Agriculture, the essential missing link
Puerto Rico’s $8.5 billion food market untapped by local agriculture
A close look at the economic output of Puerto Rico's agricultural industry over the past 50 years presents a very telling picture of how much the island's agriculture has plummeted, a pace directly proportional to the amount of locally produced food consumed.
Those disturbing statistics are difficult to comprehend, when economists estimate 70¢ of every dollar spent on locally grown food remains in Puerto Rico's economy.
As reported by CARIBBEAN BUSINESS (June 9, 2011), after decades of governmental mismanagement, the local agriculture industry produces only about 20% of the food we consume, while 80% of our food is imported. Yet according to industry experts, 90% of the food we consume can be grown or cultivated in Puerto Rico.
In 2010 alone, we imported $3.5 billion in agricultural and food products at wholesale prices, according to the latest Puerto Rico Planning Board estimates. That is money that could have stayed in Puerto Rico's economy.
In total, island residents consumed about $8.6 billion in food products at retail prices during that year. Industry sources interviewed by CARIBBEAN BUSINESS agree the island should be producing at least 45% to 50% of the products we consume. That is being conservative. We have the capacity to produce 90%, or roughly $7.7 billion worth. We are far short of that capacity.
If Puerto Rico were able to replace 90% of its agricultural imports with products grown locally, it would represent $3.15 billion staying in the local economy and roughly 85,000 new jobs in the agricultural sector.
It also would lower the cost of food, given savings in transportation expenses, and provide a secure food supply for the island.
THE MYTH OF FOOD ABUNDANCE
Rapid world-population growth along with global climate change and emerging consumer markets competing for existing food supplies are putting at risk the availability and affordability of the world's food.Sooner rather than later, Puerto Rico will be affected by this situation.
In addition, experts on the subject point out that Puerto Rico has merely three weeks of food supplies in the event the island's shipping infrastructure were to sustain a catastrophic blow. Were there to be a natural disaster such as a hurricane or tsunami, Puerto Rico would be disproportionately dependent on emergency aid. Should the maritime-transportation industry's infrastructure—responsible for moving the majority of the food consumed on the island—be drastically affected, industry executives inform that it would take a few weeks for the industry to become operational, with estimates predicting it would be at about 25% to 30% capacity. Re-establishing operations to full capacity could take months. Refrigerated cargo could be a bigger concern depending on the availability of electrical power on the island.
"Because of the way they work the vessels, barge carriers could be partially operational sooner than ship operators that use cranes to load and unload vessels," José Nazario, administrative vice president at Crowley Maritime Corp.'s Liner Services, told CARIBBEAN BUSINESS. "Ships using cranes might take much longer depending on the damages cranes sustain and the time needed to either repair or replace them. In any scenario related to a major catastrophe, it could take a long time before food-import levels go back to normal."
Eduardo Pagán, Sea Star Line's vice president, agrees. "We could work the roll-on/roll-off section of our ships without cranes, but that would just be a portion of our ships' capacity; there also is the possibility of working our ships at the Port of Ponce facilities, but that is assuming its cranes don't sustain damages. All in all, it would be a difficult situation," he said.
The truth is that although the likelihood of sustaining such catastrophic, long-lasting isolation is very slim, there are plenty of compelling reasons to examine closely the shortcomings of the industry.
X-RAY OF CONSUMPTION
About 27% of local food consumption comes from meat and related products, which make up the largest portion of food-related expenditures. Fruits and vegetables comprise 24.7%, followed by dairy and related products, constituting 11% of the total spent, according to consumer statistics from local market research & analysis firm Estudios Técnicos.
According to the CARIBBEAN BUSINESS 2012 Book of Lists, the island's 32-largest food services and product distributors took in more than $3.5 billion in revenue largely through imports, most of which could be substituted by locally grown products.
A variety of fruits, vegetables and other agricultural products are harvested year-round in Puerto Rico, and it is widely known that for every dollar spent on local agricultural products, 70¢ stays in the island's economy.
In addition to the financial aspect, increasing local agricultural production has myriad benefits. First, locally produced food products would be fresher at the point of sale than imported ones.
On average, food products imported from the mainland U.S.—the island's main food supplier—travel 2,800 miles from the source of production to the dinner table. At the very least, they must spend three days at sea. Products coming from China, the second major food supplier, travel some 9,500 miles, a nearly month-long voyage. The transportation of food cargo costs at least $300 million a year.
There are other environmental benefits of growing more food in Puerto Rico as well. A thriving agriculture industry serves to enrich the soil and protect the air and water quality.
To develop the local agriculture industry to its full potential, from the current 20% production level to 90%, will require the industry to operate like a well-honed business. Doing so will keep money in the local economy and create thousands of jobs.
This is clearly not happening. There are several reasons why.
Most local farmers don't necessarily have the skills to run their farms in a business-like manner. Entrepreneurial and marketing abilities are needed to get products from the farm to kitchens and markets locally and abroad.
According to the most recent figures, from the U.S. Department of Agriculture Census of 2007, the average farm size in Puerto Rico is 35.4 cuerdas (34.4 acres) down from 39.1 cuerdas (37.9 acres) in 2002. These small farms, on average, produced only $32,752 worth of agricultural products at market value. Of the large farms, there are 422 measuring 260 cuerdas (252 acres) or more, 66 less than in 2002.
The past few decades have seen the local Agriculture Department become little more than a provider of government funds. Farmers are producing based on government incentives instead of market demands.
In effect, the island's agriculture industry has become similar to a planned state-run economy, with the government determining production instead of market forces. However, after decades of falling production, it is clear that neither the Agriculture Department nor the island's small farmers can truly predict market demand. That has to change, say industry insiders.
"The industry has to analyze the market, see what products are in demand and produce to fill those needs," Gualberto Rodríguez, president of Caribbean Produce Exchange Inc., one of Puerto Rico's principal fruit and vegetable distributors, told CARIBBEAN BUSINESS. "Historically, that has not been the case. Farmers have an artisan approach toward the industry; they harvest the products that, for generations, they have grown without considering market needs. In the end, when there is no demand for those products, the Agriculture Department ends up subsidizing their crops.
"This model is not productive; instead of the government subsidizing inefficiencies, those funds could be used to provide education and make new technologies available to farmers, which could help promote other crops that meet market demands and generate profitable business activities."
Former Agriculture Department Secretary Javier Rivera Aquino agrees. "People have to start seeing this industry as a good business investment," he said. "The first step in this process is to focus on productivity and get away from government subsidies and protection. This change has to do with the fact that we need to have the right products available when consumers need them.
"We need to create a business culture within agriculture," Rivera Aquino said. "We need to adopt new technologies to improve production."
A DECLINING INDUSTRY
Back in 1947, before Puerto Rico moved from an agricultural society to an industrialized economy, agriculture represented 20% of Puerto Rico's gross national product, or GNP. That figure has gone down to less than 3%, according to the latest government statistics. (See chart on page 15)
Agricultural jobs have also followed that trend. According to the 2007 Agriculture Census, some 15,000 people were working in the island's agriculture sector, down from more than 40,000 in 1947. That only represented 3% of the labor force and was 2,000 fewer than in 2005. The census also shows some 10,000 farmers earn $20,000 or less annually. (See chart below)
Meanwhile, food imports have more than doubled, from $1.5 billion in wholesale prices in 1989 to almost $3.5 billion in 2010.
The following is a breakdown of the imported percent of total staple foods consumed in Puerto Rico:
- Tomatoes, 50.96%
- Onions, 76.88%
- Sweet potatoes, 81.28%
- Yams, 85.76%
- Yucca (cassava), 95.36%
- Tannia (malanga), 93.36%
- Chicken, 66.75%
- Fish and seafood, 90.29%
- Pork meat, 89.87%
- Rice, 100%
- Beans, 99.27%
- Red meat, 84.18%
Traditionally, observers have blamed Puerto Rico's high labor and production costs for the inability of the industry to achieve growth. This isn't necessarily true.
A NEW APPROACH
There are management approaches that could maximize efficiencies and build more market share.
Puerto Rico's entrepreneurial community needs to see agriculture as a business. Industry experts offer some recommendations: The government should assist in pairing groups of farmers with entrepreneurs who see the industry's possibilities, connect farmers and retailers, and invest in the industry. Grouping several small farms will allow farmers to enjoy economies of scale in negotiating raw material purchases and sales contracts, which also gives retailers confidence that contracts will be fulfilled, with products delivered in the quantities needed and on time.
One company that is successfully collaborating with farmers is Wal- Mart. The retail giant, with more than 8,500 stores in 15 countries, operates more than 50 stores in Puerto Rico, and represents $2.1 billion of the $35 billion local retail sector. These include its flagship Wal-Mart stores, as well as Sam's Club and Amigo supermarkets.
Four years ago, Wal-Mart moved to increase its purchases of locally grown foods. Since then, the company has increased locally sourced buying, from 20 farmers to more than 500 in 2012.
The move is part of the company's global attempt to rebrand itself to attract both low-price shoppers, as well as those interested in sustainability. The rebranding has seen Wal-Mart change its slogan from "Always low prices" to "Save Money. Live Better."
Iván Báez, head of corporate affairs for Wal-Mart Puerto Rico Inc., explained that the mega-retailer's local program revolves around working with local farmers to increase local agricultural production.
"Buying from local producers, fresh from the farm, allows us to minimize imports of food to the island," Báez said. "We save in energy consumption and minimize our CO2 emissions by not having to transport food across the globe. We also create local jobs and contribute to a sustainable economy."
To deal with the fact that most of the island's farms are small, Wal- Mart affiliates with farmers of all sizes. Some farms, for example, only supply one store, while other farmers have the capacity to supply many more.
The program's partner farmers receive training along with technical and business-management support so they can produce well-planned, sophisticated crops. Among the products the company buys locally are cabbage, and various root vegetables such as yucca, yams, sweet potatoes, oranges, mangoes, avocados and mushrooms.
Báez said Wal-Mart is still looking to expand its local purchases by as much as 20%. He believes there is still much to be done to improve the local agriculture industry.
To this end, Wal-Mart is joining forces with the Agriculture Department and local farmers to develop crop plans, allowing the company to forecast its local purchases in advance, and ensuring farmers will have a buyer for their crop. The plan has helped to eliminate the uncertainty retailers and farmers have faced in the past.
"We feel proud that we are helping the local agriculture industry and contributing to the development of Puerto Rico's nutritional sustainability," Báez said.
Carlos Flores, the Agriculture undersecretary added, "This is a groundbreaking initiative that has been proven to work; we are glad to participate in it."
Importantly, Wal-Mart has broken the myth that agriculture production is not viable because of high local-production costs.
AGRICULTURE MUST BE INTEGRATED INTO PUERTO RICO'S FOOD-INDUSTRY ECOSYSTEM
One of Puerto Rico's leading economic sectors is the food industry. With about $8.5 billion in annual sales, the sector has continued to grow at a steady pace during the past decade.
A HUGE MARKET AT HOME
Total food sales represent about 25% of the island's $35 billion annual retail sales in an ecosystem that includes food-industry importers, distributors, retailers, wholesalers, restaurants and convenience stores or colmados.
The industry is also an important source of employment, with a staggering 110,000 direct jobs. These represent about 12% of the local workforce, including 17.5% of private- sector employment, according to figures from the Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym).
These facts present a great opportunity for the local agriculture industry, which could be supplying most of the food needed instead of the 20% it does now. This can only be accomplished by integrating agriculture into the food industry, understanding its needs and producing accordingly.
Puerto Rico's gastronomic sector, or restaurants, represents about 44% of the local food industry. If the agricultural sector moves beyond growing just a handful of products and diversifies, it could tap into this enormous business opportunity. There is a real business potential in the fact that local agroentrepreneurs and food-related companies have a captive market of about 7,000 restaurants, which are mostly supplied by imports.
BUY LOCAL: A POSITIVE NEW TREND
In the past, local consumers had a tendency to support imported products based on a belief that they might be of a higher quality. This isn't the case anymore.
According to an islandwide survey conducted by Gaither International, 95% of those interviewed said they purchase local products regularly; this validates the market's untapped potential for local products.
When surveyed, nearly six out of 10 consumers, or 57%, report having purchased a Puerto Rico product during the past seven days, while a substantial 86% reported making such a purchase during the previous two weeks.
"These figures show that consumers aren't only expressing a willingness to acquire local products, but also that the inclination has actually turned into a common consumer pattern. The implications of this new trend in consumer behavior are far-reaching and indicative of tremendous growth opportunities for the near future," concluded Beatriz Castro, director of syndicated research for Gaither International.
Asked which local product(s) they purchased most recently, the vast majority of respondents mentioned food-related products such as viandas (root vegetables), other vegetables, fruits and milk. One-third of respondents frequently buy local coffee, and seafood was mentioned by 6%.
AGRICULTURE: HELP WANTED
If Puerto Rico is to succeed in growing its agricultural sector, the availability of a labor force will be a very important factor. Demand for agricultural workers will increase, but will people take those jobs? Even with the sector under-performing, getting people to fill those agriculture jobs has been an uphill battle.
Even when Puerto Rico faced an unemployment rate higher than 16%, half of the island's coffee crop went unharvested in 2010 and 2011 because of a lack of workers, representing a $17 million loss in 2011 alone.
Government incentives to increase the number of workers in the industry, such as allowing low-wage earners and the unemployed to keep their benefits while performing agricultural work and offering convicts reduced sentences, have largely failed. These measures don't address the real problem in agriculture: A rural workforce once living near farms has moved to urban centers.
BRINGING THE FARM TO THE WORKER
Since Puerto Rico started industrializing in 1947 with Operation Bootstrap, the population near agricultural centers has steadily declined. The workforce has since moved to urban centers, abandoning rural agricultural municipalities, to work in factories and other businesses in urban areas. With the local economy's six-year recession, many of these laborers are now unemployed and could be potential candidates to work the farms. However, it isn't cost-effective for them to drive every day from the urban centers to the fields. In many cases, they don't even own a form of transportation.
To address these issues, during harvest seasons, the government could offer transportation to and from the fields, and housing when needed.
It is estimated that for the coffee harvest, an additional 6,000 workers are needed. These workers need housing, food and other basic amenities for living on farms during the week. Some workers could be shuttled to the nearest town, where they could obtain public transportation, while others could ride in groups with workers who have vehicles.
The Migrant & Seasonal Agricultural Worker Protection Act sets federal labor-related standards with respect to the transportation and housing of agricultural workers, including requirements for payment of wages and employment conditions. The act also deals with the relationship between agricultural workers, their employers and farm-labor contractors.
The local government could incentivize the construction and maintenance of housing, and sanitary and kitchen facilities for farm laborers that meet the act's requirements. The government's investment would be more than returned by the amount of money that would remain in the economy, as well as the taxes paid by the farmers, investors and businesses along the agricultural-production chain.
NEW TECHNOLOGIES NEEDED TO INCREASE PRODUCTION
The latest figures from the Agriculture census show that, in 2007, the industry accounted for 24.7% of land used in Puerto Rico. However, in fiscal 2010, the industry represented less than 1% of the island's gross domestic product (GDP), and as previously mentioned the industry produced only 20% of the food consumed locally.
To produce 90% of the food consumed in Puerto Rico, the agriculture industry will have to become more efficient in its land use. According to the agriculture census, only 57.5% of agricultural land—320,822 cuerdas (311,197 acres) out of a total 557,528 cuerdas (540,802 acres)—was actually used for crops, pasture or grazing; new technologies promise to make the use of land more efficient. (See chart on page 17)
Hydroponics, a method of growing plants using mineral-nutrient solutions in water, forgoing the need for soil, is a good example of efficiencies provided by new technologies. While naturally, soil acts as a mineral-nutrient reservoir, the soil itself is not essential to plant growth. Using hydroponics, the plant roots absorb mineral nutrients directly from water.
The use of hydroponics allows farmers to plant on a fraction of the land needed in conventional agriculture. The advanced technique also allows farmers to be more productive and cost-efficient, leading to potential for higher wages.
Another promising technology combines biological sciences and agriculture to create bioagriculture. Puerto Rico bioscience industries have become home to nearly a dozen bioagriculture companies. These advanced agribusinesses develop and grow seeds for stateside crops such as corn, soybean, rice, sunflower, cotton and sorghum.
Seed production was Puerto Rico's seventh-most important crop in fiscal 2008, representing 3.6% of the industry, more than pork, bananas and tomatoes. By fiscal 2010, it accounted for a $35 million business.
The research & development carried out by these companies, some of which is carried out in Puerto Rico, produces seeds with higher yields, greater resistance to pesticides and other improved characteristics. Developing advanced seeds for local agricultural production will benefit both the bioagriculture industry and the conventional agriculture industry. In addition, bioagriculture leads to higher-paying jobs.
These and other new farming techniques aren't rocket science. If Puerto Rico puts bureaucracy aside and looks at agriculture as a great creator of jobs and revenue that will stay in Puerto Rico, then farming can help grow Puerto Rico's economy in a significant way and provide the island with self-sufficiency.
‘Cosecha y Crianza’: A new approach to marketlocal agricultural products
The Puerto Rico Agriculture Department is betting the agency's new "Cosecha y Crianza de Puerto Rico" (Puerto Rico Harvested & Raised) marketing initiative will create strong interest in locally grown foods.
Conceptualized to promote consumption of local agricultural products and increase demand, the new program aims to raise awareness of the quality and freshness of local products, and support farmers' efforts by instituting a labeling system that identifies them.
The private sector's positive reaction to the Puerto Rico Harvested & Raised initiative was instantaneous.
"I think this is a fantastic initiative," Ferdysac Márquez, president of the Chamber of Food Marketing, Industry & Distribution (MIDA by its Spanish acronym), told CARIBBEAN BUSINESS. "What positively differentiates this initiative from others is that it integrates everyone involved in the food-distribution chain, from producer to distributor, retailer to consumer: It is a win-win for everyone."
Products that meet Agriculture's strict quality criteria will be identified with a seal. Fruits and vegetables, including root vegetables and other produce will carry the "Cosecha de Puerto Rico" (Puerto Rico Harvest) seal—meats, chicken, eggs, milk and other animal-derived products will be identified with the "Crianza de Puerto Rico" (Puerto Rico Raised) seal.
The seal costs $250, but industry observers agree this is a small investment for the benefits that local farmers will get from participating in the program.
The marketing effort includes onsite promotion of local products at supermarkets, other retail outlets and special events.
The initiative includes an advertising campaign featuring Iván "Pudge" Rodríguez, the Major League Baseball player; Chef Giovanna Huyke; and musician Giovanni Hidalgo; all local talent with great credibility, and living examples that demonstrate when Puerto Rico sets out to accomplish something, it "does it better."
Market studies indicate seven out of 10 consumers think fresh local food products are of higher quality than those imported from other locations. Sixty-three percent place great importance on the origin of products.
"We congratulate the Agriculture Department for this novel initiative," Márquez added. "It goes hand in hand with what MIDA has been promoting and working for, and it will definitely strengthen the island's food chain."
Mercado Central, San Juan’s contribution to the island’s agriculture
Proposed food processing & distribution center will offer new marketing opportunities to local farmers
Experts point out that one of the main obstacles to growth for local agriculture is the difficulty farmers face when trying to access markets that could purchase their products. If San Juan Mayor Jorge Santini has his way, this will soon change.
As part of a $1 billion urban-and industrial-development project for Kennedy Avenue, Mercado Central—the port's anchor tenant and chief supplier to Puerto Rico's $8.5 billion food industry for more than 50 years—will be moved from its current location on the Port of San Juan, across the street to a new, bigger facility designed along the lines of the most modern distribution centers of the world. According to the municipality's statistics, Mercado Central's annual economic activity represents more than $1.16 billion in annual sales, accounting for 11% of all foodstuffs consumed on the island, including 35% of all frozen items, 18% of all fresh meats and 14% of all fresh fruits and vegetables.
The new Mercado Central's state-of-the-art, refrigerated distribution and logistics facilities were designed to support Puerto Rico's food industry and help the island become the food-distribution hub of the Caribbean, fueling growth among local food producers and promoting sales of food-industry-related activities.
The project will set minimum quality standards for products processed and marketed at its facilities, thereby helping raise the bar on local farm products.
It aims to create a world-recognized quality brand, "the San Juan Brand."
"Food production is important to every country," Santini said. "Puerto Rico's agriculture industry has been underperforming for many decades, but there is potential for growth. I know farmers that cultivate only a fraction of their total capacity because they don't have buyers for their products; often a portion of their crops goes to waste. Mercado Central will create demand for these products, incentivizing agricultural production that will spur increased economic activity while creating new jobs."
Operating at the facility will be food distributors who will add value to raw materials, transforming them into finished products and expanding exporting opportunities.
There will also be a trade center of agricultural equipment along with training centers for farmers and food processors.
The $275 million facility will occupy 79 acres within the district, including 61 acres of existing city property and 14 acres transferred by the Puerto Rico Industrial Development Co. (Pridco) to the municipality.
There are 14 companies interested in establishing operations at the new Mercado Central—nine of them already operating out of the old facility at the Port of San Juan area and five operating out of other locations.
Approximately 1,000 farmers and agroentrepreneurs also are interested in participating in the project that is expected to generate 1,525 direct and 2,000 indirect jobs.
Construction of the project is set to start early next year, and Santini said it should be operational in two years.
The project is also expected to capture a great portion of the cruiseship industry's provision purchases, which currently take place at other jurisdictions.
Mercado Central, Santini said, will create a high-end agroindustry on the island that will serve as the backdrop "to launch the new San Juan Brand, a line of products including fruits, fresh produce, meats and fish that can be marketed through the local food industry, as well as abroad."