Realising its potential: In preparation for liberalisation, the sector looks to iron out problems

Historically, the agricultural sector has been one of the primary drivers of economic growth in Colombia. According to Proexport, a state-owned investment and exports promotion agency, in 2011 the sector accounted for 9% of GDP, 21% of export revenues and 19% of national employment. The Food and Agriculture Organisation (FAO) of the UN estimates that 14.5m ha of agricultural land currently lies idle with major potential for domestic and foreign investment. For these reasons, the sector was selected as one of five strategic growth areas in the country’s National Development Plan 2010-14.

POLICY: Nevertheless, farmers face a number of challenges on the economic and political fronts. Largely catering to export markets, crops are attracting diminishing revenues due to the recent appreciation of the peso and a global slump in prices of primary cash crops, such as coffee and cacao.

Meanwhile, entrenched issues of land ownership and allocation are challenging the livelihood of small holders in some areas while undermining the scope for investment. Policymakers have introduced a number of measures to protect farmers’ revenues in the short term while aiming for better production standards, rural security and land administration in the medium term. While much will depend on the outcome of ongoing peace negotiations with the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC), the country’s biggest armed group, efforts are well under way to facilitate investment and production modernisation in the meantime.

SECTOR PERFORMANCE: Despite a change of administration in 2010, agricultural policy has been consistent over the past decade. Through a plethora of fiscal and financial incentives, the focus has been on modernisation and expansion of production areas, increasing access to financing, and developing highlevel research centres. In addition, efforts have been made to build and extend infrastructure to facilitate access to domestic markets, while a range of free trade agreements (FTAs) have been signed to optimise the sector’s performance on the international market.

According to the Ministry of Agriculture and Rural Development (MARD), annual growth averaged 3% between 2002 and 2007, a period marked by the gradual increase of production levels and stable export prices. Production levels of all combined agricultural output peaked at the end of 2007, reaching 25.4m tonnes, up from 22m tonnes in 2002. Planted surface grew from 4.1m ha to 4.7m ha while employment reached 4.3m in 2007, up from 4.1m in 2002. The situation deteriorated in ensuing years when a global economic crisis stifled demand for exports. Despite a gradual recovery of global markets since 2010, sector growth was hampered by increasing fuel costs and adverse climatic conditions, which remain key challenges to farmers.

MAIN CHALLENGES: The more frequent occurrence of La Niña, a recurring climatic cycle that lowers the temperature of the sea and increases rainfall across South America, has resulted in higher precipitation over the past three years, flooding crops, cattle grazing lands, and access to roads and other transport infrastructure, and raising humidity to levels that facilitate the spread of crop diseases.

In addition, coffee production, representing around 50% of the sector’s export revenues, has declined since 2008 as a result of a nationwide renovation campaign to replace mature trees with younger, more resistant species. As the campaign continues and young trees take around three years until their first harvest, production levels have yet to record growth from the programme. High precipitation and humidity have also affected cash crops like tobacco and banana, which reported losses in annual output of approximately 20% and 31%, respectively, in 2011, a year in which sector growth was guaranteed only by rising production levels in smaller segments such as meats and dairy, cotton, rice, soy, sugar and palm oil.

BY NUMBERS: Sound price developments at the global level have prevented revenues from dropping in tandem with volumes. In 2011 overall gross revenues went up 2.2% (3.6% if coffee is excluded). Returns on temporary crops including tobacco, sugarcane and potatoes, increased by 4.2%, the first positive growth figure since 2008, while revenues from permanent crops such as coffee, palm oil and banana grew 0.8% compared to 2010. Despite diminishing output levels, export revenues – dominated by coffee, flowers, bananas and sugar – reached $7.5bn, up 31% from 2010, largely due to positive price developments on the international market.

Overall sector growth for 2012 stood at approximately 2.6%, just below national GDP, which grew 3.1%. When announcing the results, Juan Camilo Restrepo, the former minister of agriculture and rural development, stated that, “While sector growth is out of tune with that of mining and hydrocarbons, it is satisfactory given the variety of challenges we are facing.” Similar to 2011, growth can be largely attributed to rising output in the sector’s smaller contributors like meat, dairy, corn, barley, potato, cassava, fruits and palm oil. Besides coffee, which saw production volumes drop by about 2.5% from 2011, rice, vegetables, export bananas and cacao have struggled to maintain their output. This was mainly caused by an increase in crop diseases and inadequate crop maintenance due to lower revenues from the export markets. A drop in the price of coffee, which started in mid-2011, and the continuing appreciation of the peso, which saw international sales revenues fall from around $2.85bn in 2011 to about $2.13bn in 2012, further exacerbated the situation.

CORN: Corn output scored well, reaching 1.5m tonnes in 2012 from a total cultivated surface of 286,000 ha, up by 12% year-on-year (y-o-y). Three factors are behind this growth. The first one is the impact of Plan País Maíz, a government initiative implemented in 2010 that aims to expand corn production areas and increase yields. Over the course of 2012, higher production capacity domestically coincided with lower levels of imports, notably due to a severe drought in the US, Colombia’s biggest corn supplier. This led to higher demand and better prices for domestic farmers. In the fourth quarter of 2012, prices reached $292 per tonne, up by 20% compared to the same period in 2011. Meanwhile, domestic consumption increased, driven by rising demand among animal feed producers. Despite this, imports – mostly from the US, Argentina and Brazil – continue to satisfy the lion’s share of demand.

LIVESTOCK: Livestock production in 2012 rose 3.2% on 2011, spurred by growth in beef, poultry and pork production. A key factor is the higher domestic spending on protein-rich foods among the emerging middle class. Annual beef consumption per capita had risen to 20 kg by the end of 2012, up from 19 kg the year before, while the number of slaughtered animals destined for exports increased six-fold. Per capita consumption of chicken reached 23.7 kg in 2012, slightly lower than in 2011, but up by 4.4% from 2009.

The Association for Poultry Producers (Federación Nacional de Avicultores de Colombia, FENAVI), reported that the production of eggs was up by 4% in the first quarter of 2012, reaching 2.6bn units. The sector began exporting to West Africa in November 2012, whereas Mexico has been served for a number of years. With FTAs with the US, EU and South Korea recently signed, exports are set to grow. Besides the exports market, growth in production is led by a gradual increase in consumption over the past few years, climbing from 188 eggs per capita in 2007 to 228 in 2012. FENAVI has predicted that in 2013 per capita consumption will reach 236, positioning Colombia among the highest consumers in the region. “The Colombian poultry industry can benefit from the sizeable per capita consumption of countries like Mexico as well as the EU,” Carlos Guillermo Tobón Calle, CEO of Avinal, a poultry and egg producer, told OBG.

Rising consumption and reduced prices also led to an increase in the consumption of pork. During the first quarter of 2012 domestic output grew by 7.4%, reaching a total of 1.3m head, according to reports from the Colombian Association of Pork Producers (Asociación Colombiana de Porcicultores, PORCICOL).

Meanwhile, imports from the US, Canada and Chile were also on the rise. According to the National Administrative Department of Statistics ( Departamento Administrativo Nacional de Estadística, DANE), pork imports in the first quarter of 2012 increased by 31.9% on the same period the previous year. Imports of frozen meats nearly doubled from 4493 tonnes in first-quarter 2011 to 8779 tonnes in the same period in 2012. PORCICOL forecasts annual per capita consumption will reach 8.8 kg in 2013, up from 6.3 kg in 2007. While the overall outlook for livestock looks bright, insufficient animal feed production capacity remains a problem, particularly for corn and soy, which has been exacerbated by climatic conditions.

In 2012 an estimated 80% of national consumption was imported from large producers such as the US and Argentina, subjecting Colombian farmers to global price volatility, such as the steep increase in corn prices in July due to the drought in the US corn belt. “Plan País Maíz is designed to reduce reliance on external suppliers, but demand continues to outgrow supply,” said Tobón. The weak national road network exacerbates the issue, increasing costs and transit times for imported supplies.

FLOWERS: With a share of 16% of the global market, Colombia is the world’s second-largest supplier of flowers, according to figures from the Colombian Association of Flower Exporters. Despite a drop in production over the past three years export revenues – accounting for 95% of national production – totalled just under $1.3bn in 2012, making it the largest nontraditional agricultural export. Accounting for 75% of export-volumes, the US represents the largest market, trailed by Russia, Japan and the UK, representing 5%, 4% and 3%, respectively. Planted surface reached 7000 ha in 2012 compared to 6300 ha in 2011. Around three-quarters of national production is based in the high plateau of the Savanna of Bogotá, while smaller production centres exist in Antioquia department and central and western regions.

CACAO: Despite growth in production in the first quarter of 2012, the fourth quarter registered a drop in cacao volumes. This can be attributed to the peso’s appreciation, stunting international demand and imports of cacao derivatives. Colombia produces about 1% of global supply, equating to 43,000 tonnes in 2012, compared to 4% from Ecuador and 5% from Brazil. While these numbers may seem insignificant in comparison to the output of West African countries such as Côte d’Ivoire, Ghana and Nigeria, where more than 60% of global supply is produced, the Colombian cacao is regarded as of very high quality.

Three major types of cacao exist: criollo, known for its high quality, forestero, known for its abundant yields, and Trinitario, a blend of the two that is high in quality and resistance. Colombia’s yearly harvest predominantly consists of the latter and although its cultivated surface is low compared to other nations, yields are among the highest in the world. Nevertheless, the sector remains fragmented with around 40,000 producers spread over 140,000 ha. While annual yields have reached as high as 2000 kg per hectare in some plantations – compared to 350 kg to 600 kg in West Africa – the average yield for the country stands at around 400 kg.

National output has gradually increased in recent years to levels where the crop has satisfied domestic demand and entered the international markets. For the past five years Grupo Nutresa (known as Compañía Nacional de Chocolates until 2011), a multinational food company headquartered in Medellín, has managed to entirely replace previously imported quantities of up to 30% of its annual needs with domestic production. Presuming favourable weather, output in 2013 is set to reach some 50,000 tonnes, according to the company.

MARD figures indicate that 1m ha are suitable for cacao cultivation, demonstrating the potential for a further rise in national output. However, limited accessibility and high fragmentation of land has undermined surface expansion. As a result, efforts by MARD and producers have largely focused on securing quality and consistency of existing output and increasing productivity. For 2013 MARD has made COP50bn ($30m) available for crop renovation. In addition, production subsidies have been increased in response to the drop in international prices. After a spike in February 2011, driven by political instability in Côte d’Ivoire, prices fell from around $3500 per tonne to $2000 and continue to display a downward trend. The government has therefore doubled the existing subsidy of $400 per tonne and established a $5m stabilisation fund to compensate exporters.

EXPORTS: In 2011 revenues rose by 31.4% y-o-y reaching $7.5bn, while volumes reached 4.6m tonnes; up from 3.9 m tonnes in 2010. Despite similar growth in agricultural imports, notably corn and wheat, 2011 ended with an agricultural trade surplus of $2.2bn. This performance was partly driven by coffee exports, which rose 47.5% in value compared to 2010. Additional value growth was recorded in banana exports, which grew by 20.1%, and flowers, which generated 6.6% more than their 2010 export value.

In 2012 significant drops in international prices for primary cash crops like coffee and cacao, exacerbated by a slump in demand from weakened Western European markets, resulted in a 6% y-o-y decrease in export revenues, according to DANE figures. The challenges experienced in the coffee segment were of particular importance to overall sector performance. Over the course of 2012 adverse climatic conditions, crop renovation and the peso’s appreciation led to a drop in production and export revenues of 2.5% and 25.3%, respectively (see analysis).

Marginal growth was reported in the drinks and tobacco segments, which grew from $64m in 2011 to $70m in 2012, and non-combustible crude materials, which generated $40m more in 2012.

The effects of the appreciation of the currency were offset by the implementation of the Programa de Coberturas Cambiarias, which compensates exporters for currency fluctuations.

Overseen by the Agricultural Financing Fund ( Fondo para el Financiamiento del Sector Agropecuario, FINAGRO), a state-owned agricultural fund, the programme disbursed $607m in 2012 and secured exporters’ revenues at COP1919 to the dollar, while the actual rate had decreased to COP1764 by the end of the year. According to FINAGRO’s forecasts, a total of COP62bn ($37.2m) will be disbursed in 2013 to ensure subscribers to the programme receive the same rate as they did in 2012.

Similar to previous years, the US had a dominant share in Colombia’s overall export mix in 2012, accounting for 37.3% of revenues, trailed by Belgium and Luxembourg, which reported a combined share of 6.8%, and Japan, Germany and the UK, which had 5-6% each. With eyes set on the consolidation of agro-exports, the Colombian government has been actively pursuing FTAs with its principal export markets. Since 2006 it has secured FTAs with Mexico, Chile, Honduras, Guatemala, El Salvador and Venezuela. In 2012 FTAs with the US and South Korea came into effect, and one with the EU followed in August 2013.

MILK: While negotiations have been ongoing since June 2007, the delay on the EU FTA’s conclusion was largely due to the difficulty of finding an agreement on milk imports. Contributing 9.7% to the sector’s share of GDP and generating an estimated 578,000 jobs, the milk industry is of high socio-economic importance. According to MARD, 66% of producers are smallholders who fear being overrun by more competitive European imports. Despite the slow progress both parties have gradually moved to a settlement on the matter, which was made official on August 1st when the trade agreement came into effect. Rather than liberalising the entire industry, subsegments such as powdered milk will go through a gradual liberalisation of up to 15 years, during which time imports will be capped to give Colombian producers ample time to increase competitiveness. This is complemented by a gradual disbursement of €30m from the EU aimed at creating synergies between smallholders, increasing access to domestic markets and improving phytosanitary standards. Allocation of the fund started in 2012 but has progressed slowly as the EU awaits Colombia’s compliance with a set of production improvement measures. To meet its obligations MARD has allocated COP60bn ($36m) since the start of 2012. Other products such as fresh cheeses, liquid milk, cream and butter will be excluded from liberalisation.

Despite concerns about trade liberalisation, notably at the time of concluding the agreement with the US, there have been no signs of a negative impact thus far. “For all the fears about the agricultural losses as a result of the FTAs, I am seeing primarily advantages as imports of products that are marginally or not produced at all domestically will become cheaper, such as wheat,” Santiago Escobar, corporate finance director of Grupo Nutresa, told OBG.

BUDGET: The ministry’s budget gradually increased until 2009 when the impact of the global economic crisis reduced it to a little over COP1trn ($600m) compared to COP1.45trn ($870m) in 2008. Funding has been on the rise since, in particular sector investments. In 2011 the sector was allocated a budget of COP1.73trn ($1.04bn) of which COP1.45trn ($870m) were destined for investment. The funding was divided between MARD, which received 64%, the Colombian Agricultural Institute (Instituto Colombiano Agropecuario, ICA), accounting for 10%, and the Institute for Rural Development (Instituto Colombiano de Desarrollo Rural, INCODER), which received the rest. Total budget allocation was 96.3% for that year.

In 2011 three new entities were created, each receiving autonomous funding. The Unit for Rural Land Planning, Land Development and Agricultural Uses (Unidad de Planificación de Tierras Rurales, Adecuación de Tierras y Usos Agropecuarios, UPRA), was established under the supervision of the ministry and awarded COP1.3trn ($780m), the lion’s share of the funding. ICA and INCODER received similar allocations to the previous year. The new National Authority for Aquaculture and Fisheries (Autoridad Nacional de Acuicultura y Pesca, AUNAP) and the Special Administrative Unit for Management of Restitution of Dispossessed Lands, received funding of COP19.7bn ($11.82m) and COP64.7bn ($38.82m), respectively.

The 2012 budget increased 16.9% from the previous year, reaching a total of COP2.03trn ($1.22bn), of which 83% went into investments. The rise was primarily made up of additional resources for land restitution, a priority under current policy, as well as the reinforcement of revitalisation programmes, such as producer association, product commercialisation, reforestation and female employment.

HOUSING CHALLENGES: A third priority area is rural social housing, which was allocated an additional COP200bn ($120m). While praising the increase in funding, during the announcement of the budget in September 2012, Juan Camilo Restrepo, the then-minister of agriculture and rural development, stated that additional funds of COP100bn ($60m) to COP150bn ($90m) were needed to combat pressing issues such as the deficit in rural social housing.

Bridging the rural housing gap, estimated at 55%, is a key aspect in the administration’s efforts to encourage remigration to rural areas. “The 2012 budget was the first one to display the current administration’s focus on areas beyond productive elements including housing, revenue security and land management,” María Alejandra Botiva León, director of sector policy at the MARD, told OBG. After the first quarter of 2012, the latest period for which figures were available at the time of writing, 31% had been allocated primarily through ministerial investments. For 2013 the investment budget has been increased to COP2.23trn ($1.34bn). MARD, including UPRA, accounted for 62.6% of this amount, representing an increase of 16% compared to 2012. While all entities with the exception of AUNAP received additional funding, the most notable increase was registered for land restitution, which received an investment allocation of COP202bn ($121.2m), compared to COP33bn ($19.8m) the previous year.

FINANCING: As a result of the dominance of smallholders and consequent high fragmentation, access to financing remains a primary challenge for farmers and a key priority in development policy. Commercial banks, which have a 60% share in the value of agricultural credit lines, remain predominantly focused on large, industrialised farms. Small to medium-sized operators fall outside of the commercial scope and despite representing more than 80% of the agricultural economy in 2011, received 26% of overall funding from public and private sources.

The state remains the principal source of funding for small to medium-sized operators and disburses subsidies, grants and concessionary loans through a variety of development programmes. State-owned entity Banco Agrario oversees the sector’s funds, which are predominantly disbursed through FINAGRO. While Banco Agrario’s credit portfolio grew by 13% in 2012 to COP8trn ($4.8bn), it constituted only 3.48% of the banking system, which grew by 15% in the same period. Even so, notable growth was recorded in the bank’s credit allocation to microfinancial institutions, reaching 49% compared to 42% the previous year. This came at the expense of the participation of commercial loans, which fell from 54% in 2011 to a little below 48% in 2012. The higher focus on microfinance institutions (MFIs) is in line with the policy’s aims to increase access to financing, specialise financial products and promote microinsurance. FINAGRO recognises 16 MFIs, most of which originate in regional farming cooperatives.

In 2012 FINAGRO’s investment portfolio grew by 22% from COP9.4trn ($5.64bn) to COP11.5trn ($6.9bn), according to the entity’s own calculations. Credit lines reached COP6.5trn ($3.9bn), up from COP5.4trn ($2.7bn) the previous year, and were awarded to 830,000 producers, 86% of whom are smallholders. The fund’s allocation is facilitated by a variety of financial incentives that seek to lower the cost of finance, enhance individual farmer’s capital investment capacity, provide microcredit and develop vital irrigation infrastructure. A total of COP4.9trn ($2.94bn) was disbursed by the Agricultural Guarantee Fund, a state-owned entity that guarantees 100% success for smallholders’ credit applications. The investments were also promoted by the Rural Capitalisation Incentives, which subsidises up to 40% of investments by small and medium-sized landholders in productive areas such as land preparation, machinery and equipment, irrigation infrastructure, and processing capacity. In 2012, 73,000 projects benefitted from this scheme at a value of COP263bn ($157.8m), while another COP290bn ($174m) worth of projects were in final approval stages at the end of the year.

While the annual rise in disbursements is indicative of the commitment to making small and medium-sized producers more competitive, FINAGRO’s reach has come under criticism. Operating as a wholesale bank, the distribution of funds remains in the hands of commercial banks skewed to risk management practices non-compliant with the informal nature of many farmers. This is further complicated by the low penetration of bank branches in rural areas. “The majority of smallholders have no training in bookkeeping or basic business administration. In fact, many of them are not even part of the banking system,” Escobar told OBG. The focus on regional MFIs offers an alternative distribution channel with significant potential and provides impetus for their expansion in size and number.

LAND EXPANSION: In line with its ambitions to increase competitiveness on the global market, guarantee food security and raise income from exports, the current administration is pursuing the expansion of agricultural lands. At 14.5m ha of available lands, the FAO ranks Colombia 23rd out of 223 countries and territories with potential for agricultural expansion without affecting forested areas. Potential lies in the Altillanura plains, located in the central-eastern part of the country. According to the US Department of Agriculture, 4.5m ha of lands are available for agricultural purposes in this region alone without the need for deforestation. As it shares similarities with Brazil’s Cerrado region, a vast savannah in its north-western territories, the government has its eyes set on the area for agro-industrial development and foreign capital inflows. However, poor infrastructure, cumbersome land tenure laws and regional insecurity have hampered the plans thus far.

According to law, no individual can hold more than one family agricultural unit (Unidades Agricolas Familiares, UAFs). While size limits are not uniform across the country, the aim is to prevent land concentration. Given the high levels of investment in land preparation and infrastructure agro-industries require, this kept foreign direct investment low; in 2012 the sector accounted for just 1% of the overall FDI.

Despite many efforts, the government suffered a setback in August 2012 when the Constitutional Court struck down a proposal to amend the application of UAFs. The government has not given up its plans but is pursuing alternatives in which small and medium-sized landholders would group together and partner with foreign investors.

“The government does not believe it should close its doors to foreign investors in the land and agrobusiness,” Restrepo told local media. However, local farming communities’ fears of exclusion and a return to colonial-style large landholders have produced fierce opposition (see analysis).

Meanwhile, foreign investment incentives have found their way into the regulatory framework in recent years. Revenues from new areas of crop production, including palm oil, cocoa, rubber and fruits, planted before December 2014 will benefit from a 10-year income tax exemption. Repatriated profits from foreign-owned agricultural activity are untaxed and investors have a high level of legal protection.

OUTLOOK: Recent supply and demand fluctuations have created challenging times for the sector and government funding has become central for ensuring the short-term survival of many members of the farming community. This is likely to improve as completion of renovation campaigns comes in sight, crops undergo further diversification, and competitiveness programmes are vigorously pursued to enable the sector’s performance in open markets.

Meanwhile, cumbersome land tenure laws, housing deficit and rural insecurity continue to hold back the potential contribution of rural areas to the national economy. A sector census planned for 2013 and 2014, the first to take place in 41 years, will provide policymakers with valuable input for rural development policies and could potentially accelerate the improvement of conditions in the countryside.

Another hurdle to overcome is the rise of the peso and depressed global prices for leading cash crops. The central bank has implemented a multi-pronged strategy to keep the currency’s rise in check, but as the economy remains dependent on commodity exports, its impact has yet to be seen. It seems unlikely that the government will be able to scale back subsidies and export compensation schemes in the near future. Hopes are high that demand in Western markets and prices on leading agricultural exports will soon recover and offer a little relief to farmers – and to the government’s coffers with the lower subsidies.

The pace and effectiveness of the implementation of rural development policies will depend on ongoing peace negotiations with armed groups, for whom rural land reform is essential, though representatives of the government and FARC reached a compromise on key principles for land reform in late May 2013. While the details on the agreement have yet to be disclosed and obstacles remain, the commitment to peace in general and agricultural reform in particular should provide the domestic and foreign business community with ample cause for optimism.