Country Focus: Peru

by Intern Intern1
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Peru's varied terrain and climate offer agricultural challenges, including a shortage of arable land and repeated droughts; in 1992, an "El Niño" and a severe drought slashed production of the country's primary products.

Agriculture also has felt the direct effects of recent economic and political turmoil. The removal of crop subsidies and a lack of credit discouraged production in recent years, but indications are that agriculture may be recovering as free-market prices work higher and agricultural investment is encouraged.


Peruvian agricultural policy has shifted three times in the past three decades: from a primarily private system in the 1960s to a collective or cooperative farm system in the 1970s and 1980s and, beginning in 1990, back to a private system.

Currently, the government hopes to encourage production and agribusiness by promoting private investment. One of the biggest steps in this direction was the removal in 1991 of limitations on agricultural land ownership.

Since then, domestic and foreign investors have bought land and consolidated small subsistence farms into larger parcels for commercial production using more up-to-date technology. The government also has instituted rural credit institutions administered by farmers to address the inavailability of traditional credit.

The reforms of the 1990s also implemented free markets for agricultural products. No production or consumer subsidies or price controls exist for any crops, including wheat, rice and maize. But the government has applied a system of "price bands," or import surcharges, for five basic commodities and their sub-products, including wheat and flour.


Peru has 23 flour mills with a total approximate daily capacity of 6,400 tonnes, according to 1993 data. Eight mills are located in Lima, and the region to the south of the capital is home to nine mills.

From 1988 through 1992, Peru's annual flour production averaged 624,540 tonnes, with a production high of 823,515 in 1988 and a low of 473,577 in 1990. A variety of flours is produced, from high extraction bakers flour to household flours and semolina.

Mills generally operate at a rate of 57% of daily capacity. Excess capacity was encouraged by previous government administrations, which allocated subsidized wheat supplies based on mill capacity, rather than flour sales.

Some 40% of Peru's mills are mezzanine type, but these represent 10%, at most, of total milling capacity. The principal mills are of conventional tower construction.

Although some mills use computer controlled damping systems, use of process control is not widespread. Wheat is blended using volumetric measures, but flour blending is limited.

Some 98% of flour production is shipped in bags. Flour prices are quoted as net, ex-factory without sack. Delivered flour includes the cost of sack, transport and an 18% value-added tax. Flour generally is sold to small bakeries, as few industrial bakeries exist and pan bread constitutes a small percentage of bread production.

Peru's annual flour consumption in recent years has been in the range of 700,000 to 750,000 tonnes, with imports making up the difference between domestic production and consumption. Argentina, the U.S. and the E.U. are the primary flour suppliers.

Until 1989-90, Peru imported only small amounts of flour, generally fewer than 30,000 tonnes, wheat equivalent. With economic reforms and reductions in trade barriers, flour imports jumped sharply to 130,000 tonnes in 1989-90 and peaked in 1990-91 at 292,000 tonnes.

In mid- to late-1991, the price band surcharge for flour imports was restructured, effectively raising the import price by more than 20%, and by 1992-93, flour imports had dropped to 92,000 tonnes.

An undetermined amount of flour also has entered the country illegally as contraband. This flour avoids price band duties, which can exceed 100% of the import price of flour.

The high cost of imported wheat, which necessarily raises domestic flour prices, also has encouraged the proliferation of contraband flour. When the market price of imported wheat declines, the price band surcharge increases, and wheat is subject to another 15% import duty and the 18% VAT. These charges bring the average cost per tonne of imported wheat to millers to about U.S.$270.


The feed industry centers on poultry production. The primary feed component is yellow maize because of consumer preference for yellow pigmentation in poultry meat.

The industry was hard hit by the recession in 1992 and 1993, which reduced meat demand at the same time that stiff competition within the industry led to sharply lower prices. Subsequently, the poultry industry went through a period of cutbacks to lower fixed and variable costs. Those reductions, along with the refinancing of short-term debt through long-term credit extended by the Andean Development Bank, has left the poultry industry poised to capitalize on increased demand from population growth and overall economic recovery.


Peru has free trade agreements with Colombia, Venezuela, Bolivia and Ecuador and is a member of the General Agreement on Tariffs and Trade.

Since beginning its economic reform program, Peru has acted aggressively to remove trade barriers in many sectors. Even for grains, which remain subject to the price band import surcharges, the government readily grants import clearances with no other restrictions.

The surcharges are subject to intense political debate. On one hand, the Inter-American Development Bank has pressured Peru to reduce the surcharges to a flat 10% as a condition for additional bank loans. On the other hand, the Ministry of Agriculture has resisted these efforts, as the surcharges are the source of about U.S.$100 million in discretionary income for the ministry.