Agribusiness – the way forward?

Items

• Introduction

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  Over the last ten years the going has got tougher for the main Latin American and Caribbean economies (LAC). In this report we will outline some of those difficulties and make the case for why one particular sector, agribusiness, may be able to play a key role in reversing a generalised trend towards slower growth.

  The essential story of the last 10-15 years is that the region had a good period, followed by a less good one. The LAC economies enjoyed the benefits of a major commodities boom, which helped boost export revenues, lift economic growth rates, reduce poverty, and expand the size of the middle classes. Various trends in the world economy seemed to come together in a way that benefited Latin America. Globalisation and free trade appeared to be in the ascendancy. The Chinese economy grew at an accelerated pace, feeding global demand for raw materials. Latin America was able to generate record export earnings from its traditional primary commodities, among them soya, wheat, coffee, sugar, copper, iron ore, and zinc.

  The thrill is gone: regional growth loses impetus
  Annual % change in GDP

  

  Source: World Bank

  The commodities boom or super-cycle lasted around 10 years and ran out of steam by 2013. So, if we look back over the last ten years, we have very roughly two distinct and separate five-year periods. The five years running to 2012 were still marked by the boom. Despite the global financial crisis of 2008/09, these were good years for LAC. The moving five-year average GDP growth rate stood at 5.1% in 2008. Although it then trended down, it was still a respectable 3.0% in 2012, pushing up again a little to 3.4% by 2014. After that, however, it became clear that the boom had definitely played itself out. The five-year average LAC growth rate dropped sharply to only 1.2% in 2016, and to 1.0% in 2017. For 2018 it is likely to remain around 1.0%. So, the second five-year period has been troubled. Because of population growth this rate of GDP expansion equates to stagnant or even falling per-capita incomes. The low growth of recent years has seen poverty and inequality begin to creep up again.

  There was clearly a strong correlation between commodity prices and LAC economic growth. The chart below shows the evolution of the main commodity price indices compiled by the IMF. In broad terms it has a similar shape to the LAC GDP chart: a strong rise since the turn of the century, a sharp dip during the 2008-2009 crisis, a new peak in 2011-2014, and then a pronounced decline. A very important point is that there is a consensus among economists: the commodities boom was a one-off, and is not going to return with anything like the same intensity. In other words, the outlook for commodity prices is for modest recovery at best. Latin America will have to learn to live without those windfall export revenues.

  

  Source: IMF

  The situation now is indeed very different to the commodity boom years. The Chinese economy is still growing, but more slowly than before. Within China there has been a rebalancing: domestic consumption is now playing a bigger role leading growth than investment in export-oriented businesses – one result is that the composition of Chinese import demand is now less raw materials-intensive than it was before. The US also continues to grow, but the rise of protectionist sentiment under the Donald Trump presidency has created widespread uncertainty – not least for Mexico, which depends critically on trade with its northern neighbour. There is a possibility of a worsening US-China trade war which could be intensely disruptive to the global economy. More generally, investors have been pulling away from emerging markets. Argentina suffered a financial and exchange rate crisis for much of 2018. The rise of populist leaders in Brazil and Mexico could be disruptive for multilateral trade deals.

  The new situation casts a harsh light on traditional thinking about economic development in Latin America. Although there are many variants, it has long been argued that over a period of many decades the Latin American economies have been in the process of transitioning from natural resource-led growth (led by exports of largely unprocessed agricultural and mining commodities) to an industrial phase, where growth is led by the manufacturing industry, and finally to one where the tertiary sector – the development of a wide range of services, begins to come to the fore. Debates have raged over the role of protectionism versus free trade in this process, and about the various ways that countries may be checked or blocked in their direction of travel. Some analysts have noted that other parts of the world, particularly the Asian economies, have gone further than Latin America in their transition process, particularly by competing more effectively in the globalised economy and creating more integrated value-added chains in manufacturing. Economists have focused on the ‘middle income trap’, a set of circumstances where structural imbalances, and, in particular, large fiscal and current account deficits, prevent economies like Brazil from achieving more sustainable growth and development.

  What has become clear is that to navigate the more hostile waters of the world economy, Latin American countries will have to find a way of lifting their productivity and increasing their share of value added. From this perspective reliance on commodity exports is clearly not enough for two key reasons. First, prices will remain comparatively low and, as in the past, will remain subject to periods of intense volatility. Second, exporting unprocessed raw materials means that Latin America gets only a small slice of the value added. There is therefore a strong argument for increased diversification into manufacturing and services, both of which capture more value for the producing country. Yet this can only be done in a sustainable manner if the country has a real competitive advantage. Experience shows that subsidising uncompetitive manufacturing industries is not a viable or sustainable policy. Latin America can point to some successful experiences in developing competitive manufacturing, such as Mexico’s automobile sector (which unfortunately attracted the protectionist attentions of US president Donald Trump) or Brazil’s aviation sector. But at a macro-level, it is proving difficult for manufacturing to increase its share of GDP and its contribution to development. In fact, some analysts argue that the China-led commodities boom in some ways ‘de-industrialised’ countries like Brazil, which saw a fall in manufacturing’s share of GDP.

  The hypothesis we want to investigate in this paper is whether the development of agro-industry and agro-industrial products can in some way combine the best of both worlds for the LAC region – combining a natural comparative advantage in agriculture, livestock, and fisheries (a product of fertile land, long standing farming skills, plentiful water resources, and favourable weather) with the higher levels of value added and productivity often associated with the manufacturing sector. First, however, we propose a quick detour to Shanghai.

• The Shanghai perspective

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  The China International Import Expo Fair was held in Shanghai in November 2018. The event was a milestone on various levels. It provided an opportunity for a range of international exporters to gain access to the gigantic Chinese market (the second-largest in the world); it attracted around 3,000 companies from 130 countries. At a time of pronounced trade tensions between China and the US, it could also be seen as a statement by the Beijing government of its commitment to balanced trade. Chinese diplomats pro-actively promoted the Fair. For example, Tian Qi, China’s ambassador to Jamaica, said his country was seeking to import US$10tn worth of goods and services from Latin America and the Caribbean over the next five years.

  Of particular interest was the approach taken by Latin American companies. After all, the changing profile of key Latin American exports to China over the next 10 years will play a very significant part in shaping the next stages in the development of the Latin American economies. Many see a major opportunity to export not just bulk commodities, as they did during the boom years, but a range of speciality products, processed and semi-processed goods, particularly in the food sector. Uruguayan foreign minister Rodolfo Nin Novoa points out that China must feed 20% of the world’s population but has only 7% of the world’s cultivated land. From his point of view the challenge for Latin America is to get its products to occupy a share of the available space in the refrigerators of middle-class Chinese families. Nin Novoa says Uruguay is a country of only 3m people but is currently producing food for 30m consumers, and could raise that further to 50m by using new technologies.

  A total of 12 different Brazilian coffee producing companies were present in Shanghai. Igor Brandao, director of agribusiness at Brazil’s foreign trade promotion agency, said the expo was “a great platform for supporting and promoting the entry of Brazilian brands into the Chinese market, considering the strength Brazilian coffee has in the world”. He added that it was also an opportunity to understand the new consumer habits of the Chinese. One of his conclusions was that the consumption of specialised coffees had tripled in China. To take advantage of this, he argued that Brazil needed to better brand and differentiate its coffees. Only 0.2% of Brazil’s total coffee exports were sold to China, with the bulk going to other traditional destinations such as Germany, the United States, and Italy. “We have a lot of room to grow in the Chinese market for speciality coffee,” Brandao said.

  One of the Brazilian companies at the Expo, Café Floresta, said it was looking for a Chinese partner to promote innovative coffees, such as coffee roasts flavoured with chocolate, truffle, vanilla, walnuts, and almonds. Another company, Monte Alegre Coffees, said it thought there was more value in selling high-end speciality coffees to Chinese restaurants and coffee shops than in selling in bulk to Chinese supermarkets. Rival Jamaican coffee exporters appeared to be reaching some of the same conclusions. Audley Shaw, the Jamaican minister for industry, commerce, agriculture, and fisheries pointed out that the average Chinese consumer drinks only four cups of coffee a year, adding “In a population of 1.4bn that’s where the market is for the growth of Jamaican Blue Mountain Coffee.”

  China also appears to be discovering the avocado, known locally as ‘butter fruit’. Chinese imports of avocado are reported to have increased eight-fold in the last four years. Imports in 2017 were up by 22% on the preceding year to 32,000 tonnes. Most of these shipments come from Mexico, Chile, and Peru. Consumption is concentrated in Shanghai, Beijing, and Guangzhou. The avocado was virtually unknown 10 years ago, but has been hailed as a ‘super food’. According to Mexican food consultant Roxana Quirarte, “China is a huge market. As people become aware of the fruits we export and introduce as part of their diet, consumption will increase.”

  Roger Valencia, Peru’s foreign trade and tourism minister, was also in Shanghai leading a delegation of 15 export companies. His aim was to promote non-traditional exports and boost sales to over US$1bn. Valencia said Peru had been shipping its traditional exports – among them copper, silver and gold – to China for over three centuries. Now, however was the moment to focus on high value-added non-traditionals, including fresh products like grapes, blueberries, mango, prawns, squid, and superfoods. Bolivian companies were also promoting specialised products, including quinoa, another ‘superfood’. Miguel Etchevere, Argentina’s secretary for agro-industry, led an 80-strong delegation and pointed out that China has become the number one market for Argentine food exports.

• What is agribusiness?

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  So far, we have argued that in the post-commodities boom world, Latin America must find a way to become more competitive and increase value added activities. The brief reference to Shanghai Expo suggests that in the years ahead there may be scope to develop foodstuff exports to China – an important (but not the only) market for the region. The time has now come to be a little more precise. What is exactly meant by agribusiness? World Bank economists Fabian Méndez Ramos and Nina Paustian have noted in a blog that interest in agribusiness has grown sharply partly because of its perceived ability to contribute to economic growth, reduce poverty, and link to manufacturing and service sector development. John H Davis and Ray A Goldberg first coined the term in the late 1950s. They described it as “the total sum of all operations involved in the manufacture and distribution of farm supplies; production operations on the farms; and the storage, processing and distribution, of farm commodities and items made from them”.

  Ramos and Paustian update that to say agribusiness can be visualised as occurring in the overlap between agriculture, manufacturing, services, and other economic sectors. International traded agribusiness incorporates transport, finance, and communication services, and can be considered as a subset of agribusiness. They further argue that there is a distinction between primary agribusiness (made up of three categories: agriculture, livestock and forestry) and manufacturing agribusiness (made up of 10 categories, including canned products, cereals, drinks, leather, meat, oils, paper, tobacco, wood, and others).

  By applying this definition to UN trade data Ramos and Paustian come up with interesting findings. First, when measured in constant dollars, the absolute value of global agribusiness trade has expanded significantly. Primary agribusiness trade grew from US$195bn to US$963bn between 1990 and 2014. Manufacturing agribusiness jumped from US$498bn to US$2,812bn in the same period. Yet this conceals the fact that the agribusiness’ total share of global trade actually contracted marginally. The share of primary agribusiness fell to 5% from 6% of the total, while manufacturing agribusiness came down to 14% from 16% in the 1990-2014 period.

  Second, as countries become wealthier, the ratio of manufacturing to primary agribusiness products tends to fall for imports and rise for exports. Low income economies tend to import a large volume of manufactured agribusiness products and export more primary agribusiness products. Third, in low income countries trade in manufactured agribusiness products, particularly in the case of oils, meat, and cereals, have grown faster than trade in primary products. These findings are consistent with the idea that low-income economies can increase revenues and benefits by moving up the agribusiness value chain.

• Changes in global agricultural trade

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  Focusing specifically on the LAC region, the prospects for agribusiness are closely tied to the performance of primary agriculture. For agribusiness to prosper, obstacles to a vibrant, export-oriented primary agricultural sector must be removed. There is evidence of progress on this front, although in some senses the picture is still mixed. Traditionally, one of the major barriers to the growth of Latin American food exports has been an array of tariff and non-tariff barriers, subsidies, and other regulations put in place by developed world governments, and often designed to protect their local farmers.

  Barriers and distortions to international trade are still quite severe, although less so than in the past. In December 2015 at the 10^th ministerial conference (XMC) of the World Trade Organisation (WTO) held in Nairobi, there was an agreement to abolish any remaining agricultural export subsidies paid by developed economies “immediately”, with developing countries scheduled to do the same by the end of 2018. The process had been initiated years earlier. The European Union’s notorious Common Agricultural Policy (CAP) had indeed been gradually reformed over a 20-year time span. EU agricultural export subsidies fell from over EUR10bn (US$12.3bn) in the early 1990s to under EUR2bn (US$2.47bn) by 2010. However, a range of protective tariffs and domestic subsidies still remain in place.

  Heinz Strubenhoff, a World Bank specialist, has argued that subsidies have remained persistent for so long because policymakers in developed countries tend to care more about protecting their farmers, while those in developing countries care more about protecting consumers (by keeping short-term downward pressure on food prices). He argues there is good reason to further reduce subsidies, because “Farmers all over the world are willing and able to work hard to act as real entrepreneurs in competitive local markets and, increasingly, in global value chains. Subsidies for farmers in rich countries and emerging economies undermine fair trade and agricultural development perspectives in poor food-importing countries.”

  Prospects for innovation and change in Latin American agriculture and livestock are in part dependent on the direction of changes in global trade. At least four trends are of importance for the region. First, ever since the launch of the Doha Round in 2001 (which began a limited process of reducing barriers to agricultural trade) total global agri-food trade has increased with some vigour. In fact, it grew by almost 200% in the 14 years to 2015. The big driver for this expansion has been the combination of growing populations and rising living standards in the developing and emerging economies of Asia and Africa. Although food prices fell after the commodities boom peaked, they are now expected to continue on a long-term rising path, albeit at a more moderate rate than before.

  Second, the proportion of total food production that is traded internationally is also growing. According to one study, a 2015 International Food Policy Research Institute (IPFRI) discussion paper entitled ‘Trading Food: A Nutritional Assessment’, the share of produced calories crossing an international border rose from 16.1% to 19.1% in the 20 years to 2015. Food import dependence in Asia, the Middle East, and some parts of Africa is increasing.

  Third, food trade is becoming more concentrated. The top food importers – Japan, China, the Middle East, and Korea represent almost 50% of global net foods imports. The Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay) along with Oceania (including Australia and New Zealand), plus Ukraine and a few Asian countries account for 56% of global net food exports. This concentration on both the import and export side has some potential disadvantages: one is that abrupt changes in demand or supply by one key player on either side might provoke wider instability in prices and/or in trade patterns.

  The fourth significant trend is an increase in global concern over climate change and environmental issues. This may lead to policies seeking to promote, or even to mandate, a preference for low-carbon farming techniques.

  Global agricultural exports, in US$bn

  

  Source: WTO Database, 2017

  According to the InterAmerican Development Bank (IDB), in 2014 LAC was the world’s largest net food exporter, with a positive balance of US$148bn. Other net exporters included North America (+US$36bn) and Oceania (+US$42bn). Europe had relatively balanced food trade, with a small positive balance (+US$1bn), while both Africa (-US$39bn) and Asia (-US$197bn) were significant food importers. Using United Nations data for 2015 Valeria and Martín Piñeiro, in ‘The future of the global agri-food trade and the WTO’, also emphasise the key food exporting role of the Mercosur bloc, concluding that it accounts for almost one-third of net global food exports (note that their data for Europe covers only a sub-set of exporting countries in that region).

  Net food exporters (2015) % shares in US$

  

  Source: WTO Database, 2017

  Apart from the long-term growth trend in food trade, it is difficult to predict nearer-term fluctuations. The recent growth in protectionist sentiment in some developed economies such as the US, and any further intensification of the US-China trade war could create a new set of opportunities and risks (the latter category including the possibility of increased Argentine or Brazilian soya exports to China, replacing US suppliers).

  Speaking at the 11^th WTO ministerial conference held in Buenos Aires in December 2017 on behalf of the Cairns Group of 20 agricultural exporting countries, ambassador Guillermo Valles said one of the key challenges ahead was to reduce domestic food subsidies. These had been falling in the EU and Japan, and up to a point had moved down in the US. But they had increased in China, India, Indonesia, and Russia. Domestic subsidies represented 43% of total farm income in Japan, 29% in Indonesia, 21% in China, 19% in the European Union, 15% in Russia, and around 9% in the US. Ambassador Valle also drew attention to the prevalence of non-tariff measures (NTMs) in agricultural trade. In 2016, he said, average agricultural tariffs were 7% ad valorem, but NTMs were three times larger, representing around 21% ad valorem.

  • The Cairns Group members comprise: Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Pakistan, Paraguay, Peru, the Philippines, South Africa, Thailand, Uruguay, and Vietnam.

  One conclusion is that international agricultural trade has become freer than in the past, but that there are still significant tariff and non-tariff barriers, and domestic subsidies. This does not directly eliminate the benefits of agribusiness-centred export strategies for Latin American countries. However, if trade were freer than it is now, the benefits of those policies might be greater.

• Agribusiness and the productivity debate

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  A report published in 2017 by the McKinsey Global Institute, ‘Where will Latin America’s growth come from’, sets out the productivity challenge facing the Latin American economies. It notes that in the last 15 years the region has achieved growth of around 3% per annum, while China, South Asia, and sub-Saharan Africa have been growing at around 5% per annum. There has also been a problem with the type of growth achieved in the LAC region. About 80% of it is explained by “strong labour inputs reflecting growing populations rather than rising productivity”. Output per worker has grown at only 0.6% per annum, one of the weakest productivity performances of any region in the world. Worse, there are other factors likely to make future LAC growth even more sluggish, such as falling fertility rates leading to slower expansion of the labour force, the end of the commodity price boom we have already mentioned, and the growing risks of protectionism. McKinsey concludes that if productivity remains constant, growth in the next 15 years will be 40% lower than it was in the last 15 years.

  The report says Latin American governments should consider four priorities to counteract the prospect of a low-growth future. One of them is to “expand high value-added activities across key value chains by removing obstacles to competitiveness”. The others include promoting the adoption of efficient digital and automation technologies; improving work force skills by strengthening the link between education and employment and closing gender gaps; and finally investing in long-term drivers of productivity growth.

  The report examines the difference in productivity between the US and Latin America. Average US productivity, measured in GDP per employee, is given an index value of 100. By comparison, average productivity in Latin America (the horizontal red line in the chart below) comes out at only 26. In other words, a Latin American worker produces only about one quarter of what a US worker does. The gap varies by sector. Latin American workers in mining, professional services, construction, utilities, and manufacturing have above-average productivity, but it still falls far short of the US benchmark. Latin American workers in agriculture have the lowest level of productivity, only about 20% of the US benchmark.

  

  Source: McKinsey & Company

  There are at least two different conclusions that can be drawn from this graphic. One might be to argue that Latin America should concentrate on improving the productivity of those sectors that are already closer to the US benchmark – such as mining, professional services, and construction. The other might be to instead focus on the laggards, because making an improvement there could make much more of a difference to the economy as a whole. Clearly, some policies – such as improving the ease of doing business – will have an across-the-board positive effect on productivity in all sectors. Increasing investment can have both an across the board and more sector-specific effect.

  There is a substantial argument to be made in favour of agribusiness as a key sector where productivity can and should be raised to wider beneficial effect. The McKinsey report notes that mining, the highest-productivity sector in LAC, employs very few people, and actually made a negative contribution to the region’s productivity growth (of -4%) from 2000-2015. Agriculture, in contrast, accounts for 15% of total employment and made a positive contribution to the region’s productivity growth in the same period (of +2.5%). Agribusiness also offers potentially more of a multiplier effect, given its linkages connecting urban and rural areas, as well as to the manufacturing and service sectors of the economy.

  There is also plentiful evidence to suggest that Latin America has a significant comparative advantage in the natural resource sector, including agriculture, which it is not properly exploiting. The region has 50% of the world’s forested areas which make up the largest carbon sinks in the world, 12% of the world’s remaining arable lands, four times the internal renewable water resources per capita as other regions, and 27% of global bio fuels production. It also has large oil and gas and mineral deposits. McKinsey uses two measures to capture the way Latin America is failing to make the most of these resources. One is a measure of natural resource productivity, defined as value added per US$1m of reserves. Another is an index-based measure of “natural resource sophistication” which is a rough guide to the complexity of the goods produced. The conclusion is that LAC’s natural resource productivity is 70% below that of the top 25% of the most productive economies in the world, while its natural resource sophistication is 40% lower than that of the same group of countries.

  

  Source: McKinsey & Company

• Agribusiness and new technology

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  Agribusiness may also prove to be a very suitable sector for the adoption of various types of new technology, another of the priorities that the McKinsey report recommends. LAC agriculture and food companies use double or triple the amount of water than their counterparts in the US or China. It follows that more efficient use of water could lead to increased outputs. Advances in automation technologies such as artificial intelligence, robotics, analytics, and the Internet of Things (IoT) also offer the possibility of major improvements in efficiency.

  There is in fact a wave of innovation under way known as the growth of ‘AgTech’, defined as the application of emerging new digital systems and technologies to traditional agriculture and livestock production and distribution. A group of small Latin American companies is beginning to introduce radical new approaches. In Brazil a company called Bovcontrol uses data in the cloud, implanted chips in livestock, mobile communication, and analysis to improve performance on meat, milk, and genetics production. It is also used for certification of origin and herd and inventory control. In Mexico a company called CEICKOR has found that high-tech greenhouse temperature and irrigation control systems can increase tomato yields from 25-30kg per square metre to 50-60kg. Another innovative Mexican company is called Lluvia Sólida (‘Solid Rain’). It has perfected a biodegradable polymer that absorbs and stores rainwater, allowing farmers in arid regions of the country to hold back reserves and better manager irrigation.

  BUG Agentes Biológicos, a Brazilian venture, uses wasps as bio-agents, getting them to do the job of chemical pesticides but without the harmful side effects. BUG came into its own in 2012 when Helicover, a caterpillar pest that attacks soya plants, began to develop an immunity to pesticides: the company’s winged bio-agents did the job instead with an 80% success rate. In Peru, Spacedat is using drones to aggregate aerial imagery to help farmers monitor their crops. At different points around the continent, in fact, drones are beginning to be used experimentally to inspect crops for disease and to deliver a new geo-referenced approach to farming called precision agriculture. In Argentina Kilimo blends satellite, climate, and local data to come up with optimum irrigation schedules for each crop. The company claims farmers who use its system can boost yields by 30% and improve water efficiency by as much as 70%.

  In another development the UN’s Food and Agriculture Organisation (FAO) has signed an agreement with Telefónica of Spain to use digital data to help farmers deal with climate change. There will be initial pilots focusing on more efficient water use in El Salvador, Colombia, and the ‘dry corridor’ that runs through Central America. Telefónica has already been involved in projects covering 17,000 hectares in Chile, where remote sensors have been used to measure humidity and solar activity. Initial results suggest using the ‘big data’ captured in this way can lead to a reduction in water usage of up to 20%. If that can be replicated in Central America’s dry corridor, it could bring major benefits to the 10.5m people living there: it is an area which is particularly vulnerable to drought and climate change, stretching across Guatemala, El Salvador, Honduras, and Nicaragua. Among other things the project sets out to improve weather forecasting for farmers.

  Manuel Otero, director general of the Inter-American Institute for Cooperation of Agriculture (IICA), has articulated a vision of how AgTech could develop the sector. He argues that regional agriculture must become more technologically savvy and rebrand itself as a source of future jobs, improving the lives of small-scale farmers and stopping the population drift into urban areas. “Agriculture and rural areas sometimes get a bad press…we have to communicate a new vision and revitalise agriculture as a dynamic sector,” Otero told the Thomson-Reuters foundation, adding “Independent of the contribution of agriculture to GDP, it is a strategic sector – food security and global and environmental sustainability depend on it.” He says small-scale family farmers continue to form the backbone of the industry: they need support to allow them to work collectively and adopt technologies processing raw crops into higher-value products. Smart technology can be used to increase yields. Similarly, technology can help reduce the wastage of scarce resources such as water. Switching agricultural chemicals for microbial alternatives can reduce soil degradation. In Otero’s view, a trade-off needs to be reached between increasing production and yields on the one hand, and protecting the environment on the other. He said, “There is a new equilibrium in agriculture that necessarily has to be in better harmony with nature so that we can maintain and hopefully increase high yields but above all, preserve natural resources for future generations.”

  A study by the IDB, ‘Agro-Tech: Inovaciones que no sabías eran de América Latina y el Caribe’, confirms the productivity potential of the AgTech revolution. It notes that 38% of Latin America and the Caribbean’s total area is cultivated, and that in 2014 the region was the world’s largest net food exporter to the tune of US$148bn. If, as expected, the global population reaches over 9bn people by 2050, it will be necessary to increase global food production by 50% to meet additional demand. A large part of that could come from Latin America. Agribusiness could play key part in achieving that surge in productivity and output, applying a wide range of techniques including mechanisation, automation, improved genetics, big data, and improved distribution and logistics.

• The Peruvian experience

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  Peru is often cited as an agribusiness success: the country has experienced strong growth in non-traditional exports, many from the agribusiness sector. Much of this growth has come from new crops, including grapes, asparagus, avocados, mango, cocoa, bananas, and quinoa. From 2006-2014 traditional agricultural exports (such as coffee, sugar, and wool) grew to US$840m from US$574m. But the non-traditional agricultural exports grew even faster. A detailed World Bank study published in 2017, ‘Gaining Momentum in Peruvian Agriculture: Opportunities to Increase Productivity and Enhance Competitiveness’, gives some insight into this success. It notes that as in many Latin America countries, agriculture’s share of GDP and employment has fallen in recent decades, part of an ongoing structural change as other sectors of the economy expand. However, this should not distract attention from the fact that the sector is still growing at quite healthy rates. From 2000-2015 Peruvian agricultural GDP grew by an average of 3.3% per annum. Agriculture also has important backward and forward links to other parts of the economy: if these are taken into account, agriculture’s share of total GDP is 11.3%, four points higher than the 7.3% reported in the national accounts.

  

  Source: World Bank

  The World Bank found that productivity growth in Peruvian agriculture had been “robust”, averaging 2%-3% per annum. This was the case even though agriculture fared differently in different parts of the country. The report talks of two different realities. In the coastal (Costa) region and some pockets of the highlands (Sierra) there are “dynamic, highly productive, commercially successful agricultural systems that are well integrated into local and/or international value chains and that provide acceptable livelihoods for participants”. The other reality, more evident in the Sierra and jungle (Selva) regions is marked by “static, unproductive, subsistence-oriented agricultural systems that are poorly integrated into the market and afford unacceptable livelihoods for participants”. In these regions many farmers own very small plots of land which trap them in low-input/low-output activities. A look at regional trends shows that productivity has been growing most in the Costa and in areas where the higher-value and export crops are cultivated.

  Referring to agribusiness in particular, the report stresses the important role both of the private sector and of governments to create a favourable environment. It comments, “Not always appreciated is the fact that the emergence in Peru of a thriving agro-export sector was made possible by policies that created a favourable business environment to stimulate private investment while at the same time exposing agribusiness firms to the winds of competition.” Governments had introduced supportive policies affecting labour and land markets, taxation, trade, and sanitary and phytosanitary compliance. Despite these positive efforts, there was still scope to do more, particularly to improve inadequate logistics.

  The improved performance of Peruvian agribusiness rested in part on sustained policies over the last 25 years that had provided both ‘hard’ and ‘soft’ investments. The hard investments include irrigation infrastructure, processing and storage facilities, and logistics. The soft investments include better market coordination, value chain integration, better compliance with quality and safety standards, and greater focus on buyer and consumer preferences. An interesting point made in the report is that the government hopes to incorporate small-scale producers into supplying specialised niche markets, characterised as ‘Level 5’ and ‘Level 6’ markets. These are essentially the more sophisticated markets. The report uses a Level 1 through-to Level 6 classification system based on the stringency and complexity of buyer requirements (see table below).

  

  Source: World Bank

  Crops sold on Level 5 and Level 6 markets tend to have high value and offer opportunities for the farmers to capture a greater share of that value. Yet the report notes than in Peru and other countries there are relatively few documented cases where large numbers of small producers have successfully integrated into Level 5 and Level 6 markets. This may be because barriers to entry are high in terms of investment costs and knowledge and skills. There is however more evidence of success in large volume products that have been ‘de-commodified’ and differentiated into distinct speciality segments, described as Level 3 and Level 4 markets.

  One example of relatively successful ‘de-commodification’ is the Peruvian coffee sector, which the World Bank says has experienced “astounding” development, doubling in size over the last 25 years. Many coffee institutors and associations had collapsed in the 1980s during the prolonged Sendero Luminoso insurgency. It was only in the 1990s that surviving coffee cooperatives created the Junta Nacional del Café, recovering a share of total exports. In the 1990s NGOs and other organisations began to promote the idea of achieving organic and other certifications for Peruvian coffee (among them the Fair Trade and Rainforest Alliance schemes). This was coupled with a focus on supporting small farmers in the early stages of processing (harvesting, milling, drying, sorting) and encouraging collective action. Marketing campaigns also played a key role generating international awareness of the new quality of speciality Peruvian coffee. The net effect according to the World Bank was “better export prices, community empowerment, and other benefits to small scale producers”. However, the report notes that the coffee industry is still exposed to significant risks including price volatility and damage caused by the coffee rust disease.

  A similar process of de-commodification occurred in cocoa production. In the 1990s cocoa was promoted as part of a crop substitution programme designed to stop small farmers growing coca, the main ingredient for the drug cocaine. However, the cocoa seed hybrid used, CCN51, produces only average quality beans which therefore forced Peru to compete in the conventional cocoa market, dominated by West African producers, which is highly competitive and price sensitive, and has low profit margins. In this case too, using different indigenous seeds and pursuing organic certification offered a more profitable way forward. Peru is now the world’s second-largest producer of organic cocoa. Compliance with certification and traceability requirements is costly but essential, given that most large international chocolate producers are committed to achieving 100% certification of their sources of supply.

• Brazil: the agribusiness powerhouse

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  Because of the size and fertility of its territory, its large population, and its big economy (one of the world’s top ten) Brazil can be described as the agri-business powerhouse of Latin America. The importance of the agribusiness sector is not always recognised, however. It can be argued, for example, that in the 2015-2016 recession, the sharpest recorded economic downturn in recent Brazilian history, agribusiness actually ‘saved’ the economy from an even worse crash, something which has not been fully recognised. In 2017, as Brazil began to slowly climb out of the recession, agribusiness had a record year, growing by 13%, the strongest expansion recorded in 21 years. Soya, with a 55.2% increase in crop yields, and maize production (with a 19.4% increase) led the way.

  Data on the size and structure of the Brazilian agribusiness sector is somewhat patchy but still impressive. In 2017 it accounted for around 23% of Brazilian GDP. In the same year, the first agricultural census conducted by IBGE, the national statistics institute, in 11 years showed that in the intervening period the area dedicated to agribusiness activities had expanded by 16.5m hectares, an area equivalent to the size of Portugal, Belgium, and Denmark combined. According to IBGE census coordinator Antonio Florido, Brazilian agricultural establishments now occupy 41% of national territory. Most of the expansion came from larger establishments. ‘Big agro’ – farms of 10,000 hectares or more – now account for 47.5% of the cultivated area, up from 45% in 2006. The census produced other indications of expansion and modernisation. For example, in the 2006-2017 period tractor sales grew by 50% to reach 1.23m units, while the number of mechanised harvesters rose by 49% to 173,000 machines.

  One description of agribusiness in Brazil is that it supplies ‘the 4 Fs’ to the world: food, feed, (bio) fuel, and fibre. The country is the world’s largest producer and exporter of coffee, sugar, and orange juice, and is highly ranked in the production and export of soybean, maize, ethanol, pork, beef, and poultry chicken. As mentioned, agribusiness accounts for almost a quarter of GDP; it also represents one-third of total employment and a larger 40% share of exports.

  

  Source: PwC

  There are at least five major value-added production chains operating within the agri-business sector in Brazil. In first place, the sugar and ethanol value chain has been growing at an annual rate of around 6%. Roughly half of the country’s sugar cane output is used for producing refined sugar, while the other half goes into production of ethanol for energy. After hydrocarbons, sugar cane has become the second-largest source of energy in Brazil accounting for 16% of all energy consumed. In second place, the oilseed and grains complex performs a key role producing but also processing and adding value to a wide range of products based on soya, maize, rice, wheat, beans, and cottonseed. Production has been growing at around 8% per annum. Typically, this sector produces not just the raw materials but also processed foodstuffs such as cooking oils.

  In third place comes the coffee value added chain. While the scope for adding value may be a little more limited than in the oilseeds and grains complex, as we have seen, the development of speciality and organic coffee is creating new opportunities, especially in new markets such as China. The sector experiences both demand- and supply-side volatility and average growth rates have been more modest, at around 3% per annum. The fourth value chain – orange juice – has a high degree of linkage between essentially agricultural and more industrial and service sector activities (extracting juice from the oranges, and storing, refrigerating, transporting, and marketing it to international destinations). The sector is highly concentrated and organised. Juice processors have global operations and highly developed infrastructure. Finally, the fifth value added chain is the production and sale of animal protein – essentially beef, pork, and poultry. Brazil is a major international player in this sector. Total meat production rose 25% from 2008-2012. Average growth has been strongest in pork (8% per annum) followed by poultry (3%) and beef (2%). There are big contrasts in industry structure within this sector. Production of poultry and swine is highly organised, but the cattle (beef) sector suffers from still-high levels of informality and a lack of coordination of the value chain.

• The complex life of the Mexican tomato

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  The production and sale of agribusiness goods across international frontiers is often more complex than it appears at first sight. A recent study by the University of Arizona, ‘Mexican Fresh Tomatoes – Agribusiness Value Chain Contributions to the US Economy’, analyses the economics of the sale of Mexican fresh tomatoes into the US. In 2016 Mexico sold 3.4bn pounds worth of fresh tomatoes into the US, for a value of US$1.9bn. By weight, 1.7bn pounds of these exports were round tomatoes, 1.5bn were plumb (Roma) tomatoes, and the remainder, 228m pounds, were cherry and grape tomatoes. More than half these tomatoes were produced using protected agriculture techniques (greenhouses), with the remainder grown in open fields. Mexico’s share of the fresh tomato market in the US has been running at 40%-50%.

  The report notes that Mexican tomato producers have both forward and backward links to the value-added production chain. Forward links are those that connect them to the next stages of production, transportation, warehousing, and to the wholesale, retail, and foodservice industries ultimately leading to the final consumers in the US and Canada. Backward links concern the purchase of inputs needed for the production process, things like labour, fertilisers, and raw materials. These backward links can also cross international boundaries. Typically, Mexican tomato producers have backward links for the acquisition of greenhouses (from the Netherlands, Spain, and Mexico), for tomato seeds (Netherlands, Israel, and the US), for seedlings (Mexico and Canada), and for fertilisers (Mexico, Israel, and the US).

  Tomato production and trade in North America has developed agribusiness supply chains that take into account seasonal growing conditions, industrial specialisations, and comparative advantage across countries. The benefits of these agribusiness chains to a net tomato importer such as the US are not limited to the increased availability of tomatoes for consumers. North of the border the wider benefits include economic activity taking place within the transportation, warehousing, wholesale, retail, and foodservice industries to deliver tomatoes to end-buyers in both the US and Canada. South of the border the benefits include economic activity supported by demand for labour, goods, and services from Mexican tomato producers including the agricultural inputs needed for production.

  

  Source: University of Arizona

  The study found that US and Canadian imports of fresh tomatoes from Mexico contributed an estimated US$4.8bn in total economic activity to the US economy in 2016, including direct, indirect, and induced multiplier effects. The activity supported nearly 33,000 full and part-time jobs, earning US$1.4bn in employee compensation, US$353m in business owner income, and US$801m in corporate profits and other returns. In total US$2.9bn of US GDP was directly and indirectly supported by the tomato value chain.

  Clearly, multiple factors influence which parts of the value-added chain take place north or south of the border. The balance of trade at the border itself tells only part of the story. The value chain is shaped by comparative advantage, cost structures, competitiveness, industry organisation, transport, weather conditions, and government policies, just to name a few. It is interesting to note that the US is a net importer of fresh tomatoes from Mexico, but a net exporter of processed tomato products to Mexico. Exports of processed tomato products totalled US$96m in 2016, with nearly 247m lbs of prepared or processed tomatoes, tomato juices, and tomato sauces and ketchup exported to Mexico. In the US, the processed tomato industry is much larger than the fresh tomatoes sector; in Mexico it is the other way around with the fresh tomato sector dominating.

• Can there be an agro-industrial revolution?

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  The IDB argues that an agro-industrial revolution could help the Latin American economies advance towards more sustainable growth. In a briefing for heads of state attending the Summit of the Americas in Lima in mid-2018, the IDB said that LAC is a major net exporter of food, accounting for 16% of world food and agricultural exports and 4% of imports. The world is beginning to run out of cultivated land, but of the 446m hectares of land still potentially suitable for sustainable expansion, over a quarter (28%) is located in Latin America. LAC was also the only region in the world to achieve the Millennium Development Goal of halving malnutrition between 1990 and 2015.

  The global population will grow by another 2.3bn people from 2018-2030, and those people will need to be fed. LAC can play a key role in meeting that demand. It has almost one-fourth of the world’s forests, 40% of the renewable water resources, and 12% of agricultural production. The region’s agricultural production has surged since 1990. It has the largest fertile land reserves in the world, and since 2000 has achieved the biggest expansion of agricultural output. Although LAC’s agricultural productivity (measured by Total Factor Productivity, TFP) grew by 45% from 1980-2012, it still lags behind the more developed OECD countries, meaning that there is room for further gains.

  The IDB says “Over the last decade, not only agriculture but agribusiness has seen substantial growth in the region, creating a significant number of jobs and adding key elements to the food basket. It also represents an alternative to urban migration, supports local culture and adds value to female labour. The contribution of agri-business in countries such as Brazil and Argentina ranges from 25%-30% of GDP. In Mexico, agribusiness contributed 12% of GDP.”

  The value of LAC agricultural exports doubled from US$105bn to US$213bn over the last decade. While agriculture’s share of GDP may have fallen, it still accounts for 24% of LAC exports. LAC accounts for over half the world’s exports of banana, sugar, and soya, and over one-quarter of its exports of coffee, beef, chicken, meat, and maize. Against this background, there has also been major qualitative change. Rapid urbanisation, changing diets, and new technology have all had an impact.

  The IDB report makes it clear that agro-industry and agri-business can make a major contribution to future LAC growth and development. But it also notes that this will require overcoming a number of obstacles. These will include combating protectionism in international trade; increasing output in an environmentally sustainable fashion (and in particular reducing or reversing deforestation); increasing the quality and nutritional value of produced food; and ensuring resilience in the face of climate change.

  The private sector active in agribusiness will also face some specific challenges. Along with governments it will need to develop better infrastructure to reduce costs and enable better access to markets. Wider use of information and communications technology (ICT) and data delivered to cell phones can improve the efficiency of rural markets, particularly by sharing up-to-date price information. Better access to agricultural credit and research and development also has a role to play, along with the adoption of AgTech innovations. There is also scope to reduce food wastage. The IDB calculates that food losses in Latin America amount to 220kg per capita every year; most of this occurs post-harvest, between production and sales. Losses are highest in the cereals, fruits, and vegetables markets. The food that is wasted could feed as many as 300m people every year.