Key cash crops rebound following market fluctuations

Endowed with a favourable climate, high seasonal rainfall, good quality soil and low-intensity farming methods, the agricultural industry has traditionally been the most consistent contributor to Papua New Guinea’s economy as well as its largest employer. Although export revenues have been outpaced by mineral and energy sales, the sustainability of the agricultural sector ensures its place as a pillar of PNG’s future economy as it was in the days before gold mines and natural gas projects. Forestry, agricultural and fishery activity currently make up around one-third of the economy and remains the principal livelihood of the vast majority of PNG citizens.

Weary of becoming too dependent on the multibillion-dollar resource projects pumping investment into the country and creating new revenue streams from the sale of gold, copper, nickel and natural gas that could expose the economy to Dutch Disease, the government is making concerted efforts to build up the agriculture industry as a means of diversification.

By The Numbers

In 2012 agricultural exports totalled PGK2.7bn ($1.1bn) according to the latest full-year data available from the Bank of PNG (BPNG), down significantly from the PGK3.8bn ($1.54bn) in revenues collected the previous year. Forestry products contributed another PGK627.1m ($254.9m), down from PGK768.3m ($312.3m) in 2011, while the marine products industry exported PGK329.5m ($133.9m), up from PGK259.8m ($105.6m) the previous year. Much of the drop-off in the agricultural export value was due to dramatic decreases in commodity prices from 2011 to 2012, particularly for the country’s two top exports of palm oil and coffee. Forestry declines were primarily the result of a lower volume of shipments as regulations governing log felling were tightened. On the whole, agricultural exports accounted for 20.5% of all PNG exports for 2012 while forestry products chipped in another 4.8% and marine products another 2.5%.

A continuation of relatively weak commodity prices in most areas as well declining production in the forestry, copra, coffee and cocoa industries led to decrease in export value in 2013 to PGK2.45bn ($995.9m), according to Treasury Department estimates. Palm oil remains the dominant export crop with an estimated PGK789.6m ($321m) in 2013, followed by forestry products worth PGK615.3m ($250.1m), marine products (PGK299.7m, $121.8m), coffee (PGK274.5m, $111.6m), copra oil (PGK40.4m, $16.4m), rubber (PGK34.3m, $13.9m), copra (PGK16.8m, $6.8m) and tea (PGK7.9m, $3.2m).

Money Talks

Recognising that agriculture is crucial in efforts to diversify PNG’s economy away from mineral and energy exports, the government is increasing support to the industry. With more than two-thirds of the population living in rural areas and dependent on agriculture for survival, the state continues to prioritise the industry in its annual budget. Funding for the Economic and Agricultural sector rose by roughly 50% between 2013 and 2014 to hit PGK777.9m ($72.3m), and includes major outlays for agriculture-related projects, such as PGK40m ($16.3m) to establish the Agriculture Commercialisation Equity Fund (ACEF), PGK85m ($34.55m) for the National Development Bank and another PGK50m ($20.3m) for the Special Economic Zone (SEZ) – Corridor Development.

The first of these initiatives, the ACEF, is a two-stage pilot programme designed to boost investment in the sector. The initial PGK10m ($4.1m) component consists of subsidising landowners to cover the costs of survey and registration fees incurred when developing their land for commercialisation. This is followed by the second PGK30m ($12.2m) stage in which potential investors are matched with developmental projects for coffee, cocoa, oil palm, rice, rubber and livestock projects.

Allocations to the development bank and SEZ affect the sector indirectly by boosting the financing available for loans to small and medium-sized enterprises as well as developing infrastructure in the SEZ at Sepik Plains that is expected to attract foreign investment in oil palm plantations and other agricultural processing.

Development Channels

Targeted spending is also focused on capacity building of the agricultural hub at Mt Hagen in the Highlands region. Some PGK61.4m ($25m) has been allocated to key infrastructure projects, including PGK40m ($16.26m) for the development of new and existing roads and PGK1.4m ($569,100) for the Mt Hagen Rice Project. Other relevant budget lines include PGK46.5m ($18.9m) for the Department of Agriculture and Livestock, up from PGK39.5m ($16.1m) in 2013; PGK42.4m ($17.2m) for the Office of Coastal Fisheries Development Agency, up from PGK2.5m ($1.02m) in 2013; PGK32.4m ($13.2m) for the Coffee Industry Corporation, compared to PGK7.2m ($2.9m) in 2013; PGK31.8m ($12.9m) for the PNG National Forestry Association; PGK16.8m ($6.83m) for the Cocoa Board of PNG; PGK16.7m ($6.8m) for the National Agricultural Research Institute; PGK16.6m ($6.7m) for the Cocoa Coconut Institute; PGK11.5m ($4.7m) for the Fresh Produce Development Company; PGK10.2m ($4.15m) for the Oil Palm Industry Corporation; PGK8m ($3.25m) for the Livestock Development Corporation; and PGK7.2m ($2.3m) for the National Agriculture Quarantine and Inspection Authority.

Palm Oil

As the only commodity cultivated on a large scale using plantations and the nucleus estate smallholder (NES) systems, oil palm growers have been able to take advantage of economies of scale to command a dominant position in the country’s agricultural sector. Based primarily in New Britain and New Ireland, the industry’s composition has remained largely unchanged in terms of structure over the years, with smallholders working just over 40% of palm acreage with larger plantations making up the rest.

Under the NES model, smallholders are responsible for cultivating and harvesting crops on their land, while nearby nucleus estate milling firms are responsible for the collection, transportation and processing of the fresh fruit bunches, along with their own supply. These larger parent plantation agro-companies offer other assistance to smallholders by providing seedlings, financing (usually interest free), pest and disease control operations, support services, repair and maintenance of transport infrastructure, and support for social infrastructure (education, health and police).

Due to more efficient operations, plantations account for roughly 70% of domestic output compared to about 30% from smallholders. Two main plantation groups control the majority of palm oil production within six NES operations led by New Britain Palm Oil (NBPO), which accounts for more than 80% of all planted oil palm acreage, with the remaining area controlled primarily by Hargy Oil Palms. In July 2012 NBPO added the 5351-ha Orangerie Bay Plantation to its sites: West New Britain (64,492 ha in production), Higaturu Oil Palms (22,620 ha), Milne Bay Estates (12,807 ha), Poliamba (7765 ha) and Ramu Agri Industries (11,260 ha).

The Bialla Oil Palm Project, managed by Hargy Oil Palms was established in 1969 and has a total planted area in production of 25,020 ha (11,584 ha plantation, 11,488 ha smallholders and 1948 ha other outgrowers). Other global players in the industry, including Malaysian giant RH, also plan on entering the market. However PNG’s complex land ownership regulations have led to delays, including RH’s plans for the 42, 000-ha Sigite Mukus Integrated Rural Development Project.

Exports

Overseas sales of the commodity more than double the value of the next most lucrative export crop, coffee, with PGK1bn ($406.5m) worth of palm oil shipped in 2012 and on pace for a similar total in 2013, with first quarter exports of PGK241.1m ($98m), according to the most recent figures from BPNG. Total production was down 4.9% from 2011 to 2.54m tonnes due to above-average rainfall, according to the PNG Palm Oil Council (POC). A second straight year of abnormally high precipitation further dampened production in 2013. While aggregated production data for 2013 was unavailable at the time of publication, NBPO, the country’s largest producer, reported that its output declined from 1.59m tonnes in 2012 to 1.5m tonnes in 2013. As a result, crude palm and palm kernel oil extraction declined 7% from 545,207 tonnes to 507,855 tonnes for the year. Treasury Department estimates also indicate a decline exports from 483,000 tonnes in 2012 to 440,200 tonnes worth PGK789.6m ($321m) in 2013.

Trouble In Paradise

Although palm oil has been by far the best performer in the PNG agricultural sector, the industry is not without its concerns regarding long-term profitability. Compared to the heyday of 2011 when crude palm oil (CPO) traded for between $700 and $810 per tonne, commodity prices remain significantly lower despite clawing back some of these gains in late 2013. Weaker global demand for the cooking oil and rising stock resulted in palm oil prices dropping from a high of $743.80 per tonne at the start of 2013 to around $699.20 per tonne by August that year, before rebounding to $783 per tonne in the third quarter of 2013 over concerns of damage to Philippine production as a result of Typhoon Haiyan.

These gains are also partially the result of constricted supplies of other seed oils, which has raised prices, benefitting CPO exporters marketing their product as an alternative. With global plantation expansion over recent years – particularly from leaders in Malaysia and Indonesia – the market is well supplied, while demand for product (and competition from alternatives like soy beans) is no longer significant enough do drive up prices. NBPO recorded revenue and pre-tax profit falls of 17.5% to £335.8m and 78.8% to £10.4m, respectively, from 2012 to 2013, according to company reports.

The government has been mulling regulatory and structural changes that could institute new price controls and possibly push for more domestic downstream processing of the oil, similar to measures by global palm oil leaders Malaysia and Indonesia. But with much less product as well as a more costly, 100% sustainably certified crop, PNG’s market differs greatly from other mass producers. “PNG is unique in term of its social, economic and business landscape. What works in neighbouring South-east Asian countries does not necessarily work here,” Ian Orrell, executive director of the PNG Palm Oil Council, told OBG. “Production costs in PNG are much higher. Indonesia can produce palm oil 30-40% cheaper than is possible here. The shipping costs of moving refined palm oil from Indonesia to Port Moresby is significantly less than shipping PNG-made palm oil domestically from the refinery in Kimbe to Port Moresby. The cost of building a CPO mill in PNG is up to twice as expensive as building the same mill in Indonesia. The reason is that the cost of locally sourced goods and services are as much as 200% to 300% higher.”

Cocoa

Cocoa production is the third major cash crop for PNG, and has gained a reputation as a high-quality product with PNG being the second-largest cocoa producer in the region. Yet like other commodities, growers have been hit hard in recent years as market prices softened, although gains at the end of 2013 and early 2014 have given the industry a ray of hope. Cocoa prices traded around $2295.70 per tonne at the beginning of 2013, further rising to $2623 per tonne at the end of October, according to Treasury Department data. From January 2013 to January 2014 the International Cocoa Organisation’s (ICCO) daily cocoa price index grew by more than 20 points, reaching a high of 25 in December 2013. But while price may be rebounding, the cocoa pod borer pest continues to ravage domestic crops, particularly in prime growing regions of East New Britain and Bougainville. Production for the 2012/13 season is estimated at 36,000 tonnes, down from 39,000 tonnes produced the previous season, but the ICCO expects a stronger showing of 40,000 tonnes in 2013/14. Nearly all of PNG’s cocoa production is exported, with an estimated 29,500 tonnes shipped in 2013 worth PGK151m ($61.4m), according to figures from the Treasury Department.

Sustainable Growth

While PNG’s extractive resource industry is inherently unsustainable in the long run, the country’s agriculture sector is developing businesses that should be able to contribute to the economy long after the mineral and energy push fades. Several agricultural subsectors like forestry, palm oil and fisheries have developed highly profitable yet more environmentally responsible business models.

Government efforts to back up these segments have led to a tightening of regulations in recent years, particularly in the forestry industry, which is the single-largest contributor to carbon release in the world. Efforts to close regulatory loopholes as well as the implementation of international emissions-reducing standards in 2009 by the Office of Climate Change and Development have helped to stem the tide. Funding for PNG’s Department of Environment and Conservation (DEC), which is responsible for the protection of air, water, soil, biodiversity and the sustainable use of natural resources, has increased to PGK51.8m ($21m) in 2014 from PGK44.4m ($18m) in 2013, and now exceeds allocations dispersed to the Department of Agriculture.

The 2014 national budget projects these levels of expenditure will continue through 2018, with annual outlays of PGK50.5m ($20.5m), PGK51.7m ($21m) and PGK52.9m ($21.5m) starting in 2015. The PNG Climate Change Authority received PGK15.4m ($6.3m) in the 2014 budget, of which PGK6.6m ($2.7m) was earmarked for the development of the Climate Change Adaptation Initiative. Some of these costs are offset from grants made be international donor organisations, including PGK22m ($8.9m) from the World Bank for the DEC’s Environment, Climate Change and Sustainable Livelihoods programme and another PGK6.6m ($2.7m) from the Australian government channelled into the Climate Change Adaptation Initiative.

Fishery Conservation

As a global leader in tuna exports, any further significant decline in the world’s fisheries could have devastating effects on PNG’s fishing industry. Seeking to ensure adequate fish stocks for the future, the government has implemented a number regulations designed to restrict catches to sustainable levels. On the domestic level all participants must comply with the National Fisheries Authority’s (NFA) National Tuna Fishery Management Plan, which dictates all sector regulations, from equipment to licence limits to total allowable catches. Multilateral regional agreements like the Parties to the Nauru Agreement (PNA) also caps the amount of fishing vessels and tonnage caught per year. A significant regulatory tool implemented within the PNA is the vessel day scheme (VDS), which restricts the amount of fishing days allocated, vessels allowed in PNG’s exclusive economic zone (EEZ) and tonnage caught to 2010 levels (see analysis). Revenues from the VDS, which totalled $63m in 2013 at a rate of $5500 per day, can then be funnelled back into the NFA and used to bolster oversight and compliance. Despite these regulations, enforcement can sometimes prove difficult with so many foreign-flagged vessels plying PNG waters and so few maritime resources to patrol them. Unlicensed fishing vessels are still known to slip in and out of territorial waters after illegally harvesting fish, while even registered and monitored vessels are sometime found in violation of codes.

Land Reform

In addition to the high costs of production, another key impediment to growth of the agriculture industry is the difficulty in freeing up large plots of land due to PNG’s opaque customary land policy. Substantial reforms to simplify the process of consolidating and leasing plots of land would help the sector to create larger, more efficient agricultural operations.

A recent stab at this reached its peak in 2010-11 when the Special Agricultural and Business Lease (SABL) system was established as a means of creating legal titles on customary land to support consolidation and development. However, a series of flaws was discovered during the process in which land that was ostensibly leased out for up to 99 years for the purpose of cultivation was being logged but then left fallow. An all-time record export bonanza in the forestry sector followed with PGK705.9m ($287m) and PGK732m ($297.6m) worth of logs shipped in 2010 and 2011, respectively, compared to PGK439.4m ($200.6m) in 2009. A moratorium and government enquiry were then launched to look into 77 SABLs in 2011, with damning results made public in early 2014 that only four of the 42 leases examined were upheld as “problem free”.

Recent efforts at land reform from recommendations by the Independent Consumer and Competition Commission have led to the National Land Development Programme. The initiative, being formalised in 2014, includes legislative reforms targeting more effective administration of incorporated land groups, as well as freeing up customary land via voluntary registration, effective land dispute resolution and transparent administration of the land markets. “The government is respectful of firms that have operated here for a long time and that have made significant investments in the agriculture sector and is keen to keep a levelled plane field,” Greg Worthington-Eyre, CEO of Trukai Industries, told OBG.

Outlook

Looking forward, the commodity price declines that wracked a number of industries, including cocoa, coffee, copra oil and palm oil should rebound as demand and commodity prices gain momentum after a stronger first quarter in 2014. A return to normalcy from the unusually wet weather that affected crop output in 2012 and into 2013 should boost production levels in 2014 while the declining value of the kina will make PNG exports more attractive. Ongoing land reform efforts and programmes designed to increase yields of existing smallholder crops should also facilitate growth. Lastly, planned improvements in transportation infrastructure are due to pave the way for more efficiency and expansion into untapped areas.