World Cocoa Foundation

Peru and the Peruvian Cacao Market

Overview of Peru

Peru is an investment grade country (S&P & Fitch: BBB+, Moody’s: A3) of approximately 30 million people on a land mass of over 1.28 million square kilometres thereby placing the country, on a land mass basis, as 20th in the world, with a size similar to Alaska and South Africa. Peru is regularly described as a “Latin Tiger” economy and benefits from a rapidly growing private pension fund system established in 1992, low inflation, a stable banking system, positive demographics, low debt levels and fiscal surpluses at the federal level. Peru is also signatory to dozens of free trade and investment agreements and uses global trade to
promote the continued success of its commodity, oil & gas and agricultural sectors.

The country has excellent demographic trends as the population is expected to grow to over 33 million by 2020. The median age is 27 years, among the lowest in Latin America.

Peru has benefited from market-orientated policies that have generated real GDP growth rates of 5.6 per cent. since 2000, consistently above the Latin American average of 3.3 per cent. In 2013, while the Latin American region as a whole slowed to 2.7 per cent., Peru maintained a 5.6 per cent. growth rate. Some notable achievements include:

  • Over the last nine years, gross debt to GDP has fallen by half to a historic low of 19 per cent.
  • Due to the country’s high reserves of over US$64 billion (more than doubling since 2008), net debt to GDP has fallen to a historic low of 2.2 per cent. and the country has no requirements at this present time to borrow in the international markets. International reserves now stand at 33 per cent. to GDP; and,
  • Uninterrupted, positive economic growth since 1999.

Peru is the highest-ranked major Latin American economy after Chile (which S&P rates as A-) and was positively highlighted in HSBC’s “World in 2050” report as one of the world’s top twenty six fastest growing economies until 2050. Peru’s “Shining Path” communist insurgency ceased to be a major threat in the midnineties and the country no longer suffers from the violence that is still seen in Mexico (S&P: BBB+) or Colombia (S&P: BBB-) today.

Importantly, Peru has a vibrant agricultural export industry in avocados, berries, grapes, asparagus, fish meal and fish oil. There are several foreign publicly traded companies with their principal operations in Peru, including China Fishery Group Limited (fisheries), Maple Energy plc (sugar cane) and Pacific Andes International Holdings Limited (fisheries). There is a tradition of agricultural investment in Peru and a large base of trained labour at cost-effective price points.

The Government of Peru has encouraged the growth of agricultural exports and leveraged Peru’s counter-seasonal production capabilities in fruits and vegetables to North America and Asia. Increasingly, Peru is regarded as the global low-cost location to produce sugar cane for ethanol and this has resulted in a surge of investment on the northern coastal area. It is important in Peru to continue to develop further the country’s export market, particularly in agricultural goods, and a number of incentives have been put in place, including zero export taxes and Law 27037 (which offers various tax exemptions or reductions to 2048 for businesses that operate in certain parts of the Peruvian Amazon).

Overview of the Cacao Market in Peru

Peru is the third largest grower of cacao in Latin America, with, in 2014, approximately 145,000 planted hectares. Peruvian cacao production in 2014 was 70,000 metric tonnes, an increase of 5 per cent. over 2013. The Directors believe that the Company’s currently total planted estate of 1,199 hectares, inclusive of the PAPEC programme, as at the end of September 2015 constitutes the largest cacao plantation in Peru. The remainder of the industry, save for a locally owned group with approximately 1,000 hectares of planted cacao, predominately comprises small farmers with approximately 3 to 10 hectares under cultivation.

Commercial cacao cultivation requires skilled estate supervisors and low cost labour (as regular pruning, maintenance, harvesting, etc cannot be carried out mechanically); these two ingredients drive field productivity and costs; in the opinion of the Directors no other cacao producing country has as favourable a combination of these two factors. The Loreto region of Peru is ideally suited for large-scale cacao production as:

  1. The climate is extremely favourable, with the ideal amount of rainfall (approximately 2,500 mm per annum), falling evenly throughout the year;
  2. There is a highly skilled technical base of cacao experts incountry;
  3. There is sufficient supply of high quality planting materials such as CCN-51;
  4. Low-cost logistics network to the key export markets; and
  5. The Group’s estates’ proximity to Iquitos, the capital of Loreto, allows for reliable supply of fuel, materials, people and equipment to the plantation.

Due to an extensive anti-narcotics programme in Peruvian Amazon, which was supported by US AID and the United Nations, over the last 20 years, there is a plentiful supply of trained field technicians looking for permanent, stable employment. The availability of a skilled managerial workforce positions Peru favourably compared with countries more commonly associated with large-scale plantation businesses, such as Malaysia, Indonesia and West Africa. Early indications are that the Group is in the fortunate position of being the employer of choice for trained field technicians who are essential for maintaining healthy cacao and high yields. In terms of low cost labour, there is a plentiful supply in the region, due to a lack of alternative formal employment and accompanying high unemployment rates. At maturity, the Group’s estate will require the full-time employment of over 800 people.

The Group also expects to benefit from the Peru’s zero tax fiscal environment, freehold title and investment grade status of Peru. Cacao production is a zero tax corporate activity in Peruvian Amazon due to Law 27037. This structural tax advantage provides for superior plantation level returns when compared with the dominant producers in West Africa, which for the most part have confiscatory export tax regimes. In terms of land ownership, Latin American countries benefit from freehold land title compared to Southeast Asia or West Africa, where leasehold title provides less security. Land is also held by individuals, rather than communities, making it easier and less controversial to acquire. Peru’s investment grade status – currently rated BBB+ by S&P and Fitch, and A3 by Moody’s, with an expected medium term upgrade to “A”, makes Peru one of the safest countries in Latin America in which to invest.