1 U.S. Department of Agriculture Foreign Agriculture Service, PSD Online Database

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1 Before the U.S. International Trade Commission Investigation No Overview of Cuban Imports of Goods and Services and Effects of U.S. Restrictions Written testimony submitted by Brett Blankenship, President of the National Association of Wheat Growers and Roy Motter, Chairman of U.S. Wheat Associates In accordance with a Federal Register notice dated February 4, 2015, and modified on March 4, 2015, we submit this testimony on behalf of the previously named organizations and their members. U.S. wheat growers export approximately 50 percent of their wheat crop every year. As a tradedependent industry, growers rely on the ability to open and expand international markets. Cuba, with no domestic wheat production, represents substantial potential for U.S. wheat growers. Cuba s 11.3 million people consumed an average of about 800,000 metric tons (MT) of wheat per year over the past ten years, 1 making it the largest importer of wheat and wheat products in the Caribbean. Wheat Situation Post-TSRA For many years, the U.S. wheat industry was shut out of the Cuban market, but the industry was finally able to establish a foothold after passage by Congress of the Trade Sanctions Reform and Export Enhancement Act (TSRA) of The U.S. wheat industry had repeatedly recommended both to Congress and the Administration that trade with Cuba should be normalized and travel restrictions to and from Cuba should be lifted. TSRA was a partial answer to those recommendations. The U.S. wheat industry has a well-established interest in the Cuban market. It began organizing humanitarian donations of wheat flour to Cuba as early as 1998 and established relationships with bakers and millers throughout that process. So, when a devastating hurricane hit Cuba in 2001, the U.S. wheat industry began exporting wheat to Cuba under TSRA and quickly began establishing market share. Exports grew rapidly, eventually peaking at 500,000 MT in Marketing Year (MY) 2007/08. TSRA required Cuban buyers to pay cash in advance, so Alimport, Cuba s food import agency, paid cash for each wheat shipment as the vessel sailed from a U.S. port. However, on February 22, 2005, the Treasury Department s Office of Foreign Assets Control (OFAC) amended the regulation to require Cuba to obtain and present letters of credit from a third-party, foreign bank, with the cash payment coming from the bank, not directly from Alimport. The change increased the cost of buying U.S. wheat by adding an excessive and unnecessary administrative burden for Alimport that has had a large effect on U.S. export potential. In fact, 1 U.S. Department of Agriculture Foreign Agriculture Service, PSD Online Database

2 Thousand Metric Tons the U.S. share of wheat exports to Cuba dropped from 48 percent in 2005 to 38 percent in 2006 and 28 percent in As global grain markets spun into turmoil during the price shocks of 2008, the U.S. temporarily increased its wheat market share back up to 49 percent, but the slide subsequently resumed, eventually reaching zero market share in 2011 where it has remained ever since. Cuban Wheat Imports from the United States U.S. Imports Non-U.S. Imports The primary suppliers of wheat to Cuba are now the European Union (73% market share average since MY 2011/12) and Canada (25%). Proximity alone should also provide a competitive logistical and price advantage for U.S. growers. It is only a two-day sail from the U.S. Gulf to Cuba compared to a week s voyage from Canada and two weeks from European ports. In the nearby Caribbean market of the Dominican Republic, the U.S. holds a 95 percent market share. In Cuba where the only additional market variable is our own trade restriction the U.S. has a market share of zero. Cuba has significant milling capacity to manufacture flour, including semolina for its pasta manufacturing industry. During the time that Cuba was importing wheat from the United States, the vast majority of wheat purchased was hard red winter or bread wheat grown in the southern Great Plains, although Cuba sometimes imported durum. Today durum is sourced primarily from Mexico. Cuba s industry is well-positioned to utilize a variety of U.S. wheat classes and a new foreign direct investment (FDI) law approved in March 2014 could lead to increased opportunities to demonstrate the advantages of utilizing U.S. wheat Regulatory Changes On December 17, 2014, President Obama announced an intent for normalization of relations between the U.S. and Cuba. This announcement marked the greatest change in U.S. policy towards Cuba in 54 years. Among the most important steps for exporters and financiers is the presidential order to review Cuba's status on the list of state sponsors of terrorism. In April 2015,

3 the President removed that designation. A series of new or modified regulations relate to travel (12 categories of travel) and remittances and expand the list of permitted U.S. exports. Banking regulations will allow for direct exchanges, eliminating the need for third-country transactions, and the use of U.S. credit and debit cards will be permitted for use by travelers to Cuba. U.S. telecommunications companies will be allowed to export equipment to Cuba, and foreign ships will be allowed to enter the US after engaging in "certain humanitarian trade" with Cuba. Subsequent regulations that took effect in January 2015, indicated that the term "cash in advance" will be understood to mean "cash before transfer of title and control." It was underlined in a White House statement that this revision was intended to improve U.S. agriculture and food sales to Cuba. However, several obstacles continue to prevent U.S. wheat exporters from being able to restore a competitive position. Sales Constraints There are several reasons why U.S. wheat has not been able to have a sustained market share in Cuba: 1) Transaction requirements 2) Shipping restrictions 3) Trade relationship Transaction Requirements The typical cadence of a transaction to purchase wheat begins with a tender by a prospective importer. Once the importer places an order with a supplier, the importer s bank provides a letter of credit to the supplier s bank, which then notifies the supplier, who then ships the wheat to the importer and claims against the letter of credit for their payment. A mate's receipt or bill of lading is then issued, which represents the transfer of ownership from the supplier to the importer, giving title but not yet full control of the wheat to the importer. The full set of required documents by the transaction and specified in the letter of credit are obtained and assembled by the exporter. These are sent by overnight courier to the bank which has confirmed the letter of credit. The bank reviews all of the documents for conformity with the terms of the sale and then releases payment to the exporter. It is at that point that the importer has actually paid for the wheat. In this process, the cargo has been loaded and has begun its voyage to destination one to three days before the exporter may actually have received the payment for the wheat. In the case of Cuba, with such short sailing distances, the possibility arises that the vessel could reach Cuba before the documentary and payment transaction is complete. Prior to the 2005 OFAC changes that reinterpreted the term cash in advance, it had been interpreted to mean cash before shipment i.e. cash in the exporter's hand even before loading the cargo could begin. Originally, against this payment term, transactions really took place on a "cash against documents" basis, where there was no letter of credit involved, but the exporter was paid on an unsecured basis after the ship loaded and all of the documents were collected and presented to the Cubans. The U.S. government eventually objected to this cadence, as technically, the cargo was being shipped to Cuba before payment was received. Disallowing this

4 practice blocked the U.S. industry's ability to supply Cuba, as the strict "cash before shipment" was clearly not a normal commercial transaction/payment term, and literally no transactions in the international grain trade occur in that manner. The primary improvement with the January 2015 OFAC changes is to interpret cash in advance to mean cash before transfer of title and control for the purpose of allowing expanded financing options. Essentially, this allows payment to be made while the wheat is en route to Cuba, giving the banking system an extra 2-3 days to make the payment to the exporter against a letter of credit. After the 2005 "reinterpretation", if Alimport wanted to buy U.S. wheat it would first have to find a bank in a third country that could provide a letter of credit, enduring that extra work, effort and increased costs for every transaction. It was primarily the extra steps and increased transaction costs imposed on the Cubans in this process that brought their strident objections and eventual refusal to continue doing business in this manner and under these requirements. Regardless of payment timing, the cash requirement is difficult to meet because Cuba is apparently cash poor and in a tough financial situation. Its bond ratings indicate a very high credit risk, so most credit transactions are short-term or backed by a foreign government. Still, the inability of U.S. exporters to offer any credit terms puts U.S. products at a competitive disadvantage. Increasing access to USDA commercial loan programs would also be helpful, but we do not believe that alone will reverse the downward trend in agriculture exports to Cuba. Cuba has access to other sources of commercial credit and adding such a resource does not reduce the administrative burdens that exist for Alimport. Finally, U.S. exporters have limited options in obtaining a letter of credit from a third-country bank because very few foreign banks are willing to deal with the compliance costs associated with doing business between the U.S. and Cuba. The U.S. government has imposed massive fines on foreign banks that have violated U.S. sanctions laws, so the remaining banks willing to facilitate business between the two countries must assume significant expenses to assure compliance. That expense must be paid for by the U.S. and Cuban parties. Compare this to buying wheat from the European Union (EU), where Alimport currently sources about two thirds of wheat entering Cuba. European exporters can offer financing, structure payments however they d like, let their banks and the Cuban banks deal with each other directly, and travel to Cuba easily without having to worry about travel restrictions or forms (and even stay a few extra days to enjoy Cuba s beaches, which is prohibited for Americans selling agricultural products). Layer on top of that the general distrust and hostility between the American and Cuban governments and it s no wonder that Cuba currently prefers to buy non- American products whenever possible. Shipping Restrictions Under the Cuban Democracy Act of 1992, vessels cannot load or unload any freight at any place in the United States within 180 days of departure from loading or unloading goods in a Cuban

5 port unless a license for that vessel has been issued by the Secretary of the Treasury. The net effect of this policy has been to make freight rates to Cuba significantly more expensive than they would be otherwise. For example, a 25,000 ton vessel of wheat from the U.S. Gulf to Veracruz, Mexico, is estimated on May 15, 2015, to have an ocean freight rate of $14/ton. However, a similar sized vessel from the U.S. Gulf to Havana is estimated to cost nearly double that price. There are several reasons for the disproportional difference: 1. The vessel cannot return to the United States once it touches Cuban ports for 6 months. 2. Shippers from third countries do not have the option of making a stop to load or unload in Cuba before continuing on to the United States. 3. Even if a U.S. Treasury license has been obtained allowing the vessel to return immediately, it must return empty because no Cuban goods can be loaded for export to the United States. The 2015 OFAC regulations now allow shippers to operate under a general license if the vessel entered Cuba for the purpose of trading in humanitarian goods (including agricultural products), but this has no effect on their ability to do backhaul loads or carry cargo from third countries other than humanitarian products. Trade Relationship The overriding constraint to normalizing relations with Cuba and reopening US wheat exports to Cuba remains the embargo. If Cuba is to become a successful export market for U.S. farmers, the aforementioned regulatory obstacles need to be repealed. But more than that, we need to see the trade sanctions in their entirety lifted. Cuba has enormous economic potential, and while it certainly remains a communist country, that hardly justifies the scale of the sanctions, especially when trade relations with other communist countries are growing deeper all the time. Even putting aside the specific regulatory constraints, Cuban importers still do not want to purchase from the United States because the U.S. embargo poisons the trade relationship. Our competitors actively pursue the Cuban market and use their open trade relationship as a selling point. The regulatory barriers discussed above erode our competitive advantage and make that selling point more salient. The United States is perfectly positioned to be Cuba s largest trading partner in a number of agricultural products and other goods and services. A substantial increase in trade and travel could provide a major boost to Cuba s economic prospects, which will in turn lead to greater consumption of U.S. products, including wheat, in Cuba. U.S. Wheat Associates estimates that the lost market share in Cuba due to the embargo and the associated regulations could be over $150 million per year. U.S. wheat growers also assert that the entire U.S. agriculture industry and the Cuban people will benefit from easing these unilateral restrictions.

6 We appreciate your efforts in developing this report and also support the efforts by many in Congress and the Administration to improve the trade relationship between the U.S. and Cuba. We look forward to working with you as you continue to examine this issue. Brett Blankenship President National Association of Wheat Growers Roy Motter Chairman U.S. Wheat Associates