Peruvian Agricultural Sector Had the Biggest Contraction in 30 Years

agrícola Peru

“Social protests caused the collapse of the Peruvian economy in the first quarter…”

Victor Fuentes Campos is a public policy manager at the Peruvian Institute of Economics, holds a degree in economics from the University of the Pacific, and a MSc degree in public policy from the University of Chicago.

Victor Campos, public policy manager at the Peruvian Institute of Economics

AgriBrasilis – How has the Peruvian economy performed and what are the expectations for 2023? How is the agricultural sector?

Victor Fuentes – The Peruvian economy has shown weak growth throughout 2023, accumulating a contraction of 0.4% between January and March, and subsequently registering an annual increase of 0.3% in April. This low dynamism during the first four months of the year forced the IPE [Peruvian Institute of Economics] to review the GDP growth perspective for 2023 from 1.9% to 1.7%.

The reduction in growth is mainly because of the slow dynamism of private spending, affected by the absence of new investments, the lower generation of formal jobs, and inflationary pressures, that still limit the recovery of household purchasing power.

The agricultural sector fell 20% in April 2023, which represented the biggest contraction in the last three decades, after a series of adverse shocks suffered by farmers in 2022. Among these shocks, we can mention the rainfall deficit in the high Andean areas of the center and south of the country, as well as the sharp increase in the costs of fertilizers and pesticides.

The reduction in the agricultural sector has been explained mainly by the lower profitability of products aimed at the domestic market, which contributed to approximately 90% of the sector’s contraction in April and accumulated a drop of 13.5% in the first four months of 2023.

AgriBrasilis – What is the participation of agriculture in the country’s economy? What are the main crops and livestock activities?

Victor Fuentes – The agricultural sector represents approximately 6.0% of GDP. Although this percentage seems small, the economic relevance of agriculture is evident in the job market, since almost 25% of the jobs generated in the country are concentrated in the sector.

The main crops are traditionally rice and potatoes, which together represent almost half of production for the domestic market. However, in recent years, other products have begun to gain importance, such as blueberries, aimed at meeting foreign demand.

Poultry farming is predominant in animal production and concentrates more than half of the livestock subsector production. After that, milk, meat, and egg production follow.

AgriBrasilis – What government incentives, including agricultural credits and subsidies, are available to farmers?

Victor Fuentes – One of the tools that the Peruvian government uses to support farmers is the Financial Inclusion Fund for Small Farmers. This fund works as a guarantee scheme through which the reduction of interest on loans granted by Agrobanco to small farmers is promoted. The Central Government recently transferred US$ 13.51 million for this purpose.

Another program that has been strengthened recently is Agroideas, with which farmers are financially supported in the implementation of business plans to improve their competitiveness and access to markets, through the co-financing of machinery and equipment, as well as through the adoption of new technologies. The program’s goal for 2023 is to fund 1,086 business plans for a total of US$57.36 million, with an emphasis on regions recently affected by adverse weather conditions and with an approach that considers the empowerment of rural and indigenous women at the national level.

AgriBrasilis – Some evaluations indicate that the prospects for private investment in the country are negative. What is your opinion and what are the consequences of this condition?

Victor Fuentes – Private investment fell by 12% in the first quarter of 2023 and should maintain a double-digit drop at the beginning of the second quarter, according to IPE calculations. This poor performance is because of the absence of large investment projects to replace Quellaveco’s size in the mining sector and the significant loss of momentum experienced by self-construction spending.

Private investment should accumulate a reduction of 5.0% in 2023, because of the slow recovery of business confidence and because of the still high financing costs.

The main consequences of the decline in private investment are fewer opportunities to create formal jobs, which will limit the recovery of household purchasing power in the short term. In the medium term, negative investment performance reduces the country’s capacity and growth potential, through lower capital accumulation and limited progress in the economy’s productivity.

AgriBrasilis – What are the economic effects of the social protests that are taking place in Peru? Is it possible to say that inflation is one of the causes of these protests?

Victor Fuentes – Social protests caused the collapse of the Peruvian economy in the first quarter, a period that accumulated a drop of 0.4%. The sectors linked to domestic demand, such as construction, commerce, and services related to tourism activity were affected with greater intensity.

The detail of the economic results for the first quarter revealed that the roadblocks and violent demonstrations caused a loss of dynamism in private expenditure, through the decrease in household consumption and the interruption of investment works, mainly in self-construction.

Pre-conflict inflation may have influenced the protests in the south of the country. In fact, at the end of 2022, 9 of the 11 cities in the country with the highest inflation were located in southern Peru. However, the evidence points more to the fact that the blockades and social unrest have caused greater inflationary pressures in the regions, given the lack of supply of basic products, such as food and fuel, mainly in the south and east of the country.

In Puno and Madre de Dios, for example, prices for consumers in January increased by 6% and 3%, respectively, compared to the previous month, well above the national average monthly inflation (0.5%). Prices began to reverse this strong increase as the supply of food and fuel in the main markets of these regions returned to normal.

Behind the social conflicts registered at the beginning of the year are more structural reasons, that transcend the cyclical dynamics of inflation. Puno and Ayacucho, for example, have the third and fourth highest poverty rates at the national level (40.7% of the population on average). Puno has the highest incidence of anemia in the whole country, for example, with 67% of children under three suffering from this condition.

AgriBrasilis – You consider that the regional economies in the south of the country should perform worse in 2023. Why?

Victor Fuentes – Currently, the south of the country has shown a very different dynamic between the subregions that comprise it. On the one hand, there is the Moquegua region, for example, that has been growing at an average of over 30% between the third quarter of 2022 and the same period of 2023, favored by the start of the production phase of the Quellaveco mining project.

However, at the other extreme are the rest of the southern regions, such as Apurimac, Ayacucho, Arequipa, Cusco, Puno, and Tacna. On average, the GDP of these regions fell by 4.1% in the first quarter of 2023, which illustrates the negative effects of the protests and blockades registered at the beginning of 2023. It is very likely that, in the face of a latent social conflict, this area of the country presents a greater degree of uncertainty, that affects the consumption and investment decisions of the private sector, which affects its economic performance more than in other areas of the country such as the north, center, and east.

As the disturbances that affected the functioning of several mining regions or that limited the mobility and transit of people dissipate, the southern zone could recover at a faster pace by the end of 2023.

AgriBrasilis – What is the role of free trade agreements for agricultural exports? Which markets have been opened up in recent years?

Victor Fuentes – The signing of trade agreements between Peru and other countries has played a fundamental role in positioning Peruvian agricultural products on international markets.

Peru has 22 trade agreements in force to date. This includes markets such as USA, China, European Union, Andean Community, Pacific Alliance, Australia, UK, Canada, etc. Through these agreements, most agricultural products for export access these markets without major restrictions, and without paying tariffs. All of this has allowed Peru to consolidate itself as one of the leading exporters of products such as blueberries, grapes, avocados, and quinoa in the world.

In 2022, blueberries, grapes and quinoa from Peru ranked first in the world export market, followed by asparagus (Peru ranks 2nd in world exports), citrus fruits (2nd), avocados (3rd), artichokes (3rd), mangoes (4th), cocoa (9th) and coffee (15th), whose foreign sales totaled US$ 6.1 billion in 2022 and were destined for the USA, Holland, Spain and the United Kingdom. Exports of these products grew seven times between 2007 and 2022, and are tax-free under trade agreements with the US, European Union, China, Chile, Mexico, Colombia, among others.

A notable example is the foreign sales of avocados, which increased more than 19 times between 2007 and 2022, and even today this is a food whose demand is growing.