Multisectoral value chain analysis ‘Connecting Central America’

1. 1. Context and structure of the VCA document

To explore the potential of a multisectoral programme in Central America in the framework of the EU-financed Central American Regional Economic Integration (INTEC) project, financed by the European Union and the Netherlands Ministry of Foreign Affairs, the Centre for the Promotion of Imports from Developing Countries (CBI) assigned ProFound – Advisers In Development and the Centro Agronómico Tropical de Investigación y Enseñanza (CATIE) to conduct a value chain analysis (VCA) for 5 pre-selected sectors in 6 countries: Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and Panama.

The VCA was carried out between January 2018 and June 2018, from the inception to finalization phases. The research consisted of both desk and field research in Central America and in Europe.

The VCA Report is structured according to the different Value Chains:
1) Specialty Coffee,
2) Cocoa and Derivatives,
3) Fresh Fruit and Vegetables,
4) Processed Fruit and Vegetables and
5) Fish and Seafood, and addresses the following elements for each Value Chain:

• Key European market characteristics and Central America’s competitiveness on the European market
• Structure, governance and sustainability of the value chain
• Value chain bottlenecks, risks and opportunities
• Proposed solutions and support actions

The main findings and conclusions for each value chain are described below:
 

1. 1. Main findings and conclusions
      1. Specialty coffee

Coffee is a highly significant sector, and part of the economic and institutional fabric, in all 6 Central American countries covered in this value chain analysis. The sector involves hundreds of thousands of stakeholders: (small, medium-sized and large) producers and their communities, cooperatives/federations/associations, local traders, processors and exporters; not to mention service providers, technicians, institutional personnel and other value chain actors. As such, coffee has important impact on rural incomes and livelihoods, and on the general economy of Central American countries.

Following the coffee rust crisis, the sector is even more present on the agendas of national governments, as well as in the activities of international cooperation agencies present in the region. It has also spurred research and regional cooperation, especially regarding climate change resilience and related subjects such as genetic varieties.

Central American coffee is of great interest to the quality-oriented European market. The region furnishes complex, high-altitude Arabica coffees with multiple social and ecological certifications which matches current European market trends. This is sought after by both regular and specialty coffee buyers, who are active on a market showing stable growth in the long term – but which is marked by diversity and strong competition.

Central American countries also compete for similar coffee markets. Intra-regional trade is limited in the region, and this is not an aspect that can change in the short term. The coffee industry is highly institutionalized and regulated, and each country invests highly in promoting and positioning their origins and micro-regions on the international market. However, there’re increasing opportunities for regional collaboration. The research identified potential in intra-regional cooperation by utilizing existing activities, such as the organization of regional pavilions at international trade fairs, and the involvement of regional organizations and platforms in such activities, most importantly PROMECAFÉ.

In terms of its sustainability risks and opportunities, the coffee sector still presents challenges which halt its development, but which have shown important progress in recent years. An example is child labour, which has received strong attention from several initiatives in Central America involving the private sector. In terms of fair pricing to producers, the lack of minimum price-setting mechanisms and high level of intermediation still pose a challenge in rewarding producers for their coffee in some countries. The environmental impact of the sector is also negative when it comes to waste management and chemical use; in spite of existing efforts, the sector still has problems in these areas. On the other hand, the high level of shade-grown coffee in Central America mitigates the impact on forest and biodiversity.

The main bottlenecks and opportunities identified on the specialty coffee value chain, as well as the possible solutions and support actions for the CBI programme were:

1. 1. 1. Cacao and derivatives

The cacao sector in Central America has faced structural problems in the last decades. Production and productivity remain low, and the sector’s economic impact is limited when compared to other value chains investigated. However, cacao is experiencing a phase of revival in the region, further incentivized by a growing international market and a number of national and international programmes and projects. The presence of European companies in Central America, notably Ritter Sport and Chocolats Halba, has further benefitted the sector and safeguarded an export market for the region’s cacao. While Nicaragua and Honduras register the highest production volumes in Central America, each country has ongoing activities related to cacao bean exports and processing.

Generally, cacao is one of the sectors in this multi-sectorial value chain analysis providing most growth potential, also in terms of impact. Cacao is grown in agro-forestry systems, and engages thousands of small producers (and their families), commonly organized into cooperatives and secondary cooperatives. It is also a natural alternative for lower regions affected by global warming, and where higher-quality coffees can no longer be produced. In fact, many cooperatives in Central America are already starting to grow and export cacao in addition to their current core business of coffee. This transition is also increasingly receiving institutional attention.

In terms of market demand, cacao profits from an international (particularly European) market which offers continuous (and growing) demand for the product. In addition, a severe shortage worldwide is expected in the coming years due to ageing plantations and population growth, fueling demand further. The decline of Venezuelan plantations during its lingering political and economic crisis and the decline of Ecuador’s reputation may offer extra opportunities to Central America.

Central American cacao has nutty and complex flavour characteristics that are sought after in the high-quality chocolate market, which is the fastest-growing segment in Europe. The focus for Central American suppliers should be on quality (not quantity), as the region is not competitive in volume-oriented markets.

Cacao also provides potential in value addition processes. Currently, cacao beans are exported from neighbouring countries to a professional and certified chocolate plant in Northern Honduras and processed into semi-finished products (derivatives) like liquor, butter and couverture.

However, the industry is still restricted by insufficient cacao bean supplies and an immature export market for value-added cacao products.

The level of intra-regional trade and cooperation in cacao is the highest among the different value chains investigated. On the one hand, competition amongst Central American countries causes no serious issues, since cacao production is limited. On the other hand, the industry has organized itself around regional organizations, a milestone being the creation of the cacao sector association AMACACAO with its trademark CUNAKakaw.

The sustainability risks and opportunities in the cacao value chain are mainly affected by social elements. There are mixed reports on the representativity of women within the sector. There is an evident engagement in the first steps of the value chain, and in the production of artisanal chocolate, but a limited role in decision-making positions. On the other hand, the sector is widely covered by certifications which improve its sustainability record. In addition, the cacao sector shows a high level of community engagement and technical assistance to producers, particularly in chains developed for export markets in Europe. However, the research also showed that there are producing communities which remain excluded from export chains and do not profit from support.

The main bottlenecks and opportunities identified on the cacao and derivatives value chain, as well as the possible solutions and support actions for the CBI programme are:

1. 1. 1. Fresh fruit and vegetables

The fresh fruit and vegetable sector is very significant to the development of Central America’s rural areas, highly influenced by government policies and programmes related to agricultural production and exports. Central America’s production and exports of fresh fruit and vegetable (and export-competent companies in this sector) are mainly concentrated in Costa Rica, Guatemala, Honduras and, to a certain extent, in Panama. Nicaragua and El Salvador may have isolated success cases, but the wider sector is still restricted by productivity and infrastructural issues.

The types of companies involved in the sector are mixed. Central America is marked by a strong presence of 4 multinationals (Del Monte, Chiquita, Dole and Fyffes) which are vertically integrated and dominate the chains for bananas, pineapples and partially for melons. However, there are also independent producers and SME exporters who are able to take a position in niche markets. In addition, there are interesting opportunities in other products/product groups in which producers/SMEs are engaged such as leguminous vegetables, Asian vegetables, berries, avocados and sweet potatoes.

The European market for fresh fruit and vegetables shows growth prospects for Central America. European importers foresee an ongoing growth of the market for exotic and tropical fruit in the next years, and the risk of market decline is generally very low. There’s continuous demand for larger product categories like banana and pineapple, but also increasing opportunities for products such as (Hass) avocado, blueberries, exotics (examples: passion fruit, papaya, granadilla, maracuya, kiwano, cherimoya and carambola), mini-vegetables and leguminous vegetables (sugar snaps and mangetouts). Organic assortments also show potential, with examples in passion fruit, citrus, ginger and sweet potatoes. However, Central America has limitations in organic production.

European importers are generally interested in fruit and vegetables from Central America, but concerns related to illegal activities in drug trade and identity fraud were mentioned during the interviews. In addition, Central American suppliers can only remain competitive on the European market under strict conditions related to quality, low MRLs and certifications. GlobalG.A.P. is a minimum requirement and an unnegotiable condition for market access. Social certifications like GRASP and SMETA are becoming market entry requirements as well. Efficiency, which results in a competitive pricing, will also be essential for Central America’s competitiveness. The research showed that Central America is not competitive in the price aspect when compared to Asian suppliers, for example.

Central America shows some activity in intra-regional trade for fresh fruit and vegetables. But the trade flows mainly indicate that these products are imported for domestic consumption; physical consolidation of supplies (for exports) amongst suppliers in different countries is currently not realistic.

In spite of several initiatives in government programmes and certifications, the sustainability performance of this sector is still affected by the overuse of agrochemicals and deforestation, the latter mainly resulting from the expansion of production areas. From the social perspective, child labour and decent work aspects also affect the value chain, even though the private sector is taking actions at national and regional levels to tackle these issues. Fair pricing and land ownership show mixed reports.

The main bottlenecks and opportunities identified on the fresh fruit and vegetables value chain, as well as the possible solutions and support actions for the CBI programme are:

1. 1. 1. Processed fruit and vegetables

The European market for juices, dried, frozen, canned or otherwise processed fruits and vegetables offers many opportunities for Central American suppliers of natural and healthy products, such as fruits and vegetables which are preserved without sugar syrup or other additives. Currently, Central America is already a main supplier of processed pineapple, banana and (water) melon. The processing industries around these products are concentrated in Costa Rica and Guatemala and mainly consist of large companies with access to large volumes of raw materials supplied by fresh fruit and vegetable producers. In addition to these large companies, SMEs also have opportunities to access the European market and contribute to creation of exports and employment. SMEs offer interesting niche products such as healthy and exotic processed fruits and vegetables.

By definition, processing adds value to products. The most highly valued processing methods in Europe are those that preserve nutrients and appearance of fruits and vegetables, while maintaining a low microbiological activity. European standards on such quality characteristics are strict and only companies able to comply with those product standards can benefit from the market opportunities. Compliance requires advanced food safety and quality management systems such as ISO 22000, BRC or IFS. Certificates of compliance with such process standards is becoming an important requirement to enter the European market.

To improve compliance by companies with international standards on food safety and quality, the governments in Central America must first harmonize their current standards. This reduces the burden on companies to comply with different standards and stimulates intra-regional as well as intercontinental trade. Support from CBI and local BSOs with knowledge and implementation of standards and respective certification followed by trade fair participation considerably improves their access to European markets.

Processors of commodities such as pineapple, banana and melons require scale to be price competitive in the European market. Only a few Central American companies currently have such scale and many SMEs which aim to compete in these markets are struggling to achieve the required scale. First of all, they need improved access to finance for investment in scaling-up facilities and certification and for working capital to cope with European payment terms. Some banks in Central America are already providing solutions to these financial problems. Expansion or replication of these solutions is crucial to increase the number of internationally competitive SMEs in the processed fruits and vegetables sector.

Secondly, processors must collaborate with producers of fresh fruits and vegetables in clusters to improve their access to sufficient volumes of raw materials. Adding value to products which are not suitable for the fresh market is a mutual benefit for producers and processors. This provides a strong incentive to organize themselves in clusters with support from BSOs. These clusters enable collaboration on production planning, sorting and grading, and financing of production. Technical Assistance from experts of CBI and other BSOs on these topics further supports cluster development.

Niche markets are less price competitive and require less scale. Improvement of access to such markets requires distinction from competitors. Plenty of Central American SMEs already distinguish themselves with unique exotic processed products, such as hand-cut broccoli and processed products from unique varieties of pineapple. Market analysis by CBI can determine if additional products from Central America have opportunities in European niche markets.

CSR offers additional possibilities for Central American suppliers to distinguish themselves from competitors and access niche markets. In Europe, CSR is gaining importance and compliance with one or more of the following standards adds significant value to products: GlobalGAP (GRASP), Sedex Members Ethical Trade Audit, Sure Global Fair International Raw Material Assurance, EU organic. The ‘Juice CSR Platform’ is one of the driving forces behind compliance with these standards in the European juices sector and is a potential partner in programmes such as those of CBI which aim to improve CSR performance in Central America. SMEs will benefit strongly from programmes which improve their knowledge on relevant standards in European markets and provide support with implementation of CSR measures and respective certification.

The main bottlenecks and opportunities identified on the processed fruit and vegetables value chain, as well as the possible solutions and support actions for the CBI programme are:

1. 1. 1. Fish and seafood

The fish and seafood market in Central America can be generally divided into artisanal and industrial production. Most export chains, particularly in aquaculture, are those related to industrial production, where food safety systems are well-established and companies have sufficient scale and connection to markets. Within fishery, a range of semi-industrial and larger industrial companies are active in the sector, and the chain is less vertically integrated and faces more serious certification and traceability issues. In both cases, industrials and semi-industrial players are important employment and income generators in their areas of activity. However, several larger scale/ industrial companies are foreign-owned and cannot be included in a CBI programme.

All Central American countries report activity within the fish and seafood sector, but at different scales and potential to export markets. Honduras and Nicaragua are the largest Central American exporters in this sector, concentrating the largest shrimp companies in the region (main export product in this sector), and also exporting significant amounts of rock lobster (Nicaragua and to a smaller extent Honduras), tilapia (Honduras) and yellowfin tunas (Nicaragua). Panama is also an important player in this sector, also supplying shrimps (from aquaculture and capture) to export markets, as well as frozen fish. Costa Rica (particularly for tilapia, trout, fresh/chilled fish and shrimps) and Guatemala (predominantly shrimps) also report export activities in the sector. El Salvador has an interesting domestic market, but exports (including to Europe) are mainly related to a Spanish-owned tuna company.

Opportunities on the European market for fish and seafood vary widely per product group. Considering aquaculture, Central American shrimp is suitable for higher-end markets, and will have difficulties competing with cheaper-priced peeled treated shrimps from Asia. Central America’s edge lie on its high-quality and “clean” shrimps, and ability to offer flexibility and customer service. Regarding tilapia, the European market is in decline and offers little growth opportunities for Central America. Opportunities for cobia are mainly concentrated around high-end, high-quality and high-priced markets. Within fishery, rock lobster offers interesting opportunities due to its high price and low availability, and Central America could compete by exporting mixed containers.

However, competition comes from cold-water supplies from Canada. In addition, the product presents sustainability concerns. For reef fish, opportunities on the European market can be found mainly in niches such as ethnic markets and a limited number of food service markets.

There's little and sporadic activity in regional trade for fish and seafood amongst Central American countries, and most of this trade relates to illegal cross-border trade. Problems in the harmonization of standards and controls by health and food safety authorities, as well as their capacities for inspection, is an important challenge. However, there is interesting potential in integrating fisherfolk, processing plants and exporters in a regional value chain to export to Europe, taking advantage of the Association Agreement between the European Union and Central America, as well as in complementing CENPROMYPE’s pilot project on regional fisheries value chains.

Most sustainability concerns for the fish and seafood sector can be found on the fisheries segment; Central America’s aquaculture segment is highly regulated and certified. Decent work aspects, related to dangerous fishing methods, negative social impact and unfair payment systems especially affect the sustainability performance of rock lobster. Illegal/over-fishing is also a significant sustainability concern in this sector, affecting several species (shrimps, rock lobsters, snails, sailfish, etc.) and leading to trade restrictions.

The main bottlenecks and opportunities identified on the fish and seafood value chain, as well as the possible solutions and support actions for the CBI programme are: