Last week bananas’ industry got good news, the bananas’ tariff in European Union will face a decline from US$223 per tonne to US$145 per tonne, this decline will be in the next 8 years. The most interesting fact is Bananas’ production faces economies of scale, it means a decline in tariff will bring benefits to consumer and banana multinationals. Costumer will buy cheaper bananas and multinational will face higher profits. By 2011 banana multinationals faced a profits of US$58 per tonne before exporting the product and US$175 per tonne before putting them on shelves. The big issue is these multinationals do not give a high social value such as investments in host countries where bananas are grown, for instance technology, infrastructure and new products made in Latin America are scarce, therefore these multinationals are in debt with host countries still.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Latin America bananas industry got good news last week, they will face a tariff reduction from US$223 to US$145 per tonne in the next 8 years. This is a right decision due to tariff to bananas make huge distortions in the international market. However, most of banana multinationals which grow bananas in Latin America do not have social compromise to improve the global economy in the long run, they invest in projects that are not profitable in the long run. For instance, Chiquita Brands, Dole Food Companny and Banacol do not work in big projects in Latin America such as expanding their activities to produce other high value products such as technology, services and relevant infrastructure to produce new product to the World. These multinationals just invest in short run projects to show off their social compromise, for instance Banacol invest in health, education and sports centers, of course these investments are welcome but the problem is they are not profitable by their own, these projects depend of subsidies from these multinationals, it is fair to highlight these multinationals work according with environment requirements. Society expects these multinational work actively to improve income distribution and economic growth.
Why banana multinationals can improve income distribution and economic growth
Banana business has shown an impressive growth in the last 50 years as figure 1 shows, the volume of production increased from 21.3 million of tonnes in 1961 to 107 million tonnes in 2011 that means an annual average growth of 3.3%. Bananas exported around World increased from 3.7 million tonnes in 1961 to 19.3 million tonnes in 2011 that means an annual average growth of 3.3% also.
Figure 1. Bananas total production and exports around the World 1961-2011
(Million of tonnes)
Source: own calculation with FAO and Trade Map data.
Moreover, bananas’ business is highly profitable, as the production increase bananas' price shows a decline as figure 2 shows, it means that bananas' production faces economies of scale (as production increases, price goes down and profits goes up). By 1961 a tonne of bananas showed an international FOB price of US$642.3 at real prices of 2011 while this tonne showed a FOB price of US$481.8 in 2011, in real terms banana’s price showed an annual decline of 0.5%. This declining in price and increasing bananas’ exports volume let higher income to banana multinationals, by 1961 the value of exports reached US$2,284 million at real prices of 2011 while this income reached US$9,296 million in 2011 as figure 3 shows. Through official information one can conclude that banana multinational’s profits are increasing, by 2011 they got a profit of US$58 per tonne at FOB prices and US$175 per tonne before put them on shelves in supermarkets such as Walmart or Sainsburys’, therefore the total profits for banana multinational is not less than US$233 per tonne in 2011.
Figure 2. Bananas’ FOB price 1961-2011
(US$ real price of 2011 per tonne)
Source: own calculation with FAO and Trade Map data.
Figure 3. Banana exports value 1961-2011
(US$ million constant 2011)
Source: own calculation with FAO and Trade Map data.
Expectations due to bananas’ tariff reduction
Due to tariff reduction and economies of scale from bananas’ production, then the volume of production will increase, consumers price will decline and banana multinationals will face higher profits also. Production forecast is around 25.1 million tonnes by 2019, moreover a tonne of bananas can be bought at approximately US$623 per tonne at real prices of 2011 in 2019 as figure 4 shows. These results were calculated under econometrics tools and they are statistical significant.
Figure 4. Economies of scale for banana production
(US$ constant of 2011)
P: Price
AC: Average Cost
MC: Marginal Cost
Source: Own calculation with official data.
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