The Fight for Top Banana

A global virus is wiping out the world's most popular banana strain. Can these companies survive?

Apr 10, 2014 at 1:58PM

Scientists continue to warn that the world's banana crops are in grave danger. $43 billion worth of Cavendish bananas are facing "disaster" from virulent diseases, particularly from a fungus known as Panama disease tropical race 4 (TR4). The Cavendish is the most popular banana consumed in the United States and Europe. 

The United Nationals Food and Agriculture Organisation (FAO) told the U.K. newspaper,The Independent, that the spread of TR4 represents an "expanded threat to global banana production." Experts said there is a risk that the fungus, for which there is currently no effective treatment, has also already ruining the world's most important banana growing areas in Asia and Latin America. The FAO will soon warn that "virtually all export banana plantations" are vulnerable unless its spread can be stopped and new resistant strains developed. 

According to estimates, TR4 could destroy up to 85-95% of the world's banana crop by volume. Not only could this  impact your morning bowl of cereal, it can hurt your portfolio. 

Fresh Del Monte Produce
(NYSE:FDP) (not to be confused with Del Monte Foods, the purveyor of canned vegetables and pet food), fared slightly better than competitor Chiquita Brands International (NYSE:CQB) in 2013, with overall sales up 8%, thanks to increased banana sales. The company had a little trouble in Europe last year, which led to a non-cash dent in net profitability causing an operating loss of $28 million.

Shares of Fresh Del Monte fell recently upon reports that its fourth-quarter earnings missed the mark. The bottom line adjusted loss was $0.35 per share against expectations of a $0.16 loss. However, revenue climbed 13.3% to $880 million, beating expectations of $791 million. 

CEO Mohammad Abu-Ghazaleh said, "2013 was a year of contrast for us with increased sales and strong progress toward our long-term initiatives tarnished by a disappointing conclusion to the year," but said the fourth-quarter loss was due to "higher input costs and lingering issues in our European market."

But it all begs the question: Can the company handle a global banana virus?

Fresh Del Monte Produce reported approximately $3.4 billion in net sales in 2012, of which $1.5 billion was in banana sales. Overall net sales were down 5% from 2011, and banana sales were down 7% for the year. Bananas and other fresh produce represented 45% of its net sales.

Gone Bananas
Chiquita recently announced a plan to merge with Ireland's Fyffes (LSE:FFY) to create the world's largest banana company. Bananas made up 64% of Chiquita Brands overall 2012 and 2013 revenue. It was also the only segment to earn a profit last year.

The new company, to be known as ChiquitaFyffes, will bump the now-privately held Dole from the top banana position. The merger should provide the company with the ability and efficiency to facilitate cost savings and increased profitability. But whether or not that will be enough to fight TR4 is yet to be seen.

Chiquita's stock price has risen 16.4% over the past month, better than the 1.7% decrease the S&P 500 has seen over the same period of time. Fyffes reported a 6.3% increase in revenue to €1.1 billion for its fiscal 2013 year. Excluding Fyffes' share of its joint ventures, revenue grew to €836 million, an increase of 6.6%.

The company said that the increase in turnover was driven by, "further organic growth in the banana and melon divisions, combined with price inflation in the banana and pineapple categories, reflecting higher input costs."  But will the new company be able to keep stock prices and revenue up as its major crop and staple (the Cavendish banana) depletes?

According to BananaLink, a U.K. public interest group, Dole has about a 26% market share; Chiquita has 22%; Fresh Del Monte Produce has 15% and Fyffes has 7%. That means the top three companies will have 70% of the global market if the deal is allowed to go through.

While the ChiquitaFyffes news may cause momentary excitement, the overall big picture shows some dark spots ahead. A globally devastating virus with strong potential to wipe out the entire crop of the most popular strain of banana should not be ignored. The banana industry is mature, but volatile. It is possible that even if and when the global banana stock of Cavendish bananas is depleted the higher demands and inevitable subsequent inflated prices will keep from hurting the individual companies until a new strain of banana replaces the Cavendish. Only time will tell how quickly the banana will disappear, and how significant the damage will be. Investors should keep aware of the changing environment and monitor the progress of the new banana development, before slipping on a bad stock.   

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