How agricultural exports turned into a major growth engine for Peru

How agricultural exports turned into a major growth engine for Peru

Peru Economy & Policy Corporate & Sovereign Strategy Features

Renato Nagaro spends his days carefully checking hectare after hectare of blueberry crops on a farm along Peru’s northern coast. A few years ago “I would have laughed if someone told me I would be working with blueberries,” says Nagaro, farm manager for a joint venture between US-based Agro Vision and Chile’s Frusan. “It is an entirely new experience.”

Blueberries are new not only for Nagaro, but for Peru as whole. From a few test plots that brought in just $32,400 in 2010, according to the Peruvian Association of Exporters (ADEX), blueberries became Peru’s fastest-growing agricultural export last year, with export earnings amounting to $237 million.

Blueberries are just one in a basket of crops fueling an agriculture boom in Peru, driving investment and boosting earnings. Agricultural exports reached $5.5 billion last year. Agricultural products are the country’s second-largest source of export income after metals, and President Pedro Pablo Kuczynski’s administration forecasts another 14% jump this year.

Why is agriculture, an ancient endeavor, suddenly booming in Peru? The answers lie in a combination of factors, including investments by local and international agribusinesses, widespread irrigation that has made great swaths of land arable and free-trade agreements with most of the world’s large economies.

Natural incubator

The Peruvian coast is a long desert strip, punctuated by river valleys. It has a temperate climate with abundant sunlight year round. “You don’t have extremes, no hot summers and no cold winters. It is like a greenhouse that you can control,” says Alfonso Altet, business development manager for Agro Vision.

A particular Peruvian advantage is the ability to time crops to take advantage of windows when countries in the northern hemisphere are not producing and southern hemisphere neighbors are just starting to ramp up harvests. “In the middle of winter in the US, it is the height of production here. And we have low-cost production. Those are two advantages that make Peru competitive,” says Agro Vision chief executive Thomas Snyder.

This is especially the case with recently introduced crops such as asparagus and blueberries. Nagaro describes an army of workers who work in the fields each day of the off-season to pull flowers off bushes. This prevents the blueberries from producing until September, when US harvests are mainly over and Chile, the big grower in the southern hemisphere, is not yet ready. 

“Peru is counter-seasonal to the US market,” adds Joseph Bormann, an analyst at Fitch Ratings. “So once Peru was able to grow enough fruits and vegetables for export, it makes perfect sense that you would see rapid growth, particularly from markets like China, Japan and the US.”

New lands

What was missing from the Peruvian formula was water. Despite torrential El Niño rains that fell in the first quarter of this year, the Peruvian coast typically gets almost no rain. But in recent years, massive new irrigation projects have opened up great expanses of new farmlands. Northern coast projects include the Olmos in Lambayeque, which has added 38,000 hectares, and the Chavimochic in La Libertad, currently in its third stage of development, which will add another 63,000 hectares to the 46,000 hectares already opened by the project. A third project, Majes Siguas II, is slated to add 38,500 hectares in the southern Arequipa region.

Peru’s Central Bank estimates that Olmos will add $600 million to export earnings, while Chavimochic will add $1.2 billion to the $1 billion in exports already coming from the project, and Majes Siguas II will increase exports by close to $1 billion when operational.

Agro Vision has grown its Olmos footprint from just 254 hectares in 2016 to 2,000 hectares, with plans to add 329 hectares this year. Beyond blueberries, the company exports grapes, and has planted asparagus and avocados, with an investment averaging $38,000 per hectare. Agro Vision has also acquired 12,000 hectares in neighboring Morope, where it completed an environmental impact assessment and began drilling wells for irrigation. It has 150 hectares of asparagus planted there.

“The addition of irrigated lands and new agro-export crops are definitely attracting interest from international investors as well as local investors who are looking at value-added opportunities,” says Paula Carrión, director of ADEX’s agro-export unit.

While authorities are confident that the irrigation ventures will meet estimates, problems have arisen. The Olmos project was built by Brazil’s Odebrecht, which is currently under intense legal and financial strain after admitting to corruption at home and in many Latin American countries, including Peru. A December 2016 plea bargain in the US indicated the company paid $29 million in bribes to secure contracts in Peru between 2005 and 2014.

Odebrecht attempted to sell the Olmos project earlier this year to a joint venture formed by Canada’s Brookfield and France’s Suez, but the Lambayeque regional government rejected the sale, arguing that it could not go through while corruption investigations are ongoing.

Snyder says Odebrecht’s problems are not disrupting Olmos because all the lands have been sold and Odebrecht’s local subsidiary, H2Olmos, has committed to maintaining the irrigation system. “We don’t expect any problems,” he says.

A different scenario faces Chavimochic, where Odebrecht and Peru’s Graña y Montero, a local construction company, won the concession in 2013. The $715 million third stage has been delayed, with the companies unable to reach financial close. President Kuczynski said at a press conference in March that the Chavimochic impasse would be resolved within a few months and that work should be completed within the 2018 deadline, indicating that several Asian and European companies, which he did not name, had expressed interest in taking over the work.

After more than a decade in the planning stages, construction on Majes Siguas II began in late 2016. The Arequipa regional government, which is overseeing the project, faces some opposition from local farmers. They say the plan to sell plots starting at 200 hectares makes it impossible for them to acquire land.

Juan Carlos Barberena, who heads an environmental group in Huancarqui, a small town near Majes Siguas II, says the project, like Olmos, will not benefit local residents. “There could be a positive impact during the construction phase, with some jobs, but once it is done it is going to benefit large companies and not the people who live here. That is always the case with these kinds of projects,” he says.

Tapping markets

The road to exports in Peru has largely been paved with free-trade agreements signed with most of the world’s major economies since the start of the decade. The country has implemented 16 trade agreements since the watershed pact with the US in February 2009. More than 90% of Peru’s $36.8 billion in 2016 exports were covered by free-trade agreements, according to the Mincetur. The central bank put the country’s trade surplus at $1.7 billion in 2016 and just shy of $4 billion for this year. Agricultural exports reached 98 countries in January, according to the most recent data from the Agriculture and Irrigation Ministry. Still, Peru is not finished with its trade talks. It has been in negotiations with Turkey since 2014, and talks are scheduled to begin in June with India. The deal will represent India’s first “next generation” trade agreement in Latin America and will include not only goods and services, but also investment parameters.

“India is going to be an important market for us,” says Trade and Tourism Minister Eduardo Ferreyros. “We see tremendous potential for agriculture, fruit, vegetables and grains in a market with more than 1 billion people.”

The government, in the meantime, has been working to perfect existing agreements by eliminating non-tariff barriers, particularly phytosanitary inspections that deem shipments free of harmful pests and plant diseases. Last year, it got pomegranates and figs added to the list of products entering the US, which, Mincetur says, will add another $80 million to export earnings.       

It has negotiated five separate phytosanitary protocols with China since the free-trade agreement was implemented in 2010. The first air shipment of blueberries was dispatched last November, while the first shipment by sea arrived in Guangzhou, China, at the end of February.

“Free-trade agreements have opened new markets, giving Peru comparative advantages that other countries in the same position do not enjoy. Trade agreements are also important to investors, because they provide clear rules that are respected,” Carrión says. 

Pointing to last year’s $5.5 billion in agricultural exports, Ferreyros adds, “We need to be ambitious. We should think not about doubling agro-exports, but aim much higher. I see no reason for us not to see $20 billion as a target.” LF