Despite slower growth, the sector outlook remains stable

Agriculture in Peru is a story of contrasts. The development of industrial and export-oriented agriculture, concentrated on the Peruvian coast, is leading sector growth and diversification efforts. Since 2000, industrial agriculture has grown at an annual average rate of 6.7% while non-traditional agro-exports have increased at an annual average rate of 19%, driven primarily by vegetable and fruit exports. The government has supported growth in this segment with a number of large-scale irrigation infrastructure projects that are quickly expanding irrigated land on the coast of the country.

By contrast, traditional agriculture has grown at a much slower rate of 2.2% since 2000. Concentrated in the highlands and jungle areas, this type of agriculture is characterised by high fragmentation and a lack of competitiveness, stemming largely from logistics challenges. Here, the government has focused on promoting associations between small and medium-sized producers to increase the adoption of technology and more efficient practices, increase profitability, and ultimately reduce rural poverty, which is estimated to reach 48%.

The sector has achieved stable growth but, with Peru’s economic slowdown, the government must now continue to promote investment on the coast while ensuring small Andean farmers are integrated into the expanding and lucrative export industry.

Sector Performance

Increased domestic consumption, exports and investment have led to consistent sector growth for more than a decade. From 2003 to 2012 growth averaged 4.14%, according to the Ministry of Agriculture and Irrigation ( Ministerio de Agricultura y Riego, MINAGRI).

In 2013, a decline in production volumes of key crops, in particular coffee, saw growth slow to 2.2%, reaching a production value of nearly PEN23bn ($8.2bn); agriculture, which accounted for roughly 63% of sector revenues, grew 1.8%, while livestock, responsible for the remaining 37%, grew by 2.8%.

Agro-industry performed similarly, reporting a rise of 3% to reach a value of PEN7.65bn ($2.7bn).

This slowdown registered in 2013 has continued into 2014, with the sector registering marginal growth of 0.93% year-on-year (y-o-y) from January to September. Although agriculture registered zero growth over this period, the sector was propped up by the livestock segment, which expanded 2.9%.

Despite playing an important socio-economic role, employing roughly 26% of the population, the sector’s contribution to GDP has gradually declined in the past decade. According to the National Institute of Statistics and Informatics (Instituto Nacional de Estadística e Informática, INEI), in 2013 it represented 7.6% of GDP, having decreased from 8.9% in 2000.

Although Peruvian agriculture is relatively diversified, with over 75 cash crops, production value is derived from a concentration of produce, including rice, potatoes, coffee, asparagus and sugar cane.

Traditional crops, including coffee, cotton and sugarcane, have all experienced difficulties in the past few years. Conversely, diversification efforts on the coast have seen non-traditional crops, in particular vegetables and fruits such as avocadoes and asparagus, quickly climb to the top of the export list.

Coffee

Peru’s most important agricultural export product, coffee, has seen its share of revenues decrease dramatically. The crop reached an important peak in the 2011-12 season, when it accounted for approximately 24% of agricultural exports and generated $1.5bn in export revenues. However, since then production has fallen.

In 2013 the spread of coffee leaf rust, a fungus which has affected most coffee-producing countries in the region, saw production fall by 19.7%, from 320,164 tonnes in 2012 to 257,228 tonnes. International prices fell by 24.8% the same year, leading to a 31.4% drop in the value of exports, from just over $1bn free on board in 2012 to $695m in 2013. The industry has been somewhat mixed in 2014. At 199,055 tonnes, production was down by another 24.6% y-o-y in the first eight months of 2014. In addition to leaf rust, production was affected by another pest, the coffee borer beetle, which is estimated to have affected more than 30% of the 400,000 ha in production. Domestic prices fell by 22.7% in the same period; however, export revenues are expected to reach $720m-780m by year-end 2014, even as production recovery in neighbouring Colombia and Brazil affects demand for Peruvian coffee.

Cotton

Cotton is another traditional crop that has seen its importance diminish considerably in recent years. Production fell from 110,954 tonnes in 2012 to 82,487 tonnes in 2013, while cultivated surface was down to 31,366 ha in the 2012-13 season, having declined from 89,428 ha in 2007.

The industry showed some signs of recovery in the first eight months of 2014, with production increasing to 89,820 tonnes. However, the country remains dependent on imports to satisfy its 172,000 tonnes of demand per year. Between 2006 and 2011 the sales volume of locally produced cotton fell by 42% to 45,000 tonnes while the participation of local producers in the market fell by 27%.

The government has rescinded production subsidies but remains committed to the recovery of the sub-sector through technical assistance and the promotion of associations among small-scale producers. However, losses have led many producers to switch to more profitable crops.

Quinoa

The golden grain, as quinoa is known locally, is the success story of the Andean highlands. Quinoa production reached 87,300 tonnes from January to August 2014, growing 85.7% y-o-y, while planted area increased 37.7% y-o-y in the same period, to nearly 60,000 ha. Efficiency also increased, with average yields rising by 34.9% to 1458 kg per ha.

According to MINAGRI, between 2007 and 2013 quinoa exports grew at an impressive annual average rate of 50.8% in volume and 21.7% in value. In the first six months of 2014 quinoa exports reached $74m, growing 236% y-o-y. Heightened demand for the superfood sent prices skyrocketing in 2013, designated the international year of quinoa, with wholesale prices in Peru rising by 88.2% over the 12-month period. Rising international demand is expected to continue fuelling growth in years to come. Marco Vinelli, director general of the Agricultural Business Directorate and chief of Agroideas, a government programme aimed at increasing competitiveness, told OBG, “MINAGRI is promoting quinoa production to respond to overwhelming demand from Asia in particular, where efforts are being made to increase mass consumption of quinoa.”

While quinoa production is concentrated in the highlands, a decentralisation of production should be expected in coming years. The success of the crop has raised the interest of large agro-exporting producers on the coast, where quinoa production is set to start in late 2014. Some 300 ha have been planted so far, but given the higher yields on the coast, the prospects are promising. Though national average yields stand at 0.8 tonnes per ha according to MINAGRI, yields on the coast average around 3.5 tonnes and can rise as high as 6 tonnes per ha in Arequipa, compared to a maximum 1 tonne per ha in the highlands. Even so, the highlands should remain the production centre of the healthier and more expensive organic quinoa.

Cocoa

Cocoa is another crop registering significant growth. Expanding demand from both the external and domestic market saw production grow by 14.3% in 2013, reaching 71,400 tonnes. The crop grew an additional 8.5% y-o-y in the first eight months of 2014, with production totalling 55,852 tonnes, while exports increased by an impressive 78.3% to 23,000 tonnes in the same period, reaching $72m, up significantly from $34m over the same period in 2013. Total cultivated area has reached around 104,400 ha, according to MINAGRI.

Peru is already a leading exporter of organic cocoa and is working to continue to develop this segment. Planted area in the San Martín, Ucayali and Junín regions, the main organic cocoa-producing areas, is on the rise, and a campaign to replace old trees with newer, better quality ones is also under way. The government is focused on increasing production of fine cocoa, which attracts higher premiums. “There is a possibility that cocoa originated in Peru. If this can be proved the plan is to articulate marketing efforts to develop a collective brand which can be marketed along with the country brand,” Vinelli said.

Palm Oil

As with many of its neighbours, palm oil production in Peru has seen notable growth in the past decade, reaching 557,515 tonnes in 2013, an increase from 181,000 tonnes in 2000, when the government declared the expansion of palm oil production of national interest. In the first eight months of 2014, production increased 17.6% y-o-y, from 332,066 tonnes to 390,692 tonnes.

While palm oil production has raised a number of environmental concerns, in particular growing rates of deforestation and the displacement of native communities, Peruvian authorities have supported expansion in this sub-sector, in part because of its role in the war against narcotics trafficking. Like coffee, palm oil cultivation provides farmers an alternative to coca cultivation.

At around 60,000 ha, planted area has more than quadrupled from 14,000 in 2009 and the potential for expansion is significant. According to MINAGRI there are 600,000 ha with potential for cultivation of palm oil. Currently, 90% of production is concentrated in the San Martín and Ucayali regions while Loreto and Huánuco account for the remaining 10%.

Though growth has been largely driven by small and medium-sized producers, which account for 60% of cultivated area, prospects are attracting a number of big players as well. Grupo Romero, one of the country’s largest conglomerates and the owner of palm-producing companies Palmas del Espino and Palmas del Shanushi, has around 22,000 ha in production. In early 2014 the group had four projects in the evaluation stage for an additional 35,000 ha in Loreto and has announced plans to increase its planted area to 120,000 ha by 2021.

The slow adoption of technology and inefficient practices among small and medium-size producers have kept agricultural productivity levels among these producers relatively low, between nine and 12 tonnes of fresh fruit bunches (FFBs) per ha. Palmas de Espino, for example, reported yields of between 20 and 25 tonnes of FFBs per ha.

Livestock

Accounting for roughly 37% of the sector’s production value, livestock has been the support system of the sector in the past year. Driven by increased domestic consumption, livestock production grew 2.8% in 2013, a figure which was maintained during the first eight months of 2014.

The highest growth was registered in the poultry segment, which saw production increase by 4.9% yo-y from January to August 2014, from 961,669 tonnes to a little more than 1m tonnes. The production of poultry, which represents 53% of total meat consumption, is expected to grow 5% in 2014 according to Scotiabank forecasts, driven by increased consumption. National per-capita consumption, at 39 kg in 2013, is among the highest the region. Higher prices for pork and beef as well as the instability in fresh fish catches are likely to continue driving up chicken consumption. With domestic production unable to meet demand, the price of chicken has gone up by 20% y-o-y in October 2014.

Forestry

One segment which could see significant development in coming years is forestry. Peru has around 106m ha of forest land or potential forest land. Of this total, around 68m ha are forested. More than 90% of it is located in the north-eastern part of the country, along the Amazon basin.

Despite having the ninth-largest forest resource in the world and second in Latin America after Brazil, the country is an insignificant player in the global stage, accounting for less than 1% of timber exports. Forestry contributes 1.1% to GDP.

According to MINAGRI, the forestry sector expanded marginally from 2002 to 2012, at an average annual rate of 1.7%. National timber production totalled 864,000 cu metres in 2012 and exports amounted to $395m. The industry has yet to successfully add value to production; only 11% of timber production is processed.

Long neglected, forestry seems to have just recently come under the government’s radar. In 2011 a new Forestry Law (Law 29763) was approved to promote the sustainable management of resources. The law established the National Forest and Wildlife Service (Servicio Nacional Forestal y de Fauna Silvestre, SERFOR), an independent agency which has been in operation since July 2014.

With a budget of PEN57.3m ($20.5m) for 2015, SERFOR is in charge of overseeing the sector and promoting sustainable development and investment. It will also play a key role in the implementation of a series of measures announced by MINAGRI in June 2014 to promote the forestry and wildlife segments. These entail streamlining a minimum of 10 bureaucratic procedures to reduce the time needed to get licences in the sector.

SERFOR will also be in charge of redesigning the concession process and is currently working with the regions of Loreto and Ucayali to this end. According to MINAGRI, more than 24m ha have been designated as permanent production areas.

Since 2002, 613 concessions for timber and non-timber forest products were awarded, covering a total of 7.6m ha. However, of these, only 35% are active. According to MINAGRI, an additional 10m ha could be awarded as concessions; 9m currently deforested hectares could also be sustainably managed for the creation of new plantations.

Given how undeveloped the timber industry is, the potential for sustainable development is significant. Henry Balarín Maúrtua, general manager of Grupo Forestal Vulcano, an exporter of wood products, told OBG, “Chile invested $516m over a 20-year period with proper incentives, which enabled it to reach $6bn in exports annually. In Peru, the potential is even higher, as we have a larger resource and 20-30 species of timber unique to Peru.”

However, illegal logging, the displacement of native communities and a high degree of informality have had a significant impact on the sector. “More efforts should be made to combat informality and illegal logging while providing incentives to companies operating formally, ” Balarín added. The segment is likely to see added incentives in coming years. Vinelli told OBG, “MINAGRI is studying the incentives given in other countries, in particular Chile, to promote a transition in focus from extraction to sustainable management. The goal is to increase export revenues to $2.5bn in the next ten years.”

According to MINAGRI goals for 2015 include reaching 2m cu metres of supervised forestry production, and 200,000 ha of timber plantations.

Fisheries

The fishing industry is facing a second year of troubled waters as supplies of anchovies, which represent 90% of industry sales, have fallen to a record-low, leading authorities to suspend the second anchovy-fishing season of 2014. The suspension came after a difficult 2013 in which exports of anchovy-based fishmeal fell 23% to $1.36bn, from $1.77bn in 2012, and anchovy-based fish oil exports dropped 37% to nearly $343m. Total exports from the fishing sector were down 18% the same year, totalling $3.2bn. The first anchovy fishing season of 2014 was also disappointing; only 68% (1.71m tonnes) of the total allowable catch was harvested. With the possibility of a strong El Niño event in 2015, efforts to diversify and expand the human consumption segment are under way in a bid to reduce dependence on anchovy (see analysis).

Sector Exports

Agricultural exports have been seeing strong growth since 2009, exceeding $4.2bn in 2013 and representing 10% of total exports, according to central bank figures. From January to July 2014 the value of agricultural exports increased 23.1% y-o-y, surpassing $2.48bn, thanks to significant growth in non-traditional exports, which accounted for 90.1% of total agricultural exports.

Non-traditional exports grew an impressive 27% y-o-y and brought in nearly $2.25bn. The increase was driven by rising demand in key export markets, including the US, the Netherlands, China, Hong Kong, Italy, Belgium, Ecuador and Spain.

Fresh avocados, grapes and asparagus were the top earning crops, grossing $253m, $233m and $169m, respectively, followed by mangos ($120m), quinoa ($91m) and cocoa beans ($72m).

Diversification efforts by large coastal agro-exporting companies have seen the rise of a few promising crops that are quickly climbing to the top of the country’s export list. One of these is table grapes, exports of which reached $443m in 2013, and grew 79.3% y-o-y in the period January to June 2014, to $233m. Avocado has registered a similar trend, with exports increasing 74.3% y-o-y from January to June, to $253m, a significant increase from the $145m recorded in the same period the previous year.

Blueberry is the most recent gamble for agro-exporting companies and it seems to be paying off. Though still small, exports increased exponentially from $465,000 in 2012 to nearly $17.3m in 2013, a figure that is expected to continue growing in 2014. From January to September exports reached almost $12m. The coastal climate allows the country to grow berries year-round, providing it with an important advantage over regional competitors.

Traditional exports, which represented 9.9% of total agro-exports, fell by 1.9% y-o-y in the first seven months of 2014, from $272m to $262m, mainly due to lower exports of coffee and sugar, which registered drops of 9.3% and 22.1%, respectively. Agricultural exports are sent to nearly 150 markets around the world; however, the US continues to be the main market for Peruvian agricultural goods, accounting for 27.3% of the total in 2013, followed by the Netherlands (13.8%), Spain, Germany, Ecuador and the UK. Combined these six markets account for more than 60% of the country’s total traditional and non-traditional agricultural exports.

Growth Drivers

Stable sector growth has been driven by a combination of factors. The Law for the Promotion of Investment in Agriculture (Law 27360), which has been in place since 2000, represented an important step to the revitalisation of the sector after decades of terrorism, and an agrarian reform that led to increased fragmentation. Among the tax and labour benefits provided by the law is a reduction of the income tax from the regular 30% in other industries to 15%. The law, which will remain in place until 2021, has encouraged private investment and contributed to the development of the agro-export industry. In recent years the latter has also benefitted substantially from Peru’s trade openness policy. Today Peru has preferential trade agreements with 53 countries, including the US, China, the EU, Japan, Thailand and South Korea, representing a market of roughly 2.5bn people. A number of other free trade agreements are in the negotiation stage, including the Trans-Pacific Partnership, and agreements with Turkey, Honduras and El Salvador.

Irrigation

In a bid to support agro-exports along Peru’s coastal land, national and regional authorities have initiated work on a series of irrigation projects through public-private partnerships, which are increasing irrigated surface substantially.

According to MINAGRI, completed and ongoing irrigation projects will add 400,000 ha of irrigated surface to the Peruvian coast, representing an investment of more than $3.2bn.

“The deficit in irrigation projects is estimated to be between PEN5bn ($1.8bn) and PEN7bn ($2.5bn). The irrigation projects on the coast as well as the Mi Riego (My Irrigation) programme are pillars of the MINAGRI’s efforts to increase irrigated land,” Guillermo Rebosio Arana, an advisor at MINAGRI, told OBG. Olmos Tinajones, in the Lambayeque region, is the most recent project to be inaugurated, in October 2014. An investment of $580m, the project provides irrigation to some 43,500 ha and will generate an estimated additional $1bn in annual agro-exports and 240,000 direct and direct jobs. Brazilian construction firm Odebrecht, which in 2010 was granted a 25-year concession, remains in charge of maintenance of the Olmos Tinajones project.

Meanwhile, the third phase of the Chavimochic project, in the north-western region of La Libertad, is set to add another 63,000 ha of irrigated land and improve irrigation of 48,000 ha in the nearby Chicama Valley. In December 2013 a consortium made up of Peruvian and Brazilian construction companies, Grana y Montero and Odebrecht, were awarded the concession for the maintenance and operation of the first, second and third phases of the project. Representing an investment of $715m, the project is expected to add around $1.2bn per year to agricultural export capacity, once completed.

A third major project is Majes-Siguas II, in Arequipa, which aims to provide an irrigated surface of 46,500 ha and a hydroelectric unit. The first phase, which entailed the construction of preparatory infrastructure, was completed in 2010. However, the project has been on hold since then, shortly after it was awarded to a consortium of Spanish and Peruvian engineering firms, Cobra Instalaciones, Seguros and Cosapi, because of a dispute between the Arequipa and Cusco regional governments.

The Puyango project in Tumbes, an investment of $300m, will add another 41,600 ha and generate an estimated 120,000 jobs. The concession for the first phase of the project has yet to take place.

Meanwhile, on a smaller scale, the Alto Piura project in Piura, and the Chinecas project in Ancash, will add another 19,000 ha (and improve irrigation to 31,000 ha), and 33,053 ha (and improve irrigation to 10,500 ha), of newly irrigated land, respectively.

Challenges

Nonetheless, a number of challenges remain. While the coast has seen tremendous development in the past two decades, the fertile Andean highlands continue to suffer from a lack of competitiveness. A significant infrastructure gap makes the transportation of more sensitive vegetables and fruits from the Andean region difficult and is holding back the development of agro-exports.

Ulises Quevedo, CEO of agro-exporter Grupo Rocio’s subsidiary Talsa, told OBG, “The gap in infrastructure presents a challenge for Peruvian companies to remain competitive on a global level. However, the projects to improve roads and diversify ports and airports will lower logistic costs and increase Peru’s agribusiness potential.”

In the jungle, overly complicated bureaucratic procedures have also hampered development. “With vast water resources, the jungle presents great opportunity for agribusiness, which would help reduce costs and increase productivity. We now need to work on diminishing bureaucracy and the time to acquire licences to help take advantage of this untapped potential,” Quevedo told OBG.

Budget

The agricultural budget has increased in recent years, in line with the government’s commitments to the sector. In 2015 nearly PEN2bn ($714m) are being allocated to MINAGRI and its related agencies, including the Agricultural Health Service, the National Institute for Agricultural Innovation and SERFOR. The amount represents a rise of 19% compared to the 2014 budget.

With its expanded budget, MINAGRI hopes to achieve sector growth of 4%, increase agro-exports by 17% and reduce rural poverty by an ambitious 41%, in 2015. The largest single portion of MINAGRI’s budget, PEN905m ($323.1m), is being allocated to programmes aimed at increasing competitiveness among small and medium-sized producers, and ultimately reducing rural poverty. These programmes are geared at increasing irrigation infrastructure, improving management practices, and promoting innovation and the adoption of technology.

Sector Policy

The Mi Riego programme, a PEN1bn ($357m) fund started in 2013, was created with the goal of developing irrigation infrastructure in Andean areas 1500 metres above sea level, and has been a key component of the government’s efforts to reduce poverty and expand irrigated land. The programme is expected to increase irrigated surface area by as much as 120,000 ha, according to MINAGRI. As of September 2014, 30% (PEN289m, $103.2m) of Mi Riego funds had been allocated.

Another pillar of agricultural policy is the Productive Conversion Plan in the Valleys of the Apurímac, Ene and Mantaro rivers, home to more than 50% of the country’s coca production. Central to coca eradication efforts, the programme aims to convert coca plantations to legitimate uses. In 2014 a total of PEN30m ($10.7m) was allocated to assist with government efforts to replace some 3000 ha of coca with alternative crops, in particular coffee and cocoa.

To promote innovation, the government is allocating PEN18m ($6.4m) to establish eight regional agro-business innovation centres in the departments of Cusco, Ayacucho, Junín, Huancavelica, Cajamarca, Puno, Ancash and Moquegua.

In an effort to increase production value, MINAGRI programmes are also targeting specific crops. For example, the coffee industry is being propped up by a programme to mitigate the effects of leaf rust and renovate 12,500 ha in coffee producing regions. As of September 2014 a total of $100m had been allocated to the programme and another $200m will be assigned until 2018. Through its Pro-Quinoa programme, the government is promoting the expansion of quinoa production, particularly among small producers of crops such as rice, which require more water and are not profitable on a small scale. ProQuinoa scheme provides technical assistance to small producers and also aims to connect the producers with large exporters, to grant them access to a significantly expanded market.

“The base of government policy continues to be the goal of promoting associations between small farmers to increase productivity and the adoption of technology and better practices,” Vinelli told OBG.

As in many of its regional neighbours, the majority of the country’s farming community of 2.5m is made up of small farmers; 90% have less than 5 ha. Programmes such as AGROIDEAS have promoted partnerships among small farmers as well as between small and large-scale producers in order to increase competitiveness by providing machinery, equipment and technical assistance.

Sector Financing

Agricultural financing has registered substantial growth in recent years. In 2013 total credit to the sector reached nearly PEN6.7bn ($2.4bn). As of July 2014, almost PEN7.4bn ($2.6bn) in loans had been advanced, representing a y-o-y increase of 18.5%, compared to the PEN6.2bn ($2.2bn) of the same period in 2013. The number of beneficiaries increased slightly, from 277,199 to 277,381, in the same period.

The largest portion (64%) of the loans came from multi-service banks, which are known locally as banca múltiple. Agrobanco, the state-owned lending institution dedicated to agricultural financing, followed, with a 14.3% share. Municipal and commercial banks accounted for another 10.7% and 7.2%, respectively, while rural banks (cajas rurales) represented 3%. Despite the increase in overall financing, small and medium-sized producers continue to have difficulty accessing credit. Risk-adverse commercial banks are mainly focused on large-scale producers, while the high rate of informality in the sector, estimated to reach 90%, coupled with the lack of land titles among small and medium-sized producers, contribute to the current low credit penetration.

Agrobanco plays a key role in servicing small to medium-sized producers and has been experiencing rapid growth. As of July 2014 its credit portfolio exceeded PEN1bn ($350.5m), a y-o-y increase of 112%, and expectations for 2014 are high. “The goal for 2014 is to reach PEN1.5bn ($535.5m) in credit; 70% for medium and long-term credit for infrastructure, treatment plants, machinery and equipment, and the remaining 30% in short-term credit,” Walther Reategui, general manager of Agrobanco, told OBG.

The number of beneficiaries has also increased, from 30,788 in July 2013 to 49,726 in July 2014, and the potential for expansion is high. “There are 2.5m potential agricultural clients in Peru. Currently fewer than 300,000 are served,” Reategui told OBG. Agrobanco intends to end 2014 with 95,000 clients.

At 19%, Agrobanco offers the industry’s lowest interest rates compared to more than 40% for each of the other lending institutions. According to Reategui, Agrobanco hopes to diversify its credit portfolio in coming years from its current overwhelming focus on agriculture, which represented 85% of the credit portfolio in 2013. As a result, credit to the livestock, forestry and fisheries segments should be expected to increase in the next few years.

Outlook

Despite the recent slowdown, growth prospects for the sector remain stable. MINAGRI forecasts the sector will grow by 2.5% in 2014. The livestock segment is expected to expand by 3.7%, driven primarily by increased poultry production (4.2%), while agriculture is expected to register slower growth of 1.8%, propelled by higher production of key crops, such as asparagus (4.1%), sugar cane (8.9%), grapes (6%) and quinoa (5%).

However, a possible El Niño event in 2015 could have an effect, even if temporary, on exports. In April 2014 Lima’s Chamber of Commerce estimated that exports could fall between 2% and 4% due to effects of the weather phenomenon, which has already caused drought in a number of Latin American countries. Even so, the number of additional hectares coming into production from newly irrigated lands, as well as Peru’s trade openness policy should continue to provide a stable base for sector expansion.