BEFORE THE: UNITED STATES INTERNATIONAL TRADE COMMISSION

Transcription

1 BEFORE THE: UNITED STATES INTERNATIONAL TRADE COMMISSION : In the Matter of: : : The Impact of Trade Agreements: : Inv. TA Effect of the Tokyo Round, U.S.-Israel FTA, : U.S.-Canada FTA, NAFTA, and the : Uruguay Round on the U.S. Economy : Comments by Florida Citrus Mutual March 31, 2003 Andrew Lavigne Executive Vice President & CEO Florida Citrus Mutual P.O. Box 89 Lakeland, Florida (863) tel. BARNES, RICHARDSON & COLBURN 1225 Eye Street, N.W., Suite 1150 Washington, D.C Matthew T. McGrath Amy H. Warlick, Economist

2 INTRODUCTION AND SUMMARY This statement is filed on behalf of Florida Citrus Mutual (FCM) of Lakeland, Florida, in response to the notice published by the U.S. International Trade Commission, 68 Fed. Reg (Mar. 3, 2003), requesting additional written comments on the economic effects of various trade agreements, including NAFTA and the WTO Uruguay Round Agreements. FCM is a voluntary cooperative association whose active membership consists of more than 11,000 Florida growers of citrus for processing and fresh consumption. FCM's membership accounts for as much as 80 percent of all oranges grown in the United States for processing into juice and other citrus products. The 6-year staged reduction of U.S. tariffs on orange juice from WTO-member countries under the Uruguay Round Agreement (URA), commencing on January 1, 1995, and the 15-year staged elimination of the U.S. tariff/tariff rate quota on orange juice from Mexico under NAFTA, commencing on January 1, 1994 were very significant events in the history of the U.S. citrus industry to the extent that they encouraged under-priced imports, which contributed directly to the erosion of U.S. processing orange prices and grower earnings. Furthermore, FCM believes that this damage occurred without any counterbalancing positive effects on U.S. orange juice exports. While the impact of these two agreements pales in comparison to the devastating potential impact of a Free Trade Agreement of the Americas that would further reduce U.S. tariffs on orange juice from Brazil, the effects of the agreements, thus far, provide useful illustrations of the unique dynamics of this industry and how tariff reductions immediately translate into price erosion and grower losses. 2

3 BACKGROUND The global orange juice industry is highly unique. World consumption of commercially processed orange juice is concentrated chiefly among only 2 regions: the United States and the European Union. This pattern is dictated by consumer preferences as well as the fact that consumption of commercially processed orange juice is a function of disposable income level. Thus, any multilateral reduction of orange juice tariffs cannot open the gates for U.S. juice exports to trade-liberalizing countries with low juice demand. Global orange juice production is also concentrated chiefly within only two countries: Brazil and the United States. Brazil's production is controlled by five very large processors, 1 which control roughly 80 percent of Brazil's FCOJ production. Given that they also operate and control Brazil's tank ship distribution system, these companies indirectly control nearly all of Brazil's FCOJ exports, which represent approximately 75 percent of world FCOJ exports. The large Brazilian processors benefit from advantages brought by past subsidization and dumping, lax environmental protection, weak and largely unenforced labor laws, frequent national currency devaluation (which reduces the relative cost of production inputs and provides false incentives for overproduction), and oligopoly price manipulation. The Brazilian oligopoly dominates the EU orange juice market with their lowpriced juice. The only juice processors in the United States that can afford to export to the EU are those receiving U.S. import drawback incentives to do so. Many of these U.S. processors, blenders and reprocessors are Brazilian-owned and operated and, therefore, able to utilize Brazil s tanker distribution network to transport the juice from the United 1 These dominant Brazilian processors are Cargill Citrus Ltda., Citrosuco Paulista S.A., Citrovita Agro Industrial Ltda., LouisDreyfus Citrus S.A., and Sucocitrico Cutrale Ltda. 3

4 States to the EU. Since the liberalization of EU tariffs within a multilateral agreement would benefit the Brazilians as well, there is little utility to US growers in such thirdcountry liberalization. Any reciprocal tariff reduction agreement, even one that includes the EU, will always be very limited in value from a U.S. orange juice exporter s perspective. In addition, any multilateral tariff reduction agreement that includes Brazil will always be devastating to a U.S. orange grower. It is against this grim backdrop that the U.S. citrus industry was forced to accept tariff reductions under both NAFTA and the URA as a trade off for other US trade objectives. URUGUAY ROUND AGREEMENT The effects on the U.S. citrus industry of the inflow of under-priced Brazilian orange juice into the U.S. market resulting from the Uruguay Round Agreements have been severe. Although there are forces other than the URA tariff reductions driving down the prices of Brazilian juice in the U.S. market, Brazil, the world s largest orange juice producer, was the primary beneficiary of the United States URA commitment to reduce U.S. orange juice tariffs by 15 percent. It cannot be denied that these staged tariff reductions contributed to the plunging import unit value of Brazilian juice. In 2002, the average landed, duty paid value per liter of imports from Brazil was 31 percent less than the average during the 5 years prior to URA implementation ( ). 4

5 U.S. Import Unit Value of Bulk FCOJ from Brazil Landed, Duty-Paid Value/Liter Dollars/Liter Source: Official U.S. trade data from the U.S. Department of Commerce. NAFTA Although Brazil is, by far, the larger producing country, Mexico s exports to the U.S. have also adversely affected U.S. growers. The volume of U.S. imports from Mexico since the passage of NAFTA have fallen somewhat short of pre-nafta expectations, primarily due to droughts in Mexico, as well as an outbreak of citrus tristeza virus (CTV) throughout most southeastern Mexican citrus groves. While the Mexican government has been working to eradicate this virus at both the state and federal levels, progress has been slow. These natural events have temporarily moderated what appeared, prior to NAFTA, to be a sharp escalation in Mexican orange production. Undoubtedly, the strong Mexican peso and heavy competition from underpriced Brazilian FCOJ, not to mention duty-free CBERA orange juice, in the U.S. market have also impeded Mexico s orange juice exports in recent years. 2 2 "Mexico, Citrus: Mexican Government Hosts Citrus Forum, 2001," GAIN Report, FAS, USDA, June 13,

6 Despite the natural, currency and competitive difficulties Mexican producers have faced, U.S. imports of frozen orange juice from Mexico have still exceeded the NAFTA TRQ in every year, except Thus, Florida orange growers have still had to contend with significant volumes of orange juice from Mexico. However, U.S. growers are not nearly as concerned about the volume of imports from Mexico as they are about the price effects of those imports. As U.S. tariffs on Mexican juice are being gradually phased down, the unit price of orange juice imports from Mexico has continued to fall. In 2002, the average landed, duty-paid value per liter of bulk FCOJ imports from Mexico was 25 percent less than the average during the 5 years prior to NAFTA implementation ( ) (see chart below), as compared to the above-referenced 31% reduction in the Brazilian price resulting from the URA tariff reductions. U.S. Import Unit Value of Bulk FCOJ from Mexico Landed, Duty-Paid Value/Liter Dollars/Liter Source: Official U.S. trade data from the U.S. Department of Commerce. 3 "Mexico Citrus Semi-Annual Report," GAIN Report, FAS, USDA, April 25,

7 IMPACT ON U.S. PRICES The continual declines in the prices of U.S. imports from the world s largest orange juice producer, Brazil, and the Western Hemisphere s third largest orange juice producer, Mexico, has contributed to the erosion of U.S. wholesale orange juice prices as well as the prices earned by Florida orange growers. The commodity futures price of FCOJ is considered one of the most accurate indicators of the U.S. wholesale price of FCOJ. The chart below shows the extent to which wholesale prices have been decimated, in part, by reductions in the U.S. tariff on Brazilian FCOJ. Annual Average FCOJ Nearby Futures Settlement Prices cents per pound of solids Note: 2003 figure based on January-March Source: New York Board of Trade, reported by the Economic and Market Research Division, Florida Department of Citrus at 7

8 The declining wholesale prices have wiped out a fair number of Florida bulk processors that utilized Florida-grown oranges. Many of these failing processors ended up selling their Florida plants to the Brazilians at fire sale prices. This further concentration in the processing sector granted the Brazilians even greater control over global juice pricing. When wholesale FCOJ prices fell, growers were not able to respond by tightening U.S. juice orange and orange juice supplies in order to stabilize grower prices. It is a hard fact of this industry that in the short-term (1-5 years) the U.S. supply of juice oranges is highly inelastic, because oranges are a perishable product whose supplies are primarily dictated by the number of productive citrus trees in the United States, environmental factors such as temperature and rainfall, and citrus infestations or diseases. Capacity utilization in citrus groves is always near 100 percent, because all wholesome citrus fruit is picked. Since it takes at least 4-5 years for a new orange tree to begin bearing fruit and 25 years for it to stop bearing fruit, supplies cannot be manipulated in the short run in response to price. Thus, given the inability of orange supplies to respond to juice prices, the U.S. on-tree price of juice oranges immediately plunged, causing the rates of return for some growers to fall below the break-even point and resulting in a number of grove closures. The prices of early and midseason varieties face the greatest price pressure as they tend to come on the market each year at the same time that the heaviest volumes of under-priced FCOJ imports from Brazil are entering the U.S. market. Between 1993/94, the growing season preceding implementation of both NAFTA and the URA, and 2000/01, the most recent growing season for which on-tree price data are available for oranges for processing, Florida on-tree prices for late season varieties fell by 20 percent, while prices for early and mid-season varieties fell by 44 percent (see chart below). 8

9 Florida On-Tree Prices per Box for Oranges for Processing 7.50 dollars per 90 lb. box Early & Midseason Late Season (Valencia) growing season Source: FASS, USDA, Reported in Citrus Reference Book grower prices. The following chart shows how the URA tariff reductions correlate with falling 9

10 Correlation Between URA Tariff Reduction Schedule for Frozen OJ and Florida On-Tree Prices of Oranges for Processing on-tree prices - dollars per box base tariffs - cents per liter Early & Midseason Prices Late Season (Valencia) Prices URA Tariff Reduction Schedule growing seasons 7 SOURCE: FASS, USDA, Reported in Citrus Reference Book Between 1994 and 2000, under the URA, the U.S. tariff on Brazilian juice fell by 1.4 cents per liter (or 0.23 every year for 6 years). Between 1994/95 and 2000/01, on-tree prices of early and midseason varieties fell by $1.23 per box (or an annual average of 22 10

11 for 6 years), and on-tree prices of late season varieties fell by $.72 per box (or an annual average of 12 for 6 years). Thus, for every 1 per liter that the tariff was reduced, growers lost almost $1 per box in on-tree prices of early & midseason varieties and about 50 per box of late season varieties. 4 The early and midseason varieties were hit hardest because Brazilian juice enters the U.S. market closer to when they are being harvested and processed. This is not to say that some expansion in U.S. orange production following the late 1989 freeze did not affect prices; however, the sharp and sustained price depression, especially among the early and midseason varieties, is largely attributable to the increased presence of under-priced Brazilian, and to a lesser extent Mexican, FCOJ in the U.S. market. IMPACT ON U.S. CONSUMERS One would think that such pricing pressure, while disadvantageous for U.S. growers, would have brought tremendous benefits to U.S. orange juice consumers in the form of cheaper juice. To the extent that only processors are considered consumers, this is exactly what has happened. However, none of the U.S. processors cost savings were ever passed on to the final consumer at the retail level. In fact, during the years following implementation of the NAFTA and the URA commitments on orange juice, U.S. retail orange juice prices began rising dramatically in sharp contrast with the declining wholesale and grower prices (see chart below). 4 Calculated by Florida Citrus Mutual. 11

12 Growing Divergence Between Futures and Retail Prices of FCOJ futures (wholesale) prices cents per pound of solids Futures Price Retail Sales retail prices dollars per gallon Source: Futures prices from the New York Cotton Exchange (charted on calendar year basis), and retail prices from A.C. Nielsen (retail sales of frozen orange juice in grocery stores >$2 million annual sales, reflects actual prices paid after discounts) (charted on marketing year basis). What has happened is that orange juice retailers are charging the final consumer what the market will bear, which is apparently higher and higher each year, while the processors, reprocessors, and blenders, who buy their raw materials (FCOJ from Brazil or processing oranges from Florida growers) at plunging prices, all share in pocketing the significant juice mark-up. This pricing situation benefits the oligopolistic Brazilian processors two-fold because 1) they now own some of the processors in the United States that are benefiting from the mark-up, and 2) their low-priced FCOJ exports to the United States depress the prices received by U.S. growers thus forcing many of them out of business and expanding the Brazilian processors' control over world orange juice supplies and prices. 12

13 LOOKING AHEAD This investigation was mandated by section 2111 of the Trade Act of 2002 (Pub. L , 116 Stat. 933), because Congress found it critical to evaluate the impact of previous trade agreements before making decisions on future trade agreements negotiated under Trade Promotion Authority. Therefore, it is important that we provide the context for understanding how these previous trade agreements compare with the two agreements that the President is now negotiating: the Free Trade Area of the Americas (FTAA) and the WTO Doha Development Agenda. While, under the NAFTA, the United States has committed to eliminating U.S. orange juice tariffs on Mexican juice at the end of a 15 year phase-out schedule, and while the resulting inflows of under-priced orange juice from Mexico are certainly a serious threat, the experience of Mexican orange juice imports into the United States resulting from NAFTA cannot be used as the truest model of the potential impact of Brazilian orange juice imports into the United States should U.S. tariffs on Brazilian juice be reduced or eliminated. In short, Mexico is not Brazil. Brazilian orange juice production dwarfs that of Mexico (see chart below). Brazil has more than twice as much land dedicated to orange production as Mexico and more than 3 times as many trees. Therefore, Brazil processes 23 times as many oranges as Mexico. 5 5 Data in this and the previous sentence reflect Mexico's 2001/02 orange crop and Brazil's 2000/01 orange crop (from "Mexico: Citrus Semi-Annual," GAIN Report, FAS, USDA, Apr. 25, 2002, and "Brazil: Citrus Semi-Annual," GAIN Report, FAS, USDA, Nov. 20, 2001). 13

14 metric tons, 65 degrees Brix 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Orange Juice Production in Mexico and Brazil Mexico Brazil 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 Source: World Horticultural Trade & U.S. Export Opportunities, FAS, USDA. The United States is currently Mexico's largest export market for orange juice. Mexico has the ability to divert fruit from fresh domestic consumption into orange juice processing for export to the United States; however, Mexico would not be able to shift very large quantities of orange juice from other foreign markets into the United States. This situation is quite different, however, in Brazil's case. In marketing year 2001/02, Brazil exported more than 7 times as much as juice to foreign markets outside the United States as it exported to the United States. 6 If U.S. FCOJ tariffs applying to Brazilian FCOJ were reduced or eliminated, Brazilian processors would have the ability to divert massive quantities of FCOJ from European markets into the United States on very short notice, potentially flooding the U.S. market and decimating U.S. grower prices overnight. The results of the URA commitments are a better model of the potential impact of a future trade agreement that further reduces orange juice tariffs applying to Brazil. 6 ABECITRUS/SECEX at 14

15 However, it must be understood that the URA commitments to gradually reduce U.S. tariffs by 15 percent over the course of 7 years did not bring tariffs to a level that would induce the diversion of massive amounts of Brazilian juice from EU markets into the United States. If U.S. tariffs on orange juice from Brazil are reduced further in an FTAA or under a new WTO agreement, not only will U.S. growers suffer the consequences of under-priced imports and plunging wholesale orange juice and on-tree prices, but at some point the Brazilian citrus industry would make the critical decision to divert exports away from the EU and shift them into the United States. At this point, any surviving U.S. growers who had weathered the storm of plunging prices would be wiped out by the heavy volumes of Brazilian juice diverted from Europe, the only other major market. FCM asserts that if U.S. orange juice tariffs applying to Brazil are further reduced or eliminated, the price of U.S. imports of bulk FCOJ from Brazil, as well as the futures contract prices of FCOJ and the U.S. wholesale price of orange juice, would fall rapidly. At the same time, the volume of U.S. FCOJ imports from Brazil would increase significantly. The supply of U.S. juice oranges and orange juice, however, would remain constant in the short term because, as explained previously, they are by nature not responsive to price. In the final stage, the price of juice oranges would immediately plummet and, in turn, cause grower rates of return to fall well below the break-even point. Given that Florida orange growers do not receive any direct domestic subsidies to buffer the impact of commodity price downturns, the drop in grower rates of return would result in widespread grove closures. The grove closures would leave unemployed over 42,000 citrus grove workers in Florida alone, and jeopardize the existence of all U.S. juice extractors and processors that depend on domestic citrus. It would also have grave consequences for the following upstream suppliers of the U.S. juice orange industry: nurseries that supply replacement trees to citrus groves, suppliers of fertilizer, fungicide, herbicide and insecticide to citrus groves, 15

16 suppliers of irrigation and spraying systems, mechanical harvesters and farm implements, financial institutions, especially merchant banks that have citrus exposure, insurance companies that serve the citrus industry, and freight companies that haul citrus to processing plants. Since the land on which processing oranges are grown consists of very sandy soil with little agricultural value outside of citrus production, and the volume of all other fruit juices extracted in the United States combined pales in comparison to orange juice, the above upstream industries could not exist if orange juice production were no longer viable. In addition, because the production of about 75 percent of all processing oranges is concentrated in Central and South Florida, entire counties in these regions would be ravaged and their real estate values would tumble as thousands of groves would be abandoned, with no practical alternative land utilization. Processors, reprocessors and blenders (many of them owned by Brazilian processors) -- the first consumers of imported orange juice -- would reap the benefits of tariff reduction, while the final U.S. orange juice consumers would never see the price break supposedly derived from the tariff reduction. Past experience suggests the opposite result. As the Brazilian processors amass greater and greater global market power, after the elimination of the U.S. as a major global producer, final consumers in the U.S. would eventually suffer the consequences of unrestrained orange juice prices. CONCLUSION Florida Citrus Mutual understands that free trade in many industries, including many agricultural industries, can lead to increased competition, eventual price benefits to consumers, and overall global economic growth. Unfortunately, theoretical free trade cannot deliver these rewards to such a concentrated and polarized global industry. The 16

17 U.S. orange juice tariff is the only counterbalance upon which the unsubsidized Florida citrus grower can rely. There are no support prices, non-recourse loans, or other domestic programs to level the field. As this tariff has been partially chipped away under the NAFTA and URA, our industry has seen glimpses of the potentially life-threatening negative economic effects that further tariff reductions on orange juice from Brazil would bring. Implementation of NAFTA and the URA have already encouraged the inflow of under-priced imports from both Mexico and Brazil, which has contributed to the erosion of U.S. processing orange prices and grower earnings. However, by encouraging the diversion of Brazilian juice exports from the EU to the U.S. market, further U.S. tariff reduction on Brazilian juice would unleash far more devastating economic effects than we have ever experienced as a result of the NAFTA or URA. Florida Citrus Mutual urges the Commission to report that reductions in the FCOJ tariff under the URA and NAFTA have had a direct and negative depressive impact on grower returns, likely to be repeated and intensified if tariffs are reduced any further in FTAA or DDA negotiations. Respectfully submitted, Andy W. LaVigne Executive Vice President & CEO Florida Citrus Mutual Matthew T. McGrath Barnes, Richardson & Colburn Counsel to Florida Citrus Mutual Amy H. Warlick International Trade Economist Barnes, Richardson & Colburn 17