Ask THE media and people in the street about manufacturing, and many will tell you, it is about cars, chemicals, clothing, electronics, steel and machines. Very few know that agri-food manufacturing is a strategic part of it.
What is manufacturing? One definition: The process of converting raw materials or parts into goods that meet a customer’s expectations. The Food and Agriculture Organization of the United Nations, a leading knowledge center, claims that agro-processing industry refers to the subset of manufacturing that processes raw materials and intermediate products from agriculture, forestry and fisheries.
A large part of agricultural production undergoes some degree of transformation between harvesting and final use. The upstream industries are engaged in the initial processing of agricultural commodities. Examples are rice and sugar milling, coconut oil milling, vegetable grading and cutting, and fish canning. The downstream industries undertake further manufacturing operations on intermediate products made from agricultural materials. Examples are coconut oil refining, feed milling, bread making, and candy manufacturing.
How large is agri-food manufacturing in the Philippines? Most provinces, if not all, have rice mills. There are coconut oil mills in Calabazon, Eastern Visayas, and most of Mindanao. There are sugar mills in Cagayan Valley, Central Luzon, Calabarzon, Western, Central and Eastern Visayas, Northern, Central and Southern Mindanao. There are fruit processing plants in Caraga, Central and Western Visayas, Davao, Northern Mindanao and Soccsksargen. There are feed mills and meat processing plants in many parts of the country. Bakeries are all over the 1,600 municipalities.
In 2011, the gross value added of food manufacturing amounted to P885.7 billion, beverages P80.6 billion, and tobacco products P6.4 billion. The total, P972.1 billion, accounted for 47.5 percent of total manufacturing output measured in gross value-added. This excludes other agro-processing such as primary rubber, cultured wood products, etc.
By contrast, electronic products totaled P275.5 billion; petroleum products, P150.3 billion; and chemical products, P136.7 billion. They are large industries but they fall short compared to food manufacturing output. With respect to employment, total manufacturing employed about 3.2 million in 2011. There are no hard statistics by industry, but most likely, food processing was a major job generator.
What ails the agri-food manufacturing industries in the Philippines? There are many factors: lack of raw materials, high power costs, access to credit, lack of trained manpower, and others.
Let us discuss the issue of raw material supply, which is very critical to plant profitability.
The agriculture and fishery sector supplies most of the raw material for Philippine manufacturing, except perhaps those with imported supplies such as flour milling, meat processing and, to some extent, feed milling. The low raw material base of agriculture and fishery has affected the performance of the agri-food manufacturing industries. Based on statistics and industry sources, the following industries are operating at low capacity utilization:
Coconut products. The industries in this cluster are many: oil milling, desiccated coconut, activated carbon, coconut powder, coconut water, coco coir, activated carbon and other products. Most plants are operating on as low as 50-percent capacity. A xylitol plant in Davao reportedly closed recently due to lack of coconut shell charcoal.
Sugar milling. By and large, most mills operate at about 60 percent capacity utilization. Most mills pay haulage allowance to planters just to secure sugar cane, resulting in lack of competitiveness.
Natural rubber. Rubber processing plants producing crumb rubber for exports are operating below capacity. One plant in North Cotabato runs only two days a week.
Fruit processing. A big plant in Cebu indicated it has a good supply of mango, banana and pineapple, but has practically little of other fruits such as passion fruits, guava, and jackfruit. Its buyers overseas want a variety of processed fruits.
Coffee processing. The country imports some 25,000 tons of beans annually to supply the domestic requirements of about 50,000 tons of roasted beans.
Cocoa processing. Some 85 percent of consumption is supplied by imports as reported by a leading chocolate firm.
There are other industries that could not be built due to limited raw material supply. There are several culprits for raw material shortages and lack of new investments in processing industries. First and foremost is the low productivity of crops such as coconut, sugarcane, coffee, rubber and fruits. Second is the limited variety of raw materials such as fruits. Thailand, a leading fruit packer, has a wide variety of raw materials: pineapple, mango, guava, tamarind, longan, lychee, durian, custard apple, rambutan, jackfruit, among others.
Low productivity and narrow diversification of agriculture have a direct impact on agri-food manufacturing uncompetitiveness. First, assembly cost is very high with small lots. Second, the cost is exacerbated by carrying small lots over poor roads. Third, the seasonality factor and limited range of raw material supply limits the options of multiproduct processing lines. Fourth, quality and traceability could be problems with small lots and long logistics chain. Lastly, economies of scale gains are negated.
There is scope for improving the performance of the agri-based processing industries. The current low-capacity utilization limits the growth of nonfarm employment, exports and investments. But the industries can generate more employment and investments if there is a productive and reliable agriculture base to start with. Thus, addressing supply chain issues in agriculture and fisheries becomes critical. This means promoting investments to increase farm productivity, enhancing farm diversification, addressing power supply, and building better road network. It is my experience that relying solely on local governments to execute development program is misguided. There must be contributions from actors in the value chains to make the industry competitive. In the final analysis, the value chain is only as strong as its weakest link.
(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is executive director of the Center for Food and AgriBusiness of the University of Asia & the Pacific. Feedback at map@globelines.com.ph.)