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									        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
            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



 Thousands of tonnes

                       8000                                                                                                  World
                                                                                                                             Latin America
                                                                                                                             Far East



                               1988        1989      1990     1991     1992          1993   1994   1995      1996     1997

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

                          14000                                                                                             40


                                                                                                                                 Ecuador's percentage of world trade
    Thousands of tonnes




                              0                                                                                             0
                                  1988       1989     1990     1991    1992          1993   1994   1995   1996       1997

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,

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
·     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)
Fertilizers                                                             436                0.182
Plant supporting and bunch                                              834                0.347
Field Administration (3 persons)                                          36               0.015
Irrigation                                                              500                0.208
Nematods Control                                                        228                0.095
Sigatoka desease Control                                                636                0.265
Weed Control                                                              78               0.033
Insect Control                                                            38               0.016
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
HARVEST                                                                 651                0.271
PACKING                                                                 384                0.160
TRANSPORT                                                               553                0.230
FARM MANAGEMENT                                                         504                0.210
SUB TOTAL                                                                                  0.872
TOTAL                                                                                      2.178

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

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

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

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,

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.
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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




  Thousands of tonnes

                                                                                                                              Total exports
                                                                                                                              Exports to Europe




                                     Ecuador                         Colombia                       Costa Rica

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


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     Association, 41 pp.
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Striffler, S. 1999. Wedded to work: Class struggles and gendered identities in the
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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.
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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

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
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                                    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%

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
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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.
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Annex 2          Terms of reference

The impact of the multinational companies on the banana sector in

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
·    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

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.
  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).
    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).
  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.
  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.
   This problem is not confined to Ecuador, see for example van de Kasteele (1998).
       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.
     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.
  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.
 The Cañartes commented that the administrative procedures involved in seeking certification by the
UK-based Soil Association were dauntingly complex.
 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.
  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,

  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 years 1994, 1995 and 1996 are used as a reference period to determine the import rights of
individual operators.
       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.
  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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