Top tomato producer struggling to stay afloat

SARRAT, Ilocos Norte – Northern Foods Corp. (NFC), the country’s biggest tomato producer for 20 years now, is in a tight bind. It is struggling to stay afloat despite enormous internal problems such as an aging plant, constant pole-vaulting by its contract farmers and the even bigger threat posed by growing tomato paste imports from China.

In a recent dialogue between NFC board of directors and its contract farmers here in Barangay San Joaquin where the plant is located, chairman Bernardo Jorge B. Mitra pleaded with farmers, for the nth time since he assumed the post, to stop their practice of pole-vaulting, or selling their contracted Ilocos Red tomato variety to traders from Divisoria. Farmers understand the implications of short-selling NFC, but find it impossible to resist the higher prices offered by traders.

"Pole-vaulting is a serious problem here. Our cumulative deficit since January is five thousand metric tons of tomatos, We are already behind schedule. So we even face the possibility of reducing our production target for 2005," said Mitra.

Norberto Mendoza, NFC vice-president for operations pointed out to farmers the potentially disastrous consequences of pole-vaulting.

"What we tell farmers constantly is that if NFC closes, employees would be the ones to first lose their jobs. They on the other hand pole vault, they earn money. But come to think of it, even if they continue planting tomato, who will buy from them at a guaranteed price? While our buying price is low, that is already their net income because we provide all the inputs, from the land preparation to the seeds, irrigation and planting. With only the traders left as their market, one can be certain it will be the traders that will call the shots when it comes to pricing," said Mendoza.

Having enough volume is critical for NFC. As is the practice of most tomato paste processing plants in the world, including big-league players like Italy and the United States, the NFC plant runs for only four months a year, from January to April.

The big difference is that US and Italy have a diversified product line because of their bigger capacities and it is from this that their cost efficiencies are obtained. In contrast, when NFC’s programmed volume is not met, its unit cost of production per kilo of tomato paste goes up.

"Our cost could reach up to P42 per kilo compared with P29 per kilo last year. On the other hand the selling price is now just averaging P35 per kilo. Giving in to higher prices is not possible because raw tomato alone is already about 60 percent of NFC’s cost to produce tomato paste," said Lydia Martinez, consultant of NFC.

Pole-vaulting is a constant source of friction between NFC and farmers here, but bigger problems are confronting the company.

"We need to upgrade our plant to be able to improve and produce other product lines that would fetch a bigger price and keep the plant open," said Mendoza.

He said major parts of the plant face obsolescence despite major repairs and maintenance of P41 million since 1991.

NFC needs P195 million to retool three major plant facilities such as the aseptic sterilizer, concentrator and refiner, including the upgrading of the bag filler process controls, ancillary equipments and plant utility equipment.

"This would cost P118 million while P77 million will be for farmers‚ payment so that we could have ready money to pay them and would not have to borrow yearly for that," explained Mendoza.

Upgrading these facilities will enable NFC to produce and market the higher paste grade of 30/32 Brix which is required by 50 percent of the Philippines‚ tomato paste requirements. Brix is the standard unit of measure of the percentage of natural tomato soluble solids (NTSS) which is the value used to measure the solids attributes of a tomato product. Tomato paste must not contain less than 24 Brix NTSS.

Currently, its operations are limited to the production of a single line of 28/30 Brix and can only meet up to 28 percent of total local demand. An upgraded plant will double production volume to 13,000 metric tons (MT) with the processing of both 28/30 and 30/32 Brix.

"But what would really be the upside if we are able to upgrade our plant is that we could encourage farmers to improve their yield and this will translate into higher incomes while ensuring a market for the more than 3,000 tomato growers in the Ilocos region, while also allowing us to absorb the displaced tobacco and even garlic farmers," stressed Mendoza.

No Takers

But while NFC, needs to undertake the rehabilitation and upgrading of the plant, its poor financial standing, has resulted in a futile exercise to go to the banks for support. The company accumulated deficits over the years and has long outstanding accounts with various government agencies such as Livecor, National Livelihood Support Fund and the Quedancor.

Martinez said the company had been undercapitalized from the beginning since its initial capital was just enough to buy the plant equipment.

"There was no working capital from the very beginning, so even that initial working capital had to be borrowed," she added. For working capital, NFC borrowed from various government agencies. These have tainted its income statement but in recent years, its operations improved, allowing it to have net operating income as well as positive and adequate cash balances since 1994.

Still, when NFC went to the banks to borrow, reality again kicked in.

"NFC cannot use the land where the plant is situated as collateral because it is being leased from the provincial government. The only asset is the plant which would not accept it since the land is not own by the company’s. Also, the value of the plant is zero," said Martinez.

It has so far been turned down by the Land Bank of the Philippines , Development Bank of the Philippines and the Philippine National Bank. Last year, NFC submitted its P195-million loan proposal to the Department of Agriculture’s (DA) Agricultural Competitiveness Enhancement Fund (ACEF) but was also turned down even after it passed the technical review.

"This is a significant industry in Ilocos Sur and Ilocos Norte and the tomato farmers are the ultimate beneficiary. After passing the technical review, it was tabled for approval by the last executive committee of ACEF, but then the rules were changed. They said NFC was not qualified because the maximum loan was reduced to P30 million. While this was going on, an ex-com member approached us and asked if its alright if they allowed P60 million. That is not clear with us, why set a P30 million limit and yet ask us if P60 million was okay," noted Martinez.

Threat From China

While contending with internal problems, NFC is also struggling to fend off growing imports of tomato paste from China, now averaging about 4,000 MT yearly.

"We are competing against Chinese tomato paste producers with two, three, five-year old processing plants," said Mitra.

China reportedly, has more than 50 processing plants, all of which have bigger production capacities than NFC.

China is so strong that it has even invaded the US and Italian markets. Italy has stepped up its efforts to ward off tomato imports from China by redefining the standard for "passata" to mean that for any product to be called passata it should be prepared directly from fresh tomatoes in Italy. Because of China’s cheap production costs, some Italian companies have been buying from Chinese tomato paste producers and passing these off as passata.

NFC on other hand, despite China’s lower grade tomato paste, has been unable to convince a major market segment – the country’s fishcanners, to use local tomato paste.

"We cannot penetrate the sardines industry and they are big importers of tomato paste. We are puzzled because some of the buyers admit that our product is far more superior than the ones from China. They bought a token volume, but only on the intercession of the Board of Investments," said Mitra.

We are dumped not just sub-standard tomato paste, but even unhealthy ones as well, those that Japan rejected. They said we are off specs, but that’s because the fish canners prefer lower specifications," added Mitra.

To control imports of tomato paste from China, NFC is trying to convince the Cabinet-level Tariff and Related Matters (TRM) committee to grant its petition for a two-tiered import tariff. This is aside from its previous plea for the TRM to increase current import tariff on tomato paste from 10 percent to 30 percent for 28-30 Brix content, it also wants additional protection by having a different import tariff for tomato paste with Brix content exceeding 30.

NFC currently produces an average of 6,000 MT tomato paste yearly with 28-30 Brix content, the same kind being exported into the Philippinesby China, while Italy and the United States bring in tomato paste with 32 Brix and above.

Mitra said that while a 30 percent tariff hike should be imposed on tomato paste with 28-30 Brix, the NFC is comfortable with maintaining or lowering the tariff for the 32 Brix tomato paste.

"We don’t produce it anyway. But if we could upgrade our plant, we will be able to produce the 32 Brix. What this means is the likes of major food processing companies like Del Monte Philippines which imports about 10,000 metric tons annually can start buying from us. That would also translate into significant foreign exchange savings," said Mitra

Mitra said the proposed tariffs would provide a breather for NFC and the rates asked are still well within bounds of the country’s tariff commitments to the WTO.

The NFC is also planning to revive its anti-dumping case against China filed with the DA in 2001.

"We filed our petition but no action has since been taken by the department. It was the first anti-dumping case in the agriculture sector and its outcome would be significant especially since the influx of imported agricultural products have already killed other sectors such as the onion and garlic industries," stressed Mitra.

Keep NFC Open?

While beset with difficulties, Mendoza said government should exhaust all possible options to keep the plant open.

"NFC may not be as strong financially, but there are other economic factors such as the local employment, we are the largest taxpayer for Region I. Keeping the plant open will allow that multiplier effect to continue and even expand. We have farmers relying on NFC for their produce, we have the displaced tobacco farmers and other allied industries such as the truckers and kaing weavers," said Mendoza.

Since NFC started operations in 1984, it has increased its customer base to include its biggest buyer, Jollibee Foods Corp., Genosi which toll packs for McDonalds Phils., California Manufacturing Co. Inc., RAM Food Products Inc., Del Monte Phils., Heinz-UFC Phils. Inc., San Miguel Foods, Purefoods-Hormel, toll packers and sauce and ketchup manufacturers.

Ilocos Norte Chamber of Commerce and Industry president Manuel M. Ablan said it is critical to keep the NFC alive.

"It is the only agro-processing industry in the province, the other manufacturing concern is Coca-Cola Bottlers. It provides livelihood to our farmers. Even if farmers continue planting after Northern Food closes, there is no longer a guaranteed price for their produce so the old cycle is revived with traders dictating the price, it will be them that will benefit from the closure of the plant," said Ablan.