Mr. Castro, Tear Down This Wall!

Background

Cuba has a long and rich history, but this story—the story of the island and the superpower—began in the 1800s. By the turn of the century, Cuba had become a sugarcane powerhouse thanks to an influx in slave labor and the geographic monopoly that its colonial power, Spain, had over the Caribbean. The United States—the southernmost tip of which is only about 100 miles from the island—was eyeing Cuba with an increasingly expansionist eye. By the 1850s, a controversial but influential document began to circulate amongst American diplomats, calling for the US to purchase Cuba from Spain—and, if Spain refused, to take the colony by force. The following decade saw the outbreak of the American Civil War, which put such plans on hold.

But the US soon did intervene in Cuba, helping rebels oust the Spanish at the very end of the century. Americans gained temporary control over Cuba, and worked to increase their level of influence over the island and facilitate its business interests across several sectors, particularly agriculture. By the start of the 20th century, Cuba finally achieved true, albeit tumultuous, independence. These years were marked by several rebellions, some of which the US helped to quash. Despite the political turmoil—which eventually culminated in an authoritarian and corrupt regime—Cuba was thriving economically. The global market for sugar, its biggest cash crop, was seemingly insatiable, and demand for its other products, particularly nickel and tobacco, was steady. And when the Cubans were prospering, the Americans were too: according to the USDA, by the late 1950s approximately three-quarters of Cuban arable land and half of its sugar and rum industry was owned by US interests.

By 1959, amidst a climate of rising income inequality, discontent over the strength of American interests, and a growing interest in communism, Fidel Castro succeeded in toppling the US-aligned Cuban government. True to his communist ideals, one of the first items on Castro’s agenda was nationalization. Hotels, oil refineries, factories, sugar plantations and land were nationalized—including those that belonged to the Americans (some of those who were effected are still seeking compensation from Cuba). This caused an uproar in the United States, which passed its first embargo against Cuba in 1960, which was expanded over time.

The depth and the complexity of the US and Cuba’s long relationship help explain why relations failed to improve following the end of the Cold War—Cuban resentment over US “imperialism” was not just rooted in Communist rhetoric, it was partly rooted in its own history.

Cuban agriculture

Cuba was a colony set up to produce sugar and tobacco, and following independence its economy continued to be dependent upon those two crops. Citrus—especially grapefruit—as well as rice, a national staple, have also long played vital roles in the economy.

Cuba’s relationship with its then-closest partner, the United States, froze in the 1960s but it was quick to pick up another superpower ally, the Soviet Union. In 1972, Cuba became a member of the Council for Mutual Economic Assistance (Comecon), the international economic group of socialist states. Cuba was to become the major provider of sugar to member states, and these members committed to buy sugar at a designated price higher than the international average—sometimes several times as high. Cubans, along with fellow member countries, were able to buy Soviet oil at less than the market price, and had preferential access to derivative products like petrochemical fertilizers. 

Cuba’s designation as sugar provider to the Eastern bloc meant that cane production remained intensive—output increased substantially in the 1970s and 1980s, peaking in 1989—but such production was far from efficient. The fixed, inflated price that producers received for their goods failed to incentivize efficiency, and the model of agricultural growth emphasized an absolute increase in output, rather than a productivity-driven increase. The fact that sugar accounted for almost all of Cuba’s exports, and that its market-distorting trade practices made it extremely dependent on Comecon, practically ensured that once the Soviet Union collapsed, Cuba would go down with it. And when the dominoes of Soviet-propped socialist states began to fall in the late 1980s, onlookers—especially those in the United States— anticipated the imminent fall of Castro’s Cuba. They waited, and although the state grew weaker, it failed to break.

The disintegration of its benefactor forced Cuba to change many of its habits and practices. Even as non-socialist countries around the world opened themselves up to trade with the country, they would not be buying Cuban goods at above the market price, as Comecon did. And even though Cuba could still buy food, oil, and fertilizers from a growing list of countries, it would not be getting any preferential deals for them. 

Cuba was thus forced to grow more of its own food, and did so, in part, by converting land that had been dedicated to sugar cane and tobacco to growing food crops. Cubans devoted more land to growing items like rice, beans, corn and bananas—all staples in the Cuban diet.

At the same time as it began downsizing its sugar operations, Cuba’s sugar cane yields began to drop. Short on the foreign exchange necessary to buy the necessary agricultural inputs and used to operating inefficiently, the sugar industry began its disconcerting collapse.

In 1961, Cuba’s cane yields were virtually the same as Brazil’s, but by 2013, Brazilian yields were nearly 90 percent higher than their Caribbean counterpart. The most striking period for Cuban cane productivity was 1990-1993: yields plummeted from about 60 tonnes per hectare in 1989 to just under 55 tonnes by 1991, and to 36 tonnes by 1993. The industry has not really recovered, with yields still struggling to break 40 tonnes per hectare. 

These concurrent factors meant that Cuban sugar production in 2013 was only about 25 percent of what it was in 1961, and only about 17 percent of its Soviet-era peak in 1990.

With the fall of the Soviet Union, Cuba’s access to cheap oil went with it. The newfound fuel shortage of the 1990s inadvertently gave rise to two now very trendy agricultural practices: urban farming and organic production. Higher transportation costs meant that it made sense to grow food as close to cities as possible. The reduced access to cheap synthetic pesticides and fertilizers from the Eastern Bloc meant that farmers could no longer afford to apply such inputs to their crops; and so the system of organopónicos was born—urban, organic gardens.

Organopónicos have become central part of Cuban life—thousands exist across the country today, and provide the city’s urbanites with a significant proportion of the fresh fruit and vegetables they consume. 

Cuban imports

Cuba’s tropical climate means that it is inhospitable for wheat production, so despite the government’s best (experimental) efforts to produce the grain, the country has to import all of the wheat it consumes. And its consumption has grown substantially over the past several decades—quadrupling since 1960, a period over which its population grew by less than 60%. Most of Cuba’s wheat—about $170 million of the grain— is sourced from the European Union (especially France), with Canada being the second-most significant player, responsible for about $67 million in 2014.

Production of corn has increased about six-fold since 1990 to about 426,000 tonnes in 2013, but that has still not been enough to satiate demand. After wheat, corn is the most imported grain in Cuba. Poultry products, soybeans (especially meal and oil), and concentrated milk are all also major food imports for the island. 

Much of Cuba’s food imports come from its traditional trade partners, a list at the top of which are the European Union, Brazil, and China. But over the past decade and a half, one newcomer to Cuban agricultural trade has taken a fast, commanding role: the United States. 

In 2000, US exports of food and medicine to Cuba were legalized under the Trade Sanctions Reform and Export Enhancement Act. The proximity of the US, and the fact that it is a major producer of all of Cuba’s major imports— wheat, corn, soy, poultry—meant that following the Act’s signing, the US quickly became one of Cuba’s top sources of agricultural items. By 2008, about 38 percent of all agricultural exports to Cuba came from the United States, equivalent to $658 million in goods— a staggering increase from what was effectively 0 just 9 years prior. 

But after that year, America’s share of the Cuban market began to fall. The trade act of 2000 allowed for Americans to sell agricultural goods to Cuba, but prohibited the use of credit in these deals, requiring transactions be done through cash, and requiring the use of a third-party bank (which can increase transaction costs). So America’s trade competitors in Cuba were able to crowd out the relative newcomer to the scene by offering the Cubans more attractive credit terms. By 2014, American agricultural exports to Cuba had dropped to $300 million, which represented only about 16 percent of the island’s agricultural imports. 

Implications of the normalization of relations

From an American business’s point of view, normalizing Cuban-American relations is an obvious, lucrative move. If Americans were able to export their goods to Cuba without the cash-only caveat, it would be exceedingly difficult for other exporters to compete for the billion-dollar market.

In December 2014, President Obama announced that the US would begin work to restore full relations with Cuba. Such a restoration must come from Congress, and now that the executive has given his blessing for the policy change, private pressure on Congress to rethink the Cuba policy has begun to mount. 

In January 2015, a large group of organizations formed the US Agriculture Coalition for Cuba (USACC), which is chaired by a Vice President of Cargill, and counts dozens of other influential members—including the American Soybean Association, Louis Dreyfus, the Arkansas Rice Growers Association, and the National Chicken Council. In March, a delegation from the coalition paid a historic visit to Cuba, meeting with government officials and farmers as a part of a broader campaign message to Congress to lift the restrictions against Cuba.

From the Cuban agricultural perspective, normalization of relations could offer the country substantial savings in food imports. Cuban individuals already purchase staple foods like rice and beans at low, heavily subsidized prices, with the government absorbing the overwhelming majority of these fluctuating costs. The timing of these potential savings may be particularly important, given that Venezuela, a long-time provider of oil to Cuba at preferential prices, is likely to roll back that preferential status as it falls deeper into its own economic crisis. 

In terms of export potential, the United States would likely become a significant market for many of Cuba’s coveted, but illegal, products—particularly rum and cigars. But for its flagship product, sugar, the American market is less certain. The US is both one of the world’s top producers and consumers of sugar. And its sugar producers enjoy substantial protection from the government, through mechanisms including price supports and tariff rate quotas (TRQs). America’s trade partners have a strictly delineated quota as to how much sugar they can bring in at the preferential tariff level of 0.625 cents per pound—anything above that amount faces tariffs of 16.21 cents per pound, enough to make such an import totally uneconomical. Cuba’s sugar export potential in the United States is therefore inherently limited. But there remains the possibility that closer ties to the US may help Cuba boost its ailing sugar sector—through the provision of affordable inputs or equipment—and encourage higher earnings that way. 

Cuba is more likely to find an American market for its products besides sugar. Fish, which Cuba already produces in significant quantities, could be a particularly promising sector for the country. In 2012, Cuba exported more than $50 million worth of crustaceans, a seafood imported in particularly large quantities by the United States—in 2014, the US imported $314 million of crustaceans from Mexico alone. Mexico also supplies the US with $91 million in fresh fish$17 million in mollusks, and $13 million in frozen fish, and is a particularly useful analogy given similarities between Mexico and Cuba in terms of respective levels of aquatic life.

Conclusions

In agricultural terms, the US seems to have the most to gain from the normalizing of its relationship with Cuba. Cuba is more likely to see the advances in sectors like telecommunications—advances that have the potential to be transformational. But for both parties, the end of a seemingly never-ending stalemate, is in and of itself a major and lasting gain.