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BRINGING HOME THE BACON: U.S. PORK TRADE

pork

BRINGING HOME THE BACON: U.S. PORK TRADE

The Year That Wasn’t

This year was supposed to mark a comeback for U.S. pork producers. Instead, the industry faces volatile markets and unprecedented supply chain disruptions. COVID-19’s domino effect on farmers, processors, retailers and consumers underscores the complexities of our modern food system.

In late April, meat industry executives warned the United States could soon face a meat shortage after processing facilities closed temporarily due to the spread of COVID-19 among employees. Total meat supplies in cold storage facilities across the United States totaled roughly two weeks’ worth of production. With processing at a standstill, meat supplies for retail grocery stores were expected to shrink by nearly 30 percent by Memorial Day, leading to increases in pork and beef price prices of as much as 20 percent, according to analysis by CoBank.

Shuttered plants also meant that farmers had nowhere to send their mature pigs, creating a massive livestock backlog. While many meat processors have re-opened as of May 2020, hog farmers may yet be forced to euthanize as many as seven million pigs in the second quarter of 2020, a loss valued at nearly $700 million. The Food and Agricultural Policy Research Institute forecasted a total loss of $2.2 billion for the U.S. pork industry in 2020 due to the pandemic.

US 3rd largest pork producer

Going Whole Hog on Exports

According to the United States Department of Agriculture, the United States is the world’s third-largest producer and consumer of pork, shipping on average more than 5 billion pounds of fresh and frozen pork internationally each year since 2010.

But this dominant role in world pork trade is a fairly recent phenomenon. The United States became a net exporter of pork in 1995. Exports jumped from two percent of total production in 1990 to 21 percent in 2016. What made this spike possible?

The U.S. pork industry has gone through a major restructuring since the mid-1980s, shifting from small, independently owned operations to larger, vertically-integrated companies that contract with growers to raise pigs. This structure increased the industry’s productivity and year-round slaughter capacity. Between 1991 and 2009, the number of hog farms in the United States dropped by 70 percent but the number of hogs remained stable.

The National Pork Producers Council calculates that exports account for nearly 36 percent of the total $149 average value of a hog. While American pork is shipped to more than 100 countries, just four countries account for 75 percent of U.S. pork exports: Mexico, Japan, China, and Canada. It’s easy to see why implementation of the U.S.-Mexico-Canada Agreement is important to U.S. pork producers: Mexico alone accounts for about one-third of all exports by volume. U.S. exports of pork increased 1,550 percent in value since 1989, when the United States first implemented a free trade agreement with Canada.

U.S. pork producers mainly compete with pork producers in the European Union, Canada, and Brazil for sales in overseas markets. American farmers were concerned they could lose market share in Japan after the United States did not join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) and Japan made a trade deal with the European Union. Japan is the largest value market for U.S. pork and the second largest market by volume. However, pork exports there have been trending higher in 2020 following the U.S.-Japan Trade Agreement.

Where US pork exports go

Higher on the Hog in China?

For the last two years, American pork producers have found themselves in the crosshairs of a trade war between the United States and China, a key export market. In April 2018, China levied a 25 percent retaliatory tariff on many U.S. pork imports in response to Section 232 tariffs put in place by the United States. In 2019, China again retaliated against American pork, this time in response to Section 301 tariffs.

Before the trade war, China was the second-largest market for U.S. farm exports (after Canada). In 2016, China purchased nearly $20 billion in American farm products but sales dropped sharply in 2018 to $7.9 billion.

The “Phase One” U.S.-China trade agreement went into effect on February 14, 2020. It includes a commitment from China to import an additional $12.5 billion in U.S. agricultural products during 2020 on top of a 2017 baseline of about $24 billion. The agreement also provides access for a larger variety of U.S. pork products and restores access for processed pork products, which had been blocked by China.

As part of this deal, on February 17 China announced tariff exclusions for 696 products, including pork. In the first quarter of 2020, China bought $5.05 billion in U.S. farm goods, up 110 percent from last year. China’s pork imports almost tripled from March 2019, reflecting a major domestic supply gap caused by African Swine Fever (ASF).

However, concerns remain if it is feasible for China to meet the purchase targets set in the agreement. Through March 2020, U.S. Census Bureau data show that U.S. agricultural exports to China were only at 37 percent of year-to-date targets. The American Farm Bureau Federation found that U.S. agricultural exports to China need to accelerate by 114 percent each month from May through the rest of the fiscal year to meet the “Phase One” target.

China ag purchases fall in trade war

Not Exactly “Year of the Pig” for Pork Industry

The possibility of U.S. sales to China going unfulfilled seems surprising. Another virus – ASF – has been ravaging China’s pork output since August 2018. ASF is a highly contagious, deadly pig disease with no known treatment or vaccine. It does not affect humans or food safety but it has had a devastating impact on China’s pork industry, the world’s largest, leaving a shortage in domestic supply.

Despite low officially reported cases of ASF, as many as 350 million pigs died from the disease in China during 2019. (And because the disease continues to spread across borders, one quarter of all the world’s pigs may die from ASF.) After more than a year of declining pork output, China’s total pork supply gap is estimated at 18 million tons – a figure much larger than total global supplies. Chinese consumers have faced record high prices for pork, traditionally their protein of choice. Some parts of the country also faced meat shortages due to disrupted supply chains during the COVID-19 quarantine.

To address persistent high prices, the Chinese government auctioned off a small amount of frozen pork from publicly held pork reserves, but the move was largely symbolic and had a limited short-term impact on prices. The government’s total pork reserve volumes are a national secret and not publicly available.

Enter: Coronavirus

As American hog farmers were positioning to fill China’s need to import more pork, enter the coronavirus in early 2020, which threw the U.S. pork market into extreme volatility.

After COVID-19 forced processing plants to temporarily close, U.S. pig prices dropped 27 percent in about a week, reducing profits for pig producers while consumers paid more for pork at the grocery store. The demand for meat often takes a hit during economic recessions as consumers keep a close eye on their grocery bill. At the same time, the industry lost major food service markets such as restaurants, universities, and elementary schools that were also shut down.

To help pork producers and other farmers, USDA on April 17 announced the Coronavirus Food Assistance Program (CFAP) to provide $19 billion in emergency aid to farmers and ranchers hit by market disruptions. CFAP includes $16 billion in direct payments to producers and $3 billion in purchases of fresh produce, meat, and dairy products for distribution through food banks. USDA will purchase an estimated $100 million per month in pork and chicken, along with other food products, beginning in May. Nonetheless, an industry-funded analysis by Iowa State University found that American hog farmers will lose $5 billion (or $37 per pig) due to reduced prices for pork and shuttered processing plants.

US pork shipments to China

Saving Our Bacon

America’s pork industry has been beset with uncertainty in recent years. The latest Purdue University-CME Group Ag Economy Barometer found that the unknowns surrounding the pandemic have further decreased farmer optimism to a four-year low, with 67 percent of farmers saying they are worried about the impact of the coronavirus on their business.

Prior to COVID-19, U.S. farmers were already reeling from lost sales due to China’s tariffs. The saving grace for U.S. pork producers now is that pork exports are actually ramping up.

During March and April, the number of pigs slaughtered per day decreased by 40 percent, but shipments of U.S. pork to China more than quadrupled, including whole carcasses as well as products that Americans generally don’t eat, like feet and organs. The U.S. Meat Export Federation estimated that so far in 2020, about 31 percent of U.S. pork has been exported with one-third of that volume going to China.

That means that in the near term, increasing exports will remain vital for the U.S. pork industry to weather the coronavirus storm as processing capacity gets back online and domestic sales begin to rebound.

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Sarah Hubbart provides communications strategy, content creation, and social media management for TradeVistas. A native of rural Northern California, Sarah has melded communications and policy throughout her career in Washington, D.C., serving in government affairs, issues management, and coalition building roles in the agricultural sector. She is an alum of California State University, Chico and George Washington University.

This article originally appeared on TradeVistas.org. Republished with permission.
farm

A SHORTAGE OF FARM GUEST WORKERS COULD THREATEN AMERICA’S HARVEST

Harvest season is here

Right now, acres and acres of lettuce sit ready to be picked in California’s Salinas Valley – an area known as the Salad Bowl of the World. But who will harvest it?

The Golden State is an agricultural powerhouse, producing more than 400 commodities, including one-third of all U.S.-grown vegetables and two-thirds of our fruits and nuts. In 2019, California’s agriculture exports totaled $21.02 billion, ranking first among all states in the value of farm exports for the last twenty years. California’s almonds are a favorite of the European Union, its dairy products ship to Mexico, California pistachios travel to China, and the state’s high-quality rice is increasingly popular in Japan.

Spring means harvest season is here – or will be soon – for many crops in California and around the country, from asparagus to cucumbers to tomatoes and more. Thousands of workers are needed to pick these crops. And over the years, those workers have become harder and harder to find – a challenge that is being exacerbated by the COVID-19 pandemic.

Labor shortages cause farm losses

The American Farm Bureau Federation says that U.S. agriculture needs 1.5 to 2 million hired workers. These challenging, often seasonal, positions are essential to food production – but few U.S. citizens are willing to fill them. A California Farm Bureau Federation survey found that 56 percent of California farmers have been unable to find all the workers they need during the last five years.

While some farmers are shifting to labor-saving technologies, others can’t afford the expense of mechanization. And many of the high-value fruits and vegetables that California is known for must be harvested by hand to ensure their quality.

Given this chronic labor shortage, immigrants – most from Mexico – play an increasingly crucial role in our food system. Foreign-born workers can legally come to the United States to perform short-term farm labor under the H-2A Temporary Agricultural Worker Program, often referred to as the H-2A visa program.

56 percent cant find workers needed

Temporary labor through H-2A program

The Immigration Reform and Control Act of 1986 established the agriculture-focused H-2A program and a separate H-2B program for skilled workers in industries like healthcare and tech. The H-2A program is the primary way that U.S. farmers can legally hire immigrant labor from countries deemed eligible by the Department of Homeland Security (DHS). The process requires several steps and fees.

To participate, farmers must first receive a temporary labor certification for H-2A workers from the Department of Labor (DOL). This should be submitted 60 to 75 days before workers are needed. Then, farmers must file a petition to the DHS U.S. Citizen and Immigration Services (USCIS). After USCIS approves the petition, prospective H-2A workers outside the U.S. apply for a visa through the U.S. Department of State at a U.S. Embassy or Consulate and seek admission to the U.S. with the U.S. Customs and Border Protection (CBP) at a U.S. Port of Entry.

Open positions unable to fill

Rules are in place so that the H-2A program does not take jobs from domestic workers or lower the average wage. Before hiring H-2A workers, farm employers must demonstrate to the DOL that they are unable to recruit U.S. citizens for their open positions. They are also required to pay a state-specific minimum wage that may not be lower than the average wage for crop and livestock workers in their region during the prior year, known as the Adverse Effect Wage Rate.

Once approved, H-2A visa holders are allowed to work in the U.S. temporarily. The visa can be re-approved annually for up to three years. A worker loses their H-2A status if they leave their job. After a worker has three years of H-2A status, they are required to leave the United States for at least three months before applying to receive a H-2A visa again. The H-2A visa does not apply to a worker’s family members and does not give workers a way to gain permanent legal status. Unlike the H-2B program, there is no cap set on the total number of H-2A visas that can be granted each year.

number farmer workers exceeds visas

Greater need than visas

In 2019, nearly 258,000 immigrant workers were granted H-2A visas, with most working in Florida, Georgia, Washington, California, and North Carolina. Participation has jumped from 48,000 positions certified in 2005. However, the number of farm workers that are needed each year far surpasses the number of H-2A visas that are granted. Data from the U.S. Department of Agriculture (USDA) shows that the percentage of farm workers who are not legally authorized to work in the United States grew from 14 percent in 1989 to more than 50 percent in recent years.

While the H-2A program has grown in size, both farmers and farm worker advocates are critical of it. Farmers say it is a complicated, expensive process to navigate. Furthermore, year-round agriculture sectors like dairy farming, pork production or even mushroom farming can’t use the program since it is only available to seasonal industries. Labor groups argue H-2A needs reform to provide more protections to workers.

Agriculture’s workforce challenges recently received some attention on Capitol Hill. In December 2019, the full House of Representatives passed the bipartisan Farm Workforce Modernization Act (H.R. 5038). Among its many changes, the bill would make H-2A more flexible for employers and establish a new, capped program for year-round workers. It would also provide a pathway to permanent resident status for farm workers and include new enforcement measures. While the House’s passage of H.R. 5038 marks the first time that body has approved immigration legislation since 1986, the bill has not received a vote in the Senate.

The Trump Administration has also shown interest in updating the H-2A program, streamlining the application process on the USDA website. DOL issued a proposed rule in September 2019 that would update how the Adverse Effect Wage Rate is calculated, among other provisions. That rule has not yet been finalized. Additionally, in October 2019 the DOL issued a final rule to modernize the market labor test by allowing farmers to advertise jobs on a central online registry rather than a local print newspaper.

critical industry

COVID exacerbating labor shortage

Travel restrictions and government closures due to COVID-19 are adding to the concerns about America’s shortage of farm workers. The U.S. stopped processing non-emergency visas like H-2A in Mexico on March 18, 2020 out of health concern for U.S. Embassy employees. This immediately led to calls of alarm from agriculture stakeholders who are looking ahead to a busy spring and summer season.

The State Department later said it would continue processing H-2A applications and granted new flexibility so both new or returning workers would not be required to go to a U.S. consulate for an interview according to social distancing protocol. The DOL announced additional, temporary H-2A flexibilities in April 2020 to help prevent a labor shortage. However, governments around the globe continue to enforce travel restrictions to limit the spread of the coronavirus, potentially keeping workers from the harvest.

Some farmers are reporting that they are unable to get workers on time. In Canada, foreign workers have been delayed by border restrictions and canceled flights. Once they arrive, the Canadian government requires workers to be quarantined for 14 days (with pay) before they can begin work. The United States does not have a similar quarantine requirement but American farmers are concerned that fruit and vegetable harvests will still be impacted. Workers who have arrived are in the fields for longer hours due to the labor shortfall. Abad Hernandez Cruz, a Mexican farm worker in Georgia, told Reuters why he is working 12+ hours a day: “if the farm doesn’t produce, the city doesn’t eat.”

Agriculture is a critical industry

Agriculture has been deemed a critical industry during the pandemic. Americans are seeing firsthand the strengths and vulnerabilities of our complex food supply chain. One paradox is that farmers across the country have been forced to dump millions of gallons of milk and destroy millions of pounds of fresh food while some grocery store shelves go bare. The widespread closure of restaurants, hotels and schools has left farmers with no market for half of their crops due largely to the differences in Americans’ eating habits while quarantined at home.

So far, a lack of labor has not been a major force behind this food dumping. However, the situation could change if the pandemic persists longer into the harvest season or if farm workers begin testing positive for COVID-19. Farmers are also concerned that fewer workers will apply for H-2A visas over fears of catching the virus. Without enough workers, leafy greens, berries, and cucumbers would likely be the first crops to be left fallow, followed by peaches, plums, nectarines, and citrus.

The important role that guest workers play in ensuring America’s food supply during the pandemic underscores the interconnected nature of global agriculture trade. In reality, without H-2A and other immigrant labor, that romaine lettuce in Salinas would never make it to your salad bowl, or to other dinner tables around the world.

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Sarah Hubbart provides communications strategy, content creation, and social media management for TradeVistas. A native of rural Northern California, Sarah has melded communications and policy throughout her career in Washington, D.C., serving in government affairs, issues management, and coalition building roles in the agricultural sector. She is an alum of California State University, Chico and George Washington University.

This article originally appeared on TradeVistas.org. Republished with permission.

growers edge

Growers Edge & CropX Partnership Addresses Farming Challenges

Savings for water, fertilizer, energy, and labor costs are just some of the many added benefits farmers can anticipate following the announcement of an agriculture-focused partnership between Growers Edge Financial, Inc. and CropX. The strategic partnership addresses farming challenges head-on and solves complex issues through advanced technology solutions, including soil-sensing technology designed to eliminate crop-input costs through accurate, reliable data.

“The financial instruments available today do not meet the needs of farmers who want to embrace new ways to improve the profitability and sustainability of their operations,” said Joe Young, president and chief operating officer, Growers Edge. “Working with strategic partners like CropX, we are providing the incentive a farmer needs to confidently adopt new technologies that can drive their long-term sustainability and business success despite rising environmental and business challenges.”

Through a careful process utilizing CropX cloud-based technology and integrated in-field sensors, soil data and management is optimized and implemented based on analyzed data determining the precise amount of water specific to plant needs, ultimately boosting crop yields while maximizing opportunities in cost-savings and waste reduction.

“Giving farmers direct access to all of the intelligence below the ground empowers them to sustainably cultivate more profitable and productive farms by accurately predicting and managing crop needs. However, many farmers are hesitant to invest in soil sensing technologies after being burned by complex, expensive – and often even ineffective – technologies in the past,” said John Vikupitz, president, CropX. “Our partnership with Growers Edge will help farms of all sizes and budgets confidently embrace in-soil data technologies to modernize farm management.”

Beginning in 2020, the two companies will host a pilot program in which farmers can participate in that includes a Growers Edge money-back guarantee and irrigation practice prescription.

pesticide

Pesticide Imports into the U.S. Expand Rapidly Against Large But Stagnating Domestic Output

IndexBox has just published a new report: ‘U.S. Pesticide And Other Agricultural Chemicals Market. Analysis And Forecast to 2025’. Here is a summary of the report’s key findings.

The revenue of the pesticide and agricultural chemical market in the U.S. amounted to $14B in 2018, waning by -3% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). Overall, pesticide and agricultural chemical consumption continues to indicate a moderate reduction. The most prominent rate of growth was recorded in 2016 when the market value increased by 5.6% y-o-y. Pesticide and agricultural chemical consumption peaked at $16.2B in 2013; however, from 2014 to 2018, consumption stood at a somewhat lower figure.

The Market For Pesticides And Other Agricultural Chemicals in the U.S. Is Buoyed By Domestic Products

In value terms, pesticide and agricultural chemical production stood at $14B in 2018. The U.S. market is largely supplied by domestic products, therefore the trend patterns of the consumption volumes and production volumes generally reflect each other.

Exports from the U.S.

In 2018, the exports of pesticides and other agricultural chemicals from the U.S. stood at 63K tonnes, jumping by 6.4% against the previous year. Over the period under review, pesticide and agricultural chemical exports, however, continue to indicate a deep downturn. The most prominent rate of growth was recorded in 2014 when exports increased by 17% year-to-year. In that year, pesticide and agricultural chemical exports attained their peak of 102K tonnes. From 2015 to 2018, the growth of pesticide and agricultural chemical exports remained at a somewhat lower figure.

In value terms, pesticide and agricultural chemical exports totaled $1.4B (IndexBox estimates) in 2018. The growth pace was the most rapid in 2018 when exports increased by 36% against the previous year. In that year, pesticide and agricultural chemical exports reached their peak and are likely to continue its growth in the immediate term.

Exports by Country

Brazil (11K tonnes), Canada (9.1K tonnes) and Mexico (6.6K tonnes) were the main destinations of pesticide and agricultural chemical exports from the U.S., with a combined 41% share of total exports. The UK, South Africa, Costa Rica, India, France, Belgium, Colombia, Peru and China lagged somewhat behind, together accounting for a further 33%.

From 2007 to 2018, the most notable rate of growth in terms of exports, amongst the main countries of destination, was attained by the UK (+92.8% per year), while the other leaders experienced more modest paces of growth.

In value terms, Brazil ($393M), Canada ($204M) and Mexico ($149M) were the largest markets for pesticide and agricultural chemical exported from the U.S. worldwide, together accounting for 52% of total exports. These countries were followed by the UK, France, China, India, Colombia, South Africa, Costa Rica, Belgium and Peru, which together accounted for a further 22%.

India recorded the highest growth rate of exports, among the main countries of destination over the last eleven-year period, while the other leaders experienced more modest paces of growth.

Imports into the U.S.

Pesticide and agricultural chemical imports into the U.S. totaled 62K tonnes in 2018, jumping by 15% against the previous year. Overall, the total imports indicated buoyant growth from 2013 to 2018: its volume increased at an average annual rate of +11.2% over the last five years. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Based on 2018 figures, pesticide and agricultural chemical imports increased by +88.6% against 2014 indices. The most prominent rate of growth was recorded in 2017 when imports increased by 22% y-o-y. Imports peaked in 2018 and are likely to see steady growth in the immediate term.

In value terms, pesticide and agricultural chemical imports totaled $433M (IndexBox estimates) in 2018. Overall, pesticide and agricultural chemical imports continue to indicate a resilient expansion. The pace of growth was the most pronounced in 2017 with an increase of 81% year-to-year. Over the period under review, pesticide and agricultural chemical imports attained their maximum in 2018 and are likely to continue its growth in the near future.

The share of imports in terms of total consumption increased rapidly over the last two years and reached 6% in 2018. The largest increase refers to supplies from China and Mexico. Despite the tangible growth those figures, however, are still insignificant against the volume of domestic production.

Imports by Country

China (18K tonnes), Mexico (13K tonnes) and France (6.9K tonnes) were the main suppliers of pesticide and agricultural chemical imports to the U.S., together comprising 61% of total imports. These countries were followed by India, Israel, Germany, Italy, Chile and Belgium, which together accounted for a further 29%.

From 2007 to 2018, the most notable rate of growth in terms of imports, amongst the main suppliers, was attained by Israel (+86.9% per year), while the other leaders experienced more modest paces of growth.

In value terms, China ($140M) constituted the largest supplier of pesticide and agricultural chemical to the U.S., comprising 32% of total pesticide and agricultural chemical imports. The second position in the ranking was occupied by Mexico ($55M), with a 13% share of total imports. It was followed by France, with a 9% share.

From 2007 to 2018, the average annual growth rate of value from China amounted to +38.3%. The remaining supplying countries recorded the following average annual rates of imports growth: Mexico (+29.3% per year) and France (+10.9% per year).

Source: IndexBox AI Platform

rose

WHEN A ROSE ISN’T JUST A ROSE: HOW TRADE POLICY WAS USED TO FIGHT DRUGS FROM COLOMBIA

A Grand Gesture

As evidence that Valentine’s Day is here, roses are everywhere – grocery and drug stores, gas stations, and sidewalk vendors offering a bunch for the last-minute Romeo. Until the late 1980s, most roses sold in the United States came from California. A dozen roses would have set you back around $150, which is why the tradition was a grand gesture and a symbol of the seriousness of your relationship. Not really so much today – a dozen roses can be purchased for less than $20.

Why are roses so affordable? The explanation is years of U.S. Government trade, development, and drug eradication policies designed to move South American growers away from cultivating the coca plant used to make cocaine, by substituting commercially profitable production of cut flowers.

Flower Power

Americans will give each other 200 million roses over the Valentine season. The majority were grown in Colombia. Over the course of a year, Colombia exports around 4 billion roses to the United States and supplies 60 percent of U.S. imports of fresh cut flowers overall. Production and shipping are so efficient and cost-effective that roses from Colombia can reach the U.S. East Coast ahead of a similar shipment from California.

The competition from South American suppliers, particularly Colombia, has caused California production to plummet by 95 percent since 1991. The year 1991 is significant. It was the year Congress passed the Andean Trade Preference Act (ATPA, later expanded and renamed the Andean Trade Promotion and Drug Eradication Act).

ATPA represented a tool in the U.S. policy toolkit to disrupt the drug trade and cartels in Bolivia, Colombia, Ecuador and Peru, and slow the flow of drugs into the United States. Reducing or eliminating tariffs on imports from the region was intended to incentivize farmers to replace illicit coca production with legitimate (and safer) alternatives.

Thorny Issues

The reduction in tariffs gave Colombian growers a boost, but the seeds to grow the Latin American rose industry were really planted back in the 1960s under President Kennedy through economic development programs implemented by the U.S. Agency for International Development (USAID) to combat the spread of Communism in Latin America. Over decades, U.S. funding supported the infrastructure critical to developing an industry that could offer employment, education and empowerment to hundreds of thousands – predominantly female – workers.

The program’s successes came at the expense of U.S. growers. The U.S. florist industry petitioned for a series of anti-dumping investigations that resulted in negligible penalties on importers, and little tangible relief for U.S. industry. As imports grew, the number of U.S. rose farms dwindled from several hundred to fewer than 20 large-scale rose producers today.

Not Everything is Coming Up Roses

The savanna near Bogotá, Colombia’s capital city, is ideal for flower cultivation. It sits 8,700 feet above sea level about 320 miles north of the equator and possess clay-rich soil. Since the 2016 peace accords between the Colombian government and the Revolutionary Armed Forces of Colombia (FARC) rebels, many of the coca farms in this area have been replaced with flower production.

But Colombia’s blessings are also a curse. FARC offshoots and other guerrilla groups have been able to move coca production from central highlands to the country’s coastal deltas and frontier areas where it is thriving.

Aerial fumigation to wipe out coca plots was discontinued due to concerns about the effects on human health and damage to local soil and water systems. As well, crop substitution programs have lapsed, leaving a lack of economic alternatives for poor communities where cocaine traffickers have moved in ( though the government has announced plans to replace around 50,000 hectares of illegal crops with the growing of cacao and fruit trees).

As a result, coca production is on the rise. With somewhere between 150,000 and 180,000 hectares of coca under cultivation, according to United Nations and U.S. estimates, Colombia produced its largest crop of coca in 2016 in nearly two decades.

A Rose by Any Other Name

Trade preference programs played some role in helping to provide a safer livelihood for hundreds of thousands of South Americans while making roses accessible to most everyone and for all occasions. Walmart buys so many roses that its purchases are actively monitored by the industry as an economic indicator.

Back in California, the remaining growers still produce around 30 million roses each year. Rather than cultivate mass-produced roses (the red, long stemmed, no scent, durable variety), these growers are working with universities and research centers to create new and specialty cut rose varieties to serve niche segments of the markets such as weddings and other high-end celebrations.

More reading: Archived reports by the Office of the U.S. Trade Representative on the operation and impact of the Andean Trade Preferences Act can be accessed here.

Sarah Smiley

Sarah Smiley is a strategic communications and policy expert with over 20 years in international trade and government affairs, working in the U.S. Government, private sector and international organizations.

This article originally appeared on TradeVistas.org. Republished with permission.

blockchain

SMALL AND MEDIUM-SIZED GLOBAL TRADERS ARE BANKING ON BLOCKCHAIN

This is the second in a three-part series by Christine McDaniel for TradeVistas on how blockchain technologies will play an increasing role in international trade.

Give Me Some Credit

Every business requires capital to operate. To sell products to customers overseas, many companies also need trade financing and insurance from third-party lenders. About 80 percent of all global trade is transacted through third-party lenders and cargo insurers, but the process is complex, can be costly and many banks find it too risky to support small and medium-sized enterprises (SMEs).

Blockchain has the potential to increase transparency, speed and accuracy in assessing risk across the trade finance process, which in turn could expand the supply of credit available for international trade transactions – good news especially for SMEs that face significant hurdles accessing credit. Here’s how.

Pay Me Now or Pay Me Later

Buyers who import goods from sellers in other countries generally want to pay upon receiving the merchandise so they can verify its physical integrity on arrival. Exporters, on the other hand, generally prefer to be paid as soon as they ship the goods. Trade finance can bridge this gap.

Exporters and importers engage third-party lenders and insurers who will guarantee payments on the basis of collateral and indemnify the exporter, importer and related parties in the event that the merchandise is damaged, stolen or lost while in transit. In this way, trade finance provides the credit, payment guarantee and insurance needed to facilitate an international trade transaction on terms that will satisfy all parties.

80% of trade relies on finance

Steps on the Trade Journey

Intermediaries such as freight forwarders typically manage the physical journey of merchandise, from the original producer to the border, across the border (maybe several borders), and to the final buyer.

Each step must be verified: when was the merchandise transported from the factory or farm to a warehouse, when was it moved from the warehouse to a container, when was the container loaded onto a ship, when did the ship get underway, when was the container unloaded from the ship at port, and when was the merchandise transported from the port to the end consumer.

Different trade finance instruments, such as lending, letters of credit, factoring and cargo insurance cover legs of the journey. A letter of credit is a guarantee from a bank that a buyer’s payment will be received and be on time or else the bank will take responsibility for the payment. Factoring is accounts receivable financing to accelerate cash flow. Cargo insurance insures the merchandise while en route.

Without Finance, Trade Would Sink

The World Trade Organization estimates that 80 percent of global trade relies on trade finance or credit insurance. The global trade finance sector (i.e., the global volume of letters of credit) is worth roughly $2.8 trillion. Demand for trade financing exceeds availability, resulting in the underutilization of existing capital. According to the Asian Development Bank, the global trade finance gap — the difference between the demand for and supply of trade finance — has reached $1.6 trillion.

SMEs Face a 50 Percent Rejection Rate

The shortfall in supply reflects the complex and risky nature of trade finance which often involves multiple parties. Before banks will issue letters of credit in trade finance, they require potential customers to present a solid credit history and a strong balance sheet, conditions that tend to favor larger institutions.

SMEs typically experience more difficulty navigating the trade finance process and dealing with the cost and complexity of banking regulations than larger companies. In 2014, SMEs had trade finance requests before financial institutions rejected at a rate of over 50 percent. In comparison, the rejection rate for multinational corporations was only seven percent.

Links in the Trade Finance Chain

According to the United Nations, there are typically eight major steps required to obtain a letter of credit, although in practice the Credit Research Foundation lists more than twenty. Each step of the process is dependent on the previous steps, and some steps involve sending the same document back and forth for verification purposes. The administrative burden is greater for SMEs than for large firms.

survey of 2,350 SMEs and 850 large firms conducted by the U.S. International Trade Commission in 2010 showed that lack of access to credit is the major constraint for SME manufacturing firms seeking to export or expand into new markets and it is one of the top three constraints for SME services firms.

rate of rejection for trade finance

How Blockchain Can Help Ease Trade Finance

Requirements to authenticate each transaction in the trade finance and insurance process can engender large amounts of paperwork and cause delays at each step. Every handoff must be approved and verified.

Instead, blockchain uses digital tokens that are issued by each participant in the supply chain to authenticate the movement of goods. Every time the item changes hands, the token moves in lockstep. The real-world chain of custody is mirrored by a chain of transactions recorded in the blockchain.

The token acts as a virtual “certificate of authenticity” that is much harder to steal, forge or hack than a piece of paper, barcode or digital file. The records can be trusted and greatly improve the information available to assure supply-chain quality.

Using blockchain as a digital ledger for these handoffs would allow involved parties to instantly track and receive secure information about the traded goods. Parties can monitor the entire shipping process and verify the completion of each step in real time. This increased transparency and ease of monitoring reduces the risk that a borrower presents to a potential lender or insurer.

Banking on Blockchain

A number of financial institutions are piloting the use of blockchain-enabled trade finance platforms.

Bank of America, HSBC, and the Infocomm Development Authority of Singapore collaborated in 2016 to develop a trade finance application designed “to streamline the manual processing of import/export documentation, improve security by reducing errors, increase convenience for all parties through mobile interaction, and make companies’ working capital more predictable.” Using the application, each action in the workflow is captured in a distributed ledger and all parties (the exporter, the importer, and their respective banks) can visualize data in real time, offering transparency to authorized participants while ensuring confidential data is protected through encryption.

Barclays used blockchain in 2017 to issue letter of credit that reportedly guaranteed the export of $100,000 worth of agricultural products from Irish cooperative Ornua to the Seychelles Trading Company, noting the parties were able to execute a deal in four hours that would usually take up to 10 days to complete.

A group of European banks launched a trade finance blockchain platform in July 2018, initially focused on facilitating small and medium-sized businesses trading within Europe. In September 2018, the Hong Kong Monetary Authority announced plans to launch a trade finance blockchain platform. Twenty-one banks are participating in the platform, including large institutions such as HSBC and Standard Chartered. The Hong Kong Monetary Authority is also reportedly working with its counterpart in Singapore to develop a blockchain-based trade finance network to settle cross-border transactions.

Lessons for Trade Policymakers

As the trade finance industry begins to utilize blockchain technology, there are some potential implications worthy of policymakers’ attention.

First, the large number of intermediaries and corresponding administrative costs in trade finance tend to fall particularly hard on SMEs and the relatively higher cost of each transaction makes SME financing less attractive to banks. If blockchain can reduce the costs of trade finance, more small and medium-sized businesses could trade globally.

Second, although blockchain technology does not alter the fundamental credit risk of borrowers, the increased transparency and access to information it delivers could improve the accuracy of banks’ risk assessments. If perceived risk is greater than actual risk, a nontrivial number of loan applications may be denied even though those loans have the potential to be successful. If blockchain brings greater confidence and issuance of good loans — that is, those that are paid back — the transactions they support would bring value to the economy.

In these important ways, blockchain can increase transparency across the trade finance process and decrease risk for all parties, in turn expanding the supply of credit available for international trade transactions.

ChristineMcDaniel

 

Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on TradeVistas.org. Republished with permission.