The Impact of Peru’s New Agrarian Law

Nearly three years after the repeal of the country’s Agrarian Promotion Law - which helped propel the sector to new heights - the effects of its replacement are beginning to be felt.

by Gabriel Gargurevich Pazos
Farmworker protests in Peru in 2021

The photograph went around the world. A plainclothes police officer fired a handgun at a protester. José Elice, the Interior Minister at the time, told reporters, “There is no justification for police using outlawed weapons under these circumstances, it’s in clear violation of the law and regulations.” Twelve people lost their lives in the Peruvian agrarian strike of 2020-2021, which began in the southern Ica region and later extended to include farm workers from La Libertad and Piura, in the north of the country.

Nearly a month into the protests, in December 2020, lawmakers were still deadlocked over one of the central demands: the repeal of the Agrarian Promotion Law. This legislation had been brought in nearly two decades earlier with the goal of driving investment in the sector. Despite only having been extended in 2019 to the end of 2031 under the government of Martín Vizcarra, the law was finally superseded, giving way to the New Agrarian Law.

Gabriel Amaro, president of the Association of Agricultural Producers’ Guilds of Peru (AGAP), asserts that “the new agrarian law has undermined the competitiveness of our sector.” The new law, he says, introduced a string of needless overhead costs and risks to an agricultural sector that had enjoyed several years of export growth, rural job creation and investment attraction. “The benefits for the country were abundant, both socially and economically. The new law has put a damper on new investments, leading to a corresponding slump in the creation of formal jobs and a slowdown in the sector’s rapid growth trajectory,” he says.

Last September, the Foreign Trade Society of Peru (ComexPeru), a business association, published a report outlining the negative impact on Peruvian agribusiness of repealing the Agrarian Promotion Law, which included severance pay and legal bonuses in daily wages. “Following the enactment of the New Agrarian Law in early 2021, the cost of hiring rose … and a special agricultural work bonus, amounting to 30% of the minimum wage, was introduced,” the report explained.

A Cold Shower

More than two years after its implementation, agricultural expert Ángel Manero also commented on the new law’s consequences. Manero has held key positions including manager of Sunshine Export — a mango exporter — director of the Agricultural Bank, National Director of Agriculture, and is currently a consultant in agricultural development. In addition to levying overhead costs, he notes, the law is gradually phasing out the perks of lower income tax and social health insurance payments. “Under the Agrarian Promotion Law, the agricultural sector paid 6% towards social health insurance, whereas other sectors paid 9%. Starting in 2025, agriculture will match this 9% rate.

Moreover, profit-sharing with workers gradually increased. These changes came as a cold shower to our agro-export entrepreneurs; the changes will slash their average net profit to half of their previous earnings.”

Manero does concede, however, that this new law helped quell the protest’s unrest. “It relieved some of the mounting social tension between the workforce and the business owners,” he says. He also notes that the agro-export industry has continued to grow at nearly 10% annually, owing to pre-law investments and favorable coffee prices. He goes on to add, “We also need to acknowledge that 2021 was a milestone year for several products in our export assortment, such as avocados, blueberries, citrus fruits, grapes and mangos. In this post-Covid year, we hit the equilibrium between supply and demand; the days of unsatiated demand are behind us. From this point on, our supply can only grow in sync with demand growth. Unfortunately, the global demand for fruits and vegetables has been experiencing lower growth lately.”

A key question is whether this new law caused new plantation projects to stall, or whether companies are just curbing their planting activities to better manage the market.

For Amaro, Peru’s agricultural investment trajectory has been impacted by various factors. “It’s not solely about the new agrarian law, though it should be mentioned that it does bear a significant portion of the blame. It’s also about the global crises we’ve been witnessing since 2020, along with the political instability that Peru has been grappling with over the past six years, in addition to increasingly challenging conditions for the sector.”

During the period of the Agrarian Promotion Law, there were plans to cultivate approximately 30,000 new hectares over a span of five or six years, “not to mention the new areas made accessible by thousands of hectares from large irrigation projects like Majes Siguas and Chavimochic, among others. However, this vision was never fully realized due to the aforementioned factors,” explains Amaro.

On the other hand, Manero cautions that indeed, many new planting projects for avocados, grapes, and blueberries have been put on hold, “but not because of the new agrarian law, rather because the markets are swamped with fruit during our export window. The issue isn’t about edging out other countries anymore; any added supply from us depresses our prices. If there were more unmet demand, these projects would have gone ahead despite the new law. Peru’s top twenty agro-export companies have an inventory of over 100,000 hectares ready to be sowed right away. I anticipate that new planting will likely resume from 2027 onwards, albeit at a reduced intensity.”

Companies in the Shadows

The now-repealed Agrarian Promotion Law unquestionably provided substantial benefits to Peruvian agribusiness. It sparked an upsurge in investment and formal employment, helping the country’s key products to thrive. Consequently, many people experienced significant enhancements in their job situations. This was highlighted in ComexPerú’s report, which also emphasized that “according to the Central Reserve Bank of Peru’s figures, poverty in the agricultural sector of agri-exporting regions (La Libertad, Lambayeque, Ica, and Piura) decreased by 50 percentage points between 2004 and 2017.”

In contrast, the new version of the law has overlooked the persistently high level of labor informality in the agricultural sector. Specifically, last year it climbed to 96.2%, and in 16 regions, it exceeds 99%, as per the National Household Survey (Enaho) figures. On the other hand, regions with greater implementation of the former agricultural labor regime have shown better results. For instance, Ica, with an informal employment rate of 58.9% in the sector, has been particularly noteworthy.

Manero points out a detrimental effect of the new agrarian law, which is its tendency to foster informality. “These under-the-table companies that avoid paying labor benefits have a negative impact on the formal sector. The state has a significant role to play here. However, I do think it’s essential to establish a new promotional framework that includes agribusiness, the aquaculture sector, forestry, tourism, metal mechanics, and other labor-intensive industries.

“A primary incentive could be setting the income tax at only 15% for any amount that’s reinvested in the business. The state needs to prioritize job creation, as well as revenue collection through sales tax,” he says.

Automation and Diversification

Despite these challenges, Amaro remains undeterred. He insists that the agricultural sector is one of the most resilient and always finds ways to progress. He highlights Peru’s advantageous agricultural conditions and the country’s enormous agricultural potential that could enable it to “conquer all markets. We’re just getting started and always look towards the future with optimism, regardless of the difficulties.”

Amaro also highlights some strategies that Peruvian agribusiness is starting to implement, in its pursuit of solutions and improvements: “Agricultural operations are enhancing their internal processes, automating, seeking superior varieties and diversifying crops and markets to sustain the sector and address present challenges. Furthermore, the new government, which was properly established through a constitutional transition and represents a significant departure from its predecessor, is developing policies to engage with economic stakeholders and regions in managing crises, fostering growth and mitigating the impact of climate-related disasters like Typhoon Yaku and El Niño, among others.”

For his part, Manero identifies diversification as an urgent requirement for Peruvian agribusiness. “Sadly, cherry cultivation has been sluggish, and we don’t foresee another crop that could potentially account for at least another 10,000 hectares (24,700 acres). However, every crisis offers opportunities, and companies under pressure to diversify will begin exploring options that were unthinkable a few years ago, such as the frozen pre-fried potato industry, high-yield wheat and corn; they’ll also keep an eye out for new exotic flavors for the beverage industry, and consider sectors like biodegradable products. While these options require time to be realized, they must be set in motion.”

According to Amaro, enhancing the business environment and competitiveness is the primary challenge that both public and private sectors need to address to stimulate growth. “This challenge is particularly significant in the agricultural sector — investing in agriculture equates to improving the living standards of citizens across all of Peru. More agricultural investment translates into more formal employment and greater economic and social benefits. A top priority is to restore the promotional aspects of the sector and improve all regulations impacting it, with rules that genuinely enhance its competitiveness.”

Amaro further emphasizes, “Strengthening public-private partnerships is crucial for the implementation of urgently needed measures. Expanding international markets, incorporating small farmers into the agri-export chain, transitioning to new technologies, researching new crops are just a few of the challenges faced by Peruvian agribusiness today.”