adjustments in the agro-processing industry and the rp-us fta

Cecilio P. Costales

The DLSU-AKI Working Paper Series represents research in progress. This paper is preliminary, unreviewed and subject to further revisions and final editing. The views and opinions in this paper are of the author(s) and do not represent the position or opinions of DLSU-AKI or its Members, nor the official position of any staff members. Limited copies of this paper can be requested from DLSU-Angelo King Institute, Room LS223, De La Salle University, 2401 Taft Avenue, 1004 Manila, Philippines. Please request papers by number and title. Tel. No: (632) 524-5333; (632) 524-5369; Fax No: (632) 524-5347.

Adjustments in the Agro-Processing

Industry and the RP-US FTA

Series 2008-10

DLSU-AKI Working Paper Series 2008-10

RP-US FTA: Agro-Processing Industry 2 May 2008

Table of Contents

Executive Summary 4

Chapter 1. Introduction 7

Policy/Strategy Context and the Role of the RP-US Free Trade Agreement 7

Status of the Agro-Processing Industry 8

Objectives and Rationale 11

Chapter 2. Industry Overview 12

Agro-Processing Industry in the Philippines 12

Background of the Sub-Industries 14

Competitiveness of the Agro-Processing Industry 26

Chapter 3. Potentials for and Major Constraints to Agro-Processing

Industry’s Development

30

Constraints to Development 30

Market Scope for Expansion and the RP-US FTA 34

Current and Future Profitability 35

Chapter 4. Issues/Implications of an RP-US FTA and Strategic Directions for

the Competitive Development of the Agro-Processing Industry

36

Issues/Implications 36

Major Strategic Directions 38

Chapter 5. Recommended Action Plan: Agro-Processing Industry

Development Program

43

Basic Program Framework 43

Program Objectives 43

Component Projects 44

Component 1: Technology Development Acquisition and Adoption

Component Program

45

Component 2: Institutional Capacity Building Component Program 48

Component 3: Logistics Support System Development Component

Program

52

References 59



List of Tables 1. Animal Breeder Imports, 1990-1998 19

List of Figures 1. Average volume of imports of grandparent (GPS) and parent stocks (PS),

1980-2001 20

2. The floriculture agribusiness system 24 3. The Philippine floriculture industry diamond model 28 4. Proportion of research and development budget appropriated to various

research institutions through PCARRD 29

5. Strategic development framework for the agro-processing industry 39 6. Distribution of research and development projects by PCARRD by field,

2004 45

7. AMESC operated and managed by agricultural machinery manufacturers linked to farmer cooperatives or federation

48

8. Framework for business data and process integration in the hogs and broiler sub-sectors

55

9. Structure of the Web-Based integrated logistics system network 56 10. Proposed organizational structure of the Agro-Processing Logistics

Service Providers Association 57



Executive Summary

The agro-processing industry has been a major force in the growth and development of the agribusiness sector. It has substantially contributed to the Gross Value Added (GVA) in agriculture and the Gross Domestic Product (GDP) in general. However, national and global political, technological, financial and economic events, and happenings have necessitated new approaches in agribusiness operations and strengthening institutional capabilities and linkages. The RP-US FTA is an opportunity to build competitiveness of the agro-processing and other related industries and effectively support its growth and development. Increased development potential of the agro-processing industry through improved market performance and international competitiveness would be able to attract private sector and foreign investments in the industry. This would enable the industry to sustain its research and development, institutional, and logistical requirements in the long-term. Other forthcoming benefits from the competitive development of the industry would be in the form of socio-economic spill-overs such as poverty alleviation. The development of the agro-processing industry will require a parallel growth of the other sub-sectors of the agribusiness system that include the input, production, marketing, and the support subsystems. This paper takes into account the constraints that impeded the development of the agro-processing sub-sector and its contribution to national development program goals. More specifically, it proposes a set of recommendations for operational strategies that will develop the comparative advantage potential in agricultural crop production, agro-processing and marketing in the context of RP-FTA. The approach is not agro-processing specific but is done within the framework of the agribusiness system. A number of agro-processed products are traded internationally. Processed mango as well as fresh mango, banana chips, abaca fibers, coconut coir, and ornamental plants/cut flowers have strong international markets in Asia, Europe and the United States. For some products (such as banana chips and mango puree) exports have grown in terms of volume and value, for others such as abaca (Manila hemp) export figures exhibited a declining trend. The issues raised by the industry representatives during the consultative meeting in the first phase of the project were:

• For abaca – the need to have plantation economies rather than backyard-type production, to control the incidence of pests - the use of an integrated pest management system, improved use of technology, the regulatory constraint in the export of abaca fiber and related products, and the enhancement of stripping technology in the farm level.

• For coco coir fiber – the relatively high cost of production, low level of cost efficiency, reliability and dependability of the logistics system, relatively inferior quality, technology inadequacy and lack of economies of scale

• For processed food such as banana chips – lack of quality standard resulting to price fluctuation and cut-throat-competition, technological deficiency especially in the peeling



of banana and first frying operation, inadequate research and development programs and unstable supply of raw materials.

• For the agro-processing sub-sector – increasing cost of energy as a consequence of rising oil prices in the international market substantially raising the cost of production and threatening the competitiveness of large export-oriented agro-processing firms and eroding the profitability and viability of small and medium size firms.

The hogs, poultry and floriculture industries were included in the second phase of the project because of their potential as export goods. The incidence of disease outbreaks in major hog and broiler chicken producing countries in Asia has opened windows of opportunity for these industries. The floriculture industry on the other hand is poised to go into export as countries that are major producers of cut flowers and ornamental plants face higher cost of production due to rising energy fuel. Growing in greenhouses which requires heating and cooling has become prohibitively costly that the growers have to cut short the growing cycle by importing planting materials from other countries such as the Philippines. In general, the agribusiness system is characterized by lack of coordination and control and concentration in agro-processing. Production has been constrained by inadequacy in technology, cultural management practices, capacity, cost of inputs, logistics, sub-sector associations and organizations, credit and financial facilities and laws and regulations. Concentration of agro-processing to a few firms has been unfavorable to the growth and development of the industry. It has created a barrier for entry in terms of input and information capture to the detriment of small and medium agro-processing players. For these reason the agro-processing industry in general has to put up with an eroding competitiveness as it faces problems of poor quality, insufficient volume and high cost of raw materials. There is a need for industry and government interventions to prop up the industry. However, with government faced with political as well as economic problems it has no other recourse but to adopt a status quo and reactive strategy. Industry for now has been playing a wait and see attitude. An RP-US FTA therefore, provides a breathing room for initiating interventions that could be directed to the weaknesses of the agro-processing agribusiness system which in the process could serve as a catalyst for supporting industry growth and development. The advantages that will arise from such agreement will weigh more than the disadvantages. The entry of US agro-based processed products will not threaten the viability of the industry but rather will have a reinforcing effect in generating competitiveness and weeding out inefficient and non-innovative agribusiness processing firms. Technology diffusion will be faster and strategic alliances with US firms will allow easier access and entry into foreign markets and the development of new products for old and new markets. The Philippines could develop to be a strategic jumping point for processed agricultural products of US and Philippine agribusiness processing firms. The general effect, therefore, is more towards growth and development rather than industry deterioration. Aside from Japan, the United States of America is one of the major trading partners of the Philippines. The United States has one of the highest agriculture and industry gross value added. It is also considered as a leader in leading edge technology, research and development in the world. A strengthened cooperation between the Philippines and the United States in the agro-



processing industry will therefore be beneficial for bilateral trade and trade with other Asian countries most especially China. An RP-US Free Trade Agreement (RP-US FTA) is expected to provide ‘windows’ for mutual benefit in the industry in terms of carefully selected commodity groups as to current and future market potentials. Under the RP-US FTA, the industry may be supported in four ways: (a) increasing bilateral trade between the two countries as well as regional trade with other ASEAN member-nations; (b) engaging in research, development, and innovation; (c) transfer of technology and manpower exchange; and (d) investment partnerships in production, production related, and processing businesses. The issues/implications arising from the agreement include the following: (a) industry clusters to achieve volume, quality, and reliability; (b) innovation and technology diffusion and generation; (c) food and product standards; and (d) government policies. In view of time and resource constraints, only four sub-industry groups were selected. These are: (1) fiber industry: abaca and coco coir fiber; (2) processed fruit industry: mango processing and banana chips manufacturing; (3) meat industry: pork processing industry and broiler meat processing; and (4) floriculture industry.



Chapter 1

Introduction

Policy/Strategy Context and the Role of the RP-US Free Trade Agreement

Agriculture and industry play important roles in the Philippine economy. While the

services sector remains as the dominant contributor to economic growth in the Philippines, both agriculture and industry contribute to economic gross value added, generate employment and export revenues, promote food security and alleviate poverty. The traditional view in development is for the government to focus first on the agricultural sector in terms of policies, programs and resources and shifting its emphasis on the industrial sector later when the former has become more efficient. This view has increasingly been replaced by the more progressive notion that both sectors may be pushed simultaneously in as much as they could effectively complement each other.

Through the years, the agriculture sector has become a form of industry in itself in view

of technology, vertical integration, marketing and consumer preferences following the profile of comparable industrial sectors, with their notable complexity and richness of variety and scope. The industrialization of agriculture has generated what is referred to as the agro-processing industry, which means transforming products originating from agriculture, forestry and fisheries. The Food and Agriculture Organization considers agro-processing as a subset of manufacturing that processes raw materials and intermediate products derived from the agricultural sector between harvesting and final use (Food and Agriculture Organization [FAO], 2004).

With its relative abundance of agricultural raw materials and relatively low cost labor,

which are critical factors for agro-processing, the Philippine agro-processing industry has been a key contributor to economic growth. The industry contributes to industrial output (in terms of manufacturing value added), provides export earnings and generates employment. It also is a means to alleviate poverty and address food security. However, special attention must not only be given to policies (and their sustainability) that affect the prices of inputs and output to producers, processor and consumers, such as policies regarding taxation, subsidies, direct support and tariffs, in the short and the long term but also to policies that contribute to the creation of an environment suitable for business and investment growth.

Aside from Japan, the United States of America is one of the major trading partners of

the Philippines. The United States also has high agriculture and industry gross value added. It is also considered as having the leading edge in technology, research and development across the world. A strengthened cooperation between the Philippines and the United States in the agro-processing sector is therefore worthwhile to pursue. An RP-US Free Trade Agreement is expected to provide ‘windows’ for mutual benefit in the industry in terms of selected commodity groups. Under the RP-US FTA, the industry may be supported in four ways: (a) increasing bilateral trade between the two countries as well as regional trade with other ASEAN member-nations; (b) engaging in research, development, and innovation; (c) transfer of technology and exchange of scholars; and (d) joint investments in production, production-related, and marketing ventures.



Status of the Agro-Processing Industry

In 2002, the industry exported agro-based products valued at US$1.075B (NCSB, 2004).

It has contributed to the 6.2 million employment for agriculture and has served as a major component of the food security program of the country.

The export winners in the industry are the food processing and fiber industry. About 80

percent of export of the former comes from the fruit processing sub-sector. Processed coconut products, mango and banana are the major exports. Coconut oil has remained a major export winner and is expected to maintain its steady growth. There is an increasing acceptance of the product due to spillover effect from the development of a new product, the virgin coconut oil. Medical findings indicate that coconut virgin oil is beneficial to human health. Virgin coconut oil and coconut coir fiber are two emerging industries with potential to become an export winner. Another industry with export potential is the floriculture industry. Increasing cost of production contributed by higher energy costs from operations of greenhouses and logistics have seriously diminished the cost competitiveness of major producers of cut-flowers and other floricultural products in the world. In the livestock industry, the continuing outbreak of foot and mouth disease (FMD) and avian influenza in major producing countries such as Thailand, China, Vietnam and Taiwan have opened windows of opportunity for export of chilled carcass, pork cuts and processed pork and frozen chicken meat cuts and processed chicken meat.

The industry’s structure is characterized by a concentration of big players. San Miguel

Food Corporation dominates the food and beverage industry with his acquisition of Purefoods. Its products range from processed meat to beer. The other big players are Universal Robina Farm, CDO, Marsman Drysdale, Dole Philippines, Del Monte Philippines, and SWIFT Foods Inc. These companies account for about 80% of the total domestic market for processed food and beverages. They are also the main exporters. The remaining 20% is distributed among small and medium sized agro-processors. The coconut processing industry is also dominated by a few players one of which is Franklin Baker.

The performance of the industry as reflected by its competitiveness has much to be

desired. Although we are competitive against imported goods, we are not competitive in the export market. The three major constraints hindering growth and development of the industry are:

Poor sector performance. The anemic growth of the agricultural sector reflects the poor performance of the agro-

processing industry. Agriculture during the 1990’s (excluding the -6.6% growth of 1998) grew only by 1.9% while population grew by about 2.3%. This could be attributed to major constraints in competitive assets and processes (World Bank, 2000). Competitive assets include: (1) technology, (2) finance, (3) infrastructure and transportation, and (4) human resources.



Competitive processes cover: (1) quality, (2) cost efficiency, (3) reliability, and (4) dependability.

The interactions of these two sets of variables determine the level of competitiveness of

nations in general and industries in particular. Technology constraints both in the production and processing side, inadequacy of capacity, inefficient marketing practices, logistics inefficiency, infrastructure weaknesses, inadequate human resource development and financial resource limitations have resulted to poor quality, lower cost efficiency, dependability and reliability. This has resulted to eroding competitiveness manifested by declining market share, lower quality, decreasing profit and ebbing sustainability.

For example, the Philippines cost of producing corn, an important component of feeds for

livestock, is higher compared to our Asian neighbors such as Thailand. The sub-sector’s cost of production is Php5.50/kg as compared to Thailand’s Php3.00 to Php5.00/kg. The reason for this is the failure of the sub-sector to integrate farm operation and adopt cost efficiency enhancing technologies such as automated drying and processing machineries and equipments. As a consequence, the cost of livestock feed increases, which in turn is translated to higher cost of producing hogs and broilers in the process pushing up prices of pork and chicken meat. Feeds account for about 60% to 70% of the cost of producing hogs and broilers. In the Abaca sub-industry, technology constraint in stripping has lead to lower quality abaca fibers. While the floriculture industry though it has attained quality at par with other leading cut flowers and cut foliage producers in the world it is faced with dependability problems in terms of production capacity and marketable surplus. The coconut fiber sub-industry is also faced with similar technology, reliability and dependability problems that have resulted to higher cost, lower quality and lower volume of produce.

Added to these, are adverse climatic changes (i.e., El Niño and La Niña) and the

increasing frequency of typhoons that have hit production areas in Luzon and the Visayas and severely reduced supply and pushed up prices of raw materials for processing.

Low levels and impact of public and private investments.

This is primarily due to macro-budgetary fiscal constraints, limited access to finance, uncertainty in the implementation of the Comprehensive Agrarian Reform Program (CARP), limits to foreign ownership of businesses, and weak collective organizations and strategic alliances with investors. With the government burdened with a ballooning debt and being practically cashed strap it has adopted a status quo and reactive strategy. Budget for research and technology development and infrastructure – vital determinants of competitiveness – have been reduced to the barest minimum. High interest rates have also discouraged investors to acquire new technologies, expand present capacities and set up new plants. Industry associations have merely focused on policy advocacy and rarely on collective technology generation, human resource development and entry to new markets. Most of the industry associations are fragmented. For example there are two national associations of hog growers in the hogs industry; these are the National Hog Farmers Association (NHFA) and the Philippine Hog Raisers Association (PHRA). The same is true in the coconut coir industry. The floriculture



industry on the other hand has been more fragmented as shown by the proliferation of regional and provincial associations.

At early stages of economic development growth primarily depends on the generation

and diffusion of technology. Countries that have experienced rapid economic growth are typically those that are successful in generating local technology and adopting and adapting technology that has been developed abroad.

Government being mired in managing a huge budget deficit and virtually cashed strap

has reduced expenditures in infrastructure development and Research and Development. For this reason our competitiveness rating has been lagging behind our Asian neighbors such as Thailand and Malaysia. Though the Philippines has climbed up the competitiveness ranking ladder from 61 in 2003 to 49 in 2005, our neighbors have remained in the upper thirty ranked countries with Thailand ranked at 28 and Malaysia at 27. Technology and infrastructure are the two variables that have affected our rating. In 2003, our technology index and environment component index were ranked 52 and 57, respectively. The country’s information and communication (ICT) sub-index under technology is 63 while the infrastructure sub-index is only ranked 65. In the private sector technology diffusion and generation is virtually confined to large firms and corporations. Results of R&D seldom trickle down to other industry players putting at a disadvantage the small and medium agro-processors that mainly comprise the industry. Size and financial constraints are the major deterrents in technology generation and diffusion in this part of the agro-processing industry.

Weak institutional capacity, linkages and coordination.

Major government agencies that are directly concerned in the implementation of development policies and programs have overlapping roles, generally poor implementation performance and weak capacities. Moreover, inadequate coordination also exists within GOP, NGOs and donors and between these groups and the private sector. Industry associations have not moved as one and failed to aggressively exploit opportunities and address weaknesses. For example, logistics support which is vital in the movement of goods from production to consumption has not been given due importance in the medium term development program of government. As such, there are no adequate and clear cut laws and regulations to stimulate the growth of this service industry. Moreover, infrastructures, ICT and data base systems, human resource development and support services requirement are not sufficient to encourage investment in this sector. The performance of this particular industry reverberates to the whole agribusiness sector. It is estimated that in the Philippines logistics contribute approximately 30% to 40% of the total cost of distribution, marketing and processing of agricultural commodities (Costales, 1997).

Another is the impact of increasing fuel prices to production costs. Government and private partnership is not in place in undertaking researches on alternative energy sources such as biomass and other renewable energy. The Philippines produce huge amount of biomass energy that could be harnessed by agro-processors as fuel for furnaces and dryers and for cogeneration



of electricity, technologies that are already in use in countries such as Thailand, Sri Lanka and Japan.

Objectives and Rationale

The paper aims to determine areas in the agro-processing industry where possible

collaboration between the Philippines and the United States may be established or if arrangements between business firms in the Philippines and the United States already exist for specific commodity groups, how these may be strengthened. It will focus on exploring how an RP–US Free Trade Agreement will be able to contribute to agro-processing adjustment efforts at the industry and inter-industry levels.

More specifically, it seeks to answer the following questions: 1. What is the current overall situation of the agro-processing industry in the Philippines

and by sub-sector? In relation to this, what is its importance within the agricultural sector, its linkages with other agricultural and non-agricultural sector, its state of competitiveness and government policies and programs affecting its development?

2. What are the overall prospects of the agro-processing industry in the Philippines and by sub-sector? In this connection, what is the scope for market expansion, developmental constraints confronting the industry and alternative investment/management systems?

3. How can an RP-US Free Trade Agreement contribute to agro-industrial adjustment efforts at the industry and inter-industry levels? Relatedly, what are the strengths and weaknesses of alternative industry strategies and how could the agro-processing industry be developed and diversified? In addition, a framework for agro-processing and development will be proposed.

Selected agro-processing commodities were analyzed in terms of the key features of the

product, the market (consumption and price data), supply and utilization, process flow, research and development and extension, institutional and organizational linkages and strategies, effect of globalization and government policies, constraints to development and prospects for RP-US collaboration. These commodities are processed fruits (banana chips and processed mango), fibers (abaca fiber and coconut coir fiber), pork and chicken meat, and cut flowers and ornamental plants.



Chapter 2

Industry Overview

Agro-Processing Industry in the Philippines

Importance within the agricultural sector.

The agro-processing industry enhances the fruits of the agriculture itself as it transforms

the latter’s products into new forms of consumer goods. The industry is a stimulus for the production of agricultural products, as this serves as inputs to processed products, which in turn, results in market expansion. Setting up processing facilities is a first step towards stimulating both consumer demand for the processed product and an adequate supply of the raw material, while the provision of transport, power and other infrastructure facilities required for agro-industries also benefits agricultural production. The development of this industry and allied industries provides a better atmosphere for technical progress and the acceptance of new ideas in farming itself.

Agro-processing is largely linked to the relative abundance of agricultural raw materials,

low-cost labor, and lack of adequate infrastructure. It is also suitable for nations like the Philippines, where small plants may be economically efficient, given the prevailing low purchasing power and the limited domestic market.

The agro-processing industry in the Philippines may be classified in three ways (FAO,

2004), as follows: 1. The food industries or non-food industries. The food industries are much more

homogeneous and are easier to classify than the non-food industries since their products all have the same end use (FAO, 2004). Food industries, which are processed mainly for preservation purposes, include fruit (i.e., dried mango, mango puree and juice, passion fruit juice, fruit jam such as strawberry, guava and durian, pineapple juice, chunks and cuts, banana chips, and assorted dried and sweetened fruits), vegetables (i.e., preserved young corn, asparagus spears, and pickled vegetables), milk, meat or fish. Non-food industries, on the other hand, require a high degree of processing. There is usually a definite sequence of operations, leading through various intermediate products before reaching the final product. Many of the non-food industries increasingly use synthetics and other artificial substitutes in combination with natural raw materials. Examples of the non-food industries in the Philippines are coconut coir fiber, abaca fiber and cut flowers and ornamental plants.

2. In upstream or downstream industries. Upstream industries are engaged in the initial

processing of agricultural commodities, while downstream industries undertake further manufacturing operations on intermediate products made from agricultural products. In the Philippines, some examples of upstream industries are fruit puree and jams, abaca fiber stripping, rice and flour milling, leather tanning, and saw milling) while downstream industries include bread, biscuit and noodle making, fish canning,



fish processing, meat processing, textile spinning, paper production, clothing and footwear manufacturing, handicraft manufacturing and tires manufacturing.

3. The nature of the production process, from craft to industrial organization. In the

Philippines, backyard type processors and factories that have sophisticated machinery and complex systems of organization and that produce a range of industrial products for the domestic and external markets process the same commodity. According to the United Nations International Standard Industrial Classification of All Economic Activities, agro-industrial production is present in many manufacturing sectors, such as: manufacture of food, beverages and tobacco; textile, wearing apparel; and leather industries; manufacture of wood and wood products, including furniture; manufacture of paper and paper products, printing and publishing; and manufacture of rubber products. These manufacturing sectors are all operating in the Philippines.

Linkages with other agricultural and non-agricultural sectors.

Agro-industry is a main industrial activity in the Philippines. Agro-industry contributes to

the manufacturing value added for the following commodity groupings in the Philippines: food, beverages and tobacco, textiles, clothing, leather, footwear; wood products; paper and paper products, printing and rubber products, toys, furniture and handicrafts. The industry also results in increased demand for a wide variety of machinery, equipment, packaging materials and intermediate goods used in the processing itself. Demand for these products is considered as derived demand since they are dependent on the demand of the processed or main product. Examples are machinery, equipment and facility in processing and packaging mango, banana chips, pork and chicken meat, and fibers (i.e., coconut and abaca fibers) stripping, transformation. An increase in demand for ornamental plants on the other hand creates a parallel demand for pots, potting soil, fertilizers and other garden materials and equipment.

Agro-processing results in ‘sideway linkages’ or linkages which derive from the use of

the by-products or waste products of the main industrial activity. For example, animal feed industries can utilize several agro-industrial products, such as blood, carcass and bone meal, while agricultural wastes can be used as fuel, paper pulp or fertilizer.

Agro-processing as a means to alleviate poverty and promote food security.

With a third of the Philippine population living below the poverty line based on official

statistics, the industry may help address the reduction of the number of poor. Since the majority of the poor is living in the countryside, employment generated by the industry is expected to generate incomes for rural households and address time smoothing in the labor market. About 21 percent of the total employees in manufacturing are agro-processing employees, while wages to employees in agro-processing is about 23 percent of the total wages in manufacturing that generally require more skills and training (UNIDO, 1997).



Since agro-processing industries can often be located economically in the area where raw material is produced, they can therefore contribute to the relief of rural underemployment, which is a characteristic of developing nations, like the Philippines. Not only is agro-processing industry expected to raise incomes but also improve nutritional levels. For example, floriculture farms which are mostly located in rural areas have contributed to municipal as well as provincial employment and economic growth which provides the means for higher food expenditure. The planned establishment in General Santos City in Mindanao of a new meat processing plant by Sunpride Inc., a food processing firm based in Cebu City, is expected to boost the local hogs industry and adds employment opportunities to the local workforce and provide more access to meat and other meat products, an important source of protein.

Food security may be attained from the processing of food products. Moreover, since the

agro-processing industry is a major source of employment and income, this will translate to improved access to food and other necessities to large groups of population, which contributes to food security. Food security is important to address with the increasing population, decreasing arable land and the prevailing fiscal crisis.

Background of the Sub-Industries

Abaca fiber.

The Philippines is the main supplier of abaca fiber in the world. The only competitor is

Ecuador but its fibers are inferior compared to Philippine abaca fibers. The country’s agro-climatic conditions are highly suited for growing Abaca. The major producing regions are Western Visayas, Bicol and Southern Mindanao.

Fiber has multiuse including production of paper pulp, ropes and cordage, cloth and

fibercrafts. The fibercraft sector is one of the more important sectors of the abaca industry due to its high contribution to foreign exchange and employment generation. Fibercraft products like rugs, bags, placemats, doormats, hats, hotpads, coasters, yarns and handwoven abaca fabrics have been exported for so many years generating some US$21.5 million for 2001. Demand for these products has continuously increased in contrast with the falling demand for other abaca products. The major export destinations for fibercrafts are the United States, the United Kingdom, Japan, Italy, Australia, China, Spain, France and Turkey.

Competitiveness of the industry is slowly being eroded by production, technology and

financial constraints. Cost and quality have been seriously affected as long needed reforms in the industry remain to be implemented. Low adoption of technology and vulnerability to weather disturbances are two main reasons for low productivity. Technology in processing such as the prevalence of hand stripping has further affected quality. Hand stripping at most produces only class B quality fibers according to industry sources. Disease infestation has continuously adversely affected production causing irregularity and instability in supply of raw materials. Industry information has however, indicated that this has slowly been controlled and managed.



Coco coir fiber.

The Philippines being the largest coconut producer in the world has abundant supply of coconut husks for coco coir production. As of the year 2000, about 4.09 million hectares planted to coconut produced about 12,499 million nuts.

Like the abaca fiber, coconut fiber has multi-uses which includes coco-fiber mat for

erosion control, rubber coated mat for furniture and car upholstery, horticultural pots, soil conditioner, filtering materials for drainage, fuel briquettes, and others. Rubberized coir sheets are also suited for packaging scientific, photographic, electronics and other delicate equipment and products (FIDA, 2004). Coco peat which is compacted coco coir dust with or without fibers is gaining popularity in the US and Europe as a substitute for sphagnum peat moss. But the industry has to upgrade its technology and processing capability to compete with the higher quality and cheaper Indian and Sri Lankan coco-peat. India and Sri Lanka are the two leading producers and exporters of coco-peat in the world.

Rising environmental conservation awareness in Europe, U.S., and Canada have

dampened the demand for sphagnum peat moss. Indispensable exploitation, including peat extraction for growing media have forced peat miners to concentrate extraction on already degraded peatlands (800,000 km2). However, strategically sustainability requires the substitution of fossil peat by renewable resources. The area of peat mires have substantially decreased due to reclamation by agriculture, industry and housing and extraction for horticultural and energy use. Anti-peat campaigns of environmental groups in Europe, especially in the UK and Ireland, at the end of the 1980's have influenced the general public and users in the horticultural trade to decrease their use of Sphagnum peat and to use alternatives. This has pressured the British government in February 2002 to declare that 90% of the peat currently used in professional horticulture and retail trade will be replaced by 2010. Consequently the British “Peat Producers Association” has renamed itself in 2002 to “Growing Media Association”. India and Sri Lanka have been fast to capitalize to this new opportunity. Currently, Sri Lankan and Indian coco-peat are used in the EU and the US as substitute for peat moss in landscaping soil amelioration and potted soil formulation. The Middle East with their arid type of soil is one of the major markets for peat moss and potting soil.

Worldwide concern on soil erosion and desertification has raised demand for new soil

conserving technologies. The Philippine coco-coir erosion control mats and logs are innovative products that have been proven as an effective technology in slowing the impact of soil erosion and desertification. For example, tests in China and Vietnam have been successful in preventing erosion and regenerating the vegetative cover of canal sidings and reclaiming desert areas. The Philippine geotextile has been chosen this year (2005) as one of the 12 finalists in Newsweek and BBC’s (British Broadcasting Corporation) World’s World Challenge. This competition is intended for identifying groups or individuals all over the world whose projects have contributed great impact at grass root level. More demand for coco-coir fiber is also expected with the banning of polyurethane materials for furniture and car seats since coco-coir fiber is a good substitute for this banned material (DTI, 2004).



Several constraints need to be addressed for the industry to achieve steady growth. Foremost are technological, financial and logistical concerns. Technological constraints exist in the dicortication and drying of coco coir fibers and dust. Philippine coir fiber and dust could not meet the world standard for moisture content due to these limitations. Technology on baling is limited to imported technologies which due to a depreciated peso is relatively expensive. High logistic costs especially in in-farm collection of husks and shipping from the farm to processing centers and to the market have contributed to higher cost. This is one of the major problems raised in the consultative meetings by industry stakeholders.

Processed mango.

The mango (Mangifera indica, Linn.) agro-industry is one of the major sectors of the fruit industry. The dominant variety produced is the Philippine Carabao mango which is popularly known in the world market as the Manila Super Mango. Philippine Carabao mango accounts for 97% of the total production of mango in the country and practically the only mango exported as fresh and processed. Its distinctive taste and quality differentiates it from other mango fruits and is the reason for its popularity in the world market.

Dried mango, puree and juice are the more popular products in the world market.

Demand for dried mango has continuously increased while demand for mango puree and juice have experienced a continuing slump. But in 2003 there was a sudden surge in demand observed for all mango products. Whether it is an indicator of recovery or not is still to be seen. Meanwhile, prices have declined due to the depreciation of the peso and competition from substitute products.

Supply of Carabao mango for processing is abundant. New plantings from expansion of

farms and establishment of new farms have increased the potential supply of this fruit for processing and for marketing as fresh.

Technology adoption especially in the processing side has increased more particularly in

the area of packaging. The higher allocation of research and extension budget for mango has also improved production practices through higher technology adoption and generation.

The industry however, is vulnerable in the production side due to limitations in varieties

planted, slow adoption of cultural management practices and supply constraints that could affect competitiveness. The industry is mainly dependent on one variety, that is, the Carabao mango. A disease outbreak specific to this variety could practically wipe out the industry.

Based on the survey conducted by PCARRD (Philippine Council for Agriculture,

Forestry and Natural Resources Research and Development) there is low level of technology adoption in handling, packaging, and transporting of fresh mango. Improper handling of fruits is a major cause of high incidence of bruises, cracks, and other physical deformities. Supply constraints have also increased cost resulting to higher prices of fresh mango and higher cost of operation as processing plants operate below production capacity. According to the 1999 study of DOST-PCARRD, it would require about 8.8 mt to 10 mt of fresh mango per day or 792 mt to



900 mt per 90 days to support the operation of an integrated mango processing plant for fresh exportable mango, mango puree, and mango balls. Moreover logistic problems continue to haunt the industry in terms of cost inefficiency, reliability and dependability.

In the world market, strong competition comes from other mango producing countries

such as Mexico, India, Pakistan and Australia. In Europe for example, Indian mango puree or juice are the more preferred mango drinks. Moreover, these countries have developed over time different varieties that allow them to come up with multi-form products.

Banana chips. The Philippines is the only supplier of banana chips in the world. The country is

endowed with agro-climatic conditions suitable for the growing of Saba/Cardaba banana, the main ingredient in the production of banana chips or crackers. The major growing areas are in Luzon and Mindanao. There are currently 18 banana chips processing plants which are located in Metro-Manila, Metro-Cebu, Davao del Norte and Gen. Santos City. Banana chips are considered as health foods because of its nutritional value. Growing health consciousness in the U.S., EU, Japan, and other developed countries has boosted demand. Banana chips are popularly and mainly used as ingredient for ice creams, cakes, breakfast cereals, or eaten as a snack food. In the next five years this sub-sector will maintain its dominance of the world banana chips market. However, emerging threats will come from Indonesia and Thailand. These two countries have recently started establishing Cardaba/Saba plantations for purposes of producing banana chips (DTI, 2004). Thailand could develop as a serious threat due to its wide tracts of land suitable for plantation type growing and more developed production and processing technology. Several factors influence the short-term and long term competitiveness of the industry. This includes:

1. Technology constraints. The major areas of concerns are in production, processing and packaging. Low technology adoption in production has resulted to poor productivity. In processing the major concerns are peeling and the first frying technology. Peeling which is a highly labor intensive process is a major component of the cost structure of banana chips processing. The representative of the banana chips industry during the consultative meeting of the first phase of the project has identified first frying as a key technological concern which have affected quality and cost efficiency.

2. Supply constraints. The following factors have constrained supply of Saba/Cardaba for banana chips and cracker processing. a. A major constraint is the limited land available for commercial planting;

Saba/Cardaba banana are usually planted in small lots along river banks and rice paddies; there are only very farms that can be classified as plantation type;

b. Competition in land use from other commodities such as Cavendish banana, pineapple, asparagus, and high value fruits have further decreased area available for Saba/Cardaba; in Mindanao, multinational firms offer advance payments to



farmers for a five year contract growing arrangement for pineapple and Cavendish banana;

c. Banana ketchup processors, vinegar, flour and local food processors (i.e., sweetened banana, ‘Halo-halo’) have competed with banana chips/crackers processors for Saba/Cardaba;

d. Weather disturbances such as the El Niña and La Niña phenomena and the regular typhoons that hit the country annually severely affect supply and raise prices of banana fruits. Highly vulnerable are Luzon and Visayas growers. Price in Mindanao rises from P2.60 per kg to P6.00 per kg when typhoons devastate the Cardaba/Saba plantings in Luzon (Patayon, 2001). Logistics costs arising from bringing the input from Mindanao to processing plants in Luzon, add up to production cost. Meanwhile, specificity of time limits the time of transporting and processing the banana.

3. Other constraints. Banana chips processing uses a lot of coconut oil in frying. The

cost of coconut oil represents about 42% of the total cost of processing. Price of this input is expected to rise in the future as coconuts are diverted for the production of coconut virgin oil, a higher value product of coconut. A disease outbreak has the potential of devastating the crop.

Pork.

Unlike the poultry sub-sector wherein the supply chain is predominantly vertically integrated, the hogs sub-sector consists primarily of fragmented independent players. Input acquisition, growing, slaughtering, processing, distribution and marketing operations are done by different business entities. With coordination and supply chain management problems inherent to this kind of set up performance efficiency is low. Cost inefficiencies result from double handling and transport of live hogs and meat products from one operation to another. With the inherent difficulty of coordinating internal functions and a weak link with external entities such as LSPs (Logistics Service Providers), intermediaries and buyers higher cost is incurred in non-value adding activities. Responsiveness to customer requirements also suffers due to lack of control of critical logistics functions such as transport and storage. Besides, with the inability of the system to coordinate demand and supply, quality deterioration and inconsistency of volume deliveries result.

This system also supports the prevailing practice of marketing live hogs from growing

centers to consumption centers such as Metro-Manila, Metro-Cebu and other urban areas which is cost inefficient and risky to animal health. For example, marketing live hogs from Gen. Santos City in Mindanao to Metro-Manila unnecessarily increases costs. But the biggest concern, is that this practice favors the spread of Food and Mouth Disease (FMD) and other hog diseases that when uncontrolled could lead to devastation of a multibillion industry.

Export of Philippine pork is mainly constrained by the inability to make the country FMD

free. Presently, only the Visayas and Mindanao regions are FMD free regions with Luzon still an FMD critical area. However, there are already evidences that export of pork is in the offing.



As indicated in the preceding sections, Sunpride will put up a meat cutting and processing plant at General Santos City for the European Union market pork requirements. Mindanao and Visayas being FMD free regions have the potential to do export, an important consideration in the decision of Sunpride Foods Inc., to base its meat cuts export processing plant at Gen. Santos City.

Evidence of vertical integration has been noted in the industry. This has been shown by

expansion and new entrants of medium and large players in the industry such as Limcoma, Robina Farms, Monterrey Farms, Sunpride, Jolizas Farm, and GSC Imperial Slaughterhouse and Farm. Increasing acceptance of chilled/frozen meat in the domestic market, higher cost efficiency, competitive benefits, increasing public awareness on food safety and health and the potential for export are the main drivers of growth for this market channel. Table 1 Animal Breeder Imports, 1990-1998

Year 6umber (heads) Value (US$)

1990 768,626 4,744,253 1991 1,086,899 8,340,384 1992 11,943, 399 19,395,698 1993 3,257 ,764 10,647,486 1994 3,447 ,746 11,262,557 1995 6,850 ,086 18,503,075 1996 10,850, 086 23,740,157 1997 812 ,706 9,631,559 1998 530 ,961 6,866,174

The government’s program of “pork-in-the-box” and FMD eradication program will have the effect of speeding up vertical integration in the hogs industry. Increasing cost of inputs such as brood stocks and feeds with special reference to corn is another factor that favors movement towards this direction. Breeding stocks in the livestock and broiler sub-sectors are virtually imported from the US and the EU. As shown in Table 1 importation of brooder stocks for livestocks reached its peak in 1992 and 1996 amounting to 11.94 million and 10.85 million heads, respectively.

The hog industry is made up mostly of small and medium sized hog farms. Technology

diffusion and generation in the small and medium sized hog farms are limited by economies of scale and weak industry associations. Large firms such as Monterey Farms of San Miguel Corporation, Foremost Farms of Lucio Tan, Robina Farms of the Gokongwei family, and the Tyson Agro-Ventures of the Lucio Tan family, are, however, characterized by large capacity and technology advance processing plants.



Chicken meat. Today the industry has reached high level of vertically coordinated transactions. In the

past, the sub-sector was dominated by backyard growers mainly producing native breeds. In 1953, commercial broiler production started with the entry of Magnolia.

At present, the broiler sector is dominated by large vertically coordinated integrators

attracted by the profitability of the industry and increasing per capita consumption of chicken meat. Moreover, scaling effects characterized by strategic alliances with input suppliers, logistics providers, and consumers resulted to substantial reduction in average production and marketing cost and reduced economic uncertainties in the supply chain.

Vertical integration in broiler production both covers backward and forward integration.

Backward integration includes grandparent day-old-chic (DOC) importation, purchasing of feed inputs, feed manufacturing, acquisition of production and processing equipment. The industry is dominated by large vertically firms such as Magnolia/Purefoods of San Miguel Foods Corporation, Tyson/Bountry Agri-ventures, Swifts Food Inc. of RFM Corporation, Vitarich Corporation and Universal Robina Farms. It is estimated to have attained 70 percent production efficiency relative to leading broiler producing countries.

Supply of day-old-chicks (DOCs) for its grandparent stocks (GPS) and parent stocks (PS)

requirements is entirely dependent on importation. Importation grew at an annual average rate of 37% from 1980 to 2001 (Figure 1). Integrators not only supply their own broiler DOC requirements but also the requirements of small and medium scale growers. Growing of grandparents is done by the integrators. Parent stock and broiler growing are both sub-contracted and owned. Hatcheries, dressing plants, blast freezing and cold storage facilities, and packaging are mainly sub-contracted. Figure 1. Average volume of imports of grandparent (GPS) and parent stocks (PS), 1980-2001.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1980-1985 1986-1990 1991-1995 1996-2001

Year

Million Birds

Source: Costales, A, et al., Policy, Technical and Environmental Factors Driving the Scaling Up of Livestock production in the Philippines: Implication for Small-Scale Producers, 2002.



Meanwhile, UBRA (Union of Broiler Raisers Association) members source their breeder

stock either from the integrators or the Fil-Malay, a joint Filipino-Malaysian marketing venture, based in Cavite, which is engaged in importing the grandparents from the United States, to produce the parent stock and breeder stock, which they sell to commercial raisers.

On the supply of feed, while other small-sized feedmillers have their own brands of

mixed feeds, the integrators not only supply their own feeds for internal use but also compete in the commercial market for mixed feeds. However, the integrators can exercise price competition against popular brands.

Forward integration covers dressing operation, packaging, blast freezing, cold storage

and marketing of fresh and frozen dressed chicken, choice cuts, and value-added products. Grandparent DOCs imported from Europe and United States produce the parent stocks which in turn yield the broiler DOCs.

In the market for output, large integrators can specify product characteristics from their

contract growers by controlling cultural management practices. By also exercising control over the dressing and processing of output, they can guarantee customized products and ensure consistent quality.

Increasing price of fuel oil has dramatically pushed up the market price of liquefied

petroleum gas (LPG), the fuel used in brooding DOCs. The industry consumes a lot of this type of fuel as it takes about 9 days to brood.

A movement away from an emphasis on cost-reduction through efficient integrated

large-scale operation. Higher per unit cost are incurred by independent smallholders (P46.60/kg), followed by independent large producers (P42.10/kg). For fee contractors, production cost per kilogram is only P3.1/kg for small and P2.2/kg for large contractors. Major differences in the production cost structure of between independent smallholders and large commercial broiler farm are the cost accounted to hired labor and the total overhead cost. Hired labor cost share is relatively higher among smallholder farms (5.4%-6.3%) than large commercial operators (2.1%). This marked difference is accounted to the cost of unpaid family labor which is not present in large commercial operations. To a large extent, unpaid family labor constitutes bulk of the smallholder farms’ labor cost. Other operating costs (e.g. utilities and other maintenance costs) are higher among smallholders (7.7%) than commercial farms (2.5%-4.2%). Being 80 percent of the total broiler producers are contract growers (rearing more than 10,000 heads per production cycle), the observed difference in unit cost suggests the remarkable shift from small-scale farm operation to efficient integrated large-scale production.

A move towards outsourcing be it for technical input, product manufacture or logistics. Under the contract growing agreement, the integrator provides DOCs, high quality feeds, vaccines, preventive medicines, veterinary services and technical assistance. The grower on the other hand must provide for land, labor, poultry housing, management and supervision of the



flock and laborers, equipments, utility materials needed in large-scale broiler production. Thus, compared to independent growers, the risk involved in contract growing is relatively lower.

Post-production facilities such as storage and processing are being outsourced from

nearby areas, i.e. in Calamba. Aside from these facilities being absent in Batangas, these require high capitalization and operational and overhead costs. Therefore, with the goal of production and marketing efficiency, large integrators prefer production and marketing inputs to be outsourced from trusted providers. However in other areas, the practice is for an Integrated Dressing and Packaging Plant.

Floriculture.

The floriculture industry, long since regarded as a sunrise industry still remains in the startup stage of development. Though the domestic market has been growing steadily in the last ten years the industry is far from attaining its growth potential. Export performance has been mediocre and contribution to national income and employment has been relatively low. While our South-East Asian neighbors such as Thailand, Malaysia and Singapore have been reaping benefits from exports of floriculture products valued from $50.0M to $100.0M a year, our export have been a measly $2.0M. However, looking at it from a business point of view the gap indicates a huge growth potential.

Importance of the industry. The performance of the industry can only be gauged by comparing it with the same industry in other countries or similar industries within the country. Comparing with other Southeast Asian countries, the potential for growth is very high. Assuming conservatively that we can attain 30% of the average export of other Southeast Asian countries, our export could reach as high as US$22.5 a year, which is substantially larger than the current US$2.0M export.

The development and growth of the industry have spillover effects on other industries

and sectors of society. These include the fertilizer and agrichemicals industry, plastic industry, coconut industry, transport industry and tourism industry. The tourism industry has benefited from floriculture-based festivals such as the “Pinagbenga” flower festival of Baguio City and the “Kadayawan” festival of Davao City. These festivals have drawn large visitors of domestic and foreign tourists in these particular cities. Hotels and recreation businesses as well as many small and medium business manufacturing and service enterprises have benefited in the process.

As most of the growing areas are naturally found in rural areas where the incidence of

poverty is considerably high (i.e., about 60%) it also contributes to the national program of alleviating poverty in the countryside. Opportunities are created for entrepreneurial business undertakings through schemes such as contract growing and growing-retailing schemes generating supplemental income to farmers and households and long term employment to rural workers. These have happened in the Calabarzon region, Bulacan province and other areas within and around Metro-Manila. The potential for enlarging the employment base is



considerably large. Holland the leading exporter of floriculture products in the world supports 56 percent of its total work force directly and indirectly.

The industry has also contributed to the promotion of peace in Mindanao through social

interactions of Muslims, Christians and indigenous people in industry associations such as the Floriculture Industry of Davao, Inc. (FIDI), Mindanao Cutflowers and Ornamental Plant Growers of Mindanao (MINFED) and other similar types of industry associations.

Through the use of technology, the industry has contributed to environmental

sustainability. Biotechnology has prevented the depopulation of endangered plant species and has resulted to improved quality and new varieties. New plants and flowers produced by this method have created more interesting and more attractive plants and flowers that has enhanced urban environment. One only needs to look around and admire the landscape streets and avenues of highly urbanized areas such as Makati City. According to Green Architecture Movement chair Amado de Jesus, green roofing, that is landscaped roofs, is a new trend in architectural greening in Europe which is fast gaining popularity for its environmental benefits. It not only alleviates the “heat island” effect, a common phenomenon in cities, but also reduces excessive run-off of rain water and scrubs off the air of its pollutants.

Besides providing aesthetic and environmental values the industry is also a source of

food. For example the orchid “Karma” which is being produced by Holland is marketed as vegetable. A variety of flowers can be used as salads. Rosemarinus spp., parsleys, thymes and some herbs are popular garden plants both for aesthetic and food purposes. Ornamental plants and flowers have also been a rich source of healing products. It is a rich source of scented products for aromatherapy.

The floriculture agribusiness system. As in the other commodities an agribusiness

system approach to identify and describe the key components, structure, linkages and interactions in the industry is used. The strategic group mapping approach (Thompson & Strickland, 2003) and dynamic cluster model (Best, 1999) were used to evaluate competitiveness level.

The floriculture agribusiness system has three major components, the suppliers, growers

and consumers sectors (Figure 2). Support services include transport and handling, government, financial and other institutions.

Generally the floriculture agribusiness system can be categorized into two subsystems

based on product type and market. These are the cut flower/cut-foliage subsystem and the ornamental plants subsystem that includes potted flowering plants. The subsystems differ in terms of product characteristics, cultural management practices, handling and storage requirement and catered markets. The presentation of these subsystems was lumped for ease of analysis however, without losing effectiveness.



Figure 2. The floriculture agribusiness system.

Cutflower subsystem. Cutflowers and cut-foliage are primarily used for flower

arrangements for special events and occasions. These include Valentine’s Day celebration, All Souls day, Christmas and New Year’s celebration, weddings, fiestas and honoring the dead. It is also becoming popular as gift for mother’s day, décor in opening commercial establishments and as gift for hospital patients.

Demand is highly seasonal with peaks during the months of October to February. The

main buyers are florists and flower retailers. Highly urbanized areas are the major consumption centers with Metro-Manila representing roughly 85% of the total market.

In the domestic market, price and quality are the prime considerations. While in foreign

markets such as Japan quality is given foremost importance. The order qualifier is quality while the order winner is price. The key factors considered are freshness, features and free of disease and mechanical damages. Most counties follow the EEC Regulations Standards 16/38 in assessing quality. The Philippine floriculture industry however, does not follow a formal quality standard.

Export is very minimal. In 1999, the value of export of cutflowers/cut foliages was less

than a million dollars. This increased to US$2.9 million in 2005 due to export of planting materials to South America. The major export markets are Japan and the USA.



Price is greatly influenced by seasonality of demand. High prices prevail during the peak

demand season hitting the highest point during November. However, in some instances prices dip due to oversupply caused by massive importation. The absence of an industry standard quality has lead to inter- and intra-regional variation of price. Increasing cost of inputs most of which are imported is another contributing factor to price fluctuation.

The major production centers are located in provinces near Metro-Manila such as the

Calabarzon region, Bulacan and Pampanga. Baguio City, Cebu City and Southern Mindanao are the other major producing areas. Large commercial growers account for most of the production of cut flowers. The small holders with backyard type production greatly outnumber the large commercial growers. High technology usage is observed among commercial growers and low usage among small growers. There are only a few that use controlled environment or greenhouse growing such as the Agrikultura Filipina and Flower Farm in :Luzon and the, Puyat farm and Waling farm in Mindanao.

The critical inputs of production include planting materials and agrochemicals, key

determinants of quality and cost. Growers import their planting materials from Thailand, Malaysia, Singapore, Taiwan and Holland. These countries are rich sources of new varieties of orchids, Anthuriums and other plants for cutflower production. Thailand, Malaysia and Singapore are the major breeders of orchids using natural breeding and biotechnology methods. They supply our requirement for new breeds of orchid planting materials and other cutflower plants. Holland is the foremost supplier of Anthurium, Carnation, Lilium and other semi-temperate cutflowers. Licensing arrangements with foreign supplier in the use of planting materials are sometimes practiced. This is common in anthurium growing in which a special licensing agreement is made with Holland, the suppliers. For example Agrikultura Filipina has a licensing agreement with Anthuria from Holland for the supply of anthurium planting materials.

The critical points in the agribusiness system that have major influence on price and

quality are supply of planting materials and agrochemicals, production technology and schedule of production, location, packaging, transport, handling and storage.

Live ornamental plants and potted flowering plants. Ornamental plants are used in

outdoor and indoor landscaping and as decoration in residential houses, hotels, and other institutions. Size, form and shape of plants conforming to the American Nursery Standards are the major requirements of landscapers. But the domestic market does not follow an industry accepted quality standard. Novelty of plants is the preference of hobbyists, collectors and other plant enthusiasts. Customized plant type and form is the preference of importers.

Unlike cutflowers/cut foliages ornamental plants are not perishable and therefore can be

inventoried. The main concern of growers is to maintain form and shape and reduce damage by pests and diseases.



Small to medium-sized nursery growers comprise a major portion of the live ornamental plants sector. The plants grown ranges from outdoor plants for landscaping to indoor plants. Production areas are far much distributed compared to cutflower production. Small growers cater to the demand of the particular area where they are located. For example, growers from the Calabarzon area, Bulacan, Pampanga and other neighboring areas including those found in Metro-Manila supply Metro-Manila’s requirement for ornamental plants.

Export is also negligible but has the potential of increasing. This is indicated by the

increasing export of live ornamental plants such as Dracaena to South Korea and other types of plants to Japan.

Competitiveness of the Agro-Processing Industry

The Philippine agro-processing industry is at the bottom of the competitive ladder when

compared with our Asian neighbors. Most industries are characterized by eroding competitiveness for reasons earlier mentioned in the preceding sections. In general terms, the country’s cost competitiveness is limited to import substitution in some industries such as the pork and broiler meat processing sub-industries and the floriculture industry. We have competitive advantage in other areas such as abaca, coconut coir, banana chips and mango processing primarily due to comparative advantage in agro-climatic conditions. However, threats are emerging from neighboring countries such as Thailand, Indonesia, Vietnam and Malaysia most especially in the food processing industries. As far as the competitiveness of the floriculture industry is concerned it is still far behind when compared to neighboring countries such as Thailand, Malaysia, Singapore and Taiwan. In the coconut coir industry, we need to reach the level of development of Sri Lanka and India to be competitive in the international market.

The anemic performance of the industry can be traced to the inability to develop over

time competitiveness fundamentals that are vital in the establishment of a highly vibrant and economically healthy industry. In the age of globalization, competitiveness is no longer a choice but a requirement for survival and growth. In the broadest sense, competitiveness denotes how effectively a nation competes in the global market place. The US Department of Commerce defines competitiveness as “the degree to which a nation can produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.”

We can cite several reasons for this failure. Foremost is the lack of a competitive

strategy or development plan for the industry in the context of economic growth, poverty alleviation and environmental sustainability. We are no longer competing against the best firms in the country but also with the best in the world. Second is a highly fragmented and unorganized industry with low productivity and wherein products are not based on internationally recognized quality standards. Third is the low level of technology development and usage. Fourth is the lack of macro-policies and enabling programs and weak institutional linkages that have created a not so conducive business environment and have wasted a lot of



resources. Clearly as it is difficult for an industry to perform well when the macro-economy is ailing, it is abnormal for a firm in a troubled industry to perform well.

The agro-processing industry could not follow the same path of development as its

neighbors. It has to leap frog to catch up and substantially narrow down the competitiveness gap. Discipline is needed to realign directions, restructure the industry, create and maintain harmony, adopt/adapt, develop and harness technology, develop strategic alliances and create strong linkages that would move the industry among the best in the world into the next millennium. Purpose, competitive priorities, and marketing and operational strategies should be clear. The industry should be able to restructure to suit purpose and strategies, to identify and strengthen the enabling processes and technology and finally to partner with government in formulating policies and programs that are supportive of the growth and development of the industry. All of which should be done in full consideration of the industry’s potential capabilities and limitations. The RP-US FTA could play a major role in the development process.

Four basic elements were considered in further assessing the level of competitiveness of

the industry using the dynamic cluster model. These include strategy of the individual firms and industry, industry demand, cluster of related and supporting industries and factor conditions (Figure 3).

The industry is ranked high with regard to factor conditions or initial endowments on

which firms seek to compete. The country has comparative advantage in climate and there is abundance of land highly favorable, especially for the floriculture sub-industry, for growing all year round a wide array of tropical and semi-temperate plants and cutflowers/cutfoliage.

The country is strategically located relative to export markets such as Japan, China and

South Korea. Domestic growers have easy access to market centers such as Metro-Manila, Metro-Cebu and other highly urbanized centers. There are sufficient skilled farm workers and wage rate is competitive. However, logistics and input costs are relatively high. These unfavorably affect Mindanao and Cebu growers who have to transport their products to Metro-Manila. Higher price of inputs such as agrochemicals and planting materials for crop produce, and feeds and broodstock for livestock and poultry products, most of which are imported comprise a major part of the cost structure constraining price competitiveness.

The agro-processing industry is weak in advance factors such as transport, storage and

handling facilities, research and development capability, collective strategies and micro- and macropolicies needed to remedy market imperfections and stimulate industry growth. Infrastructure support is inadequate for smallholders. For example, there are practically no cold storage facilities that are vital in maintaining freshness and other quality attributes of cutflowers/cut-foliages, pork, and broiler meat at transshipment points. Transport and handling is not reliable and not fast enough to bring the produce to intended markets most especially to foreign markets.



Figure 3. The Philippine floriculture industry diamond model.

In the hogs sub-sector for example, by far, the University of the Philippine Los Baños (UPLB) has been the leading R&D service provider in terms of implementing PCARRD projects (Figure 4). PCARRD, the lead executing agency implemented only approximately 6 percent of the total projects done from 1989 to 2003. Other implementing R&D institutions (earning only 15% of the total share) include state universities and colleges such as Cavite State University (CavSU), University of Southern Mindanao (USM), Western Visayas State University (WVSU), and Central Luzon State University (CLSU).



Figure 4. Proportion of research and development budget appropriated to various research institutions through PCARRD.

Source: PCARRD (2004)

Mainly due to lack of financial support and the low priority given to the agro-processing industry, government R&D is ad hoc. Problems in inputs, packaging and other post-harvest operations are therefore not addressed. Growers have no other alternative but to source parent materials/stock from foreign breeders. This has caused large importation of traditional and new parent materials/stock.

Government micro- and macropolicies have been inadequate to meet the requirements of

the industry. Fiscal incentives such as tax, investment and subsidies are ad hoc and are not part of a deliberate and long-term industry development program.

What is encouraging, however, is an increasing per capita consumption of agro-processed

goods. But local prices still remain low which is indicative of lower quality. Consumers have become sophisticated and their preferences have expanded demand for new varieties and old favorites. Demand is highly seasonal and this has created serious problem in inventory and profitability. This is most serious with the cutflower sector where products are highly perishable and could not be stored for long. There are also exogenous factors such as the continuing weakness of the world economy and the ailing domestic economy that have stunted industry performance.



Chapter 3

Potentials for and Major Constraints to Agro-Processing Industry’s

Development

Constraints to Development

Credit constraints.

Capital is needed to set up or expand operations in the agro-processing industry.

However, though there are sufficient amount of money available for loan, the volume of loans availed for by the agribusiness sector has been minimal. While the Philippines has an Agri-Agra Law, which requires banks to set aside 25 percent of their loanable funds for agriculture and agrarian reform purposes, these formal financial institutions would rather pay the penalty for violating the law then comply because of the high risks associated the low repayment records registered in the sector.

This is one of the major reasons for the conservatism of the Philippine banking system

making it difficulty for smallholders to avail of commercial financing. Collaterized loans have made it difficult for small and medium processors to avail of financing for acquisition of adequate technologies and investing for expansion. In the farm production side, small and medium farms could not avail of agricultural loans since banks do not accept agricultural land as collateral.

Although farmers could organize cooperatives to avail of credits, poor management has

resulted to nonproductive operations and in some instances to financial meltdown. Statistics show that only one percent of the total cooperatives in the Philippines are classified as financially and economically viable and sustainable.

In addition, loan requirements are biased towards some agricultural crops such as tree

crops. For example, the grace period for loans is not long enough to make viable investments in fruit tree crops such as mango. Tree crops need a gestation period of 6 to 9 years before the payback period starts. Banks require the payback period to start after one year.

Technology weaknesses.

Studies have shown that countries that successfully adopt and adapt technology are those that were able to develop competitive and sustainable industries. Take the case of Japan during the period of 1950 to 1970, technology diffusion was mainly responsible for the development of its industries and its economy in general. This is in spite of low endowment in natural resources. Large agri-business firms are the ones who have access to large capacity and advance technologies and facilities. Small and medium processors however, are mainly dependent on backyard type and small capacity technologies. Besides internal technology related problems, the upstream processing industries suffer from technology deficiencies, such as rice and flour milling, abaca stripping, coconut coir stripping, and even fish canning prevail in their primitive



form. Sometimes it is the organization, which is primitive, the low degree of value added produced and the lack of linkages both with the chemical and mechanical industries and with marketing and financial services (FAO, 2004). This may be observed in the processing of some fruits, vegetables, tobacco or livestock products, which can be classified as primary agriculture and are not of export quality.

Investments in research and development have been wanting in terms of hard technology generated both in the upstream and processing side. For example in 1996, a DOST study shows that P61.817M was allocated for fruit crops researches of which 30% of the total budget was allotted for mango related studies. This budget is less than one percent of the commodity’s share of GVA which is not large enough to cover technology development concerns. This trend can be observed in present budget allocations as discussed previously.

The bias of the political leadership towards political crops such as rice and corn have

confined studies to these crops to the disadvantaged of high value commodities such as fruit crops growing and processing. In the National Research Development and Extension Agenda and Program (NARDEAP) 2003 for commodities made by the Department of Agriculture (DA), agronomic concerns dominate the research undertakings. For example in coconut, there is only research on coconut coir which the study on Revitalizing the Coir Industry which was implemented by the University of the Philippines Los Baños in 2000. Although drying and processing technologies for downstream products such as rubberized coir, geotextiles and biodegradable nursery pots have been identified as priority concerns, no research is being conducted along these fields of study. Most of these researches are being done by the private sector, but are in most instances limited in scope, ad-hoc in nature and are not available to the public.

The agro-processing industry would definitely benefit from improved, modern

technology to make production more efficient. A classic example is that of Brazil where the production of tropical juices has increased more than twenty-fold in the past ten years after it overcame the technological barrier as to the chemicophysical stability necessary to maintain the characteristics of fruit juices at a commercially acceptable level in the 1980s.

Raw agricultural products supply and other critical inputs problems. The raw materials used by the agro-processing industry are generally seasonal, variable

and perishable. Seasonality means that some of the raw materials are only available during specific months of the year. Variability refers to fluctuations in supply or availability of raw materials (due to the effects of weather and pests and diseases), while perishability refers to the shelf life of the raw materials.

Seasonality effects include high financial requirements during months of high supply for

primary processing and inventory of raw materials for future production, under-capacity processing plants in commodity specific processing equipment and machineries, higher prices during the off-season, and risks associated to product failure due to disease outbreaks and weather disturbances such as dry spells and typhoons. These problems are primarily associated



with small and medium processors. Weak in financial base and faced with specificity of equipment and machinery, they end up buying raw materials with relatively higher prices and poorer quality, operating below optimum capacity. Processing firms in the Luzon and Visayas regions are the ones most susceptible to the effect of weather disturbances. For example, when there is crop failure due to typhoons or dry spells in the Luzon region, banana chips and mango fruit processors in Metro-Manila have to get their raw materials from Mindanao. Additional costs in transport, handling and storage are incurred which pushes up the cost of production.

Variability in quality and volume of production can be attributed mainly from the

upstream side of processing. As most of the supply of commodities comes from small and non-integrated farms, there is wide variability in cultural management practices especially in the use of critical factors of productions like soil and water resources, pest and disease inputs, broodstocks and fertilizer. This can be observed from Saba/Cardaba, mango, hogs, and floriculture production. Reliability that is the consistency of quality and volume produced becomes a major problem that should be addressed. Importers of cutflowers and cut foliage from Japan, pinpointed the inability to supply consistent volume and quality as one of the major problems they have encountered with floriculture firms in the country (Costales, 2002). Although some industries are going into vertical integration through contract farming and setting up of nucleus farms, the volume generated is not enough to fill up their requirements for raw materials for processing. The non-integration of the supply chain due to small and fragmented farms makes its difficult to have control over quality and volume. Weather disturbances have contributed to the deterioration of the situation.

Another major concern is the inadequacy of industry quality standards. Lack of quality

standards has hampered the ability of the processing industry to enter foreign markets. In the floriculture industry for example, the absence of industry quality standards for cut-flowers and cut-foliage has been a major constraints in the entry to the lucrative Japanese floriculture market. The reason why the Netherlands is able to penetrate and dominate the international trade for floriculture products is due to industry domestic standards that are superior to the average international standards. In the food industry importing countries include food safety such as certification for Hazard Control and Critical Control Points (HACCP), ISO, FAO, WHO and Codex Alimentarius as part of their quality requirements.

The inadequacy of transport, cold storage facility and processing technology has lead to

wastes and cost inefficiencies due to the inability to address perishability of commodities and processed output. Technology limitations in packaging and low adoption of controlled environment growing have decreased effective utilization of raw material as the potential shelf life of raw materials is not met. In Israel where growing conditions are very harsh due high ambient temperature, very low humidity and limited water supply, the use of environmentally controlled greenhouses in the production of vegetables and floriculture products have made it possible to reduce schedule production all year round not only to minimize the perishability impact but also to smoothen out demand and supply fluctuations.



Infrastructure and transportation inadequacy.

Logistics in general is generally a critical factor in determining the most economic location for an agro-processing complex. For products that are affected by the supply of labor and the availability of power and other infrastructure, they must be economically set up in the area where the raw material is produced. For example cold cuts and meat processing plants should be located near the source of hogs to reduce logistics costs. In the Philippines logistics cost is estimated to be about 30% to 40% of the total cost of distribution, processing and marketing of commodities. While advance countries such as the US and Argentina are using bulk handling, transport and storage of grains such as rice and corn our grain industry still do these with the grains in sacks which is a very inefficient. Cost inefficiency in logistics has been pinpointed as major contributor in the relatively higher cost of feeds in the Philippines. Corn is a major ingredient of animal feeds. In broiler feeds it accounts for about 65% of the total volume of feed. The inadequacy in the cold chain has constrained the movement of perishable products such as vegetables and cutflowers/cut foliage from production centers to centers of consumption.

Human resources and labor supply limitations.

Human resource limitations are not only found in the production of inputs for processing but also in support services such as the logistics industry. Occupational standards are inadequate that makes it difficult for firms to hire skilled and professional manpower in production operation and management. In the case of the meat processing industry, the lack of accredited butchers has been identified as a major constraint in the establishment of livestock slaughterhouses and meat cutting and processing. The limited number of skilled workers and management in logistics has constrained the development of a dynamic logistics industry. Inadequacy of manpower has forced processors in Metro-Manila to hire workers from the provinces. For example, Diamond Inc., a firm based in the Food Terminal complex at Taguig, Metro-Manila, which is engaged in fresh mango export to the US, Japan and other international markets, has to get their sorters, packagers and other plant workers from the Bicol region during peak operations (i.e., March, April, and May).

Environmental constraints.

While the agro-processing industry contributes to economic growth and agricultural development, it can also result in undesirable environmental side effects. There are several environmental risks arising from agro-industrial operations that extend from raw materials production to marketing of finished products.

Land-clearing and cultivation and the use of agrochemicals are production activities that create environmental risks. Erosion, soil depletion, siltation of waterways, and degradation of habitat are some of the environmental impact of these activities. Toxins and excessive nutrients in soil and surface and groundwater, also worker safety and product residues are the environmental issues related to excessive use of agrochemicals. Davao River has in recent years been attributed to the residual effect of fertilizer use in banana plantations located along the river



banks. The use of toxic substances to control pest and diseases of stored raw materials such as grains pose a hazard to product and workers safety. In processing, environmental risks arise from the use of additives, the type of processed used, toxic and solid emissions, and effluent emissions. Similar to other industries, if left unchecked, the industry can create environmental pollution or hazards in many ways.

In the Philippines, where there is a proliferation of small industries, the companies in

these industries often lack the financial resources to use modern and clean technologies. The problem becomes more serious with these industries located in the metropolis. Anti-pollution regulation exist as part of existing environmental laws, but the necessary institutional, legal and monitoring structures to effectively enforce these laws are found wanting.

The proliferation of processing plants along the banks of Laguna Lake has contributed to

the pollution of the lake. This is also true in other urban areas where processors preferably locate their plants near water ways such as rivers and streams for ease of disposal of waste products. For example in Valenzuela City, out of its 390 factories, 108 are located near the Meycauayan River and 43 are close to Tullahan River. Recently (July 16, 2005), the Department of Environment and Natural Resources (DENR) stopped the operation of four agri-based processing plants in Valenzuela City due to activities hazardous to the environment. Two are food processing plants (Pinnacle Foods Inc. and Suncrest Foods Inc.) while the other two are a textile drying plant (A.O. Knitting Manufacturing, Co. Inc.) and a repacking plant (Contract Packaging Corporation).

Other constraints.

Tariff escalations even with the Uruguay Round General Agreement on Tariff and Trade (GATT) will discourage the creation of opportunities for the Philippines to diversify into higher-value processed commodities. Import subsidies for food distribution systems lower the supply of local produce and prices of processed food products and thus reduce the incentives to develop local manufactures for a variety of food products (FAO, 2004).

Rising cost of energy has become a major concern as world fuel oil prices continue to rise

due to supply constraints. In the poultry industry brooding and dressing are two of the highest energy consuming process in broiler production. Slaughtering in the hogs industry is another energy consuming process. In other agricultural commodities drying and firing furnaces are two of the most energy consuming processes. Logistics costs have also substantially increased due to higher transportation cost.

Market Scope for Expansion and the RP-US FTA

Increased liberalization and market orientation of agricultural policies opens a series of

interesting perspectives for the industry. Prospects appear favorable, specifically because of the rising demand for more variety of food consumption, the switch to high income-elasticity goods and the importance of marketing and processing. Agricultural products are expected to shift to



new lines of comparative advantage, which will be influenced by the new market perspectives and the effects of technology and changing tastes. The challenge is to be able to adapt production to the increasingly sophisticated and demanding requirements of the market of developed countries (FAO, 2004).

Current and Future Profitability

Patterns of food consumption in developed economies are evolving. It may be observed

that there is an increasing concern for health and fitness and this is one of the reasons why there is a significant decline on per caput food consumption of sugar. Also, vegetable products and fruits as well as fish and other marine and water products are increasingly becoming substitutes for livestock products and these trends are expected to continue in future years.

While developed economies practically consume only processed food, the development

of agro-industries is increasingly becoming one with the development of industrial agriculture. The so-called new agricultural exporters, such as Chile and Thailand, have expanded their capacity to provide markets with both fresh and processed goods undergoing sophisticated operations in collection, quality control, packaging, storage, refrigeration and transport. Chile is an example of a nation that has recognized the increasing importance of processing and marketing activities as it has used thorough planning in all the phases of the supply chain, from the original producers to the final consumers. Chilean exports are sent to the European markets precisely at the intra-seasonal levels when local products, including off-season produce, are not available. Thailand is another case in point – where agro-industrial products constitute 65 percent of total exports given its market-friendly environment and adequate financial and support services (FAO, 2004).



Chapter 4

Issues/Implications of an RP-US FTA and Strategic Directions for

the Competitive Development of the Agro-Processing Industry

Issues/Implications

There are four pillars of the RP-US FTA, namely: (a) bilateral trade between the two

countries as well as regional trade with other ASEAN member-nations; (b) partnership in research, development, and innovation; (c) technology diffusion and manpower exchange and development; and (d) investment partnerships in production, production related, marketing, and processing businesses.

To strengthen the four pillars and to achieve the potential benefits from an RP-US FTA

for the agro-processing sub-sector the following four major issues should be addressed: (a) development and growth of industry clusters; (b) innovation and technology diffusion and generation; (c) food and product standards; and (d) government policies.

Industry clusters.

To generate the volume and quality of goods that will be traded industry clusters should be developed and strengthened. Being a developing country, these industries should have comparative advantage over their US counterparts to achieve a more or less balanced trade. The banana chips, coconut processing (i.e., coco-coir and dust, virgin coco-oil), abaca fiber, and carageenan are just some examples of this type of industries. These products are complementary do not directly compete with US products. Apple, orange and other kind of fruit purees can complement mango juice and other Philippine fruit based purees and juice and vice-versa. In the case of pork and meat, the opportunity lies in Asian markets especially Japan which could be tapped through strategic alliances between US and Filipino firms.

External as well as internal scale economies are important in generating volume and

lower production cost. External scale economies arise from the entry of more players in the industry thus increasing industry output. Internal economy scales will be generated from the increase of capacity of firms in the industry in the process contributing to total industry output. For this to happen the agro-processing industry clusters should be driven by self-sustaining and self-reinforcing inter-relationships among the various industry players arising from geographical proximity. The nature of the industry’s products requires geographical proximity. Specificity of time constraints distant transport and long inventory of factors such as fruits because of their perishability. Bulkiness of materials, in the case of coco-coir and abaca fiber, makes transport and handling more expensive. Specificity of location requires that the crops should be planted in areas that are agro-climatologically conducive, and livestock and poultry in areas that are disease free. For example Cardava/Saba is most suited in Mindanao where agro-climatic conditions favor its growing and where it is typhoon free. Hogs are preferably raised in Mindanao and Visayas since these regions are recognized as foot-and-mouth disease (FMD) free regions.



The Mango processing industry cluster in Cebu is one example of an industry cluster

based on geographical proximity. Nearness to the supply of fresh mango has been one of the major drivers of industry growth and development. Aside from mangoes produced in the province, the industry sources its mango from other provinces in the Visayas and Mindanao.

Innovation and technology diffusion and generation. Continuous innovation boosts development of new products and processes important in

driving higher demand and entry to new markets. Interfirm and cooperative competition are the major drivers of innovation which forces the industry and firms to adopt and adapt better technology and generate new ones. The success of developing countries lies in their ability to facilitate technology diffusion in the early stages of development and generate technology in the advance state of development. This has been the case of Japan and Taiwan, two of the most progressive countries in the world.

Technology in processing, drying and packaging are the major areas of concern that

should be given special attention. Automation is necessary to achieve quality and reliability of products. Production facilities should conform to world standards and best practices should be adapted to achieve higher productivity. With costs a major constrain in technological diffusion and generation, competitive cooperation can address such problem. Interfirm cooperation or government-industry cooperation can be developed for this purpose. This has been shown for example by the industry packaging plant in Bulacan. This facility has been a joint undertaking of the Department of Trade and Industry (DTI) and food processors in Bulacan. A self-liquidating project it extends packaging services to food processing enterprises in Bulacan. Cooperation with other industry research institutions and academe should be tapped.

Food and product standards.

Setting of product standards ensures quality and consistency. Product standards are a

requirement for food safety which is a major requirement in trade of food products. The US, Japan, EU and other developed countries have implemented food safety standards to ensure public safety from food terrorism and other public health hazards. This is a key issue that is essential in achieving acceptability of Philippine agro-processed products in the US, EU and other Asian nations. For non-food products such as coco-coir, virgin coconut oil and abaca fiber, quality standards provide the means of establishing sustainable product acceptability.

The industry should be laying the groundwork necessary to meet these food safety

requirements such as HACCP certification and traceability. HACCP certification, which is being implemented by the National Meat and Inspection Service (NMIS) for the meat processing industry, should be strengthened and accelerated. This should also be done with other agro-processing industries to maintain the integrity of the products. Industry clusters with firms and government cooperation should start implementing food traceability which require strict



documentation of the place of origin, handling, storage and transportation of food products including raw the materials used.

Government policies.

The government plays an active role in the development of industry clusters. Government

support in terms of resource allocations are directed to regions based on politics and need and not on the real economic potential. In this case resources are thinly spread and the impact produced is not significant. Moreover, priorities are not consistent with the industry requirements for growth and development.

The delay and uncertain implementation of the Agrarian Reform Program has delayed

investment in long gestating crops such as fruit trees and expansion of other types of crops. Furthermore, higher cost of production continuous to haunt the upstream side of agro-processing industry due to the inability of government to provide clear-cut options for productivity improvement of land reformed lands. Lack of government policies on logistics has prevented the creation of an effective and efficient logistics industry that is crucial in the movement of goods from production centers to market centers. As a result high cost of transporting, handling and storage still is a major cost component of the production of processed goods and commodities. Studies show that this cost runs as high as 40% of the total cost of goods, which is substantially higher compared to the 10% to 20% in other countries.

Low investment in R&D has constrained technology generation and innovation in

general. Government has been channeling less than 1 percent of gross value added to agriculture (GVA) of different commodities to research and extension. This has worsened with the present economic problems of the country constraining government expenditures to the barest necessity.

Major Strategic Directions

To address the competitive issues faced by the agro-processing industry and to effectively

implement the adjustments needed to exploit the opportunities arising from an RP-US FTA, two major strategies should be adopted. These are the operations or production strategy and marketing strategy. Linking these two is the institutional strategy. The strategic framework is as shown in the figure below.



Figure 5. Strategic development framework for the agro-processing industry.

Marketing strategy.

The marketing strategy primarily addresses the issue of scale economies and industry

growth. Expansion of markets by stimulating domestic demand, entering new markets, and developing markets for new products will stimulate expansion of operations requiring new investments on capital and technology. It will also have the effect of producing economies of scale which will consequently improve profitability and therefore, attract new investments.

In the context of an RP-US FTA, it will generate opportunities for strategic alliances

between RP and US agro-processing firms and/or between agro-processing firms and ancillary service firms to stimulate domestic demands for agro-processed products and for the Philippines to serve as a jumping board for foreign markets such as China, Japan, European Union and other Asian countries. Moreover it would facilitate the movement of agro-processed products between the US and the Philippines. The agreement could strengthen existing partnerships and create new ones that will utilize existing trade networks and relationships in foreign markets.



Philippine firms could take advantage of established US brand names in facilitating entry to these markets. This would also allow easier cogeneration of new products especially in the food processing sector.

Operations strategy.

The production strategy aims to improve productivity towards a competitive level. A major factor of concern is technology development, diffusion and utilization with focus on development of new products using biotechnology and new processes. Another is the utilization of renewable energy sources such as bio-mass materials in achieving an optimal mix of energy utilization. Other factors are access to financial windows that considers the peculiarities inherent to the industry, infrastructure development such as logistics and communication and information facilities and human resource and organizational development.

Opportunities in technology development and diffusion arising from the agreement will

allow the industry to address quality, cost efficiency, reliability and dependability issues. With zero tariffs on processing as well as raw material production equipment, machineries and facilities, advance technology will be more accessible to the industry with prices lower than traditional source such as the Netherlands. For example, in 2000 shade nets and plastics for greenhouses from the Netherlands have a combined cost of around FOB P140.00/sq.m. In 2004, the price has gone up to FOB P340.00/sq. m., an increase of 142%. The same situation is true with meat cutting and processing, juice and puree and packaging equipment. Advances in biotechnology could also be tapped in the generation of superior hybrids of plants and animals. The US could be a source of new varieties of ornamental plants and cutflowers, a major driving force in stirring growth of demand. Annually, the Philippines import of floriculture products is estimated at US$3.5 million. With technology more accessible quality can be improved towards international standards.

In addition, with better technology and larger production capacity, cost efficiencies,

reliability and dependability will be improved in the presumption that industry players create clusters of processors and commodity producers. As a consequence wastes will be minimized, productivity will increase and plant utilization efficiency improved as the supply chain becomes more integrated and closely managed through technology intervention such as information and communication technology.

Institutional development strategy. The marketing and operations strategies are linked together by the institutional

development strategy that includes the participation of support institutions, government, financial and educational institutions in supporting the development and growth of the industry. Micro- and macropolicies are important in strengthening institutional linkages and industry structure. This includes among other things fiscal incentives such as tax incentives for technology adoption, cost sharing in participating in international trade and exhibition fairs, R&D subsidy and investment incentives.



The logistics service industry is one of the more important support institutions that need

to be given special attention. Logistics cost accounts for a major portion of the cost structure of agro-processing and as such its performance is important in achieving import and export parity cost competitiveness. Clear cut laws and regulations that support and encourage the growth of logistics service providers are important in establishing an effective, cost efficient, reliable and dependable logistics system. Infrastructures, data base and information and communication technology, human resource development and support services establishment are the other determinants of an effective logistics service industry.

In the aspect of land utilization, implementation of CARP should be accelerated to

remove uncertainties in investments for expansion and new ventures. As raised in the second consultative meeting, the slow implementation of CARP have been identified as a major stumbling block in creating plantation type farms and in expanding capacities in fruit processing.

Benchmarking of best industry practices.

Once the key determinants of competitiveness are identified, benchmarking with the best practices in the local industry and those in other countries is necessary in the operationalization of action plans to achieve focus and incremental improvements. Benchmarking is the process of determining who is the very best, who sets the standards, and what that standards are. The aim is to synthesize all the best practices and tailor-fitting these to local situations. This involves identification of weak points and assessment if the said weak points are key result areas. Once key result areas are identified, the object is to figure out how to converge with the standards (i.e., the best practices) set by leaders in the industry.

A review of best practices in the agro-processing industry based on the experiences of

other developing nations is necessary. Benchmarks must be established. Similar to Chile and Thailand, careful studies must be done of potential competitive advantage, including cost, quality and marketing characteristics such as off-seasonality and timeliness of delivery. Apart from timeliness in all phases of the product cycle, reliability in terms of quality, delivery and other contractual conditions (composition, prices, packaging) are important.

For the food processing sub-industry we can for instance benchmark with Morocco.

Morocco is an example of a country with an advanced stage of development of agro-industry (FAO, 2004). Morocco has a well-developed food preserve industry for tomato sauce, fruit juices and other canned fruits which ensure stronger linkages with sectors other than agriculture, both as provider of inputs (chemicals, glass, aluminum, and paper) and as dependent sectors of further processing (marketing services). The food industry in Morocco is estimated to purchase only about 70 percent of its raw materials from agriculture, while the final product sold to the consumer and exported in increasing quantities contain more than 45 percent of non-agricultural products.

A more advanced stage of development may be observed on the food and beverages sub-

sector in countries such as Turkey, Argentina and Chile. This is characterized by a full



development of the forward linkage chain, with several marketing and other services incorporated in the final product, and product innovation prevailing over process innovation to provide a competitive advantage and sources of growth to the firms in the market (FAO, 2004). The linkage with the marketing chain appears to be well established, with the presence of both organizational and financial links between the producers and the retail outlets. The pace at which new products are introduced is quite fast, and this may be traced to product innovation.

In the United States and in the European Union, because of the huge size, market

leadership and the degree of internationalization of the food industry, the food-processing companies in this country and regional bloc, often set up a base for a whole technology of processed food production. The areas involved range from the planning and quality control of agricultural products and other raw materials, to the design and manufacture of machinery, specification of the product cycle and the provision of specialized financial and other services (FAO, 2004).



Chapter 5

Recommended Action Plan

Agro-Processing Industry Development Program

Competitive development of the Philippine agro-processing sector requires certain sets of adjustments and policy changes in each specific agro-processing industry based on the provisions of the RP-US Free Trade Agreement (FTA). This program, the Philippine Agro-processing Industry Development Program (AIDP) shall serve as a strategic intervention to raise the competitiveness level of the agro-processing industry by providing development options in the production, processing, and distribution segments of each industry supply chain.

Basic Program Framework

To catch up with other countries urgent and innovative moves are needed. Foremost is

the need for a strategic industry development plan and a disciplined effort to implement such plan such that the industry could leap frog to global competitiveness. Focus should be given to vital problems and issues such as:

1. Inadequate collective strategies 2. Weak institutional capability and linkages 3. Low level of technology use and unsustainable research and development program 4. Insufficient access to credit, and 5. Inadequate micro- and macro-policies

The strategic development framework shown in Figure 5 should be transformed into a

development plan that should tackle the fundamental issues of industry direction, structure, competitive priorities and enabling technologies and processes.

Program Objectives

The program generally aims to develop the Philippine’s comparative advantage potential

in agricultural crop production, agro-processing and marketing vis-à-vis other major agricultural trading economies in the context of RP-FTA.

Specifically the program strives to: 1. Expand and implement better industry reforms and programs; 2. Encourage more effective public and private investments; and 3. Strengthen institutional and organization roles, capacities and coordination.



Component Projects

The AIDP aims to catalyze the growth of the agro-processing industry by providing the necessary development options for increased level of competitiveness, especially in the area of multi-lateral trading. This being the central theme of the program, it aims to foster harmonious interaction among the various players in each specific industry supply chain. It is much expected that the congruent interfacing of the said industry players including policy makers and support service providers shall bring forth the level of multi-sectoral collaboration that is required for the sustainable development of the agro-processing industry.

The program shall cover five representative agro-processing sub-industries which show

high growth potential in both the local and international trade scene. These are: 1. Abaca and coco coir fiber Industry 2. Mango processing and banana chips manufacturing industry 3. Pork processing industry 4. Broiler meat processing industry 5. Floriculture industry

The programmatic nature of the basic program framework shall lend to its flexibility as to

possible application to other promising agro-processing sub-industries in the medium to long-term development.

The major program components are: 1. Technology Development Acquisition and Adoption Component (TDAA); 2. Institutional Capacity Building Component (ICB); and 3. Logistics Support System Development (LSSD) Component

These component programs are designed to layout strategic steps with clear

understanding and consideration of different technological, marketing, and institutional constraints currently besetting the agro-processing industry.



Component 1

Technology Development Acquisition and Adoption Component Program

Rationale for the Component Program

Focusing on the hogs sub-sector, public sector investment on R&D has placed a

noticeable priority on the sub-sector’s production component (Figure 6). This encompasses studies on over-all cultural and management aspect of production and experiments on swine nutrition. Based on PCARRD data (2004), R&D investment in production ate up almost 72 percent of the allocated budget while the remainder was shared by R&D efforts on disease prevention (14%), genetic improvement (4%), socio-economics (5%), monitoring (4%), and policy studies (1%).

Figure 6. Distribution of research and development projects by PCARRD by field, 2004.

Disease Prevention

14%Genetic Improvement

4%

Monitoring

4%

Policy Studies

1%

Socio-Economics

5%

Production

72%

Source: PCARRD (2004)

Processing, as may be deemed very important for the development of the sub-sector’s competitiveness has not received due recognizance from the public sector as far as R&D is concerned. Moreover, post-processing technologies i.e. transport and storage, have significant developmental impact on the agro-processing industry. These, however, have been given little attention.

Objectives of the Component Program

The Technology Development Acquisition and Adoption (TDAA) component program aims to:



1. Generate technology that encompasses the entire supply chain of agro-processing

industry; 2. Encourage adoption and adaption of technology most especially in processing,

drying, packaging, transportation. storage and handling; 3. Develop technologies in the production of raw inputs directed towards improving cost

efficiency and quality; and 4. Develop technologies, processes and methodologies that will address the stringent

food safety requirements of HACCP and traceability.

Description of the Component Program

As food safety mechanisms are strictly required in net importing countries like Japan,

financing of technology development in the following fields are necessary: 1. Food testing and evaluation of the quality of food products for specific markets.

This involves various tests required by the international market for food products. This includes chemical, microbiological, micro-analytical (micro-filth), physical and sensory testing, package testing (cans, bottles, and flexible packages), shelf-life testing, label evaluation, process establishment and tests for heat distribution in retorts;

2. Product development and pilot production of products for market testing. This

involves development of products in laboratory and pilot scale to establish technical and market feasibility. In floriculture this would require producing new breeds of cut flowers and ornamental plants. In hogs and poultry, breeds that are suitable for tropical conditions should be developed to improved growth efficiency and resistance to animal diseases. New products in banana chips should be developed to provide more choices to consumers. Flavors could be improved such as the use of strawberry, orange, and chocolate flavors. In the abaca fiber industry new handicrafts designs should be developed further to increase use of abaca fiber.

3. Plant and process inspection, provision of quality assurance services and shipment

certification. This involves inspection of plants to determine compliance with international standards for good manufacturing practices and certification of products produced under agreed quality control procedures. HACCP certification and monitoring should be steadily expanded and improved. The National Meat Inspection Services (NMIS) should be strengthened for this purpose. A HACCP and traceability awareness information and training should be conducted in an industry wide basis to hasten up adoption of food safety requirements.

4. Training on food testing, plant inspections, Good Manufacturing Practices (GMP)

and Hazard Analysis Critical Control Point (HACCP). FDC conducts training courses for industries in general or for specific companies in areas related to food



testing, processing and quality control. This could be done in partnership with industry associations to build up capabilities and effectiveness of the program.

5. Research and Development in industry related problems and on the development of

needed technologies. This involves short and long term studies on specific industry problems such as causes of product spoilage, mechanical damages and development of food testing methods. For example in the floriculture industry there is a need to develop packaging technologies that will significantly lengthen the shelf life of cut flowers. Considering that perishability is a very critical factor that should be considered in shipping cut flowers, lengthening the shelf life will allow shipping the products through shipping lines rather than air lines. Cost of transporting using the air mode is almost double that of sea freight.



Component 2

Institutional Capacity Building Component Program


The Institutional Capacity Building (ICB) Component Program aims to strengthen the

development potential of the agro-processing industry, specifically in the five sub-industries mentioned in the previous section. Through collective efforts of the private sector and ancillary industries, institutional linkages and networks of the agro-processing industry shall be enhanced, if not developed to maximize potential benefits from the RP-US Free Trade Agreement (FTA) that can possibly accrue not only to the agro-processing but to the whole agriculture sector as well.


The general aim of the ICB component is to build and strengthen the capability of the

agro-processing industry in keeping pace with the rapid developments in the international multi-lateral trade scene. Treating the industry as one institutional entity, the program shall provide integrated and holistic development options which are deemed necessary for the industry to converge to international trading standards.

Specifically, the ICB component program shall: 1. Provide means to enhance local private and foreign sector investment in the

Philippine Agro-Processing Industry; 2. Develop a conducive policy and business environment for multi-sectoral

collaboration to achieve the most efficient clustering arrangements among different agro-processors in the industry; and

3. Promote backward and forward integration of various components of the agro-processing industry’s logistics chain.


The ICB component program shall be designed to be programmatic in nature to

accommodate flexibility possible application to other agro-processing sub-industries as may be done in the course of the implementation of the RP-US FTA. As such, this component program shall be comprised of three sub-components, these are:

1. Clustering Sub-Component; 2. Agricultural Machinery and Equipment Service Center (AMESC) Sub-Component;

and 3. Production Systems Integration (PSI) Sub-Component which consists of an Integrated

Slaughter House-Processing-Cold Storage/Blast Freezing-Meat Cutting (ISH4)



Development Facility pork processing and an Integrated Dressing Plant-Processing-Cold Storage/Blast Freezing-Meat Cutting (IDP4) for broiler meat processing.

Clustering sub-component.

Industry competition is fragmented which limits innovation. There are very few large

growers each of which has its own strategy of marketing distribution. Collective strategy in production, marketing and promotion is not sufficient to move faster turnover of produce in the domestic market and to enter foreign markets. Largely, the industry lacks the capability to do long term R&D. Few firms only do research and development. Government lacks the capability to do sustainable R&D due to financial difficulties and its lack of interest in the industry.

The agro-processing industry as a cluster is practically financed through equity. Access

to credit is a problem as small processors could not meet the stringent requirements of lending financial institutions. It thus limits acquisition of capital and expansion of operation. The inadequacy in R&D has resulted to over dependence on foreign suppliers for planting materials and other inputs. Deficient transport, storage and handling facilities have constrained production especially during the peak season. The absence of an industry quality standard has kept prices low. This could be beneficial to the industry in terms of import substitution. But it is also indicative of low quality products. Moreover, due to inefficiency in the different parts of the agribusiness system, there is uneven growth of the different components of the cluster a clear indication that the industry is experiencing competitive dysfunction.

The project primarily proposes a clustering program for small-scale agro-processor

especially for the floriculture, abaca fiber, and coco coir agro-processing sub-industries. Doing so shall increase the financial and technical capacity in acquiring and developing processing technologies which are highly required to compete in the international market.

The strategy therefore is to group small-scale industry players. At the same time that

initial steps in clustering (social preparations and consultations) are being done, technology development shall also be on-going. By the time arrangements for clustering are finalized, new technologies are shall be ready for piloting.

Agricultural machinery and equipment service center sub-component.

The efficiency of the operation of the center shall rely heavily on the coordination of

production and machinery utilization such that bottlenecks during peak times are reduced. Thus, active participation from both the farmers and the center must be established and sustained.

As shown in Figure 7, the AMESC shall be operated and managed by the private sector

more preferably by agricultural machinery manufacturers and importers. Farmer’s cooperatives can invest and be a partial owner of the enterprise. The necessary requirements for operations are: (1) creation of the agricultural machinery and equipment service center (AMESC); (2) establishment of strong farmers’ clusters or cooperatives; (3) tie-up program between farmer



cooperatives and the center; and (4) linkage with financing institutions and private sector investors.

The targeted proponents of the AMESC are the machinery manufacturers and importers

and federation of cooperatives. The federation should have attained a sustainable level of financial, management and marketing capability and is willing to enter into a joint venture arrangement with the AMESC. Farmer cooperatives should have at least 250 to 500 has integrated production area to take advantage of economies of scale of mechanized operations. The group should have a proven stable operation and financial standing for at least 5 years. The center’s capacity will be based on the number of cooperatives that can be serviced. Initially it could start with two cooperatives with 500 has production capacity for rice and/or corn. Figure 7. AMESC operated and managed by agricultural machinery manufacturers linked to farmer cooperatives or federation.

The center will have the following infrastructure and processing facilities: 1. Farm machinery and equipment and shed 2. Irrigation equipment 3. Workshop tools and equipment 4. Warehouse with office space 5. Drying and processing facility 6. Light cargo vehicle

Vertical integration sub-component.

The Production Systems Integration (PSI) Sub-Component shall provide independent

smallholder farmers the opportunity to expand their business operations from production to processing and marketing by equipping them with the necessary farm infrastructure, facilities,



technology, and management acumen. That is, farmers are encouraged to vertically integrate their operations to achieve high level of cost efficiency by streamlining their logistics chain.

For example, in the Broiler Sub-Sector which is primarily dominated by integrators, they

can easily adapt to changes in the production and market environments. This is basically due to their vertically integrated nature of production, processing, and distribution. With the avian viral infection (AVI) outbreak in 2003 in major producing Asian countries like Thailand and Vietnam, the local large broiler integrators were able to identify and efficiently utilize the opportunity for them to export broiler meat to broiler meat consuming countries like Japan.

In the case of pork, the present set up of spatially fragmented slaughterhouse, blast

freezing, cold storage, processing and packaging facility suggests cost inefficient due to doubling handling and higher transportation cost. Integrating all these facilities will translate to transportation savings. It should be well noted that delays at any point between these separate facilities could increase cost due to higher opportunity cost. Besides higher cost, there is under-capacity of existing processing facilities. Additional capacity, therefore, is needed to meet the increasing requirements of processed pork products. Likewise, this problem can be addressed by vertically integrating operations from the point of production to processing to product distribution.

In the general context of the agro-processing industry, there is a need to strengthen the

capability of small and medium scale independent agro-processors to enable them to face the challenges and strategically utilize the emerging opportunities in the domestic and global market through vertical integration. This being stated, this sub-component shall ensure that agro-processed products that would be distributed locally and internationally are of high quality, and that all sanitary and phyto-sanitary requirements needed for international trading based on GATT-WTO guidelines are well complied with.

The institutional aspect of this sub-component shall emerge in the initial steps required in

linking various agro-processors to input sources and distribution points. It shall be very necessary that the institutional networks are well established so that efficient sourcing of production and processing of quality inputs and prompt product delivery are achieved.

Joint-venture investment in processing and marketing sub-component.

Essentially, because of limited financial and physical resources, small and medium scale

independent processors are limited to concentrating only in the domestic market. However, potentials for export and trade globalization provide huge prospective for market expansion. To do this, they have to develop capabilities that approach that of the integrators. Investments in processing and market infrastructures require high cost of capitalization and operation. The key therefore is to seek private-sector assistance in terms of financial aid through Joint-Venture Investments (JVI).

The purpose of JVI is to create a constant and sustainable linkage between local agro-

processors to private entities and/or to foreign agro-processors. This strategic alliance shall aid in



the entry of new and more efficient agro-processing technologies and advancement of local knowledge on cultural management practices, as well as machinery equipment fabrication.



Component 3:

Logistics Support System Development Component Program


The Philippine agriculture sector is at the crossroad of eroding competitiveness which is

manifested by high cost of producing commodities and food translating to higher food prices in the market. This sectoral condition is primarily caused by inadequacy of competitive assets (i.e., infrastructure, transportation and communication, technology, human resource, and financial resources) and competitive processes (i.e., quality, responsiveness, and reliability).

Considering the sector’s underdevelopment, supply chain in general and the logistics

system in particular play a very significant function. Thirty to 40 percent of processing, marketing, and distribution are due to logistics. Given the state of the sector’s logistics system, high costs are incurred because of product delivery delays, high percentage of unfilled orders, and long lead time impressing significant impact on product quality and output price. More importantly, management of information, which is one of the major functions of logistics, is crucial in animal health and food safety monitoring and control. Protecting public health and ensuring food safety are among the paramount concerns in international trading.

The increase in the physical infrastructure alone is not a sufficient condition for the

improvement of logistics systems. The logistics information capability which facilitates the seamless flow of information is a very important element in further enhancing the efficiency of logistics activities and in potentially reducing the demand for the transport infrastructure itself. Furthermore it builds into the system responsiveness and flexibility, keys to responding to markets which are rapidly changing and where customers are requiring a range of services and to the increasing awareness and demand for quality and safe food.

ICT specifically can provide the following function to improve supply chain management

in general, and logistics chain management in particular: (1) centralized coordination of information; (2) integration of transportation, distribution, ordering, and production; (3) direct access to both domestic and global transportation and distribution channels; (4) transparency allowing locating and tracking the movement of goods; (5) consolidation of acquisition of inputs; (6) intercompany and intracompany information access; (7) data and information interchange; (8) data access at the consumption and production points; (9) instantaneous updating of inventory levels in real time (Russell & Taylor, 2003); and (10) monitoring and control of animal health and food safety.

ICT is important in attaining cost efficiency, responsiveness to consumer’s requirements

and reliability in delivering the right kind of product and volume of product required by the market. ICT application to the agro-processing industry can bring the following benefits to logistics system management:

1. Cost savings and price reductions from lower transaction costs. 2. Cost savings from reducing non-value activities thus eliminating excess

intermediaries.



3. Cost savings and better responsiveness from shortening supply chain/logistics chain transaction times for ordering and delivery.

4. Better and wider choices and more information for customers that could foster higher competition among producers.

5. Collection and analysis of large volume of industry data. 6. Gaining access to both domestic and global markets, supplies and distribution

channels.


This Logistics Support System Development (LSSD) component program shall develop new logistics systems support facilities which would aid in streamlining the highly inefficient agro-processing industry logistics chain. Specifically, the objectives of the component program are:

1. To create and install strong Information and Communication Technology (ICT) networks across the agro-processing industry’s supply chain;

2. To create a private sector-led logistics management group that shall ensure efficient and effective delivery of logistics services; and

3. To ensure that all agro-processed products are compliant with food safety and HACCP requirements.


The LSSD component program’s banner is the creation of a strong ICT network that shall

streamline agro-processing production and distribution operations. This shall be supported by a private sector-led management group. There are two component sub-programs of LSSD. These are:

1. Web-Based Integration of Data and Processes in the Agro-Processing Supply Chain;

and 2. Creation on an Agro-Processing Logistics Service Providers Association.

Web-based integration of data and processes in the agro-processing supply chain.

From a logistics operations point of view, the seasonal effects of harvests, as well as

overproduction, leads to large stocks. Moreover, the short lifetime of many agricultural products among their production, conversion and consumption, requires a collaborative effort in decision-making about planning, procurement, inventory management and distribution. By providing rapid and efficient communication and transactions between the involved entities, supply chain networks can facilitate co-ordination between production, marketing, logistics processes and consumer requirements, in order to achieve short-term economic benefits and gain long-term competitive advantages.



The advantageous properties of a logistics system depend to a large extent on the modeling of business processes and information standards and this constitutes a major challenge. Standards play an important role to open business coordination, since they define the form of the interpretation of messages, documents, processes and services passing through the agribusiness partners. A business process can be defined as a set of one or more linked activities, which collectively realize a business objective. There is a need to automate processes across all of the partners and ensure that transactions flow quickly. Every transaction is determined as the sequential exchange of business documents/messages, resulting in the transition to a new state for the partners. The objective is the development and use of common business vocabularies that describe the structure and the semantics of the exchanged messages.

In order to enable organizations to set up and manage reliably the agro-processing

industry’s logistics system, an Internet-based application should be developed which aims to model and integrate dynamically and collaboratively business processes and agribusiness data in a totally visual manner requiring mostly business than technical background by the users. The application can be used in other agricultural logistics systems, especially in those that require the sharing of skills and information as a critical success factor to achieve the ultimate goal of meeting customer’s expectations at a lower cost. Figure 8. Framework for business data and process integration in the hogs and broiler sub-sectors.

Adopted from Folinas et al., 2003

The framework for modeling and integrating business processes and information in the hogs and broiler sub-sectors follows a five-step approach (Figure 8). The objective is two- fold: (1) to ensure that the exchange of business information will take place in real time and without human intervention; and (2) that all the stakeholders in the sub-sectors will have access and will use the same information.



According to the framework, a certain entity with clearly defined decision-making powers is a necessity. This entity will be responsible for providing the necessary technological infrastructure and for carrying out the logistics activities. The most significant skills that this entity should possess are, on the one hand, the ability to integrate the competencies of enabling partners into successful networks that meet customer’s requirements and, on the other hand, the ability to handle arising problems of coordination and interoperability issues in the network. The Logistics Service Provider (LSP) can take over this important role. If LSP is capable of linking the business processes of the individual organizations by quickly implementing the connecting inter-organizational logistics processes, other stakeholders in the sub-sector do not need any competencies of their own, as far as the logistics processes are concerned, and need only a general knowledge of logistics.

In the examined environment, a customer order initiates the composition and operation of

the logistics system network over the Internet (Figure 9). It is clear that for an enterprise to anticipate in a logistics system network, minimal technological infrastructure must be available. The Internet is anticipated as the most cost-effective supporting infrastructure in the hogs and broiler sector. Order assignment is set up via a LSP web site, responsible for the selection of agribusiness partners based on their core competencies and provided services. Figure 9. Structure of the Web-Based integrated logistics system network.

Adopted from Folinas et al., 2003



Arising problems of coordination regarding logistics information systems are solved with the use of the LSP as an integration coordinator. LSP should bundle together the services, hardware, software and network infrastructure required to integrate the systems and applications within and across the sub-sectors’ supply chain. It should combine several state-of-the-art technologies into a pre-built and pre-deployed technology platform that will enable tightly aligned but loosely coupled, integration with a fixed monthly fee-pricing model (Folinas et al., 2001). The LSP shall maintain a central database that contains pre-configured business scenarios and vocabularies for specific business processes.

Creation of an Agro-Processing Logistics Service Provider Association.

The Agro-Processing Logistics Service Provider Association (ALSPA) shall be created to

have a body that would be responsible for the establishment and development of an effective logistics system for the agro-processing industry. The association will oversee the requirements, development and growth of the logistics sector as a major support service to various industries and sectors in the country.

With the association’s creation, plans and activities leading to coordination and

management would be integrated. These plans and activities would translate to economic benefits such as reduced cost of moving commodities from the point of production to point of consumption thereby ensuring on-time deliveries and faster rate of turn-over. Quality and products will be provided to consumers. Furthermore, it also complements the food security agricultural competitiveness programs of the government. Figure 10. Proposed organizational structure of the Agro-Processing Logistics Service Providers Association.



It will be primarily headed and led by a private sector group composed of Logistics

Service Providers (LSPs), Agro-Processors, and major players in the input and distribution market. Government agencies that will be also involved are the Department of Trade and Industry (DTI) and Department of Transportation and Communication (DOTC).

Under the association are the Logistics Service Groups representing the various

agricultural sub-sectors (Figure 10). For example one LSG is the Livestock and Poultry LSG which will be responsible for the logistical concerns of the hogs, cattle, goat, broiler, layer and duck sub-sectors.



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