AN economies of scale situation is achieved when an increase in the scale of production decreases long-term average costs. In other words, the production cost per unit of the commodity produced decreases as the company expands its operation. This is because fixed costs such as machinery, building, administration and rent decrease as these are distributed across the many and additional outputs of the company.
Economics also informs us that “growth is a function of investment,” of which there are two major sources: the government (public) and the private sector. But in a market economy such as ours, the main source of investment is the private sector. This is because the bulk of the nation’s wealth is in the hands of the private sector.
Why are these concepts so important when discussing the prospects for sustained and high growth of Philippine agriculture and the agri-food sector? The simple reason is that these are critical elements in triggering economic growth and promoting development.
The agri-food sector comprises agricultural production (raw materials), food and beverage manufacturing (processing), and food and beverage distribution (marketing). Together, these comprise more than a quarter of the country’s gross domestic product.
The food and beverage manufacturing subsector, meanwhile, contributes around half of the gross value added of the agri-food sector and employs more than a million workers. It is the main source of growth of the agri-food sector.
However, the foremost problem of the agri-food sector and Philippine agriculture in general is that both are dominated by micro and small enterprises/cultivators that do not enjoy economies of scale. In addition, there is little private investment, both local and foreign, happening to trigger rapid growth.
In a 2021 study conducted by the late Ramon Yedra, he noted that our food and beverage manufacturing subsector was dominated by micro and small enterprises, comprising around 99 percent. In agriculture, because of the protracted implementation of the agrarian reform program, the average land size cultivated by our small farmers is around a hectare.
Given the retail-like operations of these firms and farms, it can be safely concluded that a big part of our food and beverage manufacturing subsector and agriculture does not enjoy economies of scale. This partly accounts for the relatively high prices of our agricultural and food commodities.
As for private sector investments in agriculture, Yedra noted that only 1 percent of total registered business establishments are engaged in agriculture production. Similarly, of approved investments both local and foreign prior to the Covid outbreak, only 1 percent went to agriculture. This is a clear reflection of the unattractiveness of agriculture as an investment venture for entrepreneurs.
To find out the reasons behind the hesitance to invest in the agri-food sector, he conducted focus group discussions with 53 companies clustered by industry groupings: commodity-industries; cold chain and logistics; and investment and financial services.
Commodities produced by the respondent firms were high-value crops such as banana, cacao, coffee, cashew, dragon fruit and purple yam (ube). They included small, medium and large companies. For the investment and financial services, respondents came from a bank, stockbrokerage, private equity firm and the Philippine Stock Exchange.
The main impediments identified by the respondents as to why the private sector is reluctant to invest in the agri-food sector can be categorized into three main areas: overall investment climate, ease of starting a business and business operation concerns.
For the first, the common observation is that investors see the agri-food sector as risky and unstable compared to other industries. There is policy inconsistency, difficulty of obtaining market information, a cumbersome tax system, rising local property taxes, outdated investors’ incentives and a landholding limitation that deters big-scale investors wanting to attain economies of scale to make their operations economically viable.
As to the issue of ease of starting a business, the major disincentives cited were the tedious process of securing permits, licenses and certifications; and difficulty in accessing capital, particularly for small and medium enterprises. It was also noted that there were no venture capitalists that cater to small-scale startups engaged in the agri-food sector.
Lastly, on business operation concerns, the highlighted issues were: high cost and inefficiency of logistics (transport, shipping, storage), procurement of raw materials and poor infrastructure in the provinces, particularly in areas near sources of raw materials.
Complaints were articulated regarding poor road structure and conditions (e.g., not fit for big transport vehicles), ports and shipping (high cost and inefficient) and electricity (high cost and fluctuating power supply). Agro-processors found difficulties in securing quality, reliable and adequate supplies of raw materials, plus high costs in transporting these.
As I noted in the beginning of this column, economies of scale and the greater participation of the private sector are critical elements in achieving sustained and high growth for agriculture and agro-industrial activities. Unfortunately, the Philippine agri-food sector gets a failing mark in both.
Our farms do not enjoy economies of scale because of the protracted implementation of agrarian reform, which has resulted in miniscule farm sizes. Establishments in the food and beverage manufacturing subsector are dominated by micro and small enterprises.
There is little interest among the private business sector, both local and foreign, to invest in agriculture because of policy and structural reasons that prevent their agricultural ventures from becoming economically and financially viable.
It is inevitable that in the relative absence of private sector investment, government investment has to fill the gap. Unfortunately, government resources are limited compared to the wealth in the hands of the private sector.
Worse, government investment comes mainly in the form of subsidies for small farmers. These do not have a long-lasting impact on attaining sustained productivity, only lasting during the planting season. For small farmers to remain productive, they have to rely on a perpetual and ever-increasing amount of dole outs.
It is no wonder then that our agriculture sector is backward and underdeveloped.
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