Price adjustments under the Tomato Suspension Agreement (called ‘the Agreement’ going forward) follow unique and very specific rules, some of which turn ordinary trading rules upside down. In this article, we will briefly discuss the history and purpose of the Agreement before discussing these rules in more detail. We’ll also look at some of the illegal ways firms have tried to circumvent the Agreement.
History & Purpose
In April of 1996 the U.S. tomato industry filed an antidumping petition with the U.S. Department of Commerce (DOC) alleging that Mexican producers were selling tomatoes at less than fair value in violation of U.S. antidumping regulations. In the context of international trade, dumping is when a foreign producer sells its product into a foreign market at lower prices than it sells domestically; or, when the foreign producer sells its product into a foreign market below its cost of production. The concern is that dumping may be used by the foreign supplier to drive competition out of the market for later exploitation.
In October of 1996 the DOC announced its preliminary finding that Mexican tomatoes were being dumped in the U.S. market. Faced with the possibility of stiff customs duties, which had been eliminated under the North American Free Trade Agreement, Mexican producers entered into an agreement with the DOC, whereby the DOC agreed to suspend its investigation and Mexican producers (or “signatories”) representing substantially all of the subject tomatoes agreed to a prohibition against selling fresh tomatoes, other than for processing, below a minimum “floor price.”
Although this agreement has been revised from time to time, its essence has not changed. Reference or “floor prices” are published at http://enforcement.trade.gov/tomato/2013-agreement/2013-agreement.html. These floor prices refer to the f.o.b. (free-on-board) price from the selling agent and include all palletizing and cooling charges. Any transportation expenses beyond the point of entry into the United States must be added to the floor price and must reflect the cost of an arm’s-length transaction (i.e., transportation pricing must be consistent with prevailing market prices).
These prices, and other terms of the Agreement, are only required between the signatory (or the signatory’s sales agent) and the first buyer of the subject tomatoes, but subsequent sales may also incorporate these terms by agreement between the parties.
Price Adjustments
Although the idea of prohibiting sellers from pricing their product too low may be unusual, the requirement that Mexican tomatoes be sold at or above minimum floor prices seems straightforward enough. It is, however, complicated somewhat by the perishability of fresh tomatoes and the losses incurred when produce arrives with excessive levels of condition defects. Because unmerited price adjustments could be used to circumvent the floor price, the Agreement is very specific with respect to procedures and the proof needed to support price reductions. The following rules and/or nuances apply when making price adjustments:
#1 – All paperwork and claims are to be resolved within 15 business days after the U.S. Department of Agriculture (USDA) inspection certificate is issued, unless the claim is referred to the Perishable Agricultural Commodities Act (PACA) Division for mediation.
