Insight: How Trump's steel tariffs kick the can business

Del Monte Pacific

10/05/2018 06:00

By Nick Carey
    WOODLAND, Calif., May 10 (Reuters) - Dan Vincent is in a
bind. 
    The president of Pacific Coast Producers (PCP) plans to use
around 700 million tin-coated steel cans this year for tomatoes,
peaches and pears from 168 growers here in California. 
    His cooperative then sells the canned fruits and vegetables
to grocers ranging from Walmart Inc  WMT.N  to Kroger Co  K.N ,
as well as food services companies such as Sysco Corp  SYY.N 
and a host of restaurant chains.
    Since President Donald Trump announced sweeping tariffs on
steel and aluminum to help the domestic steel industry on March
20, PCP's steel costs have jumped 9 percent as the market prices
in the tariffs before they even take effect.
    Vincent now expects his steel bill for the year to rise $18
million to $20 million, forcing him to choose between taking a
potential 75 percent cut to his company's profits, or pushing
the added costs to his retail customers and eventually to
consumers - many of whom are lower-income Americans "who can
least afford it," Vincent told Reuters. 
    "Look, we all want to protect U.S. steelworkers," Vincent
said while touring a tomato farm in Woodland, California. "But
we don't want to be an unintended consequence of this."
    Meant to protect U.S. jobs and even out trade imbalances,
the Trump administration's tariffs on steel and aluminum are
having a ripple effect throughout the U.S. economy, from cars to
aircraft to oilfield pipes. Cans have a special significance in
the debate over the pros and cons of the policy. 
    U.S. Commerce Secretary Wilbur Ross, during a March 2
appearance on CNBC, held up a Campbell Soup Co  CPB.N  can and
said it only contained 2.6 cents worth of steel in it, equating
to less than a one cent added cost per can. 
    "Who in the world is going to be too bothered by six tenths
of a cent?" Ross said. 
    A Commerce Department spokesman said the figures Ross used
were based on the cost of tin plate steel and calculated for a
10.75 ounce (0.3kg) can, adding steel is "only one component of
the cost."
    Canning industry executives, however, say the cost of
America's most common 15 ounce (0.43kg) can is actually around
17 cents, and will rise 4 cents thanks to tariffs. 
    Even a 10-ounce can costs food processors up to 14 cents,
and should cost 3 cents more with tariffs.
    Those pennies add up. If the cost of all 24 billion cans
Americans use annually went up 3 cents, it would generate an
additional $720 million in costs someone in the supply chain
must eat, industry executives said.
    "Our members have razor-thin margins," said Nickolas George,
president of the Midwest Food Products Association, which
represents Seneca Food Corp  SENEA.O  and Del Monte Pacific Ltd
 DMPL.SI , which both can fruit and vegetables, among others.
"Lower profits for them mean less innovation, less investment,
less expansion into new markets and less hiring."
    
    HIT TO THE POCKETBOOK
    For consumers, a spike in prices in the grocery aisle puts
poorer Americans at risk, U.S. government statistics show,
because they spend more of their budget on food than those in
higher income brackets. 
    For a graphic, click https://tmsnrt.rs/2I2OcYy   
    The canning industry has made economic fairness part of its
public argument for canceling the tariffs. According to 2012
research commissioned by the Can Manufacturers Institute,
Americans on food stamps and other food assistance programs
consumed 7.1 cans of fruit and vegetables every week, compared
with the national weekly average of 5.5 cans. 
    Retailers and companies like PCP work to keep the cost of
canned fruit and vegetables under 99 cents, which is what
Vincent calls the "magic number," a psychological threshold over
which poorer U.S. consumers in particular have historically
walked away.
    "I'm afraid the tariffs are going to push us over that 99
cent threshold," Vincent said.    
    A key question is whether Walmart will let producers pass on
higher costs, as the retail giant is renowned for pushing back
against price hikes, said Edward Jones analyst Brittany
Weissman.
    Walmart referred Reuters to the Retail Industry Leaders
Association trade group. Hun Quach, the group's vice president
for international trade, said with tariffs "the bottom line is
there is no other place for through costs to go than to
consumers."
    Rivals for PCP in China and Europe, meanwhile, are seen
getting a boost from steel tariffs. Canned fruit and vegetables
imported into the United States will not be subject to tariffs
because they are classified as finished goods, so foreign
competitors are under no pressure to raise prices. 
        
    PUTTING INVESTMENT ON HOLD
    The farmers in PCP's cooperative grow fruits and vegetables
in the rich, sandy-loam soil of California's Central Valley,
east of San Francisco. 
    One of those farmers is Frank Muller, chairman of the
cooperative's board and a second-generation tomato farmer.
    On the thousands of acres he farms, workers carefully drop
young tomato plants into perfectly-formed holes, irrigated by
underground strips to save water. New seeds and more precise
planting techniques have helped Muller more than double the
yield of his fields during the past three decades to 55 tons of
tomatoes per acre.  
    But at the same time, his costs have exploded. In just one
example, he now pays $2,600 per 100,000 seeds up from $20 three
decades ago.
    Muller had planned a new steel equipment storage building on
his farm, but that investment is on hold, he said, due to
uncertainty about the cost.
    "The tariffs hit me at both ends," Muller said. "It means
higher input costs and it will hurt our end markets."
    Richard Elliot is another of PCP's farmers worried by
tariffs. A fifth-generation pear grower, he said a broader trade
war would hurt his exports to Canada and South America. But
Elliot is more concerned steel tariffs will harm PCP, which he
relies on to buy and can a significant portion of his crop. 
    "We can't be in business unless PCP is doing well," he said.
    PCP has expanded over the years, investing in a fruit import
business to can exotic fruit and a cherry-growing operation in
Oregon. When a rival closed its Modesto, California,
peach-canning plant earlier this year citing rising costs and
"import competition from China and Europe," PCP took over that
business.
    The 700 million cans PCP needs for this year's growing
season will add close to $20 million in unplanned additional
cost. The company had expected profit for this year of $24
million, but those extra steel costs could cut PCP's profits by
up to $18 million, Vincent said.     
    To cut costs, PCP will process the extra fruit without
adding to its labor force.
    "There's a lot of money we could have made that will go into
steel," PCP's Vincent said.         

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Poorer Americans spend more on food    https://tmsnrt.rs/2I2OcYy
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 (Reporting By Nick Carey; editing by Joe White and Edward
Tobin)
 ((nick.carey@thomsonreuters.com; +1 312 636 8837;))