While the large share of high-value services in Panama’s economy, including finance, telecommunications and logistics, is envious for emerging economies around the world, the small size of its agricultural sector arouses some concern. Despite impressive GDP growth in recent years, including regional records of over 10%, the agriculture sector grew just 6% in 2011 and 3.9% in 2012, according to figures from the National Institute of Statistics and Census (Instituto Nacional de Estadistica y Censo, INEC). Meanwhile, the performance and competitiveness of Panamanian products on the international market has faced challenges since the onset of the global financial crisis in 2008, from which the country has only recently started to recover. As a result, agriculture’s contribution to GDP fell from 8% at the start of the millennium to 2.5% in the third quarter of 2013, according to the INEC.
Re-Focus
In a bid to boost the sector’s recovery, the Ministry of Economy and Finance – in its Strategic Plan 2010-14 – identified agriculture as one of four strategic growth areas for the country, together with tourism, logistics and financial services. Besides ambitions to increase productivity and curb the rise in imports, the plan calls for the creation of 500,000 new jobs by 2020, many of which will come from the agricultural sector. The socio-economic weight of the sector has played an important part in its selection. More than 40% of Panama’s population lives in the countryside, and the majority earn modest livelihoods through small-scale agriculture, which is marked by high fragmentation, out-dated technology, lack of land titles and poor access to financing. These challenges are exacerbated by the deficit in physical infrastructure, which affects production costs and access to local and regional markets. Under the guidelines of the roadmap, agricultural policies aim to address such setbacks by increasing access to capital, facilitating small-scale investment through fiscal and financial incentives, and formalising trade agreements with foreign markets such as the US, the EU and emerging economies in the Latin America region.
Thus far, the measures have been received with mixed enthusiasm. While fiscal and financial facilities have been welcomed, the increasing number of free trade agreements (FTAs) is held accountable for rising imports and lingering deficits to production and regulatory standards. Critics also call for a higher agricultural allocation from the national budget, which is currently $138m and similar to the 2012/13 fiscal year, though the proportion set for investment in the sector has decreased by $38m year-on-year from 2012/13. This is likely to affect sector development, including the construction of new infrastructure such as irrigation systems, access roads and markets, and building competitive know-how and technology.
Sector Composition
As per agricultural figures from INEC, roughly 30% of Panama’s land is dedicated to agriculture. The farming community consisted of 248,560 members, with this figure broken down into 88,675 members operating on small-scale land of less than 0.1 ha and 159,885 operating on land larger than 0.1 ha. High rainfall along the Atlantic coast and dense forest in 80% of the country have led to a concentration of agricultural activity in the eastern highlands, notably in the Chiriquí Province where volcanic soils have proven the most fertile of the country. About 80% of national output comes from this region, while another 15% is in the provinces of Herrera and Coclé on the Pacific side of the country. Primary crops include bananas, pineapples, melons, papaya, potatoes, corn and rice, among others, while principal grains comprise coffee and sugarcane. In addition, Panamanians have the region’s highest per capita consumption of poultry, with large production quantities of chicken as well as beef, veal and pork. Fish is also abundant, despite its decline in recent years, and the country’s main product is shrimp, both sea-caught and farm-raised.
Key Produce
The agro-industrial sector is dominated by several large companies that are primarily involved in the production and processing of bananas, as well as other fruits, and also sugar for both the domestic and international market. One such example is US firm Chiriquí Land Company, better known as Chiquita, which, with an estimated 15,000 ha, is the country’s largest landowner as well as its primary banana exporter. Del Monte, another US-based agro-industrial player, produces and exports juices, canned vegetables, fruits and sauces, while Hawaii-based Dole Foods has a sizeable fresh fruit operation.
In sugar production and refinery more than 95% of the market is in the hands of four major domestic players overseeing some 22,000 ha of plantations, according to the latest agricultural census. The Calesa Group encapsulates various agro-industrial entities including Coclé-based Ofelina and Compañía Azucarera La Estrella, a subsidiary, which have a combined cultivated surface of 10,000 ha. In addition to its sugar operations, the Calesa Group is also active in livestock, grains, shrimps and seeds. The National Sugar Company, also based out of Coclé Province, produces granulated sugar for the domestic and international market. Varela Hermanos, located in the Herrera Province, has 800 ha of sugarcane under management destined for production of alcoholic drinks such as rum. Lastly, there is the San Bosco Agroindustrial company based in Chiriquí Province, which also specialises in sugar.
Research
The cattle industry, meanwhile, is another important segment. In recent years, Panama has taken some major steps towards the improvement of the country’s livestock with the addition of new ranch-management techniques, genetic development of different breeds and use of improved livestock nourishment. Export agreements have also been signed with several countries in Central America and the Caribbean, thus keeping producers connected to sector growth plans. According to Luiz Nasser, CEO of Born Animal Biotechnology, a local research group, these opportunities are one of the main reasons investors are choosing Panama as a base for research facilities, with the country’s good sanitary conditions making it easier for groups such as Born Animal Biotechnology to export their research and products. “Our focus is to take lab technologies, derived from academic research, into the real world. Animal reproduction technologies is an important market segment,” Nasser told OBG. “Export potential for this kind of technology to the region is enormous. We have the capacity and know-how, but particularly for certain technologies, we prefer to work with partners, in order to better navigate the local regulatory and business landscape.”
Performance
The sector has faced a number of challenges since the start of the millennium. The rapid pace of urbanisation, accompanied by a surge in real estate has led to a gradual reduction of cultivated surface and rising land prices. Furthermore, delays in road infrastructure development have affected profit margins, which have been additionally challenged by longer dry spells and intense rainy seasons in recent years. Crop disease has been on the rise and has particularly affected primary export products such as bananas. As such, farmers were ill-prepared for the sudden drop in demand for exports at the onset of the 2008/09 financial crisis from which the sector has only started recovering in 2012. During 2008 and 2009, production values dropped from $719m to $646m. Losses were particularly damaging for pineapples, watermelons and melons, which fell by 61% over that period. Bananas – the country’s leading agricultural export – dropped by 35%, pig breeding by 15% and fish by 40%. Cultivation of coffee has also decreased significantly over the past decade. In Chiriquí, the country’s biggest agricultural region, cultivated surface area dropped from 8.5m ha at the start of the millennium to 6.5m in 2011, while in Coclé, the country’s second-biggest producing area, planted surface area fell from 3m ha to 1.6m ha over the same period. Overall, cultivated surface area has decreased by 35,000 ha from 2008 to 2012 with a drop in production levels of up to 30% in key staples such as rice, corn and kidney beans. According to INEC, production levels have gradually bounced back since 2010, and 2012 was the first year production values were registered above pre-2009 levels, at $743m.
According to INEC figures, cultivated surface for rice fell 12.1% between 2009 and 2013, from 111,910 ha to 98,380 ha, whereas production dropped 17% over the same period. Corn, on the other hand, saw its cultivated surface area grow increase 14.1% to 66,860 ha, while production jumped 37.1%. Likewise, cultivated surface for kidney beans surged 21.3% to 13,090 ha, with production almost doubling to 99,600 tonnes. Fisheries, however, has seen a far steeper drop. Whereas in 2008 the domestic catch was valued at $412m, in 2011 it came in at less than half that at $181m. 2012 was the first year since 2008 to show a marginal improvement, when total production reached $186m. This was partially the result of a small recovery in shrimp sales, which rose by 7.4% over the year, raising revenue by $40.4m. Meanwhile, the segment’s contribution to national GDP dropped from 2.1% in 2008 to 0.7% as of the third quarter of 2013. In the first half of 2013, the fisheries sector saw growth of 17.5%.
Exports
After gold, agricultural products are Panama’s biggest export earner. In 2012, the sector accounted for 46.5% of total exports led by revenues from bananas, which accounted for 10.4% of the total, followed by unrefined sugar (5%), pineapple (4.2%), frozen and fresh fish (4%) and shrimp (4%).
The drop in output has not left export revenues unaffected. According to the Panama’s Employers Association, revenues dropped 50% between 2007 and 2011, when they reached $205m. In 2011 alone, export revenues from fish were down 61.9% on 2010, while melons, watermelons and coffee posted annual losses of 57.4%, 55.3% and 32%, respectively. As with production values, export revenues showed their first signs of recovery in 2012 with 4.2% y-o-y growth recorded.
According to figures of the Comptroller General, a particularly notable contributor was pineapples, whose revenues rose from $26.2m in 2011 to $28.6m in 2012.
While shrimp sales fell 6.4%, registering a total turnover of $27.3m, revenues from cattle meat surged by 40.2% on the previous year. At $71.5m, bananas registered the highest share of agricultural export income, slightly above the $69.8m posted for the previous year.
As per the most recent figures from the Ministry of Commerce and Industry (Ministerio de Comercio e Industrias, MICI), revenues from agro-industrial exports in 2012, including sauces, boneless meats, palm oil and refined sugar, showed significant improvement compared to 2011, rising 83.8% from $68m to $125m.
Trade Policies
For decades Panama has been a strong supporter of free-market mechanisms, which serve as the foundation for its well-established and outward-looking service sectors such as finance and logistics. Gradual liberalisation, marked by membership to the World Trade Organisation in 1997 and a recent string of trade agreements with key markets such as the US, Canada and the EU, have facilitated trade and investments across the economy. However, the consequential reduction of state support mechanisms for the agricultural sector has come under increasing criticism as the slow recovery of domestic production is hampered by a rapid rise in agricultural imports. According to INEC, import of foodstuffs reached $562m in 2009, $773m in 2011 and $837m in 2012.
Competitiveness
The FTA between Panama and its biggest trading partner, the US, is at the core of the ongoing debates between policymakers and agricultural stakeholders. Since the FTA was penned in 2011, more than half of all US agricultural exports have been exempted from import duties, including beef, sorghum, soybeans, corn oil, wheat, fruit and a variety of processed products, while most others will go through a 15-year transition period. In addition, quotas for duty-free access have been applied on items such as grade beef cuts, chicken leg quarters, pork, corn, rice and dairy products. In return, up to 89% of Panama’s agricultural exports will enter the US market duty free. However, as the impact of the agreement on agricultural output is becoming more visible, doubts have been raised about the advantages for Panama’s farmers. A significant issue is the difference in efficiency of the agricultural sector in both countries, with many US products already competitive before the FTA came into effect, thus raising concerns that trade liberalisation would lead to the detriment of local production capacities such as rice, sugar, milk, beans and vegetables.
A second issue is the added cost to Panamanian exporters to comply with US requirements on production standards, ecological measures and labour policy changes. This has led to price inflation at home in some product categories and further erosion of their strength to compete with US imports.
Moreover, in order to comply with the FTA requirements, the Panamanian government has eliminated financial support mechanisms such as the certificate for the promotion of agricultural exports. This mechanism allowed for payments to up to 20,000 exporters of non-traditional agricultural products to compensate for fluctuations of prices on the international markets. According to the Panamanian Association of Exporters (Asociación Panameña de Exportadores, APEX), production losses of up to 30% for items such as pineapples, watermelons, melons, seafood and fish have been registered as a result of the withdrawal.
Since the start of 2014, MICI and the Ministry of Agricultural Development (Ministerio de Desarollo Agropecuario, MIDA) have been in talks with sector associations such as APEX and the Association of Non-Traditional Agriculture Exporters to design an alternative support measure in line with the FTA guidelines. While tripartite discussions were still under way at the time of writing, various new facilities have been introduced in a bid to support local farmers. One such example is Law 25, which was signed into effect in May 2013. The law stipulates that investments in capital goods by small and medium-sized producers in a selection of segments are to be accompanied by public funds for up to 50%. Product categories include those deemed essential to food security and the sector’s sustainability such as rice, cacao, coffee, sugarcane and flowers.
In October 2013, the Legislative Commission of Agricultural Affairs also approved an act providing incentives up to $2500 for producers of rice, corn, sorghum, soybeans, potatoes and onions.
Financial Incentives
Furthermore, in a bid to increase access to financing, the National Bank of Panama (Banco Nacional de Panamá, BNP) reduced interest rates on agricultural loans to 2%, with the exception of palm oil-related loans which have been lowered to 2.5%. The measure also works retroactively and allows existing loans to be transferred to the BNP. Meanwhile, the Agricultural Marketing Institute (Instituto de Mercadeo Agropecuario, IMA) has stepped up its technical assistance programmes to help farmers improve their administration skills and, consequently, raise their eligibility for bank financing. The government has also boosted budgetary allocations by freeing up $165m for irrigation investments in the southern province of Los Santos where the majority of the country’s remaining rice production is located. According to government sources, increasing the rate of irrigated lands, currently at 15% of the total cultivated surface, is a core objective in restoring rice production yields and output.
“While falling rice yields in recent years have pushed growers to other, more profitable crops such as sugarcane, national consumption has steadily grown to per capita levels that currently rank among the highest in the region,” Julio César Ábrego Batista, director-general of the IMA, told OBG. “Therefore, in order to curb the rapid and ongoing increase in rice imports, we need a concerted effort to stabilise and grow our national output,” he added.
Fewer Barriers
On August 1, 2013, a trade association agreement with the EU – Panama’s second biggest trade partner – came into effect. Under the framework, which is part of a regional pact including Honduras and Nicaragua, the EU will liberalise 91% of tariff lines, including dairy products, fruit and vegetables, and nuts, while Central American countries will liberalise 48% of tariff lines over a 10-year period. In addition, duty-free quotas will be expanded annually and applied to sugar, beef, rum and rice, while banana tariffs will be lowered $156 per tonne by 2017 and $102 per tonne by 2020. The agreement with the EU followed an FTA with Canada that came into effect in April 2013, and other negotiations with Singapore and Taiwan have been concluded over the past few years. Meanwhile, Panama signed an FTA with Colombia in September 2013 that is due to take effect in 2014, and negotiations are under way with key regional trading partners such as Mexico, which will follow previous agreements with Chile, Peru and other Latin American countries.
Growth Areas
Following a regional trend to encourage production and consumption of bio-fuels, Panama offers significant growth potential in the production and processing of sugarcane and palm oil. In 2011, Law 42 was signed, establishing rules and regulations governing the production and use of biofuels, including ethanol and bio-diesel. According to the law, implemented at the start of September 2013, the initial requirement for use of ethanol in gasoline and palm oil in diesel is set at 2% and will gradually rise to 5% by April 2014, 7% by April 2015 and 10% by April 2016.
A study undertaken by Intracorp, a Panamanian consultancy group, notes that Panama will need up to four production units across the country, as well as $38m of investment in plantations and agricultural equipment to fulfil the 10% ethanol requirement. Intracorp estimates that Panama can accommodate up to 50,000 ha of sugarcane without affecting the composition of its agricultural sector or the need to clear forests. This will allow for exports to strategic markets such as the US, where Panama will enjoy competitive advantages over established bio-fuel producers such as Brazil thanks to its FTA. As for bio-diesel, the study notes that investments of up to $75m are required for palm oil plantations and production facilities in order to meet the 10% minimum requirement. The developments are slated to attract significant levels of private sector investment in research and production of bio-fuels. One such example is Panama Green Fuels (PGF), a research outfit set up in collaboration with Quinvita, a Belgium-based biofuel company, and Panama’s government.
In April 2012, PGF signed a memorandum of understanding (MoU) with Swiss group IDIAP and MIDA to trial the commercial cultivation of jatropha, from which bio-diesel can be made. Under the MoU, PGF will provide know-how and seed technology to IDIAP’s researchers in a bid to develop the level of local biodiesel research and production capacities. By May 2013, the seedlings had been grown in the nursery of the National Institute of Agriculture (Nacional Instituto de Agricultura, INA), and thereafter transferred to land belonging to INA and IDIAP in July. The results of research and flowering on land belonging to IDIAP are expected to be ready in 2015.
Outlook
The recovery of national agricultural output will remain dependent on the speed at which Panama’s farmers can adjust to the demands of the global market. While the government is pursuing an extension of trade agreements with strategic growth markets, helping its own farmers along will be essential to the success of its agricultural sector. Positive inroads have been made with recent financial incentives, and industry stakeholders are further pushing to accompany these measures with other strategies likely to be announced in the short run. Meanwhile, regulations mandating the use of biofuels will encourage new investments, boost the size of the sector in the national economy and add to the country’s export portfolio.
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