January , 2000

Fruits of Thought

Gone Bananas

The news has been uniformly discouraging for those who follow the banana industry. It seems as if every major banana company is announcing the expectation that final 1999 earnings will fall below already depressed estimates. Stock prices are setting new lows.

A Panamanian banana grower bought a chunk of Chiquita stock, and Dole has retained Goldman, Sachs & Co. to explore “strategic alternatives.”

Oh how the mighty have fallen. My family’s produce company once imported virtually every item, but there was no business we fought harder to get into, with less sustained success, than the banana business. My dad had a banana deal some thirty-odd years ago, and he still remembers it as the best business in the world.

In those long gone days, Chiquita was the player, and Chiquita would announce a weekly price. The no-brand bananas such as the ones we were marketing would undercut Chiquita’s price by a buck or so, and we would sell out relatively easily to those outlets that didn’t need the Chiquita brand.

We never had any secret inside information, but the business cycle for bananas was simple to follow: In the early years, Chiquita alone – and eventually a few big players – had access to very cheap ocean transportation, as they operated and mostly owned their own fleet of ships optimized for shipping bananas. This gave Chiquita an insurmountable edge on costs and meant that nobody could really compete effectively.

Chiquita would moderate its import volume to maintain a very profitable price level, so high that smaller producers, even without cheap ocean freight, could ship independently and manage to make a profit. These independent producers would proliferate until they would prove enough of an annoyance that the banana giants would open the spigots and increase banana imports. Prices then would drop, and these thinly capitalized independents would be unable to compete and would likely go out of business or, at least, stop shipping independently to the major western markets. In time the cycle would resume, and banana prices would rise again and create new opportunities for independents.

Something has gone very wrong. It’s not so much that bananas have never been so cheap; it’s that banana prices have never been so low for so long. Even a horrid hurricane seems to have had no impact on banana prices.

A European Union licensing system that has been found in violation of World Trade Organization (WTO) rules has caused some of the damage. This regime guarantees a share of the European market to inferior quality fruit from African, Caribbean and Pacific former colonies of certain European countries. Not only is this directly suppressing sales of Latin American bananas within the EU, but this licensing system leads to the diversion of bananas to other markets such as North America or Asia. This increased supply without increasing demand leads to lower prices worldwide.

Supposedly, the European Union will soon be implementing a WTO-compliant program, which should help, but by itself, any European reform is unlikely to be a panacea for the banana giants. After all, one would expect that limited supplies of top quality bananas allowed into European countries would result in reduced volumes, and in higher prices. But low prices in Europe are pointed to by all the banana companies as a source of their problems.

Problems in Eastern Europe generally, and Russia in particular, have left the banana market reeling. Dole once was selling 5 to 7 percent of its worldwide banana volume in Russia but the sales there today are negligible. The collapse of the Russian market and the restriction on European sales leaves an awful lot of bananas looking for a home.

Domestic demand hasn’t helped much. Although Chiquita has a catch phrase: “Chiquita Banana, quite possibly, the world’s perfect food” – much of America has been paying more attention to Dr. Atkins and his low carbohydrate, high protein diet.

For the last several years the industry has been playing a kind of musical chairs. One company gives supermarket chain X a big cash payment to secure a long contract and displace a competitor. The competitor immediately does the same with supermarket chain Y in the same city to salvage market share. When all is said and done, the banana companies have blown a fortune, and nobody is eating any more bananas than they were before the music started.

Not all that much has really changed since the days when the banana industry was the envy of the produce trade. The big banana companies still control the transportation, so the big problem this time is not being nibbled to death by little guys. The problem is the big guys have lost the discipline to import only those levels they can sell profitably and to do the hard promotional work necessary to boost consumption.

But the losses have become too much and, perhaps, companies are starting to smarten up. Dole announced a 17 percent reduction in its worldwide banana production, and Del Monte has pledged to reduce European imports by 10 percent. Costs are being pared at all companies, so if an upturn comes to pass, the profits should be strong.

The produce industry relies on a strong banana industry. When doing well, these companies alone have the resources – both financial and organizational – to help build industry institutions, to help the trade do business more effectively and to inspire consumers to eat more fruits and vegetables. Let’s hope that the new millennium sees a banana industry back to its senses – and to profitability.  pb