Jamaica - Agricultural Credit Project

RESTRICTED Report No. PA-66a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AGRICULTURAL CREDIT PROJECT JAMAICA December 8, 1970 Agriculture Projects Department  CURRENCY EQUIVALENTS US$1 = J$ 0.83 J$ 1 = US$1.20 J$ 1,000 = US$1,200 J$ 1,000,000 = US$1,200,000 WEIGHTS AND MEASURES f.p.s. System ton means short ton ABBREVIATIONS ACB - Agricultural Credit Board CGA - Jamaica Citrus Growera Association CIB - Jamaica Coconut Industry Board DFC - Jamaica Development Finance Corporation IDB - Inter-American Development Bank JDB - Jamaica Development Bank MAF - Jamaica Ministry of Agriculture and Fisheries MRLD - Jamaica Ministry of Rural Land Development PCB - Jamaica Peoples Cooperative Bank  J A4LICA AGRICULTURAL CREDIT PROJrCT TABLE OF CONTENTS Page No. SlT"fARY AND CO`NCLUSIONS ......... .............. i-ii 1. INITRODUCTION ........ ...................... 1 II. BACKCROUND. 1 A. General. 1 B. Agricultural Credit. 3 III. TfE. PROJECT.. 5 A. Brief Description. 5 B. Detailed Features. 6 C. Cost Estimates and Financing. 7 D. Procurement and Disbursement. 9 E. Administration and Coordination Committee .10 TV. JAMAICA DEVELOPMENT BANK (JDB) .10 V. PRODUCTION, MARKETING, PRICES AN) FARTWRS' BENEFITS ... 14 VI. BETN.EFITS XAT) JUSTIFICATTO. .17 VII. RECOMTENDATIONS ....................... ,. 18 This appraisal report is based on the findings of a mission which visited Jamaica in June 1970 and was composed of Messrs. W.H. Spall and K.W. Berg (Bank), R. Hewson (FAO) and C. Bell (Consultant).  -2- ANNEXES 1. Agricultural Background 2. The Coconut Industry 3. The Citrus Industry 4. The Beef Industry 5. The Dairy Industry 6. Jamaica Development Banlk (JDB) Appendix 6-1 -- Jamaica Development Bank - Projected I3RI) Loan Cash Flow Appendix 6-2 -- Jamaica Development Bank - Condlensed Balance Sheets Appendix 6-3 -- Jamaica Development Bank - Projected Income and Expenses Statement Appendix 6-4 -- Jamaica Development Bank - Condensed Projected Balance Sheets Appendix 6-5 -- Jamaica Development Bank - Statement of Policy Appendix 6-6 -- Jamaica Development Bank - Projected Incorme and Expenditure Account - Agricultural Credit Division 7. Farm Incomes and Financial Rate of Return on Investments Appendix 7-1 -- Yield, Cost and Price Assumptions Appendix 7-2 -- Farm Models and Financial Rate of Return Appendix 7--3 -- Summary: List of Goods Appendix 7-4 -- Farmers' Loan Cash Flow 8. Estimates of Disbursements 9. Economic Rate of Return MAP  JAMAICA AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises an Agricultural Credit Project for which a Bank loan of US$3.7 million equivalent is proposed. This would be the first agricultural project the Bank has helped finance in Jamaica. It would support a three-year lending program for the planting of coconuts and of citrus, for increasing beef production and for expanding dairy farms. The Jamaica Development Bank (JDB) would be the borrower and would be responsible for Project administration. ii. JDB is a new multipurpose institution, which became operational in September 1969 as a successor to the Development Finance Corporation (D)FC). Large-scale commercial farmers have suffered from a lack of medium- and long-term development credit. The commercial banks are concerned mainly with short-term financing and the Agricultural Credit Board (ACB), a quasi-autonomous organization within the Ministry of Agriculture and Fisheries, has concentrated on lending to small farmers. The Government, realizing the need for development credit for larger farmers, has made this one of JDB's main responsibilities. JDB would establish an Agri- cultural Credit Section for this purpose. The new section would require the assistance of internationally recruited experts in the initial stages and provision for technical assistance has, therefore, been included in the proposed loan. iii. Due to the rapid development of bauxite mining, industry and tour- ism, the importance of agriculture in Jamaica's economy has been steadily declining. Agriculture's contribution to GDP was 9% in 1969 compared to 31% in 1950. Agricultural production value declined in 1969 and agri- cultural products represented only 28% of total domestic exports compared with 44% in 1963. On the other hand, the value of food imports has increased to US$72 million in 1969 compared with US$49 million in 1965. The gap in Jamaica's current account balance of payments widened sharply in 1969 and the gap was financed largely by private capital inflow. However, an increase in agricultural exports and import substitution crops is of increasing importance to the economy. iv. The Project has been designed to increase production of citrus for export and coconuts, beef and dairy products for import substitution, mainly by investment in land preparation, establishment of new pastures, fencing and farm and dairy machinery. The estimated net foreign exchange earnings/savings attributable to the Project at full development would amount to JS 2.5 million (US$3.0 million) annually of which J$ 0.8 million (Us$1.0 million) would represent increased exports and J$ 1.7 million (US$2.0 million) savings on imports.  - ii - v. Total Project costs would amount to US$8.0 million equivalent. Sub-borrowers would contribute 20% and JDB would contribute 34%. The proposed loan, equivalent to about 46% of total Project costs, would cover the estimated foreign exchange component. Sub-borrowers would be charged 8-3/4% per annum interest. The Government would bear the foreign exchange risk and would receive a fee from JDB. vi. The range of items to be financed under the Project is very varied and not suitable for bulk procurement. A number of foreign firms are represented, assuring keen competition. Supplies are adequate on the local market and prices competitive. Tariffs on goods to be used within the Project do not exceed 6%. Therefore, procurement would be through normal commercial channels. vii. The financial rates of return are estimated to range from 16 to 22%. The overall economic rate of return is estimated at about 17%. Appro- priate assurances have been obtained and accordingly the Project is suit- able for a Bank loan of US$3.7 million equivalent for a term of 16 years including a grace period of five years.  JAMTAICA AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.(1 An FAO/IBRD Cooperative Program mission to Jamaica in June 1969 idlentified two agricultural credit projects--one for small farmers, and the other for large farmers. The Government is negotiating with the Inter-American Developmenit Bank (IDB) for funds to finance the Small Farmers' Project. Final preparation of the lending program for the Large Farmers' Project was completed by an FAO/IBRD Cooperative Program mission which visited Jamaica in January 1970. This would be the first agricultural loan by the Bank Group to Jamaica and would support a three-year lending program to large farmers for the development of new citrus orchards, the planting of coconuts, and the expansion of beef and milk production. 1.02 The Bank loan would be made to the Jamaica Development Bank (JDB), a multipurpose development institution constituted in March 1969. JDB is the successor to the Jamaica Development Finance Corporation (DFC) which lent with mixed success for industry, tourism and housing. Neither JDB nor its predecessor has had experience in agricultural lending. A Bank pre-appraisal mission consisting of Messrs. M.J. Walden, D.B. Argyle and K.E. Nougaim visited Jamaica in January 1970 and concluded that JDB, suitably strengthened, could be a direct borrower of a Bank loan for an agricultural credit project. 1.93 This report is based on the findings of an appraisal mission to J3muaica in June 1970 consisting of Messrs. W. H. Spall and K. W. Berg (Bank), R. Hiewson (FAO) and C. Bell (Consultant). II. BACKGROUND A. General 2.01 Jamaica, a tropical island with an area of some 4,400 sq Di (2.8 million ac), lies in the Western Caribbean Sea. It is about 150 mi long with a maximum width of about 50 mi. Population at the end of 1969 was about 2 million. 2.o2 Inland hills of limestone and shiale rise to some 7,400 ft in the Blue 14ountains (east of the island, see Map). Average rainfall varies frorm 140 in, well distributed in the northeast, to less than 50 in of seasonal rain in the south. Commercial farming is concentrated on fertile, flat alluvial soils on the coastal plains, while subsistence farming prevails iTn the hillv inland terrain. The island is prone to hurricanes, which caused considerable damage in 1944 and 1951 (Annex 1).  - 2 - 2.03 Bauxite mining, industry and tourism have developed rapidly, while agriculture's rate of growth has lagged significantly below the average of other sectors and it has in fact stagnated in recent years (1966/69); con- sequently, the relative contribution of agriculture to the island's economy has declined. In 1969 it was 9.0% of GDP compared to 10.3, in 1968, 11.6% in 1965 and 31.0% in 1950. But despite its declining share of CI)P, agriculture is highly important to Jamaica. It is still the largest source of employment, engaging about 40% of the labor force. 2.04 Agricultural exports (1969, US$70 million) represent 28% of total exports and are second in importance after aluminia and bauxite (56%o to- gether), but their percentage has steadily declined (36% in 1966 and 44% in 1963). The most important agricultural export products in 1969 were sugar (US$34 million), bananas (US$15 millioni), citrus (US$8 million) and pimento (US$5 million). Food imports in 1969 rose to US$72 million compared to US$49 million in 1965. Imports of sugar, fish and meat products showed the largest increases and meat imports in particular rose to 13,200 ton (US$11 million) in 1969 compared to 11,500 ton in 1968 after having doubled between 1962 and 1967 (Annex 1). 2.05 Jamaica has been financing development programs in rural areas which have had a substantial welfare component. These have helped alleviate income disparities but agricultural production, particularly export and im- port substitution crops, could be increased rapidly by orienting agricul- tural development policies more towards encouraging commerical farming. The Government recognizes this and is now pursuing a policy under which it continues to provide assistance to the economically less strong as well as to provide assistance for the commercial part of the rural sector. Increased agricultural exports and import substitution are vital if the balance of payments position (estimated at an overall deficit of about US$14 million in 1969 compared to a surplus of US$34 million in 1968) is to be improved; this Project is a first step in this direction. 2.06 Jamaican agriculture was founded on sugarcane, which is still dominant, although other crops (bananas, coconuts, citrus, cacao, coffee and pimento) have become important. In recent years the sugar industry has suffered major setbacks caused by drought, agricultural labor shortage and processing and transport problems resultine in low reinvestments and declining production which dropped steadily from 560,000 ton of sugar (1965) to 360,000 ton (1969); a large amount of processing machinery has become obsolete. Banana production has also declined, in addition to adverse weather this was caused by internal and external marketing problems; banana exports declined from 200,000 ton (1966) to 150,000 ton (1969). About 17,000 ton (1969) of copra is produced from 95,00J0 ac of coconut plantations. Production has recovered steadily after a damaging hurricane in 1944 and a less severe one in 1951, but the industry is now suffering from the devasta- ting lethal yellowing disease. Fortunately, a new coconut variety (Malayan Dwarf) has been found which is highly resistant to the disease and less sensitive to hurricane damage than old plantations (Jamaica Tall) and re- planting is taking place, (about 10,000 ac have already been replanted) which would be assisted by the proposed Project (Annex 2). Citrus production has remained at about the same average in recent years despite yearly  - 3 - variations due to adverse weather and Jamaica produces about 3 million boxes of citrus 1/ of which about 1.3 million boxes are processed into juices and segments. Most of the rest is consumed locally as fresh fruit, par- ticularly by the tourist industry, although small amounts are exported (Annex 3). Another export, pimento, has risen in importance amounting in 1969 to US$5 million export value. 2.07 Out of total land area of 2.8 million ac about 550,000 ac are cultivated. Sugarcane occupies the largest area (180,000 ac) followed by coconuts (95,000 ac) and bananas (80,000 ac). Other important crops are cacao (43,000 ac), pimento (29,000 ac), citrus (27,000 ac) and coffee (22,000 ac). In addition to cultivated land, there are about 500,000 ac of pasture and 400,000 ac of scrub or "ruinate" which provide occasional, seasonal grazing (Annexes 4 and 5). 2.08 About 185,000 farms occupy in total 1.5 million ac all of which is not used agriculturally. Of these, some 181,000 farms (97% of the total) of less than 25 ac each occupy only 37% of farmland. Farmers of from 25-100 aC (3,0o() farms) occupy 8% of the land and the remainder, 55% or 0.8 million ac, are held by 1,000 farms with over 100 ac each. The largest landholders are 18 sugar estates, owning together about 200,000 ac, and four bauxite mining companies, also owning together about 200,000 ac. About half of the land owned by these two groups is cultivated. 2.09 Most of the land is freehold and small farmers are encouraged by the Government to acquire legal title to the land they cultivate. The Ministry of Rural Land Development (MRLD) assists these farmers through its Regional Land Authorities and Land Development and Utilization Commission. 2.10 MRLD's extension services assist small farmers only. The technical officers of the Ministry of Agriculture and Fisheries (MAF) would be available to assist the large farmers involved in the Project. In addition, the Citrus Growers Association (CGA)(a farmers' association) and the Coconut Industry Board (CIB) (a statutory body) have their own extension and research organizations and these services would be freely available to the Jamaica I)evelopment Bank (JDB) and Project farmers. The extension and research services are considered adequate for the farms involved in the Project. B. Agricultural Credit 2.11 During 1969, the banking and finance sector maintained the high level of activity and rapid expansion which began during the last quarter of 1967. While the 1968 financial situation was characterized by excessive liquidity, 1969 was marked by a resurgence of demand for loans and a rapid expansion in bank credit, and by mid-1970 Jamaica was suffering from a liquidity shortage. Total commercial bank lending rose from J$ 174 million (US$209 million) at the end of 1968 to J$ 244 million (US$293 million) in 1969, an increase of 41%. 1/ Oranges 80 lb per box. Grapefruit 90 lb per box.  - 4 - 2.12 Lending to agriculture cannot be determined precisely since loans are categorized according to borrowers' stated occupation rather than to end-use. Thus lending to sugar estates, which is one and a half times greater than to all other farmers, is classified under "manufacturing" even though borrowings are largely used for growing cane. Despite the substantial rise in overall bank lending (para 2.11) advances to agriculture and agricultural industry have remained fairly constant over the last four years at about J$ 30 million (US$36 million), of which about two-thirds was from comriercial banks and one-third from Government agencies. As at the end of December 1969, this represented about 15% of total credit to all sectors. 2.13 The Bank of Jamaica is the Central 13ank. Control over interest rates is exercised by use of the Bank Rate (currently 6%), and of liquidity by requiring a minimum liquid assets/deposits ratio from commercial banks (presently 17-1/2%) and by directions to banks restricting certain types of credit. The Bank of Jamaica offers rediscount facilities for first class papers for a maximum of 270 days at a rate of 7% with a possibility of extension for another 270 days. 2.14 There are seven commercial banks (all with substantial overseas equity) and three Government controlled banks: the Jamaica Developmnent Bank (JDB) (para 4.01 and Annex 6), the Government Savings Bank (which accounts for 9.4% of time and savings deposits of the banking system) and a Governiment financed Agricultural Credit Board (ACB) which on-lends most of its funds to small, semi-independent Peoples Cooperative Banks (PCBs). 2.15 Commercial bank lending to agriculture is limited, particularly for long-term credit; most is provided by the two largest banks---the Bank of Nova Scotia Ltd. and Barclays Bank Ltd.--and it represents only about 10% of total bank advances. Some of this credit is medium-term but most is slhort-term by way of revolving overdraft facilities to sugar companies and large farmers for seasonal requirements. The prime interest rate is 8% per annum and rates vary between 8% and 12% depending on borrowers' credit standing. 2.16 The ACB, a semi-autonomous organization within the Ministry of Agriculture and Fisheries, has been the main agent for Government-supported lending to small farmers. It is mainly concerned with fostering, supervising, controlling and making loans to 115 PCBs and derives its funds from Govern- ment grants. PCBs borrow from ACB at 3% and on-lend at 6% per ann-im. ACB has not been efficient; there are too many PCBs for the volume of advances resulting in high overheads and heavy losses. Arrears of PCBs loans average 40% of portfolio, some of it uncollectable. (Total portfolio at the end of 1969 was estimated to be J$ 11.7 million or US$14 million). ACB also makes loans directly to farmers at 6% per annum with a maximum of J$ 20,000 (US$24,000) but the number and amount of such loans is small (present out- standing balances are approximately J$ 250,000). Loans between J$ 10,000 and J$ 20,000 require the approval of the Minister of Agriculture. 2.17 Commercial farmers' credit requirements have been catered for to a limited extent by ACB and the commercial banks, but long-term development loans have been very restricted and there is a larc~e unsatisfied demand for  -5- agricultural credit. Many large farmers, however, have the potential to greatly increase production if suitable credit were available. 2.18 Until JDB became operational in September 1969 (para 4.01), the only sources of institutional credit for agriculture were the commercial banks and the ACB. The ACB is mainly concerned with making loans to small farmers and it is being strengthened to undertake the Interamerican Devel- opment Bank (IDB) financed Small Farmers' Project. JDB has been given the zesponsibility to lend to larger commerical farmers and it would be the channel for the proposed Bank loan (para 3.14). III. THE PROJECT A. Brief Description 3.01 The Project, which would be part of JDB's lending program, would finance large farmers' long-term investments (totalling about US$7.7 million) over a period of three years. It would consist of: planting coconuts (34% of total investment) and citrus (20%) and expanding beef (33%) and dairy (13%) operations. Also included would be technical assistance to strengthen the Agricultural Credit Section of the JDB. JDB would be the borrower and wou'd administer the Project. The total Project cost is estimated at J$ 6.6 million (US$8.0 million) and the Bank's contribution would be US$3.7 million or 46%, covering the estimated foreign exchange cost. Incremental production arising from these investments would increase citrus export earnings and replace imports of copra, beef and milk, thus improving Jamaica's balance of payments position. 3.02 The following table shows the investments expected to be made over the three-year period: Average Number of Investment Typical Acres Planted per Farm Total Acreage in Year Total in 3 years Investment Investment Planted 1 2 3 Acres Farms J$ J$ Coconuts 100 1,000 2,500 1,500 5,000 50 44,000 2,200,000 Citrus 10o 500 1,500 1,000 3,000 30 42,000 1,300,000 P'asture/beef 300 3,000 6,750 3,750 13,500 45 47,000 2,100,000 Pasture/dairy 110 275 825 550 1,650 15 54,000 800,000 Total - 4,775 11,575 6,800 23,150 140 - 6,400,200 About 140 farmers would participate in the Project and would essentially be well established farmers already operating farms cultivating about 100-200 ac; they would have considerable additional idle land which would be developec under the Project. It is assumed that JDB's commitments would be made within the first two years of the Project. Phasing of farmers entering the investment program is estimated as follows:  -6- Year . . 1 2 Total Investment Number of farms Coconuts 20 30 50 Citrus 10 20 30 Pasture/beef 20 25 45 Pasture/dairy 5 10 15 Total 55 85 140 B. Detailed Features Coconuts 3.03 Subloans would be made for planting Malayan dwarf coconuts (usually temporarily interplanted with bananas during the first five years) to about 50 farmers, each planting approximatelv 100 ac (total 5,000 ac) over a period of about two years. Farmers would be given loans for a maxi- mum of 15 years, including four years of grace if coconuts are temporarily interplanted with bananas, or for 15 years including six years of grace if plantations are rehabilitated without bananas. Loans would cover up to 80H of investment costs for three years including: land preparation, planting material, farm-road construction, machinery and equipment, pesticides, fertilizer and labor (Annex 7). Citrus 3.04 The Project would include planting about 3,000 ac of citrus, mainly oranges and grapefruit, and some ortaniques. 1/ About 30 farmers, most of whom alreadv have citrus orchards, are expected to plant about 100 ac each over a period of two years. Loans to farmers, which would be for up to 15 years including seven years of grace, would help finance up to 80% of total investment costs over a three--vear development period including: land prep- aration, planting material, farm-road construction, fertilizer, pesticides, machinery and equipment, and labor. Pasture Establishment for Beef Production 3.05 The expansion of beef operations through pasture improvement (mainly pangola grass planting) would be financed. About 45 farms with 200 ac of existing improved pasture are expected to plant an additional 300 ac; in all about 13,500 ac of new pasture would be established. Eachi farm is expected to develop the additional pasture in about two years and would re- ceive a loan for up to 12 years including five years of grace covering up to 80% of the investment costs for a three-year period. Investments woulcd be made in: land preparation, fertilizer, weed control, fencing and corral establishment, tractor and equipment, water supply installation and live- stock purchase. Farmers would need to purchase about 1,100 heifers for the 1/ A cross of oranges and tangerines.  - 7 - Project. It is estimated that not all might be readily available on the domestic market when needed, and accordingly the higher cost of about 500 imported heifers has also been included in Project cost estimates. Pasture Establishment for Milk Production 3.n6 Existing dairy enterprises would get long-term loans for expanding their operations. About 15 farms would each establish 110 ac additional improved pasture, a total of about 1,650 ac. Loans would cover up to 80% of investment costs for the first three years including: land preparation, fertilizer, weed control, fencing, tractor and equipment, farm-road construc- tion, dairy equipment and water supply, feed storage and livestock purchase. Terms of the loans would be up to 10 years including three years of grace. Technical Assistance 3.07 JDB's new Agriculltural Credit Section requires the initial assist- ance of internationally recruited experts, and provision for two experts (an ag,ricultural economist with banking experience and a livestock expert) for three years has been includede in the proposed loan (para 4.07). Other locally recruited staff would be employed as required to assist in appraisal, sunervision and accounting and to replace the experts after about three years. In addition, technical officers of the Ministry of Agriculture and Fisheries (MAF) and the extension andl research staff of the Citrus Growers Association ancd the Coconut Industry Board would assist JDB and Project farmers. C. Cost Estimates and Financing Project Cost 3.08 Total Project cost is estimated at J$ 6.6 million (US$8.0 million) of Twhich 46%, J$ 3.1 million (US$3.7 million) would be foreign exchange. Cost estimates and foreign exchange requirements are: Foreign JS million US$ million Exchange Local Foreign Total Local Foreign Total % (a) ieendMin rogram 1. Coconuts 1.3 0.9 2.2 1.5 1.1 2.6 42 2. Citrus 0.8 0.5 1.3 1.0 0.6 1.6 38 3. Beef 1.0 1.1 2.1 1.2 1.3 2.5 52 4. Dairy 0.4 0.4 0.8 0.5 0.5 1.0 50 Sub-total 3.5 2.9 6.4 4.2 3.5 7.7 45 (b) Teclhnical Assist- ance 0.0 0.2 0.2 0.1 0.2 0.3 67 Total Project Cost 3.5 3.1 6.6 4.3 3.7 8.0 46  - 8 - Estimates are based on present prices with an additional allowance of 10% for cost increases. The following investment cost would be involved (Appen- dix 7-2; 7-3): Pasture/ Pasture/ Coconuts Citrus beef dairy Total