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Peru and China as competitors in world markets: The Asparagus case

Rome, September 2011

Geoffrey Cannock

Managing Partner,

Applied Economics

FAO. Workshop on Agricultural Trade Linkages between Latin America and China

1

Asparagus : main facts

Asparagus is a high-value, labor-intensive perennial vegetable

crop. It is used as a gourmet product.

Asparagus is sold in three type of products: canned, fresh and

frozen. It is also grown as green or white asparagus. Green is

sold mainly as fresh whereas white is processed.

It is consumed mainly in Europe, Asia and USA.

Introduction

2

China is by far the world’s largest asparagus producers

(89%) followed by Peru (4.3%).

Main export (US & EU) markets have also important

domestic production sector.

Country

2009: Asparagus Net

Production 2004-2006

(1000 Int $)

China 5 918 309

Peru 285 681

Germany 89 371

Mexico 58 204

U.S. 45 207

Spain 44 415

Italy 40 502

France 16 767

Greece 15 472

Source: FAO

World’s largest producers of Asparagus

World’s largest producers of Asparagus (2009)

World production of Asparagus

3

Peru and China: main macroeconomic indicators

Source: MEF

Peru and China have enjoyed high levels of

GDP growth rate during the last decade..

Trade (exports and imports) between Peru

and China reached US$ 9.5 billions. This

year, trade is expected to be 4% or 5%,

higher depending on commodities prices.

Starting this year, China has become Peru´s

most important trading partner.

598 676

1245

1871

2261

3040

3567

4079

5426

464 646770

1060

1584

2474

4065

3267

5120

0

1000

2000

3000

4000

5000

6000

2002 2003 2004 2005 2006 2007 2008 2009 2010

Peru-China: bilateral trade 2002 - 2010(US$ millions)

Exports Imports

8.4 8.39.1

10.0 10.1

11.3

12.7

14.2

9.6 9.2

10.3

3.0

0.2

5.04.0

5.0

6.87.7

8.9

9.8

0.9

8.8

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

China Peru

Peru and China GDP growth rate

Source: BCRP, World Bank

Source: MINCETUR

China Peru

Population (millions) 1 341.4 29.5

GDP (US$ millions) 5878 257.0 153 839.0

Per capita GDP (US$ millions) 4 382.0 5 222.0

Exports of goods and services (% GDP) 29.8 25.7

Imports of good sand services (% GDP) 25.9 22.8

Trade of goods and services (% GDP) 55.7 48.4

FDI: net flow (US$ millions) 185 081.0 7 328.0

China Perú

Población (Millones) 1 341,4 29,5

PBI (US$ Millones) 5 878 257 153 839

PBI per capita (US$) 4 382 5 222

Exportación Bs. y Ss. (% PBI) 29,8 25,7

Importación Bs. y Ss. (% PBI) 25,9 22,8

Intercambio Comercial Bs. y Ss. (% PBI) 55,7 48,4

IED: Flujo Neto (US$ Millones) 185 081 7 328

Tipo de Cambio Promedio (Moneda Nacional / US$) 6,8 2,8

4

Largest producer and consumer of asparagus in the world.

Mainly a preserved white asparagus exporter.

Foreign investment in the sector, especially from Spain.

Largest supplier to Europe (main white preserved asparagus market).

Family-farms. Atomized agriculture.

Production concentrated between April and June

Irregular quality, low diameters producer.

But still a low-cost producer in a labor-intensive activity.

China: main facts

5

World’s leading exporter of asparagus.

Peru exports: preserved and fresh, both white

and green.

It’s cultivated in the coastal strip (La Libertad,

Ancash, Lima, Ica).

Main players are domestic investors. Little

foreign investment in the business.

Largest supplier to USA (main fresh green

asparagus market).

Vertically integrated plus contract farming.

Relatively large firms dominate the cluster.

Year-round production.

Higher per Ha yields than China.

Recognized high quality products.

Better quality but higher costs than China.

Peru: main facts

6

II. Asparagus main performance indicators

7 7

Peru: Evolution of agricultural exports

Peru´s total agricultural exports increased from US$ 294 millions in

1990 to US$ 3 165 millions in 2010.

It is mainly explaained by the growth of non-traditional exports

(asparagus, grapes, artichokes, etc)

Source: BCRP

0

500

1 000

1 500

2 000

2 500

3 000

3 500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Peru: agricultural (traditional and non - traditional) exports, 1990-2010(US$ millions FOB value)

Agricultural (non - traditional) exports Agricultural (traditional) exports

294

3165

8

Asparagus: production and harvested areas (Peru-China)

In Peru, harvested area of

asparagus increased in 40%

between 2000 and 2009, leading to

a production of 314 000 tonnes.

In China, harvested area increased

39.3%, between 2000 and 2009.

Production of asparagus is,

however, 20 times Peruvian

production (6. 5 million tonnes)

Source: FAO

0

5

10

15

20

25

30

35

0

50

100

150

200

250

300

350

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Peru: harvested area and production of asparagus (1990 - 2009)

Harvested area (thousands of ha) Production (thousands of tonnes)

0

200

400

600

800

1000

1200

1400

0

1000

2000

3000

4000

5000

6000

7000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

China: harvested area and production of asparagus (1990 - 2009)

Harvested area (thousands of ha) Production (thousands of tonnes)

9

Peruvian asparagus exports increased

by 172% from 2000 to 2010.

In 2010, Peru’s asparagus exports

were US$ 427 millions (FOB value)

Peru: Asparagus exports and main destinations

0

50

100

150

200

250

300

350

400

450

500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Peru: asparagus exports by type, 2001-2010(US$ millions FOB value)

Canned Fresh Frozen

Market destinations

Fresh Asparagus Canned Asparagus 1/ Frozen Asparagus 2/

1. European Union– US$ 76

millons (70%)

2. U.S. - US$ 24 millons (23%)

3. Others (7%)

1. U.S.– 69%

2. European Union - 26%

(Netherlands, Spain,

UK)

3. Others - 5%

1. U.S.– US$ 53 millons (53%)

2. European Union. - US$ 24

millons (35%)

3. Others (12%)

1/ FOB value

2/ FOB value

10

USA EU

Fresh

Asparagus

Canned

Asparagus

Frozen

Asparagus

Asparagus trade by varieties: fresh, canned, frozen

187

236 228251

291

105

156

185 114 106

27 31 3624 30

0

50

100

150

200

250

300

350

2006 2007 2008 2009 2010

Peru: Asparagus exports(FOB value - US$ millions)

Asparagus, fresh or refrigerated

Asparagus: prepared or conserved, not frozen

Frozen asparagus

55.4%

0.0%

84.45%

0.02%

97.15%

2.13%

41.4%

58.0%

Source: UN- Comtrade

Peru and China: share in imports

2010

Peru

China

Source: Peruvian custom - SUNAT

There has been an increase of fresh and

frozen Asparagus between 2006 and 2010.

In the case of canned Asparagus, there

has been a decrease of 42% the last two

years.

64.4%

9.2%

39.3% 1/ 37.4%

1/ Spain: most representative case 11

Peru is the main source of imports from

U.S. in every type of asparagus

In European Union, there is an important

participation of China in canned and frozen

asparagus imports.

7.803.01

68.86

11.25

57.44 56.88

0

10

20

30

40

50

60

70

80

2005 2006 2007 2008 2009 2010

Peru: Fresh asparagus exports to China (US$ thousands)

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010

Exports to China Exports to China - Hong Kong

Peru China World Market

Q

P P P

Q Q

S

D

S

D

S

D

Excess supply:

Exports

Excess demand:

Imports

Peru and China trade in the Asparagus market

Source: UN-ComTrade

In the last five years, Peruvian Fresh

Asparagus exports to China increased by

250%.

China has an increasing demand for

products aimed to their growing middle

class. May become an important export

market for Peru, especially in Fresh

Asparagus.

12

(US$ Trade Value)

Main competitive advantages for asparagus market in Peru

Growing seasons

jan feb mar apr may jun jul aug sep oct nov dec

Country

México

U.S.A

Canada

Country

Argentina

Chile

Ecuador

Peru

Ancash

Ica

La Libertad

Lima

Country

China

Thailand

Country

Spain

France

Netherlands

Italy

Portugal

Germany

Country

New Zeland

Australia

Oceania

Asparagus annual production areas

North America

South America

Regions

Asia

Europe

In Peru, Asparagus production

increases from August/September until

February/March, when production

starts to diminish because of lower

temperatures.

Green Asparagus has two harvests

per year. The first one, from January

to May/June and the main one from

september to December.

Exports of fresh asparagus depend on

the opportunities in the target markets.

The rest of production is canned or

frozen.

In China, production increases

between April and June.

In U.S., production increases in April.

Source: Technoserve

Opportunity for

Peruvian exports

13

Lower labor costs

As a lower middle-income country with a skewed income distribution, wages are

below those of many of its competitors.

3.3 3.4 3.8 3.9 4.1 4.2 4.45.1 5.1 5.0 5.1

5.16.0

5.5 5.4

8.79.4 9.7

10.311.3

12.1

10.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

China and Peru: yields for Asparagus production 1989-2009(TN/Ha)

China Peru

High yields for Asparagus production

Source: FAO Source: FAO

10.64

6.42

5.40

5.12

5.07

4.74

4.20

0 2 4 6 8 10 12

Peru

Chile

Germany

China

Mexico

Spain

United States of America

Crop yields for Asparagus production 2009 (tn/ha)

14

Main competitive advantages for asparagus market in Peru

Peru World Market China

Q

P P P

Q Q

S

D

S

D

S

ED

Excess demand:

Imports

Peru and China trade in third countries (USA-EU). Processed

China´s excess supply would have to increase significantly to gain more market share and

price out Peruvian exports.

ESPE

ESC

H

15

1 000

2 000

3 000

4 000

5 000

6 000

7 000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

China Peru Spain United States of America Germany

Peru and China: main competitive advantages

Peru has lower farm prices of

Asparagus production than main

producers in the world

Asparagus producer price, 1991-2007 (US$ dolars/metric ton)

Source: USDA

17

This process still needs

to be labor-intensive, in

order to preserve the

product quality.

Competitive advantage

in E.U. market: canned

Asparagus

Advantages in Asparagus processing

and packing

Progress in logistics and quality control

There has been a

technological change in

logistics that allows high-

quality Fresh Asparagus to

be exported using the

maritime mode

Complementary

investments in airports, Cold

terminals for air cargo)

III. Peru’s domestic and trade policies for promoting agribusiness

17

There has been a significant reduction of tariffs

66%

26%

18%13%

3.4%

0%

10%

20%

30%

40%

50%

60%

70%

July 1990 December 1990 December 1992 December 1999 2011

Peru: Tariff weighted average 1990-2011

tariff weighted average

Source: MINCETUR

Tariffs have been reduced

from 66% in July 1990 to

3.4% in 2011, as a result of

unilateral reductions as well

as recent Free Trade

Agreements.

Tariffs for most of agricultural products have been reduced.

18

108

124

158

145

157

183

100

120

140

160

180

200

2005 2006 2007 2008 2009 2010

Fresh Asparagus exports to USA(2005-2010)

Exports to USA (US$ millions)

E.U. – Peru FTA U.S.A. – Peru FTA

China– Peru FTA

FTA’s and effects on Asparagus exports

FTA doesn’t

still come

into force

Tariffs

Fresh: 12%0%

Canned: 25%0%

Frozen: 20%0%

Tariffs

Fresh: 10.2%0%

Canned: 17.6%0%

Frozen: 14.4%0%

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010

Peru: Canned asparagus exports to countries of EU(US$ millions)

France Germany Italy Spain

Tariffs

Fresh: 9%0%

Canned: 17%0%

Frozen: 17%0%

The China-Peru Free Trade Agreement, which came

into effect on March 2010, granted zero duty to

Peru’s fresh asparagus exports to China.

The customs authorities may exchange information

on the origin of the product and the declared value

Tool to prevent undervaluation of goods imported.

Fresh Asparagus exports increased by 3% between

2009 and 2010.

Phitosanitary protocols still need to be worked out.

0

2000

4000

6000

8000

10000

12000

14000

0

500

1000

1500

2000

2500

3000

3500

4000

2005 2006 2007 2008 2009 2010

Peru: imports of capital goods for agriculture, 2005 - 2010(US$ thousands)

Hand tools for agriculture, horticulture, forestry

Tractors (other than works, warehouse equipment)

Source: UN Comtrade

Source: UN Comtrade

19

The China-Peru Free Trade Agreement and other FTAs

Canada– Peru FTA

U.S.A. – Peru FTA

99.9% of total exports in 2009 and 2010 were free

of import duties.

296 products (US$396 millions) increased their

exports in 100% or more between 2008-2010:

fresh grapes (214%), sugar (347%).

Overall agricultural (traditional) exports increased

by 39% with respect of 2008.

100% of exports are free of import duties since

01.08.2009

94% of imports are free of tariffs.

August 1st, 2009

February1st, 2009

EU – Peru FTA January 2012

China– Peru FTA

Agriculture exports sector grew by 67%, from

2008 to 2010.

173 new exporters. 70% are micro-enterprises.

Most of Peruvian imports from China belong to

construction materials and capital goods, with

growth rates of 54% and 59%, respectively.

Direct investment has not show up yet in the

agricultural sector.

It might happen in the irrigated land tender

processes currently underway (184,000 has).

March,1st, 2010

Immediate and complete reduction of tariffs on

99.3 percent of Peruvian exports to the

European Union.

95% of agricultural products included.

20

PPP initiatives

“Frio Aereo” . Cold export terminal

“Frio Aereo” is an association of producers and

exporters of Peruvian capital in the business of

exporting fresh vegetables, which include

asparagus, flowers, grapes, snow peas, fruits,

among others.

IPEH (Peruvian Institute of Asparagus and Vegetables)

IPEH, formed in 1998 with the support of Peruvian trade

Promotion Agency (PROMPEX). Is a civil non-profit organization

formed by producers and exporters of canned, fresh and frozen

asparagus, IPEH represents the asparagus industry, participating

with 80% of exports of this product.

Currently, the IPEH provides information services, implementation

of GAP, technical assistance, access to markets.

21

IV. Main impacts of the Asparagus cluster on the Peruvian economy

22

a. More jobs and higher wages

Asparagus activity provides the country an estimated 50 000 jobs decentralized along

the Peruvian coast, of which 60% are women.

Businesses counted by year of commencement of operations (2008)

Source: SUNAT

The number of businesses created has increased from 81 905 in 2005 to 190 567 in

2008 in the country. The trend is similar across the the principal regions producers of

asparagus.

Employment rates in Ica and La Libertad are one of the highest in the country. Since

2003, the employment rates have grown 25% in Ica, 12% in Piura, 9% in Chincha, 8%

in Pisco and 6% in Trujillo as a result of agro-export activity.

Businesses counted by year of

commencement of operations: 2008Peru Lima La Libertad Ica

From 2000-2004 204 554 82 118 11 600 4 749

2005 81 905 31 289 4 899 1 957

2006 115 321 44 008 7 247 2 470

2007 135 674 52 488 8 950 3 173

2008 190 567 70 891 9 067 5 629

23

b. More jobs and higher wages – Higher income

Due to agro-exporting activity, agricultural

producers in the asparagus valleys have

had the highest income growth rates in

Peru.

The highest income growth rate is

reported in southern coast, especially the

valley of Ica.

Source: INEI

Per capita annual income of agricultural producers, 2007-2008

2007 2008 Variation (%)

Northern coast 5015.1 6161.7 23%

Central coast 6050.1 8568 42%

Southern coast 7735.9 11937.7 54%

In recent years, small farmers are using

more and more products to nourish the soil

and improve yields.

This has promoted the creation and

consolidation of many small businesses

that sell these products. The development

of these businesses is closely linked to

agricultural performance.

26

V. Risks factors that might affect Peru’s competitiveness

25

Real exchange rate

4,45

4,50

4,55

4,60

4,65

4,70

1994 1996 1999 2001 2004 2006 2009

Banda Superior 1/ Banda inferior 1/

TCR de equilibrio TCR Multilateral

1/ TCR de equilibrio más/menos una desviación estándar.

Fuente: BCRElaboración : Apoyo Consultoría

Equilibrium RER

Lower band 1/

Multilateral RER

Upper band

1/ Equilibrium RER less one standard deviation.

Multilateral Real Exchange Rate and Equilibrium Real Exchange

Rate 1/

Source: BCRP

The Multilateral Real Exchange Rate is a

weighted measure of real bilateral exchange

rates with several countries

The Equilibrium Real Exchange Rate is

used as a benchmark to identify the existence

of a misalignment the multilateral real

exchange rate or observed.

The downward trend of the Equilibrium

RER with the probability of misalignment of

the Multilateral RER shown in the chart may

suggest that the general evolution of the

exchange rate can possibly be a constraint for

the competitiveness of Peruvian agriculture.

1/ The equilibrium multilateral real exchange rate (MRER) is estimated by applying BEER methodology (Behavioral Equilibrium

Exchange Rate). This methodology seeks to estimate the equilibrium MRER based on its theoretical foundations, instead of the

filter approach that estimates the equilibrium MRER as the trend component of MRER observed. To do this this, we used as

explanatory variables the ratio of prices between tradable and non tradable products, government expenditure as% of GDP and net

foreign liabilities and mid –run and long-run as% of GDP. 28

Protectionism

According to the USDA, Peruvian asparagus compete with Washington´s state

canned production (declined 73% by 2008). The three biggest canners in the state

closed their operations. Michigan and California have also been affected.

Consumers in Spain have been complaining that asparagus imported from China

and Peru are being sold as made in Navarra - Spain.

Several antidumping cases have been filed against China in labor-intensive

industries.

27

Labor costs

Between 2005 and 2008, agriculture wages increased

by 31.5 %.

Workers employed by agribusinesses earn about 30

percent more than those working for agricultural firms

that serve the local market.

Growers in Ica reported that labor costs were about $8

per worker per day in 2008, higher than in other parts

of the country. Ica has reached the point where labor

for the exporting agricultural companies is getting

scarce, driving wages higher.

Still, asparagus production continues to be labor

intensive and not mechanized.

28

Source: Agricultural Direction Info

Projected areas for the Ica Valley

(thousand hectares)

Fuente: Dirección de Información Agraria – Ministerio de Agricultura, encuestas, PROFODUA (2009)

Over-exploitation of water resources

0

100

200

300

400

500

600

700

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Millones de M3Annual mass – River Ica

Millions of m3

Source: Agricultural Direction of Ica

The main asparagus-growing valley

is basically supplied by

groundwater.

The aquifers are not recharged at

the same speed they are being

extracted (sign of

overexploitation).

Furthermore, coastal valleys suffer

from a high level of variability of

river flows . This affects local

production of main exporting fruits

and vegetables.

“Water – print” concerns in certain

markets. 29

21,2

20,720,4

20,2

19,8

19,419,0

18,8

18,518,1

17,7

16

17

18

19

20

21

22

100% 97% 94% 91% 88% 85% 82% 80% 77% 75% 72%

Disponibilidad de agua subterránea para bombeo

Source: MINAG

Between 2000 and 2009, there has been a higher number of products with value added and a higher

number of market destinations.

181

Markets

162

Markets

+12%

Mainly Africa & Asia (i.e.

Namibia, Senegal,

Slovakia, etc)

3 620

subheadings

4 370

subheadings

+21%

Artichokes, grape paprika,

avocados, piquillo peppers,

etc.

2000 2009 2009 2000

Exports: New Markets Exports: New Products

The number of enterprises that export increased from 4 256 (2000) to 7 669 (2009).

Reactions to these risks: product diversification

30

Reactions to these risks: product diversification

Not only asparagus increased its production the

last years, but also other crops like avocado,

green coffee, mangoes and grapes. Their share

of total exports also increased.

Source: FAO

0

50

100

150

200

250

300

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Gross production (2004-2006) of agricultural items 1991-2009(Millions of Int. $)

Avocado Green Coffee Asparagus Mangoes Grapes

Gross production (2004-2006) of agricultural items 1991-2009

(US$ millions)

Source: FAO, BCRP, MINCETUR

8%

10%

11%

13%12%

12%

10%

12%

9%

15%

13%

5%

7%

9%

11%

13%

15%

17%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Peru: Share of Asparagus exports in agricultural

exports

31

Conclusions

China may become an important export market for Peru, especially for fresh asparagus.

Chinese farm machinery and agricultural inputs may also increase Peruvian

competitiveness.

China and Peru will be important players in the global markets. Peru would likely keep its

advantages in the fresh market. China could increase its share in the processed market in

the EU, if the market premium for quality starts disappearing.

Peru´s needs to address domestic issues to keep its competitiveness in the asparagus

value chain, mainly regarding water resources management, and phitosanitary issues.. A

low-risk external factor related to trade might be ill-grounded antidumping cases against

both Chinese and Peruvian imports in either the US or EU markets.

Agribusiness are investing relatively more in alternative high-value crops such as grapes

and avocados.

32