The development of the Colombian cut flower industry

Policy, Research, and External Affairs WORKING PAPERS L Trade Policy Country Economics Department The World Bank May 1991 WPS 660 The Development of the Colombian Cut Flower Industry Jose A. Mendez The Colombian cut flower industry is one of the major develop- ment success stories of the last 20 years, growing from small beginnings in 1966 to the world's second largest exporter of cut flowers in 1980. The industry also has become a majoremployer of low-skill female labor. The Policy, Research, and Extemal Affairs Complex distributes PRE Working Papers to disseminate thc findings of work in progress and to encourage the exchange of ideas among Bank staff and all others interested in development issues. These papers eany the names of the authors, reflect only their views, and should be used and cited accordingly. The findings, intrpretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countries.  Policy, Research, and External Affalrsj Trade Policy] WPS 660 This paper-a product of the Trade Policy Division, Country Economics Department-is part of a larger effort in PRE to understand the economics of the emergence of "fairness" as a standard for regulating international trade, its implications for the continued openness of the international trading system, and its continued functioning as an important vehicle for development. Copies are available free from the World Bank, 1818 HStreetNW, Washington, DC20433. Please contact NellieT. A rtis, room N10-013, extension 37947 (35 pages, with tables). The Colombian cut flower industry is one of the Evolution of the Colombian cut flower major development success stories of the last 20 industry illustrates how the market system years. The industry scarcely existed in 1966 but enables a society to coordinate its economic developed rapidly. activities in the most effective way. Historically, cut flower production moved from the eastem By 1980, Colombia was the world's second United States to the westem and southern states largest exporter of cut flowers after the Nether- and then to Colombia. lands, accounting for 8 percent of . world export supply of cut flowers, and it continues to In both cases, development of air transporta- hold that position. tion made markets accessible within hours from anywhere in the world. This freed growers to This rapid development has made the cut shift production to areas with favorable land and flower industry a major contributor to the labor costs as well as a good giowing climate. Colombian economy. Cut flowers are now the nation's leading nontraditional export and fourth In the United States, consumers have ben- largest earner of foreign exchange after coffee, efited from the greater variety, lower prices, and petroleum, and bananas. wider availability of flowers. The U.S. economy also has benefited from the employment opportu- The industry also has become a major nities created by the necessity to handle and care employer of low-skill, largely female labor for the increased volume of flowers at the drawn from the low-income areas surrounding wholesale and retail level. Bogota. In 1989, the industry employed more than 70,000 workers and generated another 50,000 jobs in such ancillary industries as packaging and transportation. The PRE Working Paper Series disseminates the findings of work under way in the Bank's Policy, Research, and Extermal Affairs Complex. Anobjectiveof theseries is to getthesefmdings outquickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the PRE Dissemination Center  TABLE OF CONTENTS Page I. Introduction 1 II. Evolution of the U.S. Cut Flowers Industry 3 A. Dominance of Eastern growers 3 B. The rise of Western and Southern growers in the 5 United States III. The Rise of Colombian Growers 6 A. The right combination of factors 6 B. Overcoming obstacles 9 C. Recent developments 12 D. Future Problems 13 IV. The Ulp-and-Down Colombian Government Policies 13 A. The undoing of a bad policy 14 B. The return of a bad policy 15 C. Another attempt to undo a bad policy 16 D. Policies specific to the cut flowers industry 16 E. Implications for Colombian policy 17 V. U.S. Growers' Efforts to Limit Cut Flower Imports 18 A. Summary of trade actions 18 B. No winners 21 C. Closing comment on the antidumping law 24 VI. Conclusion 24 References 26 Endnotes 27 Tables 29  Introduction The Colombian cut flowers industry is one of the major development success stories of the last two decades. Although the industry scarcely existed in 1966, it soon developed into a world class producer and highly successful exporter. By 1980 Colombia was the world's second largest exporter of cut flowers after the Netherlands, accounting for 8 percent of the world export supply of cut flowers. Today, ten years later, it continues to hold that position. With its export success, the Colombian cut flowers industry has become a leading contributor to Colombian economic development. Cut flowers are now Colombia's leading nontraditional export and fourth largest earner of foreign exchange behind coffee, petroleum, and bananas. The industry has also become a major employer of low-skill, largely female labor derived from the low- income areas surrounding Bogota. In 1989, the industry employed over 70,000 workers (70 percent of which were women) and was respinsible for another 50,000 jobs in ancillary industries such as packaging and transportation. This employment effect, concentrated in a small area, has made a major contribution to the standard of living of the urban poor. The industry also has symbolic importance to Colombians. It is mostly owned by Colombians, and its success is the result of private entrepreneurship turning the advantages offered by Colombia's climate and labor market into a commercial success. The Colombian cut flowers industry's success has also made it the target of protectionist efforts in the United States, its primary market. U.S. growers have tried to obtain limits on cut flowers imports since the early 1970s and their efforts have escalated rapidly during the 1980s. After twice failing to get escape clause protection, U.S. growers have concentrated their efforts on obtaining import relief under the U.S. unfair trade laws. They have filed petitions under every major provision of the unfair trade statute. However, to date, no one appears to have been the winner in these trade actic.ns. U.S. growers are unhappy because the actual protection they received 1  was modest and much less than expected. Colombians are unhappy even though the modest size of the protection is a victory of sorts. They note that it has come at a sizeable cost. They argue that the $1 million spent in legal fees through July 1989 (an amount similar to that of U.S. growers) could have been used to promote U.S. flower consumption to the benefit of all growers. A major theme that emerges from this study is that the development of the Colombian cut flowers industry is a textbook story of how a market economy works. Entrepreneurs, both Colombian and American, saw the opportunities offered by changing economic circumstances and wore willing to take the risk of developing the new business opportunities. By doing so, they provided consumers, particularly those in the United States, with greater variety, lower prices and much greater availability of floral decorations. This process began, however, in North America during the early 1950. as the locus of production of the cut flowers industry shifted from the Eastern United States to Western and Southern states, and then to Colombia; the development of the cut flowers in Colombia is simply an extension of this process. The study proceeds as follows. Section II describes the evolution of the cut flowers industry in the United States beginning in the 1950.. Section III outlines the factors that made Colombia an attractive location for cut flower production and the role played by American and Colombian entrepreneurs in making the industry a successful exporter. The broad historical and geographic sweep of sections II and III serves to highlight the similarity in the two processes. Section IV examines the role of Colombian government policy. The story begins in 1967 when the Colombian government introduced a series of reforms designed to offset the disincentives to exporting. The implications of Colombia's entry into the U.S. market are outlined in section V. This section reviews the history of U.S. growers' efforts to limit imports of cut flowers. 2  Evolution of the U.S. cut flowers industry In the 1950o, U.S. cut flowers production moved from the Eastern United States to Florida and California. Two decades later, cut flowers production shifted to Colombia. The forces that led to both movements were the same. In both cases, the development of reliable air transportation freed cut flowers production from areas close to major consuming markets, but with high land and labor costs. Entrepreneurs saw the possibilities offered by these changes and accepted the risks of developing new business opportunities. Both stories are textbook examples of how a market economy works. A. Dominance of Eastern growers Once cut from the plant, flowers are highly perishable. :fter cutting, roses last 3 to 5 days, carnations 7 to 10 days, standard chrysanthemums 7 to 12 days, and pompon chrysanthemums 10 to 14 days. Prior to 1950, this high perishability was the principal determinant of the location of cut flower production in the U.S. Since it was important to minimize the time between the cutting of the flower and delivery to consumers, the first cut flowers producers in the United States were located in the major consuming areas in the Northeast, i.e. Boston, Philadelphia, New York (Nelson 1981). Tte concentration of cut flower production in the North is illustrated by the data in table 1. In 1949, 12,427 establishments were engaged in the production for sale of cut flowers and flowering plants.I Of these, 70 percent were located in the Northern United States, with Pennsylvania and New York having the largest number of producers. Establishments in the North also tended to be smaller, family-owned operations. Their average sales per establishment (see column three) were below the average for all regions, as well as for the United States. The only advantage in locating in the Northeast was proximity; in terms of production costs, it was the least desirable area for producing flowers in the United States. Costs were higher for a number of reasons. 3  First, most commercial quality cut flowers are grown in greenhouses because they require _sal growing ccnditions: long days of sunshine, high light intens2.y, and mild temperatures.2 The less ideal the external environment, the greater the cost of the greenhouse since it must be more airtight, and the higher its operating expenses. Airtight greenhouses must be constructed of sturdier materials, metal frames and glass rather than wood and cloth (or plastic film). However, the Northeast has shorter days, lower light intensity, and harsher winters, particularly during the peak production periods. This means that Northern growers have more expensive greenhouses and higher heating and other fuel costs. Second, cut flowers production is one of the most labor-intensive agricultural activities. Labor is required it nearly every aspect of its production and very few activities are adaptable to mechanization. In 1949, labor costs were 45 percent of total costs. (See table 1.) Yet labor has traditionally been most expensive in the Northeast. Finally, like all agricultural activities, cut flowers production requires land. However, land values in the North we-e higher due to their proximity to major urban -enters. Production costs for growers in each region are also listed in table 1. In almost every instance, Northern growers' labor, land, and fuel cost shares were higher than those in other parts of the c -ntry. The fuel cost share for Northern growers (9.3 percent) was forty-six times that of Florida growers, three times that of Southern growers, and two times that of Western growers. In addition, the value of land, structures, and equipment per square foot was highest in the North. Despite these higher production costs, Northern producers could continue to remain in operation by charging a premium for their flowers. Consumers were willing to pay this premium since the flowers were fresher and had a longer shelf life. The premium compensated Northern growers for higher production costs, much like a production subsidy. 4  B. The r.se of Western and Sc"thern growers in the United States The development of regularly scheduled commercial air flights during the 1950s eliminated Eastern grower's ability to charge a premium for freshness. Air transportation made it possib.e for flowers to be ut and then transported to any location in the United States within hours. Th's meant that producers could choose to locate in areas with lower production costs. These low-cost areas were largely in the West and South, where labor and land was more abundant and where the climate was more favorable. Eastern markets thus opened up to Western growers. Commercial airlines also encouraged western growers to sell flowers in the East (Nelson, 1981). In the 1950s, most air cargo headed westward and planes were often empty on their return eastward. To encourage eastward traffic, the airlines offered lower air freight rates on eastbound cargo. The competitive position of Northern growers deteriorated. Already pressured by rising land and labor costs due to their proximity to urban areas, they now had to confront the price depressing effects from a greater availability of low-cost Western flowers. The effect on the U.S. cut flowers industry was dramatic. U.S. production of cut flowers began to shift away from the high-cost growing areas in the East towards lower-cost growing arepe in the West and South. The data in table 2 illustrates the shift in proauction location.' Carnations and chrysanthemums, the more durable and relatively inexpensive flowers, were the first to shift production location. Carnations shifted first to California and Colorado, while chrysanthemums moved to California and Florida. Production of roses shifted more slowly.' The other major changes during this period were in the size of establishments and in the concentration of industry output. The amount of output per establishment increased, particularly in areas outside the North. The industry also became more concentrated. In 1975, a few firms accounted for the majority of output. For instance, the U.S. Department of Agriculture reported that 25 percent of the growers accounted for nearly 75 of the 5  production of cut flowers in 1975, the last year concantration data were reported. Thus, from the 19509 through the mid-1970s, a few large establishments, particular.y in California, increasingly displaced the small, family-operated establishments in the North. It is useful to note that the changes in the U.S. cut flowers industry from the 1950. to the early 1970s occurred prior to the emergence of any import competition. The first imports occurred in 1966, but by 1970 their share of the U.S. market was only 1.1 percent. We now turn to the emergence of import competition. The rise of Colombian growers5 During the late-1960s, cut flower production shifted location to Colombia. The shift was an extension of the regional shifts that had occurred in the U.S. The development of commercial air transportation opened up Colombia's attractive environmental and labor conditions to flower growing. The shifts were so related that one of the first Colombian cut flower enterprises was started by four Americans, one of which was a California grower concerned with rising land and fuel costs in the United States. Even the order in which flower types were introduced into Colombia was the same. Carnations and chrysanthemum, flowers which are sturdier and technically less demanding to produce, were introduced first and later followed by roses, which are more fragile and more complex to produce. A. The right combination of factors Colombia was an ideal location for the growing of cut flowers. It had near perfect environmental conditions and an abundance of le.nd and unskilled labor. The climate in the plateau region surrounding Bogota (Savana de Bogota) has year-round moderate and unvarying temperatures, 12-nour days, and high light intensity. As a result, high quality flowers can be grown year- round without expensive greenhouses and without incurring costs for heating, 6  cooling and artificial lighting. For instance, high-quality flowers are grown year-round in the Bogota area in simple structures of wood and plastic. In the Medellin area, the same structures are used only to protect flowers from disease and heavy rainfall during the rainy season. The ability to produce commercial-quality flowere year-round also mears that Colombian growers can continue to prod"_e during the winter months in the United States. These are the months during which demand in the United States is greatest (due to the large number of holidays), while environmental conditions ere least favovable for both home gardens and commercial growers.6 Two other factors made Colombia an ideal location for growing flowers. The country is abundantly endowed with naturally fertile land, which during the early 1970s was being used in low-value activities (Shypula 1981). More importantly, Colombia also had an abundance of low-skilled, largely female labor. This abundance meant that wage rates in Colombia were significantly lower than comparable rates in the U.S. This is illustrated by the data listed below. AVERAGE DAILY WAGE FOR PRODUCTION WORKERS Colombia United States Agriculture Horticulture Private Non- services agricultural 1966 $.82 $16.03 $19.80 1970 .82 21.25 23.97 Source: Urrutia (1985, 10), USDOL and CEA. This wage difference translated into a sizeable cost advantage for Colombian growers. Using the cost data in table 1, the 1970 wage differential meant that Colvmbian production costs were 4! percent lower than U.S. costs. If the fuel cost savings are included, then Colombian production costs were 49 percent lower than U.S. costs. Moreover, the labor end fuel cost advantages were not offset by the high cost of sh.ipping flowers to the United States. Even after factoring in shipping costs, Colombian production costa were still 31 percent lower than U.S. costs. Not surprisingly, these sizeable cost advantages meant that the profitability of selling Colombian flowers in the U.S. market at U.S. prices 7  was enormously high. A 1971 Colombian government study estimated that a cut flower grower could expect to earn a profit amounting to 57 percent of the sales value or a 600 percent return per year on the initial investment.' Another source notes that "the cost of a carnation in Colombia could be as lo,w as one cent and the grower could sell it to the wholesaler in the US for 5 cents." (Riemer 1982, 44-45). Still another source notes that some margins were reportedly 100 percent (Morrow 1989). Although the development of reliable air transportation opened up Colombia's potential as a flower growing area, it was the cow 4.nation of two additional factors, occurring simultaneously, that led to its development as a major exporter of the cut flowers. The two key elements were the entrepreneurial efforts of a team of four Americans and a major shift in Colombian government policy in 1967. This team of Americans prcvided the right combination of skills to overcome the many obstacles to exporting, while the government's policy shift (consistilng of the removal of government-created burdens) provided an environment in which their efforts would be rewarded. The role played by the Colombian government's policy is outlined later in a separate section. In 1969, Thomas Kehler, an American businessman, put together a team of entrepreneurs to determine if a flower export business would be feasible. The team consisted of Harmon Brown, the California flower grower concerned with rising land and fuel prices in the United States; Bill Mott, an econotist; and, David Cheever, who as a university student had used computer simulations to identify the Savanah de Bogota as ideally suited for the growing of flowers. Following a feasibility study, each invested $25,000 and formed a company called Floramerica. The company was a major success. W- 'in a short period of time, it became one of the world's major exporters. By 1986, the company had $50 million in annual sales (Rhee and Belot 1989). Although Floramerica's success was dramatic, its effect on the Colombian cut flowers industry was even more so. In 1970, Floramerica accounted for 8  nearly all of Colombia's cut flowers exports. However, by 1986, the share held by other Colombian firms had r..sen to over 67 percent, primarily because of the demonattatioa effect of Floramerica's success and due to the diffusion of technological know-how from Floramerica to other Colombian firms. Many Colombian companies copied their production and marketing me.!iods, and often hired members of Floramerica's staff. David Cheever, for instance, left Floramerica after two years in order to establish a consulting firm to help new flower companies, and two members of Sunburst Farms, Floramerica's brokerage off'ice in Miami, left to set up their own brokerage firm. This new firm, called Colombia Floral Exchange, is now the second largest importer of flowers behind Sunburst Farms. In sum, Floramerica was directly responsible for the development of the Colombian cut flowers industry (Rhee and Belot 1989). B. Overcoming obstacles Despite the significant advantages of growing flowers in Colombia, serious obstacles stJll remained to be overcome before the flowers could be exported profitably. The most important problem dealt with the handling and ..ransport of the flowers. Growers had to ftad a way to efficiently handle and transport them from Colombia to the U.S. Many early shipments of cut flowers were destroyed in the heat while waiting to 5)e loaded onto planes or to be inspected by customs officisls. Avianca, the major carrier, behaved as a monopolist unconcerned with being responsive to cut flowers growers. It refused to make special provisions for handling the flowers. It considered them secondary to the trarLzport of passengers, and shipped them in regularly scheduled passenger flights stored with the passengers' luggage. To solve this problem, Floramerica and another company, Jardines de los Andes, encouraged other airlines to enter into the business of shipping cut flowers. The first company to do so, Aerocosta failed, and Floramerica and Jardines de los Andes were left were left scrambling for a carrier for months since Avianca refused to carry their 9  flowers. Later, growers did convince Avianca to handle flowers at night and to purchase several freighters to transport them. Other companies also entered into the business of shipping cut flowers. Colombian growers were also instrumental in the development of sophisticated receiv .ag and distribution facilities in Miami. Through their association (ASOCOLFLORES), Colombian growers helped form a common handling company in Miami. This company, called Transcold, would unload the flowers into refrigerated storage areas and have them ready for customs inspections prior to their shipment to wholesalers. Another major step taken by Colombian growers, such as Floramerica, was to establish wtiolly owned importer-distributor companies in Miami and later in Europe. This allowed them to eliminate third party brokerage houses and to control the marketing of their products. It also made it easier to stay abreast of market developments. Today, there are more than 100 importers- distributors of cut flowers in Miami. In 1988, the industry had more than 2,000 employees and, in 1987, had a payroll of about $28 million.8 These facilities handle over 90 percent of the imports entering the United States from Latin America. Colombian growers faced virtually nc problems with distributing flowers throughout the United States, particularly in the eastern states. Growers tapped into an already established system. A trucking company, Armellini, had originally handled the shipping of Florida-produced chrysanthemums to major consuming markets in the Northeast. Armellini guaranteed delivery to Eastern markets within two days. The existence of this distribution system, combined with the greater density and purchases of buyers along the shipping routes, meant that the transportation costs of selling Colombian flowers in Eastern markets was below that of flowers shipped from the West coast (Morrow 1989). Once the impediments to shipping cut flowers from Colombia were overcome, Colombia's exports grew dramatically. Exports to its primary market, the United States, grew at a phenomenal rate; for instance, in 1973, 10  they grew 374 percent. (See table 3, column 7.) By 1980, the industry had become the world's second largest exporter of cut flowers. Equally as impressive was the short time it took the industry to become the United States' leading supplier of foreign cut flowers. In 1974, Colombian growers accounted for over 83 percent of all U.S. imports of cut flowers and its share of U.S. imports was even larger for certain flower typess 93 percent of imported carnations and pompon chrysanthemums came from Colombia. Later, the industry also captured a large share of the U.S. market. Measured in dollars, Colombia accounted fo- 25 percent of the U.S. cut flowers market in 1988. However, measured in units, Colombians accounted for 67 percent of all carnations, 65 percent of all pompon chrysanthemums, and 25 percent of all roses sold in the U.S. Colombia's entry into the U.S. cut flowers market has turned into a major source of benefits for U.S. consumers. These benefits have come in the forr of lower prices, increased variety, greater year-round availability, and increased access through nontraditional outlets. The greater year-round availability of foreign cut flowers has been especially beneficial to U.S. consumers because of the nature of U.S. demand. Imports of cut flowers have helped limit the sharp increases in prices that result during the peak demand-low domestic supply periods. These lower prices have in turn fueled U.S. consumers' demand for cut flowers. Low-price imports have also benefited U.S. consumers by transforming the marketing of cut flowers in the United States. The increased year-round availability of low-cost cut flowers has reduced the costs and risks associated with holding large inventories of flowers. This in turn has made it practical for flowers to be sold by nontraditional or non-florist outlets such as supermarkets and street vendors. Krogers, for example, one of the first high-volume sales outlets to sell flowers, only opened its first flower department in 1978. But, by 1986, 760 of its 1,351 stores were selling cut flowers. Moreover, other major chains had followed its lead. For instance, in 1986, all of Safeway's 1,351 stores had a self-service floral department. 11  Thus, while only 13 percent of U.S. supermarkets had handled flowers in 1977 (Morrow 1989), that number had risen to 86 percent in 1986.9 These marketing changes have further fueled consumer demand. They have done so not only by making inexpensive cut flowers more readily available, but also by creating a greater awareness of cut flowers among consumers and by changing consumers' perception that flowers are a luxury good available only in high-cost specialty stores. Yet, even traditional outlets, such as florist shops, have benefited from the increased availability of low-cost imports and the accompanying expansion in consumer demand. Although their share of retail sales has declined over the last two decades, the surge in consumer demand has led to an increase in their number. In 1963, there were 20,000 flower shops. By 1988, that number had grown to 36,200. In addition to providing benefits to U.S. consumers, low-cost flower imports have created employment opportunities in the U.S. economy, particularly at the retail and wholesale level. At the retail level, grocery stores have increased the demand for workers to care for and stock the new floral departments. At the wholesale level, there has been an increased demand for workers to handle the increased volume of flowers. These employment gains are in addition to those gains noted among Miami importer- distributors. C. Recent developments Colombian exporters have developed into a world class, largely Colombian owned industry. Over 400 firms have an estimated 3,571 hectares under cultivation. As it did in the beginning, the industry continues to export the majority of its output (between 90 and 95 percent), with the United States accounting for 80 to 85 percent of total sales. However, it has lessened its dependence on carnations and now produces more than 30 varieties of cut flowers.'