Multivariate Modelling of the Canary Islands Banana Output. The Role of Farmer Income Expectation

The EU is the world‘s largest importer of bananas and the only major managed market in the international banana trade. Spain is the main banana producer within the European Union (EU), followed by France and Portugal. In all these countries the fruit is grown in overseas islands situated in tropical or sub-tropical areas and bananas are a pillar of the economic, social and environmental balance of these regions. Spanish production comes from the Canary Islands, an insular environment located in the Atlantic Ocean more than 1000 km south of the Iberian Peninsula and near the northwest coast of Africa. In the context of high production costs and strong competition from Latin American imports, the compensatory aid that local farmers have been receiving from the EU since 1993 has helped the archipelago to maintain its agricultural position while constituting a main support from an economic, social and landscaping standpoint. This research analyses the Canary Islands banana output evolution through the use of certain multivariate dynamic models that consider the influence of past production costs, past farmer income and future expectations, including a sensitivity analysis. We consider annual data time series on production, perceived prices and production costs for the period 1938-2002. Model predictions are contrasted using data for the period 2003-2006, thus spanning a wide period of time that includes key points such as the 1993 reform and the introduction of the 2006 reform. The empirical work highlights, as do all EU norms, the importance of maintaining adequate farmer income expectations to assure subsistence banana production.