From the conference held by Martin Stilwell (HIT) during the World Tomato Processing Congress (Budapest, 9-12 June 2024, “Where are we now” session).

I think we all know what this means, there is a saying in English: “The elephant in the room”. 

So I am going to be fairly blunt in my presentation. I was asked to talk about Cost of production and as I want to live on, I thought about talking about competitiveness. It's not quite the same thing, because cost of production is always difficult and to present the cost of production of other countries, we’re in danger of misrepresenting them. So I thought I would look at it from another perspective. 

So moving to the next slide, Can we measure competitiveness? I do think that most of you will know my five years' cycle, we're heavily into denial at the moment. And it's better, I think Alistair mentioned we probably need a psychiatrist, it's better to focus on these aspects than to talk about, to try and disguise them in some ways. Fortunately we now have AI, and I asked my AI to tell me what's going to happen or what should happen. Basically it tells me that we need to cut production next year by 32.5%.

I said to my AI, I don't think that's gonna be possible. The answer I then got was: you can cut by 16% next year, but then we will only be fine in 2027.

So this is what I genuinely think we are facing. There are other aspects to this, but then I don't want to put another picture of an elephant again. We essentially have a massive increase in production in China.  And we have our Chinese colleagues here. My own perspective is that I believe that unfortunately China will pay the brunt of this increase. 

I could be wrong but I really think that unfortunately for China, a large part of the surplus this year will remain in China and this time next year will still be there. 

But moving on to competitiveness, we have a number of factors, and the first one is location. Duncan Blake, Alistair's father, drew these two lines across the globe and basically this is very true, the best growing areas are in these two areas, north and south. It doesn't mean you can't grow tomatoes outside these bands. But it does mean that the most competitive areas are located in these two bands. And most of the major producing countries that I'm going to talk about are in fact located in these bands. 

Now if we look at global exports, this is just the percentage of global exports up to the month of February, So a year to February 24. 3.8 million tons, of which China exports 32%, Italy 20% Spain and then interestingly Iran has emerged as a major exporter and has overtaken Portugal, then Portugal, Turkey, Chile, Egypt and then others.

I have a lot of data, it’s at the end of my presentation and I will stop before that, but the presentation will be made available to you afterwards.

It's quite interesting to see where the Chinese exports go. China exports 16% to Iraq, Iran had this market and has lost it in the last few years. And it's one of the major reasons why Iran now appears as an exporter globally, whereas before it was exporting essentially to Iraq.

Italy is the second and it's quite interesting to look at that. Italy imports and then re-exports products to Africa, North Africa and you see Libya coming up as the fourth element. Italy for many reasons is a remarkable country,as far as tomato is concerned. It has undergone an enormous transformation in the last 10 years in terms of its industry, it has followed a strategy of avoiding the production of tomato paste. And where it uses tomato paste to export to North Africa or other countries, it imports the tomato paste and merely cans it and then re-exports.

If we go to Northern Italy, Northern Italy is now essentially specialized in typical Italian products, they are generally low concentration products,and they don't face serious competition from imports. So it's an example for us to adopt over the longer term.

For competitiveness, we have to define “where” because typically, competitiveness in your local country, you are the most competitive. When we look at overall exports, my idea is that Europe is probably the target market for a number of large exporters. And the physical distance is therefore extremely important. And I assumed the port of Rotterdam, for central Europe and the port of Naples for Italian imports. And this is a graph which tells you the distance between the major producing countries and those ports.

Variable costs are another issue. And generally some of these costs are known because they are published in one way or the other. I picked up what I believe people are going to pay for tomatoes this year in different countries.

The minimum wage, with some variations, is generally a publicly available number. 

Energy is obviously an extremely important aspect of production. And it has, increasingly, because of its carbon content. A very important aspect because of legislation which is emerging. 

Then packaging, I haven't got any costs for packaging, not because I couldn't get them but because it is a relatively neutral number. Most people buy their packaging fairly aggressively. There aren’t very major differences in the cost of packaging. 

Now if we look at raw materials, there isn't that much to comment, other than perhaps Turkey. Turkey has 60% inflation, so to obtain an actual price, it's a difficult number to get. On the other hand, Turkey also has a different form of buying tomatoes. A very significant proportion, more than half, is actually bought on a daily basis at a fluctuating price during the processing season. So we don't know, it depends largely on how large the crop is. From the field’s perspective, it also depends on how much the processor wants to buy as to what the price will be when they start to season in late July or August. Other than that, Egypt is clearly competitive, as is China. Chile, and then prices are relatively similar, in terms of euros per ton. I put on the right hand the forecast volume for each country, so that gives you some idea, when you look at the price. 

Now an important aspect of the crop this year. We had extremely high inflation last year, which led to Central Banks rising interest rates. Interest rates are just starting to come down, at least in Europe last week, the European Central Bank reduced the interest rate. Inflation has dropped in most of the major countries, from 10% or higher than 10%, and is approaching the published target of 2%. Still there is some hesitation amongst central banks as to when they will start easing interest rates, but interest rates have a particular importance this year in many years. They are an important factor but over the last 10 years, we had interest rates close to zero. And carrying inventory was therefore not particularly onerous or problematic. You could see, with interest rates in Turkey, where you pay 50 percent interest rates, it will be suicidal to be left with significant stock which at the end is financed by the bank. But even for the USA and Europe, the interest rates of four and five percent are not small. So it's something that we have to bear in mind when looking at competitiveness. 

Now, labor costs. 

I looked that up on the internet. It is available and I confirmed it but it astonishes me that the minimum wage in California is so much higher than all the other producing countries. On the other hand, we do need to bear in mind that the processing factories in California are several multiples larger than companies in the rest of the world. Therefore the actual unit labor cost is probably similar or even lower.

Italy, in Europe, I was quite surprised, probably our Italian colleagues will confirm, but there is not an official minimum wage. There are various numbers published and this was a number I found for Northern Italy. I think Southern Italy probably is a very difficult number to find anyway, so I left that blank.

The rest is basically published numbers on the financial press. It obviously shows probably what we expected. In terms of the order, I was a little surprised by the Turkish number. On the other hand, we need to bear in mind that the Turkish number is probably heavily influenced by inflation at the moment.

Now, energy.

Energy was extremely important, following the tragic start of the war between Russia and Ukraine. And you can see that it is very evident in the top graph where you have an enormous surge in cost. But it's gradually settled back. Most of the global industry is using natural gas. I understand that in China most of the plants have moved or are moving towards natural gas from coal. Natural gas prices from the graph, that you can get again from the financial press, show that natural gas prices in China are a little higher than those in Europe and significantly higher than the US, where the costs of energy In general are lower than in Europe or China. 

Now, energy sustainability and in particular carbon emissions. It's something we see in the press every day. We attribute climate change essentially to CO2 in the atmosphere.

And a number of countries are moving towards limiting the use of energy, forcing industries to become more efficient. And essentially there are two methods which are being used at the moment to promote efficiency by limiting and increasing the cost of energy. And there is a carbon tax which is a very simple method to implement, which basically taxes carbon at x per ton and if it doesn't change, the government takes in that amount of money. But it does very little to limit the quantity being used. 

What is starting to emerge, ETS, which is Emissions Trading Schemes, are I think going to be the general worldwide legislation sooner or later. It’s going to work this way, basically the system, they call it CAP and Trade. The CAP is a maximum limit and then if you exceed that CAP, you have to buy on an open market. At the moment, it's quite interesting. The system in Europe has now been running for quite a number of years and there is a clearly fluctuated carbon price, there is no maximum limit to the price under the scheme. California in the US has stood out from other States and has a system. 

Essentially if you look at the world map, you have 5 groups. You have California and the EU, who have ETS systems fully implemented and functioning, And then you have ETS which has been partially implemented, such as China where it's not applied to the tomato processing industry; Chile is looking at the system, as is Turkey; and Iran and Egypt and other competitors have at the moment no known plan.

When you look at the Californian system, from what is available on the internet and what I understand, they have a system where the price goes up every year. 

The European system, in contrast, the available free licenses decrease every year, so every year you have to buy more licenses to emit. 

The Californian system essentially has three tiers, it has a basic tier which is the price goes up by 5% a year. If that tier is exhausted, they have tier 2 where they have a price ceiling market, which is different From Europe and basically what they have is if the free market price actually hits the ceiling, the Californian government will issue more licenses to insure that it doesn't exceed this level. 

If we go to Europe and we look at carbon costs, and this is publicly available, this is what we as an industry have been having to pay; and obviously it grows during the period of the energy crisis, it came back down this year and it came back up to a level of around 70 euros a ton. 

Now why is this important? Let me talk a little bit about China. China, as I understand, has the legislation, it has published the legislation and it has applied the legislation only to electricity generators so far. It also has not limited the number of free allowances. So essentially it's a system, but it hasn't got a particular price. And you can buy licenses, if you need to, in China at very low value, at 7 or 8 euros a ton. This is important because Europe is moving to legislate in this area for all imports. 

There is a European legislation that was passed on the first of October 2023  (CBAM). Essentially it's a system to protect European industry from imports on an energy level, the European Carbon Border Adjustment Mechanism. This mechanism is meant to be fairly simple and in theory it is very simple. As of the first of January 2025, importers will have to register the carbon content of their products; it doesn't mean that they will have to pay anything but the EU will note what has been imported. From the first of January 2026, exporters to the EU who do not tax their product at home will be taxed the difference between the European costs and their local costs. 

In terms of competitiveness, certainly important in terms of an emotional issue for Europeans, probably for many people around the world in terms of carbon emissions, it will represent in my calculation maybe 30-40 euros a ton. So it's a cost, it won't prohibit imports, but it will be a cost. Now going back when we talked about sustainability, Europe, as is California, is very advanced in legislating. There was the Green Deal which, after yesterday‘s European election, we are not sure quite what will happen, but the Green Deal was extremely aggressive to start in moving to I could say “limit” but if I were a farmer I would probably say “ban” a number of products or pesticides which farmers need in order to be able to grow these crops. 

This is heavily ingrained, I know most of the buyers here, I know many of the European countries. European companies are now wedded to a system where they have to be careful in terms of their consumers as to where they buy their products. And that is essentially why I do think that China will struggle to sell to a number of European customers, simply because they don't have the infrastructure to meet these increasing demands which European companies are obliged to have because of let's call it an emotional feeling of the general population in Europe.

I think probably in that sense California is similar to Europe and stands out from the rest of the US. 

So now I have a series of graphs which I put up, I looked this up for all the countries. I think there are 7 or 8 major exporting countries. 

Looking again at Italy, it used to be a large exporter to Africa, essentially now it's a large exporter to Europe.  

The USA, again, exports to Italy. Essentially there is a market. The US has a Howard mold count limitation. Probably many of you don't know what a Howard Mold Count (HMC) is. Professor Howard was an American professor who developed a method whereby, for processed fruits and vegetables, you squeezed the product on a slide and then you measured the mold contamination on a grid-shaped measuring field. And it’s a percentage, so up to 100. 

The legislation in the US, the FDA limit is 40, which is really quite low. To give you an idea of what this means, most of us would be quite willing to eat tomatoes in a salad which gave a mold count of maybe up to 50%. It sounds horrible, 50% mold, but with a visual guide, you would be quite willing to eat tomatoes at that level. When it starts to get higher, obviously most of us would find it less attractive. But the US cannot produce for sale in the US, so products that are 40 or above 40 can be exported to Europe, where the limit is 70. And that explains why there is typically a quantity which comes from California to Europe every year.

Spain, a major exporter, mainly to Europe. 

Iran is a surprise for us, still exporting to Iraq. But also emerging as a supplier for Russia. Russia has disappeared from exports of European countries in recent years. And to countries we probably didn't think about as consumers of tomato paste, Afghanistan, Armenia, a number of countries here.

Portugal again, like Spain, typically Europe, one exception: we export a significant part of our production to Japan.

Turkey again, Iraq is a major consumer.

Chile, Japan is number one,  and then South America and a few countries in Europe. 

Egypt, it is what it is, it's not a massive export, growing exports.