VZCZCXRO4553
PP RUEHCHI RUEHDT RUEHHM
DE RUEHML #1236/01 0790803
ZNR UUUUU ZZH
P 200803Z MAR 06
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC PRIORITY 0062
INFO RUEHZS/ASEAN COLLECTIVE

UNCLAS SECTION 01 OF 02 MANILA 001236 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS 
STATE PASS TO USTR FOR BWEISEL AND DKATZ 
$OC FOR 4430/ITA/MAC/DBISBEE AND SBERLINGUETTE 
 
E.O. 12958: N/A 
TAGS: ETRD EAGR EINV RP
SUBJECT:  MINDANAO BANANA PROFITS SLIP 
 
 
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SUMMARY 
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¶1.  U.S. banana growers in Davao City reported that profits 
fell by as much as 40 percent in 2005.  They attribute the 
decline to overproduction, along with increasing operation 
costs.  The Philippines supplies over 95 percent of the 
total Asian banana market, with exports going primarily to 
Japan, Korea and the Middle East.  U.S. companies Del Monte 
Fresh, Marsman-Drysdale, and Dole/Stanfilco Philippines 
produce over half of the total industry and reported 
combined gross revenues of $322 million for 2005.  The three 
companies alone directly employ over 16,000 people in 
Mindanao, and contract services employ at least another 
20,000 there.  Declining profits and possible competition, 
particularly from India, raise concerns about long-term 
growth prospects.  The industry is backing off from 
expansion plans. Even so, these "banana powerhouses" are 
developing strategies to diversify while maintaining their 
market advantage. 
 
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REGIONAL BANANA PRICES PLUMMET 
------------------------------ 
 
¶2.  Meetings with three leading U.S. banana exporters on 
February 23 and 24 in Davao City revealed that the typically 
profitable banana export business brought net profit losses 
for most major U.S. producers in 2005, a trend that is 
expected to continue in 2006.  One company reported as much 
as a 40 percent decline in net profits in 2005, compared to 
2004, which it attributed to a 15 percent increase in fuel 
costs, a 15 percent increase in salary costs, and increasing 
contract costs due to the strong peso.  In addition, a 
record number of banana producers resulted in overproduction 
and market flooding, which caused prices to collapse.  Ten 
years ago, there were about five or six producers, which 
grew to between ten and twelve in 2005.  In Japan, which is 
the most profitable export market for most U.S. companies, 
bananas can sell for anywhere between about $5.00 and $12.00 
a box, depending on the season, with an average sale price 
of about $7.00 a box.  Companies reported that prices in 
Japan fell to as little as $1.50 a box in 2005. 
 
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PHILIPPINES IS ASIA'S BANANA PLANTATION 
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¶3.  U.S. companies produced well over half the industry 
total of 164 million boxes of bananas exported in 2005.  Del 
Monte Fresh, Marsman Drysdale, and Dole/Stanfilco reported 
combined 2005 gross revenues of $322 million.  The 
Philippines supplies over 95 percent of total banana imports 
to other countries in Asia, and the vast majority of these 
bananas are grown in Mindanao.  Primary export markets are 
Japan, Korea and the Middle East.  Thailand, Taiwan, and 
Malaysia produce some bananas, but offer little competition. 
India has the potential to compete heavily, particularly for 
the Middle Eastern market due to its proximity, but so far 
is producing for domestic consumption only.  U.S. companies 
said that if India wanted to start exporting, it could do so 
"in a heartbeat."   Del Monte Fresh and Marsman Drysdale are 
particularly concerned about India since they export 40 
percent and 60 percent of their bananas, respectively, to 
the Middle East.  However, Dole/Stanfilco said that while 
India has the plantations in place, Indian growers would 
have to improve their quality to export. 
 
¶4.  All three companies grow other fresh produce such as 
mangoes, pineapples, and asparagus, together less than five 
percent of total production for Marsman Drysdale and 
Dole/Stanfilco and about 20 percent for Del Monte Fresh. 
The majority of pineapple production is handled by sister 
companies that produce juices and canned fruits, which are 
among the top three Philippine agricultural exports. 
 
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FRUITS OF LABOR 
--------------- 
 
¶5.  The three companies employ a combined total of over 
16,000 people on Mindanao Island, including a small number 
of casual laborers during peak seasons. Dole/Stanfilco 
reported an additional 20,000 employed through contract 
services.  Companies did not report any major labor issues. 
Dole/Stanfilco added that employment opportunities have 
brought visible improvements to the quality of life for many 
people.  Many of Dole's plantations are surrounded by 
 
MANILA 00001236  002 OF 002 
 
 
"bandits," but Dole said that the company's employment 
opportunities are recognized as benefits for the surrounding 
community and mitigate any potential security problems. 
 
--------------------------------------------- - 
LAND OWNERSHIP DISPUTES HAMPER BANANA BUSINESS 
--------------------------------------------- - 
 
¶6.  The biggest investment challenge facing U.S. banana 
growers is land ownership.  Some properties may have two or 
three different titles or no title at all.  In addition, 
land is often owned in small acreage, necessitating a 
"piecemeal" acquisition strategy.  Since U.S. companies 
cannot own land, they sign long-term lease agreements.  Most 
companies lease and operate about half their production land 
and then subcontract with individual growers for the 
balance.  Dole/Stanfilco reported a case that has been 
ongoing for more than five years.  The company has a lease 
agreement for 90 hectares of land, but the ownership is 
heavily disputed.  Dole's position is that it does not 
matter to them who owns the land.  They just need the issue 
resolved so they can resume production.  The 90 hectares can 
produce about 2.7 million boxes of bananas, or about 8 
percent of total 2005 production, which they have omitted 
from company projections.  Dole has been talking to the 
Department of Agrarian Reform, but has seen no result yet. 
 
--------------------------------- 
SOME GROWERS PEEL BACK INVESTMENT 
--------------------------------- 
 
¶7.  Given the poor performance of banana sales in 2005, most 
companies do not have any immediate plans for additional 
investment.  Dole/Stanfilco said that the company had a 
three-year investment plan in place, but 2005 results 
brought investment to a halt.  However, Del Monte Fresh is 
proceeding with expansion plans to develop 800 hectares for 
pineapple production and 2,200 hectares for banana 
production.  Total investment is valued at $3 million.  Del 
Monte's representative said that the investment decision was 
made at corporate headquarters, but may not be well advised 
given market conditions. 
 
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COMMENT 
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¶8.  The banana industry provides a significant number of 
jobs on Mindanao.  Declining profits could result in job 
losses, which could in turn affect economic stability in 
Mindanao.  U.S. companies are disappointed with 2005 
financial results, but these companies are some of the 
biggest players in the market and are best situated to 
weather challenging economic conditions.  Despite the 
general pessimism, U.S. companies are developing strategies 
to maintain their market edge, including expanding more into 
the Middle East market, devoting more resources to other 
produce such as pineapples and mangoes, developing organic 
products to fit niche markets, and competing on the basis of 
quality.  These companies have been in the banana production 
business in Mindanao for over 20 years, and it is unlikely 
that a few bad years will have much of an effect on their 
long-term profitability.  However, potential competition 
from Indian growers could present a more difficult challenge 
to Philippines-based U.S. companies, forcing them to 
reevaluate market and production strategies. 
 
KENNEY