Home to a remarkable amount of biodiversity, rich volcanic soil, bountiful waterways and a moist tropical climate, Papua New Guinea possesses all the elements to fashion itself into a thriving agricultural exporter. These native assets have supplied the basic natural building blocks providing nourishment to the country’s population throughout history, and more recently to the agri-business industry for exporting cash crops such as coffee, tea, cocoa, spices, copra, rubber and palm oil.
Up until the decline in commodity prices and completion of the PNG liquefied natural gas project in 2014, the agriculture, forestry and fisheries sector was the largest contributor to the economy and accounted for more than one-fifth of the country’s gross value added as recently as 2013.
Given this abundance of naturally-occurring inputs along with a substantial labour pool already well versed in agriculture cultivation, the only stumbling blocks standing in the way of a robust agro-industry are the means to increase efficiencies throughout the value chain to make production and distribution more competitive.
Weathering The Storm
After an encouraging period of growth up to 2013, the agriculture, forestry and fisheries sector has been more recently negatively impacted by low commodity prices, old-aged trees, crop diseases, unfavourable weather conditions and poor market infrastructure.
As a result, the industry was projected to grow at a pedestrian 2.1% rate in 2015, according to the National Budget 2016, a downgrade from earlier government estimates of 3.2% and the 2015 national budget estimate of 3.6%. The expected 2015 growth rate represents just one-quarter of the average annual growth in industry output from 2007 to 2013. The downgrade is due to lower-than-anticipated production of key export crops which more than offset a higher palm oil production mainly coming from the newly planted areas.
The ongoing weakness of international commodity prices has also impacted the sector, particularly in coffee, cocoa and copra production, given that these commodities are mostly produced by highly price-sensitive smallholders. Another contributing factor to the 2015 downgrade is the adverse effect of a prolonged drought that devastated food crops and export commodities throughout 2015 and into early 2016, forcing the government to provide relief assistance in affected areas. The full extent of the drought on the export commodities is not expected to be realised in the 2016 harvest.
This rough patch of the sector is an extension of a downturn first seen in 2014 when the output of the agriculture, forestry and fisheries sector as a measure of nominal GDP declined from PGK13.21bn ($4.5bn) in 2013 to PGK10.18bn ($3.5bn) the following year. Prior to the 2014 drop-off, the sector had experienced steady growth from PGK7.56bn ($2.6bn) in 2007 to its peak in 2013, growing at an average rate of 8.4% over the seven-year period.
But as the economy cools and new investment in the country wanes, the agriculture and fisheries sectors continue to serve as a fallback for the economy and for employment.
The sector was one of only two industries, along with finance, business and other services, to record positive job growth in the first half of 2015, as the sector’s employment index, which uses March 2002 as a base, increased from 177 in 2014 to 181.1 in June 2015. This contrasted to the overall trend of job declines nationwide in which the aggregated non-mineral employment index declined from 178.9 to 172.7 over the same period. At the same time the index for the mineral industry has been falling since 2013 and was at 221.2 in June 2015. Within this large labour pool, the vast majority of workers in the agriculture sector continue to work on smaller, less efficient farms with an estimated 80% of the sector made up of smallholders.
Mini Cash Crops
The country’s agriculture export market remains very much a niche player in the global agri-business game, focusing on smaller quantities of high-quality products that are sold to markets at premium prices. Unable to compete with large-scale agri-business powerhouses, companies in the country have been utilising competitive advantages to level the playing field by cultivating organic, fair-trade and certified products which fetch more favourable prices, particularly in wealthier developed economies.
Palm oil remains by far the biggest agriculture revenue earner with PGK837.6m ($285.9m) worth of the product shipped overseas in 2015, down 22% from PGK1.08bn ($368.7m) in 2014 and PGK903.5m ($308.4m) in the previous year, according to the Bank of PNG (BPNG), the central bank. Export income derived from palm oil exports was at its lowest level since 2009. Coffee and cocoa are the other major contributors to the sector with exports valued at PGK393.5m ($134.3m) and PGK255.7m ($87.3m), respectively, in 2015. Coffee exports declined by 12.6% from PGK450.3m ($153.7m) in 2014, while cocoa exports increased by 5.2% from PGK243.1m ($83m) in 2014.
Production increases of both crops are being actively pursued in PNG through farming optimisation programmes carried out by the PNG government and the World Bank to boost output and income for cocoa and coffee farms, with some evidence of success already apparent in 2016 (see analysis). Besides the three main commodities, other exports from PNG include copra with PGK45m ($15.4m) in export income in 2015, rubber with exports worth PGK7.9m ($2.7m), copra oil with PGK39.2m ($13.4m) worth of export and tea exports totalling PGK4.9m ($1.7m).
These crops, along with the seafood and forestry segments, combine to create the third-largest export block behind the energy and mining sectors. After peaking in 2011 at PGK3.79bn ($1.3bn) on the back of record production levels bolstered by strong commodity prices, agriculture exports have experienced a tumultuous half decade in the wake of unstable market prices and erratic weather conditions. Agriculture shipments registered PGK2.69bn ($920m) and PGK2.74bn ($940m) over the next two years before they temporarily rebounded to PGK3.09bn ($1.1bn) in 2014 on the back of higher domestic production.
In 2015 the value of agricultural, marine products and other non-mineral exports, excluding forestry and refined petroleum product exports, totalled PGK2.31bn ($790m), accounting for 10.9% of total merchandise exports in 2015, compared to 12% a year earlier, according to BPNG.
More recently, prices for PNG’s agricultural export commodities have been negatively affected by weakening global demand throughout 2015 along with adequate global supply for most commodities and the effects of the prolonged drought affecting much of the country.
The cocoa sector is also recovering from a crippling bout with cocoa pod borer (CPB), which decimated cocoa trees in many areas of the country and pushed many smallholders into cultivating other crops. But with the scourge now largely contained, the silver lining to the devastation to much of the country’s cocoa crop is that the infestation wiped out many of the industry’s older, mature trees which were past their producing prime.
Now, with government and other programmes focused on rebuilding the agriculture and fisheries sector from the ground up, a new generation of high-quality, CPB-resistant strains of cocoa are being planted which will ultimately serve as a base for a more productive and reliable cocoa crop that will soon be entering its prime production years.
Already a major contributor to the economy and largest employment sector, the agriculture sector is recognised by many as the best chance for the country to steer its economy away from one reliant on extractive resource exports to a more broad-based, diversified system. “If we want to solve unemployment and reduce crime, we don’t need to hire 10,000 more police officers; we need to support farmers,” agri-business consultant Allan Bird told OBG. “If we want people to pay for their health care, we need to allow them to earn an income from farming. Agriculture can be used as a vehicle to resolve a lot of these issues. We can use this to empower people, and if we take advantage of this it will have a multiplier effect on the economy.”
Cognisant of this, the PNG government has rolled out numerous agriculture development plans all seeking to boost efficiency and output from the sector while improving incomes and conditions for the large portion of the population tied to the sector. Faced with significant challenges stemming from technical, cultural, budgetary and geographic limitations, these plans, such as the National Agricultural Development Plan (NADP) 2007-16, have resulted in mixed and often lacklustre results.
Developed with assistance from the World Bank, the NADP set targets of 5% annual growth in the agricultural sector to be obtained by improving upon eight key priority areas ranging from food and nutrition security to information management and communication. Taken as whole, the NADP mapped out a strategic direction for the sector along with implementation plans backed up by strong, long-term government financing of a PGK1bn ($341.4m) budget for its 10-year lifespan.
The programme’s real-world effectiveness was hampered, however, by numerous administrative and funding issues as well as a lack of communication and continuity across different government bodies from the national level down to the provincial and local.
While the government has engaged programmes such as the NADP to address some of the sector’s most pressing issues such as financing, farm to market facilitation, education, training and subsidised inputs, the results of these programmes have been difficult to quantify in the past, as the implementing entities generally lack mechanisms to collect information on the outcomes. In other instances, the strategies lack enough continuity to be able to assess their effectiveness in a longer-term scenario.
This inability to implement an effective development scheme from the top down remains a common source of consternation voiced by many in the agriculture sector: that there is a disconnect between a real need for positive change and unfulfilled political promises made in Port Moresby. So far, there has been little to show from recent government plans which produced precious little improvement in spite of a hefty budget outlay. Initial projections outlined in the 2015 budget brought allocations to the Department of Agriculture and Livestock (DAL) to historic levels with expenditures of PGK46.58bn ($15.9bn) and PGK73.16bn ($25bn) planned for 2014 and 2015, respectively. However, the economic realities of the depressed global economy and sliding commodity prices quickly put a crimp on state revenue streams, forcing the government to dramatically reassess its expenditures.
By the time the nation’s 2016 budget was rolled out, funds destined for the DAL remained significant but had been slashed significantly to PGK27.2bn ($9.3bn) in 2014, PGK38.7bn ($13.2bn) in 2015 and PGK43.3bn ($14.8bn) in 2016.
Budgetary projections beyond this appear to require further belt-tightening by the department as well, with projected allocations dropping off dramatically starting in 2017, to PGK14.9bn ($5.1bn).
Going To Market
In spite of the country’s nutrient-rich volcanic soil and generally ample precipitation, the country’s agriculture sector continues to struggle with high production prices due to inefficiencies across the value chain. To start with, around 80% of the industry is made of traditional smallholder farmers which lack the resources and knowledge to gain the efficiencies achieved by larger farms utilising economies of scale and modern farming practices. Although plantation-style agriculture once extended to a number of crops in the country, the palm oil sector is currently the only agricultural commodity to employ this model of production and, as such, remains the dominant export product within the sector.
Apart from economy-of-scale deficiencies, the next link in the value chain, the post-harvest operation for goods, also has its flaws in a number of areas. Without proper care and handling – complete with sufficient packaging and storage facilities utilised immediately after the harvest – many crops, and especially fruits and vegetables, will deteriorate rapidly to the point where 50% or more of a farmer’s harvest can be spoiled by the time it reaches the end consumer. Physically moving these goods from farms to markets, urban areas and transport hubs such as ports and airports also pose significant challenges in rugged PNG. “A major problem is the temperature differential – the moment you send produce down from the highlands where it is cool to the coast where it is hotter it begins to deteriorate immediately,” Bird told OBG. “They need to be kept at a lower temperature, and that infrastructure does not exist.”
Although the difficulties vary depending upon the crop being transported as well as the location of the farm, the generally poor state of the country’s road network along with a lack of refrigerated warehouses and trucks mean that reliable transport options are extremely limited. As a result of these challenges, the country remains heavily dependent on imports for even basic food staples, although some success stories have emerged in the past few years that have created optimism for further success in import replacement-focused agri-businesses (see analysis).
Food and live animal imports into the country have remained steady in recent years, ranging between PGK953.4m ($325.5m) and PGK1.15bn ($390m) each year from 2011 to 2014 and averaging PGK1.05bn ($360) annually.
Although such imports represent only about one-third of the value of annual agriculture exports, which averaged more than PGK3bn ($1bn) over the same time period, the figure is significant enough to represent a considerable opportunity for future growth in terms of import substitution.
One area in which PNG is particularly well placed to compete on the export market is in the seafood industry. In 2015 the value of marine products exports reached PGK466.1m ($159.1m), up 31% from 2014 due to growth in export volume and price of 22% and 7.7%, respectively.
As global demand for seafood – and tuna fish in particular – expands and global stocks continue to decline, the rich fishing waters of the country constitute an increasingly valuable resource. The challenge for the country’s fishing industry is to translate this potential into sustainable value-added revenue streams and job creation in downstream industries.
This has been the impetus behind the creation of the Pacific Marine Industrial Zone and other processing centres, which are being developed as a hub initially for the tuna industry with expectations of expanding into other processing, manufacturing and light industry applications in the future.
So far this plan has been successful in attracting foreign investment into the area, with a number of processing plants already up and running and five more planned in the coming years. Much of this initial success in securing investment commitments from premier seafood suppliers from around the region is due to the strength of the PNG tuna fishery, and more specifically, the regulations governing access to these waters.
The PNG tuna industry currently operates within the parameters of the Parties to Nauru agreement, whereby the signatory nations have agreed to limit annual catchment at sustainable levels with the legal allowable catch divvied up between each of the countries (see analysis). Due to the comparatively large size of its territorial waters, PNG receives a generous portion of this allotment each year, which is allocated through the vessel day scheme (VDS). Each country can allocate the number of vessels agreed upon in any manner they deem fit, and in PNG these permits are used to attract downstream investments into the country, by granting priority access to companies that agree to set up their own onshore processing facilities.
While the plan looks like a win-win situation for both seafood operators and the government, which also receives cash payouts for the VDS as well as investment commitments, loopholes in the system have stymied job-creation efforts to a large extent so far. The majority of these new fish-processing factories often lie idle as operators opt to sail their catch to other processing centres based in the Philippines, Thailand, China and other countries. As is the case in many other downstream industries, the reason for this comes down to simple economics. The relatively high production costs in PNG make in-country processing less profitable in spite of the closer proximity to the fishing grounds.
RD Tuna is the only cannery to produce the majority of its fish in-country – usually around 65-85% – while other canneries generally process less than 10% of their catches in PNG. Seeking to rectify this imbalance, a new processors association has been formed with the aim to lobbying the government and the National Fisheries Authority to draw up new stipulations in the VDS awarding system to close this loophole and require a greater degree of onshore processing in the sector.
Forest For The Trees
Unlike other areas in South-east Asia which have been heavily clear-cut over the past two decades, PNG still retains forested areas over roughly 80% of its landmass of some 38m ha, according to the National Forest Authority (NFA). The country’s forests, more than half of which are classified as virgin old-growth forests, are an increasingly attractive commodity as the international demand for these disappearing hardwoods remains strong. In an effort to meet this latent demand, PNG’s timber companies boosted forest product exports from PGK476.8m ($162.8m) in 2009 to PGK768.3m ($262.3m) by 2011, with raw log exports accounting for the majority of these shipments at PGK439.4m ($150m) and PGK732m ($249.9m), respectively, according to BPNG data.
A Back Door
This surge in output was not without a controversy, however, which stems from the unintended exploitation taking place under special agriculture and business lease (SABL) permits. Originally established as a way to consolidate fragmented land into large, more efficient plantation estates, more than 70 SABLs were issued by the government covering over 5.5m ha of land, most of them under the auspices of oil palm plantation development. While many of the lease holders proceeded in good faith with their agriculture development plans as mandated, it became apparent that this framework could also be exploited as a back door for slash-and-burn logging operations.
Circumventing the intended purpose of these permits, some companies were able to surreptitiously manipulate their SABL into attractive timber-exporting operations with only a cursory attempt at further agricultural development once logging operations were completed.
The revelation was quickly followed by a moratorium that was placed on SABLs, and a commission of inquiry was established to investigate the deals in September 2011. At the same time the NFA ceased issuing logging permits necessary for SABL holders to carry out clearing operations.
By denying this permit, the government was able to limit the majority of SABL holders from carrying on with logging operations. Only 16 of the SABL holders were granted logging licences, covering 700,000 ha out of the total SABL area of approximately 5.5m ha – a number far less than the full 5.5m ha figure often quoted publicly by NGOs and others in opposition to SABL holders.
With this moratorium still in place, logging efforts have shifted to other areas operated by large, regulated timber companies in the country, including RH Group, Madang Timbers and Amanab Forest Products, which employ inspection, verification, testing and certification company SGS to certify the legality and traceability, and verification of origin of the logs they sell. “Here we have people on the ground to look after the area,” Goodwill Amos, acting managing director of the PNG Forest Authority, told OBG. “If you don’t comply with the logging code and log in a buffer zone, or don’t follow sustainability guidelines, we won’t allow the company to log the next setup in their area.”
With the SABL controversy now beginning to fade, the NFA is looking to bolster existing measures to hold timber companies and agriculture operations more accountable in the future.
One key step in this process is the launch of a new forest inventory project on a national level – the first of its kind for PNG. Funded by a PGK20m ($6.8m) grant from the EU, the undertaking seeks to create a more accurate picture of the country’s forests and create a baseline against which to measure future logging and cultivation.
The project will employ both satellite GPS monitoring and on-the-ground evaluations in 1000 plots to carry out the survey – a process which is expected to take three years to complete. Satellite images will be used primarily to analyse forest composition by the colour of vegetation, along with establishing a baseline of coverage for future comparison. The boots-on-the-ground component involves NFA employees physically measuring, studying and recording the composition of up to 1000 separate plots so that these figures can be extrapolated out on a national level to complete the survey.
Having established itself as the dominant agricultural segment in the country, the next natural course of development for the PNG palm oil industry would logically be to build upon this success by expanding production to meet the strong demand. The problem with this is the paradox of working with a certified eco-friendly product derived from sustainable plantations, which means that by definition future growth of production areas is limited at best. Companies operating under the protocols of Roundtable on Sustainable Palm Oil are essentially prohibited from chopping down virgin forests to use as land for new plantations, leaving them to develop relatively limited areas of appropriate contiguously placed grassland areas in a country where an estimated 80% of land area remains under forested canopy.
For these reasons, the SABL controversy had probably the most impact on the palm oil sector and will likely continue to do so in the future. The considerable negative publicity surrounding the high-profile ordeal has attracted considerable attention from the authorities in recent years. The most recent option being explored is an outright revocation of all SABLs regardless of merit. If this avenue of redress is chosen, legitimate agriculture operations, which have already invested substantial time and money resources in palm plantation projects originally intended under the regulation, would see their efforts come to naught.
The immediate fate of SABL remains somewhat murky. It appears unlikely that the scheme could continue forward even if the loopholes were shored up given the negative publicity surrounding the leases both inside the country and abroad.
As of mid-2016 the government was drafting a bill which would repeal the SABL system but still allow operators that already have permits to continue, with many of these companies expending a significant amount of money for these projects.
Even without SABL, alternative avenues such as the lease-leaseback landowner agreement remain for agriculture companies and the palm oil industry in particular to carve out larger blocks of land to form larger-scale farming projects.
Due to these restrictions, the possibility of foreign palm competitors entering the country and opening up new greenfield plantations is fairly low, given the barriers to entry. Even discounting the substantially higher operating and transport costs compared to high-volume producing countries of Malaysia and Indonesia, acquiring large plots of land legally for use as a plantation remains a long and uncertain process, and the government’s current turn towards resource nationalism remains a significant deterrent to entry into the market.
The agriculture, forestry and fisheries sector is projected to be a major driver of growth over the medium term, accelerated by the expansion of the downstream seafood industries and key development projects such as the Productive Partnerships in Agriculture project (see analysis). A recovery in the global economy will likewise have a positive impact on both demand and prices of PNG’s commodities, which should boost the export revenues for the sector while at the same time providing additional incentive for domestic smallholders to boost production. “PNG offers a pristine environment, pretty much on the par with New Zealand,” David Alcock, CEO of Mainland Holdings, told OBG. “It could become the growth engine for the Asia Pacific region in terms of export of day-old chicks from our ‘grandparents’ farms, provided that the country invests in its bio-security barriers.”
Growth in the critical palm oil sector should remain moderate going forward as the limited amount of new plantings begin to mature, but the sector does not appear primed for a wholesale expansion due to the limitations on forest clearing.
The future of the forestry and logging segment also remains uncertain pending the outcome of changes to land-lease regulations, although a forest inventory and large-scale replanting programme should help in the long run. In addition, short-term growth, particularly in food and cash crops, is also expected in 2016 thanks to improved growing conditions following the end of the prolonged drought.
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