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Fruit of Labor: The Banana Business Is Rotten, So Why Do People Fight Over It? --- It Has Set Off Riots, Coups And Now a Trade War, Despite Weak Profits --- `Dance of Two Big Elephants'
By Gordon Fairclough and Darren McDermott
Staff Reporters of The Wall Street Journal

08/09/1999
The Wall Street Journal
A1
(Copyright (c) 1999, Dow Jones & Company, Inc.)

Bananas. For more than a century, they have provoked riots and coups. Troops have been dispatched to protect them. Now they are at the center of a bitter trade war between the U.S. and Europe.

Any business worth fighting for so fiercely must be great, right? Guess again.

Banana farming is a brutal business, from the sprawling plantations of Latin America to the struggling plots of the Caribbean islands. In the past 10 years, retail U.S. banana prices have fallen roughly 15%, adjusted for inflation. Global sales are weak; the Russians and Chinese can't afford to buy many bananas this year.

The world's three largest banana companies, Dole Food Co., Chiquita Brands International Inc. and Fresh Del Monte Produce Inc. -- all based in the U.S. -- have been diversifying as banana profits have slipped. Hurricanes and bugs are constant menaces. A single misfiring refrigeration unit can convert a multiton shipment into gooey brownish sludge -- as happened not long ago to a $1.4 million boatload of Fresh Del Monte bananas.

All of which raises the question: Are U.S. and European trade warriors crazy? In April, the World Trade Organization, ruling in a longstanding complaint filed by the U.S. and others, held that Europe's elaborate regime of quotas and tariffs on banana imports violates global trade laws. It was the latest of numerous rulings over the years by various panels against Europe's banana rules. The WTO also allowed $191.4 million of retaliatory tariffs by the U.S. on some European products, infuriating the Europeans and driving trade tensions to heights seldom seen.

The European Union's executive branch is supposed to propose a response to the banana ruling next month. The E.U. says it will comply, but many doubt it will go far enough to put an end to the banana wars. Because when it comes down to it, the banana wars are about a lot more than bananas. And, as with most wars, there are ways to make money, the banana business's many pitfalls notwithstanding.

Many Europeans see bananas as a vestige of colonial glory. Some European countries say they're obligated by treaty to protect their former colonies' banana industries from foreign competition. The U.S., meanwhile, is using bananas to set a precedent for agricultural goods nearer and dearer to American farmers' hearts, such as genetically modified soybeans and corn. And developing countries have a soft spot for the industry because it is a huge employer. The lone Intel Corp. computer-chip plant in Costa Rica generates more export income than all of the country's banana farms, yet 50,000 work on the farms, while Intel employs about 2,000.

The banana business's problem isn't product popularity. About 65% of U.S. households buy bananas at least once a week, compared with about 31% for apples. The average American eats about 28 pounds of bananas a year -- more than any other fresh fruit. But bananas are growing even faster than we can eat them. World banana production has been climbing steadily, reaching 58.6 million tons last year, according to the United Nations's Food and Agriculture Organization. That's up 24% from the start of the decade. Even Hurricane Mitch, which wiped out production in much of Honduras and parts of Guatemala last year, hasn't put much of a dent in the global banana glut.

Commodity businesses aren't known for consistent profits, of course, but few are as competitive as bananas. Margins are razor-thin: Fresh Del Monte, for instance, gets the majority of its profit from pineapples, even though bananas account for 56% of sales and pineapples just 19%. "All the money is made by the supermarket -- we only get the bones," complains farmer Edgar Quiros Gonzalez, president of Cooperativa Difrusa in Costa Rica. He says he gets about $5.80 for a 40-pound box under his long-term contract with Fresh Del Monte. He says he has to pay out $5.20 a box in costs.

In a sense, the banana business contains the seeds of its own troubles. Bananas are prolific. Think rabbits. Bananas don't grow on trees; technically the banana plant is the world's largest herb. But they do grow all year long, so every season is banana season. An average acre of banana plants today produces about seven tons of fruit a year, nearly double the output of an acre of apple trees and six times that of an acre of wheat. "You need an outlet for all that fruit. That's why people fight so hard to protect their markets," says Mario A. Broutin, Chiquita's general manager in Costa Rica.

Fighting has been part of the banana business almost from the start. Largescale commercial production began after the Costa Rican government hired Minor C. Keith, a 23-year-old engineer from Brooklyn, N.Y., to build a rail line in 1871. To finance the project, Mr. Keith grew bananas along the right-of-way and sold them in the U.S. Eventually, his enterprise grew into United Fruit Co., predecessor of Chiquita, and spanned much of Central America. United Fruit's role there gave rise to the term "banana republic."

United Fruit came to symbolize America's growing commercial and political might, at the expense of European colonial powers. Britain fought back, subsidizing the shipping of Jamaican bananas to the United Kingdom. But that plan backfired when the British firms ran into financial trouble and were acquired by none other than United Fruit. Britain tried again after World War II, sponsoring development of a banana industry in the Caribbean's Windward Islands.

The U.S. and some Latin American governments didn't shrink from backing the interests of American banana companies. When a left-leaning president of Guatemala expropriated United Fruit land in the 1950s, he was overthrown in a now-infamous coup backed by the Central Intelligence Agency. But as the years passed, various Latin American revolutions, an antitrust action by the U.S. against United Fruit and other developments took their toll on profits.

By the late 1980s, the banana business looked more appealing. Demand surged after the fall of the Berlin Wall. Eastern Europeans gobbled up bananas, the kind of cheap luxury they associated with the good life in the West. And the formation of a single, unified market in Europe in 1993 was expected to turn Western Europe, at the time the fastest-growing market for bananas, into a gold rush. Banana growers started ramping up production in the early 1990s.

It was a bust. Rather than embrace free trade in bananas, the European Union agreed on a convoluted system of tariffs and quotas designed to support banana growing in former colonies, including parts of the Caribbean, Africa and Asia. They also effectively limited the number of Latin American bananas that could be sold in the EU and divided the banana world into haves and have-nots -- those who have licenses allowing them to import bananas into the protected European market, and those who don't.

Because the amount of bananas Europe allows in is far less than the amount consumers want to buy, the price of bananas in Europe is inflated to about twice the U.S. level. A pound of bananas, about 50 cents in the U.S., goes for roughly a dollar in Europe.

Here we arrive at the central paradox of bananas: Though a murderous business in many ways, bananas can be lucrative for holders of the licenses that allow selling under Europe's higher prices. Indeed, many growers railing against the European system call not so much for its dismantling, but for better access to its higher prices.

Chiquita was hit the hardest when Europe created its quota system. Until the system was created, Chiquita says, Europe was its most profitable market. It says it was frozen out of more than half its European market share when the Europeans imposed their licensing and other requirements. Moreover, Dole has had more success than Chiquita in forging alliances with European companies with import licenses. Chiquita's bitter complaints helped get the attention of the U.S. government; it and a group of Latin American governments took the case to the WTO, leading to the April ruling against Europe's banana quotas.

Brent Borrell, a former World Bank economist now working at the Center for International Economics in Canberra, Australia, calls the European system "economic lunacy." Even viewed as an aid program for former colonies, the scheme is highly inefficient, he says. Of the $2 billion Dr. Borrell estimates the arrangement costs European consumers, only about $150 million finds its way into the hands of banana farmers in former colonies. More than $1 billion ends up in the pockets of the companies that import the bananas, according to Dr. Borrell.

The European system has also managed to make the economies of some former colonies heavily dependent on bananas. Farms in the Windward Islands -- which include St. Lucia and four other island states -- are alternately baked by the Caribbean sun and lashed by storms. They yield just eight tons an acre, while Latin American plantations can produce 25 or 30 tons an acre, says Theresa Alexander Louis, an economist at the Windward Island Banana Development & Exporting Co. "We are totally uneconomical," says Tony Smith, manager of the St. Lucia Banana Co. "We couldn't survive more than two days" without European aid.

Yet bananas made up 56% of St. Lucia's domestic exports in 1997, and 35% of the exports for all the Windward Islands. The industry employed about a third of the region's work force that year. Kenny D. Anthony, St. Lucia's prime minister, summed it up in a speech last fall: "There is no future without bananas."

The centrality of the banana is viewed similarly in Latin America, and growers there are worried, too. "If we don't get access to those higher prices, a good percentage of our growers would be in a critical situation," says Victor E. Herrera, president of Costa Rica's Corporacion Bananera Nacional in San Jose. "This is a dance of two big elephants. And we are like an ant" about to get trampled.

Yet the bananas keep on coming. On tiny St. Lucia, Cecilia Blanchard totes an aluminum ladder around her 7 1/2-acre farm, picking the flowers off her banana bunches and spraying the plants and fruit with pesticides. Once a week, she brings in extra help to pick the bananas and pack them in boxes in time to meet the weekly banana boat bound for England and J. Sainsbury PLC, a British supermarket chain.

But even with subsidized prices, cut-rate loans and other aid, Ms. Blanchard, considered one of the best growers in St. Lucia, struggles. She gets the equivalent of only about $6.80 to $7.55 for a 34-pound box of bananas. After costs, Ms. Blanchard says, she averages roughly 38 cents to 72 cents in profit a box. She ships as much as 100 boxes a week.

Meanwhile, on Fresh Del Monte's Carmen farm in Santo Domingo, Costa Rica, more than 100 workers toil as long as 12 hours a day planting, pruning, weeding and spraying. To protect the fruit's thin skin from insects, bruising and sunburn, insecticide-impregnated plastic bags are draped over the bananas while they grow. Three-man crews drip with sweat in the tropical heat, harvesting tons of fruit every day. In the packing stations, men and women in rubber aprons and gloves cut bunches apart, sort bananas by size and quality, clean them, spray them with fungicide and pack them.

By afternoon, this day's fruit will be loaded onto a ship at the nearby port of Limon, bound for Wal-Mart Stores Inc.'s Sam's Club stores. Harvested while they are green, bananas must be shipped and stored between 55.9 and 57.9 degrees. The fragile fruit can't even withstand bouncing. Chiquita's Costa Rican operations use three road graders to keep the byways between its farms and the port smooth.

Given such costly headaches, few in the business want the European banana quotas -- and the higher prices they bring -- to disappear. A truly free market "would mean very cheap bananas," says Jack Loeb, a banana-industry veteran in Costa Rica. "And nobody wants that."

(See related letter: "Letters to the Editor: Oppression of Workers" -- WSJ Aug. 26, 1999)