Business World, 16 June 2015


Fructuosa Llana of Frux Food Products is a progressive entrepreneur. She recently started a promising line of snacks made from cassava flour and fortified with malunggay and other vegetables (grown in her own small garden). But her main business is still the peanut butter line she has been producing for more than a decade now.

With help from the Department of Science and Technology, she recently managed to acquire machines to homogenize the peanut butter (i.e., keep the oil from separating) and to pack it in sachets to cater to the “tingi” penchant of the Filipino consumer. She sells to a growing clientele in her native Mindanao and in the Visayas and is looking to break through the Manila market.

In short, Mrs. Llana is just the type of small-business champion anyone would admire — industrious, upbeat, creative, and constantly looking for ways to extend and improve her product line. This is just the kind of agri-processing one hopes will link farmers to that all-important bulging “value chain” (the latest development meme) to the consumer.

Through their value-adding expansion, it is hoped, small businesses can create a larger and more diverse demand for farm produce, generating income for farmers and lifting agricultural folk out of poverty. Good, no?

There’s just one problem: Frux doesn’t buy peanuts locally. It imports all the peanuts it uses from Vietnam and China.

We asked Frux (also Mrs. Llana’s byname) why this was the case. She replied that local peanuts just did not have the right moisture content needed to make peanut butter: too wet, too uneven in quality. Meanwhile, the peanuts from Vietnam and China come sorted in neat sacks, are even in color, and have a uniform moisture content. She once tried to exhort local farmers she knew to improve their supply quality but got only a tepid response.

In the end she found it too tedious and gave up. After all, social organizing was not her core competence, and in any case she was busy enough trying to keep her own business afloat.

The story is a microcosm of the country’s recent growth, which on the face of it has been creditable. It is well known by now that the growing sectors are largely driven by the growing consumption and investment of an expanding middle class — think overseas Filipino workers (OFWs) and business process outsourcing (BPO) workers. Hence the growth in malls and retail in general, condos, schools, the demand for cars, luxury brands of clothes and accessories, smartphones, fastfood franchises — and, yes, even the unprepossessing snacks that Frux makes.

All are fortunate parts of the growing economy. But the fact is that these glistening supply chains of higher value-added don’t reach far enough into the dark corners of poverty to make a difference.

The middle-class economy can subsist on its own and frankly has no existential need to develop the poorer and less efficient parts of the economy.

Given the substantial and still growing remittances of OFWs and the export earnings from BPO services (already poised to surpass remittances in the near future), there is enough foreign exchange to go around to import the things the domestic economy is too inefficient to produce — good peanuts, among others.

What is needed to complete the domestic supply chain? Amalgamation, classification and standardization. Transport and logistics costs, for instance, could be lowered if large-enough areas specialized in the same crop. Technology and agricultural extension could improve quality standards to the point where output could be bought in higher-price markets. Well-defined market standards for such things as size, color, moisture content — with corresponding price differences — would provide farmers with definite ideas for which market niches to produce. Consolidated buying and selling would reduce transaction costs and provide access to larger markets.

The problem is, who is responsible for these functions, particularly in a post-agrarian reform era? Who should (must) play the role of Frank Knight’s entrepreneur, that residual claimant after all factors of production have been paid? Small farmers themselves will protest that, being on the margin of subsistence, they have access to neither credit, nor technology, nor markets to organize things for themselves. Nor is it reasonable to expect people like Frux Llana or other small businesses to do the job: they are saddled with their own problems.

That leaves only the large-business sector, the government, and private philanthropy. None of these is without its own problems. For starters, neither the government nor philanthropy has any core competence in organizing production or markets.

As for big business and finance, the temptation to construct malls, condos and expressways, and the lucre from car and housing loans must seem eminently more compelling than the prospect of having to deal with hundreds of fractious small producers, scheming local governments, and ransom-seeking insurgents — and for what result? Peanuts. (Sorry, couldn’t resist that.)

There are, of course, exceptions. Intrepid business people like Messrs. Senen Bacani, John Perrine, and Philip Soliven have managed to thrive in challenging areas by working with local leaders or organized cooperatives. Corporations like Jollibee and Nestlé have their own versions of working around the problem of dispersed ownership among small producers, which has undoubtedly made it more difficult to achieve the organization of large-scale output.

In all cases, what has invariably worked is a combination of social preparation, reliable local leadership, and a large established business partner.

At least thus far, these appear to provide the ingredients needed to overcome Coasian transactions costs and form either markets or lasting relationships.

But these exceptions are well known because they are so few. They are also fraught with implicit costs and draw on scarce and unique talents, so the question remains whether they are replicable on any wider scale or are just freaks of nature. Until that is settled, Mrs. Llana will just have to source her peanuts from Vietnam and China.

And in the meantime the only value-added local peanut producers can expect is from those vendors whose pushcarts-cum-stoves artfully dodge Manila traffic to serve up fresh-boiled peanuts on demand. No moisture content problem there.