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Agri-Business in LebanonSector PerspectiveNovember 2020

Prepared by:

Mohamed IbrahimJad SalameZad SleimanMounia El Saad

Agri-business is a major constituent of Lebanon’s economy

64.3%

of Lebanese industrial enterprises are related to agro-food processing

18.2%

11.5%of Lebanon’s workforce is employed in the agri-business sector

of Lebanon’s total land area is classified agricultural (32ndhighest globally)

Source: FAO, CCIB, CIHEAM 2

Many of the agri-business activities across the value chain are carried out by domestically based players

Agricultural inputs

Agricultural production

Processing & Packaging Distribution Retail

Agriculture Machinery

Seedlings and Saplings

Seeds, Fertilizers and Pesticides

Animal & Fish Feed

Land & Water Resources

Plant Products

Animal Products

Fish Products

Storage

Packaging

Transportation

Wholesale Markets

Local and International Retail Markets

Agri. Waste Mgmt.

Agri. Technology

Primary Processing

Secondary Processing Dedicated Export partners

Exam

ple

of

loca

l pl

ayer

s Ke

y Pr

oduc

ts/ A

ctiv

ities

Mainly importers of seeds, fer2lizers and feedstuff

Performed Domestically Not Performed Domestically Source: More Capital Analysis 3

Existing key enablers could be leveraged to further boost the sector’s attractiveness

• Real cost of local human capital has considerably decreased following the current financial crisis

• High unemployment rate due to the recent economic crisis increases the availability of human capital in the overall agri-business sector , which already employs 6.5% of the workforce in primary agriculture and 5% in other agro-industry related activities

• Diversified climate and topography of Lebanon enables the growth of many types of crops including tropical, subtropical high value crops (e.g., avocado, banana, kiwi), as well as high processing value crops (e.g., olives, grapes)

• Strategic location to export to Europe and the GCC where production costs are higher

• Skilled, multilingual, and educated workforce that can be attracted to the sector

• Abundant creative talents that can be leveraged to deliver innovative solutions in agri-business

• Strong expat community which could add value in terms of investment, capability transfer and market access

Affordable and Available Human Capital

Favorable Climate, Location and Topography

Skilled Entrepreneurial Talents

Source: CIHEAM 4

Lebanon’s agri-business has significant room to improve in terms of efficiency, land utilization and economic contribution

Source: World Bank, FAO

Contribution to GDP by Hectare of Agricultural Land (2018, USD per ha)

12,313

8,290 8,183 7,949 7,342

4,5923,860 3,306 3,036 2,959 2,895 2,703

Malta Norway Netherlands United ArabEmirates

Egypt Mauritius Cyprus Italy Switzerland Viet Nam Finland Lebanon

5

Multiple challenges currently hinder the sector’s growth and improvement

Suboptimal Agri-business Trade

Limited routes accessible to international markets for exports, and heavy reliance on imported products competing with local

produce

Ineffective Land Utilization

Fragmented and underexploited agricultural

land areas

Lack of Proper Funding

Limited availability of funding options dedicated

and tailored to agri-business, which is further

exacerbated by the current financial crisis

Inadequate Regulatory Framework

Lack of an incentivizing agri-business policy framework to encourage further investment, production, employment, local

market development and exports

Source: More Capital Analysis 6

Agricultural lands fragmented and underexploited

70% 39% 14%

of Agri-land holdings are less than 1 hectare

Current land ownership fragmentation has an adverse impact on efficiency

which in turn is limiting the land’s productivity and positive returns of

economies of scale

of Agri-land is used for high value-added products

Limited part of agricultural land is currently being cultivated for high

economic value products despite its eligibility

of Agri-land is currently being utilized

Small proportion of agricultural land is currently being used showcasing the significant potential for incremental

growth

Source: Mckinsey, FAO 7

82%

60%

52%

12%

18%

40%

48%

88%

Beer

Processed coffee

ImportedLocally Produced

2011-2020 Average

2016

Fish2011-2018 Average

Potato2011-2018 Average

Local Consumption100%

Source: FAO, Lebanese Customs, Blom Invest

Exports have declined between 2014 and 2019 due to geopolitical factors including disruptions in land routes passing through Syria

600

650

700

750

800

2014 2015 2016 2017 2018 2019

Selected Products Consumption Breakdown (%)Yearly Agri-business Exports* (USD Mn)

Suboptimal agri-business trade balance given prevailing geopolitical factors and inefficient local production

/

* Includes fruit and vegetable products, live animals and their produces, processed food and beverages, animal or vegetable fats and oils and their deriva8ves.

8

Inadequate governmental oversight and support

Inexistent Sector Wide Strategy or Incentives

• Ambiguous perspective on crops (e.g.. investment, support, and subsidies are not targeted) as part of the Ministry of Agriculture’s strategy

• Lack of an incentivizing tax regime for agri-business related companies

• Low score in ease of doing business (143/ 190) given inefficient judicial system, corruption and tedious bureaucracy

Unfavorable Trade Agreement Framework

• Absence of trade agreements with many top performing trading partners (e.g., South Africa, Angola, Ghana) and trade promotion agencies

• Inefficient trade agreements currently in place offering minimal restriction and safeguard for local produces

Limited Food Safety & Quality Standards

• Unclear standards and weak oversight on food safety, with a fragile inspection system (not ISO 17020 certified)

• Lack of compliance with international quality concerns and export related standards (e.g. European standards)

• Non-existence of national legislation on packaging and labelling

Few Beneficial Initiatives

• Some beneficial stand-alone incentives launched however with minimal coordination with other gov. bodies & minimal promotion thus diminishing their impact

• Example of initiatives include, MoA projects, Cannabis law, BDL subsidized loans (e.g., circulars 313, 318)

Source: CBI Europe, CCIB, Ministry of Economy and Trade (MoET), Ministry of Agriculture (MoA), World Bank 9

Source: CBI Europe, MoET, USAID

Most financing across the value chain was

funded by bank loans and informal channels

(e.g. loans from traders & suppliers)

High Reliance on

Debt

Direct investments were limited due to local financial markets

dynamics and family ownership culture with

only few exceptions within agritech

Limited Direct

Investment

Initiatives limited to NGOs’ in-kind grants to farmers and subsidized loans promoted by BDL

and international organizations mostly

available to manufacturers (SMEs)

Limited Funding

Initiatives

Agri-business’s share of overall credit did not exceed 1% while its contribution to GDP exceeded 5%. Low

ticket size per investment ranging

between 4 and 600 Mn LBP

Inadequate Channeling of Funding

Trivial funding landscape

10

Recent economic crisis creates opportunities for the Agri-business sector

Impact on Agri-business SectorEconomic Crisis Characteristics

Political and Social Turmoil

• Regional conflicts impacted local political turmoil over the years, fostering corruption and bad financial management

• Diminished trust and confidence in the current Lebanese system leading to protests and civil unrest

Banking Crisis and Capital

Controls

• Rush on banks creating a sector wide liquidity squeeze• Informal capital controls in place whereby depositors' access

to foreign currency deposits was substantially limited

Currency Devaluation and

Inflation

• Lebanese pound has lost over 80% of its value since October 2019 in the black market

• Drastic increase in prices due to extremely high reliance on imports

Deteriorating Economy

• Decline in tourism due to political turmoil in addition to the Corona Virus

• Sharp decrease in economic activity due to high inflation accompanied by the decline in tourism activity

• Sharp increase in unemployment rate

Land UsageTo ensure food security and self sufficiency several initiatives were introduced to cultivate neglected agricultural lands

Trade DynamicsDemand of local products increased given the limited ability to maintain import levels due to the deteriorating currency, while the need for fresh funds boosted exports (annualized imports decreased by 22%, annualized exports increased by 4% between 2019 and 2020)

Regulatory LandscapeAgri-business sector gained visibility and priority on the political agenda which paves the way to more attention and support initiatives

Funding LandscapeCurrently the formal lending market is shut for businesses. However, current capital controls encourage direct investments by local depositors especially in export-oriented opportunities. Economic sectors are currently more attractive to fund following the diminished trust in the financial sector

Source: More Capital Analysis 11

Increasing local supply of local Agri-business products already underway to compensate for market demand

… leading to many local producers increasing their production to cover for local demand

Economic crisis has driven downwards the demand for imports… (Lebanon Imports 2018-2020, Mn USD)

423

17,889

14,060

12,502

2,891

83,089

42,664

61,090

789

2,114

3,288

762

26,720

20,424

29,810

Feed Stuff

Olive Oil

Wine

Beer

Honey

Chocolates

Water

Fruits

Dairy Products

18

355,533184,186

2018 2020 annualized

-96%

-96%

-85%

-74%

-74%

-68%

-52%

-51%

-48%

xx 2018-2020 decrease

Source: Lebanese Customs, Awalan.com

“The demand on our dairy products has increased by 50% which pushed us to

increase production by up to 2 tons per day which is around 30 percent of our

daily production”

“Our production went up 5 times, but profitability didn’t follow mainly

because of a lag in price increase. We have also sustained a shortage of

workers due to the devaluation of real wages”

12

Legacy along with new market dynamics create attractive investment opportunities within Lebanon’s agri-business sector

E X I S T I N G S E C TO R

Agr i -bus iness i s a key sec to r in

Lebanon cont r ibu t ing to 5% o f

GPD and employ ing 11 .5% o f

work fo rce . Loca l p layers a l ready

present ac ross va lue cha in and

key po ten t ia l enab le rs ex is t .

N E W M A R K E T D Y N A M I C S

Economic c r i s is c rea ted room fo r

g rowth fo r the sec to r and

inc reased i t s a t t rac t i veness v is -à -

v is o ther loca l convent iona l

inves tments ( f inanc ia l sec to r and

rea l es ta te ) .

AT T R A C T I V E I N V E S T M E N T

O P P O RT U N I T I E S

New a t t rac t i ve inves tment

oppor tun i t ies have emerged

ac ross the va lue cha in f rom

fa rming to p rocess ing &

d is t r ibu t ion .

+

Source: More Capital Analysis 13