Tuesday, 15 February 2011

How the private sector feeds us better

Business Mirror

It has been impossible for the last year to pick up a newspaper and not read about the surging increase in commodity prices. We probably tend to think about commodities as being crude oil or gold or corn. However, by definition, a “commodity” is a consumable and covers a huge range of materials, usually raw materials.

Copper is mined and eventually turned in a wide range of both industrial and consumer products from simple wiring to components used in the highest-tech electronic products. But eventually that copper is consumed. Cotton is spun into fiber and woven into cloth that is used for clothing. But here again, eventually that cloth, no matter how many rags and rugs it eventually finds its way into, is consumed.

Obviously the most easily understood example of a commodity, a consumable, is food. It is grown, harvested either as a plant or a butchered animal, perhaps processed and distributed, but eventually it is eaten and consumed.

Although not necessarily in short supply, the world has spent centuries trying to get all sorts of commodities from their point of origin to the ultimate consumer. The Age of Exploration was an economic venture to get gold, cotton and tea as examples from where they were to where they were wanted. Although the production of commodities is critical, perhaps even more critical is the transportation and final distribution of those goods. Remember the Philippines grew and flourished from 1565 to 1815 on the back of the Manila Galleon trade, bringing primarily silver and spices, along with porcelain, ivory, lacquerware and processed silk cloth to Europe.

The migration of people and cultures around the global also piggybacked on this transfer of goods and raw materials as individuals and companies set up trading posts to facilitate this commodity business.

Each country had at least one commodity that it wanted from someplace else and also had a commodity to sell to pay for its imported items. Perhaps the most notorious example was the British East India Company monopolizing the opium trade from India, selling the opium to China in return for Chinese tea, which was then shipped back to Europe. China attempted to stop England’s opium trade, resulting in two losing wars costing China Hong Kong and other concessions. Interestingly though, the way China finally beat the British was by increasing its own poppy growing so that by 1906, China was producing 85 percent of the world’s opium, effectively killing this very lucrative British enterprise.

Opium aside, agricultural food products are the most important and critical items. Not now and not a thousand years ago are nations willing to subsist only the food that they can grow. In truth, agricultural, food self-sufficiency has always meant to be able to produce enough of whatever a nation can efficiently, in order to buy other foodstuffs from trading partners.

While we think of the commodity trade as being a global phenomenon between countries, exactly the same dynamics occurs within each individual country or region. The more efficiently and cost effectively agricultural production is moved around a country, ultimately all citizens are beneficiaries of a better and often healthier food supply and at a lower cost.

American Clarence Birdseye perfected the ability to flash freeze and ship high-quality fish from Labrador, Canada, to New York. He created “frozen food.” New Zealander William Soltau Davidson developed refrigerated sea shipping, which is the foundation of nearly all food exports. Davidson is responsible for the Asia-wide (including the Philippines) use New Zealand dairy products now a hundred years after his creation. Another American, William Davis fashioned the refrigerated railroad car to ship meat carcasses to the Eastern United States from the production areas of the Midwest that then led to fruits and vegetables from the West also being moved to the population- rich East Coast. The economic benefits boomed in the agricultural areas like California as people flocked to become farmers now that they had a market for their produce.

Now we come to the 21st century, and we seem to have a worldwide problem with basic commodity foodstuff. That is not to say that in prior times, mass starvation occurred due to natural disasters. But the current situation is man, no, I should say government-made.

Notice one thing that is lacking in all of the examples above that revolutionized food production and distribution? No government interference. None of the innovators listed above waited for government policy to make the life-changing improvements in our food-supply chain. No government departments, no presidential speeches and no interference; just the free market making life better for literally billions of people.

Go to any supermarket or grocery in the Philippines and see the thousands of food products created by the private sector—from 10 different brands of hot sauce and canned tuna to dozens of different types of vegetables, both indigenous and “foreign” available to the public. What else is interesting, in spite of two decades of what I think is failed government agricultural policy, many of the now-common vegetables and fruits locally grown (lettuce for example) were very costly and rarely available until the last few years.

Certainly, the government has provided additional infrastructure, farm-to-market roads being the prime example. However, it is the private sector, individual companies that have made the difference in supplying better and lower-cost meats, fish, produce and processed foods.

Note this also: in 1976, nearly 60 percent of Philippine merchandise exports was food. That percentage bottomed out in 1999 at 4.5 percent. The percentage has doubled in 2009.

It is important to understand how private enterprise has been responsible for the vast improvement over the years of the Philippines’ basic food supply. I will continue this discussion on Thursday by looking at two very different companies in more detail. It is difficult to research complete information as most of these companies (with the exception of San Miguel and other large firms) are private and information is unavailable. However, two very different food-chain supply companies are listed on the Philippine Stock Exchange; Alliance Select Foods and AgriNurture Inc., and we will look at their business models.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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