Chinese tariffs to stunt market development for premium U.S. apple varieties
Last week U.S. growers and exporters told Fresh Fruit Portal their thoughts on an extra 15% tariff in China for cherry exports, the most significant fruit commodity to be hit by a new duty borne of a trade dispute between the two nations. One reason cherries are so vulnerable to a measure like this is their status a luxury good - in other words they are already costly to produce and ship. In that same light, new trade barriers could make it more difficult for premium or proprietary variety (PV) apples to get off the ground in China.
When the U.S. apple industry gained access for all varieties to the Chinese market in 2015 the impact was immediate. Shipments to mainland China leaped from a mere US$3.6 million in 2014 to US$23.2 million the following year.
Since then exports have lagged off somewhat down to US$17.7 million in 2017, but this is still almost five times what it was before the new protocol - a time when only Red Delicious or Golden Delicious could be shipped to the East Asian country.
In volume terms, last year apples were the third-highest U.S. fruit commodity exported to mainland China, behind cherries and citrus and ahead of table grapes.
"Gala is probably the number one other variety that has thrived and then the second variety is Granny Smith, which has exploded in volume," says Washington Apple Commission president Todd Fryhover.
"What we do see is the e-commerce aspect of China. It’s really taking off and that provides a unique opportunity for high value varieties, what we call proprietary varieties in that marketplace.
"While it’s small in comparison to Red Delicious, Galas and Granny Smiths, we’re seeing interest in some of these high-value proprietary varieties going through the e-commerce platform, which really provides tremendous incentive for our industry as currently that’s where our growth pattern is."
While there are almost too many of these cultivars to mention coming out of the Pacific Northwest, Fryhover says most of the ones with sufficient volume behind them are being tested in the Chinese market.
"The quantity going into these markets is very small. We’re just touching our toes into China into exports of these proprietary varieties because they are focused on the U.S. domestic market. No question," he says.
However, with aggressive plantings underway the development of export markets will be crucial to the success of these apples. Fryhover believes this will be the case particularly for Cosmic Crisp, a cross between Honeycrisp and Enterprise apples.
"Cosmic Crisp is proprietary in the context that every grower in the state of Washington has access to these trees, It’s not one packer, one grower, it’s everyone," he says.
"The growers of New York or Pennsylvania or in most cases overseas, they don’t have access to this variety.
"So what we see in the next 10 years is a huge increase in plantings and availability of Cosmic Crisp and it will need to go export almost immediately because volume will come on so quickly."
For the near term the industry representative expects minimal impacts given Southern Hemisphere supplies are starting to hit the Chinese market anyway now and Washington State is in the second half of its campaign.
But does he think the tariff will lead exporters to cut back in the next season that starts around September and October?
"Absolutely. When we do the math it’s roughly US$4.30 a carton that the 15% represents," he says.
"On our side we’re really focused on finding a solution in the short term to these trade disputes and re-opening the market this fall for all our fresh, new varieties that we’ll be harvesting."
He adds that prior to the recent announcement Southern Hemisphere suppliers already had lower tariffs than their U.S. counterparts, who had a rate of 10%.
"So there are a lot of advantages for them coming into the marketplace. It would be very normal to see Washington shipments drop off during this part of the season," Fryhover says.
He adds that when you include Hong Kong the export figure for U.S. apples to China is more like US$50 million.
"When we look at shipment data into China we include Hong Kong in that data point, however the protocols and duties remain exclusive," he says.
"Hong Kong remains a free port. Hong Kong does not adhere to the Chinese phytosanitary protocols. We look at both of those markets together."
But whether the new tariff regime will mean more U.S. apples go to Hong Kong instead of directly to mainland China is still anybody's guess.
Apple exporter response
New Zealand-bred varieties Jazz, Envy and Pacific Rose are owned by T&G Global, a subsidiary of German group BayWa AG. These apples have all had initial success in China, but to truly gain a strong foothold a year-round program is necessary with supplies from Northern Hemisphere partners.
Canada-headquartered Oppy forms a key part of this strategy, buoyed by plantings in the Pacific Northwest. The partnership between the two entities was strengthened last year when Oppy acquired a 50% stake in T&G subsidiary Delica North America.
"Artificial trade barriers are never a good thing for high-value agricultural exports. This does have an effect," says David Nelley, Oppy’s VP of apples, pears, cherries and global exports.
"On the apple side the variety that we would export the most to China would be Pacific Rose. That’s a variety that grows uniquely in Washington State with very high color, so it’s frustrating that there is an item that the Chinese love because of the way it grows in Washington State that now is subject to a further tax.
"Our season is complete now. We won’t know where we stand on this until November when fruit starts arriving."
But as frustrating as the situation may be for U.S. farmers, Nelley is optimistic and sees a generally "stoic" mood.
"Trade always finds a way, so perhaps this means that supplies of branded Pacific Rose out of New Zealand go a little bit longer into China, or the U.S. fruit that is a bit more expensive will be available for a shorter window. We don’t know how this will play out yet," he says.
While patents for premium apple variety Ambrosia have expired in the U.S. and Canada, major Washington State grower-packer CMI Orchards is a leader for the cultivar in terms of the amount of trees in the ground.
The company's director of export sales, Marc Pflugrath, confirms the group has been trialing Ambrosia in the Chinese market but on a small scale.
"We’re still in the developmental stage. We haven’t shipped that many of them over there yet," he says.
"China’s a Red Delicious market for Washington and we ship some Galas and Grannys over there too. As far as the proprietary varieties, we’re trying to get some traction with the Ambrosia but it hasn’t been that big a deal for us yet - maybe someday it'll turn into something.
"As big a market as China is, it’s not that big a market for us as a company [in apples]. We actually rely on some of the other markets in Asia more than China," he says.
Jeff Webb, Domex Superfresh Growers' director of international business development says trials will continue for his company's proprietary apple Autumn Glory.
"That's an apple that was developed eight or nine years ago for Domex. It can only grow in Washington State for example and it has high potential for this [Chinese] market because of its storage-ability - it's an extremely good storing apple," Webb says.
"It’s a very unique flavored apple, very crisp, holds very well on the shelf of a supermarket in ambient temperatures. It has a cross between cinnamon and caramel tones to it - it's a cross between a Fuji and a Golden essentially.
"It’s doing very well in a few other countries we’ve started with, as well as North America, and it’s growing extremely fast in popularity. Our next target is China and we’re doing specific demo programs and some of these things going forward."
Webb claims the tariff issue is however "causing speed bumps".
"The fortunate thing is it’s April right now and we’re going into a slowdown period for apples in China anyway. We don’t see the effect so much at this very moment," he says.
In contrast, Auvil Fruit Company export sales manager Bin Zhang is already seeing impacts on the commodity.
"It's already hit us. For fruit that was shipped several weeks ago that arrived after April 2 the customer is asking for an adjustment," he says.
"That’s going to hurt the growers because the tariff would have US$5 more cost per box. They’re not making US$5 – they’re making probably US$1 or US$2 so we have to help them to split the difference.
"Nobody is making that much. They’ll be happy if they make a dollar or two, but nobody is making US$5 to US$10 – the margins are just not there."
Chinese market looking pear-shaped?
Like his peers in the apple sector, USA Pears international marketing director Jeff Correa believes it's still difficult to ascertain exactly how great the impact will be on exports while he's also hopeful a resolution can be found before the season beings later this year.
"Our market window in China is already over, so there is no immediate impact for the NW pear industry. Our exports are shipped to China late August to March with volumes peaking prior to Chinese New Year (mid-January to early February)," Correa says.
"So, the NW pear industry has a reprieve until the start of our next crop season. And hopefully, these tariffs are a prelude to trade negotiations between the US and China and by the time we start our next season, there will be a positive resolution to the trade dispute."
If the U.S. pear sector does face an additional 15% tariff next season, Correa says it would take the total tariff up to 25%.
"Our main competitors in the market for western pears (Belgium and Netherlands) will have a 15% tariff advantage on us," he adds.
Regardless of what happens with the tariff, the effect on the U.S. pear sector will be much less pronounced than in the cherry, citrus, apple or table grape sectors. He says the Chinese mainland was the sixth-biggest export market in 2015-16, but its ranking has dropped to 16th place this season.
"In Asia, India and Taiwan are larger export markets," he says, adding Mexico is the most relevant export market accounting for 50% of shipments (1.4 million boxes), followed by Canada (812,231 boxes) and the UAE (150,221 boxes).
"It is hard to estimate the full impact of the retaliatory tariff because the Chinese market has been in flux for Northwest pears the past couple of seasons.
He highlights the Northwest had only had Chinese market access for five years, and in the second full season shipments to the destination surpassed 200,000 boxes.
"However, volumes have dropped significantly since that season due to smaller Northwest pear crops, higher FOB (freight on board) pricing and increased competition in the market.
"So far this season, we have shipped 35,000 boxes. We are estimating that sales could drop again next season with the increased tariff or under the best case scenario remain at the same volume level as this season."
He emphasizes there will still be some opportunities for the Starkrimson and Red Anjou varieties in the market, but volume will depend on FOB pricing next season. He highlights these red varieties in particular as there are "no other countries that are selling red colored pears to China".
"So, the hope that there will still be some sort of market for them in China even with the higher tariff," he says.
Cherry sector feedback
As part of our ongoing coverage of industry perspectives on the issue, two of the aforementioned apple shippers also offered their thoughts on the cherry crop, which is by far a more pressing concern.
"In apples if we don’t like the market or they add a duty on us, we can keep fruit in CA (controlled atmosphere) storage and we’ll figure out a way to sell it somewhere else for good money. We have options," says Pflugrath of CMI Orchards.
"The cherry season is different. You have to pick, pack and ship - what you picked today needs to be on the road tomorrow.
He says that for his company China is the most important export market for cherries behind Canada, which logistically speaking is almost like a domestic deal anyway.
"We’re still going to ship a lot of fruit over there this summer; I just don’t know how much this added 15% tariff is going to affect this," he says.
"Unfortunately I think some of that’s going to come out of the FOB pricing to make it more affordable on the other end. We've still got to have that market - we're not going to walk away from China just because they added a 15% duty on us."
Nelley of Oppy says no one is suggesting cherry U.S. cherry exports to China will stop altogether, but industry players are starting to speculate and map out potential consequences.
"Could there be more cherries from Canada and Turkey making their way to China and being tariff-free? It’s yet to be seen," he says.
"Could there be a lot more USA Cherries flooding all of the markets in Asia outside of China, and then falling back into the domestic North American market, that is USA and Canada?
"The new tariff means US$18,000-20,000 per container on ocean cherries depending on the variety. No farmer likes to pay more tax to a government and farmers competing in high-value, high-quality agricultural items detest trade barriers."
He adds Chinese importers that have been in contact with Oppy don't appear to think the tariffs will have much of an impact on Californian cherries.
"It sounds like volume in California is down from last year’s record crop – of course California will be the first ones to experience it, but the greater volume of cherries going to China comes from the Pacific Northwest so that starts in early-to-mid June. We’ll see where the impacts fall then.
"There’s no doubt this is just another headache people in the agricultural export trade face. You wake up one morning and there could be hail. You wake up another morning and you’ve suddenly got another 15% trade barrier thrown in front of you."
Table grape industry response
California Table Grape Commission president Kathleen Nave also issued a statement on the issue:
"California has been shipping table grapes to China since 1997; China has become a top export market consistently ranking in the top five," she said.
"A big part of the growth can be attributed to the lowering of the tariff over time. Currently the tariff is 13 percent.
"Increasing the tariff to 28 percent is expected to have a very negative impact on exports. In 2017, 1.78 million boxes of California table grapes were shipped to China making it the number four export market."
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