As this decade comes to a close, the future of the U.S. produce industry remains filled with challenges.
The decade has seen a growing U.S. trade deficit in fresh and processed fruits and vegetables. For example, although U.S. fruit and vegetable exports totaled $6.3 billion in 2015, U.S. imports of fruits and vegetables were $17.6 billion. This deficit has generally widened over time as growth in imports has outpaced export growth.
As a result, the United States has gone from being a net exporter of fresh and processed fruits and vegetables in the early 1970s to being a net importer of fruits and vegetables today. There are a variety of factors shaping current market conditions worldwide, and of them, here are the most important factors we feel contribute specifically the global trade of produce:
U.S. International Trade Policy
Compared to other nations, the United States has a fairly lax and open domestic import policy. Lower tariffs on U.S. fruit and vegetable imports combined with relatively higher tariffs on U.S. exports into other countries is key to explaining why U.S. export growth has not kept pace with import growth. The United States Department of Agriculture (USDA) reports that the global average tariff for fruits and vegetables is more than 50% of the import value.
In the United States though, around 60% of U.S. tariffs on fruits and vegetables are less than 5%. Other developed nations such as Japan and the European Union have more than 60% of import tariffs range from 5%-25%. Developing countries like Egypt, India, and Thailand have even higher import tariffs and since most of them comprise leading import suppliers of fruits and vegetables to the United States, they also get granted trade preferences under an existing free trade agreements, pending or negotiated free trade agreements, or other types of preferential arrangements.
Such trade preferences allow imports to the United States to enter duty-free or at reduced rates, thus contributing to rapid import growth. In some cases, duty-free or reduced tariffs provide an added advantage to supplying countries that may already benefit from lower-cost fruit and vegetable production compared to that in the United States.
The produce industry as a whole is inherently more sensitive to factors such as volatile exchange rate fluctuations and structural changes in the U.S. food industry due to their below-average profit margins and above-average inventory turnover rates. Likewise, increased U.S. overseas investment and diversification in market sourcing by U.S. companies are pivotal to understanding this downward trend.
Generally, as the dollar depreciates against foreign currencies, U.S. exports become more competitive and relatively less expensive than commodities produced domestically in the importing country, indicating a subsequent increase in price competitiveness for U.S. exports or a relative increase in import prices. Conversely, as the U.S. exchange rate appreciates, U.S. exports may become less competitive and more costly. However, the extent to which this actually results in lower prices on imported products in a foreign country will ultimately depend on how much an exporter or importer is willing to pass on to customers.
Overall, the American produce industry faces several challenges coming into the new decade. While they may seem daunting, resources like Tempus’s award-winning FX forecasting can these challenges much more manageable. By locking in Forwards and timing your payments during periods of dollar strength, you can focus on other aspects of your business when the market takes a turn for the worse. As noted above, dollar weakness makes exports more competitive, so not having to worry about fluctuating exchange rates can allow you to focus your business on engaging the global stage.