Ready for expansion: Initiatives support industry modernisation and promote exports

Providing employment for nearly one-third of the country’s 39m-strong workforce and central to supporting domestic food security, agriculture and fisheries is of vital importance to the Philippine economy. The government is well aware of the need for stability and steady growth. Current strategic priorities aim to expand planted crop area, increase yields through irrigation and the introduction of hybrid grains, encourage economies of scale through cooperatives and associations, and support the exploration of export markets.

A KEY CONTRIBUTOR: In 2010 agriculture contributed 17% of GDP, although the industry saw a slight contraction of 0.3% on 2009 due to poor yields following a long dry spell. Output in the first six months of 2011 grew by 5.5% and value by 15.9% to P706bn ($16bn) due mainly to increases in crop prices. This helped offset slight declines in prices for livestock and poultry.

According to the figures from the Bureau of Agricultural Statistics, crops dominate agriculture output, providing 51.8% of total value in 2010. Fisheries contributed 19.6% and livestock 15.3%. Rice production had the largest value, at P231bn ($5.2bn), followed by pigs P172bn ($3.9bn), chickens P113bn ($2.6bn), bananas P106bn ($2.4bn) and coconuts P81bn ($1.8bn).

IMPORTS & EXPORTS: In 2010, food imports reached $7.3bn and exports $4.1bn, resulting in a negative trade balance of $3.2bn. Exports were driven by coconut oil, worth $1.3bn, with 43% going to the Netherlands and 34% to the US. Tuna is the next biggest agriculture export, worth $359m with 25% going to the US, followed by bananas at $319m (53% to Iran) and pineapples at $240m (54% to the US).

The top import has historically been rice, which in 2010 was worth $1.7bn. This is forecast to change as the country works towards rice self-sufficiency, which should help redress the current trade deficit. The second-largest import in 2010 was milk and cream products, which amounted to $592m – 42% of which came from New Zealand. Wheat was the third-largest import, amounting to $518m, of which 54% came from the US.

RICE PRODUCTION: Filipinos are the world’s largest consumers of rice. The Seventh National Nutrition Survey conducted by the Food and Nutrition Research Institute in 2008 found yearly per capita consumption of 112 kg. This compares to just 70 kg in Japan. The government has a two-pronged plan to achieve self-sufficiency of its top food staple by increasing domestic production while at the same time lowering consumption by encouraging diversification of diet into other carbohydrates. As a cheap form of protein-heavy carbohydrate, rice is popular among people on low incomes. But rice is also a way of life in South-east Asia and changing cultural habits will not be easy.

Production of palay (unhusked rice) reached a total of 15.8m tonnes in 2010, a 3% drop on 2009 due to poor rainfall resulting in a smaller cultivated area. This shortfall led to the import of 2.4m tonnes of rice, of which 2.2m tonnes was procured through the National Food Authority (NFA), the public rice regulator, and 0.2m tonnes by the private sector.

Comparatively favourable weather over the course of 2011 saw total palay production rise to a projected yearly total of 16.68m tonnes. Imports did not exceed the targeted 860,000 tonnes for the year in spite of the devastation of hurricane Pedring in September 2011, which damaged the equivalent of an estimated 291,505 tonnes of rice. In a drive to reduce government involvement in market procurement, the private sector is expected to become the major rice importer, a reversal of the current situation, and the rice import target for 2012 has been set at 500,000 tonnes, down 42% from 2011. Due to several market controls, including strategic imports, prices remained stable during 2011 at around P34 ($0.77) per kg.

SUFFICIENCY AMBITIONS: Several initiatives are currently under way to work toward increasing domestic rice production. It is also hoped that these moves will increase the sector’s competitiveness to challenge the regional domination of Thailand as a rice exporter. Improved yields and reduced vulnerability to both drought and typhoons are both key to increasing efficiency and providing stable incomes for farmers.

Introducing hybrid grains, which are known for being more robust, consuming less water than conventional grains and having the added advantage of providing two harvests a year, could play a vital role. John Paolo Calleja, the president and CEO of Planters Products, a local farm supplies firm, sets out the challenge ahead. “Despite their proven ability to boost yields, hybrid rice varieties are still only used by about 10% of farmers due to increased cost and lack of awareness. Whether the Philippines is able to address these issues will largely determine the immediate future of the rice industry in the country,” Calleja told OBG.

HURDLES: One key obstacle is that hybrid rice requires irrigation, but coverage is limited and rain-fed rice accounts for a large portion of total rice production. Even where areas have been irrigated maintenance is needed to reduce silted channels. And because smallholdings dominate agriculture, with plots often averaging only a couple of hectares, investment in irrigation infrastructure is expensive or economically unviable.

According to Asterio Saliot, the director of the Agricultural Training Institute, diversification into areas where farmers already have established specialisations is key to developing the sector. “The Philippines should take the necessary steps to take advantage of niche markets and products within agriculture. For example, organic and so-called ‘fancy’ rice offers an attractive market, and Filipino farmers are already well-versed in rice farming,” Saliot told OBG.

Major drives are being led by microfinance and crop insurance providers to encourage farmers to form private irrigation associations or block-farming cooperatives. Many microfinance institutions will only lend to cooperatives with a sufficient amount of land, and on the condition insurance is taken out. While this helps to encourage improved economies of scale, and should allow for increased investment in equipment such as seed applicators, harvesting machines and dryers, work is still required to convince conservative farmers to enter into cooperatives or associations.

OTHER KEY CROPS: Corn production has remained relatively stable in recent years and despite dipping from 7m tonnes in 2009 to 6.4m tonnes in 2010 as a result of unfavourable weather, production in 2011 nearly returned to 2009 levels, reaching 6.97 tonnes. Yield is estimated to have improved from 2.5 to 3.1 tonnes per ha between 2010 and 2011, mostly due to a recovery from the adverse effects of the El Niño winds during first-half 2010. Unable to compete on price with subsidised corn in the world market, particularly from the US and Japan, production is largely consumed locally.

Coconut production is a close second to that of rice in terms of volume, with 15.5m tonnes produced in 2010. Exports of coconut oil and desiccated coconut, its high-value derivatives, earned $1.3bn and $153m, respectively. The former represented a marked increase on the $594m of coconut oil exported in 2009, when harvests were badly affected by low rainfall. Coconut production is rarely irrigated and therefore more susceptible to yield variations during adverse weather.

Signs are that future production is likely to continue rising. The production of embryo-cultured makapuno seedlings, which produce a higher-value coconut crop, increased from 2433 to 11,529 between 1996 to 2008, largely due to a programme supported by the Makapuno Comprehensive Technology Development and Commercialisation Programme and implemented by the Philippine Coconut Authority. In addition, LandBank, the Philippines’s largest agricultural bank, reported that loans to coconut farmers doubled in the first half of 2011 to P740m ($16.8m). These developments should help boost export potential and also assist rural development on the southern island of Mindanao, where the majority of coconuts are produced.

CROPS FOR EXPORT: Sugarcane is the top exported crop in the Philippines. The dry weather during 2010 was a blow to sugarcane production, which fell from 22.9m tonnes in 2009 to 17.9m tonnes.

This relative shortage resulted in a price spike, with farmgate prices increasing from P1.20 ($0.027) per kg to P2 ($0.045) per kg between 2009 and 2010. In 2011 further rises in output and prices to P2.20 ($0.05) per kg contributed to a 91.6% increase in the gross value of sugarcane production, to P42.2bn ($957.9m).

According to the Philippine Sugar Millers Association, approximately 72% of production is consumed domestically (and 50-60% of this by industry), with 20% exported for the global market (mainly Japan, Indonesia and China) and another 8% bound exclusively for the US. Threats to the industry include the high rate of smuggling of sugar, estimated at around 200,000 tonnes per year, and cheap imports of high-fructose corn syrup, a popular substitute used by industrialists that avoids the high import tariffs attracted by sugar. But as production remains strong and demand high, the key goals of the industry are to explore product diversification through the production of bioethanol and biomass for energy production (see analysis).

Bananas are the second-largest export crop and the country is among the top five exporters in the world. In 2010 production reached 9.1m tonnes and was expected to rise marginally in 2011 due to better than expected rainfall, which increases harvested areas. Exports declined from 1.7m tonnes in 2009 to 1.6m tonnes in 2010. Japan bought 52% of exported bananas, followed by Iran, China and Korea. Bahrain currently produces bananas on 1000 ha of land in the Philippines, and Saudi and Kuwaiti investors are looking at further cultivation of several crops including bananas, basmati rice, corn and pineapples. The benefit of Gulf investment is the cheap fertiliser supply and ability to introduce capital-intensive machinery to the sector, while also serving strategic food needs for the region.

ABACA: The Philippines supplies 85% of global demand for abaca, the fibre used in applications as diverse as tea bags, paper currency and car interiors. Demand in the first half of 2011 was strong with exports rising 51.1% to $85.7m, of which $62.9m was in abaca pulp. Major buyers of pulp are Germany, Japan and the UK, with the majority of cordage exports going to the US.

According to the Fibre Industry Development Authority (FIDA), demand is so strong that supply is an issue, as is encouraging farmers to harvest. One barrier is the high altitude of crops, which requires farmers to travel and stay on site for up to a week at a time. In addition, although abaca requires little crop maintenance, producing the fibre is very labour-intensive. To stimulate production FIDA has developed various affordable stripping machines to reduce manpower and installed drying sheds in strategic locations.

Cecilia Soriano, FIDA’s administrator, advocates for a larger government role in developing the direction of the sector. “Greater synergy in the sector should be the goal. This needs greater consistency, clarity and vision in government policy, and an associated emphasis on the enhancement of infrastructure and logistics,” she told OBG. “Intercropping should receive more attention in the Philippines, as it offers the opportunity for crops like abaca to be grown alongside cash crops and rubber trees. This boosts production and also provides for diversification, which protects the farmers from volatile prices in any given market.”

LIVESTOCK & POULTRY: Livestock production volumes have remained historically steady and witnessed modest growth of 1.6% between 2009 and 2010 and a further 0.9% in the first six months of 2011. Livestock accounted for 17.2% of total agriculture production.

Catering to the population’s love of pork, hog rearing dominates the sector and grew by 6.7% on 2009 figures to P172bn ($3.9bn), or 82% of the value of livestock production in 2010. Growth was attributed to a 10.9% rise in the price of pork, which reached P90.50 ($2.05) per kg. Despite production increases it was not enough to keep pace with demand and frozen pork and beef imports rose by 32.7% to P190.8m ($4.3m) between 2009 and 2010. The primary suppliers of these products were India (56%), Australia (23%) and Brazil (10%).

The poultry industry grew by 2.3% between 2009 and 2010 to a volume of 1.4m tonnes and accounted for 12.8% of total agricultural production. The sector was worth P152bn ($3.5bn), with chicken accounting for P112bn ($2.5bn) and eggs P34bn ($771.8m). Growth in consumption of chickens accelerated by 3.6% in the first six months of 2011, while farmgate prices fell by 4.9%. Imports of frozen chicken rose from P41.4m ($939,780) in 2009 to P67.9m ($1.5m) in 2010. The majority of chicken production is concentrated in the northern island of Luzon (66%), followed by Mindanao in the south (19%) and Visayas (15%).

Imports of dairy products made up 30.6% of all agriculture imports in 2010. Domestic dairy production was worth just $10.4m ($236,080), compared to imports of $592.1m ($13.4m). Domestic production is limited by the hot and wet climate, which discourages milk production, as well as by a supply chain lacking in modern pasteurisation and refrigeration infrastructure. New Zealand and the US led dairy imports, making up for 42% and 24% of imported supply, respectively.

FISHERIES: The Philippine fisheries segment grew by 2.5% to P221bn ($5bn) in 2010 and accounted for 18.5% of agriculture production. Aquaculture, farmed fish and seaweed is the largest segment, worth P83bn ($1.9bn), followed by municipal fishing (boats over 3 tonnes in weight fishing in all waters) worth P78bn ($1.8bn) and commercial fishing (boats under 3 tonnes fishing within 15 km of the territory) worth P60bn ($1.4bn). Top fishery exports were tuna, worth $359m, with primary destinations being the US, Germany and UK, followed by seaweed, worth $153m, exported to the US, Germany and Belgium.

GOVERNMENT INITIATIVES: Several key initiatives are under way to support government objectives of modernising the sector, promoting exports and protecting farmers’ incomes. Unpredictable weather leaves many Filipino farmers vulnerable to damaged or devastated crops. The Philippine Crop Insurance Corporation (PCIC), a publicly funded agency, is currently offering a deal in which farmers pay 45% of the premium and PCIC subsidies the remaining 55%. With 4% market coverage in 2010, mainly to rice farmers, and a doubled budget for 2012, coverage is expected to grow to 9-10% of the market. The aim is to cover 25% of rice farmers by 2015. Microfinance institutions require farmers to take out crop insurance against loans, so increased demand for loans should also boost insurance take-up rates.

Despite an expansion in agricultural loans of 9.9% to P212bn ($4.8bn) between 2008 and 2009, there remains significant demand for finance. This is in spite of Presidential Decree 717 issued in 1975 by the then president, Ferdinand Marcos, which stipulated that banks must allocate 25% of loanable funds to agriculture, or face fines of 0.5% on the balance.

The policy has had little effect since its inception, with bank loans to the sector declining by 8% between 2009 and 2010. Banks claim loans to farmers pose too much risk and often result in default, while farmers claim they are unable to afford the high interest rates and compulsory insurance, which adds further costs ( typically $11-22 per ha). Banks therefore deal primarily with cooperatives, which protects their interests but excludes those farmers unwilling to join the groups. Most farmers get credit from traders who take advantage of this captive market by charging higher rates of interest.

Despite these obstacles, PCIC hopes insurance may tackle a further emerging issue for agriculture – the aging workforce. The average age of farmers is 57 and younger generations perceive agriculture as a risky career path, shunning jobs in agricultural production for administrative or urban-based employment. This means that farming techniques will likely need to be adjusted, and the Philippines may follow the path of South Korea towards higher agricultural mechanisation.

OUTLOOK: With strong growth rates and supportive government policies, agriculture should continue to be one of the most promising sectors for investors. Growth in cooperative farming is increasing economies of scale and should stimulate increased investment in irrigation, mechanisation and production facilities. Collection of field waste for the production of bagasse, an alternative sustainable fuel, also looks to be a growth area (see analysis). Export markets are another area ripe for expansion, particularly in high-value rice, pineapples and other fruit exports to the Gulf, along with the supply of abaca to industrialised countries. The outlook for agriculture in the country is strong and the sector has shown its potential for further accelerated growth.

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The Report: The Philippines 2012

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