Middle East turmoil impacts global banana pricing, says Chiquita
Unrest in the Middle East has had spillover effects for the global distribution of bananas during a period of excess supply, according to Chiquita Brands (NYSE: CQB) chief operating officer Brian Kocher.
During a conference call to announce the company's third quarter results, he said an oversupply of bananas would likely continue through the fourth quarter. While such an imbalance is normal for this time of year, it follows from a balanced supply and demand period that lasted longer than usual.
"We actually have a little less excess supply than we planned for," he said.
While Kocher clarified that sales in the region had been improving in recent weeks with a "firming" of the market, the situation influenced global trade during the third quarter.
"Demand has also been impacted by turmoil in the Med trading markets which have traditionally absorbed excess fruit in the second half; in particular, Syria, Egypt and Libya have been less reliable outlets this year, forcing more fruit into the remaining markets," Kocher said.
"This has impacted pricing in the Med trading markets to an extent we have not seen since 2009, as well as impacting pricing in core European and North American wholesale markets.
"We anticipate that there will be excess fruit in the market through the balance of the year. We expect that to negatively impact weekly pricing markets through Q4."
Despite this dynamic, Chiquita's net banana sales rose 3% year-on-year to US$458 million during the quarter, with income for the category improving to US$20 million from a US$2 million loss in the same period of 2012.
"Our North American banana business performed well in quarter. Chiquita continued to experience significant year-over-year volume growth from existing customers and new contracts. Volumes were up 11%.
"Our banana value chain efficiency action continues to deliver as planned. In addition to increased on-farm productivity [up 15%], we continue to see savings on logistics, primarily through shipping rotation enhancement and improved backhaul efficiency.
"We have exited some low value contracts in the face of competitor discounting, but more than replaced that volume with incremental business at value-enhancing customers."
He said the company had a good ability to stretch premiums and adapt to market changes through variability in its system.
"We have a shipping configuration that doesn’t force us to sell into bad markets – we have a little bit of variability so we can make choices on where to sell.
"In each box that we sell during an excess period, we evaluate for the way to maximize cash flow - do we sell it in the Med at a depressed price? Do we try to trade it in the tropics to someone else? Do we transition it to our puree business?
Across Chiquita's divisions, the third quarter result was a GAAP loss of US$18 million, compared to a loss of US$67 million for the same period in 2012.
"Pricing showed sequential improvement over the year to date overall. We delivered significant third quarter favorable pricing variances in our European banana business. This reflected both improved annual contract pricing in the north and the benefits of balanced supply in the weekly pricing markets through the summer," CEO Ed Lonergan said at the start of the call.
"As we’ve said previously, we continue to prioritize pricing over volume in our core European and Mediterranean markets."
A mixed salad
Lonergan said the "headwinds" of a transition from the company's Midwest plant consolidation and challenging growing conditions impacted on Chiquita's salad and healthy snacks division. However, value-added salad volume was up 7.5% year-on-year due to the improved "velocity" of existing customers, along with new customers and acquisitions in branded and private label products.
"On the supply side, sourcing volume and yield has been impacted by adverse growing conditions throughout the year, most recently affecting iceberg lettuce. We are applying enhanced growing strategies in leafy greens to mitigate these kinds of agricultural risks.
"This, combined with a substantially improved apple crop, will provide benefits to the salad and healthy snacks segment in 2014."
Lonergan added the company was in the process of "two big negotiations" that were due for completion in the fourth quarter - one for in-line freight logistics in North America and the other for its linerboard and box business.