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  • THE PHILIPPINES

    STUDY ON AGRIBUSINESS, INFRASTRUCTURE, AND LOGISTICS

    FOR GROWTH IN MINDANAO

    POLICY NOTE

    August 2010

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    Acronyms Used

    AFTA ASEANFreeTradeAgreement

    ASEAN AssociationofSouthEastAsianNations

    CARP ComprehensiveAgrarianReformProgram

    FMR Farm-to-MarketRoad

    NABCOR NationalAgribusinessCorporation

    PHF Post-HarvestFacility

    RO-RO Roll-On,Roll-Off

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    1. TheWorldBankhascarriedoutastudyonagribusiness,logistics,andinfrastructureforgrowthinMindanao.FundedbytheAustralianAgencyforInternationalDevelop-ment,thestudyaimedtounderstandbetterwhythePhilippines,withitswell-educat-edhumancapitalanddiversenaturalresourcebase,significantlylagsbehindtherestofEastAsiainpercapitagrowth.Someruralareaswithhighagriculturalpotential,suchasMindanaoandtosomeextenttheVisayas,alsolagbehindtherestofthePhilippineeconomy.ThestudysoughttounderstandhowthePhilippinescouldim-proveitscompetitivenessinagribusinessandagriculturecommoditymarkets,areaswhereMindanaoenjoysstrongcomparativeadvantages.

    2. Thestudyanalyzed the constraints affecting theperformanceof agricultural valuechainsinMindanao,particularlyintermsofinfrastructureandlogistics.Theagricul-turalcommoditiesselectedwerecornandbananasbecauseoftheireconomicweightatregionalandnationallevels.Mindanao,especiallytheBukidnonplateau,isamajorproducerofwhiteandyellowcorn.Thestudyfocusedonyellowcorn,whichisgrownmainlyforanimalfeedandusedinmilledandnon-milledvarieties.Mindanaoisalsothecountrysmainbananaproducingregion,both forexportand for thedomesticmarket.RegionXI(theDavaoRegion)1istheleadingbananaproducerandsupplierofexport-qualitybananasinthecountry.Inrecentyears,thePhilippineshasbecometheworldssecondtopexporterofCavendishbananas2.

    3. AgricultureremainsanimportantsectorofthePhilippineeconomy.Seventypercentofthepoorliveinruralareas.Withitshighagriculturalpotential,Mindanaoisastra-tegicallyimportantregion.However,itisalsoplaguedbyinstabilityandhighpovertyratesinsomeareas.Theregionseconomyisagro-ecologicallydiverseandpredomi-nantlyagri-based,makingitanimportantagro-industrialbusinesshubfortheregionandforexporttrade.

    4. Both the banana and corn value chains offer considerable scope for contribut-ing to future economic growth in Mindanao, provided the appropriate policies and programs are implemented.Asupportprogramwouldentailacombinationofpolicymeasuresandpublicinvestment,aimedatleveragingprivateinvestment,par-ticularlyintheupstreampartofthevaluechains.Thereisnoreasonforthebananasub-sectorinthePhilippines,bothfortheexportanddomesticmarkets,nottocon-tinuegrowingstronglyintheyearsahead.Expandingmarketsathomeandabroadandastrongcomparativeadvantageontheworldmarketshouldbethemaindriversofthisgrowth.Inthecaseofcorn,thecountrysglobalcompetitivenessseemsmoreproblematicbutitcanbestrengthened.Thiswillallowsustainingfarmincomeswhilereducingthecostoffeedstothefast-growingpoultryandhogindustries.Inspiteof

    1 RegionXIislocatedinthesouth-easternportionofMindanaoisland.ItconsistsoffourprovinceswithitsregionalcenterinDavaoCity.2 Cavendishbananaistheexportqualitybananaondemandinternationally.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    seriouschallenges, thesetwovaluechainsdorepresentpotentiallyvery importantsourcesofgrowthfortheislandandforthecountry.

    5. However, both sub-sectors face serious challenges in terms of their current performance and mid- to long-term viability.Yellowcornproductionhasbeenin-creasing,pulledbythedemandforfeedforthelivestockandaquacultureindustriesbutwillfaceincreasingcompetitionfromimportedcorninthefutureduetotheim-plementationoftheASEANFreeTradeAgreement(AFTA).Thecurrentcompetitive-nessofyellowcornproductioninMindanaoistoolowandproductivityneedstobestrengthenedallalongthesupplychain.CavendishbananaexportinMindanaoisacompetitive,growing,andvibrantsub-sectorbutitalsofacessomecriticalissuesintermsofitslong-termviabilityandsustainability.Forbothvaluechains,thecurrentunderinvestmentatfarm-levelandinpost-harvestactivitiesunderminestheirlong-termviability.

    6. Theanalysis showed that someconstraintsarecommon to the twovaluechains,suchas:

    Lackorbadstateofbasicinfrastructureandphysicallinkagestomarketout-lets;

    Inefficientlogisticsandweaktradefacilitationpoliciesandmanagement;

    Constraints on land use resulting from the national agrarian reform program(fragmentationoflandholdings,limitedaccesstocreditandfinance);

    Lowfarm-levelproductivity,duetoinsufficientinvestmentattheproductionlevelandtheabsenceoftargetedtechnicalsupportprograms;and,

    Broadercompetitiveness issues, suchas theunfavorablebusinessenvironmentandthehighlevelofpubliccorruption.

    7. Someconstraintsarespecifictoasub-sectorandrelatetothepolicyandinstitutionaldimensionsof thevaluechain.Thereviewof thebananaexport industryrevealsanumberofinstitutional,environmental,andsocialsustainabilityissues.Inparticular,thecapacitiesofprofessionalorganizationsshouldbestrengthenedsothattheycanaddressthestructuralissuesconfrontingtheseindustries.

    8. A comprehensive program to support these value chains and improve their per-formance should be implemented in Mindanao. It shouldbestructuredaroundthreepriorityareas:

    Bridgingtheproductivityandqualitygap;

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    Investingininfrastructureforimprovedvaluechainperformanceandlinkagestomarkets;and,

    Improvingthesocialandenvironmentalsustainabilityofthecornandbananain-dustries.

    Bridging the Productivity and Quality Gap

    9. On average, farm-level productivity is low and below regional and world stan-dards for both crops.Asshowninthedetailedsub-sectoranalysis,averageyieldsinthePhilippinesforbothcornandexportbananaslagwellbehindinternationalbenchmarks.Whilethereareimportantvariationsincornyieldsbetweensubsis-tenceandcommercialfarmers,lowyieldsclearlyhampercompetitiveness,particu-larlyforcorn,andlimitreturnstofarmers.Thereisadireneedfortargetedeffortstoraiseproductivityasithasdirectandindirectimpactsontheperformanceofthevaluechains.

    10.Eventually,farmerswhocannotraisetheirproductivityshouldbeassistedintransi-tioningtoothermoreremunerativecropslikefruitsandvegetables.Intheend,thevalue chains are as strongas theirweakest link. Forbananagrowers, increases inoutputpriceshavenotbeensufficienttocompensatefortheincreaseinthecostofproductionfactorsduringthelastdecade.Inputpriceshavesurgedandhavehadadoublingeffectondecreasingnetincome.Newformsofmarketlinkageshavebeenemerging,togetherwithincreasedcompetitionintheindustry,resultinginpricewarsandhigherpricestoproducersinrecentyears..

    11.Theyellowcorn sub-sectorwill continue tobedrivenby thegrowingdemand forfeedfromthepoultryandhogindustries.However,cornyieldsaretoolowonaveragecomparedtothoseinmajorcompetingcountries.Itisonlybyraisingproductivitytoaminimumlevelof5tonsperhectareversusthecurrent2.6tons/hathatMind-anaoscorncancompetewithimportedcorn.Reducingtransportcostsisimportantinachievingbettercompetitivenessofcorncultivationinthemostremoteproductionareas.

    12.Substantial improvements in thequalityofgrainsarealsorequired tomakedo-mesticcornmorecompetitiveandcommercializationofcornmoreefficient.Thiscouldbeachievedthroughincentivesfortheprivatesectortoinvestinlargerpost-harvest facilities (PHF).Theproposed interventions shouldaimatbetteryields,reductionofpostharvestloss,andlowertransportcostsforinputsupplyandmar-ketdelivery.Whencombined,theseinterventionscouldreducefarmerscostscon-siderably.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    13.The government needs to shift its agricultural strategy toward less protective and more pro-active policies. Agriculturalpoliciesshould focusonhelping farm-ersraiseproductivityandimproveproductqualitythroughappropriatesupportpro-gramsthatcanmakethemmorecompetitive.Inadditiontoraisingfarmproductivity,therearesomeseriouschallengesintermsofimprovingqualityandpostharvesthan-dlingforcorn,andalsoinmovingupthevaluechainthroughproductdifferentiationandcertificationforbananas.Thefollowingpolicymeasuresandsupportactivitiesshouldbepursued:

    Completingtheprocessoftradeliberalizationinthecornsectorbyreducingtar-iffsonimportsfromnon-ASEANcountries.Thiswillrequireimprovingthecom-petitivenessofcornfarmersthroughatargetedcornsectoradjustmentprogramthatbothenhancesproductivityandfacilitatestransitiontoothercrops;

    Improvingavailableknowledgeandanalysisonbench-markingofcornproduc-tioncostswithregionalcompetitors;

    RedefiningtheroleoftheNationalAgribusinessCorporation(NABCOR)incornpost-harvestoperationssothat itwillpromoteprivate-publicpartnershipsandattractprivateinvestmentinPHF;

    Providingincentivestoencourageprivateinvestmentinstorageandpost-harvestforcorn;

    Establishingandenforcingqualitystandardsforcorn;

    Designinga farmproductivityenhancementandsupportprogramforcornandbananaproduction farmingsystems, tobepiloted first inaselectednumberofmunicipalities;

    Supportinginnovationsinagriculturalvaluechainfinance(tripartitefinancing)toimproveaccesstocapitalandcreditbysmallfarmers.

    Investing in Infrastructure for Improved Value Chain Performance

    14.Infrastructure constraints in the broad sense (roads, irrigation infrastructure, land use, post-harvest facilities, and power supply) are indeed critical to im-proved performance of agribusiness value chains in Mindanao.Asagriculturalcommoditieswidelytradeddomesticallyandinternationally,costremainsthemaindriverofcompetitionforbothcornandbanana.Therefore,valuechainsneedtobecostefficientatallstages.Particularlyforbananas(aperishableproduct),logisticsef-ficiencyiscriticaltoguaranteefreshness,quality,andsafetywhentheproductreach-esthefinalmarket.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    15.A farm-to-market road (FMR) rehabilitation program should be designed and implemented to improve market access for small farmers.Performanceofagri-culturalvaluechainsdependsfirstandforemostonthequalityofbasiccommunica-tioninfrastructure,primarilyFMRs.Limitedaccesstogoodroadinfrastructurehashadso far important consequences in the locationandspatialdevelopmentof thetwovaluechainsinMindanao.Targetedinvestmentinruralroadsrehabilitationcouldplayavital role in improvingaccess tomarkets for farmersand inunlockingnewareaswithproductivepotential.Improvingagribusinessvaluechainperformancere-quires increased investment for rural roadrehabilitationandmaintenance. Invest-mentshouldbeaccompaniedbypolicymeasuresoncontractprocurementandfund-ingforroadmaintenancethathavebeenrecommendedalreadyinpreviousstudies.

    16.Inter-island shipping and export logistics need to be improved.Bothvaluechainsareaffectedbysea-freightcosts,althoughindifferentways.Theproblemsforcornarehighcosts,inefficiency,andpoorserviceforinter-islandlogistics.Theseproblemsalsoaffectthetransportofbananasinthedomesticmarket.Themajordifficultyliesintheregulatednatureoftheportandshippingindustry.TherearemanyprivateportsinthePhilippines,suchasthoseusedforexportingbananasandotherfruit.Mostofthemaresmallandspecialized.Inter-islandshippinghasbenefitedfromrecentim-provementsliketheintroductionoftheRO-RO(roll-on,roll-off)system.However,itisstillconstrainednotonlybytheconditionoftheportsbutalsobytheregulationsthatgovernlogisticsoperations.

    17.Adjustments in implementation of the Comprehensive Agrarian Reform Pro-gram (CARP) are needed to allow for more efficient land use.Landtenurestatusresulting fromagrarian reformhasmultiple implications for the twovalue chains.CARPwasaninitialopportunityforsmall-scaleCavendishbananagrowerstoimprovetheireconomicsituation.However, therecentlycompletedstudyonlandreforminthePhilippines3hasshownthatCARPsoverallimpactonpovertyhasbeenquitelowcomparedtoinitialexpectations.Animportantimplicationofthesmallscaleoffarmsisthelimiteddegreeofmechanizationthatcanbeusedforcorncultivation.Thisisthecaseparticularlyforharvesting,alongwiththedifficultyofestablishingefficientmar-ketsformachineryrental.Aggregationofsmallfarmsthroughcooperativearrange-mentshasalsobeenproblematicinthebananaindustry.

    18.Specificactivitiestobeundertakenwouldinclude:

    Conductingafeasibilitystudyonapriorityprogramoffarm-to-marketroadim-provement, to includemechanismsthatensureadequate fundingforbarangay4roadmaintenancebylocalgovernmentunits;

    3 Land Reform, Rural Development, and Poverty Reduction in the Philippines: Revisiting the Agenda,WorldBank(2009).4 ThesmallestadministrativedivisioninthePhilippines;thenativeFilipinotermforavillage.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    Implementingtherecommendationsoftherecentassessmentoflogisticsperfor-mance for inter-islandshipping(portmanagement, cabotage law,RO-RO)5,andidentifying investments that could improve access to export infrastructure bysmallbananaproducers;

    Implementingmeasures to complete the agrarian reform program (improvingtenuresecurityandefficiencyoflandmarkets);

    Designingandcarryingoutastudyofthedomesticmarketforbananastoidentifythetypesofinvestmentrequiredtoimprovevaluechainperformance.

    Improving the Social and Environmental Sustainability of the Corn and Banana Industries

    19.The current lack of transparency and regulations in pricing mechanisms is a threat for the future economic and social viability of the value chains. In thebananasub-sector,theoverallorganizationalarrangementsandtypesoflinkagesbe-tweenfarmersdictatetheresultingpricespaidtosmallfarmers.Itisintheindustrysbestlong-terminteresttobringmoretransparencyandprovidemoreinformationonbananaexportprices.

    20.Environmental issues need to be addressed urgently and comprehensively.DavaoCitybannedaerialsprayingofbananaplantationsin2009.Thisshowstheacute-nessoftheenvironmentalproblemsandtheneedforboththeindustrystakeholdersandgovernmenttocometogethertoaddressthem.Italsopointstothebroaderissueofwide-spreadencroachmentofbananaplantationsandagriculture,ingeneralinurbanorsemi-urbanareas.Thisencroachmentexacerbatesthetensionsbetweenag-riculturalandnon-agriculturalactivities.Itisstronglyrecommendedthatstrategiesbedesignedandimplementedtoraisetheenvironmentalawarenessoftheindustryandimproveitscompliancewithgoodagriculturalpractices. Greatercompliancewith these standards is required and willcontributetoimprovingthecompetitivenessofthePhilippinebananas.

    21.Supporting and strengthening professional organizations should be a priority.Addressingtheissuesconfrontingthecornandbananavaluechainsrequiressomeformofcollectiveaction.Italsorequirescooperationbetweenprivateactorsandgov-ernmentinareaslikeenvironmentalsustainabilityandthespatialredistributionofproduction. Strongandresponsibleprofessionalorganizationsareneededtotackletheseissues.

    22.Concreteinterventionsinthisareawouldentail,forexample:

    5 Bridges across Oceans,AsianDevelopmentBank(April2010).

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    Analyzing opportunities for spatial redeployment of production through plan-ningusingexistinggeographicinformationsystemorGISmapping,andincen-tives(public-privatepartnerships),particularlyinconflictareas;

    Establishingandupgradingpriceinformationsystemstofacilitatetheprocessofpricediscoveryacrossthesupplychainandacrossthecountry;

    Strengtheningprofessionalorganizations inorder to improvemanagementandgovernanceinthebananasub-sector,includingsettingupapriceinformationsys-temandorganizingstudytourstopossiblemodels,suchasthebananaindustryorganizationinCosta-Rica;

    Assessingthesocialandenvironmentalsustainabilityofthebananaexportindus-tryandpromotingcertificationschemes.

    Cross-cutting and Overarching Issues

    23.Finally,anysupportprogramforagribusinessvaluechainsinMindanaoshouldalsotakeintoaccountthefollowingcross-cuttingissuesbecauseoftheiroverarchingim-portance:

    Improvingthebusinessenvironment,and

    Implementingnon-distortivemacro-economicpolicies,particularlythoserelatingtoforeignexchange,andmonetaryandcreditpolicies.

    24.Improving the business environment for the private sector is critical in order to foster the development of agribusiness in Mindanao, as well as in the rest of the country.Bothvaluechainsfacechallengesintermsofcompetitivenessalthoughondifferent termsand requireprivate investment to improve their performance lo-callyandglobally.Improvingthebusinessenvironmentshouldbeapriority.Unfortu-nately,elitecapture6,otherformsofcorruption,andlackoftransparency,hampertheflowofprivateinvestment.Thisconstrainsfuturegrowthinthesesub-sectorsasintherestoftheeconomy.

    25.Macro-economic policies should remain non-distortive. The foreign exchangerate, internal inflation,andmonetarypoliciesreflected in interestratescanhaveasevereimpactonagriculturalvaluechainperformancewhilebeingcompletelyoutofthecontrolofstakeholdersintheagribusinesssector.Thenationalgovernmentmustmakesurethattheoverallmacro-economicpolicyframeworkremainsfavorableanddoesnothindertheperformanceofthesevaluechains.

    6 Thephraseelitecapturereferstothemanipulationoflegal,political,andregulatoryinstitutionsbythewealthyandthepoliticallypowerfulfortheirownbenefit.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    ANNEX: SUMMARY OF THE CORN AND BANANA VALUE CHAIN ANALYSIS

    The Yellow Corn Value Chain at a Crossroad: Opportunities and Challenges of a Competitiveness Agenda

    Onaverage,thePhilippinesproduced3.7milliontonsofcornannuallybothyellowandwhiteduringtheperiod2004-2008.Similartothetrendsobservedatthenationallev-el,yellowcornproductioninMindanaohasbeensteadilyincreasing,overtakingthatofwhitecorn(Figure1below).TotalcorndemandinMindanaohasincreasedduringthelastdecadeby3.5percentperyear,drivenmainlybythedemandofyellowcornforfeedfor thehogandpoultry industries. Inaddition,Mindanaohas traditionallybeenanetsupplierofyellowcorntodeficitareasintheVisayasandLuzon,wherelargeprocessingcapacitiesarelocated.ThebulkofyellowcorntradeflowsinMindanaogravitatesaroundthecitiesofCagayandeOrointhenorth,GeneralSantosCityinthesouth,andDavaoCity.

    Figure 1Area cultivated in corn and yields, 2004-2008.

    Withrisingincomesandrapidurbanization,consumerspreferencesareshiftingatanaccelerated rate toward livestockproducts, inparticularhogsandpoultry.The steadyincreasein yellowcornproductionrespondstotheincreaseddemandstemmingmainlyfromlivestockintensification.Asaresultofincreaseddemand,thesectorisnowindus-trializingrapidly:backyardproductionisgivingwaytolargerscaleoperationscateringtotheurbanconsumersand,inalongertermperspective,inthecaseofhogs,totheexportmarket. EvidencesuggeststhatthePhilippinescornmarketisquiteintegratedwiththeworldmarket.Theimplicationhereisthattradeliberalizationwillhaveagreatimpactontheyellowcornsupplychain.Supporttocornfarmershasmainlybeenthroughtariffsoncornimports,whiledomesticsupportprogramshaveremainedquitelimitedinscope.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    Since1980,thesupplyofcornworldwidehasincreasedbymorethan60percent.TheAsia-7groupofcountries1hasbecomeamajorproducerofcornontheworldmarket.WhilemostoftheincreaseincornproductioncanbeattributedtoChina,therearenoclearsignsofspecializationbetweencountriesoftheregion. However,theconfigurationofcorntradewithinAsiasuggeststhatChina,inthelongrun,couldbecomethemainsup-plierofcornforimportingcountriesintheregion,includingthePhilippines.

    ThestructureofprotectionofthecornsectoracrossAsiancountriesischangingswiftlyastheregionalintegrationofagriculturalmarketsismakingprogresswiththeimplemen-tationoftheAFTAtradeagreement.Nevertheless,areductionoftariffsoncornimportsfromtheASEANregionisunlikelytohaveamajorimpactonPhilippinesborderpricesofcorn.IntheshorttomediumtermnoASEANcountrywillhavethecapacitytoexpandcornproductionandsubstitutenon-ASEANimportsofcorn.Asaresult,tariffsonimportsofcornfromnon-ASEANcountries(UnitedStates,Brazil,Argentina)willcontinuetoin-fluencetheborderpriceofcorn.

    ThecornfarmsectorinMindanaoishighlyfragmented,poorlyorganized,andcharac-terizedbyalimiteddegreeofmechanization.Productionofyellowcornisintensiveintermsofuseofcommercial inputsandhiredlabor,makingcornfarmersvulnerabletofluctuationsininputprices. AsshowninTable1below,theaverageyieldsobtainedinthePhilippinesaresignificantlylowerthanthoseinneighboringcountrieslikeThailand,Indonesia,andVietnam.However,itisalsoimportanttofactorinthewidevariabilityinyieldsobtainedbycommercialandsubsistencefarmers.

    Tradeprotectiongiventothesectorhasnotresultedinwidespreadandsystematicin-creases inproductivity.Notwithstanding, thenon-farmpartof thecornvaluechain inMindanaoiswelldevelopedandwellpopulatedwithleadinginternationalfirmsonbothsidesofthefarmgate,i.e.,thesupplyofinputstothefarmersandtheutilizationofcornonthedemandside.Inparticular,themarketstructureappearstobequitewelldevel-opedwithgoodcompetitionamongbuyersforthefarmerscorn.

    Table 1Average corn yields in selected Asian countries, yellow and white corn (2001-2007).

    2001 2002 2003 2004 2005 2006 2007China 4.93 4.81 5.12 5.29 5.33 5.17 5.56India 1.68 2.04 1.91 1.94 1.91 2.34 2.32

    Indonesia 3.07 3.24 3.34 3.45 3.47 3.66 4.08Philippines 1.80 1.92 2.14 2.15 2.37 2.54 2.60Thailand 3.73 3.85 3.87 3.83 3.96 3.95 3.93Viet Nam 3.08 3.44 3.46 3.60 3.73 3.93 4.02

    Source: FAO.

    FarmgatepricesinMindanaoarewellbelowthoseprevailinginLuzon,adirectconse-

    1 Asia-7referstoChina,India,Indonesia,Nepal,Philippines,Thailand,andVietnam.Thesecountriesrepresentmorethan90%ofthetotalproductionofcornintheregion.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    quenceoftherelativelyhighfreightratesofinter-islandshipping.DeliveryofcornfromafarminMindanaotoaprocessorinLuzoninvolvesmultipletransactionsandhandlings.Oneormorewholesalersare involved inthetransferfromthemill totheretail feeddealersordirectlytothehogorpoultryfarm.Averyactiveandcompetitivenetworkoftradersmovescornalongthesupplychainallthewayfromthemostremotebarangaystoprimaryprocessorsandfinalusers.Inanycase,whilethetradingsectoriscompetitive,itischaracterizedbyhighcostsduetopoorinfrastructureandtransactioncostsassociatedwiththelowqualityofcorn.TransportationcostsinthePhilippines,particularlybeyondthemainmunicipalcenters,arehighcomparedwithneighboringcountries.Thehighcostsarecausedbypoorroadconditions,alimitedsupplyoftransportservices,andhighfuelcosts.Therelativelyhighportandshippingchargesformovementofsmallconsignmentsofbaggedcorn,oftenincontainers,accountforthehighercostofshipmenttoManila.Asaresult, thelogisticscostsaccountforabout20percentofthedeliveredcosttoCagayandeOro,butrepresentabout40percentofthedeliveredcosttoManila.Lowqualityoffarm-to-marketroadsalsoaffectsfarmgatepricesandforcesfarmerstoadoptsub-optimalpost-harvestpractices.

    Even though they are fairlywell correlatedwithworld prices, fertilizer prices in thePhilippinespresentsomeasymmetryintermsofpricefluctuations.Whilecompetitionamongfertilizersuppliersappearsquite intense, logisticsandmarketingcosts tendtodriveawedgebetweenfertilizerpricesinMindanaoandothermajorregionsinthePhil-ippines. Tradersalsosellfertilizerstofarmersoncredittermsasaresultofthefarmerslimitedaccesstocredit,whichfinallytranslatesintohigherinputcosts. Here,again, theresultinghightransactioncosts impaircompetitivenessofthevaluechain.

    Post-harvestpracticesvaryconsiderablyalongthesupplychainanddependonthegeo-graphiclocation.TraditionalshellingpracticesandcapacityinMindanaocandiffersig-nificantlybyareabutaregenerallycharacterizedbyalowdegreeofcapitalintensity.Theexistingmulti-purposedryingpavementsinthebarangaysareconsideredtobeseverelyinsufficientduringpeakharvestseason.Thishasadirectimpactonthequalityofcorn,onitsprice,and,therefore,onthevalorizationoftheproductbythefarmer.Thelimitedstoragecapacityalsoexplainsthemainproblemsreportedbytraders.Theseincludetheabruptpricefluctuationsfollowingthepeakoftheharvestseason,whichiscompoundedbythecontemporaneousarrivalofimportsandtheincreasinglystiffcompetitionamongthem.

    Therelativelylowperformanceoftheupstreampartofthevaluechainwhichresultsinlowcompetitiveness,difficultiesinaggregatingsupply,uncertaintiesondeliveryandlowstandardsingrainqualityisathreatandachallengeforthefuturegrowthofthesub-sector.Thisisinspiteofthestrongandsustaineddemandfromthedomesticfeedin-dustry.Largerprocessors,integratingshellinganddryingactivities,areslowlyincreasingintheregion,oftenwithpublicsupport.NABCORsinvestmentsinintegratedPHFsareimprovingmarketaccessbysmallfarmers.Yet,suchinvestmentshavenotattractedtheattentionoftheprivatesector,towhichthesefacilitiesshouldbeturnedoverafterafew

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    yearsofoperation.ThislackofinterestmaydependonthegovernancestructureofthesePHFsaswellasonthelimitedfinancialreturnsduetohightransactioncostsandrisks.

    Largescaleshellingfacilitiespaymoreattentiontoqualityandcatertohigherendcornusers. Bothcornmillers,whoprocessgrainsintogrits,andfeedmillers,whoconvertcornintoanimalfeed,aresegmentsofthecornvaluechainthatarequitediversifiedintermsofthetypeofendusers,eventhoughcapacityseemstobequiteconcentratedamongafewplayers.Theinstability,unpredictableavailability,andpoorqualityofcornsupplyareincreasinglypushingmillersandintegratorstowardmanagingtheirinventoriesthroughtheimportationofcorn.WhilegradestandardsforcornhavebeendevelopedbytheBu-reauofAgriculturalandFisheriesProductStandards,theiruseissporadic,limitingtheemergenceofamoretransparentpricediscoveryprocess.Thismaydependonthegen-erallowqualityofcornthatleavestheproductionareas.Itmayalsodependonthefactthatpublicconsultationwithkeystakeholdersbeforetheissuanceofsuchstandardshasbeenminimal.

    Toidentifykeyareasforpolicyinterventionsthatwouldhelpincreasethecompetitive-nessofcorninMindanaointhecontextoftheimplementationoftheAFTAagreements,sixsimulationswerecarriedoutbasedonfielddataonthecoststructurealongthesup-plychain.Theresultsofthesensitivityanalysisoftheyellowcornvaluechainshowthat ifcornproductivitywasincreasedtoaminimumyieldlevelof5tonsperhectare,Mind-anaocouldcompetewithimportedcorn.Reductionintransportcostsisalsocriticalinimprovingthecompetitivenessofcorninthemoreremoteproductionareas.Inaddition,substantialimprovementsinthequalityofgrainsshouldbesoughtthroughinvestmentinPHFsinordertoenhancetheefficiencyofthevaluechain.ThiscouldbedonethroughincentivesforprivatesectorinvestmentinlargerPHFsandclarificationsinpublicsectorinterventions.

    The Export Banana Value Chain: Moving from Comparative to Competitive Advantage

    ThePhilippines is oneof themajorproducers andexportersof sweetbananas in theworld.Totalproductionofbananaswasestimatedtobearound8.7milliontonsin2008,withexportsofaround2.5milliontons.Thedemandforbananashasbeengrowingfastinboththedomesticandexportmarkets.Totalmarketedvolumeshaveincreasedatanannualaveragerateof11-12percentduringthelastfewyears.Someofthekeydriversofthisdemandinclude:growingpopulation,risingincomes,increasedconsumerprefer-encetowardhealthyfoodandfreshfruits,developmentofnewmarketsandimprovedcompetitivenessintermsofqualityandprice.

    Withinthisoverallgrowthpattern,itisinterestingtonotethatdomesticdemandhasac-tuallybeenstrongestandgrowingfasterthanexports.Onavolumebasis,Cavendishba-nanasandlocalbananasaccountedroughlyfor30percentand70percent,respectively,ofPhilippinemarketedproductionduringtheperiod2004-2008.Thetwotypesofba-nanasareindemandintwodifferentmarkets,andareproducedindifferentgeographic

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    locationsinMindanaoduetovarioushistoricalandagro-ecologicalreasons.

    ThepositionofthePhilippineCavendishindustrytodayiscompetitive.Thecountrynowrankssecondintheworldmarketwithasolidgrowthrecordandahighlyregardedex-portqualityproduct.Thebananaexportindustryhasbeenexpandingatasustainedrateinthepasttwentyyears,andgrowthhasacceleratedtonearly8percentperyearduringtheperiod2004-2008.Exportsreached195millionboxes2 in2008.CavendishbananaproductionandexportareconcentratedinMindanao,mainlybecauseoftheislandsnat-uralcomparativeadvantage:fertilesoil,mildclimate,diverseterrain,andtyphoon-freearea.Bananasaccountforabout75percentofthetotalagriculturalexportsoftheregion.Theycontributesignificantlytothecountryseconomyandforeignexchangeearnings,andsignificantlytothoseoftheislandandofRegionXI.

    Theindustryhasundergoneconsiderabletransformationoverthelast30years.Histori-cally,ithadanoligopsonistic3structurewithalimitednumberofexporters,mostlymul-tinationalcompaniesproducing,conditioning,andexportingthefruit.Withthe imple-mentationofCARP,theindustryhadtoadjustandrelymoreonsmallproducers.Smallscalegrowersparticipateintheindustryprimarilybysupplyingthefruittotheexporters.Today,therelationsbetweenproducersandexportersarefairlycomplex.Nevertheless,thesupplylinkagescanbecategorizedintotwomaintypes:

    Growershipmodel,wherethebuyeroutsourcesproductionthroughcooperatives,individualgrowersorcorporate-managedfarms,and

    Leasearrangement,wherethebuyerrentsthelandandmanagestheproductionprocess.

    Theaverage farmsizehasdeclinedas a resultofCARP implementation in the1990s.ThevariousarrangementsbetweengrowersandexportershavetriedtomakeupforthefragmentationoflandownershipinducedbyCARP.Whilethebananaexportbusinessre-mainsquiteconcentratedfivemulti-nationalcompaniesaccountfor90%ofexportscompetitionhasincreasedinrecentyearswiththeemergingroleofconsolidatorsorin-tegrators.

    ThePhilippinebananaexportindustryenjoysaverystrongcomparativeadvantageduetoboththeexcellentagro-climaticconditionsforbananacultivationinMindanaoanditsproximitytothe largeandgrowingmarketsofAsiaandtheMiddle-East.Neverthelessyieldsandon-farmproductivityremainlowonaverageandwellbelowthatofthecoun-trysmainworldcompetitors(Figure2).Theabilityoftheindustrytorespondtomar-ketdemandhasimprovedinrecentyears,translatinginstronggrowth. ThemainexportmarketsforPhilippinebananasareJapan,Korea,China,andtheMiddle-East.However,competitionremainsstrong in theglobalandregionalmarketsandPhilippineexport-ersperceiveacompetitivethreattotheirmarketposition.Therisksarereal,whilenot

    2 Aboxcontains13kilogramsoffruit.3 Amarketsituationinwhicheachofafewbuyersexertsadisproportionateinfluenceonthemarket.

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    immediate,andpointtotheneedfortheindustrytodevelopacompetitiveedgeinthesemarkets.

    Figure 2Average banana yields, main exporters (tons/ha), 2008.

    Source:FAO.

    Incomesat farmleveldependprimarilyontheaverageyield,whichisestimatedtobenomorethan3,500boxesperhectareandperyear,wellbelowtheworldstandardof4,500to5,000boxesperhectare.Thiscorrespondstoanaverageofaround43-45tonsofexportablefruitperhectare.Smallergrowerstendtohavelowerproductivitylevelsthancorporategrowers.TheexportpricehasbeenatanaverageofUS$240FOBpertonduring2004-2008,whilethepricepaidtogrowershasgoneupinrecentyearsduetoincreasedcompetitionbetweenbuyers.

    However,productioncostshavealsobeenonasteepriseduetoexchangeratefluctuationsandto thesurge in thepricesofagro-chemical inputs. Productivitygainsare thereforecritical tooffset inputcost increases. In2008, thenet incomeofsmallbananagrowerscouldbeestimatedbetweenUS$1,000andUS$1,400/ha/yrforthosefarmerswhowereabletoachieveagoodproductivitylevel(4,000boxes/ha).However,thosewhohadyieldsof3,500boxes/haorbelowthecaseofamajorityofsmallfarmersbarelybrokeeven.

    Asdemonstratedbyitsstronggrowthanditsabilitytogainmarketshareinrecentyears,thePhilippinebananaexportindustryiscompetitive.Itsperformancecomparesfavor-ably with Ecuador, the world leader. A Strengths-Weaknesses-Opportunities-ThreatsanalysisrevealsthestrengthsofthePhilippinebananaindustrycomparedwiththatofEcuador,whilebothcountriesexhibitsimilarweaknessesatthesmallholderlevel.Lackofaccesstofinanceandcreditforfarmdevelopment,expansionandimprovementsisacommonproblem.Themajordriversofcompetitivenessintheindustryworldwidearecost,consistencyofsupply,quality,andsafety. Sincebananasareaperishableproduct,availabilityofanefficientandreliablelogisticschaintoguaranteejust-in-timeandjust-in-shapedeliveryismandatory.

    Asreportedbygrowersurveys,smallholderproductionisaffectedbythreemajortypesofconstraints:(i)availabilityandqualityofinfrastructure;(ii)consequencesofCARPon

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    PHILIPPINES: STUDY ON AGRIBUSINESS, INFRASTRUCTURE AND LOGISTICS FOR GROWTH IN MINDANAO - POLICY NOTE - August 2010

    landuseandproductivityand,indirectly,onaccesstocredit;and,(iii)limitedcapacityforon-farmandpost-harvestinvestments,feedinginturnaviciouscircleoflowproductivity.

    Goodtransportinfrastructureandefficientlogisticsarethefirstfactorsofcom-petitivenessintheindustry.Theprimaryconstraint,particularlyforsmallhold-ers,isthereforethefarm-to-marketinfrastructure;

    Second,implementationofCARPhasledtoafragmentationoflandholdings,re-sultingindifficulties inguaranteeingcredit,andtoaninexistentandinefficientlandmarket. In thepost-CARPcontext, landavailabilityand land tenure statusremainmajorissues.Thisaffectslandproductivitybylimitingeconomiesofscale;

    Third,lowproductivityanddecliningprofitabilityofbananaproductionatfarm-level tend to reduce investment capacity,whilemanagement capacities remainweakintheabsenceoftechnicalsupportsystemsandservices.

    Thebananaindustryalsofaceschallengesintermsofitssocialandenvironmentalsus-tainability,callingforpolicing,economicmanagement,andregulation.Whiletheregula-toryframeworkofthebananaindustryhasrecentlyimprovedinthePhilippines,thecur-rentaerialspraybaninDavaoiscreatingseriousproblemsforproducersandexporters.Finally,somefactorsinthegeneralbusinessandmacro-environmentsuchastheforeignexchangerateand the interest ratescanhaveapotentiallycritical impacton thesub-sector.

    ExportofCavendishbananainMindanaoisagrowingandvibrantsub-sector.However,itisfacingsomeveryseriouschallengesahead,asmentionedabove.Keyissuesforthelong-termviabilityandsustainabilityoftheindustryhavetobeaddressed.Theycallforsomeformofcollectiveactionintheformofadequatepoliciesandinvestments,particularlyininfrastructure.Thecurrentlevelofunderinvestmentatfarmlevelandinpost-harvestac-tivitiesunderminesthelong-termviabilityoftheindustry.Competitivenessimprovementandsmallholderinclusionarecloselyrelatedobjectives.Governmentsfundingshouldbetargetedatsolvingkeybottlenecksinareassuchastransport, infrastructure, landandcreditavailability,productivityandqualityenhancement,geographicaldistribution,andenvironmentalsustainability.Policyreforms,institutionalsupportandcapacity-building,includinginsectorgovernanceandregulation,arealsorequired.