either with the Favorita or Chiquita labels. 5.3 Contract farming in practice: The producers and middlemen Angel Samaniego (pers. comm.) used to be an employee of Favorita. As we drive out of Guayaquil to visit some of his supplier, he explains that when Favorita sought to streamline its operations, Angel was encouraged to set up his own company to supply Favorita. He established his company in May 2000. He oversees 12 producers who manage a total 400 ha of plantations and produce 9,000 boxes per week. Of the 12 producers, some have 20 ha of plantation, others more; 60 ha is the largest holding. They are grouped together and via Angel sell to Favorita all year around. Juan Quinteña is one of the 12 banana producers who supply Favorita indirectly by selling through Angel Samaniego. He is typical of many smallholder banana producers. According to Juan (pers. comm.), he has 10 ha of bananas and produces 450 boxes/week. Juan used to sell his bananas to another exporter but he found that they bought his bananas one week and not the next. In the absence of any guaranteed and regular market, at times he had to sell to intermediaries for only US$1/box. Juan’s argument is that it is far better to sell to Favorita on a regular basis and for a regular price. Basically, Juan prefers the stability of selling all year around to the same buyer even though it would periodically be possible to sell to another buyer at a higher price. One of the difficulties in determining what is a fair price for a box of bananas is that few smallholder producers really know what their production costs are. Juan is no exception except he acknowledges that bananas are not very profitable due to the costs of aerial spraying against sigatoka negra. Favorita decides when and what to spray. The company does the spraying with chemicals made by another of its subsidiaries and Juan pays the costs. The impact of the multinational companies on the banana sector in Ecuador 14 Jon Hellin and Sophie Higman Juan’s bananas are sprayed about fifteen times per annum at a cost of approximately US$ 390/ha/year. Juan also adds fertiliser at a cost of US$ 216/ha/year. Whilst growing bananas may not be very profitable, Juan explains that until 1997 he used to grow cacao. He decided to switch to bananas because despite low profit margins it is still a more profitable crop than cacao and there is a regular market throughout the year. Carlos Sarcis (pers. comm.) is also a smallholder banana producer. He has 15 ha of bananas and produces on average 700 boxes/week. Carlos sells his bananas to one of the smaller exporters and is paid US$1.70/box. As is the case with many small producers, he says that he is required to sign a form saying that he has received the legal minimum price of US$ 2.18/box. Carlos explains that in 1991 banana prices were good but since then they have fluctuated even though the cost of inputs have risen steadily. Sigatoka negra is the biggest problem that he faces and he aerial sprays against the fungus eighteen times per annum at a cost of US$400/ha. Carlos admits that he does not know what his production costs actually are but he calculates that a more equitable price is US$2.50/box. Carlos also points out that, although not very profitable, bananas are better than the alternatives. Like Juan, he used to grow cacao but changed over to bananas at the beginning of the 1990s. 6 Costs of production and sale prices World-wide, there are little data available on the relative costs of production (Hubbard et al. 200b:19). Countries with the highest production per ha per annum are the most cost competitive. This includes Ecuador and Costa Rica where production can reach 48 tonnes/ha/year. Smallholder productivity in the Windward Islands and Jamaica is about 7-10 tonnes/ha/year (Hubbard et al., 2000b:19). Quality is also a critical factor for competitiveness. The FOB price (‘free on board’, the price paid to farmers at the point of having loaded the ship) in Costa Rica is regarded as a benchmark for competitiveness (Hubbard et al., 2000:13) In 1999, Costa Rican producers received a FOB price of $US 6 per box. In Ecuador the price was about $US 4 per box. However, it is surprisingly difficult to reach any consensus on the competiveness of Ecuador, not least because the prices received by farmers are for delivery to the port itself rather than FOB. In addition, the price farmers receive for a box of bananas does not reveal much about the actual production costs incurred by the farmer. José Riofrio from the University of Guayaquil, who represents neither producer nor exporter, argues that production costs (including delivery portside) vary because the calculation methods used are differentvi. He believes that production costs are approximately $1.6-1.8 per box and says that those who say that they are higher are probably adding costs of infrastructure development, such as irrigation, into their costs for the first year or two, rather than spreading the cost over 7-10 years. Banana exporters in Ecuador refer to production costs of US$1.40/box – US $1.80/box. The impact of the multinational companies on the banana sector in Ecuador 15 Jon Hellin and Sophie Higman Figures provided by CONABAN indicate that production costs are US$ 2.18 per box (Table 1). However it should be noted that irrigation costs are included in these calculations and the US$ 636/ha/year fumigation costs to control sigatoka negra are significantly higher than the costs mentioned by the farmers detailed section 4.3. On the other hand, the calculations are based on a 200 ha plantation. Assuming that family labour is included in the cost calculations, economies of scale would suggest that some of the costs detailed in Table 1 would be higher for a smallholder farmer with less than 30 ha. Andrés Arata argues that banana producers could control production and force the price up as long as Ecuadorean bananas remain more competitive than those from Costa Rica or Honduras. According to Arata, CONABAN could ‘tax’ producers about US$0.10 on each box sold. When the price of bananas drops, CONABAN could buy up supplies of bananas and force the price up. Is this realistic? Would CONABAN have the funds to sustain this over a long enough period to keep prices high? Others caution that the costs of transporting bananas through the Panama Canal are such that a relatively small increase in the price paid to Ecuadorian producers would mean that their bananas were no longer competitive. What is less contentious is that almost without exception farmers receive less than the US$ 2.18/box stipulated under Ecuadorean law. Producers need credit on favourable terms because investments need to be made to ensure that the produce meets strict quality criteria. Angel Samaniego, who supplies Favorita with bananas stresses that funiculars are needed to minimise damage to the harvested bananas. Bruised fruit cannot be sold to the US or EU. There is a possibility that damaged fruit can be sold to Chile but at prices far below those normally paid for a box. Farmers such as Juan Quinteña (see above) do not have a funicular system and they sell damaged and rejected bananas for as little as US$ 0.40/box. In 1999, Favorita secured a US$ 15 million loan from Germany. The idea was that Favorita would in turn loan the money to smallholder producers so that they could improve infrastructure such as irrigation. In 1998 the official price of bananas plummeted in Ecuador from US$ 4.50/box to US$ 2.18/box. Faced with such low prices (and even lower for those not paid the legal minimum price), farmers are unwilling to take out a loan which they may not be able to pay back. Less sympathetic observers point out that if you want farmers to invest in their plantations, a more effective way is to pay them more (at least the minimum price) rather than offering loans. Given the increased concentration in the market and the retail sector, all food companies are obliged to strengthen their market orientation. Dole, for example, is developing an aggressive strategy in this field, leading to partnerships with retailers, wholesalers and distributors, and the establishment of integrated import, ripening and distribution systems. In this context, farmers such as Carlos Sarcis and Juan Quinteña seem to be trapped in a system which, in the absence of a strong trade union that defends their interests, offers few opportunities to improve their profit margins. The impact of the multinational companies on the banana sector in Ecuador 16 Jon Hellin and Sophie Higman Table 1 Banana production costs in Ecuador (Source: Corporación Nacional de Banereros, Ecuador) Farm size of 200 ha and output of 2,400 boxes/ha/year Details Costs/ha/year Costs/box ($US) ($US) Fertilizers 436 0.182 Plant supporting and bunch 834 0.347 bagging Field Administration (3 persons) 36 0.015 Irrigation 500 0.208 PEST CONTROL Nematods Control 228 0.095 Sigatoka desease Control 636 0.265 Weed Control 78 0.033 Insect Control 38 0.016 MANAGEMENT PRACTICES Thinning 24 0.010 Drainage 127 0.053 Cutting of stems of harvested plants 40 0.017 Cutting off diseased/old leaves 53 0.022 Cutting of old parts of stem 77 0.032 Other activities 29 0.012 TOTAL VARIABLE OUTPUTS 1.307 3,136 HARVEST 651 0.271 PACKING 384 0.160 TRANSPORT 553 0.230 FARM MANAGEMENT 504 0.210 SUB TOTAL 0.872 2,092 TOTAL 2.178 5,228 In Ecuador it has been calculated that 12 % of the final retail price of a box of bananas goes to the producer, with 20 % spent on transport, 30 % on ripening costs and the rest on distribution costs and retailing (José Riofrio, pers. comm). In other Latin American countries, banana The impact of the multinational companies on the banana sector in Ecuador 17 Jon Hellin and Sophie Higman producers receive about 3 % of the final retail price (Chambron, 1999). There are, however, a growing number of examples where banana producers have formed farmer associations and where they have negotiated higher prices for their produce. Many have done this by securing a niche in the growing fair trade and organic banana markets. The impact of the multinational companies on the banana sector in Ecuador 18 Jon Hellin and Sophie Higman 7 Fair trade and organic production: Contributing to sustainable livelihoods? 7.1 The power of the consumer In recent years there has been an increase demand in the West, particularly the EU, for organic produce and also bananas sold through fair trade initiatives. In 1997, the EU imported almost 10,000 tonnes with Germany as the largest market (FAO, 1999b) The UK provides an important market for organic bananas, accounting for about a quarter of sales in Europe. The main obstacle to the growth of the organic banana market is on the supply side. Bananas are subject to several diseases making them difficult to grow organically (although see example of the Cañarte family in Ecuador, in Section 6.3). If such constraints can be addressed, it is estimated that organic banana sales would treble, in line with the market share of the organic forms of other fruit and vegetables, reaching 45,000 tonnes (approximately 1.5 per cent of the EU’s annual banana consumption) (FAO, 1999b). Organic production offers farmers more benefits than conventional banana production, especially when the organic produce is sold as part of the fair trade initiative. Fair trade seeks to change unfair international trading structures (largely due to the undue influence of a handful of banana exporting companies) and improve the social, environmental and economic conditions of disadvantaged producers by giving banana producers and workers direct access to a market, guaranteeing better trading and working conditions and thus providing them with the tools that permit them to control their own development, and to invest in environmentally friendly production methods. Workers in the Dominican Republic who supply fair trade bananas to one of the UK’s largest supermarkets receive US$1.75 per box of bananas exported. The money is destined to a social fund for the workers. At the end of November 1996, the first fair trade bananas were imported into Europe. Total sales of all fair trade bananas in Europe were 12,300 tonnes in 1997, rising to 14,600 in the following year, and over 18,100 tonnes in 1999 (Lidell, 2000). The largest fair trade markets are in Switzerland and the Netherlands but growth is expected in Germany and UK (Chambron, 2000). There are three basic prerequisites for the long-term development of fair trade bananas: high quality produce; availability in mainstream food stores; and assurance of compliance with fair trade criteria (FAO, 1999b). Specific social and environmental criteria have been established by the Fair Trade Labelling Organisation (FLO). This organisation co-ordinates fair trade at the international level and represents national fair trade initiatives in 17 countries. FLO stipulates that all potential 'fair trade' sources have to meet minimum social and environmental criteria before being accepted for the Fair Trade Marking certifying procedures. Unlike other certification schemes (e.g. for organic produce), FLO does not charge producers for the certification process. Instead importer and retailers are charged a The impact of the multinational companies on the banana sector in Ecuador 19 Jon Hellin and Sophie Higman royalty fee for use of the fair trade label of the consumer country (FAO, 2000). The consumer guarantee is provided by the labels Max Havelaar, Transfair and The Fair Trade Foundation and fair trade bananas are imported through independent importers. One of the largest fair trade companies in Europe is Agrofair, which is half owned by the producers (in Ecuador, the Dominican Republic, Costa Rica and Ghana) and half by Solidaridad, a Dutch development NGO. Farmers selling bananas through Agrofair demonstrate that fair trade initiatives can offer independent smallholders a viable route to more sustainable rural livelihoods. Producers receive a guaranteed fair price, which enables them to survive in the market place and to provide for the basic needs of their families. Producers also benefit from swift payment (net cash against documents), and continuity (buyers and sellers will establish a long-term and stable trading relationship). Ecuadorian smallholder farmers’ interest in producing fair trade bananas is increasing even though their ability to secure a niche in this market is hampered by restrictive international trading practices. 7.2 Strength through association: oritos producers in Cumandá At 300-700 m, Cumandá is a canton in the low lying hills that separate the flat coastal plain of Ecuador from the Andes. Smallholder farmers in the region grow bananas, sugar cane, citrus fruits, cacoa and coffee. Joseph Brown and Marcelo Basquez are characteristic of banana farmers in the area, and each have approximately 15 ha of bananas of which two-thirds are baby bananas known locally as oritos and the remainder are dark red bananas known as moradas. The former are sold in boxes of 7 kg and average productivity is 12-14 boxes/ha/week. Moradas are sold in conventional 19 kg boxes and yields are on average 40- 50 boxes/ha/week. Marcelo and Joseph are the driving force behind a group of 15 farmers who currently sell their bananas to Dole, Noboa and Del Monte. While Dole and Del Monte pay the minimum legal price of US $2.50 per 7 kg box of oritos, the farmers do not consider this price to be just and are seeking alternative buyers. What angers them is that the companies pay them the price of conventional oritos (and moradas) even though production in Cumandá is organic. They allege that the companies subsequently sell the organic produce at a premium and that this is not passed onto the farmers. The Cumandá farmers have set up a farmer association called the Asociación de Productores Orgánicos de Riochimbo and are currently trying to get the necessary certification so that they can sell their oritos directly in the organic and free trade markets in Europe (Hellin, 2001b). Joseph is well aware of the difficulties and challenges that the association faces. He has already attempted to send oritos to Europe. However, the boat was delayed, the refrigeration unit failed (sabotage was suspected) and the fruits were ruined. In the future, transport will be paid for by the independent European importervii. Farmers are well aware that strength and The impact of the multinational companies on the banana sector in Ecuador 20 Jon Hellin and Sophie Higman ultimately power can be best achieved through association. It is only by working together that members of the association can achieve the volume of production that is needed to secure a niche in the European market. During the dry season, the 15-man association can supply 1,300-1,400 boxes of oritos per week while during the rains the figure will rise to 3,200 boxes/week. These volumes are exceptionally small when one considers the enormous volumes of bananas that are exported weekly from Ecuador.. Joseph adds that there are 200 organic oritos producers in the Cumandá area. If they all participated, they could produce 20,000 boxes/week. In addition within the canton there are organic sugar and coffee producers who, Joseph hopes, will eventually join the oritos producers in the association. The Cumandá farmers are hoping to link up with a farmer organisation in the pacific lowlands of Ecuador called the Asociacion de Pequenos Productores de Guabo (APPG). This association is part of Agrofair (see above) and is already selling 20,000 boxes of bananas to the EU each week. Approximately 12,000 of these are sold in the fair trade and 8,000 in the conventional market. According to Joseph, APPG wants to link up with other organisations such as the Cumandá farmers and market bananas and oritos along with others products such as mango and pineapple. The overall aim is to bring together about 500 farmers from a number of associations and to establish a new organisation that will be called SUCRE (Coorporacion de Productores de Ecuador). SUCRE will eventually replace the individual associations. Its trading arm will be Agrofair Ecuador and this organisation will sell to Agrofair in Europe. SUCRE will also enable smallholder farmers to secure credit under favourable terms so that they can install irrigation systems. Securing a niche in the European fair trade and organic markets is not an easy task, especially for smallholder farmers. Leadership qualities are needed, contacts need to be forged, negotiations carried out and capital is needed to improve plantation infrastructure and pay for organic certification (producers do not pay for fair trade certification by organisations like Max Havelaar, see above)viii. In the absence of any assistance from the Ecuadorean authorities, Joseph and Marcelo need external assistance. The European NGO Solidaridad is helping the Cumandá farmers get organically certified and Joseph has managed to secure the assistance of a group of Dutch volunteers to work with local farmers on technical and marketing angles. Consumer preference and demand can also work both ways. One of the major changes in markets is the increasing power of supermarket chains with retailers specifying packing requirements and ordering own brand packs. As markets for credit, inputs and shipping become more competitive, the vertical integration which formerly characterised the banana industry is likely to diminish. Growers and their associations will need increasingly to be aware of market requirements and market their produce accordingly (Hubbard et al., 2000b:58). This is an opportunity to expand the fair trade movement. One independent The impact of the multinational companies on the banana sector in Ecuador 21 Jon Hellin and Sophie Higman banana importer in the UK is now supplying fair trade bananas from the Caribbean to one of the country’s largest supermarket chains. However, the Cumandá farmers have also discovered that retailer/consumer preferences can lead to additional demands on the producers, some of which are difficult to meet (Box 4). Box 4 Addressing the issues of quality and presentation The Cumandá farmers recognise the importance of quality control and the need to meet production deadlines. Joseph Brown is aware that consumers in the West can be fickle. Oritos are normally packed as large hands in 7 kg boxes. However, an alternative is to pack oritos in smaller clusters of six small fruits, a method preferred by exporters and retailers. This poses a challenge for producers. Firstly, if western consumers only want clusters of small fruits what happens to the larger oritos? Joseph laments the fact that there is a growing market for small clusters and an already-established market for hands of larger fruits, but there is not yet a market for clusters of big fruits. Secondly packing clusters is a skilled process which is not helped by the fact that oritos have thin skins and are easily bruised. There are special 12 kg boxes designed for the small clusters, but because packing clusters signify more handling and potential damage than hands, seven 7 kg boxes of large hands can be packed for every 12 kg box of small clusters. Joseph speculates that supermarkets prefer small clusters as they can be put immediately onto shelves while hands have to be cut into the correct size. This is an examples where consumer demands for high quality and presentation in supermarkets has been passed onto the producers. 7.3 The Cañartes and organic bananas In the context of the banana sector in Ecuador, the struggle to circumvent the power of the banana exporting companies is also being waged by the larger banana producers. Simón Cañarte does not mince his words, “now don’t get me wrong, I am a capitalist 100 % but capitalism means fair competition and the banana companies are determined to get rid of all competition. They see what we are doing here as a threat”. The Cañartes own three plantations that total just under 500 ha (50, 200 and 230 ha). At the 200 ha plantation, the threat that the family represents is spread out on the ground, about 25 m2 of organic fertiliser, called bokashi, that is drying in the sun. Chickens pick their way cautiously across the fertiliser pecking periodically at a worm or insect. Bokashi, it is a mixture of residues of mango, pineapple, banana, burnt rice husks, pods of various legume trees, coffee pulp and cattle manure. The Cañartes use special micro- organisms from the US that speed up the decomposition of the mixture so that it can be applied to the banana plantations after 11 days rather than six months. Bokashi is the key to what the Cañartes claim is 100 % organic banana production. The Cañartes argue that they are The impact of the multinational companies on the banana sector in Ecuador 22 Jon Hellin and Sophie Higman a threat to the banana companies because these same companies make considerable profits in Ecuador from the sale of chemicals, some of which they produce themselvesix. Farmers who supply bananas to companies such as Favorita are obliged to spray their plantations (and pay for this service) when technicians from the same companies deem it necessary. If more farmers turn to organic production, the company’s profit margin is reduced. The Cañartes began to produce bananas organically in the mid 1990s. Whilst organic production in the low-lying hills of Cumandá is relatively easy, the accepted wisdom is that in the more humid lowlands, sigatoka negra can only be controlled by spraying (FAO, 1999b). Management of the Cañartes plantations is based on the theory of Trophobiosis which was put forward by a French scientist called Francis Chaboussou (Box 5). Box 5 Organic banana production: the theory of Trophobiosis Francis Chaboussou, who died in 1985, sought to understand the relationship between soil and plant health. He developed a concept that he named Trophobiosis. According to this concept, plant susceptibility to pest or disease attack is directly related to the biochemical state of the plant. Pests and diseases are only a problem when the plant’s biochemical state offers the required nutritional needs. Chaboussou showed that most pests lack the enzymes to break up proteins into their constituent amino acids. The only way in which these pests can use proteins in the plants is by assimilating their broken-up constituents, amino acids. Thus, the pests attack only those plants, or the parts of plants, that have free amino acids. This state can be caused by soil deficiency in trace-elements and nitrogen excess, due to an imbalance in the fertiliser regime, and the use of pesticides. Chaboussou's work showed that many of the chemical pesticides being used by farmers lead to a build-up of free amino acids, and provided ideal conditions for pest attacks. Free amino acids are not readily available in a healthy plant, since it is either in a state of repose with no metabolic activity, or growing so fast that all the amino acids and nutrients available are quickly combined into proteins. Basically his argument is that pests starve on healthy plants. The Cañartes claim to have shown this to be the case for sigatoka negra. Simón Cañarte and his brother Paul explain that the bokashi gives life to the soil and makes the plant strong enough to resist sigatoka negra. Approximately six kilograms of the mixture is applied to each banana plant four times a year. In addition workers spray the plants with an organic and home-made foliar spray called Biol. The spray is made from whey yeast of milk, cattle manure, liquid drained from the decomposing bokashi and micro-organisms. The spray is applied to 50 ha of plantation each day. Spraying takes place in the late afternoon when stomata on the leaves are open, making uptake of the fertiliser more efficient. With just under 500 ha of directly managed banana plantations, the Cañartes are not smallholders but they are adamant that smallholder farmers can replicate the system: many The impact of the multinational companies on the banana sector in Ecuador 23 Jon Hellin and Sophie Higman have cattle and they can get hold of the other ingredients to make bokashi and the spray. Is banana production in Ecuador about to be revolutionised, the vanguard being producers who will secure market niches in the developed world independently of the large banana companies? Or is this all a sham? The Cañartes have built a small training centre at their own expense and Simón offers courses on organic banana production free of charge to other producers, small, medium or large. He is currently advising the El Guabo producers in El Oro province to turn 20,000 ha into organic production. According to CONABAN this area should be totally organic within the next five years. What is more, according to the Cañartes, organic production is more profitable than conventional bananas (Box 6). Box 6 The costs of organic banana production: The Cañarte family · Labour costs on an organic farm are 30-40% higher than on a conventional plantation. Hence, the Cañartes employ on average one person/ha in comparison with the standard 0.6 person/ha. · Organic production means that you do not have to buy in chemicals. Despite higher labour costs organic production costs are $2.30-2.40/box (a figure considerably lower than the $7/box figure suggested by one of the exporting companies). The Cañartes are highly sceptical that production costs for normal bananas are under $1.80/box, they say that they are in the range of $1.80-2.00/box and as high as $2.30/box if plantations are managed well. · Productivity in the organic system (even when well managed) is only 80-90% of that in conventionally-managed plantations. The 230 ha block produces 11,000 boxes/week and there are a further 10,000 boxes a week from the 200 ha plantation. · However, organic bananas sell for a premium. The farm-gate price for organic bananas is $5-6 per box and the price delivered to the port is $6-7 because you have to add on $1.60- $1.70 per box to get fruit packed and transported. · The Cañartes are convinced that organic production makes economic sense. Farmers who sell conventional bananas for $1.90/box are hardly covering production costs, and yet they could secure a substantial premium, with marginally higher production costs, were they to produce organic bananas. Almost the entire production of the Cañarte farms is sold to Italy with a small fraction going to the rest of the EU and Chile. The advantage that Simón has, and one that the producers in Cumandá are striving for, is volume. Each container on a ship bound for Europe or the US contains approximately 950 boxes and there are 350 containers per boat making a total of approximately 330,000 boxes per ship. The Cañartes export about 20,000 boxes a week to Europe. This translates as 21 containers, a sufficiently large volume for the European The impact of the multinational companies on the banana sector in Ecuador 24 Jon Hellin and Sophie Higman importer to have influence over the shipper. Ironically the organic bananas are transported on boats belonging to the Noboa, an Ecuadorian company and the largest banana exporter in the country. According to the contract, Noboa is responsible for ensuring that the Cañartes’ bananas arrive in good condition in Europe. In this way, the Cañartes avoid the problems encountered by the Cumandá oritos producers. 7.4 The opportunities and pitfalls of organic certification The Cañartes’ one complaint is that although their plantations have been organically certified by an Italian certifier, attempts to break into other national markets, such as the United Kingdom, have been hampered by each country’s preference for its own certifiers. According to the Soil Association, the UK’s main organic certifying body, produce certified by a legally- recognised EU certifier can be sold legally anywhere within the EU. The main advantage of being certified by a national organisation is that the national logo is likely to be better recognised than, in this case, an Italian one. Hence, there may well be marketing advantages to having a national logo. Potentially the Cañartes organic bananas could be sold in the UK with a Soil Association logo once the Soil Association has ascertained the credibility of the Italian certifier, but this recognition process can be costly. The issue of organic certification can be a major obstacle to smallholder farmers’ associations. Banana producers are confronted with different certification schemes and may not know which programme to choose in order to improve their access to markets, even though many of these schemes come under the basic standards set by the International Federation of Organic Agriculture Movements (IFOAM). Some growers opt for multiple certification but this is expensive and time consuming. Other problems facing by smallholder farmers are characteristic of other certification schemes such as the Forest Steward Council (FSC). The cost of the inspection visit may be exorbitant and the farmers may lack the skills and information needed to deal with the administrative procedures involvedx. Partial solutions to the above problems include more direct marketing channels between producers and consumers so that the former could more readily generate the resources needed to obtain certification. For example, if farmers were able to sell their produce through fair trade channels they may be able to raise the necessary funds to pay for organic certification. Also farmers can, in theory, get together and establish an internal control system so that external auditors inspect the system and a few sample farms rather than all the farms (FAO, 2000). A very successful example of this is COCLA, a coffee co-operative in Peru (Hellin and Higman 2001). However, once again the issue arises as to how farmer associations acquire the skills to establish internal control systems. 7.5 Jumping on the organic bandwagon? There are many in the banana sector who are very sceptical of the Cañarte’s claims about organic productionxi. Their argument is that if the Cañartes were doing what they claim to be doing, then others would have cottoned on and followed suit. Even those who are supportive The impact of the multinational companies on the banana sector in Ecuador 25 Jon Hellin and Sophie Higman of organic production argue that chemical applications will still be needed during the rainy season when sigatoka negra is more prevalent. Sceptics are less dismissive of the attempts to promote organic production in El Oro province. In this case the plantations are found in a drier area where sigatoka negra is not such a problem. However, even the most hardened sceptics of the Cañarte’s work are not blind to the advantages that the environmentally- conscious market offers. Favorita is proud of the fact that its two large plantations, although not organic, have been certified with an ECO-OK label. This is an environmentally-friendly but not organic label. This certification scheme was developed by the Rainforest Alliance, a US-based NGO and certification body. Chiquita actually started the ECO-OK programme with the Rainforest Alliance in 1995. On the world stage, the ECO-OK label is being used by Chiquita to establish itself as the environmental leader of the banana companies. It is part of the company’s focus on advertising as a means to strengthen its presence in the wholesale/retail sector and to improve brand awareness. Favorita claims that at the moment there is no premium for ‘ecological’ bananas (as opposed to organic bananas) but that this will change and the market will eventually pay more for ‘ecological’ bananas. Therefore, Favorita wants to get its medium and big independent producers ECO-OK certified so that it is able to take advantage of more lucrative market niches (it is possible that small producers could not qualify for the ECO-OK label because with small plantations it is almost impossible to spray by air without contaminating surrounding areas). Favorita is also suspicious that the EU may at any stage seek to exclude dollar banana by substituting strict environmental criteria in place of the new system of quotas and licenses (see below). In Europe, where the ECO-OK certification is not recognised as an eco-label, one of the main criticisms of the programme has been the lack of effective restriction of the use of agro- chemicals as an ECO-label should demand (van de Kasteele, 1998). The Cañartes likewise claim that the ECO-OK label is highly misleading and that there is little that is environmentally-sound about the scheme. However, ECO-OK does require that corridors of natural vegetation be left of planted between plantations. Organic standards do not have similar requirements. Likewise Dole claims to be developing and implementing Integrated Pest Management (IPM) on its plantations and stresses that it complies with the quality control and management criteria of the International Organisation for Standardization (ISO). However, the ISO 14 000 series is a management systems standard. It does not specify a level of environmental performance with a list of specific criteria to be met. Instead as an environment management system, ISO 14001 provides a framework for an overall strategic approach to an organisation’s environmental policy, plans and actions. It only certifies that a plantation is trying to achieve its own objectives and targets and leaves the organisation free to determine The impact of the multinational companies on the banana sector in Ecuador 26 Jon Hellin and Sophie Higman its own environmental targets. In the case of IPM this is not necessarily a guarantee of lower dosage if there is no statement of targets and no specification of the threshold level (Chambron, 1999). However, if ISO 14001 is done properly, it must address the issue of chemical applications and reduced dosage. Banana production is not alone in the sense that there are different labelling schemes available, some more credible than others. Proponents of one scheme tend to criticise the quality others. The banana companies will apply whichever scheme has most market acceptance and lower costs. According to Alistair Smith of the UK-based NGO Banana Link, the large banana companies are watching developments in Ecuador very carefully. At the moment the Cumandá oritos producers, APPG and the Cañartes do not represent a serious threat to the banana companies. But if the organic (and fair trade) initiative takes off, the large banana companies will enter the market as ruthlessly as in other area, competing and perhaps ultimately undermining the farmers’ associations. The ECO-OK label and ISO 14000 criteria demonstrate that the banana companies are ready to exploit new market opportunities. While there may be production problems associated with organic bananas, Farmers’ ability to export organic and fair trade bananas has also been hampered by restrictive trading practices. The transatlantic banana dispute between the US and EU illustrates the degree to which some of the banana companies will fight to maintain and expand their share of world markets. The banana dispute between the US and the EU was an acrimonious trade altercation that lasted for several years and was only resolved in the first half of 2001 largely in favour of the established banana exporting companies. 8 The transatlantic banana dispute* * The plethora of EU regulations, accusations of unfair trading practices and attempts to comply with World Trade Organisation (WTO) dictates, added many layers of complexity to what was, from the beginning, a far from simple issue. Details are of the dispute are provided in Annex 1. The most salient points especially with regard to Ecuador, the power of the banana companies and the impact on smallholder farmers are detailed below. 8.1 Regulation 404/93 The EU is the biggest importer of bananas in the world, consuming some 35% of total exports. This is one reason why its policy concerning the banana trade has had a strong impact on the pattern of production and trade (Chambron, 2000). Prior to 1992, a number of differential arrangements for the import of bananas existed in Europe. While Germany had a tariff-free banana market, the UK gave special treatment to imports from its former colonies in the Caribbean. Support for smallholder banana farmers in the Caribbean was needed because the lack of economies of scale and unfavourable growing conditions mean that production costs in the Caribbean are twice as high as those in Latin America. The impact of the multinational companies on the banana sector in Ecuador 27 Jon Hellin and Sophie Higman Following the formation of the Single European Market in 1992, a new banana regime was agreed in 1993 (EC Regulation 404/93). The EU had two objectives: to create an integrated market for bananas harmonising different banana trade agreements, and to guarantee that access to this market for its traditional ACP countries, was not hampered by the foreseen influx of cheap dollar bananas (van de Kasteele, 1998). Preferential treatment of the ACP countries dated back to the Lomé Convention that was signed in 1975. Regulation 404/93 used a system of licences, quotas and tariffs to give preferential access to exports from ACP countries. Imports from Latin America were thus limited both in volume and by higher prices. The process of harmonising the European market was further complicated by the contradictory need to comply with GATT (the General Agreement on Tariffs and Trade), and also to respect the guarantee of market access for ACP countries enshrined in the Lomé Convention. Regulation 404/93 sparked an acrimonious trade dispute between the United States and the EU. Europe’s banana regime was challenged on several occasions at GATT, and its successor, the WTO. The driving force behind objections to Regulation 404/93 were the banana exporting companies, led by Chiquita (Box 7), who have enormous investments in Latin America. The WTO insisted that the European Union cease its preferential access for ACP countries’ bananas. The EU refused and in 1999 the US imposed 100 % tariffs on American imports of a long list of European products, almost all of which had nothing to do with bananas (Lidell, 2000). Regulation 404/93 also did few favours for the fair trade movement. The allocation of licenses based on past performances of the operators considerably hampered the trade in fair trade bananas: Until the beginning of 2001, fair trade operators were classified as ‘newcomers’ on the market. As such, they could only access the ‘newcomer category’ which represented 8% of the total licenses. Due to constant over-applications, there were never enough licenses and in order to sell greater volumes of bananas, fair trade importers were forced to buy licences from their competitors at a high costxii. Although the picture is still unclear, the resolution of the banana dispute does not significantly improve smallholder farmer associations’ access to European markets. The ultimate winners are the traditional banana exporting companies. The impact of the multinational companies on the banana sector in Ecuador 28 Jon Hellin and Sophie Higman Box 7 The transatlantic banana dispute and the Chiquita connection With a personal fortune estimated at $800 million, Carl H. Lindner Jr and his family own 40% of the outstanding shares in Chiquita (Barlett and Steele, 2000). In a tariff-free and quota-free Germany prior to 1993, Chiquita had seized 45% of the market. Envisioning the same potential for all of Europe, as well as the former Soviet satellites that were opening up, Regulation 404/93 came as a shock. Approximately 60 % of Chiquita's operations are concentrated on bananas and, confronted with Regulation 404/93, Chiquita suffered US$ 407 million in losses from 1992 to 1994. In addition, its market share in Europe fell from 40 % to less than 20 % between 1992 and 1993 when the new EU quotas came into force. (The Economist, 2001). Unlike Dole, Chiquita concentrated on trying to circumvent Europe’s quotas, rather than on diversifying. As a result, Chiquita’s share price fell by nine-tenths between 1998 and 2001 and it has managed to make a profit only twice since 1982. Chiquita cited the EU’s trade restrictions as the cause of these losses. However, as The Economist (2001) points out, Chiquita’s plight can hardly all be blamed on Europe’s trade policies. Hurricane Mitch destroyed much of its Honduran and Guatemalan operations at the end of 1998 and high interest rates made it harder to finance its accumulating debt. Dole, Del Monte and Fyffes had all been much more astute. They had started to acquire bananas from those countries with no tariffs and generous import quotas (Hubbard et al., 2000:12). In addition they diversified. Banana trade accounts for an estimated 35 % of turnover in Dole’s food operations. Other fresh fruit and vegetables, and packaged fruits and juices make up for the other 65 %. Del Monte is the world's leading pineapple producer and a leading melon exporter. Fyffes is also a mixed fruit company, with their banana trade accounting for 25-30 % of its total business. However, Lindner has been a very large contributor to both Democratic and Republican political candidates in the United States. In 1994, Bob Dole (no relation to the banana company Dole) asked the United States Trade Representative (USTR) to investigate the EU’s restrictive trade practices and to impose tariffs in retaliation. Eventually in early 1999 the USTR imposed 100% tariffs on several dozen European imports. Pressured by Lindner and his supporters, the US government launched a trade war over bananas even though the US does not export bananas and Chiquita employs no American production workers. The impact of the multinational companies on the banana sector in Ecuador 29 Jon Hellin and Sophie Higman 8.2 Sacrificed on the altar of WTO compatibility? Chiquita and to a lesser degree the other traditional exporting companies’ efforts have been rewarded handsomely. A new agreement has been reached between the EU and US with the allocation of licenses to fill quotas based on trade volumes between 1994 and 1996. The new regime strengthens those who used licences under their own name rather than those, like Dole, who had developed their operations purchasing licences from ‘secondary importers’ and ripeners. Dole is crying foul because its efforts to diversify the source of its bananas and branch out into other lines of fruit, will count for little in the next five years, while Chiquita will be able to reverse its declining market share over the past seven years (The Economist, 2001b). Dole and the Ecuadorian government had wanted the EU to choose the ‘first-come, first-served’ regime in which quotas would not have depended on past performance (El Commercio, 2000). Being more competitive than other countries, Ecuador would have benefited handsomely from the first-come, first-served arrangement. However, the new system is still good news for Ecuador. Under the old rules and with a country quota (see Annex 1), Ecuador, Costa Rica and Colombia had a guaranteed and roughly equal share of the lucrative EU market. In 2000 each country exported to the EU approximately 600,000 tonnes even though, at 4 million tonnes per annum, Ecuador’s world-wide exports figures are twice as large each of its two main Latin American Competitors (Graph 3). Country quotas have now been abolished. As a result there will be a tendency for operators to seek the cheapest bananas available on the world market. As Figure 1 demonstrates, Ecuador produces the cheapest bananas and will benefit from the new rules. Whilst unfettered access to the EU market still remains elusive, Ecuador has also been mollified by the EU announcing its intention to introduce a first-come first-served system after 2006. Figure 1 Banana production costs in US$ (from Chambron, 2000) The impact of the multinational companies on the banana sector in Ecuador 30 Jon Hellin and Sophie Higman Total banana gross exports and exports to the European Union in 1998. Source: FAO Statistics 4500 4000 3500 3000 Thousands of tonnes 2500 Total exports Exports to Europe 2000 1500 1000 500 0 Ecuador Colombia Costa Rica Country The EU has put in place some measures to try and ensure that only genuine banana traders can get licences, but in so doing has jeopardised the future of smaller non-traditional operators, such as those who buy from independent producers and those who trade in fair trade labelled and organic bananas. The distribution of licences has been organised so that 83 % go to 'traditional operators', which in the 1994-96 reference period were principally the large banana companies, and 17 % to 'non-traditional operators'. The reality is that a ‘non- traditional” operator can only be registered as such if it can prove former imports of bananas. This means the market is now totally closed. There will be no new entrance until after 2006. In addition a non-traditional importer has the right to apply for a maximum of 12.5 % of the licenses available. If the total of the applications from exceeds 100 % of the available quota, all applications are reduced by the same factor. To date, none of the fair trade operators has actually gone out of business as a result of the new regime but there is little or no room to grow. The main losers will be the independent producers and traders who have built up their business since the mid-1990s, in particular the smaller players who have built up trade in organic and fair trade certified bananas. According to the UK-based NGO Banana link, Fair trade bananas have been sacrificed on the altar of WTO compatibility. While Ecuador is likely to benefit from the new arrangement, it will be those who are tied into the banana companies’ marketing structures who will benefit most. Independent producers like the Cumandá farmers are not favoured by the new rules. The impact of the multinational companies on the banana sector in Ecuador 31 Jon Hellin and Sophie Higman 9 Policy changes: Amending the rules of the game 9.1 The need for additional support The Cumandá farmers and the Cañarte family clearly illustrate how much can be achieved when farmers have a vision and take the initiative to fulfil this vision. What is lacking is the policies that support these initiatives. The new banana regime in the EU is an improvement on Regulation 404/93 but fundamental changes are still needed if smallholder producers of fair trade and organic bananas are going to prosper. Whilst CONABAN is adamant that smallholder producers can benefit from the booming banana sector in Ecuador, for reasons of economies of scale, it argues that the ideal farm size is 70-100 ha. With this the producer can have packing sheds and justify the costs of installing funiculars and irrigation. A tariff and licence-free system governing banana imports into the EU would, in theory, be better than the current regime, but to be truly competitive farmer associations in Ecuador and elsewhere need (at least initially) technical and marketing assistance. The existence of a market per se is not sufficient. The experience of banana associations in Bolivia illustrate the type of assistance that is needed (Box 8). Box 8 Support for banana farmer associations in the Chapare, Bolivia Bananas have traditionally been grown in the Chapare, for the local market. Since 1991, and supported by the United Stages Agency for International Development (USAID), commercial varieties for the external market have been introduced. Those farmers who have benefited most from the introduction of new banana varieties, tend to be members of a handful of farmer associations who have managed to secure a niche in the export market, predominantly to neighbouring Argentina. This has been achieved through: · Considerable technical advice on growing high quality bananas · Training in administration, accounting and marketing · Substantial assistance in infrastructure, such as packing sheds, wells and cable lines. Another feature is that farmers have consolidated individual 10-15 ha holdings to form large blocks of over 100 ha. Some degree of economy of scale is achieved and the large blocks also facilitate control of sigatoka negra, which is most effectively done by aerial spraying. There are three banana export companies in the Chapare. In addition to having their own plantations, the companies buy bananas from eight USAID-supported farmer associations. USAID encourages this purchase by paying the companies a six-month start-up incentive of US$ 0.25 per box of association-produced bananas. The largest export market is Argentina. The impact of the multinational companies on the banana sector in Ecuador 32 Jon Hellin and Sophie Higman Although Argentina imports approximately 15 million boxes of bananas each year, at the moment less than 1 % is supplied by Bolivia. A development specialist contends that more farmers in the Chapare can take advantage of market opportunities if they follow the example of the more advanced banana associations and move away from atomised farm plots of a few hectares towards larger consolidated holdings. By consolidating the agricultural activities of dispersed farmers into production and marketing centres, the farmers could reduce their costs through shared equipment and volume buying of agricultural inputs, and justify the expense of a permanent staff of administrators and marketers. For this to happen, outside assistance is initially required. 9.2 Thinking the unthinkable It is ironic that whilst diversity is a feature of other world commodities such as coffee, the world banana trade still focuses almost exclusively on the Cavendish variety. An independent banana importer in the UK stresses that supermarkets in the UK are interested in marketing other banana varieties. One of the problems is that the banana companies have such a stranglehold over world trade that diversification is difficult. The independent importer’s argument is that the exporting companies benefit from dealing with one banana variety; from a marketing perspective, the system is almost perfect. For example, a boat off the Central American Atlantic coast line (with bananas originating from Honduras, Costa Rica, Colombia Panama or Ecuador) is carrying a product that can simultaneously be sold in Europe or the US. At the last moment, the exporting company can divert the boat to the US coastline or Hamburg/Rotterdam at the last moment. Another obstacle to diversification is that the entire process of harvesting, transporting and subsequently ripening bananas has been developed for the Cavendish variety. Research and development would be needed to identify the necessary modifications to this process in order to ensure that other varieties of banana arrive on supermarket shelves in an optimum condition. With the current system operating as it does, there is little incentive for the exporting companies to invest financial resources in exploring the market potential of other banana varieties. Increasing banana diversity into the equation would make the entire marketing that much more complicated. Perhaps it is time to encourage consumers to complicate the process and seek sources of ‘alternative’ banana varieties from the myriad of smallholder producers found throughout the developing world. Thinking the unthinkable takes imagination. There are some extraordinary EU rules and regulations that seemingly serve no purpose at all. One of the complaints of the oritos producers in Cumandá is that there is no market for the single bananas that inevitably accumulate as the clusters are prepared for packing. The same independent banana importer in the UK explains that it is prohibited to import clusters of green oritos with fewer than four fruits per cluster into the EU (as such it is illegal to import single green bananas). The impact of the multinational companies on the banana sector in Ecuador 33 Jon Hellin and Sophie Higman It is not, however, illegal to sell single bananas within the EU once they have been ripened! Certainly farmers like those in Cumandá would benefit from a change in the rules. Single oritos could be imported into the EU and used in baby food or coated in fair trade chocolate ice-cream and sold in supermarkets. As it happens some Ecuadorian producers do sell single oritos to the US; the destination is the US army. The difficult is that the plight of smallholder farmer associations in Ecuador can not be separated from the issue of banana production in the Caribbean. 9.3 Alternatives to banana production in the Caribbean? Bananas used to provide the major export revenue of the Caribbean: banana exports used to make up almost half of all export earnings in the Windward Islands. This dependence goes back to the early 1950s, when the islands were British colonies. Throughout the protracted banana dispute and unable to compete with the cheaper dollar bananas, Caribbean banana exports to the EU have declined significantly despite preferential treatment under Regulation 404/93. Caribbean banana producers have been leaving the industry in large numbers. Support for the Caribbean producers was not exclusively via Resolution 404/93. In order to maintain the advantage of ACP banana producing countries, the EU adopted Council Regulations 2686/94 and 2320/96. The approach was to regard all ACP banana exporting countries as potentially competitive without protection (i.e. the envisaged situation post 2006). EU assistance was intended to achieve this by closing the competitiveness gaps with Latin American exporters. However, it is highly unlikely that all ACP banana exporters are going to survive in an open European market. Only the Ivory Coast and Cameroon have any realistic possibility of competing with countries such as Ecuador (Hubbard et al, 2000b:xi). The salutary reality is that the majority of the ACP countries did not even fill their tariff free EU quota under Regulation 404/93. Among the ACP exporters, only Cameroon, Ivory Coast and Belize delivered their quota. Suriname, the Windward Islands, Jamaica, Cape Verde, Somalia and Madagascar never fulfilled their quotas in the 1990s. Jamaican producers actually receive a FOB price of approximately $US10 per 18 kg box. Some of this is simply a transfer from the sale of about 30% of it tariff free quota (Hubbard et al., 2000: Annex A). The Jamaican banana industry aims to be profitable with a FOB price of US$7.5 - 8 per 18 kg box provided countries like Costa Rica and Ecuador continue to face a tariff rate of 75 Euro/tonne. This amounts to a 20-25% reduction in costs. However, if the 75 Euro/tonne tariff against non-ACP producers is abolished (as envisaged after 2006), the Jamaican banana industry would have to reduce costs by 40 % in order to be competitive. Realistically, this is beyond the means of most producers. There is a danger that investments, such as irrigation and drainage, designed to make ACP banana production more competitive, for example in the Windward Islands, will be wasted The impact of the multinational companies on the banana sector in Ecuador 34 Jon Hellin and Sophie Higman when markets do not materialise. In countries such as the Windward Islands and Jamaica where the banana sector is unlikely ever to be competitive, an alternative approach is to direct assistance to replacement activities rather than to the banana sector (Hubbard et al., 2000:14). The challenge for the EU is that there are few clear models and little experience to date of alternative income generation for those displaced from the banana export industry (Hubbard et al., 2000b:59). Although in a different context, recent experiences in the Andean region, where coca eradication and alternative development programmes have been implemented, demonstrate the difficulties of identifying viable alternatives (Hellin and Higman, 2000; Hellin, 2001). Ironically, there are signs that Caribbean farmers have ‘discovered’ an alternative to growing bananas. This alternative grows well in the hot and humid conditions found on many of the islands and it can be very profitable. It is also illegal. Reacting to the supply and demand rules of the free market, Caribbean farmers are beginning to grow marijuana in ever greater quantities. The Caribbean is also a very convenient transit point for those smuggling cocaine from South America to the US. The temptation to get involved in the cocaine supply chain may prove irresistible for those Caribbean producers whose livelihoods used to depend on banana production. 9.4 Exerting pressure: The need for an enabling policy environment In the current political and economic climate it is unlikely that official and overt support (at the governmental or European level) for organic and fair trade producers will be possible. Opponents consider any link between social and environmental performance and market access as a ‘protectionist trick’ to ward off competition from imports from low production cost countries (FAO, 2000). As with the objections to Regulation 404/93, the multinational banana companies will defend strenuously their share of the market. Further reform of EU import regulations towards the creation of a real level playing field, although not perfect, would (in theory) be better for the smallholder farmer associations than the current situation. Genuine free trade backed up by active consumer demand may tilt the balance partly in favour of the farmer associations world-wide who produce bananas for the organic and fair trade markets. For example, Chiquita used to supply bananas to Sainsburys in the UK. Consumers voiced their anger at the stand taken by Chiquita vis-à-vis Regulation 404/93 and the EU’s support of Windward Island banana producers. The supermarket received just over 200 complaint letters. This was enough to concern the management. Chiquita was dropped as the banana supplier. Bananas are now supplied by a company that also sells fair trade bananas from the Dominican Republic. However, even if smallholder banana producers were able to compete on a level playing field, they would still need the type of technical, accounting and marketing assistance that was so critical to the success of some of the banana associations in Bolivia (see Box 8). Hence, while much depends on there being a demand for fair trade and organic bananas (with consumers The impact of the multinational companies on the banana sector in Ecuador 35 Jon Hellin and Sophie Higman prepared to pay a premium), it is not enough. The fundamental problem is that the current policy framework provided by the WTO prevents precisely the type of assistance that smallholder farmers need. Article iii.4 of the WTO prohibits any discrimination between identical products on the basis of the way in which they are produced or processed. In sharp contrast to the rules currently governing world trade, an enabling policy environment is needed, one in which carefully targeted assistance can be directed at smallholder farmer associations. With respect to the EU banana regime, what is needed is an institutionalisation of the principles (and practice) of fair trade. Pressure for such change, prior to a revision of the EU banana regime in 2006, is already being exerted by organisations such as FLO, Banana Link and EUROBAN (a coalition of trade unions and NGOs that work to support sustainable production and trade in bananas in most European countries). Without major adjustments to the policy framework, farmer associations such as those in Cumandá are unlikely to be able to prosper in a market place dominated by Chiquita, Dole and Noboa. The impact of the multinational companies on the banana sector in Ecuador 36 Jon Hellin and Sophie Higman References Barlett, D.L. and Steele, J.B. 2000. How to become a top banana. Time Magazine 155(5). Brown, O., Charvériat, C. and Eagleton, D. 2001. The Coffee Market – A Background Study (revised draft 01/01). Oxfam, Oxford, UK. 42 pp. Chambron A-C and Smith, A. 1998. Bananas: Paradise or jungle. EFTA Fair Trade Yearbook, 1997. Chambron, A-C. 2000. Straightening the bent world of the banana. http://www.bananalink.org.uk/trade/btrade.htm Chambron, A-C. 1999. Bananas: The TNC’s "Green Gold". In: Hungry for power: The impact of transnational corporations on food security. UK Food Group, pp. 46-65. El Commercio. 2000. La pelea bananera es entre dos. El Commercio (Ecuador) November 7, 2000. FAO. 1999. The impact of banana supply and demand changes on income, employment and food security. Intergovernmental group on bananas and on tropical fruits. http://www.fao.org/docrep/meeting/X1390E.htm. FAO. 1999b. The market for ‘organic’ and ‘fair trade’ bananas. Intergovernmental group on bananas and on tropical fruits. http://www.fao.org/docrep/meeting/X1149E.htm. FAO. 2000. Report of the ad-hoc meeting on socially and environmentally responsible banana production and trade held in March 2000 in Rome. Glover, D. 1983. Contract farming and the transnationals. PhD dissertation, the University of Toronto, 446 pp. Hellin, J. 2001. Coca eradication in the Andes: Lessons from Bolivia. In Capitalism, Nature, Socialism, 12(2), pp. 139-157. Hellin, J. 2001b. Banana farmer with a bunch of ideas. The Guardian Weekly 164(25). 14 June 2001 pp. 20. Hellin, J. and Higman, S. 2000. Substituting alternative crops for coca: a viable alternative for farmers? In Appropriate Technology 27(4), pp. 10-13. Hellin, J. and Higman, S. 2001. Competing in the market: Farmers need new skills. In Appropriate Technology 28 (2), pp. 5-7. Hubbard, M. Herbert, A.; de la Touche, Y.R. 2000. Country report on assistance to Jamaica – Evaluation of EU assistance to ACP banana producers. Eva-EU Association, 41 pp. Hubbard, M. Herbert, A.; de la Touche, Y.R. 2000b. Final report – Evaluation of EU assistance to ACP banana producers. Eva-EU Association, 67 pp. Liddell, I. 2000. Unpeeling the Banana Trade. The Fairtrade Foundation. Stern, A.J. 1999. Shrimps, bananas and mangroves: A dispute resolved. The Environmentalist 19(4), pp. 317-323. The impact of the multinational companies on the banana sector in Ecuador 37 Jon Hellin and Sophie Higman Striffler, S. 1999. Wedded to work: Class struggles and gendered identities in the restructuring of the Ecuadorian banana industry. Identities – Global Studies in Culture and Power 6(1), pp. 91-120. The Economist. 2001. Bananas: Fruit suit. The Economist, February 3 2001 The Economist. 2001b. A fruity peace. The Economist, April 19 2001. van de Kasteele, A. 1998. The Banana Chain: The macro economics of the Banana Trade http://www.bananalink.org.uk/trade/btrade.htm Wunder, S. 2001. Ecuador Goes Bananas: Incremental Technological Change and Forest Loss. The impact of the multinational companies on the banana sector in Ecuador 38 Jon Hellin and Sophie Higman Annex 1 The European Union and banana imports The authors are very grateful to Anne-Claire Chambron (EUROBAN) and Alistair Smith (Banana Link) for their assistance in trying to understand the intricacies of the European Union’s policies vis-à-vis banana imports. The third section of this annex (‘Resolution’ of the banana dispute) is almost entirely based on a report for the EUROBAN Secretariat by Anne- Claire Chambron and Rudi Pfeifer (EU import regime for bananas: Impact of the July 2001 reform on market operators – 1st draft) Regulation 404/93 The fourth Lomé Convention was signed at the end of 1989 and included a ‘Banana Protocol’. The protocol gave special concessions to ACP countries and stated that no ACP country should, as a consequence of the establishment of the Single European Market, be placed in a less favourable position with respect to banana exports to the European Union. Subsequently Regulation 404/93 was adopted . It involved a combination of tariffs and quotas. · European-produced bananas formed a special category whereby they were not subject to any customs duties. However, a ceiling of 854,000 tonnes per annum was placed on the production level and quantities exceeding the quota were subject to a levy. · ACPxiii bananas were also be imported tariff-free up to 857,700 tonnes per annum. A levy of 750 ECU per tonne was imposed when the quota was exceeded (see below). · The Regulation also included provisions for non-traditional ACP bananas (bananas that are produced in ACP countries which were not traditionally supplying the EU e.g. the Dominican Republic or Ghana, together with ACP bananas that come on top of the fixed 857,7000 tonnes quota), and the dollar bananas. The tariff quota was set at 2,000,000 tonnes and was duty-free for non-traditional ACP countries and with a tariff of 100 ECU per tonne for the dollar bananas. Quantities above the 2,000,000 tonne quota were subjected to a tariff of 750 ECU/tonne for ACP suppliers and 850 ECU/tonne for the dollar bananas. The dollar and non-traditional ACP banana imports to the EU had to be matched with an import licence. An allocation system based on the historical market shares of established parties applied to the distribution of the dollar quota among the operators. Licences were allocated according to three categories: Category A: 66.5% for traditional dollar operators; Category B: 30% for traditional EU or ACP operators; Category C: 3.5% for new operators (since 1992). Categories A and B were then subdivided into three operators' categories: primary importers, secondary importers and ripeners. Each company received a number of import licences, after calculations by Brussels, for its market shares. The impact of the multinational companies on the banana sector in Ecuador 39 Jon Hellin and Sophie Higman The complex system of allocation was meant to make up for the difference of production costs between ACP and dollar producers. ACP operators paid about 9-10 US$ per box for Caribbean bananas while dollar bananas were valued at $3.5-5 per box. However, the licenses to import could be sold or leased. The Category B licences distributed to ACP operators allowed them to obtain a quota rent on the associated imports of dollar bananas into the EU i.e. they were able to lease their licences to dollar operators. This quota rent was then available to cross-subsidise imports of ACP bananas. The system resulted in an active trade in dollar licenses (Chambron, 1999:57). The Category B licenses also encouraged dollar banana companies to invest in ACP countries (Dole took the lead in this). Modifications of Regulation 404/93: Trying (and failing) to appease the critics Regulation 404/93 was modified during the 1990s. The 2,000,000 tonne quota was increased to 2,553,000 tonnes and the within quota tariff charged on dollar bananas was reduced from 100 to 75 ECU/tonne. In order to try and appease some of its critics, notably some of the Latin America banana-exporting countries and the international banana companies, the EU established the Framework Agreement which stipulated that 49.4% of the new quota was country specific and was divided as follows: Costa Rica (23.4%), Colombia (21.0%), Nicaragua (3.0%), and Venezuela (2.0%). As a non-members of GATT, Ecuador and Honduras could not join the signatories of the Framework Agreement that guaranteed the above four Latin American countries a specific volume of exports to the EU. The US companies also still strongly objected to the amended regulation because it favoured European-based companies (especially the allocation of B category licenses). The quota system established by Regulation 404/93 was based on traders' market shares and gave few market opportunities to newcomers like Agrofair. Independent national producers could no longer achieve direct access to the European market because of the lack of import licenses. Between 1993 and 1996, the average quantity allocated to newcomers was 50 tonnes per operator per year; a quantity far too small to make the import profitable (Chambron and Smith, 1998). The system removes incentive for market innovation. The licences required for these Max Havelaar labelled fair trade bananas could only be secured by engaging in close co-operation with a French banana company that had greater access to the EU market. The cost of buying or leasing licences increased the cost of fair trade bananas within Europe. Regulation 404/93 was challenged by the US along with Ecuador, Guatemala, Honduras, Panama and Mexico. In 1997, a panel established by the Dispute Settlement Body (DSB) of the World Trade Organisation (WTO) found that some aspects of Regulation 404/93 were in violation of GATT 1994. The EU initiated a review of regulation 404/93. Changes were proposed in Regulation 2362/98 and came into force on 1 January 1999. These changes included a revision of the Framework Agreement so that the individual country shares of the 2,553,000 tonnes tariff quota was allocated to countries having at least 10 % of the market share during the reference periodxiv. Four countries received almost 91.0 per cent of the tariff quota as follows: Ecuador (26.17%), Costa Rica (25.91%), Colombia (23.03%) and Panama The impact of the multinational companies on the banana sector in Ecuador 40 Jon Hellin and Sophie Higman (15.76%). The EU also proposed abolishing the A, B and C categories for the overall tariff quota and replacing them with a new system based on historic trade flows. ‘Traditional’xv operators would have access to 92 percent of the tariff quota and the traditional ACP quantities, while ‘newcomers’xvi would have the right to the remaining 8 percent. This system was also found to break WTO rules and the US imposed trade sanctions at an annual value of US$ 191 million. ‘Resolution’ of the banana dispute: Who gains and who loses? Summary of the proposed changes In April 2001, the EU and US settled the banana dispute. EU Regulations 216/2001 and 896/2001 (backed by the EU-US agreement passed on 11/04/01 and the Ecuadorian agreement passed on 30/04/01) signal the rejection of the 'first-come first-served’ system and opt for a method of license allocation based on trade volumes between 1994 and 1996. The new transitional regime will be implemented in two phases: from 1st July to 31st December 2001, and from 1st January 2002 to 31st December 2005. The main characteristics of the new EU regime are the following § There are three tariff quotas: A (2,200,000 tonnes), B (353 000 tonnes) and C (850,000 tonnes). All three quotas are now opened to all operators and all origins. § All remaining country quotas in A and B are removed. § Quotas A and B will be managed together and the tariff rate is 75 Euro/tonne § Bananas imported under quota C are subjected to a tariff of 300 Euro/tonne although ACP bananas will be exempt from this tariff. § Licences are distributed between traditional operators (83%) and non-traditional operators (the former ‘newcomers’ whose share is increased from 8% to 17%) § Within the ‘traditional operators’ category, licences are distributed on the basis of ‘historical market shares’. The reference period is 1994-1996 and applies to ‘primary’ importers only rather than secondary importers and ripeners. During this reference period, the traditional operators were predominantly the multinational traders. § Non-traditional operators are allocated licences on the basis of ‘simultaneous examination’. New conditions are imposed to qualify under this category. § In 2004 at the latest, A&B imports in total will be increased to 2,653,000 tonnes (100,000 tonnes will be transferred from quota C) and C will only be available to ACP imports, tariff-free. Importantly, this second phase has to be approved by both the Council of Ministers and the European Parliament. § The new regime is temporary and in theory it will be replaced in January 2006 by a flat- rate tariff, i.e. an import regime where all quotas and licences are removed and one single tariff is applied to all non-ACP imports. The impact of the multinational companies on the banana sector in Ecuador 41 Jon Hellin and Sophie Higman Traditional operators There are three major changes for the traditional operators. Firstly, the reference period has been set back by two years (before the new rules came into force, licenses for the first quarter of 2001 had been allocated on the basis of import figures between 1996 and 1998). Secondly, licences are now allocated to primary importers only rather than to ripeners and secondary importers. Thirdly, country quotas for Ecuador, Colombia, Costa Rica and Panama have been removed The new regulations have reduced the scope for trading licences among operators and have strengthened the position of primary importers on the market, i.e. those who imported f.o.b under the previous regime from producers directly, at the expense of ‘secondary importers’ and ripeners. It is unclear which companies have been granted licenses under the category of traditional operators. Among the ‘primary importers’, the new regime strengthens those who used licences under their own name rather than those, like Dole, who had developed their operations purchasing licences from ‘secondary importers’ and ripeners. The main beneficiary of the new EU regime will be Chiquita. Chiquita believes that they will be able to regain some market shares over Dole and that its exports will increase from the current 25 million boxes per annum to about 35 million or so in 2002. The reform is a blow to all operators who benefited from the reform of the regime in 1995 and entered the market or who significantly consolidated their operations. These include: · Independent national producer groups in Costa Rica and Columbia (and to a lesser extent in Panama), which took advantage of the previous regime to develop trade relationship with ‘secondary importers’, including some supermarkets and ripeners in Europe, thus bypassing the multinationals. · In Europe, importers and ripeners who have bought or leased licences to build or expand their businesses since 1996 (e.g. Pratts and Mack Multiples who imported directly from national producers in Costa Rica and the Dominican Republic and who will lose out to ‘primary importers’). European importers now receive licences without any indication of origin on it, which means that they are able to import from any region they like. Ecuador had favoured the first-come first-serve system and despite initial strong protests and their threat to take the case back to the WTO, an "Understanding" between Ecuador and the EU was signed on 30th April. Ecuador will still benefit from the new regulation. One of the major consequences of the end of country quotas will be an increasing tendency for operators to seek the cheapest bananas available on the world market. Production costs in Ecuador are the lowest in Latin America, and it will benefit from the Regulation at the expense of Costa Rica, Colombia and Panama. Ecuador’s position will be further strengthened as the deadline of 2006 and an open market draws nearer. Companies are The impact of the multinational companies on the banana sector in Ecuador 42 Jon Hellin and Sophie Higman already investing in ‘cheap labour’ countries such as Brazil, Indonesia and the Philippines. The scenario of a rapid ‘race to the bottom', as would have occurred with the first come first serve system was avoided, but the race was only postponed by a few years. Non-traditional operators The new rules jeopardise the future of smaller non-traditional operators, such as those who buy from independent producers and those who trade in fair trade labelled and organic bananas. The ‘non-traditional operators’ category (the former ‘newcomer’ category) is increased to 17% of the total quota supposedly “to allow new operators to enter this import trade, thereby encouraging competition”, as EC-regulation 896/2001 says in its preamble point (6) (EU, 2001). The reality is that a “non-traditional” operator can only be registered as such if it can prove former imports of bananas. This means the market is now totally closed. There will be no new entrance until after 2006. The new conditions imposed on non- traditional importers to qualify are as follow: · Non-traditional importers must prove that they have been importing at least 1.2 million Euro worth of bananas in the two year preceding registration (before it could be any fresh fruit or vegetables). The following year, they will have to prove that they imported at least 50 % of the quantities they were allocated the year before. · Importers have to lodge a security of 150 Euro/tonne for the quantities applied. Although this money is refundable, it is a large capital sum which smaller operators have difficulties mobilising. Banana traders competing for the 17% of 'non-traditional' licences (among them fair trade operators) have had to frantically try and form consortia in order to meet the EU’s criteria for application (minimum volume of banana business required is 1.2 million Euros per year). A great number of new companies were formed before the deadline for registration. These companies included former newcomers and former traditional operators who were not “primary importers” in 1994-1996 (and who were therefore unable to qualify for the 83% category). A non-traditional importer has the right to apply for a maximum of 12.5 % of the total non- traditional quantities available in quotas A/B and C. Applications are processed once a year and if the total of the applications exceeds 100 % of the available quota, all applications are reduced by the same factor (e.g. for the second half of 2001, the allocation in tariff quotas A/B was less than 5 % of volumes applied for). To date, none of the fair trade operators has actually gone out of business as a result of the new regime. AGROFAIR was allocated enough A/B licences (9,200 boxes/week) to cover current levels of dollar fair trade bananas but sees little or no room to grow. The impact of the multinational companies on the banana sector in Ecuador 43 Jon Hellin and Sophie Higman Other independent fair trade importers have done less well. Pratts overall got enough licences, but not in the right places (i.e. only 50-60% of what they need in A&B, but more C licences than they need for the Dominican Republic), whilst other independents received "about half what they needed" in total. As a result, current levels of fair trade are sustainable, but rapid growth looks difficult. Come the end of 2005, Caribbean banana producers will face a harsh reality. An open market with little external regulation means that importers will buy from the most competitive countries, whilst the absence of an international commodity agreement will make it easy for international banana companies to set the rules of the game and play exporting countries against one another in an attempt to get the ‘best’ possible export conditions (this may well translate into the worst possible conditions for workers and governments in these countries). Ecuador is likely to benefit further from the proposed post-2005 arrangements. However, as is the case now, it will be those who are tied into the banana companies’ marketing structures who will benefit most. Independent Ecuadorian producers in an on-going David-and-Goliath struggle to secure niches in the European markets. The impact of the multinational companies on the banana sector in Ecuador 44 Jon Hellin and Sophie Higman Annex 2 Terms of reference The impact of the multinational companies on the banana sector in Ecuador A) Importance of banana production in farmers livelihoods This section should focus on a specific region (if relevant) and should primarily be based on primary sources (interviews with local co-operatives and small producers). Particularly important are concrete examples illustrating the importance of banana in farmers livelihoods: · number/location of small farmers/rural workers (rough estimates) · numbers according to size of holdings, income (according to size of holdings if possible) · farm-gate prices · banana and the local environment (negative or positive factors in protecting local ecosystems) · human interest quotes about the role of banana in livelihoods · role and effectiveness of small producers’ associations B) Impact of the multinational companies on small farmers · Overview of the banana production in Ecuador · Over of the banana supply chain: number of intermediaries, number/name of multinational companies/subsidiaries, market share, degree of vertical integration, destination of bananas · Buying practices: farm-gate prices, type of contract and relationship with farmers (direct, indirect, arms-length, exploitative, etc.), quality requirements, input use requirements, etc. · Small farmer’s share of the export price and the retail price of Ecuadorian bananas · Impact of this system on small farmers’ livelihoods: income (level/stability), health, other, production technology, etc. C) Policy recommendations This section will propose policy changes to improve small banana farmers’ welfare, including, for instance, business practices of multinational banana companies, monitoring of competition between banana buyers, strengthening of farmers’ associations, etc. The impact of the multinational companies on the banana sector in Ecuador 45 Jon Hellin and Sophie Higman i The traditional ACP countries are Belize, Cameroon, Cape Verde, Côte d’Ivoire, Dominica, Grenada, Madagascar, Jamaica, Somalia, St. Lucia, St. Vincent and the Grenadines, and Suriname. The non- traditional ACP countries include Ghana and the Dominican Republic. ii While most contracts require the producers to follow the company’s technical advice, the same company is often absolved of all responsibility for the results (Glover, 1983:429). iii Contrary to the image of being entirely dominated by the multinational banana republics, contract farming has also been a feature of banana production in Central America since the 19th century, although initially the companies did not offer technical advice (Glover, 1983:250). iv The Ecuadorian government introduced a minimum price of $2.90 per box on January 1st 2001. Once again few exporting companies are paying producers this amount. v Non-payment of the minimum price is not a recent development. In the early 1980s, Glover (1983:366) questioned the degree to which Ecuadorian banana exporters observed the minimum price. vi This problem is not confined to Ecuador, see for example van de Kasteele (1998). vii An independent banana importer in the UK commented that shipping is one of the key factors in determining the success of otherwise of securing a niche in the alternative markets. viii In this context, the problems facing banana producers are no different to those confronting coffee growers who are likewise trying to secure a niche in the organic and fair trade (and gourmet) markets. ix Andrés Arata of CONABAN argues that Dole sells a chemical called Tilt which is used to control sigatoka negra. In Ecuador it costs US$48 litre while in Central America it costs US$ 28/litre. Arata argues that Ecuadorian banana producers are essentially subsidising production on Dole-owned plantation in Central America. The authors of this report are unable to confirm this. x The Cañartes commented that the administrative procedures involved in seeking certification by the UK-based Soil Association were dauntingly complex. xi An independent banana importer in the UK comments that this is a reflection of a wider problem in which conventional science has failed to recognise and acknowledge that organic production is not some utopian dream. xii The Max Havelaar Foundation argues that in Switzerland, no licence is required to import bananas, and that this is the reason why prices of fair trade bananas are similar to conventional ones (FAO, 1999b). xiii The traditional ACP countries are Belize, Cameroon, Cape Verde, Côte d’Ivoire, Dominica, Grenada, Madagascar, Jamaica, Somalia, St. Lucia, St. Vincent and the Grenadines, and Suriname. xiv The years 1994, 1995 and 1996 are used as a reference period to determine the import rights of individual operators. xv A traditional operator must have imported at least 100 tonnes of bananas (or 20 tonnes in the case of bananas with a length of 10 cm or less) from a third country and/or ACP country for marketing in the EU during the reference period 1994-1996. xvi A newcomer must have been engaged in importing fresh fruits and vegetables with a declared custom value of at least ECU 400,000 during one of the three years preceding the year in respect of which registration was sought.
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