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For training purposes, not an official document - 25 January 2017

Case Study

banana shake

The banana industry in Aspen is facing major challenges and its future is uncertain. The Government is under great pressure to identify policy changes that it may be able to implement in order to raise the international competitiveness of the industry. Increasing competitiveness means improving the ability of Aspen banana producers to compete with their counterparts in other countries. Everything indicates that this would require a major shakeup of Aspen’s banana industry.

The higher productivity of foreign producers and the uncertainty regarding the future of Aspen's preferential trade arrangements have made the last decade very difficult for itsbanana industry. Aspen's banana industry is heavily subsidized. Plans are thus being drawn for a fundamental overhaul of the banana industry with the main objectives of making it internationally competitive and financially selfsustainable. Thispossibly requires obtaining higher prices and revenues and/or reducing costs by, for example, increasing yields in the production and distribution chain.

As Chief Advisor to the Minister of Trade of Aspen, you have been tasked with developing a strategy for restructuring Aspen's banana industry and placing it on a solid footing. An expert team from the Regional Development Bank has provided economic analyses for various policy options. Your task is to advise the Minister on the policy changes that should be adopted, keeping in mind the rights and obligations that Aspen has acquired as a new WTO Member. The Regional Development Bank analyses are attached in Annexes A to H you will also have access to an Excel simulation model to generate your own estimates.

1background

1.1.Aspen is an island country situated in the Caribbean Sea.[1] Aspen has a population of twomillion people.Just over 50%of the population lives in urban areas.Aspen came under the rule of the United Kingdom in 1700 and became an independent state in 1962. The Aspen Constitution is based on the Westminster model. Legislative power is vested in a parliament. Aspen has a legal system based on English common law and an independent judiciary.

1.2.Aspen's average annual growth in income per capita reached more than 4% during the last two decades, well above the average for the Caribbean region. Aspen is a producer of crude petroleum and natural gas and its economy is heavily dependent upon these resources. Agriculture was the mainstay of the economy during colonial times and still plays significant political and social roles. The service sector has become increasingly important in recent years.

1.3.Despite its good past economic performance, Aspen is facing a fragile macroeconomic scenario. The fiscal deficit in 2016was high at around 10% of GDP, when public debt climbed to100% of GDP. Economic growth slowed to 2% in 2015and remained at that level in2016. The slowdown reflects the fall in private investments associated with the drop in foreign direct investment flows and a tighter monetary policy. The latter has induced a gradual but persistent appreciations of the Aspen dollar (ASP$) against both the US dollar and UK pound (Chart 1).

Chart 1. Foreign exchange rates, January 2002 – December 2016

1.4.Aspen acceded to the WTOon 1 January 2017after a process of accession that extended for more than 15 years.

1.5.As part of its effort to join the multilateral trading system, Aspen is undertook important commitments. In the area of trade in goods, for example, at the end of the implementation period, the average tariff ceiling for all imported products would be 10%, down from the average 25% that appliedbeforeaccession. In agriculture, the average tariff ceilings would be 20% at the end of the implementation period and 40% on Aspen's accession.

1.6.The issue of domestic agricultural support is a priority issue in Aspen. As a result of the negotiation process, Aspen made a commitment to reduce the Aggregate Measure of Support by half over a period of six years after accession. The most recent communication from Aspen to its WTO working party is attached (see attachment 1, "document" WT/ACC/ASP/17/Rev.2[2]). Aspen also made a commitment not to grant agricultural export subsidies.

1.7.As a WTO member, Aspen will adhere to the provisions of the SPS Agreement. Reaching agreement on how it will implement this agreement was challenging because of Aspen's practice of using rigid SPS requirements for imported animal and plant products.

1.8.The scope of intellectual property rights (IPR) protection was another pivotal issue in some of Aspen's bilateral negotiations. Aspen made commitments to improve its IPR regime and to meet its obligations under the TRIPS agreement with immediate effect upon accession.

1.9.Aspen is a member of the African, Caribbean and Pacific Group of States (ACP). It is also a member of the World Organisation for Animal Health (OIE) and the Codex Alimentarius, and a contracting party to the International Plant Protection Convention (IPPC). Aspen is a member of WIPO, and a signatory to the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works; it is not a contracting party to any other WIPOadministered instrument.

2Banana sector

2.1.The banana industry in Aspen employsabout 3,000 farmers. It alsosustains a total of roughly 12,000 additional people. Moreover, other sectors of Aspen's economy benefit indirectly from the banana industry, with jobs directly linked to such activities as the plastic and pallets industry, inputs suppliers and transport companies. Because of its regional spread, the contribution of the banana industry to employment is particularly critical in rural areas. Most of those areas are politically sensitive electoral districts.

2.2.Aspen bananas, when compared to fruit from neighbouring countries in Latin America, as well as some other ACP countries, have been characterized as being high cost and of inconsistent quality. In those countries, producers are able to profitably sell fruit at an f.o.b. price ofUS$0.50 per kilogramme. This is a price that could not sustain the industry in Aspen. Aspen bananas have been able to compete in the EU market only thanks to the protection available there to ACPproducers.

3Biology and production

3.1.All banana production in Aspen involves Cavendish varieties. Cavendish plants grow up to a height of 6 – 8 ft. (1.8 2.4 m). Its shortness makes it stable, windresistant and easier to manage. This, in addition to its fast growth rate, makes it ideal for plantation cultivation.

3.2.Bananas are produced in two distinctly different geographical zones of Aspen. The first zone (Zone 1) includes banana farms located in flat coastal land, with relatively easy access to urban areas, goods roads and commercial ports. The second zone includes farms located in relatively difficult, mountain terrain. This second zone (Zone 2) is relatively distant from urban centres and major ports, and road transport is difficult.

3.3.The productivity of banana farmland in Aspen depends to a significant extent on the availability of irrigation, especially in the dry season. The cost of building and maintaining irrigation and drainage works is significant and such infrastructure is limited and poorly maintained. The resulting lack of irrigation is one of the main contributors to the low yields of banana plantations in Aspen compared with Latin American banana producers. Moreover, inadequate irrigation and drainage infrastructure is a barrier to the use of a highyield variety of banana commercially grown in Latin America.

3.4.Banana plantations in Aspen, like in other banana producers in the Caribbean, are all monocultures, which has made them particularly susceptible to Black Sigatoka (black cercosporiosis). The available scientific evidence indicates that this disease mainly affects banana and plantain plants. The fungus rapidly destroys leaf tissue, thereby adversely affecting the growth of the plant.

Table 1. Banana production and average yields in Aspen, 2002-2016

Year / Production / Yield
(tonnes) / (tonnes/ha)
2002 / 60,580 / 7
2003 / 50,960 / 6
2004 / 78,305 / 9
2005 / 74,727 / 9
2006 / 89,302 / 11
2007 / 73,651 / 9
2008 / 55,468 / 7
2009 / 63,941 / 8
2010 / 55,440 / 7
2011 / 48,761 / 6
2012 / 42,980 / 5
2013 / 45,399 / 5
2014 / 45,739 / 5
2015 / 46,596 / 6
2016 / 58,800 / 7
Average / 59,376 / 7

3.5.Black Sigatokahas severely debilitated Aspen's banana industry, causing significant reductions in leaf area, yield losses of 50% or more, and premature ripening, a serious defect in exported fruit. Black Sigatoka has been particularly difficult to control in the flatland zone, where it has reduced the yield of banana farms to only 75% of the already low yields obtained by producers in the mountain zone. Because of the ravages of this disease, yields in Aspen plantations are amongst the lowest in the Caribbean region.

3.6.As shown in Table 1, banana production volumes are subject to strong annual variations. Because the total planted area has remained constant, production variations have been exclusively due to yield changes. These in turn have resulted from differences in growing conditions from year to year, in particular patterns of rainfall. The latter is a critical variable in banana production in Aspen because the limited availability of irrigation means that most banana production is rainfed.

4exports

4.1.Table 2 shows that Aspen exports a large part of its domestic production, with annual variations largely resulting from the variation in production.

Table 2. Banana domestic consumption and exports in Aspen, 2002-2016

Year / Subsidized domestic consumption / Total domestic consumption (including subsidized) / Exports
(tonnes) / (tonnes) / (tonnes)
2002 / 10,790 / 27,000 / 33,580
2003 / 11,409 / 27,324 / 23,636
2004 / 12,890 / 27,652 / 50,653
2005 / 12,450 / 27,984 / 46,743
2006 / 13,790 / 28,320 / 60,982
2007 / 12,980 / 28,659 / 44,992
2008 / 14,706 / 29,003 / 26,465
2009 / 14,370 / 29,351 / 34,590
2010 / 14,270 / 29,704 / 25,736
2011 / 14,980 / 30,060 / 18,701
2012 / 15,109 / 30,421 / 12,559
2013 / 15,206 / 30,786 / 14,613
2014 / 15,450 / 31,155 / 14,584
2015 / 16,340 / 31,529 / 15,067
2016 / 15,900 / 31,907 / 26,893
Average / 14,043 / 29,390 / 29,986

4.2.As shown in Table 3, international freemarket banana prices (as proxied by the US ports price) have fluctuated widely and frequently with shifts in world supply and demand. Nominal freemarket banana prices generally remained flat during the 1990s, mainly as a result of increasing international competition. However, over the last decade, nominal freemarket prices have trended up, reaching an average of aboutUS$1.00 per kilogramme in 2016.

4.3.Aspen banana exports are priced with reference to the domestic price in the UnitedKingdom, where virtually all of Aspen's banana exports are sold. As shown in Table 3, the nominal UK price has tended to decrease in recent years, due in part to the evolution of the EU import regime. Given the significant appreciation of the Aspen dollar relative to the UKpound (and USdollar), in local currency terms, banana export prices have experienced an even sharper fall in recent years.

4.4.Aspen's production and exports of bananas have been closely related to the opportunities created and maintained under unilateral preferential access to the EU market. As an ACP country, Aspen enjoys dutyfree access to the EU market under an Economic Partnership Agreement signed in 2008. The MFN duty for bananas exported to the EU is set to decline in annual steps from €148per tonne in 2010 to €114 per tonne in 2019. This liberalization of the EU import regime will continue to put downward pressure on banana prices in the UK market.

Table 3. International banana prices, 2002-2016

Year / US ports / UK wholesale / US ports / UK wholesale
US$/kg / US$/kg / ASP$/kg / ASP$/kg
2002 / 0.53 / 0.83 / 0.97 / 1.52
2003 / 0.38 / 0.83 / 0.58 / 1.29
2004 / 0.52 / 0.98 / 0.72 / 1.33
2005 / 0.58 / 1.31 / 0.75 / 1.72
2006 / 0.68 / 1.05 / 0.91 / 1.39
2007 / 0.68 / 1.15 / 0.81 / 1.37
2008 / 0.84 / 1.29 / 1.01 / 1.51
2009 / 0.85 / 1.17 / 1.09 / 1.52
2010 / 0.88 / 1.10 / 0.96 / 1.20
2011 / 0.98 / 1.13 / 0.95 / 1.10
2012 / 0.98 / 1.20 / 0.95 / 1.16
2013 / 0.93 / 1.12 / 0.92 / 1.10
2014 / 0.93 / 1.17 / 0.92 / 1.16
2015 / 0.96 / 1.06 / 0.90 / 1.00
2016 / 1.00 / 0.92 / 0.87 / 0.85
Average (2012-16) / 0.96 / 1.10 / 0.92 / 1.05

5the Aspen Banana COMPANY

5.1.In the early 1990s, the Government of Aspen established the Aspen Banana Company(ABC), which operates under the authority of the Ministry of Agriculture. The ABC's main services are to (i)negotiate marketing and freight arrangements for banana exports, (ii) arrange payments from sales and other trading activities to banana growers, (iii) manage receiving and loading operations, and (iv) supply pesticides, fertilizers and other materials and technical assistance to farmers. TheABC handles all banana exports and the lion's share of domestic sales.

5.2.All farmers interested in producing bananas in Aspen must first obtain a licence from theABC. Banana licences authorize farmers to plant bananas in a given surface. Banana farms are subject to regular physical verifications by ABC personnel to ensure compliance with the surfaces authorized. Since 1998, the ABC has maintained constant the total authorized banana area, at8,400 hectares. Half of this area is located in the flatland zone (Zone 1), with the rest in mountain areas (Zone 2).

5.3.The ABC is the only authorized exporter of Aspen bananas. Banana exports and imports are subject to licences granted by the Ministry of Trade. Export licences are granted automatically to the ABC. Import licences are granted only upon the advice of the ABC.

5.4.A recent report by an external consultant identified several inefficiencies and avoidable losses in the functioning of the ABC, in particular lack of proper storage capacity and high administrative costs, including as regards management of the subsidized banana distribution system (see below). The ABC's Director General strongly opposed these criticisms.

6domestic pricing and consumption

6.1.Given the importance of banana production in social and political terms, the Government has been interested in providing producers with a viableeconomic context, by regulating the internal market. Hence, the ABCis mandated with maintaining a stable banana price for producers.

6.2.Under the poverty reduction plan introduced in Aspen in 1996, the ABC has also been tasked with supplying bananas, which, along with rice, are a staple food in the inhabitants' diet, at a reduced cost for the neediest segments of Aspen's population.

6.3.With this aim, the ABC buys all bananas offered to it by farmers at a predetermined price and then sells the fruit to overseas customers or to needy local consumers at specialized outlets. Needy local consumers are identified by a food card system that entitles them to buy 20kg of bananas per year (subsidized banana distribution system, or SBDS).

6.4.Because growers in Zone 1 (flatland) are relatively close to local consumers, these growers are the natural source of bananas to supply the domestic consumption, either through the SBDS or unsubsidized local consumers. Accordingly, production in Zone 1 first goes to supply the bananas required by the ABC for the SBDS, and next it goes to supply other local consumers. Any production from Zone 1 not sold to domestic consumers then becomes available for export. When production from Zone 1 is insufficient to meet domestic demand, bananas are sourced from Zone 2, with other bananas produced in this zone exported by the ABC.

6.5.Banana growers can sell their production either directly to local consumers or to the ABC through longterm contracts. In turn, during the course of the marketing year the ABC sells a predetermined part of the quantities purchased from local growers in the domestic market to needy consumers, and exports the remaining bananas.

6.6.Table 1 shows that banana production reached 58,800 tonnes in 2016, while Table 2 indicates that the ABC sold 15,900 tonnes to local needyconsumers and exported 26,893 tonnes that same year. Therefore,all in all, the ABC acquired42,793 tonnes from local banana growers in 2016. In addition to the bananas sold by the ABC to needy consumers, growers supplied 16,007 tonnes to other (unsubsidized) domestic consumers. This volume plus the bananas supplied to needy consumers added up to the total domestic consumptionof 31,907 tonnes in 2016.

6.7.The ABC has the statutory right to fix, if it so wishes, the price of fresh bananas at all levels of the supply chain. Using this right, the ABC maintains one minimum "support price" ("producer price"), at which it buys bananas from growers. Since 2002, the ABC has maintained constant the "support price" atASP$1.20/kg.At the time it was set, the "support price" was below export sale prices but over time the"support price" has come to exceed export prices due tothe appreciation of the Aspen dollar and weaker banana prices in the United Kingdom. As a result, calls have been made for the "support price"regime to be revised or abandoned.

6.8.The domestic market price for needy consumers has been fixed at ASP$0.80/kgsince 2002. Other (non-subsidized) domestic consumers have paid in recent years a domestic market price virtually equalto the “support price” offered by the ABC to local banana growers which, as noted, stood at ASP$1.20/kg in 2016.

7cost structure: base case

7.1.The two bananagrowing zones of Aspen have distinct cost structures. The cost structures and other economic conditions prevailing in2016are referred to as the base case situation in the rest of this document. The base casesituation is detailed in the economic analysis in Annex A.

7.2.Note that all simulations in Annexes A to G assume that total domestic banana consumption and the volume required by the SBDS remain constant at the levels of 31,907 tonnes and 15,900 tonnes, respectively, recorded in 2016. This implies that the volume acquired by unsubsidized local consumers from banana growers also remains constant at its 2016 level of 16,007 tonnes. Also note that in order to smooth out cyclical price volatilitythe calculations in the Annexes use average prices over 2012-2016(see Table 3).

7.3.The areas planted in Zone 1 (flatland) and Zone 2 (mountain areas) are identical (4,200 hectares). Nevertheless, as also shown in Annex A, the volume of production in Zone 2 is higher because of the higher yields obtained there. As a result, although onfarm fixed costs per hectare are the same in both zones, producers in Zone 2 have lower fixed costs per kilogramme since they are able to spread such costs over a higher volume. On the other hand, Zone 2 producers have higher onfarm variable costs on account of the higher labour inputs required to produce in a more difficult terrain.

7.4.Bananas produced in Zone 2 also face higher transport costs to markets. Because of this, and as the market price is the same for all bananas, the farmgate price received in Zone 2 is lower than in the flatlands. The net result is that, although the cost structure of banana production is different in the two zones, farmers in both achieve the same poor overall financial results, namely, losses of ASP$0.20/kg.As a result, farmers in Zones 1 and 2 recorded losses of about ASP$5.1 and ASP$6.8 million, respectively.

7.5.As also shown in Annex A, the ABC incurred losses of about ASP$7.9 and ASP$10.4 million handling the bananas produced in Zone 1 and 2, respectively. This resulted from the ABC having acquired 42,793 tonnes from Zone 1 and 2 growers at the official "support price" of ASP$1.20/kg.In addition, the ABC incurred administrative costsamounting to ASP$1.5 million in each of the two zones. On the revenue side, the ABC sold 15,900 tonnes under the SBDS at the price of ASP$0.80/kg in the domestic market, and exported 26,893 tonnes at the f.o.b. price of ASP$0.87/kg.The resulting ABC deficit was made up by direct budgetary transfers from the Ministry of Finance.