September 23, 2015

Establishing productive assets in superior agronomic zones to supply long-term deficit markets is a compelling investment strategy. Certain agricultural commodity and food-industry supply chains will continue to undergo long term structural deficit dynamics, exacerbated by increasing and changing patterns of demand. Incumbent supply chains are adversely affected by factors such as climate change and instability, urbanization and rising labor and land costs, tariffs and trade barriers, food safety non-compliance.

Structural Deficits & Comparative Advantage

The concept of “structural deficits” is applied to agricultural and food value chains herein as a sustained trend where demand will continue to outpace supply through a long-term period, irrespective of cyclical surpluses. The dynamics of structural deficits connote a long term ‘sellers market’ for scarce goods where a return toward equilibrium requires also long term adjustments in both supply and demand, especially for perennials and crops requiring investment in post-harvest and more integrated and modernized food delivery infrastructure. Whilst ‘competitive advantage’ addresses how to beat the competition, comparative advantage highlights two important fundamentals – productivity and scarce resources (land, water, labor and capital). The impact of trade regimes must also be factored into the equation. Some of these deficit dynamics are more pronounced in the greater ASIAN region, as depicted below. The effects of tariff and non-tariff barriers pervade intra-Asian and external trade in regions like the EU.

Intra-Regional and Inter-Regional Dynamics are NOT mutually exclusive

Rapid economic and income growth, urbanization, and globalization are leading to a dramatic shift of Asian diets away from staples and increasingly towards livestock and dairy products, vegetables and fruit, and fats and oils. The diversification of diets away from the traditional dominance of rice evidences signs of convergence towards a Western diet….not entirely a more healthy direction. The diet transition is characterized by increased consumption: wheat, temperate fruit and vegetables, high protein and energy dense food, and snack foods. The rapid spread of global supermarket chains and fast food restaurants accelerate these trends.

This growing demand for diet diversity cannot be met solely by the incumbent food supply chain – neither intra-regionally nor extra-regionally. It requires and highlights the opportunity for investment in modernization of the agricultural commodity and food delivery chain. This includes all areas along the vertical integration chain from primary production and post-harvest logistics to value added processing for intermediate and finished packaging.

“Asian agriculture is on an irreversible path leading away from its traditional pre-occupation with cereal crop production, especially rice, towards a production system that is becoming increasingly commercialized and diversified.” (FAO). This is an opportunity for investment into particular food value chains, especially for countries that possess comparative advantages in agronomy, factors of production, and trade agreements. Furthermore, consumption trends in developing countries favoring healthier diets and more sustainable and socially responsible suppliers highlights opportunities for investment in agri technologies such as water saving and soil preserving ‘drip-irrigation’, biocontrol substitutes for banned substances such as glyphosate and atrazine, “track and trace” monitoring systems that provide real time transparency throughout the food delivery system, etc.

Investments which capitalize on deficits in one region, may be domiciled within the same region when advantageous – like in the example of potatoes below. In other examples, deficits in one region may be supplied by one or other regions (vegetables -fresh packaged, frozen, canned, sauces, snack foods); and in the case of cashews, raw material is transported from one region, processed in another and shipped to final markets.

Example: Potatoes for Food Industry

Potatoes are essential raw materials for potato chips and as an ingredient in the high growth salty snack food market, soups, and sauces.

Potato seed is multiplied into potato ‘chipstock’ for potato chips; off width and other potatoes are also recovered by air-drying into dried flakes and powders for other food industry such as bases for soups, sauces, and Pringles.

PepsiCo/Lays brands is forced to supplement significant raw material deficits in its Thai and Indonesian plants from Australia, Europe, and even S.American farms. However, producers like PepsiCo are forced to regularly apply for quotas to import potatoes into Thailand and Indonesia, without which they are forced to pay marginal duties of over 100%. Commercial potato cultivation requires a cooler and drier temperate climate as they are highly susceptible to pathogen pressure in the tropical climates where PepsiCo’s largest regional plants are located. Potato seed must be stored at 3C and 90% humidity in compliant facilities for nine months between growing seasons. PRIME Agri is capitalizing on the confluence of these factors and has invested in drip-irrigated sustainable primary production of potato seed and chipstock, and climate conditioned seed storage for export markets, initially. Next progression of integration includes PRIME’s investment in air-drying and establishment of a national potato brand in Myanmar which will benefit from 20-30% tariffs to incentivize import substitution.

Example: Cucumbers for Food industry & Convenience Food Market

As a Least Developed Country (LDC), Myanmar now benefits from the most favorable regime available under the EU’s Generalised Scheme of Preferences (GSP), namely the Everything But Arms (EBA) scheme. The EBA scheme gives the 49 Least Developed Countries – including Myanmar – duty free access to the EU for export of all products, except arms and ammunition.

A long term supplier to Unilever’s operations in France require 800 x 20 ft containers per year of semi processed gherkins in brine, some 11,200 metric tons or over US$14mn of sales per year. However, this major supplier is unable to source reliable and compliant raw material in its home domicile where the company’s CEO attributes their supply deficiencies to ‘rising labor costs, lazy farmers, and runaway land prices.’ PRIME Agri is partnering with this company to meet the deficit of a European food manufacturer, further leveraging the additional competitiveness of a duty-free trade and the comparative advantages of a food delivery system in Myanmar for the vegetable value chain. The vertical integration of this trade includes the optionality of OEM finished packaging in glass jars, relishes and sauces, and the supply of complimentary vegetables to the ‘convenience foods’ markets i.e. McDonald’s and other fast food companies.

Example: Cashew

International demand and supply is fairly if not marginally matched today, but this value chain suffers from a fragile supply chain which depends on its largest raw material supply from the African Ivory Coast being shipped to other countries like Vietnam, from where over 60% of the world’s processed cashew nuts are exported. The dangers of the inefficient supply chain is exacerbated by major shifts in growing consumption from India (formerly one of the largest exporters of processed cashew) and China.

Processing of RCN (raw cashew nuts) is highly labor intensive and traditionally based in India and Vietnam. However, Vietnam’s factors of production (primarily land and labor) continue to decline in competitiveness. Myanmar has vast tracts of land in suitable agronomic zones and more long-term competitive factors of production than the incumbents. A new cashew plantation requires five to six years before bearing fruit at commercial levels. However, a parallel investment in a cashew plantation and RCN processing can generate cashflow and income before the plantation bears fruits. Myanmar should continue to enjoy superior comparative advantages against Vietnamese and Indian competition through the long term. EU and N.American tariff preferences also favor Myanmar’s LDC status.

Kenneth Shein, a co-founder and Group CEO of PRIME Holdings Pte Ltd, directly oversees the Group’s Agri & Food Division. Its subsidiary, PRIME Agri Ltd is an investor, developer and operator of an integrated agri and food delivery system in Myanmar, which targets structural deficit markets while capitalizing on Myanmar’s comparative advantages in agronomy and factors of production. PRIME Agri is the first GlobalG.A.P. registered operation in Myanmar and adheres to international food safety & sustainability compliance (FSSC) standards throughout its food delivery system: primary production, post-harvest, value added processing of agri commodities, intermediate, and finished foods. Another subsidiary, Smallholder Prosperity Enterprises Myanmar Ltd (“SPE”) is actively developing Myanmar’s smallholder farmer households through its outgrower and rural commercialization program – “The Myanmar 3030 Vision.”

—

Kenneth Shein, Managing Partner, PRIME Agri Limited

The opinions expressed in this editorial are the author’s own and do not reflect the views of GAI News.