Part Two: Viva Fresh Experts Discuss Tomato Suspension Agreement
SAN ANTONIO, TX - After much anticipation and educated guessing, today is the day in which the Department of Commerce will announce whether or not it has officially withdrawn from the 22-year-long Tomato Suspension Agreement. Discussions continue for it to have a successor, as Mexican Deputy Economy Minister Luz Maria de la Mora told Reuters.
“We’re very disappointed but the good news is that negotiations continue, looking for a solution. And we hope that in the coming weeks we can in fact reach an agreement,” said de la Mora.
In Part One of Viva Fresh’s April 26 panel discussion of Congress’ withdrawal, we covered the anticipated duty price and ways tomato suppliers and buyers could prepare. To take it one step further, experts Lance Jungmeyer, President of the Fresh Produce Association of the Americas (FPAA); Jason Klinowski of Wallace, Jordan, Ratli & Brandt; and J.O. Alvarez of U.S. Customs House Broker J.O. Alvarez, Incorporated dove into anticipated changes, history, and influences of the current tomato climate.
“I would say that if we go to a duty situation, the small and medium companies are the ones that are hurt the most, and we’ll see some consolidation in the industry,” Jungmeyer shared at the time.
When later asked about pricing, he said that the FPAA worked with Arizona State University Economist Dr. Tim Richards, who has done Tomato Price Impact studies previously.
“It was found that consumers would pay up to 40-85% more for vine-ripened tomatoes if duties go into place, and that’s based on the assumption that duties would cut the Mexican tomato supply by half. That’s just based on Mexican supplies alone," Jungmeyer explained. "You start to get into other scenarios that could really bring up the price ... We might see a hurricane in Florida, we might see a freeze in Florida, we might see a frost in Mexico like what happened just a few years ago. What happens when one or both the suppliers is impacted?”
A historic reference for the scenario Jungmeyer is painting is the 1989-90 season, when tomato prices soared due to bad freezes and “the shelves were bare.”
“I think everyone in this room wants to see people eat more tomatoes; we are in the business of volume and we don’t want to see higher prices. So, to me that is one big take home from the study: It would harm consumers as they try to bring tomatoes to the table,” he concluded.
Klinowski agreed there’s going to be some consolidation and moves in the small to mid-cap section on both the U.S. and Mexican side, and reminded the room that reorganization will be necessary. He emphasized that consignment will continue and the right fit will vary from company to company. It all comes down to what mitigates or enhances audit risk.
“Just changes on who’s on what role in the supply chain matters when it comes to audit risk. Out of the gate compliance is going to mean something a little bit different to every person in this room,” Klinowski shared.
Those differences lie in capital structure, financial wherewithal, relationships with the growers, or just the position in the supply chain. And when coming into the regulatory compliance standpoint, those differences matter in the form of what the contract looks like.
“When they have a construed export price, and that number, which we don’t know what it is, becomes the yardstick upon which we govern ourselves while we are trying to hit this moving target, that, in summary, is kind of what this audit risk looks like. And the risk is held by the person that is the importer of record. Not to get on my soapbox, but that affects how your contracts look. At the end of the day, I’m hoping nobody is sitting on a contract that covers the majority of this year with fixed prices from a retailer that is going to absolutely cripple you when you add on an anti-dumping duty, even if it’s only for a 30-day period,” he stated.
These changes affect whether or not someone is a Mexican grower versus a U.S. subsidiary versus an unrelated entity as the importer of record, putting weight on decisions that might not have needed much thought over the past 25 years.
There were several moving pieces to understand, and one more that Jungmeyer posed for consideration was the timing of the request for Commerce’s immediate withdrawal from the Tomato Suspension Agreement.
“One other thing that was interesting here about the political timing of this, and it is always political, is that the ITC was scheduled to make a determination as to whether the suspension agreement was providing the protection necessary and whether we needed to continue, or whether we could go to absolutely no duties, free market, no suspension agreement, and that decision was set to come May 9. So, you’ll notice that by the petitioners seeking an early exit and requesting Congress to do that, and Congress giving the statutory 90 days ending May 7, that stopped the process that, in our opinion, would have shown the industry to not be dumping and would have put us in a completely free market. And that’s where we would like to be—I don’t think anybody likes having the suspension agreement or duties, but right now, the suspension agreement is what keeps things going," Jungmeyer shared.
He broke down for the room the current demands of both sides conveyed through public letters: that of those against the Tomato Suspension Agreement released in November of 2017 and those of the Mexican growers involved in the agreement released April of 2019. Both letters can be found below.
“I think [the Mexican growers] have gone a long way in transparency. They’ve gone a long way in meeting Florida proposals, and so far we are beyond three weeks later and still don’t have an answer. So, while we’re hopeful that there will be a new suspension agreement, we’re preparing people to pay duties and that’s what you need to be thinking about right now,” Jungmeyer related.
Alvarez posed the question of the door that might be opened should no agreement be reached.
“Last year, Mexico exported just about $2 billion-worth of tomato product to the United States. Add to that 17.56% duty, that’s a whole lot of money. I’d say be prepared. Let’s hope it doesn’t happen and that they reach an agreement to keep the suspension alive," Alvarez said. "This goes back to ‘96, they reviewed it every five years, and I know we don’t want to talk about politics up here but it is pretty much about politics, and we do hope it doesn’t affect this industry. Because this whole produce industry...they do it on tomatoes, they’re going to do it on lettuce and other types of commodities as well, if we don’t take care of this. So, what I’d say is be prepared, talk to your customs broker, talk to your bank, and just be ready.”
While there were still many questions left and much to discuss, at least one thing is certain: It won’t be a proverbial shoe-drop today, May 7, but rather a new normal for this branch of our industry to adjust to as we see what awaits on the other side of this chapter.