Public Disclosure Authorized

57656
Public Disclosure Authorized

THE PHILIPPINES

STUDY ON AGRIBUSINESS,
INFRASTRUCTURE, AND LOGISTICS
Public Disclosure Authorized

FOR GROWTH IN MINDANAO

POLICY NOTE

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

Acronyms Used

AFTA ASEAN Free Trade Agreement

ASEAN Association of South East Asian Nations
CARP Comprehensive Agrarian Reform Program
FMR Farm-to-Market Road
NABCOR National Agribusiness Corporation
PHF Post-Harvest Facility
RO-RO Roll-On, Roll-Off

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

1. The World Bank has carried out a study on agribusiness, logistics, and infrastructure
for growth in Mindanao. Funded by the Australian Agency for International Develop-
ment, the study aimed to understand better why the Philippines, with its well-educat-
ed human capital and diverse natural resource base, significantly lags behind the rest
of East Asia in per capita growth. Some rural areas with high agricultural potential,
such as Mindanao and—to some extent—the Visayas, also lag behind the rest of the
Philippine economy. The study sought to understand how the Philippines could im-
prove its competitiveness in agribusiness and agriculture commodity markets, areas
where Mindanao enjoys strong comparative advantages.

2. The study analyzed the constraints affecting the performance of agricultural value
chains in Mindanao, particularly in terms of infrastructure and logistics. The agricul-
tural commodities selected were corn and bananas because of their economic weight
at regional and national levels. Mindanao, especially the Bukidnon plateau, is a major
producer of white and yellow corn. The study focused on yellow corn, which is grown
mainly for animal feed and used in milled and non-milled varieties. Mindanao is also
the country’s main banana producing region, both for export and for the domestic
market. Region XI (the Davao Region)1 is the leading banana producer and supplier of
export-quality bananas in the country. In recent years, the Philippines has become the
world’s second top exporter of Cavendish bananas2.

3. Agriculture remains an important sector of the Philippine economy. Seventy percent

of the poor live in rural areas. With its high agricultural potential, Mindanao is a stra-
tegically important region. However, it is also plagued by instability and high poverty
rates in some areas. The region’s economy is agro-ecologically diverse and predomi-
nantly agri-based, making it an important agro-industrial business hub for the region
and for export trade.

4. Both the banana and corn value chains offer considerable scope for contribut-
ing to future economic growth in Mindanao, provided the appropriate policies
and programs are implemented. A support program would entail a combination of
policy measures and public investment, aimed at leveraging private investment, par-
ticularly in the upstream part of the value chains. There is no reason for the banana
sub-sector in the Philippines, both for the export and domestic markets, not to con-
tinue growing strongly in the years ahead. Expanding markets at home and abroad
and a strong comparative advantage on the world market should be the main drivers
of this growth. In the case of corn, the country’s global competitiveness seems more
problematic but it can be strengthened. This will allow sustaining farm incomes while
reducing the cost of feeds to the fast-growing poultry and hog industries. In spite of
1 Region XI is located in the south-eastern portion of Mindanao island. It consists of four provinces with its regional
center in Davao City.
2 Cavendish banana is the export quality banana on demand internationally.

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

serious challenges, these two value chains do represent potentially very important
sources of growth for the island and for the country.

5. However, both sub-sectors face serious challenges in terms of their current

performance and mid- to long-term viability. Yellow corn production has been in-
creasing, pulled by the demand for feed for the livestock and aquaculture industries
but will face increasing competition from imported corn in the future due to the im-
plementation of the ASEAN Free Trade Agreement (AFTA). The current competitive-
ness of yellow corn production in Mindanao is too low and productivity needs to be
strengthened all along the supply chain. Cavendish banana export in Mindanao is a
competitive, growing, and vibrant sub-sector but it also faces some critical issues in
terms of its long-term viability and sustainability . For both value chains, the current
underinvestment at farm-level and in post-harvest activities undermines their long-
term viability.

6. The analysis showed that some constraints are common to the two value chains,
such as:

• Lack—or bad state of—basic infrastructure and physical linkages to market out-
lets;

• Inefficient logistics and weak trade facilitation policies and management;

• Constraints on land use resulting from the national agrarian reform program
(fragmentation of land holdings, limited access to credit and finance);

• Low farm-level productivity, due to insufficient investment at the production level

and the absence of targeted technical support programs; and,

• Broader competitiveness issues, such as the unfavorable business environment

and the high level of public corruption.

7. Some constraints are specific to a sub-sector and relate to the policy and institutional
dimensions of the value chain. The review of the banana export industry reveals a
number of institutional, environmental, and social sustainability issues. In particular,
the capacities of professional organizations should be strengthened so that they can
address the structural issues confronting these industries.

8. A comprehensive program to support these value chains and improve their per-
formance should be implemented in Mindanao. It should be structured around
three priority areas:

• Bridging the productivity and quality gap;

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

• Investing in infrastructure for improved value chain performance and linkages to

markets; and,

• Improving the social and environmental sustainability of the corn and banana in-
dustries.

Bridging the Productivity and Quality Gap

9. On average, farm-level productivity is low and below regional and world stan-
dards for both crops. As shown in the detailed sub-sector analysis, average yields
in the Philippines for both corn and export bananas lag well behind international
benchmarks. While there are important variations in corn yields between subsis-
tence and commercial farmers, low yields clearly hamper competitiveness, particu-
larly for corn, and limit returns to farmers. There is a dire need for targeted efforts
to raise productivity as it has direct and indirect impacts on the performance of the
value chains.

10. Eventually, farmers who cannot raise their productivity should be assisted in transi-
tioning to other more remunerative crops like fruits and vegetables. In the end, the
value chains are as strong as their weakest link. For banana growers, increases in
output prices have not been sufficient to compensate for the increase in the cost of
production factors during the last decade. Input prices have surged and have had a
doubling effect on decreasing net income. New forms of market linkages have been
emerging, together with increased competition in the industry, resulting in price wars
and higher prices to producers in recent years. .

11. The yellow corn sub-sector will continue to be driven by the growing demand for
feed from the poultry and hog industries. However, corn yields are too low on average
compared to those in major competing countries. It is only by raising productivity to
a minimum level of 5 tons per hectare—versus the current 2.6 tons/ha—that Mind-
anao’s corn can compete with imported corn. Reducing transport costs is important
in achieving better competitiveness of corn cultivation in the most remote production
areas.

12. Substantial improvements in the quality of grains are also required to make do-
mestic corn more competitive and commercialization of corn more efficient. This
could be achieved through incentives for the private sector to invest in larger post-
harvest facilities (PHF). The proposed interventions should aim at better yields,
reduction of post harvest loss, and lower transport costs for input supply and mar-
ket delivery. When combined, these interventions could reduce farmers’ costs con-
siderably.

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

13. The government needs to shift its agricultural strategy toward less protective
and more pro-active policies. Agricultural policies should focus on helping farm-
ers raise productivity and improve product quality through appropriate support pro-
grams that can make them more competitive. In addition to raising farm productivity,
there are some serious challenges in terms of improving quality and post harvest han-
dling for corn, and also in moving up the value chain through product differentiation
and certification for bananas. The following policy measures and support activities
should be pursued:

• Completing the process of trade liberalization in the corn sector by reducing tar-
iffs on imports from non-ASEAN countries. This will require improving the com-
petitiveness of corn farmers through a targeted corn sector adjustment program
that both enhances productivity and facilitates transition to other crops ;

• Improving available knowledge and analysis on bench-marking of corn produc-

tion costs with regional competitors;

• Redefining the role of the National Agribusiness Corporation (NABCOR) in corn

post-harvest operations so that it will promote private-public partnerships and
attract private investment in PHF;

• Providing incentives to encourage private investment in storage and post-harvest

for corn;

• Establishing and enforcing quality standards for corn;

• Designing a farm productivity enhancement and support program for corn and
banana production farming systems, to be piloted first in a selected number of
municipalities;

• Supporting innovations in agricultural value chain finance (tripartite financing) to

improve access to capital and credit by small farmers.

Investing in Infrastructure for Improved Value Chain Performance

14. Infrastructure constraints in the broad sense (roads, irrigation infrastructure,

land use, post-harvest facilities, and power supply) are indeed critical to im-
proved performance of agribusiness value chains in Mindanao. As agricultural
commodities widely traded domestically and internationally, cost remains the main
driver of competition for both corn and banana. Therefore, value chains need to be
cost efficient at all stages. Particularly for bananas (a perishable product), logistics ef-
ficiency is critical to guarantee freshness, quality, and safety when the product reach-
es the final market.

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

15. A farm-to-market road (FMR) rehabilitation program should be designed and

implemented to improve market access for small farmers. Performance of agri-
cultural value chains depends first and foremost on the quality of basic communica-
tion infrastructure, primarily FMRs. Limited access to good road infrastructure has
had so far important consequences in the location and spatial development of the
two value chains in Mindanao. Targeted investment in rural roads rehabilitation could
play a vital role in improving access to markets for farmers and in unlocking new
areas with productive potential. Improving agribusiness value chain performance re-
quires increased investment for rural road rehabilitation and maintenance. Invest-
ment should be accompanied by policy measures on contract procurement and fund-
ing for road maintenance that have been recommended already in previous studies.

16. Inter-island shipping and export logistics need to be improved. Both value chains
are affected by sea-freight costs, although in different ways. The problems for corn
are high costs, inefficiency, and poor service for inter-island logistics. These problems
also affect the transport of bananas in the domestic market. The major difficulty lies in
the regulated nature of the port and shipping industry. There are many private ports
in the Philippines, such as those used for exporting bananas and other fruit. Most of
them are small and specialized. Inter-island shipping has benefited from recent im-
provements like the introduction of the RO-RO (“roll-on, roll-off”) system. However,
it is still constrained not only by the condition of the ports but also by the regulations
that govern logistics operations.

17. Adjustments in implementation of the Comprehensive Agrarian Reform Pro-

gram (CARP) are needed to allow for more efficient land use. Land tenure status
resulting from agrarian reform has multiple implications for the two value chains.
CARP was an initial opportunity for small-scale Cavendish banana growers to improve
their economic situation. However, the recently completed study on land reform in
the Philippines3 has shown that CARP’s overall impact on poverty has been quite low
compared to initial expectations. An important implication of the small scale of farms
is the limited degree of mechanization that can be used for corn cultivation. This is the
case particularly for harvesting, along with the difficulty of establishing efficient mar-
kets for machinery rental. Aggregation of small farms through cooperative arrange-
ments has also been problematic in the banana industry.

18. Specific activities to be undertaken would include:

• Conducting a feasibility study on a priority program of farm-to-market road im-

provement, to include mechanisms that ensure adequate funding for barangay4
road maintenance by local government units;
3 Land Reform, Rural Development, and Poverty Reduction in the Philippines: Revisiting the Agenda, World Bank (2009).
4 The smallest administrative division in the Philippines; the native Filipino term for a village.

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

• Implementing the recommendations of the recent assessment of logistics perfor-

mance for inter-island shipping (port management, cabotage law, RO-RO)5, and
identifying investments that could improve access to export infrastructure by
small banana producers;

• Implementing measures to complete the agrarian reform program (improving

tenure security and efficiency of land markets);

• Designing and carrying out a study of the domestic market for bananas to identify
the types of investment required to improve value chain performance.

Improving the Social and Environmental Sustainability of the Corn

and Banana Industries

19. The current lack of transparency and regulations in pricing mechanisms is a

threat for the future economic and social viability of the value chains. In the
banana sub-sector, the overall organizational arrangements and types of linkages be-
tween farmers dictate the resulting prices paid to small farmers. It is in the industry’s
best long-term interest to bring more transparency and provide more information on
banana export prices.

20. Environmental issues need to be addressed urgently and comprehensively.

Davao City banned aerial spraying of banana plantations in 2009. This shows the acute-
ness of the environmental problems and the need for both the industry stakeholders
and government to come together to address them. It also points to the broader issue
of wide-spread encroachment of banana plantations—and agriculture, in general—in
urban or semi-urban areas. This encroachment exacerbates the tensions between ag-
ricultural and non-agricultural activities. It is strongly recommended that strategies
be designed and implemented to raise the environmental awareness of the industry
and improve its compliance with good agricultural practices. Greater compliance with
these standards is required and will contribute to improving the competitiveness of the
Philippine bananas.

21. Supporting and strengthening professional organizations should be a priority.

Addressing the issues confronting the corn and banana value chains requires some
form of collective action. It also requires cooperation between private actors and gov-
ernment in areas like environmental sustainability and the spatial redistribution of
production. Strong and responsible professional organizations are needed to tackle
these issues.

22. Concrete interventions in this area would entail, for example:

5 Bridges across Oceans, Asian Development Bank (April 2010).

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

• Analyzing opportunities for spatial redeployment of production through plan-

ning—using existing geographic information system or GIS mapping, and incen-
tives (public-private partnerships), particularly in conflict areas;

• Establishing and upgrading price information systems to facilitate the process of

price discovery across the supply chain and across the country;

• Strengthening professional organizations in order to improve management and

governance in the banana sub-sector, including setting up a price information sys-
tem and organizing study tours to possible models, such as the banana industry
organization in Costa-Rica;

• Assessing the social and environmental sustainability of the banana export indus-
try and promoting certification schemes.

Cross-cutting and Overarching Issues

23. Finally, any support program for agribusiness value chains in Mindanao should also
take into account the following cross-cutting issues because of their overarching im-
portance:

• Improving the business environment, and

• Implementing non-distortive macro-economic policies, particularly those relating

to foreign exchange, and monetary and credit policies.

24. Improving the business environment for the private sector is critical in order to
foster the development of agribusiness in Mindanao, as well as in the rest of the
country. Both value chains face challenges in terms of competitiveness—although on
different terms—and require private investment to improve their performance lo-
cally and globally. Improving the business environment should be a priority. Unfortu-
nately, “elite capture”6, other forms of corruption, and lack of transparency, hamper
the flow of private investment. This constrains future growth in these sub-sectors as
in the rest of the economy.

25. Macro-economic policies should remain non-distortive. The foreign exchange

rate, internal inflation, and monetary policies reflected in interest rates can have a
severe impact on agricultural value chain performance while being completely out of
the control of stakeholders in the agribusiness sector. The national government must
make sure that the overall macro-economic policy framework remains favorable and
does not hinder the performance of these value chains.
6 The phrase “elite capture” refers to the manipulation of legal, political, and regulatory institutions by the wealthy
and the politically powerful for their own benefit.

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

ANNEX: SUMMARY OF THE CORN AND BANANA VALUE CHAIN ANALYSIS

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

of a Competitiveness Agenda

On average, the Philippines produced 3.7 million tons of corn annually—both yellow and
white—during the period 2004-2008. Similar to the trends observed at the national lev-
el, yellow corn production in Mindanao has been steadily increasing, overtaking that of
white corn (Figure 1 below). Total corn demand in Mindanao has increased during the
last decade by 3.5 percent per year, driven mainly by the demand of yellow corn for feed
for the hog and poultry industries. In addition, Mindanao has traditionally been a net
supplier of yellow corn to deficit areas in the Visayas and Luzon, where large processing
capacities are located. The bulk of yellow corn trade flows in Mindanao gravitates around
the cities of Cagayan de Oro in the north, General Santos City in the south, and Davao City.

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

With rising incomes and rapid urbanization, consumers’ preferences are shifting at an
accelerated rate toward livestock products, in particular hogs and poultry. The steady
increase in yellow corn production responds to the increased demand stemming mainly
from livestock intensification. As a result of increased demand, the sector is now indus-
trializing rapidly: backyard production is giving way to larger scale operations catering to
the urban consumers and, in a longer term perspective, in the case of hogs, to the export
market. Evidence suggests that the Philippines’ corn market is quite integrated with the
world market. The implication here is that trade liberalization will have a great impact
on the yellow corn supply chain. Support to corn farmers has mainly been through tariffs
on corn imports, while domestic support programs have remained quite limited in scope.

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

Since 1980, the supply of corn worldwide has increased by more than 60 percent. The
Asia-7 group of countries1 has become a major producer of corn on the world market.
While most of the increase in corn production can be attributed to China, there are no
clear signs of specialization between countries of the region. However, the configuration
of corn trade within Asia suggests that China, in the long run, could become the main sup-
plier of corn for importing countries in the region, including the Philippines.

The structure of protection of the corn sector across Asian countries is changing swiftly
as the regional integration of agricultural markets is making progress with the implemen-
tation of the AFTA trade agreement. Nevertheless, a reduction of tariffs on corn imports
from the ASEAN region is unlikely to have a major impact on Philippines border prices
of corn. In the short to medium term no ASEAN country will have the capacity to expand
corn production and substitute non-ASEAN imports of corn. As a result, tariffs on imports
of corn from non-ASEAN countries (United States, Brazil, Argentina) will continue to in-
fluence the border price of corn.

The corn farm sector in Mindanao is highly fragmented, poorly organized, and charac-
terized by a limited degree of mechanization. Production of yellow corn is intensive in
terms of use of commercial inputs and hired labor, making corn farmers vulnerable to
fluctuations in input prices. As shown in Table 1 below, the average yields obtained in
the Philippines are significantly lower than those in neighboring countries like Thailand,
Indonesia, and Vietnam. However, it is also important to factor in the wide variability in
yields obtained by commercial and subsistence farmers.

Trade protection given to the sector has not resulted in widespread and systematic in-
creases in productivity. Notwithstanding, the non-farm part of the corn value chain in
Mindanao is well developed and well populated with leading international firms on both
sides of the farm gate, i.e., the supply of inputs to the farmers and the utilization of corn
on the demand side. In particular, the market structure appears to be quite well devel-
oped with good competition among buyers for the farmers’ corn.

Table 1
Average corn yields in selected Asian countries, yellow and white corn (2001-2007).
2001 2002 2003 2004 2005 2006 2007
China 4.93 4.81 5.12 5.29 5.33 5.17 5.56
India 1.68 2.04 1.91 1.94 1.91 2.34 2.32
Indonesia 3.07 3.24 3.34 3.45 3.47 3.66 4.08
Philippines 1.80 1.92 2.14 2.15 2.37 2.54 2.60
Thailand 3.73 3.85 3.87 3.83 3.96 3.95 3.93
Viet Nam 3.08 3.44 3.46 3.60 3.73 3.93 4.02
Source: FAO.

Farm gate prices in Mindanao are well below those prevailing in Luzon, a direct conse-
1 Asia-7 refers to China, India, Indonesia, Nepal, Philippines, Thailand, and Vietnam. These countries represent more
than 90% of the total production of corn in the region.

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

quence of the relatively high freight rates of inter-island shipping. Delivery of corn from a
farm in Mindanao to a processor in Luzon involves multiple transactions and handlings.
One or more wholesalers are involved in the transfer—from the mill to the retail feed
dealers or directly to the hog or poultry farm. A very active and competitive network of
traders moves corn along the supply chain all the way from the most remote barangays to
primary processors and final users. In any case, while the trading sector is competitive, it
is characterized by high costs due to poor infrastructure and transaction costs associated
with the low quality of corn.

Transportation costs in the Philippines, particularly beyond the main municipal centers,
are high compared with neighboring countries. The high costs are caused by poor road
conditions, a limited supply of transport services, and high fuel costs. The relatively high
port and shipping charges for movement of small consignments of bagged corn, often in
containers, account for the higher cost of shipment to Manila. As a result, the logistics
costs account for about 20 percent of the delivered cost to Cagayan de Oro, but represent
about 40 percent of the delivered cost to Manila. Low quality of farm-to-market roads also
affects farm gate prices and forces farmers to adopt sub-optimal post-harvest practices.

Even though they are fairly well correlated with world prices, fertilizer prices in the
Philippines present some asymmetry in terms of price fluctuations. While competition
among fertilizer suppliers appears quite intense, logistics and marketing costs tend to
drive a wedge between fertilizer prices in Mindanao and other major regions in the Phil-
ippines. Traders also sell fertilizers to farmers on credit terms as a result of the farmers’
limited access to credit, which finally translates into higher input costs. Here, again, the
resulting high transaction costs impair competitiveness of the value chain.

Post-harvest practices vary considerably along the supply chain and depend on the geo-
graphic location. Traditional shelling practices and capacity in Mindanao can differ sig-
nificantly by area but are generally characterized by a low degree of capital intensity. The
existing multi-purpose drying pavements in the barangays are considered to be severely
insufficient during peak harvest season. This has a direct impact on the quality of corn,
on its price, and, therefore, on the valorization of the product by the farmer. The limited
storage capacity also explains the main problems reported by traders. These include the
abrupt price fluctuations following the peak of the harvest season, which is compounded
by the contemporaneous arrival of imports and the increasingly stiff competition among
them.

The relatively low performance of the upstream part of the value chain—which results
in low competitiveness, difficulties in aggregating supply, uncertainties on delivery and
low standards in grain quality—is a threat and a challenge for the future growth of the
sub-sector. This is in spite of the strong and sustained demand from the domestic feed in-
dustry. Larger processors, integrating shelling and drying activities, are slowly increasing
in the region, often with public support. NABCOR’s investments in integrated PHFs are
improving market access by small farmers. Yet, such investments have not attracted the
attention of the private sector, to which these facilities should be turned over after a few

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years of operation. This lack of interest may depend on the governance structure of these
PHFs as well as on the limited financial returns due to high transaction costs and risks.

Large scale shelling facilities pay more attention to quality and cater to higher end corn
users. Both corn millers, who process grains into grits, and feed millers, who convert corn
into animal feed, are segments of the corn value chain that are quite diversified in terms
of the type of end users, even though capacity seems to be quite concentrated among a
few players. The instability, unpredictable availability, and poor quality of corn supply are
increasingly pushing millers and integrators toward managing their inventories through
the importation of corn. While grade standards for corn have been developed by the Bu-
reau of Agricultural and Fisheries Product Standards, their use is sporadic, limiting the
emergence of a more transparent price discovery process. This may depend on the gen-
eral low quality of corn that leaves the production areas. It may also depend on the fact
that public consultation with key stakeholders before the issuance of such standards has
been minimal.

To identify key areas for policy interventions that would help increase the competitive-
ness of corn in Mindanao in the context of the implementation of the AFTA agreements,
six simulations were carried out based on field data on the cost structure along the sup-
ply chain. The results of the sensitivity analysis of the yellow corn value chain show that
if corn productivity was increased to a minimum yield level of 5 tons per hectare, Mind-
anao could compete with imported corn. Reduction in transport costs is also critical in
improving the competitiveness of corn in the more remote production areas. In addition,
substantial improvements in the quality of grains should be sought through investment
in PHFs in order to enhance the efficiency of the value chain. This could be done through
incentives for private sector investment in larger PHFs and clarifications in public sector
interventions.

The Export Banana Value Chain: Moving from Comparative

to Competitive Advantage

The Philippines is one of the major producers and exporters of sweet bananas in the
world. Total production of bananas was estimated to be around 8.7 million tons in 2008,
with exports of around 2.5 million tons. The demand for bananas has been growing fast
in both the domestic and export markets. Total marketed volumes have increased at an
annual average rate of 11-12 percent during the last few years. Some of the key drivers
of this demand include: growing population, rising incomes, increased consumer prefer-
ence toward healthy food and fresh fruits, development of new markets and improved
competitiveness in terms of quality and price.

Within this overall growth pattern, it is interesting to note that domestic demand has ac-
tually been strongest and growing faster than exports. On a volume basis, Cavendish ba-
nanas and local bananas accounted roughly for 30 percent and 70 percent, respectively,
of Philippine marketed production during the period 2004-2008. The two types of ba-
nanas are in demand in two different markets, and are produced in different geographic

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locations in Mindanao due to various historical and agro-ecological reasons.

The position of the Philippine Cavendish industry today is competitive. The country now
ranks second in the world market with a solid growth record and a highly regarded ex-
port quality product. The banana export industry has been expanding at a sustained rate
in the past twenty years, and growth has accelerated to nearly 8 percent per year during
the period 2004-2008. Exports reached 195 million boxes2 in 2008. Cavendish banana
production and export are concentrated in Mindanao, mainly because of the island’s nat-
ural comparative advantage: fertile soil, mild climate, diverse terrain, and typhoon-free
area. Bananas account for about 75 percent of the total agricultural exports of the region.
They contribute significantly to the country’s economy and foreign exchange earnings,
and significantly to those of the island and of Region XI.

The industry has undergone considerable transformation over the last 30 years. Histori-
cally, it had an oligopsonistic3 structure with a limited number of exporters, mostly mul-
tinational companies producing, conditioning, and exporting the fruit. With the imple-
mentation of CARP, the industry had to adjust and rely more on small producers. Small
scale growers participate in the industry primarily by supplying the fruit to the exporters.
Today, the relations between producers and exporters are fairly complex. Nevertheless,
the supply linkages can be categorized into two main types:

• Growership model, where the buyer outsources production through cooperatives,

individual growers or corporate-managed farms, and

• Lease arrangement, where the buyer rents the land and manages the production
process.

The average farm size has declined as a result of CARP implementation in the 1990s.
The various arrangements between growers and exporters have tried to make up for the
fragmentation of land ownership induced by CARP. While the banana export business re-
mains quite concentrated—five multi-national companies account for 90% of exports—
competition has increased in recent years with the emerging role of consolidators or in-
tegrators.

The Philippine banana export industry enjoys a very strong comparative advantage due
to both the excellent agro-climatic conditions for banana cultivation in Mindanao and its
proximity to the large and growing markets of Asia and the Middle-East. Nevertheless
yields and on-farm productivity remain low on average and well below that of the coun-
try’s main world competitors (Figure 2). The ability of the industry to respond to mar-
ket demand has improved in recent years, translating in strong growth. The main export
markets for Philippine bananas are Japan, Korea, China, and the Middle-East. However,
competition remains strong in the global and regional markets and Philippine export-
ers perceive a competitive threat to their market position. The risks are real, while not

2 A box contains 13 kilograms of fruit.

3  A market situation in which each of a few buyers exerts a disproportionate influence on the market.

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

immediate, and point to the need for the industry to develop a competitive edge in these
markets.

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

Source: FAO.

Incomes at farm level depend primarily on the average yield, which is estimated to be
no more than 3,500 boxes per hectare and per year, well below the world standard of
4,500 to 5,000 boxes per hectare. This corresponds to an average of around 43-45 tons
of exportable fruit per hectare. Smaller growers tend to have lower productivity levels
than corporate growers. The export price has been at an average of US$240 FOB per ton
during 2004-2008, while the price paid to growers has gone up in recent years due to
increased competition between buyers.

However, production costs have also been on a steep rise due to exchange rate fluctuations
and to the surge in the prices of agro-chemical inputs. Productivity gains are therefore
critical to offset input cost increases. In 2008, the net income of small banana growers
could be estimated between US$1,000 and US$1,400/ha/yr for those farmers who were
able to achieve a good productivity level (4,000 boxes/ha). However, those who had yields
of 3,500 boxes/ha or below—the case of a majority of small farmers—barely broke even.

As demonstrated by its strong growth and its ability to gain market share in recent years,
the Philippine banana export industry is competitive. Its performance compares favor-
ably with Ecuador, the world leader. A Strengths-Weaknesses-Opportunities-Threats
analysis reveals the strengths of the Philippine banana industry compared with that of
Ecuador, while both countries exhibit similar weaknesses at the small holder level. Lack
of access to finance and credit for farm development, expansion and improvements is a
common problem. The major drivers of competitiveness in the industry worldwide are
cost, consistency of supply, quality, and safety. Since bananas are a perishable product,
availability of an efficient and reliable logistics chain to guarantee just-in-time and just-
in-shape delivery is mandatory.

As reported by grower surveys, small holder production is affected by three major types
of constraints: (i) availability and quality of infrastructure; (ii) consequences of CARP on

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

land use and productivity and, indirectly, on access to credit; and, (iii) limited capacity for
on-farm and post-harvest investments, feeding in turn a vicious circle of low productivity.

• Good transport infrastructure and efficient logistics are the first factors of com-
petitiveness in the industry. The primary constraint, particularly for small hold-
ers, is therefore the farm-to-market infrastructure;

• Second, implementation of CARP has led to a fragmentation of land holdings, re-

sulting in difficulties in guaranteeing credit, and to an inexistent and inefficient
land market. In the post-CARP context, land availability and land tenure status
remain major issues. This affects land productivity by limiting economies of scale;

• Third, low productivity and declining profitability of banana production at farm-

level tend to reduce investment capacity, while management capacities remain
weak in the absence of technical support systems and services.

The banana industry also faces challenges in terms of its social and environmental sus-
tainability, calling for policing, economic management, and regulation. While the regula-
tory framework of the banana industry has recently improved in the Philippines, the cur-
rent aerial spray ban in Davao is creating serious problems for producers and exporters.
Finally, some factors in the general business and macro-environment such as the foreign
exchange rate and the interest rates can have a potentially critical impact on the sub-
sector.

Export of Cavendish banana in Mindanao is a growing and vibrant sub-sector. However, it

is facing some very serious challenges ahead, as mentioned above. Key issues for the long-
term viability and sustainability of the industry have to be addressed. They call for some
form of collective action in the form of adequate policies and investments, particularly in
infrastructure. The current level of underinvestment at farm level and in post-harvest ac-
tivities undermines the long-term viability of the industry. Competitiveness improvement
and small holder inclusion are closely related objectives. Government’s funding should be
targeted at solving key bottlenecks in areas such as transport, infrastructure, land and
credit availability, productivity and quality enhancement, geographical distribution, and
environmental sustainability. Policy reforms, institutional support and capacity-building,
including in sector governance and regulation, are also required.

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