Proc. Fla. State Hort. Soc. 123:82 86. 2010. An Economic Analysis of the U.S. Orange Juice Tariff and the Competitiveness of Florida Growers and Processors Robert A. Morris* and Ronald P. Muraro University of Florida, IFAS, Citrus Research and Education Center, Food and Resource Economics Department, 700 Experiment Station Road, Lake Alfred, FL 33850 Additional index words. Florida freeze, Brazil, citrus industries, tariffs, frozen concentrate Although Sao Paulo, Brazil has a climate and soils conducive to producing juice oranges, prior to the 1970s, Brazil was a relatively minor producer of processed oranges and orange juice (Table 1). However, a devastating Florida freeze in 1962, and subsequent freezes in the 1970s and 1980s created an opportunity for Brazil to expand its orange and orange juice production. Most of this production was exported (Table 1), primarily to the U.S. and Western Europe. A climate where freezes do not occur along with cheaper land and labor enabled Brazil to continue its expansion, until by the 1990s, Brazil was by far the largest orange juice producer in the world (Fig. 1), producing almost twice the amount of oranges and orange juice as Florida. In fact, without the protective U.S. tariff on imported frozen concentrated orange juice (FCOJ), the Florida processed orange industry would probably either be much smaller that it is or out of business. This paper shows how this tariff has been reduced by trade legislation and by inflation and the impact than it has had on the Florida processed orange industry. The FCOJ Tariffs The following section is based on information provided by Florida Citrus Mutual (Mutual). The FCOJ orange juice tariff was initiated with the passage of the Smoot-Hawley Act (Tariff Act) in 1930, before citrus concentrate had been developed. The Tariff Act imposed a tax of 70 cents per single strength gallon on imported orange juice (Table 2), probably several times as much as it cost to produce oranges and canned orange juice in Florida at that time. The citrus tariff remained unchanged until 1947 when the General Agreement on Tariffs and Trade (GATT) talks occurred in Geneva, Switzerland. There it was reduced to 35 cents per single strength gallon ($.34 per lb solids) for concentrate and 20 cents per gallon for chilled single strength juice, still probably more than it cost to produce oranges and orange juice at that time. Table 1. Orange and orange juice production in Sao Paulo, Brazil. Orange Orange juice Orange juice production production exports Season (Mil. 90 lb boxes) (Thousand metric tons 65 Brix) 1964 65 16 5 6 1969 70 35 29 33 1974 75 82 170 181 1979 80 155 435 401 1984 85 205 784 808 1989 90 295 1,050 899 1994 95 311 1,110 960 1999 00 395 1,310 1,296 2004 05 380 1,335 1,077 2008 09 330 1,020 1,030 Sources: U.S. Department of Agriculture, 1965 1990; Florida Department of Citrus, 2009. *Corresponding author; phone: (863) 956-1151; email: ramorris@ufl.edu Fig. 1. Sources: U.S. Department of Agriculture, 1965 1990; U.S. Department of Agriculture, PSD Online. Table 2. History of the U.S. orange juice tariff. Concentrate NFC z Year ($ per SSE gal y ) 1930 1947 0.70 0.70 1948 1994 0.35 0.20 1995 0.3415 0.1969 1996 0.3324 0.1893 1997 0.3237 0.1855 1998 0.3150 0.1817 1999 0.3059 0.1742 2000 Onward 0.2972 0.1704 znfc = Not-from-Concentrate orange juice; SSE = single strength equivalent. ythe concentrate tariff can be converted to dollars per lb solids by dividing the tariff per SSE gallon by 1.029 lb of solids per gallon. Source: Florida Department of Citrus, 2009. 82 Proc. Fla. State Hort. Soc. 123: 2010.
In 1963, the Kennedy administration attempted to pass legislation that would reduce and possibly eliminate duties on imported citrus products. Mutual battled against this legislation for 4 years and the duty was maintained. Later, in 1970, the U.S. government again tried to reduce citrus import tariffs. American citrus growers had operational costs that were four times higher than their counterparts. Thus, a reduction in tariffs would render them helpless in the international market. Mutual fought against this tariff reduction and won. A U.S. Customs ruling in 1980 brought a decade full of legislative victories for Florida citrus growers. U.S. Customs ruled that processors couldn t convert imported FCOJ into single strength orange juice in a Class 8 bonded warehouse in order to pay a lower tariff. If processors had been allowed to continue this practice, growers would have lost an estimated $300 million a year. Soon after, the U.S. Department of Commerce discovered that the government of Brazil had provided illegal subsidies to growers as well as FCOJ exporters. The U.S. Department of Commerce then forced these companies to pay additional countervailing taxes on exports to the U.S. Three Brazilian producers protested this accusation, but Mutual fought back and the U.S. International Trade Commission ruled to uphold a countervailing duty on Brazilian FCOJ exports. Brazil once again attempted to bypass the tariff legislation and was discovered to have been dumping FCOJ at less than the fair market value in the U.S. The U.S. Department of Commerce forced exporters from Brazil to pay an additional duty bond on FCOJ. An international trade court then ruled on an anti-dumping order that required continued surveillance of Brazilian prices. This was done in order to protect U.S. citrus growers from Brazilian exports being sold at less than fair market value. The battle for the protection of the citrus tariff continued at the Uruguay Round Tariff and Non-Tariff Measure Negotiations. Though there was a proposal to reduce the citrus tariff, Mutual combated the reduction and citrus products were excluded from tariff reductions that were included in this agreement. Trade negotiations continued in the 1990s with the advent of the North American Free Trade Agreement (NAFTA). NAFTA s primary goal was to establish free trade between Mexico and the U.S. Also, during this time, the U.S.-Canada Free Trade Agreement sought to eliminate tariffs between Canada and the U.S. Mutual fought against the effort to eradicate tariffs and was victorious when the Generalized Agreement on Tariffs and Trade maintained the tariff on imported citrus. Though NAFTA was finally passed during the 1992 93 season, it included special provisions for citrus. These provisions granted a 15-year phase-out on import tariffs as well as a snapback provision for tariffs to be reinstated if specified shifts in price and import volume occurred. Tariffs also suffered a gradual decrease as a result of the Uruguay Round Trade talks in 1994. It was negotiated that FCOJ and NFC (Not-from- Concentrate orange juice) tariffs decrease in equal increments, finally totaling 15%, after a period of 6 years. Currently, Florida citrus growers are again forced to defend the citrus tariff that protects their livelihood. If the Florida citrus industry is to remain a viable $9 billion economic engine to Florida, the current citrus tariff must not be altered in future trade agreements. Dumping In economics, dumping can refer to any kind of predatory pricing. However, the word is now generally used only in the context of international trade law, where dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. Dumping can drive domestic producers out of business while also destabilizing the competitive structure of world industries. In the U.S., domestic firms can file an anti-dumping petition with the U.S. Department of Commerce and the U.S. International Trade Commission which will then conduct an investigation. If the domestic industry is able to establish that foreign producers are dumping in the U.S. market and that the domestic industry is being injured as a result, then anti-dumping duties, or deposits, are imposed on goods imported from the dumpers country at a percentage rate calculated to counteract the dumping. The U.S. annually reviews sales and if it shows no dumping by the company, the duties are refunded in full with interest. If the review determines that dumping did occur, then the company forfeits the duties. The order can be lifted when a company successfully completes three consecutive reviews with no findings of dumping. Recent Allegations of Dumping Florida Citrus Mutual presented data showing that Brazilian processors were purchasing fruit during the 2003 04 season at prices that would generate significant losses given the prices at which they were selling FCOJ on the world market. These additional fruit purchases at a loss added to an already oversupplied market for FCOJ that 2003 04 season. Also, Brazilian processors made several deliveries of juice into the FCOJ futures market at prices well below the cost of production for just the fruit, not including the cost of processing and shipping FCOJ to the U.S. These visible transactions put substantial downward pressure on futures prices. Since movements in fruit prices and futures prices are highly correlated, fruit prices for Florida growers were also pressured downward, pushing many Florida growers into losses that season. This additional downward pressure on prices enabled Brazilian processors with plants in Florida to buy Florida fruit at substantially lower prices than if FCOJ had been fairly priced at levels that at least covered costs of production. Using the dumping margins calculated by the U.S. Department of Commerce, it is estimated that dumping reduced Florida farm gate citrus revenues by about 9%, or $70 million. Based on Mutual s investigation and examination of the data, the actual loss may have been $100 million or more. The following timeline provided by Florida Citrus Mutual describes the schedule of activities that have occurred on the current anti-dumping suit against Brazil: Dec. 2004 A coalition consisting of Florida Citrus Mutual and a group of Florida-based orange juice processors (A. Duda & Sons, Inc.; Citrus World, Inc.; Southern Gardens, Inc.) filed a petition with the U.S. Department of Com merce requesting anti-dumping duties be levied to offset unfair prices offered by Brazilian processors on orange juice. Jan. 2005 The U.S. International Trade Commission (ITC) held a preliminary hearing to review the data contained in the petition filed by the coalition. Feb. 2005 The U.S. Department of Commerce announced the decision to initiate an investigation in response to the petition filed by the coalition. Proc. Fla. State Hort. Soc. 123: 2010. 83
Jan. 2006 The U.S. Department of Commerce ruled that Brazilian processors were dumping Frozen Concentrated Orange Juice (FCOJ) and Not- From-Concentrate (NFC) orange juice, by the price margins of 10% to 60% of the export value of the juice. Feb. 2006 The ITC reached a final determination that Florida orange growers and processors have suffered material injury by reason of dumped Brazilian orange juice. Mar. 2006 Final order was issued. June 2007 The ITC reaffirmed the determination that Brazilian imports injured Florida growers and processors. June 2007 Tropicana filed a petition with the ITC requesting a new investiga tion because of changed market circumstances (higher prices). Oct. 2007 The ITC rejects Tropicana s petition filed in June 2007. Oct. 2007 The ITC reaffirmed the determination that Brazilian imports injured Florida growers and processors during the 2003 04 season. Apr. 2009 Florida Citrus Mutual filed additional dumping complaints against a Brazilian processor relating to the injury of Florida growers during the 2003 04 season. Impact of Inflation on the FCOJ Tariff Inflation has reduced the constant dollar value of the U.S. orange juice tariff by about 50% since 1980 (Table 3). During that same period, orange production costs in Florida increased Table 3. Impact of inflation on the U.S. orange juice tariff. FCOJ z Tariff NFC Tariff Current $ 1980 $ Current $ 1980 $ Year ($ per lb solids} ($ per gal) 1979 80 0.34 0.34 0.20 0.20 1983 84 0.34 0.32 0.20 0.19 1987 88 0.34 0.30 0.20 0.18 1992 93 0.34 0.28 0.20 0.17 1996 97 0.32 0.24 0.19 0.15 2000 01 0.29 0.23 0.17 0.13 2003 04 0.29 0.20 0.17 0.12 2008 09 0.29 0.18 0.17 0.10 zfcoj = Frozen Concentrated Orange Juice; NFC = Not-from-Concentrate Orange Juice. Sources: Florida Department of Citrus, 2009; U.S. Department of Labor, Bureau of Labor Statistics, 2010. from $0.69 to $1.07 per lb solids, while in Brazil they went from $0.40 to $0.73, increases of 55% and 83%, respectively (Table 4). Much of this increase occurred since 2002 03, and was the result of increased energy costs, increased fertilizer costs, and costs to battle HLB (Muraro and Morris, 2009). Brazil s orange production costs ranged from 52% to 67% of Florida s over this 1980 2009 period. However, once the U.S. orange juice tariff is added to Brazil s production costs, they ranged from 94% to 120% of Florida s (Table 5). Thus, the tariff protects Florida growers and processors now about as well as it has over the past 30 years (Fig. 2). Costs in Brazil increased 80% between 1980 and 2009 compared to 54% in Florida (Table 4), offsetting the erosion of the tariff by inflation. Duty-Drawback and U.S. Export Competitiveness Duty-drawback is a trade provision that allows a U.S. orange juice importer/exporter to receive 99% of the $0.29 per lb solids duty they paid for concentrate imports or the $0.17 per gal they paid for NFC imports as a refund against their concentrate or NFC exports. To receive the drawback, the firm must have imported orange juice within the past 3 years of their exports. Concentrate duty-drawback cannot be claimed against NFC exports or viceversa. This trade provision improves the competitiveness of U.S. orange juice in export markets, although it doesn t remove 100% of U.S. juice export cost disadvantage over Brazil (Table 6). Without duty-drawback, Florida is at a $0.45 per lb solids disadvantage in sales to Europe compared to Brazil. But with duty-drawback, it is only $0.11 per lb solids. The reason that duty-drawback doesn t completely equalize the delivered-to-europe concentrate prices between Florida and Brazil is that the shipping cost from Brazil to the U.S. is in the U.S. concentrate price. That is because in order for concentrate to be imported from Brazil, it must cover its shipping costs before it can come into the U.S. market and have an impact on U.S. concentrate prices. Since the shipping cost from Brazil is part of the U.S. price, it is also affected by the 15.2% European tariff, effectively adding $0.01 to the $0.10 in this example. Lack of duty-drawback of bulk concentrate and bulk NFC creates a trade barrier for those Florida processors who do not import orange concentrate or NFC. This has been an incentive for some Florida processors to develop an orange juice importing program. In fact, Florida Citrus Mutual has often been opposed to any legislation that would increase U.S. orange juice export price competitiveness on the basis that it would increase the incentives for Florida processors to import more Brazilian orange juice. Table 4. Delivered-in processed orange production costs. Florida Brazil Growing Harvest and haul Total Growing Harvest and haul Total Season ($ per lb solids) 1979 80 0.453 0.242 0.694 0.268 0.136 0.403 1983 84 0.521 0.253 0.775 0.267 0.139 0.406 1987 88 0.456 0.268 0.724 0.250 0.124 0.374 1992 93 0.462 0.291 0.753 0.344 0.121 0.465 1996 97 0.414 0.282 0.696 0.389 0.133 0.523 2000 01 0.435 0.324 0.759 0.336 0.089 0.425 2003 04 0.368 0.327 0.695 0.332 0.096 0.428 2008 09 0.696 0.375 10.070 0. 502 0.223 0.725 Sources: Muraro and Amaro, 1990; Muraro, 1993; Muraro, 1979 80 through 2002 03 seasons; Muraro and Pozzan, 2004; Muraro and Morris, 2010; Muraro and Morris, 2009; Muraro, 2009; Muraro et al., 2000; Muraro et al., 2002. 84 Proc. Fla. State Hort. Soc. 123: 2010.
Table 5. Orange production costs in Florida and Brazil with the U.S. tariff. Florida Brazil Total delivered-in Total delivered-in costs costs plus tariff Season ($ per lb solids) 1979 80 0.694 0.743 1983 84 0.775 0.746 1987 88 0.724 0.714 1992 93 0.753 0.805 1996 97 0.696 0.833 2000 01 0.759 0.715 2003 04 0.695 0.718 2008 09 1.070 1.015 Sources: Florida Department of Citrus, 2009; Muraro and Amaro, 1990; Muraro, 1993; Muraro, 1979 80 through 2002 03 seasons; Muraro and Pozzan, 2004; Muraro and Morris, 2010; Muraro and Morris, 2009; Muraro, 2009; Muraro et al., 2000; Muraro et al., 2002. Year Fig. 2. Sources: Florida Department of Citrus, 2009; Muraro and Amaro, 1990; Muraro, 1993; Muraro, 1979-80 through 2002-03 seasons; Muraro and Pozzan, 2004; Muraro and Morris, 2010; Muraro and Morris, 2009; Muraro, 2009; Muraro et al., 2000; Muraro et al., 2002. Table 6. Impact of duty-drawback on U.S. orange concentrate exports. $ per lb solids Florida bulk concentrate in U.S. 1.25 Brazil bulk concentrate in Brazil (1.25 0.29 U.S. tariff $0.10 shipping cost between Brazil and U.S.) 0.86 Brazil bulk concentrate in USA (0.86 + 0.10 haul from Brazil to USA + 0.29 U.S. duty) 1.25 Brazil bulk concentrate celivered into European market (0.86 + 0.10 shipping cost to Europe + 15.2% of landed value European tariff) 1.11 Florida bulk concentrate delivered into European market no duty-drawback (1.25 + 0.10 haul to Europe + 15.2% European tariff) 1.56 Florida bulk concentrate delivered into European market with duty-drawback (1.25 0.29 duty-drawback + 0.10 haul to Europe + 15.2% European tariff) 1.22 Brazilian price advantage Without duty-drawback 0.45 With duty-drawback 0.11 Conclusions Brazil has grown from an insignificant producer and exporter of orange juice in the 1960s to the largest producer and exporter of orange juice in the world. This is because Brazil has lower orange production costs than Florida or other potential producers such as Mexico, Costa Rica, China, etc. However, a tariff on U.S. orange juice imports, put into effect in 1930, protects the Florida orange juice industry. Threats to the success of this tariff have come from legislation to reduce it, Brazilian dumping of orange juice into the U.S. market, and inflation. However, this tariff protects Florida orange producers now about as well as it has over the past 30 years. That is because more rapid increases in orange production costs in Brazil have offset increases in orange production costs in Florida. The U.S. orange concentrate tariff increases Florida orange and concentrate prices by the amount of the tariff since Brazilian imports must cover this tariff in order to be sold in the U.S. However, a trade provision that enables U.S. orange juice processors who have imported orange juice and paid the tariff to receive 99% of this duty back enables U.S. orange juice exports to be competitive in foreign markets. Literature Cited Florida Department of Citrus, Economic and Market Research Department. 2009. Citrus Reference Book. p. 24, 25, 39. Gainesville, FL. Muraro, R.P. 1979 80 to 2002 03 Seasons. Economic Information Report Series: Budgeting costs and returns for Southwest Florida citrus production. Food and Resource Economics Dept., University of Florida, IFAS, Gainesville. Muraro, R.P. 1993. Break-even cost comparisons of key citrus producing areas: Florida, Brazil, and Mexico. Food and Resource Economics Dept. Intl. Working Paper Ser. IW 93-7. Muraro, R.P. 2009. Summary of 2008 2009 citrus budgets for the Southwest Florida production region. Citrus Research and Education Center, University of Florida, IFAS, Gainesville, FL. <www.crec.ifas. ufl.edu/extension/economics>. Muraro, R.P. and A.A. Amaro. 1990. An overview of Florida (USA) and Sao Paulo (Brazil) processed orange industries with comparative costs and returns, 1979 80 through 1987 88 seasons. Food and Resource Economics Dept., Econ. Info. Rpt. 274, University of Florida. Muraro, R.P. and R.A. Morris. 2009. The dynamics and implications of recent increases in citrus production costs. Food and Resource Economics Dept., University of Florida, IFAS, Gainesville. FE 793. <www.edis.ifas.ufl.edu/fe793>. Muraro, R.P. and R.A. Morris. 2010. 2008 09 costs to produce processed oranges in Sao Paulo, Brazil. Unpublished summary notes of Proc. Fla. State Hort. Soc. 123: 2010. 85
cost information from University of Sao Paulo Piracicaba, FNP, and interviews with growers in Sao Paulo State Brazil. In process. Muraro, R. P. and M. Pozzan. 2004. Production costs: Comparison between Florida and Sao Paulo. Proc. 8th Intl. Citrus Seminar. Bebedouro Citrus Research Experimental Station (Sao Paulo, Brazil). Muraro, R.P., T.H. Spreen, and F.M. Roka. 2000. The impact of the 1999 Brazilian devaluation on the delivered-in costs of oranges produced in Sao Paulo, Brazil. Food and Resource Economics Dept., University of Florida, Gainesville. FE 213 (EDIS). Muraro, R.P., T.H. Spreen, and M. Pozzan. 2002. Comparative costs of growing citrus in Florida and Sao Paulo (Brazil) for the 2000 01 season. Gainesville, FL: University of Florida, IFAS, Food and Resource Economics Dept. FE 364 (EDIS). U.S. Department of Agriculture, Foreign Agricultural Service, Foreign Agriculture Circular. Various Issues, 1965 1990. Horticultural Products. Washington, DC. U.S. Department of Agriculture, Foreign Agricultural Service. PSD Online. Various Issues. Orange juice: Production, supply and distribution in selected countries. U.S. Department of Labor, Bureau of Labor Statistics. 2010. Producer price indexes for major commodity groups. Farm Products and Processed Foods and Feeds, 1965-Council of Economic Advisors. Table B-67. <www.gpoaccess.gov/eop/>. Wilson, J.H. 1980. Brazil s orange juice industry. U.S. Dept. of Agriculture, Foreign Agricultural Service. FAS M-295. Washington, DC. 86 Proc. Fla. State Hort. Soc. 123: 2010.