FUTURE FARMING Analysis of the Food Sector in Philippines Opportunities for Victorian Exporters June 2009

If you would like to receive this publication in an accessible format (such as large print or audio) please call the Customer Service Centre on: 136 186. Published by the Victorian Government, Department of Primary Industries. June 2009 Also published on www.dpi.vic.gov.au/agribusiness The State of Victoria Department of Primary Industries 2009 This publication is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968. Authorised by the Victorian Government, 1 Spring Street, Melbourne, Victoria 3000, Australia ISBN 978-1-74217-553-9 (print) ISBN 978-1-74217-554-6 (online) Disclaimer This publication may be of assistance to you but the State of Victoria and its employees do not guarantee that the publication is without flaw of any kind or is wholly appropriate for your particular purposes and therefore disclaims all liability for any error, loss or other consequence which may arise from you relying on any information in this publication. For more information about DPI visit www.dpi.vic.gov.au or call the Customer Service Centre on 136 186 Cover picture: Fresh Fruit and Vegetable Market, Quezon City, Philippines For more information visit the website at www.dpi.vic.gov.au or contact the DPI Customer Service Centre 136 186. Produced by: Agribusiness Group Department of Primary Industries 1 Spring Street PO Box 4440 Melbourne Victoria 3001 Author: Tim Roache Manager Market Development, South East Asia DPI Agribusiness Group Kate Linden, John Naughtin, Fiona Culley, Clare Balmer

Editors:

Contents

Introduction Overview of Current Economic Situation Overall Trade Relationship with Victoria and Australia Victorian & Australian Food Exports to the Philippines Food Consumption Trends Distribution Channels Market Access Opportunities for the Victorian Food Industry Dairy Grains Meat Prepared Foods Horticulture Conclusion Reference List

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List of tables and figures Table 1: Population and economic data for the Philippines, 2007 Figure 1: The Philippines Figure 2: Trends in export of selected food commodities from Australia to the Philippines Figure 3: Trends in export of selected food commodities from Victoria to the Philippines Figure 4: Typical Filipino Food Distribution Channels for Imported Australian Agrifood 3 3

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Introduction

The Philippines is one of the worlds fastest growing and youngest populations, with 65% of its 96 million people under 30 years of age.
The gulf between the rich and poor is large with 30% of Filipinos living below the poverty line (surviving on, or less than, $US 1 per day). In urban areas poverty afflicts 20% of the population whilst in rural areas it is 47%, which has led to an estimated 10 million Filipinos being Overseas Workers. The Philippines has the highest level of English literacy in Asia (93%) and Christianity is the major religion (90%). The Philippines has a volatile political history with civilian unrest, coups and attempted coups a common situation. However, since 2001 the Government, a Republic Nation with a democratically elected President (Gloria MacapagalArroyo, 2001-Current), has been relatively stable albeit with continued high levels of corruption, lack of economic legislation and judicial reforms, rapid population growth, and ongoing insurgencies by terrorist and rebel groups which continue to undermine this stability. The Philippines consists of over 7,100 islands with a total land area of 300,000 km2, making it the second largest archipelago in the world. It can be divided into three main island groups; Luzon (north), the Visayas (central) and Mindanao (south). Four cities have populations exceeding one million, Quezon City, Manila, Calcooan City (all within the Philippines National Capital Region - NCR) and Davao City. It is these metropolitan regions that present the opportunities for Victorian agrifood products, particularly metropolitan Manila and NCR. Over 50% of the Philippines land mass is classified as agricultural land. Agricultural production is undertaken by small landholders who either lease or own their land or companies with vast agricultural estates. Due to rapid population growth and escalating commodity prices,

Figure 1: The Philippines

Source: Maps.com

increasing food self sufficiency is a major concern for the Filipino government. Typically food produced from small land holdings is consumed by the household or traded at local wet markets. Similarly, food produced from large agricultural estates results in the Philippines being a major producer and exporter of sugar, rice, corn, tropical fruits (coconuts, bananas, pineapples and mangoes), poultry and pork.

Table 1: Population and economic data for the Philippines, 2007 (in comparison to Australia) National statistics (2007) Size Population Population growth GDP GDP per capita GDP growth rate Food self sufficiency Philippines 300,000 km2 96 million 1.99% $US 300 billion $US 3,200 7.3% <100% Australia 7,686,850 km2 21 million 0.801% $US 773 billion $US 37,300 3.9% >100%

Overview of Current Economic Situation

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The Philippines economy is small and has one of the lowest GDP per capita rates ($US3,200) in the whole of Asia. However, between 2003 and 2007, GDP grew by over 50% in terms of its local currency and in 2007 real GDP grew at over 7% (although in 2008 GDP dropped to 4% as a result of the financial crisis), making it one of the worlds fastest growing economies. This has largely been driven by strong domestic demand, economic reform, relative political stability, and the successful exports of services (e.g. telecommunications, business outsourcing), labour, and manufactured goods and resources. Whilst the general macroeconomic outlook has improved dramatically over recent years, with economic growth averaging 5% since Gloria Macapagal-Arroyo became President in 2001, the Philippines needs to continue its economic reform agenda to ensure its long term fiscal stability and catch up to other South East (SE) Asian economies. Continual reform and growth will be pivotal to alleviating poverty rates, which are currently growing due to the increasing population and unequal distribution of wealth. The major industries contributing to the Philippines economy include Manufacturing (50%), Agriculture (15%), Overseas Workers remittances (15%) and Services (10%). The Agrifood sector employs over one-third of the population, and in 2007 accounted for 14% of its GDP. The landscape is dominated by expansive estates that date back to colonisation, however a national land re-distribution program, which began in 1998, is currently underway transferring land ownership to local residents. The Philippines remains a net importer of agrifood products with a trade deficit of $US 1.54 billion in 2007. Wheat replaced rice as the most imported commodity followed by dairy ingredients in 2006, which are primarily used in the large processing sector. The Philippines food processing sector is the most dominant manufacturing sector in the country. It accounts for 40% of total manufacturing output, contributes 20% of GDP per annum and is growing at 8%-10% per annum. The sector comprises of fruits and vegetables, meat and poultry, flour and bakery, dairy products, fish and marine, beverages, confectioneries, food condiments and seasonings, food supplements, bottled water, snack foods, fats and oils. This sector is heavily reliant on both domestically produced and imported agrifood products.

Overall Trade Relationship with Victoria and Australia

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Recent economic liberalisation by the Philippines Government has resulted in a trading system thats relatively open and has some of the lowest applied tariffs in the region. The Philippines is a member of the World Trade Organisation (WTO) and Association South East Asian Nations (ASEAN) and as such are party to the Australian ASEAN - New Zealand (AANZFTA), signed in February 2009 (see below for further detail). Tariff rates for most consumer-oriented products range from 3%-15% and are undergoing unilateral reduction. However industries considered sensitive such as poultry, pork, potatoes and coffee are exempt and have minimum access volumes and significantly higher tariff rates applied to them. Australia maintains a good bilateral trade and economic relationship with the Philippines. Two-way merchandise trade was valued at $2 billion in 2007-08, 13% higher than in 2006-07 and both governments consider there to be significant potential for growth. Major Australian merchandise exports to the Philippines (2007-08) include; crude petroleum - $195 million, copper ores and concentrates - $159 million, medicaments (including veterinary) - $110 million and milk and cream - $106 million. Major Australian merchandise imports from the Philippines (2007-08) include; crude petroleum - $228 million, copper - $44 million, electronic machinery and parts, other $37 million, telecommunications equipment - $35 million. Total trade in services between Australia and the Philippines in 2007 comprised $266 million in exports and $306 million in imports. The Australian Trade Commission (Austrade) has an office in the Philippines located in Manila with a focus on promoting exports of Australian food and beverage and agribusiness products and services. The Victorian Government (Department of Primary Industries) is undertaking a Market Driven Responses Project with a focus on new and emerging markets and accordingly a Market Development Manager with responsibility for South East Asia including the Philippines.

Image courtesy of Meat and Livestock Australia

Victorian & Australian Food Exports to the Philippines

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The Philippines has been, and to a large extent still is, an importer of agricultural commodities that are predominantly used as raw materials in its large food manufacturing sector. Australian exports to the Philippines reflect this trend with dairy, meat and cereal ingredients forming the majority of total agricultural trade (Figure 2). The Philippines is Victorias 13th most valuable agrifood export market valued at $175 million in 2008, increasing by 45% from 2007 (due largely to record commodity prices during 2008). However total value has decreased by $42 million since 2004, largely driven by a decrease in dairy exports due to price sensitivity and increased competition. Despite this is also a reflection of the inherent volatility of trade with Philippines which is a very price sensitive market and often viewed by exporters as a spot market as opposed to a consistent long term export market. Dairy still remains the major export industry from Victoria valued at $130 million, followed by red meat (mainly beef) $16 million and cereals valued at $13 million (Figure 3). Australian food products are held in high regard in the Philippines food manufacturing, retail and service sectors. They are perceived as being of very high quality and safe, but expensive. The Philippines is a particularly price sensitive market, and as such Australia faces fierce competition from a number of agricultural commodity and food exporters from around the world. The United States of America (USA) is the major exporter of agrifood commodities such as wheat, soy, dairy, meat and fruit as well a wide range of further value added food products into the Philippines. The US has a long standing relationship with the Philippines due largely to their association during war time efforts spanning back to 1898. The Philippines also imports similar products, but to a lesser extent, from New Zealand (NZ), Canada and the European Union (EU). However due to the significant price sensitivity of Filipinos, countries such as China and other ASEAN nations are also very prominent exporters to the Phillipines, trading in large volumes of low price products such as fruit (particularly from China), vegetables, processed foods and dry goods. Due to the diversity and size of the Filipino market, there are segments for the lowest value products (e.g. beef offal) through to high value products (e.g. primary beef cuts) and Australian exports compete in all of these segments. In general agrifood commodities (e.g. wheat, dairy ingredients) compete in low value and high value segments in the food processing sector with all of the countries mentioned above (in addition to others). Conversely, Australian exports of further value added food products (eg. cheese, portion controlled lamb), generally targeted at higher value modern retailing and food service markets, compete with imported products from the US, Canada, NZ and the EU.
$AU million 140 120 100 80 60 40 20 0 2004 Powdered milk and cream Milled products 2005 Malt Wheat 2006 Beef Live animals 2007 2008 Cheese Confectionery

Figure 2: Trends in export of selected food commodities from Australia to the Philippines Source: GTIS (2008)

$AU million 140 120 100 80 60 40 20 0 2004 Powdered milk and cream Whey products 2005 Cheese Butter 2006 2007 Wheat Ingredients 2008 Beef

Figure 3: Trends in export of selected food commodities from Victoria to the Philippines Source: GTIS (2008)

Food Consumption Trends

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Traditional food retail and service formats, particularly wet and dry markets and local sari-sari stores are the most commonly frequented by Filipino consumers. Modern retailing and food service is very much in its infancy, but transforming quickly. These factors coupled with the large and growing divide between the rich and poor result in very contrasting food consumption trends in the Philippines. In general, locally produced and/or manufactured products and low-medium priced imported products are consumed via traditional markets. Medium-high priced imported products are predominantly found in foreign owned supermarkets and five star hotel restaurants in major urban centres such as Manila. The majority of food consumed in the Philippines is manufactured by local companies, 11,000 in total (such as San Miguel and RFM Corporation), that produce food across all major food sectors, such as noodles, processed meat products (poultry, pork beef), processed fruit and vegetable products, dairy products and snack foods. These manufactured foods combined with fresh fruit, vegetables, meat and rice form the staple diet for low-middle class Filipinos, who are the dominant consumer segment in the Philippines. However, middle-high income earners are demanding non-traditional and imported ready-to-eat foods and in turn are driving modernisation of the Filipino food retailing sector. The modern retail sector is undergoing significant transformation with supermarkets, hypermarkets and convenience stores developing rapidly, along with the quality of product offered. The majority of retailers are local (laws prohibiting international retailers operating in the Philippines were only removed in 2000) and include SM Supermarkets/ Hypermarkets, Robinsons, Rustans, Makro and Pricesmart. Modern retailing is a relatively new concept in the Philippines and as such is primarily located in major urban centres alongside its customers. Despite this, the Philippines is widely regarded as one of Asias most attractive retail growth markets. Continued economic growth combined with a deregulated and highly fragmented market, along with interest from major international retailers such as Wal-Mart, Casino, Carrefour and Tesco, will accelerate growth and opportunities in this sector to satisfy the growing consumer demand for retail ready food products in the medium-long term. Filipinos spend approximately 12% of total income eating out and the sector is valued at $US3 billion, with growth of 10%-15% in the last decade. Traditional food service formats still enjoy a majority market share in the Philippines, but the modern food service market, driven by convenience and price and dominated by fast food restaurants/chains such as Jolibee, McDonalds and ChowKing, is increasing its presence with speed. High end restaurants and hotels are found in metropolitan Manila and service wealthy local and expatriate consumers. Both of these segments are heavily reliant upon imported foods.

Distribution Channels

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The food sector in the Philippines is extremely fragmented due to the excessive numbers of food retail and service outlets; the convoluted supply chains; under-developed warehousing, distribution, cool chain and transport infrastructure; and the archipelagic nature of the country. These factors lead to inefficient and costly distribution, particularly outside of Manila. In general, imported food from Australia enters the Philippines in Manila, either at the Manila seaport (frozen and shelf stable products) or the Ninoy Aquino International airport (fresh short shelf-life products). However, there are many other entry points into the Philippines including Cebu, Iloilo, Davao, Cagayan de Oro, and Zamboanga seaports and Diosdado Macapagal, Mactan-Cebu, and Francisco Bangoy international airports. Once in the Philippines the main mode of freight is via road transport and roll-on, roll-off inter-island ferry shipping. Rail freight is poorly developed and air freight is generally too expensive. Maintaining cool chain distribution is a significant issue and often leads to excessive spoilage, particularly for inter-island distribution. Distribution channels in the Philippines food processing, retail and food service sectors resemble the disjointed nature of the food sector. Figure 4 below depicts the flow of imported goods into the Philippines. As is illustrated, there are a number of members in the supply chain with very limited product going direct to retail or food service. Most imported food moves into the food processing sector before making its way into the various food retail/service outlets. Likewise imported ready-to-eat foods are typically imported by an import/distribution company before further distribution. It is rare for retailers, including modern retailers, to import directly. Although, in the medium-long term, direct importation is expected to increase particularly as global retailers enhance their presence in the Philippines.

Australian supplier

Australian consolidator

Filipino food importer Filipino food processor

Filipino trader

Filipino major retailer

Filipino wholesalers/ distributors

Filipino small retail

Filipino wet market

Figure 4: Typical Filipino Food Distribution Channels for Imported Australian Agrifood Source: DPI, 2009

Market Access

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The Philippines Department of Agriculture and Bureau of Agriculture and Fisheries (animal and horticultural products) and the Department of Health and Bureau of Food and Drugs (processed foods) are the main agencies tasked with developing, regulating and enforcing food safety standards for all imported foods. Food products must be registered with the relevant agency, which can only be done by a Filipino entity and typically takes three months. Accordingly a reputable importing company that best suits a Victorian companys exporting needs is essential in the Philippines and crucial for market access and market success. All imported foods and agricultural products are required to comply with the Philippines food health and phytosanitary laws. Similarly packaging, labelling and other specific standard must be adhered to (for more detailed information refer to references packaging and labelling). AANZFTA provides for the progressive reduction or, for most products, elimination of tariffs facing Australian goods exported to ASEAN countries, over a transition period. The following list is a summary of key sectoral outcomes for the Philippines (for more detailed information refer to references, tariffs to ASEAN countries): Meat and livestock: existing liberal access for live bovine animals will be guaranteed through tariffs bound at 0% or phased to 0% or 2.5%. Tariffs on most meat tariff lines are bound at 0% on entry-into-force (EIF) or phased to 0%, although some lines are subject to tariff reductions only, and a few lines are excluded from tariff commitments in some countries. Fish: tariffs on the vast majority of tariff lines are bound at 0% or phased to 0%, with tariffs on remaining lines mainly reduced to 5% or less. Dairy products: tariffs on all tariff lines are bound at 0% on EIF or phased to 0%, except two lines that will be phased to 5%. Grains: for most products tariffs are bound at 0% on EIF or phased to 0%. Rice is excluded from tariff commitments. Fruit and nuts: tariffs on most products phased to 0% Vegetables: Tariffs on most products phased to 0%, but there will only be modest reductions on some products with high tariffs, including potatoes, celery, carrots, cauliflowers, broccoli and lettuce. Fruit and vegetable juices: prepared and processed fruit and vegetables: tariffs on all products are bound at 0% on EIF or phased to 0%.

Opportunities for the Victorian Food Industry

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Even though the Philippines presents a number of challenges including its high price sensitivity, it also presents significant opportunities for Victorian agrifood exporters in the short, medium and long term. Due to the level of economic development, population growth and importance of the food manufacturing sector in the Philippines, export of agrifood commodities such as dairy ingredients, wheat and meat products pose as very good long term prospects. Higher priced value-added products such as ready-to-eat retail products and fresh produce will increasingly develop into substantial opportunities, more so in the medium to long term and this will be driven by growing consumer demand and modernisation of the retail, and to a lesser extent, the food service sectors.

Dairy
Dairy ingredients represent the bulk of the value and volume of Victorias food exports to the Philippines. Milk powders, cheddar, whey and butter amongst others will remain long term growth opportunities, which will also be aided by the lack of development in the Filipino dairy industry. Filipinos are the largest per capita consumer of dairy products in Asia and with increases in household incomes there is large scope to further increase demand for value-added products such as, cheeses, yoghurts and desserts as per capita consumption is still well below that of western countries.

Prepared Foods (Ingredients)

Specialised ingredients such as manufacturing grade herbs and spices, fats and oils and confectionaries are vital inputs to the Filipino food manufacturing sector. Imported directly by manufacturers, or more commonly by traders, these products tend to be more niche in nature but offer Victorian food exporters (with the capability to be flexible) good opportunities in the short to long term to supply into the Philippines food manufacturing sector.

Grains
Grains, particularly wheat, are a major imported commodity into the Philippines. Whilst not truly reflected in the export figures due to confidentiality agreements, a large volume of Australian wheat is imported for the manufacture of noodles and flour for other bakery products. There is a very large wheat milling industry in the Philippines which relies solely on imported products. The short to long term opportunities for wheat exports to the Philippines are very good and this market offers good opportunities for Victorian and Australian wheat exporters in the new deregulated wheat market.

Horticulture (Fruit)
Technically the only Australian fruit with access into the Philippines is processed fruit and due to the domestic and import competition very little Australian product is exported into the market. However, there is a considerable volume of table grapes and citrus (no tropical fruits) from Australia that enters the Philippines via a grey channel that is widely recognised in the market. Discussions are taking place government to government and in the event market access is granted for fruit product, significant opportunity exists for Victorian exporters of table grapes, citrus and to a lesser extent stone fruit. Fruit is a very large part of the Filipino diet, particularly for special occasions.

Meat
The Philippines is self sufficent in pork and poultry and is a strong exporter of these products. However, the opportunities for red meat, particularly beef, are good. Manufacturing grade beef, offals and trim for processing into products for fast food chains and retail meat products offer very good short to long term opportunities. Primary and secondary cuts of meat are currently supplying niche high-end food service and retail outlets. However over the medium to long term the demand for higher quality beef and lamb products can be expected to grow with the enhanced modern retail offer and growing highend food service sector.

Conclusion

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The Philippines is currently a good market for Victorian agrifood exporters with the potential for growth in the medium to long term. This potential will be achieved if the fundamentals driving demand can outweigh the challenges that the Philippines faces. The drivers of demand have been the strong consistent economic growth (current global financial crisis aside), continual economic and trade reform (e.g. AANZFTA), political stability, strong domestic demand, young population, the growing appetite for non-traditional foods and a very strong food manufacturing sector. The challenges include the maintenance of economic and political stability, continual economic growth to alleviate poverty, poor transport and cool chain infrastructure and corruption. Currently major opportunities exist for agrifood commodities such as dairy ingredients, wheat and meat. It is anticipated that, for the foreseeable future, this demand will continue and potentially, experience growth. Filipinos have a growing demand for western style food products and with sizeable exposure to multinational fast food chains, high-end dining (for those who can afford it) and the increasing presence of modern retailing and international retailers, the demand for value added ready-to-eat and high value fresh food products will develop.

Reference List

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Australian Department of Foreign Affairs and Trade (DFAT): http://www.dfat.gov.au/geo/philippines/philippines_brief. html http://www.dfat.gov.au/trade/fta/asean/aanzfta/ http://www.dfat.gov.au/trade/fta/asean/aanzfta/factsheets/ index.html Department of Primary Industries Victoria (DPI); Food and Fibre Report 2008, www.dpi.vic.gov.au Euromonitor International; Philippines Country Fact File: www.euromonitor.com Google: http://images.google.com.au/ Planet Retail; Grocery retailing in the Philippines: www.planetretail.net/markets United States Central Intelligence Agency (CIA): https://www.cia.gov/library/publications/the-worldfactbook/ United States Department of Agriculture (USDA); GAIN Reports RP8049, RP8015, RP8041, RP7064, RP8043: http://www.fas.usda.gov/scriptsw/attacherep/default.asp

Packaging and labelling

Bureau of Animal Industry (Department of Agriculture): http://bai.da.gov.ph/baimainframe.html Bureau of Plant Industry (Department of Agriculture): http://bpi.da.gov.ph/services.html Bureau of Food and Drugs (Department of Health): http://www.bfad.gov.ph Bureau of Agriculture & Fisheries Product Standards (Department of Agriculture): http://www.bafps.da.gov.ph

Tariffs to ASEAN countries

Department of Foreign Affairs and Trade: http://www.dfat.gov.au/trade/fta/asean/aanzfta/ Department of Foreign Affairs and Trade: http://www.dfat.gov.au/trade/fta/asean/aanzfta/factsheets/ index.html