Rethinking the price of bananas

Alistair Smith Thursday, 07 January 2010

One of the most basic roles of a permanent World Banana Forum that is focused on a transition to a sustainable banana economy could be to rethink the whole question of price.

In the past, it was the big banana companies that more or less determined their selling price to importers and wholesale markets in the consumer countries. But with the rise in buying power of the supermarket chains, most fruit is now sold directly by importing/ripening companies to retailers. Because retailers' prices are visible to all consumers, supermarkets can adjust their prices at an hour's notice in response to price moves by their competitors, without risking allegations of collusion.

In the UK, for example, a ferocious ongoing price war between the leading supermarkets has stripped more than half the total value out of the banana chain. However, the retailers claim that cheap bananas are not at the expense of producers and intermediaries, as the cuts have come out of retail margins. But for how long? If prices remain at these rock-bottom levels, the key question is what happens next time the retailers renegotiate prices with their suppliers?

Banana Link calculated that prices paid to suppliers of UK supermarkets are already one-third lower than seven years ago, as the banana companies have sought to reduce cost as much as possible. At the same time, few plantation workers now earn anything like a living wage.

Some retailers have come to accept that there is a level below which prices paid to suppliers become “unsustainably low”. Meanwhile, plantation workers and small-scale growers have been able to demonstrate to some buyers that it is they who bear the burden of price cuts passed back down the supply chains. But this is where we hit a major taboo.

Retailers fear that discussions amongst competing companies about price and its relationship to sustainable production practices would somehow violate competition laws. This taboo surrounding discussions of price has so far prevented retailers from engaging in any meaningful way with their competitors about how to break out of what they recognise to be a destructive cycle of price wars.

Fair trade – an example of what is possible

More than ten years ago, the Fairtrade Labelling Organisations International (FLO) put in place an innovative system of banana pricing which now applies to some 2% of world banana trade. For each of the countries where FLO has certified Fairtrade producer organisations, it has set minimum Fairtrade prices that are based on a calculation of “sustainable costs of production”. These costs are arrived at in consultation with producer themselves and by using other available industry data.

The guiding principle of the “sustainable costs of production” calculation is to internalise the costs of compliance with decent social and environmental standards and to generate a reasonable profit with which producers can invest in the long-term stability of their activity. In practice, many traders pay above the minimum Fairtrade prices set by FLO.

From 1st January 2010, minimum farm gate prices for conventional bananas will range from $5.30 per standard 18.14kg box to $9.00, whilst minimum FOB prices will range from $8.20 to $12.30 per box. The differential between organic and conventional prices is in the range of $2.00-2.20 per box.

Although there are certain to be imperfections in the process of calculating “sustainable costs”, it is a model that has the potential to change the way prices are seen in the overall banana economy. Now that cost information can be gathered and shared quickly thanks to information technology, minimum prices could be more responsive. The model also needs to contemplate how to incorporate labour costs, which should be moving towards living wages for all hired workers, rather than just being calculated in relation to actual wages and legal national minimum wages.

What is clear however is that this model of fair pricing is put under pressure when the conventional market is in oversupply and prices at FOB level are particularly low or when there is a downward spiral of retail prices through fierce inter-firm competition. Conventional and Fairtrade price divergence can threaten to undermine consumers' willingness to pay a fairer price. The risk of a new “race to the bottom” in the Fairtrade market where retailers and traders chase cheaper Fairtrade bananas cannot be discounted.

A new paradigm for banana pricing

We propose a multi-stakeholder approach to generate fair prices along the whole chain. This approach would not only take into account all the financial costs (land, agricultural inputs and infrastructure, plantation labour, maritime transport and labour, refrigeration and insurance, import tariffs, port handling, transport, ripening and distribution), it would also have to agree on mechanisms to internalise environmental and social costs.

This would require imagination, innovation and a high level of trust between actors at all stages. The process would also depend on the gathering and sharing of information about costs of production, volumes and trade flows by a kind of market observatory body that is trusted by all actors.

If the different actors can agree to abandon futile price-cutting that risks stripping value out of the whole chain from the top down, can find ways of overcoming the taboo surrounding ill-adapted competition policy tools, can learn from the example of fair price formation in the Fairtrade sector and can exercise sufficient imagination to generate consensus within and between banana producing and exporting countries, then bananas could show the way for the rest of the world economy. A shift in paradigm is not just necessary, but eminently possible. Let's dare to be wise.