Seeds of change: Already central to the national economy, new developments target export growth

Belied by its relatively modest contribution to the overall economy, the Philippine agricultural sector remains a key component in the social and economic development of the country –more than 24.53m Filipinos work in the sector, making it both economically and politically vital. The industry also plays a key strategic role, with the government committed to its domestic food security programmes. The sector has the potential to be a strong contributor to the national economy, particularly in the export of high-value specialty cash crops and organic produce, which command a premium abroad. To meet the twin goals of growing export earnings of agricultural products, while also increasing domestic supply, the government has launched a number of programmes and initiatives designed to boost efficiency and output within the sector.

IN FIGURES: The agriculture, hunting, forestry and fishing sector expanded by 2.92% in 2012, up slightly from the 2.59% growth registered in 2011, according to data from the Bureau of Agriculture Statistics (BAS). At constant prices, the industry’s gross national income (GNI) rose to P698.7bn ($16.8bn), representing 8.46% of total GNI in 2012, compared with P680.45bn ($16.4bn), or 8.72% of the total, in 2011 and P662.67bn ($16bn), 8.76%, in 2010. Further, at current prices, the value of agricultural production increased 1.17% year-on-year (y-o-y) to P1.4trn ($33bn) in 2012.

The poultry sector experienced the largest gains of any subsector, growing by 4.53% in constant prices in 2012 compared to a 4.35% expansion the previous year. The crops subsector, which accounts for more than half of total agricultural output, grew some 4.14% y-o-y for a total value of P797.7bn ($19bn), a bit down from the 4.85% expansion seen from 2010-11. Livestock producers also increased their output value by 1.1% on the year, while the fisheries industry was the only subsector to contract, albeit just slightly at 0.04%.

GETTING MORE: In spite of the gains being made in the sector, a number of shortcomings continue to weigh on the agriculture industry that are impinging upon both domestic food supply and the competitiveness of commodities within an increasingly open regional and global trade network. As the Philippines move forward with further tariff reductions as a result of ASEAN Free Trade Agreement (AFTA) and other international trade treaties, boosting core competencies and production efficiency will only become more important for domestic producers who will no longer be able to rely on favourable pricing mechanisms to compete with cheaper imports.

With efficiency constrained by factors ranging from current farming practices and a lack of quality inputs, to inadequate infrastructure and market-distorting policies, the state and the private sector are moving forward with a number of strategies designed to increase domestic yields and boost value across a wide variety of subsectors. These include specific crop or industry association plans such as the Sugarcane Industry Roadmap (2011-16) and a similar project being developed by the country’s banana growers, as well as government programmes such as Sustainable Fisheries project, the Food Staples Self-sufficiency Roadmap (FSSR) 2011-16 and the overarching Philippine Agriculture 2020 plan, which outlines ambitious medium-term goals including reducing poverty, achieving food security, global competitiveness and sustainability.

“A priority of the agricultural sector is to invest in value-added processes, a move that will resort in higher income to farmers, bigger job market creation and higher export value per item,” John Paolo Roberto A Calleja, president and CEO of Planters Products, told OBG.

GROWING GOALS: The FSSR programme represents an amalgamation of wide-ranging objectives brought under one umbrella policy for the purpose of increasing efficiency. In its bid to become self-sufficient in rice production, for example, the plan takes a three-pronged approach to boosting supplies: lowering costs through farm mechanisation, reducing post-harvest losses and managing consumption (see analysis).

Already a stalwart of the agricultural sector, palay (unhusked rice) production is set for further expansion in the coming years along. Increasing output of rice, through higher yields and a rise in cultivated acreage, is one of the key goals of the FSSR, which intends to achieve rice self-sufficiency for the country by 2013.

Indeed, the government is taking a wide-ranging approach to tackling the production of rice, rolling out large, well-funded priority projects across a number of areas. These include infrastructure projects designed to dramatically enlarge the country’s irrigation system with the National Irrigation Administration receiving its largest ever budget of P25bn ($602.5m) in 2012, double its 2011 funding. This expansion has assisted another Department of Agriculture (DA) programme bump up the number of annual rice harvests from four to five.

Other yield-increasing projects that have been launched include creating larger and more efficient land blocks from smaller adjoining plots and increasing the use of less expensive organic or chemical-based hybrid fertilisers, as a result of the Organic Agriculture Act of 2010. Additional priorities of the FSSR plan include a focus on research and development, with implementation of appropriate technologies by farmers, increasing access to high-quality seeds, improved education outreach (see analysis), and reform of mechanisms such as pricing systems, access to financing and land, and crop insurance, among others.

ON THE UP: These efforts are paying off, as country moved closer to its target of self-sufficiency with palay production reaching 18.03m tonnes in 2012, up 8.08% over the previous year, according to DA data. Much of this growth was attributed to a revitalisation of fields located in Cagayan Valley, Ilocos Region, Soccsksargen, Central Luzon and Western Visayas, which had been knocked out of commission in 2011 by Typhoons Pedring and Quiel. Despite these losses, 2011 output of 16.68m tonnes still managed to top the 15.77m tonnes produced in 2010, illustrating the breadth of growth achieved in the rice segment.

Another major food staple, corn, has also recorded strong growth as yields increased each year from 2010 to 2012, hitting 6.38m tonnes, 6.97m tonnes and 7.41m tonnes, respectively. Higher market prices for yellow corn and the continued use of hybrid and genetically modified organism seeds have contributed to the recent expansion, as well as decreased incidence of corn borer pests, adequate supply of water and fertiliser application, and favourable weather conditions. Increased output has raised the value of these staples. As the single largest contributing commodity in the agricultural industry, palay crops were valued at P151.11bn ($3.6bn), accounting for 19.58% of all crop value in 2012, up 8.08% at constant prices over the P139.8bn ($3.4bn) seen the previous year, according to the BAS. Corn crops, which ranked second in production value at 6.35% of total crop worth, likewise increased by 6.25% on the year to P49bn ($1.18bn) in 2012. The growth in the value of palay and corn was attributed to boosts in production as well as a rise in global commodity prices.

OTHER CROPS: Complementing the country’s two primary food staples, the Philippines also grows a wide array of other crops which are used to supplement food supplies and sold as cash crops domestically or abroad. The most lucrative of these commodities in 2012 was the banana crop, valued at P108.1bn ($2.6bn), up 5.44% (in current prices) over the previous year, according to BAS data. Fruit output was also boosted by growth in the pineapple and mango harvest, which increased in value by 23.77% and 4.91% to P17.75bn ($428m) and P19.51bn ($470m), respectively, on the year. Other crops posting gains on the strength of higher production and market price include the peanut crop, valued at P994.26m ($24m) in 2012, up 6.95% over 2011; cassava at P15.7bn ($378m), growth of 11.03%; camote (sweet potato) at P6.04bn ($146m), up 4.39%; tobacco at P3.43bn ($83m), an increase of 13.95%; and tomato at P2.82bn ($68m), up 11.04%.

FALLING OFF: At the other end of the spectrum, lower production volume and receding market prices also contributed to production value losses for a number of commodities. The single steepest fall-off occurred in the calamansi crop, a citrus fruit, which plummeted in value by 33.49% in 2012 to P2.93bn ($70.6m). Other notable declines include the 18.25% decrease in onion production to P3.89bn ($94m), the 16.21% drop in mongo (mung bean) to P1.48bn ($36m) and a 15.5% fall in garlic to P774.4m ($18.7m). Gross earnings also took a hit for aubergine, which declined 14.58%; cabbage, down 26.66%; coconut, which lost 26.68%; sugar, which dropped 24.71%; and rubber, falling 29.49%.

COCONUT SLUMP: The financial hit incurred by coconut producers came, in part, as a result of a 3.8% rise in yield on the year to 15.83m tonnes. The increased supply and suppressed demand combined to lower commodity prices and, ultimately, profits. The conditions for cultivating coconuts are very similar to those required by coffee, bananas and pineapples, and though it is not the only choice available to farmers, the availability of options can cause for somewhat unpredictable ups and downs in planting, from a macro perspective. Thus, perhaps counter-intuitively, the success of the crop is what saw profits decline. The increased harvest of coconut was due to a number of factors, including favourable weather conditions, a salt fertilisation programme carried out by the Philippine Coconut Authority, as well as new bearing trees in Sultan Kudarat and Misamis Occidental, according to BAS reports.

“Around 38 products can be derived from coconut shell,” Euclides G Forbes, administrator at the Philippine Coconut Authority, told OBG. “We are currently looking at several unconventional finished products that we want to explore for coconut, including coconut water, coconut sugar, soap and also virgin coconut oil. In this process of developing value-added products, we are also encouraging coconut farmers to participate from the crop tree to the end of market.”

SUGAR: Far and away the largest crop grown in the Philippines by tonnage is sugarcane, with 26.44m tonnes harvested in 2012. Sugarcane has diverse uses, which supports demand. While much of the annual crop is used to produce molasses and sugar, the country’s biofuels production plans have created a growing secondary market for the crop. In spite of promotional schemes for sugarcane farmers, competition from other profitable cash crops for acreage, as well as the looming 2015 deadline for the sugar import tariff to be cut nearly to nil, the sector has its share hurdles to navigate in the coming years. “The big challenge is the cost of production for sugar, which is around 850 pesos ($0.02) per 50-kg bag for an efficient farm. If we follow current market prices we will not be competitive,” Archimedes B Amarra, an executive vice-president for marketing/trading, corporate planning and corporate communications at sugar producer Roxas Holdings, told OBG.

SWEETENING THE POT: Industry stakeholders have formulated the Sugarcane Industry Roadmap ( 2011-16), which addresses both supply and demand issues to make the subsector more competitive. The roadmap will require public and private investments estimated at some P14.5bn ($349m) over five years on projects to provide farmers with a range of support from machinery, roads and irrigation to loans and financial assistance.

In terms of raw materials, the roadmap calls for an increase in productivity from 57 tonnes of cane per ha to 75 tonnes per ha, improved sugar recovery and an expansion of planted area from 422,384 ha to 465,000 ha by 2015. Implementation of this programme began in 2012 with the establishment of the first five “block farms” located in Batangas in Luzonn and Negros Occidental, which are intended to take advantage of economies of scale by incorporating around 30 to 40 separate small farms of 0.5-1 ha into larger contiguous blocks averaging around 30 ha. Another 40 block farms are undergoing a validation process, which vets each potential participant with legal ownership of land.

Looking downstream, the plan call for boosting sugarcane from a P70bn ($1.7bn) industry to P100bn ($2.41bn) through a strategy of increased consumption and diversification of end-use products, including biofuels, electricity generation, special sugars, bioplastics, biowater and biofertilisers. Biofuels is one of the most significant consumers and the government has fostered through legislation requiring a 10% blend of bioethanol in all petrol (and 2% biodiesel), primarily distilled from sugarcane. Fully implemented as of February 2012, the biofuels plan is targeting domestic production of more than 200m litres of bioethanol per year, though delays and technical challenges have so far limited output to a fraction of that. “Most players in the ethanol business are waiting for ASEAN economic integration as it will mean that the tax on sugar will slowly go down and ethanol production will become more competitive,” Willy Q Tee Ten, president of Autohub Group, told OBG. “As of now, tariffs are still too high and there is not enough local sugar cane production to source large-scale ethanol production.”

COFFEE BEAN: Other nations in the region are well ahead of the Philippines in coffee production, but that is not deterring the country from getting into the game. Vietnam, for example, is poised to become the largest producer in South-east Asia, with output of 1m-1.2m tonnes, compared to output of only 30,000 tonnes in the Philippines. However, according to John Martin Miller, the chairman and CEO of Nestlé Philippines, the Philippine bean is of superior quality and is the preferred input for Nestlé’s products, but there is a problem of supply. To overcome this shortcoming, the government and several private sector players are collaborating on a solution to increase coffee output. Coffee can be inter-cropped, and thus it can be a boon for fruit farmers, as they can cultivate the same acreage with a second revenue source concurrently with their current crop. At 18 months, the cycle for the plant is also longer than most, ensuring greater financial stability through a later-in-season revenue source. Given the plant’s benefits, Nestlé and Proceso Alcala, the secretary of agriculture, signed a memorandum of understanding in 2010 to better incentive planting of the crop.

LIVESTOCK: The livestock sector, consisting of carabao (water buffalo), cattle, hogs, goats and dairy, represents 15.13% of the total agricultural sector’s value at current prices in 2012, on par with previous years, according to the BAS. Annual gross receipts of P214.3bn ($5.2bn) for 2012 showed a slight (0.94%) increase over the previous year, led by a 12.23% hike in dairy value to P559.96m ($13.5m). The rise in dairy products was attributed to larger output – from 16,450 tonnes to 18,450 tonnes – and aided by higher market prices.

While cattle production declined slightly from 256,260 tonnes in 2011 to 253,980 tonnes in 2012, rising commodity prices were able to compensate enough to boost the overall value of the sector by 0.4% on the year. Carabao and goat production also dipped, falling from 147,520 tonnes to 142,730 tonnes and 78,200 tonnes to 75,660 tonnes, respectively, leading to a corresponding dip in value of 0.66% and 0.27%. The declining output was the result of decreased slaughter while replenishing animal stocks in the Ilocos Region, Central Visayas, Cagayan Valley, Bicol Region, Davao Region and Soccsksargen. High demand for pork in the holiday season drove hog production up 1.71% in 2012 to 1.97bn tonnes, with increases in the Ilocos Region, Central Luzon, Western Visayas, Central Visayas and Northern Mindanao, according to a BAS report.

FISHERIES: With more than 193.4m ha of oceanic waters and 26.6m ha of coastal waters across its over 7000 islands and 17,460 km of coastline, the Philippines has substantial territory to support its seafood trade, which made up 16.75% of agricultural sector value in 2012 at P237.17bn ($5.7bn) in current prices. Comprising marine fisheries, inland fisheries, municipal fisheries, commercial fisheries and aquaculture, the sector has fallen on hard times in recent years as overfishing and resulting moratoriums have reduced catches. In real terms, the value of the fisheries sector declined 0.04% in 2012 after a 3.77% drop between 2010 and 2011. The principal stocks exploited in the Philippines include tuna, demersal fish and invertebrates.

The largest contributor to the subsector, which was valued at P92.3bn ($2.2bn) in 2012, according to the BAS, is the aquaculture industry, which cultivates aquatic organisms in fresh, brackish and marine waters. This represents a 7.32% increase over 2011, due chiefly to a rise in prices in response to stronger demand for milkfish from Manila as well as for tilapia and catfish in Antique. Production was stronger on the year for a number of commodities, including tilapia and milkfish fingerlings (particularly in high demand in Pampanga and Quezon), and seaweed (in Quezon, Leyte, Bohol and Maguindanao) due to a variety of factors including a higher survival rate of fingerlings, high-quality planting materials and less prevalence of disease.

Municipal fisheries contributed another P79.53bn ($1.91bn) to the sector, down 0.68% from the P80.1bn ($1.93bn) recorded in 2011. Encompassing coastal waters within 15 km of the coastline and limited to vessels weighing less than 3 tonnes, the catches from municipal marine waters declined by 3.88% from 1.33m tonnes in 2011 to 1.28m tonnes in 2012. The tailing off of production was attributed to numerous factors, including damaged vessels and reduced fishing trips as a result of rough seas in Ilocos Sur, because of typhoons and unusually strong currents; strict enforcement of fishery laws on seiners and trawlers in Iloilo; lingering damage to corrals in Zamboanga related to flooding; and reduced fishing days in South Cotabato and Sarangani due to strong winds from the Intertropical Convergence Zone in the last quarter of 2012.

Lastly, commercial fisheries, which operate outside the 15-km municipal waters delineation, had a good run in 2012 as favourable market prices pushed gross receipts up 11.47% to P65.35bn ($1.57bn). An increase in production also benefitted the sector, the result of more fishing days and higher volumes in Calabarzon, Zamoanga Peninsula and Davao; a strong catch of anchovies and sardines in Masbate and scad in Cebu; and a lifting of the tuna fishing ban in fishing grounds of Indonesia, Papua New Guinea and Micronesia.

The segment could continue to see growth, though infrastructure is a challenge. “Fisheries in the Pacific is a virtually untapped sector in the Philippines, primarily because there are no fish port or infrastructure facilities on the eastern seafront,” Malcolm I Sarmiento Jr, the president and CEO of Aurora Pacific Economic Zone and Freeport Authority (APECO), told OBG.

POULTRY: Earnings in the poultry subsector increased in 2012 to P167.06bn ($4bn), up 5.24% over the 2011 production value at P158.74bn ($3.8bn), according to BAS reports. Annual growth was driven primarily by the industry’s largest contributor, chicken, which boosted its harvest from 1.41m tonnes valued at P118.33bn ($2.85bn) in 2011 to 1.48m tonnes worth P123.7bn ($2.9bn) in 2012. Demand for chicken drove up the annual output of broilers, particularly in the Ilocos Region, Cagayan Valley, Central Luzon, Central Visayas, Northern Mindanao, Davao Region and Soccsksargen.

Both the chicken and duck egg markets likewise fared well, rising in value by 7.16% and 9.83%, respectively, as production grew to 421,070 tonnes and 39,750 tonnes, respectively, in 2012.

MODERN METHODS: Currently, a lack of post-harvest facilities remains one of the biggest challenges. For instance, 16.5% of rice is thrown away due to the shortage of facilities for drying it. Most rice is dried on basketball courts or other open areas, resulting in spoilage. For comparison, Argentina produces 1m tonnes of rice per year, to the Philippines’ 16m tonnes, but Argentina has over 100 modern rice facilities, while the Philippines dries rice traditionally. The waste resulting from traditional techniques is a challenge, but yields could be increased with modern methods to counteract loss. “Mechanisation of farming and adoption of technology would reverse low productivity in domestic agriculture, especially as it produces zero tillage,” said Joseph Calata, chairman and CEO of the Calata Corporation. “Unlike in the Philippines, in highly productive agricultural markets in Latin America or the US, farmers do not till the land, as it damages the soil and creates water retention.” Improved soil analysis and decreasing the use of carabao could maintain healthier soils.

OUTLOOK: Although it is a large employer and a socially and politically important industry, agriculture accounts for only a token contribution to the country’s GDP in spite of its vast export promise. Recent efforts by the government to increase efficiency and productivity within the industry should help boost profitability in the sector, while advances in infrastructure, training and the quality of the crops themselves will also help to mitigate the damage that can be incurred from natural disasters and unfavourable weather. Further, once in place, business-friendly policies and enhanced infrastructure should provide an attractive market for investors looking to harness the sector’s untapped potential.