SAN ANTONIO, Texas - Painful changes are coming soon in how Mexican tomatoes are sold to U.S. importers.
A panel of industry leaders at Texas International Produce Association’s Viva Fresh show said the industry should brace for potential disruptions and consolidation in the wake of those changes.
A packed session April 26 the 2019 Viva Fresh show looked at the implications of the end of the tomato suspension agreement and between Mexican tomato growers and the U.S. Department of Commerce — and the likely start of anti-dumping duties.
The session was moderated by Dante Galeazzi, president and CEO of the Texas International Produce Association. Galeazzi said the tomato suspension agreement has been around since 1996, and the U.S. Department of Commerce’s Feb. 7 announcement of their intent to withdraw from the current agreement on May 7 has dramatically changed the supply scenario for tomatoes in the North American marketplace.
The session included discussions of the history of agreement, the current status of the negotiations and how the end of the suspension could impact the future of the tomato supply chain.
Panelist Lance Jungmeyer, president of the Fresh Produce Association of the Americas, said the original suspension agreement was renegotiated at the end of 2002, in 2008 and again in 2013.
Jungmeyer said there has never been a finding of dumping or major violations of the agreement.
“There are enforcement mechanisms in place, and so it’s unfortunate that a political process has entered into this,” he said, noting a February letter from Florida Sen. Marco Rubio and other lawmakers from the U.S. Southeast that asked the Department of Commerce to immediately terminate the suspension agreement. While Commerce did not agree to immediately end the agreement, it did signal its intent to terminate the agreement May 7.
When that happens, Jungmeyer said the Department of Commerce is expected to slap a 17.56% tariff on imports of Mexican tomatoes and resume its long-suspended dumping investigation. The timing to terminate the agreement is set only days before the International Trade Commission was scheduled to make a determination whether the suspension agreement was still needed, or if the tomato trade could return to a free market.
Countering Southeast U.S. lawmakers who want to end the suspension agreement, Jungmeyer said the Border Trade Alliance has attracted the support of lawmakers from border states who are striving to keep it in place.
“These (members of Congress) know and understand the dynamics and how important these industries are to their community,” he said.
The Florida Tomato Exchange in November 2017 has advocated for "crazy" changes in the suspension agreement that would limit inspection adjustments, Jungmeyer said, among other changes.
Under the proposal, if a load does have a problem, the entire load must be returned to Mexico at the shipper’s expense.
Another requested change is that the minimum reference price would be applied to all non-retail purchases within U.S. through the last sale. That would limit the ability of wholesalers to move tomatoes at a reduced price if there are condition factors in the load. “That tomato seller can’t sell for a loss even if they need to," Jungmeyer said.
Mexican growers have proposed changes in the suspension agreement negotiations that would increase the minimum reference price, provide new enforcement measures and tweak inspection adjustment rules.
Even with the more generous proposal, Commerce still has not responded.
“We’re hopeful there will be a new suspension agreement, (but) we are preparing people to pay duties,” Jungmeyer said.
Jungmeyer said small and medium size companies will suffer if the suspension agreement lapses and likely will be forced to close or consolidate.
Session panelist Jason Klinowski, agriculture and food law attorney at Wallace Jordan Ratliff & Brandt LLC in Birmingham, Ala., said changes to the processes of importing Mexican tomatoes will be significant but not “insurmountable.”
Compliance with the new rules will be challenging, he said, as contracts with suppliers and customers must be examined.
“The million dollar question really is ‘What does compliance look like for you?’ ” he said.
If the agreement lapses, the minimum reference price will be gone. However, there will be a risk of audit for enforcement of the duty and the question of who will be “holding the bag” if anti-dumping duties are not paid.
“In the absence of a reference price, you can’t rely on the fact that your growers are selling to you at a profit and you are also selling at a profit in the United States to avoid a finding of dumping,” he said.
Commerce can conduct audits and come up with a “construed” export price which could disregard the cheaper labor costs in Mexico and find dumping based on U.S. labor costs.
“I absolutely agree that there’s going to be some consolidation and moves in the small to mid-cap section on both the U.S. and the Mexican side,” he said.
Importers will have to have a $50,000 bonding requirement to ensure an anti-dumping duty is paid.
“In an anti-dumping situation, a $50,000 bond would give roughly $2.8 million of entered value before you’re going to get a notice of bond insufficiency from customs — and that point of time, pay up or stop,” Klinowski said.
He also warned that suppliers should avoid being involved in pricing contracts with retailers that don’t account for the added expense of the tariff.
Even if there is an 11th-hour agreement and a new suspension agreement, he said , the anti-dumping duty would likely be in place for at least 30 days while the agreement is put out for public comment.
Session panelist J.O. Alvarez, Jr., president of J.O. Alvarez Inc., Laredo, Texas, said importers must start getting ready to put in place a minimum $50,000 bond to account for the duty.
Last year, Mexico exported just about $2 billion worth of tomato products to the U.S.,” he said. “That’s a whole lot — and then add to that a 17.56% duty.”
Alvarez urged importers to be prepared. “Let’s just hope it doesn’t happen,” he said.
After the panel discussion, a press briefing was held to review findings of an analysis by economists at Arizona State University that said consumer prices for tomatoes could rise up to 40% in the period of May to December if the U.S. Department of Commerce withdraws from the tomato suspension agreement. During the winter, the report said prices of certain varieties of tomatoes could jump more than 85%, according to the study.