Since December 2014, when the U.S. and Cuba announced the intention to restore diplomatic ties for the first time in more than 50 years, the U.S. has taken steps to ease restrictions on trade, remittances and travel to Cuba. The actions have generated a wave of enthusiasm about the economic opportunities that a more normal relationship between the two countries could create.
A report released in June by the U.S. Department of Agriculture’s Economic Research Service (ERS) examines the potential impacts of more commercial ties between the two countries on bilateral agricultural trade.
The report, titled “U.S.-Cuba Agricultural Trade: Past, Present and Possible Future,” said a more normal trade relationship would lead to an increase in U.S. agricultural exports to Cuba through several channels. First, U.S. exporters would be allowed to extend credit to their Cuban buyers, enhancing U.S. competitiveness. Second, the U.S. would export a broader range of agricultural products – products currently provided by other countries. Third, to the extent that relaxation of economic restrictions on Cuba spurs economic growth there, demand for U.S. agricultural products is likely to grow, including for higher-value commodities like meat and dairy products, and for commodities traded during the 2000s but not recently, such as wheat, rice and dried beans.
Prior to the Cuban Revolution of 1959, bilateral agricultural trade featured large volumes of sugar and smaller volumes of tobacco and pineapple from Cuba, and rice, dried beans, wheat and wheat flour from the U.S. But after the revolution, U.S.-Cuba relations quickly deteriorated when Cuba’s new government took power. Cuba expropriated U.S. economic assets, including farms and sugar mills, as part of its efforts to institute a socialist economic system, and the U.S. imposed economic sanctions against Cuba and broke diplomatic relations. That is essentially where things stood until October 2000, when the Trade Sanctions Reform and Export Enhancement Act (TRSA), which authorized certain sales of food, medicines and medical equipment to a number of countries, including Cuba, was signed into law.
TRSA’s exemptions to the embargo quickly led to the reestablishment of U.S. agricultural exports to Cuba. However, TRSA does not include a legal framework for the resumption of U.S. agricultural imports from Cuba.
The ERS report said U.S. agricultural exports to Cuba averaged $365 million per year from 2012-14. Exports are heavily concentrated in four basic commodities, with chicken meat, corn, soybean meal and soybeans accounting for 84% of total exports during that period in terms of value. Corn, soybean meal and soybeans are all feedstuffs used in livestock production in Cuba. In some years during the TRSA period, U.S. agricultural exports to Cuba have included substantial quantities of rice, wheat, pork, dried beans and soybean oil. But U.S. restrictions on extending credit to Cuban buyers have made it harder for U.S. agricultural exporters to sell a larger volume and broader variety of commodities to Cuba, the report said.
From 2012-14, the U.S. was the second leading supplier of agricultural imports to Cuba behind the European Union ($383 million), while Brazil was third ($348 million). Those three trade partners supplied 61% of Cuba’s agricultural imports during that three-year period, the report said.
The report noted that a major inhibitor of U.S. agricultural exports to Cuba is the TRSA’s restrictions on the terms of payment and financing. TRSA specifies that the only payment or financing terms that U.S. persons may provide for agricultural exports to Cuba are payment of cash in advance or financing by third-country financial institutions.
The U.S. prohibition on extending credit to Cuba’s agricultural importers continues to hamper efforts to export agricultural products to Cuba, it said. From 2005-07, the U.S. exported an average of 124,000 tonnes of rice, 275,000 tonnes of wheat, and 33,000 tonnes of soybean oil to Cuba. From 2012-14, however, it noted that the U.S. exported hardly any rice, wheat or soybean oil, even though Cuba purchased many thousands of tonnes of these products from Brazil and European countries.
Cuba’s rice situation
Cuba’s diversification away from U.S. rice imports represents a loss of lucrative export opportunity for U.S. rice growers, since Cuba has the highest per capita rice consumption of any country in the western hemisphere. Annual capita rice supply (milled equivalent) is about 61 kilograms in Cuba, compared with 7 kilograms in the U.S., according to the Food and Agriculture Organization of the United Nations.
Cuba imports about half of its annual rice consumption, with rice imports averaging about 435,000 tonnes per year from 2010-14. Vietnam supplies 70% or more of Cuba’s rice imports, while Brazil supplies most of the remainder, the report said.
In 2013-14, Cuba produced 423,000 tonnes of rice (milled basis), nearly unchanged from the previous year but up 18% from 2000-01. Cuba plants two rice crops a year. The main crop is planted in April-July and harvested August-December. The second crop is planted in December-February and harvested in March-June.
Since 2009-10, rice area has averaged 203,000 hectares per year, up from an average of 144,000 hectares during the previous five years. The ERS report said the Cuban government wants to boost domestic rice production and reduce imports, especially after the 2007-08 price spike and export bans by some rice exporting countries, and has received technical assistance dedicated to the rice sector from several rice producing countries including Brazil, Japan and Vietnam.
With establishment of a more normal trading relationship, the U.S. rice industry might be able to regain a large share of Cuba’s import market, but only if U.S. suppliers are able to provide competitive terms of credit, the report said. It said several factors favor U.S. rice suppliers in the Cuban market. First, it is a consistent year-round supplier of high quality rice. Second, the U.S. enjoys a distinct transportation advantage over Cuba’s current rice suppliers, with export time being only two days compared to as many as 30 days from Asia. However, the report notes that this advantage is offset to a degree by the higher price of U.S. rice. Third, the U.S. has the potential to export rough rice to Cuba, which could be fully milled there. The fourth and final factor is if Cuba opens up further as a tourist destination, demand for high-quality rice would increase, supporting increased U.S. sales.
U.S.-Cuba possible future
The report said the executive actions announced in December 2014 by the U.S. were a small step toward establishing normal trade relations (NTR), formerly referred to as most-favored-nation (MFN) status, between the two countries. For agricultural trade, NTR includes the application of MFN tariffs to any imports originating in the other country.
While the executive actions modify the payment and financial restrictions governing U.S. exports to Cuba and provide for additional exemptions to the U.S. economic embargo, they provide no opportunities for U.S. agricultural imports from Cuba, except for the small purchases that licensed travelers to Cuba are allowed to bring home, the report said.
The ERS said the new U.S. approach to Cuba contains several key elements that have the potential to affect U.S.-Cuba agricultural trade, albeit in small ways. Several of these elements are intended to remove outright obstacles in bilateral trade, others are designed to reduce transaction costs, and still others aim at fostering greater growth in the Cuban economy.
The first element is the effort to reestablish diplomatic relations with Cuba. In January 2015, a U.S. delegation met with Cuban officials to discuss a wide range of issues and several subsequent rounds of meetings have been held. While these efforts alone do not ensure increased agricultural trade between the two countries, they portend a more favorable economic and policy environment for bilateral agricultural trade over the medium and long term, the report said.
The second element is the relaxation of some U.S. restrictions on traveling to Cuba. The loosening of travel restrictions could have a small, positive impact on U.S. agricultural exports to Cuba by making it easier for people pursuing authorized export transactions to travel there, the ERS noted. Increased travel involving private foundations, research or educational institutions, and the dissemination of information might not immediately result in more U.S. agricultural sales to Cuba, but could strengthen Cuban ties with the U.S. agribusiness and academic sectors, which could help the further development of production agriculture in Cuba, the report said.
The third element consists of additional exemptions to the embargo on U.S. exports to Cuba. New items authorized for export include certain building materials for private residential constructions, goods for use by entrepreneurs in the Cuban private sector, and tools and equipment for private-sector agricultural activity. The ERS said these new exemptions could also stimulate additional agricultural trade between Cuba and the U.S. For instance, small-scale poultry producers who import farm equipment may increase their feedstuff imports from the U.S.
The fourth element is the further relaxation of U.S. restrictions on remittances to Cuba. Remittances are transfers of money sent by a migrant or immigrant to people in his or her country of origin. Increased remittances to Cuba could increase consumer budgets, thereby enabling additional foreign agricultural sales to Cuba. Also, some remittances could be used to invest in agricultural production or retail establishments, the ERS said.
The fifth element is a set of policy changes intended to facilitate authorized transactions between the U.S. and Cuba. The regulatory definition of the statutory term “cash in advance” was revised to specify that it means “cash before transfer of title.” This regulatory change addresses the concern that the revised definition of the term issued in February 2005 adversely affected U.S. agricultural exports to Cuba. The U.S. Department of Treasury’s interpretation in 2005 required that cash payments be made before the goods left a U.S. port, whereas the revised interpretation more reflective of normal cash-in-advance arrangements. In addition, U.S. institutions will now be permitted to open correspondent accounts at Cuban financial institutions to facilitate the processing of authorized transactions, and U.S. credit and debit cards will be permitted for use by travelers to Cuba. These changes will lower the transaction costs for U.S. exports by reducing the liquidity constraint of the payment method and opening new avenues for cash flows, thereby increasing the opportunities for trade, the ERS said.
The sixth element of concern is the intention of the U.S. government to assist with providing Internet access to a greater share of the Cuban population. The commercial export of certain consumer communications devices, related software, applications, hardware, services and items for the establishment and update of communications-related systems will be permitted. These changes are intended to improve telecommunications between Cuba and the rest of the world, which may also facilitate U.S.-Cuba trade, said the ERS. In addition, wireless telecommunications in the developing world is key to helping buyers and sellers of agricultural products find better prices.
The seventh element updates the application of U.S. sanctions on Cuba in third countries. U.S.-owned entities in third countries will be generally licensed to provide services to, and engage in, financial transactions with Cuban individuals in third countries. In addition, general licenses will unblock the accounts at U.S. banks of Cuban nationals who have relocated outside of Cuba, permit U.S. persons to participate in third country professional meetings and conferences related to Cuba, and allow foreign vessels to enter the U.S. after engaging in certain humanitarian trade with Cuba. The ERS said the end of these restrictions may have unknown but positive implications for U.S.-Cuba agricultural trade.
By Arvin Donley, world-grain.com
November 9, 2015