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Cablegate: Ecuador's Cut Flower Industry Faces Challenges

VZCZCXYZ0009
RR RUEHWEB

DE RUEHQT #0995/01 2912211
ZNR UUUUU ZZH
R 172211Z OCT 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 9500
INFO RUEHBO/AMEMBASSY BOGOTA 7793
RUEHCV/AMEMBASSY CARACAS 3225
RUEHLP/AMEMBASSY LA PAZ OCT LIMA 2854
RUEHGL/AMCONSUL GUAYAQUIL 3859
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA FAS WASHDC 0611
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS QUITO 000995

SENSITIVE
SIPDIS

TREASURY FOR MEWENS
USTR FOR BENNETT HARMAN

E.O. 12958: N/A
TAGS: ECON ETRD EAGR EC
SUBJECT: ECUADOR'S CUT FLOWER INDUSTRY FACES CHALLENGES

REFTEL A: Quito 442
B: Quito 409
C: Quito 601
D: Quito 225

1. (U) Summary: Ecuador's flower sector has boomed with ATPA
benefits and has recently been targeted by the GOE as a "productive
sector" warranting increased government support. However, climate
issues, increased labor and production costs, foreign competition,
and uncertainty over ATPA renewal have challenged the sector in the
first two-thirds of 2008. Growers responded by expanding exports to
the European market. Given the economic slow-down and possible
recession in both the United States and Europe, the industry may be
facing weakening demand in its two major markets. End Summary

Flower Export Sector Strong...
------------------------------

2. (U) Cut flowers are one of Ecuador's largest exports under the
Andean Trade Preferences Act (ATPA), which provides duty free access
to the U.S. for many goods from Ecuador and other Andean countries.
The flower industry has significantly expanded in Ecuador due to
ATPA. Ecuador's Export and Investment Promotion Corporation
maintains that ATPA has led to 70,000 direct jobs in this
labor-intensive industry. The industry has also attracted FDI from
Colombia and the U.S. The flower sector has been particularly
successful in providing jobs to women, often in indigenous
communities, who frequently do not have other good options for cash
employment. In June, Ecuador's cut flower industry was identified
as a "productive sector" by the GOE (ref A). This means that
flowers and agriculture, along with nine other business sectors in
Ecuador, will be supported with $16 million over the next three
years through the GOE's Plan for Productive Development. The funds
will be used to attract new investment into flowers and other
agricultural industries.

But Faces Challenges...
-----------------------

3. (U) Ecuador's flower industry has faced challenges in 2008. A
difficult rainy season in Ecuador affected the flower sector --
cooler temperatures and increased cloud cover kept some roses from
blooming, leading to reduced production. In addition, tax and labor
laws, uncertainty over ATPA extension, and increased competition
from other countries affected the sector.

4. (U) According to the Association of Flower Producers and
Exporters of Ecuador (EXPOFLORES), Ecuador's new tax law requires
companies to pay taxes on their property even if it does not return
a profit, adding to costs. The new labor law prevents flower
farmers from hiring workers on an hourly basis, a major disadvantage
as hourly workers have always been an important addition during peak
harvest season (ref B). As a result of the new labor law,
EXPOFLORES believes that 15,000 jobs have been lost in the sector.
EXPOFLORES also states that uncertainty over ATPA renewal has hurt
the sector. While it welcomes the multiple extensions since 2006,
it notes that the short-term extensions complicate long-term
planning.

Increased Foreign Competition
-----------------------------

5. (U) Ecuadorian flower exporters are also facing increased
competition from Ethiopia and Asia. Ethiopia's industry in
particular has expanded rapidly; in the past seven years the
industry has grown from zero companies to 135 businesses with 1105
hectares under cultivation. According to one Ecuadorian grower,
Ethiopian and other Asian firms now have a "dominant" position in
Europe and have made inroads penetrating the low-end U.S. market due
to low production and labor costs. The grower noted, however, that
Ethiopia and Asia are currently unable to produce higher quality
flowers to compete with Ecuador's. Another grower commented that
some Ecuadorian firms have responded by purchasing land and
investing in Ethiopia's flower industry, diversifying abroad in
response to increased competition.

Exporters Seek European Opportunities
-------------------------------------

6. (U) The primary market for Ecuadorian flower exports is the
United States. According to U.S. Department of Commerce data,
however, flower exports to the U.S. fell by 11% in the first six
months of 2008, and flower companies anticipate a further decline
due to depressed prices, a likely U.S. recession, and concerns over
the long-term status of ATPA. The share of Ecuadorian flower
exports to the US fell from 74% in 2004 to 67% in 2007.

7. (U) As the U.S. market grows more difficult, many Ecuadorian
flower producers are expanding into Europe. EXPOFLORES claims that
a stronger euro has more than compensated for higher European
transportation costs vis-a-vis the U.S., and in 2007 flower exports
to Europe increased by 37%, with increased exports to Russia
accounting for 41% of that growth. According to EXPOFLORES,
Ecuadorian growers earn 60 cents for each higher quality rose they
sell in Russia, versus 25 cents for a typical rose sold in the
United States. This has led many rose growers within the sector to
focus on varieties for the European and Russian markets (ref C).


Vulnerable to Global Economic Downturn
--------------------------------------

8. (SBU) Ecuadorian economists and industry insiders have expressed
concern that global financial market turmoil and apparent economic
slowdown in the United States and Europe could be harmful for the
Ecuadorian flower industry, since flower purchases will likely drop
in a recession. In addition, since Ecuador is dollarized, as the
U.S. dollar rises against the Euro and the Colombian peso,
Ecuadorian flower exporters could lose competitiveness in their
second most important export market and against one of their closest
competitors.

Comment
-------

9. (U) Ecuadorian flower exports grew rapidly after the
introduction of ATPA in 1992 (?), providing a catalyst for an
industry that is now one of Ecuador's leading exporters and
employers. With that initial boost, Ecuador was able to take
advantage of its natural climatic advantage and become a leader in
the cut flower industry. The industry has been able to adjust to
uncertainty about ATPA by diversifying its market. However, it is
now facing additional pressure from domestic policy changes
(particularly large wage increases), a probable economic downturn in
its two most important markets, as well as new competitors.

HODGES

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