U.S.-Cuba Agricultural Trade - Past, Present, and Possible Future

U.S.-Cuba Agricultural Trade: Past, Present, and Possible Future
by Steven Zahniser and Bryce Cooke

Highlights:
- Establishing a more normal economic relationship between the United
States and Cuba would allow Cuba to resume exporting agricultural
products to the United States and lead to additional growth in U.S.
agricultural exports to Cuba.
- The United States is already one of Cuba's leading suppliers of
agricultural imports, thanks to a loosening of the U.S. economic embargo
on Cuba in 2000 that allows for U.S. sales of agricultural products and
medicine to Cuba.
-The executive actions announced in December 2014 relax U.S.
restrictions on remittances and travel to Cuba and allow sales of
agricultural equipment to small farmers. These steps by themselves could
foster some increased agricultural trade with Cuba.

In December 2014, the United States announced that it would re-establish
diplomatic relations with Cuba and implement executive actions intended
to ease the trade and travel restrictions currently in place.
Establishment of a more normal economic relationship with Cuba could
foster additional growth in U.S.-Cuba agricultural trade by promoting
greater productivity in the Cuban economy; increasing demand for
agricultural imports among Cuban consumers, food service providers, and
food manufacturers; and providing the policy and legal framework for the
resumption of U.S. agricultural imports from Cuba. The executive actions
announced in December 2014, however, only constitute a small step in the
direction of normal trade relations between the two countries, as
Congressional action is required to modify the longstanding U.S.
economic embargo of Cuba.

Over the long term, perhaps the most important ingredients for fostering
growth in U.S.-Cuba agricultural trade are to build a foundation for a
two-way relationship in trade and investment, and creating the trust for
sustaining that relationship. For agricultural trade, that foundation
does not yet exist. While over the past 15 years the United States has
quickly reestablished itself as one of Cuba's leading suppliers of
agricultural imports, the updated U.S. policy approach to Cuba provides
few if any opportunities for Cuba to export agricultural products to the
United States. Over the next 15 years, the challenge will be to provide
more balanced opportunities for U.S.-Cuba agricultural trade and to
continue to build confidence in the emerging bilateral commercial
relationship.

U.S.-Cuba Past: Cuba was the Largest Foreign Market for U.S. Rice

Levels of U.S.-Cuba agricultural trade prior to the Cuban Revolution of
1959 provide some indication of the possible size and composition of
future trade flows between the two countries. At current commodity
prices, U.S. agricultural exports to Cuba during fiscal years (FY)
1956-58 would have an approximate annual average value of $600 million,
while imports from Cuba would have an approximate average annual value
of $2.2 billion.

Rice, lard, pork, and wheat flour were the four leading U.S.
agricultural exports to Cuba in terms of value during FY 1956-58. Cuba
was the largest commercial market for U.S. long-grain rice exports prior
to the Revolution, often taking more than half of U.S. long-grain sales
and almost one-third of total U.S. rice exports. Meanwhile, cane sugar,
molasses, tobacco, and coffee were the leading U.S. agricultural imports
from Cuba. Past volumes of U.S. sugar imports from Cuba, 2.8 million
metric tons on average during FY 1956-58, rival contemporary volumes of
total U.S. sugar imports from all countries, 3.1 million metric tons on
average during calendar years (CY) 2012-14.

After the Cuban Revolution, Cuba switched from a market-based
relationship with its agricultural trading partners, primarily the
United States, to barter arrangements with the Soviet Union, China, and
other countries in the East Bloc. As a result, U.S.-Cuba agricultural
trade dropped sharply in 1960 and then disappeared almost completely by
the middle of 1961. As relations between the two countries deteriorated,
the United States put an extensive economic embargo into place. By
February 1962, this embargo covered virtually all aspects of U.S.-Cuba
trade, including agricultural imports from Cuba, but still permitted
unsubsidized commercial agricultural sales to Cuba. In May 1964,
however, the general license for these agricultural exports was revoked
as well. Despite some efforts by several administrations to improve
U.S.-Cuba relations, the embargo has remained in place for more than
five decades.

U.S.-Cuba Present: Relaxation of Embargo Allows U.S. Agricultural
Exports to Resume

In October 2000, the Trade Sanctions Reform and Export Enhancement Act
(TSRA) authorized sales of certain food, medicines, and medical
equipment to a number of countries, including Cuba. With the loosening
of the embargo, the United States soon became one of Cuba's leading
suppliers of agricultural imports. From 2003 to 2012, the United States
was the leading agricultural exporter to Cuba, but the United States
slipped to second place in 2013 and to third place in 2014, behind the
European Union (EU) and Brazil. During CY 2012-14, U.S. agricultural
exports to Cuba averaged $365 million per year, with chicken meat, corn,
soybean meal, and soybeans accounting for 84 percent of the value of
these exports.

Growth of U.S. agricultural exports to Cuba has been dampened by the
financial restrictions imposed by embargo. While U.S. exporters are
prohibited from extending credit to Cuban buyers, exporters from other
countries are able to do so. As a result, U.S. exporters of wheat, rice,
dried milk, soybean oil, and other commodities have seen their sales to
Cuba drop to zero, where previously they held considerable market share,
while other exporting countries filled in the gap; Vietnam and Brazil
export rice to Cuba, the EU exports wheat, and New Zealand exports dried
milk.

Another impediment to bilateral agricultural trade is the lack of a
legal framework for resuming U.S. agricultural imports from Cuba. As a
result, U.S. agricultural imports from Cuba are still zero, even though
Cuba still produces many of the agricultural commodities that it
formerly exported to the United States. During 2012-14, Cuban
agricultural exports to the world averaged $526 million per year, with
sugar and tobacco being the leading products. During this time, the
leading customer countries for Cuba's agricultural exports were China
(including Hong Kong), accounting for 45 percent of the total, and the
EU, accounting for 36 percent. 

Recent Executive Actions Create Possibilities for Some Increased Trade

The executive actions announced in December 2014 updated the U.S.
approach to Cuba, with several key elements that have the potential to
affect bilateral agricultural trade. The first element, the effort to
re-establish diplomatic relations with Cuba, began in January 2015 and
was completed in July 2015. While diplomatic relations are not a
guarantee of increased agricultural sales, they do increase expectations
of a more favorable economic and policy environment for bilateral
agricultural trade over the medium and long term.

The second element relaxes U.S. restrictions on traveling to Cuba by
expanding the set of classifications of U.S. citizens and permanent
residents who may visit Cuba under general license from the U.S.
Government, requiring no special approval. This could lead to increased
travel by people pursuing authorized export transactions, possibly
resulting in additional U.S. agricultural sales and stronger commercial
ties with Cuba via the dissemination of information by the U.S.
agribusiness and academic sectors, because some of the classifications
directly relate to such linkages—such as the activities of private
foundations or research and educational institutes; the exportation,
importation, or transmission of information or information materials;
and certain export transactions that may be considered for authorization
under existing regulations and guidelines.

The third element creates additional exemptions to the embargo on U.S.
exports to Cuba, which could also stimulate agricultural trade between
the two countries. These exemptions include certain building materials
for private residential construction, goods for use by entrepreneurs in
the Cuban private sector, and agricultural equipment for small farmers.
The new exemptions could also stimulate additional agricultural trade
between Cuba and the United States. For instance, small-scale Cuban
livestock producers who import equipment for their operations could also
increase their feedstuff imports from the United States. In addition to
these new exemptions for U.S. exports, licensed U.S. travelers to Cuba
will be allowed to import up to $400 worth of goods, with a limit of
$100 for tobacco and alcohol combined.

The fourth element relaxes 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. U.S. remittances to Cuba are
already quite large—approximately $2 billion per year. Since 2009, the
United States has placed no limits on remittances to close relatives in
Cuba, except for certain officials of the government or the Communist
Party. The new policy approach has raised the limit on general donative
remittances to most Cuban nationals from $500 to $2,000 per quarter, and
donative remittances for humanitarian projects, support for the Cuban
people, and support for the development of private businesses in Cuba no
longer require a specific license. Increased remittances to Cuba are
expected to increase consumer budgets, with the potential for additional
agricultural exports to Cuba. In addition, some remittances could be
used to invest in agricultural production or agriculture-related
businesses, such as restaurants or retail establishments.

The fifth element facilitates authorized transactions between the United
States and Cuba. The regulatory definition of the statutory term "cash
in advance" was revised to specify that it means "cash before transfer
of title." Under the previous interpretation of the term, in effect
since February 2005, cash payments for U.S. agricultural exports to Cuba
needed to be made before the goods could leave a U.S. port. In response
to this requirement, Cuba shifted to the more laborious technique of
paying for its purchases of U.S. agricultural products with a confirmed,
irrevocable letter-of-credit completed with a third country bank. In
addition, U.S. institutions will be permitted to open correspondent
accounts at Cuban financial institutions to facilitate the processing of
authorized transactions, and travelers are allowed to use U.S. credit
and debit cards while in Cuba.

The sixth element declares the U.S. Government's intention to assist in
the expansion of Internet access to 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 are now permitted, and
telecommunications providers are now allowed to establish the necessary
mechanisms in Cuba, including infrastructure, to provide commercial
telecommunications and Internet services. These changes are intended to
improve telecommunications between Cuba and the rest of the world, which
may also facilitate U.S.-Cuba trade. In addition, wireless
telecommunications in the developing world is central to helping buyers
and sellers of agricultural products to find better prices.

The final element updates the application of U.S. sanctions on Cuba in
third countries. U.S.-owned or -controlled 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 moved out of the country, permit U.S. persons
to participate in third-country professional meetings and conferences
related to Cuba, and allow foreign vessels to enter the United States
after engaging in certain humanitarian trade with Cuba.

Current Trade Patterns Offer a Clue to Potential U.S.-Cuba Trade

Establishing a more normal trading relationship with Cuba, either
through executive action or more profound legislative changes, is likely
to have a positive influence on U.S.-Cuba agricultural trade. If U.S.
agricultural imports from Cuba are allowed to resume, Cuba will need to
diversify its agricultural exports in order to benefit fully from such a
policy change. Sugar currently accounts for about 90 percent of Cuba's
total agricultural exports, but U.S. sugar policy might inhibit Cuba's
ability to export sugar to the United States. Most U.S. sugar imports
come from Mexico, which has duty-free access as part of the North
American Free Trade Agreement (NAFTA) but faces price and quantity
restrictions as a result of agreements suspending U.S. antidumping and
countervailing duty investigations concerning sugar from Mexico. The
United States uses a tariff-rate quota system, instituted through the
Agreement on Agriculture of the World Trade Organization (WTO), to
manage its sugar imports from most other countries. Cuba is a WTO
member, so if Cuba were allocated quota space, some level of imports
would likely occur, depending on U.S. market conditions and the quota's
size.

Over time, Cuba is likely to develop comparative advantages in the
production and export of fruit, vegetables, tropical plants, and cut
flowers, although this will require substantial levels of investment to
construct the physical capital for such operations. As a potential
agricultural exporter to the U.S. market, Cuba will face competition
from other exporting countries in the Western Hemisphere, many of which
have free-trade agreements with the United States. Over the past several
decades, Cuba is reported to have made strides in organic production and
in the production of certain fruit and vegetables, due in part to the
decreased availability of pesticides, fertilizers, and petroleum that
resulted from the Soviet Union's dissolution. Certification of organic
production destined for foreign markets, however, takes time, and some
Cuban growers might shift away from organic techniques if given greater
access to non-organic inputs.

For U.S. exports, a more normal agricultural trading relationship with
Cuba might eventually resemble the current relationship between the
United States and the Dominican Republic, a country that is similar to
Cuba in terms of total population and per capita income. Currently, the
Dominican Republic is a much larger market for U.S. agricultural
exports. During 2012-14, U.S. agricultural exports to the Dominican
Republic averaged $1.1 billion per year, compared with $365 million for
U.S. agricultural exports to Cuba. The United States also exports a
wider range of agricultural commodities to the Dominican Republic than
to Cuba, including some products—such as rice, wheat, nonfat dried milk,
cheese, dried beans, and soybean oil—that Cuba currently imports from
countries other than the United States and other products—such as beef,
turkey, breakfast cereals, and fresh apples—that Cuba does not currently
import in sizable quantities. Thus, a more normal trading relationship
with Cuba could feature much larger levels of U.S. agricultural
exports—in part due to the growth in the share of U.S. exports at the
expense of other exporting countries, such as the EU and Brazil, and in
part due to a broadening of the commodity composition of U.S. exports.

The prospects for U.S.-Cuba agricultural trade also depend on which
policy measures the Cuban Government uses to foster further economic
growth and development. A scenario featuring a broader opening of the
Cuban economy to foreign trade and investment is likely to lead to more
sustained growth of bilateral agricultural trade. Growth could be
particularly strong if such an opening spurs income growth in Cuba and
the expansion of sectors that rely on agricultural imports, such as
tourism, restaurants, food service, food manufacturing, and livestock
production. Cuba's economic growth and expansion of bilateral
agricultural trade are constrained by the availability of credit: the
current credit rating for Cuba's sovereign debt indicates sovereign debt
of low quality and high credit risk.

Congressional action would be needed to define the policy framework for
establishing a more normal economic relationship with Cuba. Actions that
might stimulate U.S. agricultural exports to Cuba include a loosening of
restrictions on private-sector credit for Cuban purchases of U.S.
agricultural products and allowing Cuba to export products (agricultural
and nonagricultural) to the United States, which would enable Cuba to
accumulate the foreign exchange needed to increase its agricultural imports.

Source: USDA ERS - U.S.-Cuba Agricultural Trade: Past, Present, and
Possible Future -
http://ers.usda.gov/amber-waves/2015-august/us-cuba-agricultural-trade-past,-present,-and-possible-future.aspx#.Vne2NRUrLjZ