If the current rate of foreign agricultural imports is anything to go by, it is a billion-dollar market opportunity.
Market studies and assessment of investment opportunities in Nepal often cite agriculture as a priority sector. Reasons include the predominant role of agriculture in the Nepali economy, the government’s focus on propelling the sector forward through programmes such as the Agriculture Development Strategy and the rapid surge in agri imports over the last 10 years. Indeed, for a country as reliant on agriculture as Nepal, the four-fold increase in agricultural imports during the last 10 years -- from just under USD 500 million in 2008 to USD 1.95 billion in 2019 -- is remarkable. It also provides a number of opportunities for import substitution.
To understand these opportunities better, it would be useful to understand what has happened over the last 20 years in the agri and food sector in Nepal. First, the country has played catch-up in the amount of food available to its inhabitants. While in 2000 the average daily calories available was around 2,200 per person, by 2019 this had increased to 2,800. This is significantly higher than India, and only 15 percent or so below a country like Sweden. Encouragingly, diet composition has not changed dramatically - or at least not in the direction of many emerging countries where meat and sugar see their share in consumption rise fastest.
So, has the production of food kept up with consumption? Delving deeper into the issue, we can see that up until the end of the first decade of this century (2000-2010), Nepal was largely self-sufficient in food production. After that, imports of several important agri products started to constitute an increasing share of supply in Nepal, while domestic production stagnated. Data from the United States Department of Agriculture (USDA) confirms this- the ‘total factor productivity’ in Nepali agriculture only rose by about 1 percent per year during 2008-2016, a lot less than what would be needed to supply for Nepal’s increasing appetite. At a sub-sector level, trade statistics reveal that imports of fruits, rice, wheat, maize, vegetables and potatoes all saw fast growth during the last 10 years.
This rapid rise in imports contrasts with the much more modest economic growth that Nepal has witnessed during the same period. In fact, national expenditures as a share of production (essentially what a country spends compared with what it produces) was steady at around 110 percent for most of the 1980s and 90s (rates of more than 100 percent are possible because people can spend from savings, borrowings or earnings from abroad.) However, from 2000 onward this ratio started to increase. It was 122 percent in 2009 and rose to 138 percent in 2019. This either means that the country has been indebting itself rapidly, or that is has been spending money that was made available from some other source.
For those familiar with the importance of migrant workers for Nepal, it may not come as a surprise that it was the latter; data from the World Bank confirms that personal remittances in Nepal have increased dramatically over the 21st century – from around USD 100 million (2 percent of GDP) in 2000 to over USD 8 billion (25-30 percent of GDP) in 2019.
This may be insightful, but it does not immediately reveal practical investment opportunities. For that, we also need to understand what Nepal produces (or can produce) in relation to what it imports. A deeper analysis of the various subsectors of agriculture in Nepal provides further insight.
Let us first take a look at rice. Imports from India have been rapidly increasing over the last 10 years or so (from USD 20 million in 2009 to USD 300 million in 2018). Sector experts point to the dominance of basmati rice in imports of rice, which points at a change in diet (or more accurately, a change in taste preferences). Indian imports have been filling the gap left by the lack of domestic production of this variety (the government does in fact not have production data on this).
In the case of dairy, the picture is somewhat different. Since 2008, Nepal has imported around USD 12.5 million of dairy products per year, with some ups and downs. Statistics suggest that the large majority of these imports are in milk powder, although the products sold at modern supermarkets in the urban centres of the country also suggest significant amounts of cheese, yogurts and pasteurised milk products. Opportunities here are more modest in size but could be found in developing new varieties of domestic dairy products to compete with the international brands currently being imported.
In maize, the rapid increase in imports (from around USD 3 million in 2009 to USD 105 million in 2019) is mostly related to the country’s need to produce animal feed. Anecdotal evidence suggests that domestic feed mills are not opposed to purchasing domestic maize but need its moisture content and pollution to be better controlled and its aggregation and logistics better organised. Currently, feed mills pay a small premium for imported maize from India for these conveniences, which suggest that there is an opportunity to replace these imports with domestic supplies. The low commercialisation rate of maize in Nepal - only around 15 percent of all maize produced by the country’s farmers gets sold commercially – points at additional opportunities to develop domestic supply. Setting up the infrastructure for maize (quality, logistics and aggregation) can provide access to a USD 100 million market.
Horticulture is another sector with a plethora of investment opportunities. Imports of the broad vegetable category (including fruits and potatoes) grew from USD 25 million in 2009 to over USD 250 million in 2019. Within vegetables, 90 percent of the imports comprised of peas, onions, lentils, beans and gram. Besides lentils, not many of these vegetables are grown in large numbers in the country. However, there is no direct biological reason why they could not be grown. In fact, some of these crops would be quite suitable for Nepali soil. For example, apples are the largest imported fruit category (USD 80 million in 2018, up from around USD 10 million before 2010). Nepal grows apples as well, albeit in limited varieties.
For many horticulture crops, contract farming is an established way of doing more intensive and higher value farming. Setting this up requires initial investments – in field staff, input supplies and infrastructure to liaise with farmers on a frequent basis. This has existed, at modest scale, in Nepal since the 90s for fruits (citrus, bananas) and off-season vegetables. While the regulatory framework is still not fully developed, contract farming is in essence nothing more than a clear contractual relationship between buyer and seller, which can be set up with a more generic legislative framework as well.
Potatoes accounted for around USD 60 million in imports in 2019 (around 30 percent of this was frozen). Domestic potato production grew significantly during 2000-2010 (from 1.2 million metric tonnes to 2.5 million metric tonnes annually), but then plateaued during the next decade (despite a bumper crop in 2018). Here, the story behind the rise in imports seems more related to the need for volume – imported potatoes do not command a premium or are considered tastier, they are simply needed as domestic supply is not sufficient. If the economics of potato growing make sense, using some of the fallow or unused agricultural land in Nepal to increase production can be an interesting investment prospect.
Agriculture in Nepal has been characterised by a strong focus on subsistence for many years. Although cash crops like sugar, tea, cardamom and even cauliflower are mostly commercially grown, several staple crops and other vegetables are still predominantly used for own consumption. This by itself is not a bad thing, but the correlation between subsistence farming and low yields suggests that Nepal could be growing and commercialising a lot more domestic produce. Investing in the infrastructure and services needed to do so can grant access to proven market demand –if the current rate of foreign agricultural imports is anything to go by, it is a billion-dollar market opportunity.
Rick van der Kamp is team leader of the Nepal Agricultural Market Development Programme, an SDC project implemented by Swisscontact.