Social and economic reforms breathe life into Colombia agriculture

The tides of Colombia’s agricultural sector, which for years lagged behind neighbouring countries due to landownership restrictions and underdeveloped transport infrastructure, have fast been changing. As of early 2016, several key reforms and progressive measures were beginning to allow investment to flow to the Colombian countryside. A forthcoming peace deal with the Revolutionary Armed Forces of Colombia, combined with a push to reintegrate former combatants into society offer hope of a safer countryside and increased government emphasis on rural development.

Meanwhile, in late 2015 the Ministry of Agriculture and Rural Development (Ministerio de Agricultura y Desarrollo Rural, MADR) announced funding to boost domestic production of key crops and a land reform law that would open the door to large-scale agribusiness. With new roads and ports to link Colombia’s interior to domestic and export markets, 2016 looks set to be a turning point for the agriculture sector, and a year in which an integrated agricultural policy begins to take shape.

Land Of Opportunity

In the first three quarters of 2015 the agricultural sector expanded 3% year-on-year (y-o-y) and accounted for 6% of GDP. Over the past decade, the segment grew at a slower rate than overall GDP, meaning that it accounts for a shrinking proportion of the economy. The signing of free trade agreements has opened Colombia’s farmers to tough competition from international agricultural producers, particularly the US.

In 2000 Colombia produced 25.6m tonnes of food and imported 5.5m tonnes. By 2014 production had reached 31.4m tonnes, but the country imported 10.3m tonnes of food, accounting for 28% of total consumption, at a cost of over $6bn. In the first five months of 2015 Colombia imported $866m worth of cereals and rice, of which 50% came from the US. Many local producers of staples such as corn, wheat, potatoes and rice have been forced out of business by cheap imports and converted their plots to cattle grazing.

Intense droughts caused by the El Niño climactic phenomenon also had a major impact on production in the first nine months of 2015. Barley production fell 50% y-o-y while wheat and maize dropped by 44% and 27%, respectively.

Plenty Of Land

With the Colombian peso continuing to weaken, importing foreign foodstuffs has had a sizeable effect on the trade-balance. The source of much frustration to both the government and consumers is that Colombia has the land and climate required to avoid such reliance on imports. According to the latest agricultural census in August 2015, the country has 113m ha of rural land, of which 44.5m ha are suitable for cultivation. However, only 7.13m ha are used for this purpose.

A 2000 report by the World Food Organisation identified Colombia as one of seven countries that between them held over 50% of the world’s unused farmland. At the same time, restrictions on the acquisition of land have disincentivised large-scale agribusiness investors (see analysis). The Colombian agricultural sector attracts just 1% of all foreign direct investment in the country.

Reap What You Sow

In October 2015 the government launched a programme to encourage the production of food staples. Colombia Sows ( Colombia Siembra) involves an investment of $500m between 2016 and 2018 with the aim of cultivating an additional 1m ha with rice, corn, soya, legumes and vegetables. In addition, the plan aims to create 260,000 jobs in rural Colombia and boost agricultural growth from 2.3% in 2014 to 6.2% in 2018.

One of the key findings of the agricultural census was that 83% of producers lacked sufficient machinery and infrastructure to produce at competitive prices and just 9.6% of farmers had received technical assistance to develop their plots. The MADR says that Colombia Sows will address this shortfall by investing in machinery, irrigation and technology transfer through “appropriate financing instruments”. A portion of the funds will also be channelled to export products, with the goal of reaching 4% annual growth in agricultural exports. “Colombia Sows will generate long-term supply of agricultural and livestock products, exploiting the potential of goods such as cacao, palm oil, Hass avocados, Tommy and Keitt mangoes, maracuya, gulupa and uchuva, which are subject to high demand in international markets,” said Aurelio Iragorri Valencia, the minister of agriculture, at a press conference to announce the policy.

Cowboy Country

The cattle raising business is the largest segment of Colombia’s agriculture sector, accounting for around 20% of agricultural production and 3% of GDP. “When the country opened up to foreign trade in the 1990s, many producers of corn, cotton and wheat became uncompetitive and turned their pastures over to cattle raising,” Jorge Cubillos, head of the office of planning for the Colombian Federation of Ranchers (Federación Colombiana de Ganaderos, FEDEGÁN), told OBG. “Today around 33m ha are used for grazing.”

According to FEDEGÁN figures, the country’s total livestock increased 0.9% to 22.6m heads of cattle in 2014. However, slaughtering fell 3.6% to 4.3m animals. Milk production showed a 1.5% increase over the same period to 6.7bn litres.

Cattle Challenges

The sector faces numerous challenges in 2016. First, droughts in 2015 led to the deaths of 38,000 animals, and the displacement to new pastures of 600,000 more, incurring a total cost of around $300m, according to FEDEGÁN. Long-term, the sector also suffers from a lack of productivity and competitiveness. Of the country’s 500,000 cattle ranchers, 82% own fewer than 50 animals and half of those have fewer than 10. “To regain competitiveness, cattle farms will need to modernise and invest in technology,” Cubillos said. “The largest ranches are capable of doing that, but we expect to see some consolidation and it will be important to support smaller ranchers during this transition phase.” The country also needs significant investment in its cold chain logistics and slaughterhouses. According to data from the National Institute of Food and Drug Monitoring, only 394 of the country’s 721 meat packing plants were operational in January 2016, with the remainder either falling short of sanitation standards or closed because they were uncompetitive.

“Colombia is one of the cheapest places to raise cattle,” Cubillos said. “A kilogram of meat costs $1.20 to raise, compared to $3.70 in the US. However, meat loses its competitiveness in the cold chain and slaughterhouses, making it costly to export. At present Colombia can only export to countries that accept lower sanitary standards such as Russia, North Africa and the Caribbean.” The potential has already been noticed by Brazilian meatpacker Minerva Foods. In July 2015 the firm announced the $30m acquisition of Có rdoba-based slaughterhouse, Red Cárnica, with the goal of exporting meat to Lebanon and Egypt.

Palm Oil

Since the crop was introduced to Colombia nearly 60 years ago, palm oil cultivation has been one of the success stories of Colombian agribusiness, with the country becoming the fourth-largest producer worldwide. In the first half of 2015 the country produced 653,657 tonnes of palm oil from 500,000 ha, a 3% increase y-o-y. Total production for 2015 was forecast to exceed 1.2m tonnes, up from 945,064 tonnes in 2011.

With many of the country’s food producers and cosmetics firms using the product as a substitute for vegetable oils and other ingredients, domestic consumption is strong and three quarters of production is consumed in Colombia. Importantly, Colombia’s palm growers saw a bounce in productivity in 2015, with 3.16 tonnes of palm oil produced per ha. In 2013 productivity had been reduced to 3.07 tonnes per ha with the worsening of the country’s budrot epidemic, which is estimated to have affected a total of 100,000 ha in the last 20 years and cost the industry an estimated $300m. Nevertheless, output in 2015 is still some way behind the 3.46 tonnes per ha achieved in 2011 and the global average of 3.70 tonnes per ha.

However, while budrot seems to be receding, the palm oil industry faces other challenges. With soaring production worldwide, palm oil prices fell from $1020 per tonne in January 2012 to $529 per tonne in December 2015. The situation for Colombian growers is compounded by relatively high labour costs compared to Asian competitors and the high cost of imported fertilisers as a result of the depreciation of the Colombian peso. In addition, the Colombian biodiesel industry, an important outlet for domestic palm oil, has not grown as anticipated. In 2003 the government set out plans to raise the bioethanol and biodiesel content of petrol and diesel to almost 20% by 2015, but in reality, the figure has never exceeded 8% for ethanol and 9.2% for biodiesel. Palm oil is included under the Colombia Sows plan, but industry leaders believe a wider strategy for the industry is needed – one that improves yields, cuts costs and adds value to Colombia’s palm oil production rather than simply expanding the cultivation area.

Not So Sweet

Colombia has grown sugarcane since colonial times, but increased imports have stunted growth of the industry. In 2014 the country produced 2.4m tonnes of sugar, down from 2.6m tonnes in 2004. In the first 10 months of 2015 the country’s sugarcane farms produced 2.02m tonnes of sugar, a 1% increase y-o-y. International prices have also fallen, from $0.27 per pound in 2011 to $0.13 per pound in 2015. In October 2015 a dozen sugar growers in the Valle del Cauca region were hit with a fine of $112m – a record in Colombia – when the Superintendence for Industry and Commerce (Superintendente de Industria y Comercio, SIC) found them guilty of forming a price cartel to keep imported sugar from reaching the market. The allegations had been brought to the SIC by several local food companies, including Coca-Cola, Nestlé, Bimbo and Nacional de Chocolates. In the face of high sugar prices for their domestic production, many of these firms had been importing sugared goods from their plants in neighbouring countries rather than pay the higher prices in Colombia.

Coffee Bean Bonanza

In 2015 Colombia’s coffee growers boasted the largest crop in 23 years, with a total production of 14.2m 60-kg bags, a 17% increase y-o-y. Exports reached 12.7m bags, up 16% y-o-y. In terms of export value, in the first 11 months of 2015 Colombia exported $2.56bn in coffee, a 7% y-o-y rise. The segment’s performance in 2015 marks a swift turnaround from 2012, when disease and poor climactic conditions led to a yield of just 7.7m bags. Indeed the considerable shift demonstrates the success of the coffee tree renovation campaign, which has replaced some 3.4bn trees with leaf-rust-resistant strains since 2008.

“The process of tree renovation has now slowed, but it never ends,” Luis Fernando Samper, chief communications and marketing officer for the National Federation of Coffee Growers ( Federación Nacional de Cafeteros, FNC) told OBG. “We have succeeded in bringing the average coffee tree age down to seven years, but we would like to get to six years.” In 2008 the average tree age was over 14 years. Productivity has also shown a marked improvement. “Five years ago we were producing 10 to 11 bags per ha, now that figure is 16 and we expect to continue improving,” said Samper.

Mocha Market

The FNC plays a central role in the Colombian coffee industry, acting as a guaranteed buyer – at market prices adjusted daily – to the country’s 500,000 small producers. In recent years it has purchased around 22% of total national production. The FNC also works as a business association, a key source of social and infrastructure spending through a national coffee fund and as the industry regulatory body. The sprawling influence of the organisation has led to criticism, however. In March 2015 a report on the national coffee industry commissioned by President Juan Manuel Santos returned its results. Its proposals included ending the guaranteed purchase policy, removing restrictions on quality of beans and removing many of the responsibilities of the FNC, essentially reducing it to a business association. The report points to Colombia’s falling share of global coffee exports – which fell from 18% in the early 1990s to 8% in 2015 – as evidence of the need for reform.

Samper counters that the 1990s base data is misleading, because Colombia was in the process of unloading stocks accrued under the International Coffee Agreement, an export quota-setting agreement that broke down in 1989.

“Our priority is not to gain international market share, but to ensure Colombia’s coffee growers are profitable,” Samper said. “We sell every bean we produce, the goal is to reduce costs for growers and to differentiate our coffee. We need to push coffee to the wine frontier, providing content for consumers and building knowledge of the distinct coffees from Colombia’s regions.” In August 2015 Roberto Vélez Vallejo became the FNC’s general manager. He pledged to decentralise much of the organisation’s decision-making to regional offices and announced that it will accept lower-density beans in anticipation of the effects of El Niño.

Fruits

After coffee, bananas are Colombia’s most important agricultural export. The coastal departments of Urabá and Magdalena are the centre of some 48,000 ha of banana plantations, with four companies controlling three-quarters of all production. In 2014 Colombia exported $729m worth of the fruit, up from $432m in 2004. In the first half of 2015, Colombia exported 43m 18-kg crates of bananas, an increase of 2m crates y-o-y, and total exports for 2015 are estimated at 88m crates.

However, rising competition from Ecuador and Central America, where production is more efficient, has made the industry unprofitable. Ecuador typically harvests 3000 crates per ha of plantation; in Colombia this figure is under 2000. According to Juan Camilo Restrepo, president of the Colombian Banana Growers Association, the country’s banana producers have accumulated losses of over $211m over the past decade. The weakening of the peso is expected to allow Colombia’s banana growers to regain competitiveness but, as Restrepo told business daily La Republica, major investments are needed in irrigation and disease control to give the industry a new lease of life.

Fortunately, other fruits have proven more successful in recent years. In 2015 the Colombian cacao industry continued its recent trend of growth, fuelled by increased demand from developed markets and Asia. Annual production was estimated at 54,000 tonnes, up from 42,000 tonnes in 2012. In 2015 the National Federation of Cacao Producers (Federación Nacional de Cacaoteros, Fedecacao) developed five new cacao seed clones, which it says are more resistant to plagues and disease.

Production of Hass avocados grew over 150% from 2012 to 2014 to reach 44,000 tonnes, and in the first quarter of 2015 Colombia exported $4.6m of the fruit, compared to $4m for the whole of 2014. In recognition of its growing status, Colombia was named host country for the 2019 World Avocado Congress. Other areas considered of particular potential are pineapples and mangoes. In 2014 exports of the former totalled $2.1m with the US as the primary market. ProColombia, the country’s trade promotion agency, hopes to ship pineapples to over 40 countries in the coming years.

Rocky Road

In August 2015, upon receiving the results of the first agricultural census in 45 years, President Santos announced that the country had “everything still to do in the countryside”, and that the government had “moved like crabs” regarding land reform. The country’s farmers face the short-term problem of the 2015-16 El Niño climactic phenomenon – expected to cause the worst droughts in 50 years – and the long-term challenge of boosting investment and improving infrastructure. In the wake of falling government revenues from oil production, the sector is also competing for ever-scarcer funds. In August 2015 the MADR’s annual budget was slashed from $1.2bn to $500m. However, the ministry’s cuts are likely to be more than compensated for by increased spending in rural Colombia in the wake of a peace deal.

The effects of El Niño, which is already unpredictable in its severity, can be tempered by expanding insurance coverage to poor farmers. In the first 11 months of 2015 the area of insured arable land rose 45% to 172,690 ha, at a total value of $285m, according to the Agriculture Sector Finance Fund (Fondo para el financiamiento del sector agropecuario, FINAGRO). As an incentive to insure crops, FINAGRO provides up to 80% of premiums for insurance policies. From January to November 2015, the fund subsidised two-thirds of the $18.8m in premiums. Crop insurance has also become more dynamic by the entrance of local and international players (see Insurance chapter).

Outlook

A coherent agricultural policy appears to be developing in Colombia, one that opens opportunities for small growers and agribusiness giants alike, and that focuses investment to boost domestic production of staples as well as cash crops. In the event of a signed peace deal, the provision of jobs and an increase in investment in rural Colombia will be key to bringing stability to the countryside, the worst affected areas in the country’s internal conflict. The huge expanses of under-utilised farmland, up until now a source of wasted potential, are sufficient in size to allow both large- and small-scale farming to grow.