“Why bananas should be handled with care” by Alicia O. Lu (June 6, 2011)

SUITS THE C-SUITE By Alicia O. Lu
Business World (06/06/2011)

To the ordinary consumer, bananas are considered commonplace and cheap.

It is an everyday fruit, available year round.

But in the eyes of an external auditor, bananas are a delicate commodity, a highly perishable fruit in an industry fraught with social, economic and political implications.

From growing to harvesting, packing and shipping, banana production requires care and the human touch.

Due to the stringent technical and quality standards and requirements for export-quality bananas, almost none of the processes in the production can be automated.

Quality inspectors meticulously examine the length and thickness of banana fingers for proper calibration and the arrangement of the clusters. They need to ensure that these are free from defects in order to pass tight quality-control requirements.

First-rate quality bananas (which naturally sell at a premium) are usually classified in the market as “Class A.”

Producing these in the sales mix is the top-of-mind objective for most banana producers.

Along with Ecuador, Costa Rica, Colombia and Guatemala, the Philippines is a top player in the international trade of bananas.

The major banana importers are the United States, Canada, Japan, the Middle East and the European Union. The Philippines is the leading provider for Japan.

Because the consumer markets have different banana import regimes, the international trade of bananas is highly regional and competitive.

As one of the country’s top dollar earners and tax contributor to government, the banana industry provides employment to thousands of Filipinos, with equal opportunities for women and indigenous people.

The industry has been instrumental in developing related industries such as transport, retail, food, consumer goods, entertainment and properties. The industry has also prompted government and private organizations to improve infrastructure to enhance trade efficiency.

The industry’s success redounds to the benefit of the communities in and around banana plantations.

Aside from providing the basic needs of banana workers (food, shelter, health and employment), there are also increased educational opportunities.

It has been noted that there is an increasing number of students from banana-producing areas due to improved household incomes and scholarships granted by banana companies.

Moreover, the industry continues to help transform under- and/or undeveloped land into highly productive enterprises.

In selected areas in Mindanao, the industry has created a positive impact on cultural and political conditions. By providing equal employment opportunities, the industry encourages an attitude of unity in diversity and which has led to improved peace and order on that island.

With social, political and cultural dimensions to consider, the challenges that industry players face can seem daunting.

Added to that is the threat of various plant diseases, volatile foreign exchange rates, temperature and climatic differences, high cost of labor and inputs, varying shipping and trucking systems, legal struggles on specific spraying methods, and the influx of small players whose produce do not undergo extensive quality checks.

Furthermore, the Philippines has yet to penetrate other markets such as Australia where the standards set by agricultural authorities are very rigid.

Global competition in the banana trade has also become stiffer over the years as new banana-producing countries like India and China emerge and gain strength. These countries have vast tracts of land needed for planting the crop.

In addition, India sets a lower minimum wage rate than the Philippines, and has an advantage in terms of proximity to some key markets.

From an accounting perspective, the adoption of accounting standards for agriculture (Philippine Accounting Standards 41) has also become a concern for banana companies because the standard suggests an accounting treatment on standing crops that is different from previous accounting practices. The standard requires the recognition of biological assets which are standing crops at fair value less estimated costs to sell, except for rare cases where the fair value cannot be measured reliably.

The complexity of the processes involved in the biological transformation of banana plant (which would be affected by some unpredictable factors like weather, disease, etc.) frequently causes banana companies to devote a considerable amount of time in determining appropriate bases for their assumptions and estimates of fair value.

Market-determined prices or values may not be available for standing crops. Hence, companies use the present value of expected net cash flows from the assets in their most relevant markets, discounted at a current market-determined rate in determining fair value. These assumptions and estimates would include number of boxes that can be produced and sold, selling price per box, foreign exchange rate, among others.

A lot of other interesting factors have to be considered as well in the range of assumptions and benchmarks, in order to arrive at the most reliable estimate of fair value, such as whether the bananas are planted in a lowland, midland or highland area. For instance, lowland bananas are harvested nine months after planting, while highland bananas are harvested after 14-16 months and so its pricing commands a certain premium.

We can attribute the growth and success of our banana industry to Filipino workers’ competence, diligence and care.

However, while the industry appears to be vibrant and continuously expanding, it is not yet close to being truly robust to become, as the expression goes, a “top banana.” More than ever, the industry at this time needs increased government support, notably in terms of technical and other assistance to improve processes and product development.

(Alicia O. Lu is a Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.