OBG talks to Milton von Hesse, Minister of Agriculture and Irrigation

Interview: Milton von Hesse

Most large-scale agricultural projects and investments have been focused on the coast. What about developments in the highlands and jungle?

MILTON VON HESSE: There is still substantial potential for additional development along the coast. In fact, in the next two years there should be around an additional 150,000 ha that will be made available for agricultural projects due to large-scale irrigation projects currently under way. Thus, the coast will continue to see ample development and investment, especially of the kind geared toward export, given the infrastructural connectivity along the coastline.

In the other parts of the country, particularly the sierra and the jungle, where business ventures have been far more limited, the government is pursuing a number of programmes to facilitate investment in these areas. These programmes have to be adapted to the unique geographical characteristics of their environment. In the sierra, for example, there is not as much open land available, the climactic conditions are not as favourable, and much of the arable land is already occupied by small-scale agricultural producers who have an average of 2 ha each.

To address this, in 2013 we launched the “Mi Riego” fund, which aims to lessen the dependency of these farmers on rainwater for their crops by financing formal irrigation projects. The 2013 budget for this fund is PEN1bn ($376.6m), and the aim is to cover 40,000 ha in the first year alone. Additionally, the ministry is evaluating other projects throughout the country that should help to open up extra tracts of land for agricultural investment and development.

Decades-old land reform and the lack of titles in many places contribute to delays or inhibit investment. What is the solution?

VON HESSE: The legacy of agrarian reform is that much of the land is fragmented. Additionally, the division of generational inheritances since major land reforms were enacted decades ago has resulted in the further fracturing of land, and while the average parcel of land used to be around 3 ha, it is now nearing 2 ha.

Of course, the ministry cannot possibly work directly with each small landowner. To overcome this, we are working with farmers to facilitate and encourage the formation of associations and cooperatives. Once these groups are formed, the ministry will provide advice, training and management, and these cooperatives will allow farmers to capitalise on economies of scale.

Low insurance and credit penetration limit the ability to hedge harvest problems. What are your thoughts on how to change this?

VON HESSE: Small-scale agricultural producers, normally oriented toward export but not necessarily trained in business management, for the most part lack access to private sector funding. This is due in large part to the government’s tendency to forgive debts in the segment, making it a high-risk market for the private sector. But even if this were not the case, due to the social complications of seizing collateral assets in the result of an inability to pay, the segment remains unattractive for private investors.

Thus we see an immense opportunity for Agrobanco, the agricultural development bank, to play a greater role in this segment, which should help to correct many of the failures of the current system. The bank will be able to fill a market need for credit lines and financial support, where there is a gap. However, the bank’s work goes beyond that. Rather than simply giving farmers money, Agrobanco will help them formalise, and craft business plans and strategies that will allow them to succeed and move on to the next level of development.

Such an increased role for Agrobanco will require continued improvements in the bank’s governance, profitability and liquidity. But by taking these steps, we also see Agrobanco as a low-risk means by which the private sector can invest in this segment, both directly in projects and perhaps even as shareholders in the bank.