The power of the U.S. dollar provides a ripe new view on tomato trade

Professors of Agribusiness Jeffrey Englin and Troy Schmitz and Research Professor Octavio Valdez-Lafarga revealed accusations of dumping by American agricultural groups coincided with the appreciation of United States currency against the Mexican peso.

There’s nothing better than handpicked fresh tomatoes to top off a salad, compliment a sandwich, or make a pot of Sunday sauce. When most of us think of tomatoes, we think about the many recipes we can make with the different varieties of the delectable fruit — grape, plum, cherry, Roma, Campari, and beefsteak — not about how they have taken center stage in political debates about international trade.

As it turns out, tomatoes are the highest-valued fresh produce in the United States, and supermarkets carry tomatoes from the United States as well as Mexico and other countries. Before 2010, domestically produced tomatoes held a larger U.S. market share than imports, but since then, the Mexican share of the U.S. tomato market has grown. Today, Mexico holds the largest share, which experts estimate at approximately 54%. Over the years, the intense competition between Mexican and U.S. tomato producers has fueled questions about unfair trading practices like dumping, or price slashing, on the part of Mexican farmers.

Tomatoes in the news

On September 19, 2019, the U.S. Department of Commerce finalized an agreement with Mexican tomato growers to suspend the ongoing antidumping duty investigation of fresh tomatoes from Mexico. In a press release issued by the Commerce Department, Secretary of Commerce Wilbur Ross said, “Today’s successful outcome validates the administration’s strong and smart approach to negotiating trade deals. The department’s action brought the Mexican growers to the negotiating table and led to a result that protects U.S. tomato producers from unfair trade. It also removes major uncertainties for the Mexican growers and their workers.”

In a nutshell, the agreement prevents price suppression and undercutting and eliminates dumping, allows Commerce to audit up to 80 Mexican tomato producers and U.S. sellers, and adds an inspection mechanism to prevent imports of low-quality tomatoes from Mexico. The action, the press release states, exemplifies the Trump Administration’s “priority of ensuring trade agreements are fair, reciprocal, and benefit American farmers, workers, businesses, and consumers.”

But have the Mexican farmers been involved in unfair trade practices to steal business from U.S. tomato producers or could there be another explanation?

Unfair practices vs. exchange rates

A new study by scholars at W. P. Carey’s Morrison School of Agribusiness casts new light on the controversial subject. “The Role of Exchange Rates on Country-Differentiated Demand: The Case of United States Tomatoes” published in the Journal of Agricultural and Resource Economics by Professors of Agribusiness Jeffrey Englin and Troy Schmitz and Research Professor Octavio Valdez-Lafarga revealed accusations of dumping by American agricultural groups coincided with the appreciation of the U.S. dollar against the Mexican peso.

“We find no evidence of dumping,” says Englin. “We find the value of the two currencies is moving around, and every time the American agricultural groups complain about dumping, it’s because the peso went into the tank. This means it’s cheap to grow tomatoes in Mexico, relative to a dollar.”

In other words, when the U.S. dollar is very strong, tomato buyers get more bang for the buck.

“According to our analysis, when we see a lot of cheap Mexican tomatoes coming in, they are seeing a strong dollar,” Englin says. “They are not seeing Mexicans growing products for free. Mexico does not appear to be subsidizing Mexican tomato production. That’s not what’s happening.”

The dollar is stronger than the peso, and consumers benefit from lower prices.

The study looked at graphs of accusations of Mexican dumping and the value of the U.S. dollar and the Mexican peso. Whether the peso went down or the dollar went up, inevitably, six months later there is an influx of Mexican tomatoes in the United States. Englin and his colleagues attribute the time lapse between the change in the exchange rate and the volume of cheap tomatoes to the duration of contracts, which are usually signed at least six months ahead.

The effect of costs on pricing

“If you are a tomato producer in Florida and you look at these cheap Mexican tomatoes, you say they must be selling them to us below the cost to grow them,” Englin explains. “In Florida, the cost didn’t change, they do everything in dollars. But Mexican costs are plummeting.” When it costs less to produce the tomatoes sold for U.S. dollars, the profit margin goes up and prices reflect that.

But Englin understands the frustration of American farmers. “I get it. I don’t blame them. If you were selling a product and you watched the price of your competitors fall, you’d go nuts, right?”

The good news is the variations in exchange rates are ongoing, and at times benefit the Mexican farmers, while at other times, when the peso is higher, American farmers have the advantage.

Dynamically, over the years, these values bounce up and down peso versus the dollar. Some years, the American farmers do well and some years the Mexican farmers do well. It’s a dynamic arrangement.

— Jeffrey Englin, Professor in the Morrison School of Agribusiness

The idea for the research came from one of Englin’s co-authors and former doctoral students, Octavio Valdez-Lafarga, who is now on the research faculty at Autonomous University of Occident, Mexico.

Born and raised in Sinaloa, a Mexican farming state, Valdez-Lafarga says tomatoes are one of the most profitable crops there and as a result, have been some of the more contentious when trade disputes have arisen between producers in the U.S. and Mexico.

“Considering I wanted to do some research on a relevant topic for my state as well as to fulfill a requirement from my sponsor, the Mexican National Council for Science and Technology, it was a great idea to have it as a chapter of my dissertation,” he explains.

Price floors and purchase power

The scholars first looked at several different reasons that might explain the increased market share of tomato imports in the U.S., but just looking at the price was limiting. “We found price floors are in effect to prevent dumping and most of the time, monthly tomato prices were consistently above the price floors,” Valdez-Lafarga says. “Besides, the U.S. dollar is a stronger currency when compared to the Mexican peso, which makes the case for an increased purchase power of the U.S. consumer when it comes to importing products from Mexico.”

So the team decided to test the assumption for the case of tomato demand in the U.S.

In addition to examining Mexican imports and exchange rates, their study also looked at tomatoes imported from Canada. However, the findings weren’t the same, Englin says, because the Canadian and U.S. dollar doesn’t fluctuate as widely as the Mexican peso.

The correlation between exchange rates and prices is especially meaningful when it comes to fresh produce because they can’t be stored like lumber or iron. What’s more, there’s the matter of climate and weather conditions.

“The importance of the economics regarding international trade of any agricultural crop stems from our ability to further understand the level of economic connection that trading partnerships can foster for basic goods such as food, and how this can improve the overall economy for both trading partners,” Valdez-Lafarga says.

Pricing and quality

Regarding the September 19, 2019, U.S. Department of Commerce agreement, Englin predicts it will slow Mexican imports, resulting in less supply. This will drive up prices for consumers. He also questions the notion it will improve product quality. “The quality issue is a red herring to me,” he says. “I don’t think it’s going to change the quality of tomatoes. The market won’t accept bad quality or dangerous quality produce. The last thing supermarkets want to do is sell tomatoes contaminated with listeria or salmonella. They are good at quality control.”

For his part, Valdez-Lafarga sees some benefits of the new agreement, including to promote fair competition within the U.S. market. “From the Mexican producer side of things, they have a better expectation of what the lower prices could be. It helps producers hedge any risk of having prices so low that the actual destruction of the crops would occur as the market would provide no prospects for profit."