Repsitioning RP Agriculture For Global Competitiveness

The Lapanday experience: Lessons and emerging strategies

A few years ago, the Asian financial crisis forced us to realign our business interests along what we concluded was our strength – globally competitive agribusiness. Within four years, we refocused most of our interests, shedding off non-core assets, paying down debt, and investing in core business technologies and systems to make us more globally competitive. As a result, today we stand on two legs, the first being Del Monte Pacific, which is publicly listed in Singapore with a market capitalization of $300 million; and Lapanday Foods Corp., a privately held business entity.

Del Monte is principally into processed tropical fruits, with pineapple as its base product, but we have since successfully grown our tomato and pasta lines as well. We now supply approximately 17 percent of pineapples traded globally. Lapanday, which I will speak a little more about, is a fresh produce company based also in Mindanao, principally into bananas. Both companies are now almost equal in size, have a combined turnover of over $400 million, and together generated approximately $50 million in income last year.

Both companies are very close to my heart, but I’d like to highlight the characteristics that have led our second leg, Lapanday Foods, toward growth and competitiveness. This company has grown in four years from $50 million to $200 million in revenues, with much of the growth principally generated internally. What was primarily a grouping of banana plantations that sold fruit ex-farm gate then packed them off to multinational brands Del Monte and Chiquita is now a fresh produce marketing company with a seed-to-shelf orientation.

We are conscious of the need to be the best – in terms of price, quality, reliability, customer service, and flexibility. In most cases, we are the entity that is benchmarked against; in others, we strive to benchmark against the best. Our work ethic is legendary in Mindanao; there is always someone, somewhere in the organization working all the time, 24 hours a day, 365 days a year.

Lapanday now supplies bananas to all major produce markets in the world. But we are still prevented from exporting to the United States, Taiwan, Australia, and Europe, due to phyto-sanitary or non-tariff related barriers, an issue, which I shall discuss later. We have expanded from bananas to other tropical fruits in our distribution network. Besides sourcing fruit from Mindanao, we have also begun to source from Hawaii and Central America where we have entered into purchase arrangements with independents.

Our business learning curve has sometimes been costly, especially in China, but we have learned our lessons and profited from our mistakes. Today, in China, we enjoy a 36 percent market share for bananas selling under our own brand, Mabuhay. We have since expanded our product lines beyond bananas to piggyback on our cold chain logistics and distribution system.

Lapanday is led by a focused, dedicated, and passionate management team, competing directly with multinational companies, and increasingly known for reliability. We have an international management team – Filipino, American, Israeli, Dutch, Colombian, Chinese, Korean, and Japanese – who have had extensive experience in the business of perishables. We function as a flat organization, performing our duties and responsibilities, in a non-hierarchical manner. We believe that everyone, from managers, consultants, to workers, play an equally important role in the success of our company. We all share a common vision towards directing Lapanday to eventually become a truly global transnational Filipino company.

The past few years have been daunting. We have had to work harder to catch up. We have had to innovate and test technologies to improve our products, and de-commoditize them by niche marketing the products we grow, source and sell. Most important, we have had to move with urgency.

We honor our contracts to the established multinational companies while we also grow our in-house brands and develop parallel systems on our own. We have this passion to learn; train our people to think outside of the box, and to re-train them and expose them to current technologies, while searching for what is commercially applicable.

Biotechnology, biodegradable plastics, using nature instead of chemicals to handle pests, are just some of the many programs we have under test. When we do something different, we always ask ourselves if it makes us more competitive, or if it improves quality, or if it differentiates our product so we can derive a better margin, or if it makes us more reliable as a supplier to our customers.

Looking beyond Lapanday: Lessons for national applications

I can talk endlessly about our experience in Lapanday. But today, I would like to look beyond Lapanday and share the relevance of our work in the context of Philippine agriculture. I wish to enumerate the lessons we have learned so we may all reflect on them and apply these in Philippine agriculture.

One, as our experience taught us, globally competitive agriculture clearly offers considerable economic and social benefits. It serves as a reliable contributor to exports, employment, and rural incomes.

For example, Lapanday’s contribution to national exports was estimated at $357 million in 1998 alone. In the arena of employment, we are considered as the top employer in the agriculture sector of Mindanao.

What this figure means is that the people of Mindanao can always rely on agriculture, both in good times and in bad. Whenever the economy falters, the agriculture sector, together with the remittances of OFWs, props up the economy and alleviates the personal lives of the rural people. Likewise, in periods of prosperity, agriculture remains as a major contributor to the national economy and a source of better incomes – enabling farm families to send their children to schools, or provide medical treatment to their kids – because food consumption spending increases.

Two, the financial crisis of 1987 forced US to streamline operations and focus on our core business. We have to re-direct our resources to where Lapanday is most competitive. We had to do this painful exercise to become better positioned in the global arena.

The Philippine agriculture bureaucracy however, given its scarce resource, continues to maintain a huge bureaucracy and large number of programs and projects without cognizance to the market and international realities. This type of governance is ineffective especially given a cash strapped government. It prevents Philippine agriculture from effectively plugging the operational loopholes required for global competition. It spreads government resource thinly. Consequently, it fails to adequately develop globally competitive products.

Three, we always look outside our national borders and use the global market as a prism for analyzing and improving our work, our skills, and our products. In our bid to attain competitiveness, we are willing to sacrifice traditional business interests and learn the art of focusing our resources and efforts towards our distinctive competencies. It includes the willingness to take risks, and the capacity to develop mechanisms to alleviate those risks. It also includes adopting new technologies, and financing these innovations to respond favorably to market signals.

Unfortunately, we cannot say the same for Philippine agriculture. The country’s agricultural sector today, despite its healthy contribution to the economy, remains largely "local" in orientation, supplying only consumers within the country. As such, it has little incentive to be competitive. Its farming practices are antiquated; its logistical arrangement are inefficient; and national policies are often geared towards merely improving consumption, rather than improving the agriculture’s competitiveness.

Four, our partnership with our farming contingent, including our independent growers, was critical to our growth. We invested a great deal in improving their skills and capabilities, or in developing a competitive shield that would strengthen their capacity to produce efficiently.

We believe that our growers and workers need to earn in much the same way we do. Their lives need to improve faster than our profit margins. We see this as a practical guidepost for doing business – for we are able to reduce transaction costs on one hand, and in other hand, we are able to uplift our lives apace.

Fifth, we have accomplished our work at Lapanday through our own initiatives. We had no support from government.

What this experience tells us is that government has to unleash the productive potential of the private sector and leave the task of rural modernization to business. The evidence clearly suggests that only the private sector can be relied upon to introduce innovation and harness new technologies.

Our company had to introduce new techniques to our farming as well as to our independent growers because it made business sense for both of us. New technologies made Lapanday competitive. Likewise, our farmers were daring enough to try our new planting materials, or non-traditional pest management schemes, on the promise of higher yields and better returns.

A new framework for agriculture

These are only some of the lessons of Lapanday. They are really simple and straightforward. I believe that the challenge lies in applying them to the larger picture. My task is really to apply these lessons in the context of the national strategy for global competitiveness.

To do this, I have attempted first to construct some sort of groupings who will constitute as the players in our bid for competitiveness in agriculture. I have identified three major groupings within the agricultural sector and I would like to share with you my thoughts and experiences with respect to each grouping, and their modernizing agriculture.

The small farmers and the rural micro-enterprises

Small farmers and small fishermen, who constitute the majority, have the greatest social need. They grow mostly traditional base crops (rice, corn, coconuts) and/or make their living through subsistence fishing. They need the most help in terms of financial resources, technical expertise and systems, and support services that will increase their productivity.

Traditional corporate farms and agribusiness enterprises

These groups are focused and dependent on the local market, producing traditional crops and products (sugar, poultry, livestock). They need less financial help than the small farmers and fisher folk, but they would benefit from being allowed to use agricultural land as collateral for credit. This access to financing will help them reach the high level of competitiveness. Furthermore, they need (a) technology to help them become more productive and more profitable; and (b) safety nets if they’re competing against subsidized imports, or those that benefit from lower production costs in their countries.

The progressive and modernizing commercial farm sector

This sector is compromised of the corporate farms that have partnership with small farmers. They have an international market orientation, and they always strive for global competitiveness; they supply higher value crops and products (fruits, vegetables, fish, seafood) and have high growth contribution potential.

As such, their strong link to the global market places them in a position where they can provide the support services necessary to make farming profitable. They provide purchase orders to farmers and fishers, and offer growership arrangement, or subcontracting schemes, they alleviate risks attributable to agriculture and aquaculture. At the same time, they enable the small farmers to diversify their sources of income and raise their standard of living.

What the companies competing internationally need from government is not financial support, but diplomatic support by helping gain access to export markets, by pushing for lower tariffs in countries which we seek trade, and most especially, by fighting the removal of non-tariff barriers. In addition, this sector also needs quick approvals for new technologies.

Six challenges for transforming agriculture

The first challenge is to establish agriculture modernization as a foundation of national global competitiveness. All sectors, corporate and small producers, have to agree on the notion that only by having a global vision and by modernizing agriculture, can we make the small farmers become viable and agriculture profitable.

To do this, we have to secure the full support of the progressive corporate farms to lead in this bid for modernization and competitiveness. They are in a position to assume the leading role in this effort because they are globally oriented and are updated on market access and competitive technologies which other country use. As such, they can advocate modernization and re-orient agriculture from a production-driven, into a market-driven economic activity.

The second challenge is for government and the corporate farms to build a program to organize small farmers and develop them into rural-based micro-enterprises. In the United States, billions of dollars were spend for developing small farmer cooperatives like Tri Valley of the United States with their S&W brand, and Ocean Spray.

These producers coops are able to compete internationally. They have adopted the techniques to supply products that are reliable in price, quality, and delivery. Though both have gone under, government has to learn from these experiences as well as from our own especially our prawn and rami agri-aqua industries that have suffered the same fate as cooperatives in the United States. These sad experiences should not be a deterrent in trying new schemes and creating innovative mechanisms for our small farmers to become globally integrated.

The third challenge is to streamline the agriculture bureaucracy and re-orient it towards becoming more internationally oriented, market-driven, and technology based. Ours is a globally linked world. We can no longer pretend that our old structures can still effectively address problems in an environment that has become global.

The private sector therefore needs to help government redefine its regulatory policies and agencies especially in the area of quarantine, and approval of new technologies. Furthermore, we in the private sector have to devise new mechanisms for closer coordination with government especially on matters of trade. We must be prepared to work hand-in-hand with government. We have to synchronize our effort so that we will have a solid and unified Philippine panel – one that can more effectively push the country’s interests forward and thus reap positive results.

The fourth challenge is to strengthen key agencies and offices that are geared up for international work. It is in our best interests for government to be better informed, better prepared, more focused, deliberate, and strategically aligned with the industry or product sector that they are negotiating for. We have to help government create accountabilities and clear milestones. Above all, we have to constantly remind agencies to execute the programs with a greater sense of urgency.

We have to bear in mind that the Philippine government is weak in terms of its institutional capacity and financial capability. It is currently cash-strapped, highly centralized, and deeply politicized. The private sector must therefore be ready to assist in covering the government expenses where resources are lacking. In the United States, private sector help finance the lawyers, and the researchers necessary for negotiations.

The fifth challenge is to develop industry adjustment measures for all sectors. Government has to take the initiative to organize various industry groups in preparations for bilateral trade negotiations. On a per sector basis, government has to lead in the discussion of proposals on "safety nets," the specific adjustment measures including the time for the withdrawal of these support measures.

The six challenge is to rationalize all the national policies and operations affecting agriculture. On top of this list is credit policy. My experience tells me that when credit is available in this country, which is not often the case for agriculture, it is expensive and requires too much collateral. Land, which is supposed to be a natural form of collateral, is not accepted by the private banking industry as a whole. On the other hand, if credit is provided by GFIs to small farmers, the collateral value and bureaucratic red tape preclude them from borrowing.

Another touchy subject is the land reform policy. Though this issue is very politically sensitive, it is important I believe to take a serious look at this problem again. Given the lessons of the past, and the realities of fiscal appropriations to land acquisition, we have to collectively, both government and private sector, develop creative ways to address landowners compensation, and land productivity for farmers. Without this strategic review, investments in agriculture, and farm productivity, will continue to deteriorate. Perhaps is the time to address to revisit this issue again.

Going beyond our interests

Companies like Lapanday, which are healthier than others, cannot remain islands of prosperity in a sea of mediocrity. Solutions to Philippine economic development go beyond employing people in our companies, to reaching out and sharing what we can so that our neighbors can become better at what they do.

Generally, as CEOs, we do it to appease our conscience, make good corporate politics, or create a situation so that our success does not unnecessarily draw attention to ourselves. In either case, we need to be part of the solution to diffuse this ticking time bomb called poverty.

The recent political events are wake up calls for all of us. If we are to survive as a nation, we need to collectively find ways to create enduring institutions for cooperation and accumulate social capital.

Intellectuals and policy-makers, it is said, analyze operations of business and its systems. But, it is managers who build them. As CEOs, I believe we play an important role in incarnating the truth of our society’s limited capabilities with the essence of challenges.

The task before us is to become not only managers, and creator of wealth. We need to be educators too, bridging the gap between our vision and the familiar, between our future and our people’s experiences.