Turbulent times for rum
By Edwin Laurent
The Caribbean did really well in July’s International Spirits Challenge, in which distilleries and alcoholic drinks from all over the world competed.
Chairman’s Reserve Finest St Lucia Rum won the overall trophy for rum, ahead of big brands such as Havana Club, Bacardi and even the renowned Ron Zacapa 23, distributed by the world’s largest drinks company, Diageo.
According to the August 2013 edition of Drinksint.com, the St Lucia Distillers, hidden away in the banana fields of the lush Roseau valley, won the individual Distillery Trophy from across all spirits categories.
You might, of course, expect these awards to feed optimism and be followed by marketing success, but all is not well.
Caribbean rum is now facing serious challenges that will make competing more difficult and may result in severe losses in export markets.
This series of articles in Caribbean Intelligence© will explore what the region is up against and consider actions that the industry and governments can take to help safeguard their interests in the international rum trade.
Rum is serious business
The drink’s association with relaxation, entertainment and pleasure can too easily detract from the serious business that is rum, with all the jobs and livelihoods that it supports.
This is the product that is most intimately associated with the Caribbean and its history.
International sales in rum have been booming in recent years, with considerable scope for expansion in both traditional and non-traditional markets.
Brands such as Royal Oak, El Dorado, Chairman’s Reserve, Appleton and Mount Gay are attracting a growing international following well beyond the Caribbean.
The regional industry provides 10,000 jobs and is the most valuable agriculture-based export, with earnings of US$500m.
For the industry to prosper, however, it must be able to export on a profitable basis, since the regional market is too limited to absorb the volume of rum that is produced.
Small target market
Whilst the quality of high-end aged rums can be enough to retain the allegiance of those “true aficionados” who can afford to indulge their tastes, they are, though, only a small minority of consumers.
Most of the rum that is traded internationally is not bottled and branded, but is shipped in bulk - the most price-sensitive sector of the market.
Success in the international rum trade is therefore determined by commercial considerations, principally relative costs.
The Caribbean is concerned that recent developments in the US and EU, its two major markets, can make it more difficult to compete.
The changes will potentially lower the costs borne by other suppliers, which can therefore reduce their selling prices and grab market share from the Caribbean.
The problem in America
The cause of the current agitation among producers is the extensive tax breaks and other state-funded support to rum producers in Puerto Rico and the US Virgin Islands (USVI).
Caribbean rum producers claim that distillers such as Diageo and others operating from these US territories are handed a massive, but unfair, market advantage.
Their governments have made several approaches to the US, although so far without success.
As far back as 9 August 2012, Cariforum ambassadors in Washington wrote to US Trade Representative Ron Kirk, while on 24 August, the chairman of Caricom wrote to US President Barack Obama.
In May of this year, Caricom’s Council for Trade and Economic Development (COTED) called for an amicable solution to the rum dispute with the United States.
It was determined “to seek a satisfactory solution to the matter of trade-distorting subsidies being granted to USVI and Puerto Rico rum producers that threaten the long-term viability of the rum industry in the Caribbean”.
How the US scheme works
Rum distillers in Puerto Rico and the USVI receive a range of grants for marketing, promotion, subsidising their raw material purchases, building new facilities etc. They also receive exemptions from various property and other taxes.
The financial inputs and tax exemptions mean that their costs of production are lowered.
The rum that they produce can therefore get to market cheaper than would otherwise have been the case.
Caribbean rum exporters argue that this not only disadvantages them vis-à-vis their Puerto Rican and USVI competitors, but that the arrangement also contravenes WTO rules.
John Beale, Barbados’ ambassador to the US, told the Washington Diplomat in January, “We have had four legal opinions, and it is quite clear that while there may be different approaches, the WTO would probably rule in our favour."
Where does the money come from?
The US federal government levies an excise tax of $13.50 per proof-gallon on rum and passes on the proceeds to the treasuries of Puerto Rico and the USVI.
This is referred to as the Cover Over programme.
The arrangement dates back to the Jones Act of 1917, which directed that the tax on all rum produced in or imported into the US would be passed on to the Puerto Rico Treasury.
Quite bizarrely, that same legislation also prohibited the production and sale of alcohol! Then in 1954, the Revised Organic Act included the USVI as a beneficiary.
Given the large amounts of rum that the US imports and produces, the sums involved are considerable.
According to a 2010 Congressional Research Service report in 2008, Puerto Rico received US$371m and the USVI almost US$100m.
Quite understandably, these territories are staunch defenders of this lucrative facility, which has to be renewed every year by Congress.
While the programme is financed from a levy on rum, funds do not have to be spent just in that sector.
From the federal government’s perspective, the purpose is quite broad. In the Senate report accompanying the Act of 1954, Congress expressed “a desire that the USVI use the covered-over revenue to loosen the dependence of the USVI on periodic appropriations from the U.S. government” and went on to recommend that “the people of the Virgin Islands bend their efforts to stimulating and increasing business in every way possible”.
The Cover Over programme is really a redistribution of tax revenue to support development in two relatively economically disadvantaged territories of the US.
Frank Ward, chairman of the West Indies Rum and Spirits Producers' Association (WIRSPA), said last January to the Washington Diplomat magazine: "Our beef is really with the subsidies given to the rum companies, not with the programme itself. Some of our member companies have already seen massive losses because of their inability to compete on price.”
The Caribbean has long since lived with the Cover Over system of payments to Puerto Rico and the USVI and does not object to it.
However, given WIRSPA’s reckoning of the harm caused by the subsidies that it enables, the region’s agitation is understandable.
The next article in this series will examine some of the other challenges facing Caribbean rum exporters that could well turn out to have even more serious long-term implications for their future viability than the US subsidy programme.
Edwin Laurent has served as an Eastern Caribbean Ambassador to Europe and worked in London for the Commonwealth. He has recently been awarded the Cross of the Order of St Lucia for contributions to economic development.