June 11, 2019 / 7:15 PM / 14 days ago

Mexico tariff uncertainty leaves U.S. produce importers in the lurch

CHICAGO/LOS ANGELES, June 11 (Reuters) - On Friday evening, watermelon importer Scott Vandervoet received a flurry of WhatsApp messages from his fellow Nogales, Arizona produce brokers: U.S. tariffs on all Mexican goods due to take effect on Monday were off after the United States and Mexico reached a migration pact.

With shipping season for Mexican produce such as table grapes, melons, avocados, mangoes and salad mixes at its peak, the brokers were elated. But their relief was short-lived; on Monday, U.S. President Donald Trump threatened more tariffs if Mexico's Congress did not approve the plan.

"I'm beleaguered. We're just on the edge of our seats here. The threat lingers at the back of our minds ... As long as trade is linked to this asylum-seeker situation that has nothing to do with us, we'll continue to be pressured," Vandervoet said.

Anxiety has plagued the industry for two years, starting with agonizing negotiations to overhaul the North American Free Trade Agreement between the U.S., Mexico and Canada, and spiking each time the White House threatened to close the U.S. border with Mexico to halt the flow of migrants.

Worries peaked on May 30 when Trump suddenly announced the 5% levy on Mexican imports to begin on June 10, rising to 25% by October unless Mexico stemmed the stream of Central American migrants crossing into the United States.

Like Vandervoet and his father, most produce brokers have slim margins that would not be able take the hit.

The uncertainty has left importers concerned about meeting orders from grocers and restaurants, and threatens to disrupt supply chains as some Mexican farmers cancel seed orders for next year or put them on hold.

And if the tariffs become reality, importers are going to have to pass the taxes on to customers or risk going out of business.

Piled into 475,207 40,000-pound truckloads, the United States imported nearly $12 billion of fresh fruits and vegetables from Mexico in 2017, the latest year such statistics are available. The goods were mostly brought in via Pharr, Texas and Nogales, according to data from the U.S. Department of Agriculture.

"25% of $12 billion is $3 billion a year," said Lance Jungmeyer, President of the Fresh Produce Association of the Americas, adding the industry's already thin margins would crumble from such a blow, especially those of tomato importers.

In early May, the Trump administration imposed a 17.5% tariff on Mexican tomatoes after the two countries were unable to renew a 2013 agreement that suspended a U.S. anti-dumping investigation ). With an additional 25% tariff, tomato importers could be looking at 42.5% tariffs, Jungmeyer said. "That's a lot for people to bear."

Big buyers for tomatoes and Central Mexican lettuce include McDonald's, Burger King and Yum! Brands' Taco Bell, Jungmeyer said.

McDonald's, Burger King and Taco Bell did not respond to requests for comment.

Last week, Chipotle Mexican Grill Inc estimated a $15 million hit from the tariffs, saying it could cover the costs by raising burrito prices by around 5 cents. Compounding importers' problems, entry-points were already busy due to the large U.S. appetite for Mexican goods, limiting options for truckers that might want to speed up shipments ahead of any potential tariffs, according to Peter Friedmann, executive director Agriculture Transportation Coalition. "The ability to move a lot out of Mexico is limited," he said.

'ABSOLUTELY DEVASTATING'

Walmart Inc, the world's biggest retailer, said on Friday that it was concerned that fresh produce prices would rise if tariffs went ahead. Chief Executive Doug McMillon said Walmart would resist higher prices on fresh produce for as long as it could, adding: "If the customer is focused on avocado prices, we will hold those prices for as long as we can and focus elsewhere," he said.

If other companies followed suit, it would be another big blow for fruit and vegetable brokers.

The produce import industry and supporting businesses account for more than 22% of jobs in Santa Cruz County, surrounding Nogales, according to a 2013 report by economists at the University of Arizona. Trade and support for factories across the border account for another 10% of the workforce.

"Hopefully, importers will be able to pass costs on to the retailer, whether it's Kroger or Walmart, and the consumer will pay the added cost," said Jaime Chamberlain, who heads J-C Distributing Inc. "We're going to try, but if there's no demand for our products at that price, it's going to be difficult."

Kroger and Walmart did not respond to requests for comment.

Chamberlain's family, based in Nogales, has imported Mexican fruits and vegetables for about 48 years for grocers including Walmart and Kroger Co.

"If the 25% goes through, it will be absolutely devastating for the Nogales community. Over 4,000 jobs depend on produce," Chamberlain said.

"I understand why the president wants to do this. But this is very difficult, and will be detrimental to my community, my industry, and my state of Arizona." (Reporting by Richa Naidu and Lisa Baertlein. Editing by Vanessa O'Connell)

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