Central America Agribusiness Report Economics Essay

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Central America's recent adverse weather conditions have led to major problems with agricultural output. The region was hit a major blow in 2009 as droughts caused extensive problems in the area's largest corn producing country Guatemala. Coffee production in the region also fell due to abnormal climatic conditions which included an extended summer and a drought which occurred in what is normally the rainy season. Erratic and worsening weather conditions now pose a major threat to the region's agricultural potential.

Key views:

Central American corn production expected to 13.97% growth to 2014. However, largest corn producing country Guatemala is expected to see corn output continue falling, with production growth of -2.19%.

Central American coffee production to grow 13.2% to 2014 although there will be wide regional variations. For Costa Rica we forecast growth of 51.8% on 2009 levels. In contrast, in El Salvador, coffee output to 2014 is forecast to decrease by 15%.

Central American beef production expected to grow 17.8% to 2014, due to emphasis on organic production from the region's largest producing country Nicaragua. Pork production will increase by 13.5% due to ongoing modernization of hog farms.

Central American sugar production growth to 2014: 16.39%, due to an increase in land being cultivated and modernization of plantations.

Key trends and developments:

Rising temperature rates mean that Central America could lose around a third of land suitable to grow coffee by 2050 as global warming impacts on the conditions for best quality beans such as Arabica. Changing weather could mean that growers farming coffee at low altitudes will lose crops as lower-lying coffee producing areas become unviable, forcing farmers to move to higher altitudes.

Central America is gradually reducing its reliance on its US trade ties, exemplified by the signing of a liberal trade agreement with the EU in late May 2010. However, the US remains the region's major trade partner absorbing 41% of its total exports. With Central America also highly reliant on remittances from the US, a secondary slowdown in the world's largest economy would put significant downwards pressure on local economic growth in the region.

A low economic base means that GDP per capita in Central America is expected to increase at a significant rate, with very positive implications for private consumption. Over the longer term, regional GDP per capita (in US dollar terms) is expected to increase by more than 100% over the next 10 years, with regional real GDP growth set to average 3.2%. This means that consumption of food products, particularly for the likes of sugar and coffee, has substantial potential to rise.

Central America - SWOT Analysis

New Zealand Agriculture SWOT

Strengths 

With a large land area and a range of climates, Central America is suited to large-scale agricultural production across a diversified range of products.

Central America's large population provides a plentiful supply of labour, with relatively low wages by developed country standards and also a large market for goods

Weaknesses 

The poor state of infrastructure outside of major population centres makes expansion of production more difficult

Central American farms are often very small and have low yields in comparison with more developed agricultural nations.

Safety concerns and disease risks are also a problem owing to poor knowledge and training among many smaller operators.

The region is prone to adverse and abnormal climactic conditions which can greatly impact on agricultural output and yield levels.

Opportunities

Rising incomes among the population of the Central American region will allow greater spending on food, ensuring strong domestic demand for the area's agricultural output.

The Central American region has the potential to make more of a name for itself with organic and speciality products, as witnessed by the beef industry in Nicaragua and the coffee trade in Guatemala.

Threats

The US remains the region's major trade partner absorbing 41% of its total exports. With Central America also highly reliant on remittances from the US, a secondary slowdown in the world's largest economy would put significant downwards pressure on local economic growth.

The security of food availability is a critical issue in the region. For example, in late 2009, for the first time ever, Guatemala was included on a worldwide list of countries in crisis requiring external assistance in terms of food provision, as compiled by the United Nations Food and Agriculture Organisation (FAO).

Central America could lose around a third of land suitable to grow coffee by 2050 as global warming impacts on the conditions for best quality beans. In addition, ongoing and worsening adverse weather conditions in the region in the form of droughts and hurricanes will impact on grain, coffee and sugar harvest potentials.

Industry Forecast: Central American Coffee Outlook

BMI Supply View:

Central America's coffee production stood at 11.2mn tonnes for the 2009/10 season, a 4.2% y-o-y drop on the previous year primarily due to abnormal climatic conditions which included an extended summer and a drought which occurred in what is normally the rainy season. This has resulted in a drop in global supply, which the International Coffee Organisation (ICO) claims hit 120mn bags in 2009/2010, compared to consumption of 134mn bags. In turn this has resulted in a sharp increase in prices, especially for Arabica coffee, for which Central America is a major production region due to the quality of the volcanic soil, the abundance of rainfall and the long growing seasons.

In June 2010, prices of Arabica coffee hit a 12-year high, and were almost three times 2003-levels. Honduras and Guatemala are the two largest coffee producing countries in the region, together accounting for a 62% share of Central American coffee output. Coffee is grown in 15 of the 18 states of Honduras, provides employment to 30% of the domestic population and contributes more than 36% of the agricultural GDP. Coffee producers in the country have been investing in their plantations in terms of new seeds, improvement of planting density, soil conservation as well as the production of more "value added" coffees (speciality, certified and organic). Out of Guatemala's 22 geographical departments, only 3 are not producing coffee. Guatemala has positioned itself as a marketing leader with worldwide recognition for its specialty coffee. However, the renewal of old coffee plantations is becoming a critical issue in Guatemala as the area planted has not been increased since 2003 and there are no plans in place to increase plantation areas.

The outlook for 2010/11 is marginally brighter for Central America with output growth of 3.9% forecast. However, the first hurricane of the season has already wreaked widespread damage in Guatemala and El Salvador with the coffee crop affected due to flooding and mudslides. Indeed, according to Guatemalan coffee growers group Anacafe, storm damage from Hurricane Agatha could reduce coffee production in the country by 3% in 2010/2011. A particular problem has been landslides, triggered by the storm, which has destroyed planting ground. Meanwhile, in El Salvador the primary damage has been to infrastructure with, floods destroying roads and bridges, which is reducing access to some coffee plantations. Much of the high-quality, Arabica coffee in Guatemala and El Salvador, is grown in small farms, and these have been particularly impacted by the weather conditions. Meanwhile, there are also fears that prolonged humidity could cause a devastating fungus on the plant leaves.

To 2014, BMI forecasts coffee production growth in Central America of 13.2% on 2009 levels, a year-on-year average increase of 2.6%. However, within this overall forecast there are widespread discrepancies for varying countries within the region. Costa Rica, for example, is set to show substantial coffee production growth. To 2014, we forecast growth of 51.8% on 2009 levels, primarily due to improved fertilization levels reducing previous production declines. In contrast, in El Salvador, coffee output to 2014 is forecast to decrease by 15% over 2009 levels. This is primarily due to the fact there is insufficient finance available to modernise practices and affect a sustained production turnaround.

BMI Demand View:

Demand for coffee in the Central American region remains relatively strong with BMI forecasting a 4.4% rise in consumption in 2009/10. In the Central American region as a whole, coffee consumption has risen in recent years, as customers start to patronise modern style coffee bars and drink more at home and work. To 2014, we forecast demand growth for the coffee sector in Central America, increasing by 16.13% on 2009 levels. Central American GDP per capita, from a very low base, is forecast to rise at a substantial rate with the subsequent positive implications for private consumption. Regional GDP growth is set to average around 3% with regional GDP per capita expected to jump by more than 100% during the decade to come.

In terms of variations within the overall region, Honduras stands out as the country with the strongest consumption levels. To 2014, BMI forecasts coffee consumption rising by 42% on 2009 levels. Consumption per capita in 2008 stood at 3.77 kg, a 56% increase on the previous year. With a young population, Hondurans are consuming more and different types of coffee (for example, frozen coffee drinks), while the economy has been growing rapidly in recent years, with GDP per capita increasing 11.3% in 2008 and 10.7% in 2009. Across the region there have also been initiatives to increase domestic consumption by educating consumers on quality coffee and proper preparation. An increase in internet cafes and speciality coffee shops is further stimulating consumption. For example, in Guatemala, at least five new specialist coffee chains have been opened in the last two years.

To 2014, production growth for coffee will far outpace consumption demand in the Central American region, meaning that the area will remain an important export channel for coffee. Honduras exported 3.2mn bags in the 2009/10 season with Germany, the USA, Belgium, Italy, South Korea, the UK, France, Sweden, Japan and Finland accounting for 85% of total shipments. However, there has been a decrease in demand noted for coffee exports from the region due to the global economic crisis and allied currency considerations.

Risks To Outlook:

With hurricanes already impacting on the 2010/11 coffee season in Central America, BMI forecasts for output could yet need revising downwards.

The major production risk facing Central American coffee production is the rising temperature rates. A new study from the International Center for Tropical Agriculture shows that Central America could lose around a third of land suitable to grow coffee by 2050 as global warming impacts on the conditions for best quality beans such as Arabica. Changing weather could mean that growers farming coffee at low altitudes will lose crops as lower-lying coffee producing areas become unviable, forcing farmers to move to higher altitudes.

The other risk for coffee production in many Central American countries is the ageing nature of much of the coffee plantation land with no plans in place for renewal.

On the consumption side, demand for the likes of Guatemala's premium certified speciality coffee is vulnerable to a contraction of the spending power of consumers in the West. As economic conditions worsen, consumers may be forced to trade down from premium coffee to mass-market brands, which would hit the market for Guatemalan exports.

In addition, Arabica coffee prices may rise a further 19% by the beginning of 2011 against a background of tight world supplies and rising demand. Stockpiles have fallen to their lowest since September 2002 as pests and poor weather in two consecutive crops hurt output in both Central America and Colombia.

Industry Forecast - Central America Corn Outlook

BMI Supply View: 

Central America's corn production stood at 3.04min tonnes for the 2009/10 season, a 5.6% y-o-y fall over the previous year. The region was hit by a major blow in 2009 as droughts caused major problems in the area's largest corn producing country Guatemala. The country accounts for 36%of the region's annual corn output. In addition to the drought, diseases and heavy rains (which impacted on yield levels), contributed to the low harvest in the eight corn-growing regions of the country's 22 provinces. Adverse crop conditions affected yields in both rain-fed and irrigated acreage and plantings were well below average. In terms of the other corn producing countries in the Central American region, El Salvador was also badly impacted by the drought conditions with output falling by 8.8% y-o-y.

The outlook for 2010/11 is marginally brighter, given a normal rainy season, with output growth of 3.4% y-o-y forecast. However, BMI may downgrade these forecasts depending on how weather conditions pan out. Indeed, a heavy storm season is expected over the coming months, according to Colorado State University, including 18 tropical cyclones in the Atlantic and 12 in the Pacific. Many small-scale farmers in Central America do not have the means to recover from storm damage and this could keep production suppressed in 2010.

To 2014, BMI forecasts corn production growth in Central America of 13.97% on 2009 levels, a year-on-year average increase of 2.7%. However, within this overall forecast there are widespread discrepancies for varying countries within the region. For example, BMI expects corn output in Guatemala to continue falling, with output growth of -2.19% forecast to 2014, due to the threat of adverse weather conditions such as droughts and heavy rain, related to climate change. Indeed, in 2009 the droughts devastated the corn crop causing food shortages for 500,000 families. However, over the longer term corn production in Guatemala could benefit from a new programme from the Institute of Agricultural Science and Technology, launched in March 2010, to provide farmers with improved seeds. Indeed, it is estimated that these new seeds could eventually increase output by 1mn quintals per year.

However, in countries such as Honduras and Nicaragua BMI expects corn production to rise far more substantially. To 2014, BMI forecasts corn production growth in Nicaragua of 60.93% on 2009 levels and in Honduras of 26% on 2009 levels. Both countries have previously been smaller producers of corn within the overall Central American region but are now concentrating on improving output levels.

BMI Demand View: 

To 2014, we forecast demand growth for the corn sector in Central America, increasing by 17.3% on 2009 levels. A low economic base means that GDP per capita in Central America is expected to increase at a significant rate, with very positive implications for private consumption. Over the longer term things also look positive with regional GDP per capita (in US dollar terms) expected to increase by more than 100% over the next 10 years, with regional real GDP growth set to average 3.2%.

For corn, demand growth will largely come from livestock consumption for which corn is used as feed. Over the forecast period growth in pork and poultry will lead to corn consumption increasing as a result. Corn is also a household consumption staple and extremely important to the local population in Central America. In terms of variations within the overall region, Guatemala is the exception to strong increased corn consumption levels. To 2014, BMI forecasts corn consumption rising by just 5.25% on 2009 levels. In contrast, corn consumption looks set to increase in all other countries in the region, with Costa Rica, Nicaragua and Panama being the strongest performers (a rise of 34%, 24% and 23% respectively to 2014 over 2009 levels). Corn remains a traditional staple of the Central American diet and consumer demand is, therefore, set to continue rising, in line with population growth and economic expansion.

To 2014, consumption growth for corn will far outpace production capability in the Central American region, impacting on prices and meaning that the area will remain import dependent for its grain needs. This factor will be particularly marked in Costa Rica, El Salvador, Honduras and Panama, as the countries in the region with the greatest supply demand imbalance.

Risks To Outlook:

There have been improvements in rainfall so far in the 2010/11 harvest season but should the drought that has persisted in parts of the region continue and should there be another heavy storm season this year, BMI's forecasts for Central American corn output - while already modest - could yet need revising downwards.

With a large proportion of Central American corn grown on non-irrigated smallholdings production is very vulnerable to weather. If rains do not fall as expected, the annual harvest can be badly damaged, much more than would be the case if more modern production techniques were used. The use of traditional less-resistant seed varieties also puts Central American farmers at more risk of short-term losses, owing to weather or pests, than larger competitors elsewhere.

Certainly, for the region's largest corn producing country, Guatemala, the immediate situation is not overly optimistic. In late 2009, for the first time ever, the country was included on a worldwide list of countries in crisis requiring external assistance in terms of food provision, as compiled by the United Nations Food and Agriculture Organisation (FAO). Severe weather patterns are negatively affecting the planting of grain crops leading to fears over the vulnerability of food supplies in the country.

Central America is gradually reducing its reliance on its US trade ties, exemplified by the signing of a liberal trade agreement with the EU in late May 2010. However, the US remains the region's major trade partner absorbing 41% of its total exports. With Central America also highly reliant on remittances from the US, a secondary slowdown in the world's largest economy would put significant downwards pressure on local economic growth.

Industry Forecast - Central America Sugar Outlook

BMI Supply View:

Central America's sugar production stood at 4.6mn tonnes for the 2009/10 season, a 2.6% rise on the previous year. The Central American region accounts for roughly 3% of global sugar production. Guatemala is by far the principal producing country in the area accounting for 52% of volume output on an annual basis in the region.

There are 14 active sugar mills in the country. Despite less than ideal weather conditions, mainly excessive rainfall, sugar output continues to expand in Guatemala. In recent years the sugar yield has been failing in the country, but started to recover again in 2009. The loss in efficiency has been explained by the extended rainy seasons and reduced sunlight. The sugar industry in Guatemala is relatively streamlined with the land and associated infrastructure owned by a few large companies and landowners. However, Guatemala, like many other Central American producers, has a scarcity of land available to expand cane planting, thereby capping the amount the sector can ultimately grow.

Meanwhile, Honduras is expecting sugar production to increase by 6.4% in 2010/2011 as farmers increase the amount of land under cultivation in response to strong sugar prices. The country expects to maintain high output levels as farms increase their technical capabilities and improve equipment.

To 2014, BMI forecasts sugar production growth in Central America of 16.39% on 2009 levels, a year-on-year average increase of 3.2%, with growth linked to improving sugar prices. There are, however, variations in the overall trend for the region. BMI forecasts that sugar production in Costa Rica to 2014 will grow by 35.8% on 2009 levels, primarily due to increased areas being planted and better weather conditions in the main growing areas. In contrast, in both El Salvador and Panama, BMI forecasts that sugar output levels will rise at a much slower rate to 2014 (by 6.9% and 5.9% respectively). Erratic weather conditions are expected to exert an impact on sugar cane harvests in these countries.

BMI Demand View:

Demand for sugar in the Central American region remains strong with BMI forecasting a 5.6% rise in consumption in 2009/10. To 2014, we forecast demand growth for the sugar sector in Central America, increasing by 21.6% on 2009 levels. GDP per capita in Central America is projected to rise at a significant level from a low base, with extremely beneficial consequences for private consumption. Generally sugar consumption throughout the Central American region is being driven by increased demand for confectionery and fruit juices as population and per capita incomes rise.

In terms of variations within the overall region, Guatemala stands out as the country with the strongest consumption levels. To 2014, BMI forecasts sugar consumption rising by 32% on 2009 levels, primarily due to stronger demand from the local confectionery industry, which has been expanding its operations to supply both the domestic and export markets. Per capita consumption of sugar now almost stands at 53 kg in Guatemala.

To 2014, production growth for sugar will far outpace consumption demand in the Central American region, meaning that the area will remain an important exporter for sugar. The region's largest producer Guatemala exports around 68% of its total production and is the world's fourth largest exporter. The US, Canada, and Korea continue to be the country's major export markets for raw sugar, whilst refined exports to Chile, Taiwan, China, Malaysia, and Indonesia are also increasing. In addition, Mexico has had to import almost 200,000 tonnes of sugar from Guatemala for the 2009/10 season owing to poor harvesting results. This is a drastic change from 2008/09, when Mexico did not import any sugar from its Central American neighbour, according to the Guatemalan Sugar Growers Association.

In June 2010, the US moved to ease tariffs on sugar imported from Central America. Costa Rica exports approximately 130,000-140,000 tonnes of sugar per year. As a result of the change in tariff structures, Costa Rica can sell up to 13,880 tonnes of sugar in the US without duties, according to the Cost Rican foreign trade industry.

The Central American region is also moving in response to demand from the ethanol industry. Both Honduras and El Salvador have approved laws for the production of ethanol, whilst Guatemala is interested in supplying locally produced alcohol from domestic sugarcane and, potentially, might be able to provide the entire region with enough ethanol to account for a 10% blend with gasoline.

Risks To Outlook:

The importance of the Central American region in terms of the world sugar market is growing steadily. However, improving yields and efficiency in the area remains a critical factor to be taken into consideration as does the effect of ongoing and worsening adverse weather conditions. In addition, sugar cane diseases continue to affect several production sites. Also some sugar producing countries in the region are struggling in order to keep the proportion of sugar land planted from declining, as competition from urbanisation and high land prices start to slowly take area away from sugar production.

Consumption of sugar could also take a hit from the poor economic conditions. Confectionery products are still a luxury for many Central American consumers and consumption is likely to suffer when economic times are hard as consumers cut out non-essential items.

A return to global economic slowdown, triggered by double-dip recessions in major economies, such as China, Europe and the US, could impact demand for sugar as consumer spending power is squeezed. Meanwhile, sugar prices remain low after record highs in 2009, and if they do not pick-up rapidly, this could impact production.

Central America Livestock Outlook

BMI Supply View:

Beef production in Central America stood at 322,000 tonnes for the 2009/10 season, a 1.2% y-o-y increase, driven by growth in the Nicaraguan market. Nicaragua is the principal country for beef production in the Central American region, accounting for 38% of annual beef output from the area. The country has also been the fastest growing in terms of beef production, showing a 51% growth between 2004 and 2009 primarily due to its long cattle ranching history and extensive grasslands. All other countries in the region produce less than 100,000 tonnes of beef on an annual basis. The outlook for 2010/11 remains marginally brighter with output growth of 3.1% forecast y-o-y although almost all growth is attributed to the Nicaraguan market.

To 2014, BMI forecasts beef production growth in Central America of 17.8% on 2009 levels, a year-on-year average increase of 3.5%. Nicaragua again is forecast to show the largest increase in beef production, with a 36.3% growth on 2009 levels. The country is gearing up to tap into the growing potential for global organic meat consumption, and USAID is funding a programme to help Nicaraguan cattle ranchers improve their quality and increase their ability to compete in world markets. Indeed, according to USAID, the organic beef market could generate US$5bn a year globally, with growth rates in excess of 20%. With over a million hectares of pastureland Nicaragua, combined with low pesticide contamination, Nicaragua is well position to benefit from this market.

Guatemala is the sole poultry producing country in the region. To 2014, BMI forecasts poultry production growth in Central America of 4.92% on 2009 levels, a year-on-year average increase of just 0.9% The industry remains fragmented and small scale in nature with large scale modernization needed to improve productivity.

Pork production in Central America is much smaller than both beef and poultry, standing at 80,000 tonnes for the 2009/10 season, a 1.2% y-o-y increase. Guatemala and Panama are the largest pork producing countries in the region, together accounting for a 62% share of total output. However, El Salvador has in fact been the fastest growing country in terms of pork production showing growth levels of 150% between 2004 and 2009, albeit from an extremely small base. The outlook for 2010/11 is marginally brighter with output growth of 2.5% forecast y-o-y. To 2014, BMI forecasts pork production growth in Central America of 13.55% on 2009 levels, a year-on-year average increase of 2.7%. We forecast that El Salvador will see pork production growth of 28.6% on 2009 levels, attributable to a major push by the country's hog farmers to modernize the industry in order to improve meat quality. In contrast, for both Guatemala and Panama, BMI forecasts that growth levels will be much slower at 7.9% on 2009 levels for both countries.

BMI Demand View:

We expect domestic consumption of all meat products in the Central American region to rise out to 2014. Pork consumption will see the strongest consumption gains of 26% to 152,000 tonnes. Beef consumption will see growth of 15% to 266,000 tonnes, while poultry consumption will grow by 9% to 233,000 tonnes. The expansion of Guatemalan fast-food chain Pollo Campero, will help drive demand for poultry. Presently, Pollo Campero, which specialises in fried chicken, is the largest fast-food chain in Latin America, and is also making inroads in the US. Pollo Campero currently has 325 stories in 13 countries but is looking to increase this to 1,750 over the next decade.

The gains in the livestock sector, will be underpinned by increasing macroeconomic growth and the subsequent rise in per capita incomes. These gains will allow poorer segments of society - which traditionally forego meat consumption for cheaper goods - to include more meat in their diets. In addition, as GDP per capita levels increase in Central America, this will positively impact on private consumption.

To 2014, production growth for beef will outpace consumption demand in the Central American region, meaning that the area will remain an important export channel for the meat. Nicaragua remains the principal beef exporter in the region. However, prices of beef in Latin America are rising and are closing in the levels seen in the developed world, reducing the price competitiveness in the region. This has mainly been due to domestic price increases and growing competition with cropping. In addition production costs are on the rise. The primary markets for Nicaraguan beef are the United States, El Salvador, and Venezuela. Meanwhile, consumption growth for both poultry and pork will far outpace production capability in the Central American region, meaning that the area will remain import dependent for its meat needs in these areas.

Risks to Outlook:

Like many growing emerging market livestock sectors, production growth has often been coupled with safety concerns and Central America's industry is no exception. Disease is also a problem owing to poor knowledge and training among many smaller operators.

Just recently, as part of a free trade agreement, the EU has offered market access to new imports of 9,500 tonnes of beef on an annual basis from Central America. Although the Central American countries lobbied for higher quotas for beef, these were rejected. However it remains to be seen whether the beef production sector in these countries can achieve the necessary EU standards. A 2003 inspection by the European Commission of beef production in Nicaragua, for example, revealed evidence of use of hormones and growth promoters which are illegal in the EU.

Central America is gradually reducing its reliance on its US trade ties, exemplified by the signing of the trade agreement outlined above with the EU in late May 2010. However, the US remains the region's major trade partner absorbing 41% of its total exports, and any slowdown in the US economy will place substantial pressure on Central American economic growth prospects.

On the consumption side, while strong economic growth has boosted incomes in recent years, much of Central America's population still live in relative poverty. Growth in demand for meat will be reliant on incomes continuing to rise. If growth slows more than we expect, demand for and production of meat could undershoot our forecasts.

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