AP Reader Dave Hojilla poses a very valid concern that Doomsday for Philippine agriculture is coming because “After distributing 4.119 million hectares* of agri land to farmer-beneficiaries nationwide, we lease close to 1.5 million hectares to foreign corporations for 25-50 years.”.
I agree with Dave that doomsday might be coming for Philippine Agriculture – particularly the Philippine Sugar Industry. There are various scenarios which can be proposed on the policy changes – for this post, I will focus instead on what can be done – if headwinds are such that there will be no immediate change in the CARP-ER. Much like US Medicare and Social Security – both Democrats and Republicans know they will be hitting huge deficits based on the current industry structure, yet cutting the deficit caused by these entitlements is a politically charged issue – and both Dems and GOP will not touch the issue… until the Tea Party’s “nuts” came along. Then, the GOP and the Dems adopt a bipartisan consensus on reforming entitlements.
Philippine politics however has yet to come to a consensus on how to deal with CARP. While I take the view that the best solution is to abolish CARP, abolish DAR, open the economy, generate and support more entrepreneurs – it will take time to muster political will given that Congress is stacked with collectivist and populist politicians who pander to their base – and will fight the abolition of CARP – it’s a great cause – albeit misguided. How CARP ruins agricultural development was discussed very well by BenK – and he provided some solid policy fixes. I have also joined his call for abolishing CARP and the DAR. But I know – it is wishful thinking at this point. Thus, I switch hats – and be more pragmatic about the current state of affairs – the AS-IS.
Assuming that there will not be any policy change on agrarian reform anytime soon what can the Philippine agriculture industry do to become more competitive and profitable? Globalization and multilateral free trade agreements are here to stay – and we can fear it, hate it – or embrace it. The former is easy – allow me to present the case for the latter – embracing it – against the backdrop of CARP as we know it today. What can landowners, farmers, corporate farms and cooperatives do.
A good model is provided by Australia’s sugar industry – which operationally is similar to the Philippine sugar industry – but ownership of the various operations in the suppy chain and the value chain are more diverse. In contrast, the Philippine sugar industry has yet to adopt a similar approach. Before I get ahead of myself, allow me to present a model of the sugar industry’s supply chain:
As described in http://www.tdtvictoria.org.au/rightmove/activity5.htm:
THE SUGAR PRODUCTION PROCESS
Sugar is grown in many countries around the world. It is produced from sugar cane in countries with warm climates and from sugar beet in cooler climates. Sugar cane grows best in tropical or subtropical areas due to the high temperatures and regular rain supply these climates provide. Australia produces raw sugar from sugar cane grown primarily in Queensland’s subtropical and tropical coastal regions. Sugar cane is also grown in the subtropical north of New South Wales.
HARVESTING THE CROP:
Sugar cane can take between 10 and 16 months to grow before it is ready for harvest between June and December. Harvesting begins by burning the crop to reduce the amount of leaves, weeds and other matter which can make harvesting and milling operations difficult. Farmers use a machine called a harvester to gather the crop. It moves along the rows of sugar cane. As it does so it removes the remaining leafy tops of the cane stalks, cuts the stalks off at ground level and chops the cane into small lengths called billets. The billets are loaded into wire bins towed alongside by a tractor. These field transporters take the harvested sugar cane to collection areas known as cane pads. At the cane pads, the billets are transferred into very large bins ready to be collected and taken to the mill. The sugar mills have to organise collections from each of the cane pads in their catchment area. The mill companies use road transport service providers to co-ordinate this task. This is an important job. Sugar quality and its value reduce over time. Sugar cane should be harvested and delivered to the mill within 16 hours. If the farms are a long way from the mill, rail transport might also be used.
Transport providers often use technology to help them deliver an efficient and effective service. They can use GPS systems to locate the relevant cane pads and have electronic tracking devices on the billet bins to help them track and record the movement of each farmer’s produce.
Farmers often belong to a co-operative which owns or works with the sugar mills. Mills need to process the sugar cane straight away to ensure quality. If too much sugar cane is delivered at one time and cannot be processed, the sugar will decrease in quality and the farmer will lose money. The mill also needs to make sure that it has enough sugar cane to process to stay open. The mills and the farmers work together to plan their crop and harvest to ensure no sugar cane is wasted and the mill has a sufficient supply. Each farmer within the co-operative is allocated a time within the season to harvest the different sections of their farm to ensure the optimum supply of sugar to the mills.
THE MILLING AND REFINING PROCESS:
On arrival at the mill, the billets are weighed and washed. This weight is recorded so the mill knows how much to pay the farmer. The cane is then fed through a series of mill rollers to extract the sugar juice which is treated to have impurities removed. The sugar juice is heated to evaporate any water leaving a thick syrup called molasses in which raw sugar crystals will form. A machine called a centrifuge separates the raw sugar crystals from the syrup. The raw sugar is tumble-dried and placed in large storage bins and sorted for transport. This bulk sugar is transported to the refineries directly or to bulk terminals by road or rail.
If the sugar is being exported, it is stored in the bulk terminals until it is needed for shipment. Then it is transported via conveyors straight to the wharf and loaded into the ship’s hold.
Although sugarcane is only harvested between June and December the refineries operate all-year-round. They need a constant supply of raw sugar so access supplies from the bulk terminals where it is stockpiled.
When the raw sugar arrives at the refinery the final impurities in the sugar are removed. The sugar is then graded into required sizes and packaged. Orders are assembled and dispatched to the refinery’s customers, including food manufacturers, by road or rail.
QUESTIONS TO CONSIDER
Why do the farmers and mills have to co-ordinate their harvesting schedule?
Why is raw sugar stockpiled in the bulk terminals?
Why do the billet bins have electronic tags?
Why is efficient transport to the mill so important?
What information do you think the transport providers need to co-ordinate the collection of billet bins?
The diagram below shows a model of the value chain of the agriculture industry.
The execution of functions throughout the value chain can be just by one entity – or multiple entities – which in turn can be vertically horizontally integrated – or outsourced.
the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration.
Vertical integration is one method of avoiding the hold-up problem. A monopoly produced through vertical integration is called a vertical monopoly, although it might be more appropriate to speak of this as some form of cartel.
Nineteenth century steel tycoon Andrew Carnegie introduced the idea of the existence and use of vertical integration. This led other businesspeople to use the system to promote better financial growth and efficiency in their companies and businesses.
is the growth of a business enterprise through the acquisition of companies that produce the intermediate goods needed by the business or help market and distribute its product. Such expansion is desired because it secures the supplies needed by the firm to produce its product and the market needed to sell the product. The result is a more efficient business with lower costs and more profits.
Related is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale.
Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase scales and to gain market power. The acquisition of DirectTV by News Corporation is an example of forward vertical expansion or acquisition. DirectTV is a satellite TV company through which News Corporation can distribute more of its media content: news, movies, and television shows. The pending acquisition of NBC by Comcast Cable (as of January 16, 2010) is an example of backward vertical integration.
Of course, protecting the public from communications monopolies that can be built in this way is one of the missions of the Federal Communications Commission.
the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets. Horizontal integration in marketing is much more common than vertical integration is in production. Horizontal integration occurs when a firm is being taken over by, or merged with, another firm which is in the same industry and in the same stage of production as the merged firm, e.g. a car manufacturer merging with another car manufacturer. In this case both the companies are in the same stage of production and also in the same industry. This process is also known as a “buy out” or “take-over”.
A monopoly created through horizontal integration is called a horizontal monopoly.
A term that is closely related with horizontal integration is horizontal expansion. This is the expansion of a firm within an industry in which it is already active for the purpose of increasing its share of the market for a particular product or service.
I have no information to make a determination that the agricultural corporations and coops have made a serious effort about product positioning, and identifying their core strengths – and outsourcing areas where they don’t have expertise to companies that have the ability to provide the service better and cheaper than they can. My take is that the Philippine agriculture industry – just like any other industry in the Philippines has not bothered to re-evaluate their business models in the light of a dynamic global economy.
Our competitors have more diversity – while we are still bent on the pre-CARP days of a monopolist – vertically and horizontally integrated sugar – and agricultural industry – in general.
Japan for instance has a very active cooperative activity in the rice sector. In fact it has been seen as an obstacle to corporate farming – and keeping rice farmers quite happy – and politicians who keep the rice farmers happy – get re-elected. In the Philippines however, our way of keeping rice farmers happy – went overboard with its anti big landowner bias. As a matter of reflection – what if the situations were reversed – and the farmers were now huge landowners – and their holdings will be carved, how would they feel about it?
Going beyond the identification of gaps – the Philippine agricultural industry needs to start talking within the industry to identify their businesses positioning in the value chain – and the supply chain – and recalibrate their ownership structure – and identify more innovative models that result in a win-win.
The challenge as shown in the above illustration is to move the Philippines from its fixation on vertical and horizontal integration as the only way towards agricultural development and nudge it towards where its competitors are curently situated. The greater sophistication of the industry structure of our competitors reflect the entrepreneurial bent of their cultures in comparison to the Philippines more timid culture – only few individuals are willing to take the risk, lots are more inclined to wait it out – iwas pusoy – This was well documented in a study on cultural differences – In his bestselling book Culture’s Consequences, Geert Hofstede proposed four dimensions on which the differences among national cultures can be understood: Individualism, Power Distance, Uncertainty Avoidance and Masculinity.
The following section applies only to the risk takers – proceed at your own risk. Of course, without risk – the reward isn’t that high 🙂
Enter Outsourcing. We have been so used to the concept of outsourcing as something that comes from overseas. Outsourcing can also be applied in our own backyard. As explained in Wisegeek.com
Outsourcing refers to a company that contracts with another company to provide services that might otherwise be performed by in-house employees. Many large companies now outsource jobs such as call center services, e-mail services, and payroll. These jobs are handled by separate companies that specialize in each service, and are often located overseas.
There are many reasons that companies outsource various jobs, but the most prominent advantage seems to be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do the work for considerably less money, as they don’t have to provide benefits to their workers and have fewer overhead expenses to worry about.
Outsourcing also allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company. The specialized company that handles the outsourced work is often streamlined, and often has world-class capabilities and access to new technology that a company couldn’t afford to buy on their own. Plus, if a company is looking to expand, outsourcing is a cost-effective way to start building foundations in other countries.
There are some disadvantages to outsourcing as well. One of these is that outsourcing often eliminates direct communication between a company and its clients. This prevents a company from building solid relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon its outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly.
Putting it all together:
The various industry players – tier 1, tier 2, farmers, millers, landowners, workers unions, cooperatives, corporate can sit on the table and comprehensive tackle the following:
- Identify each of the players positions in the entire supply chain.
- For each company, evaluate its value chain – keep the core function, outsource other operations that don’t have value-added.
- Craft a project plan to synchronize production that leverages economies of scale through industry linkages.
- Enable industry linkages that stimulate consolidation of production without prejudice to ownership of the operations.
- Develop Industry-standard operating procedures to become more efficient, cost-effective, resilient, and highly competitive.
- Access to low interest working capital either through innovative financing arrangements with Tier 1 players – or in lieu, the Land Bank or even the PNB.
- Deploy public-private interagency pursuit teams that can generate more strategic sales leads and revenue.
These measures may not have the maximum effect as the optimal solution of abolishing CARP and the DAR – but can mitigate the losses by changing the way we think about our business models, our competition, and our markets – about the way we do business with the world. After all – we can’t expect to have different results if we use the same methods in a changed business environment – remember the dinosaurs, the mammals and the Ice Age?
The challenge is quite simple – can the industry get its act together, sit on the table, and dig or climb or jump or get a lifeline out of the hole that CARP has dug for the industry. Government has done a lousy job – it’s about time time for private enterprise to show its wares and step up to the plate.
Cmon guys – there are other uses for sugar cane than sugar – the ethanol market is a SELLERS market – and even more profitable. But that’s a blog post for another day.
And that’s my two cents worth of bulsyetan. Have a good one.