Introspective
Business World, 22 September 2019
Public support is shifting from rice consumers in 2018 to rice farmers this year. Last year, the country’s inflation rate breached Central Bank’s upper band. Analysts blamed that on rice price inflation, which carries among the largest weight in the consumer’s price index.
Policy makers in both executive and legislative branches reached the consensus that it was the decision — or lack of it — on the timing of importing rice by the National Food Authority (NFA) that caused it. The punishment was swift. In less than a year, Congress came up with the rice tariffication law getting rid of the NFA’s monopoly in rice imports and other regulations, ending the agency’s privileged status of being both a referee and player in the local rice market.
The rice tariffication law is a landmark reform. For decades, many had attempted to revisit the 1972 charter of the NFA to get rid of the NFA’s import monopoly. They all failed. It was that single event in 2018, the high price of rice, which brought us rice import liberalization.
It was a big surprise indeed since price spirals are commonplace in the local rice markets. Sometimes they are due to the world market, but most of the times are traceable to the NFA, in whom Presidential Decree No. 4 of the late President Ferdinand Marcos entrusted all our rice security.
Last year’s price surge could have passed as one among the many. It is interesting to note that the 13% year-to-year price increase in 2018 was one of many. It ranked 13th place in the order of price increases from 1970. The highest was a 47% increase of rice prices in 1984. The 2008 rice price crisis in the world market pushed up rice prices by 30%. But 2018 turned out to be memorable, because the spiral gave us the rice import liberalization law that some of us, including myself had advocated.
Not all of us wanted the rice import liberalization and the stripping of the NFA’s regulatory functions. Those who opposed the reforms might themselves have been caught by surprise at the swiftness by which the law was whisked through Congress. But when it passed, they were still hoping the President would veto it, but he respected the wisdom of our legislators and his Cabinet, with the exception of former Agriculture Secretary Emmanuel Piñol.
KEEPING RICE IMPORT MARKETS CONTESTABLE
Rice importers were all ready to import rice, which they prepared for even before the IRR was issued. In the first half of 2019, rice imports swelled to nearly 2 million metric tons.
But somehow that did not do very well. We all expected rice prices to go down to below P30 a kilo given the current level of world prices. However, the price of well milled rice got stuck at P36 a kilo, and some of us have urged the government to go after the rice cartel which is blamed for not passing most of the benefits of the reforms to rice consumers.
There are simpler explanations, other than the cartel, for the observed prices in the first half of 2019. One is a quality upgrade of imported rice. If importers are out there to maximize their profits, they would likely first buy the more expensive, better quality rice varieties, which would be attractive to households in highly urbanized cities. Indeed, I talked to an NFA official who confirmed that they were having a hard time selling their own stocks in the market because imported rice had fewer “brokens” to say the least.
But more importantly, we may be looking at a rice market in the process of finding its equilibrium under the new rules. In a major reform like rice import liberalization, the big traders may be the first ones to enter and thus get the larger shares of the rice import business. Because of the large quantities they hold, their release and price decisions influence rice prices, and there is no longer an NFA to offset that. In economics, we call this market oligopolistic.
But for as long as the rice import business is open to us all, its profits attract new importers, and that process goes on until the above-normal profits are brought down to competitive levels. And that would then be the time that rice consumers start to enjoy rice at less than P30 a kilo.
Notwithstanding our disappointment, it is interesting to note that the decline of rice prices in the first half of 2019 relative to its 2018 average is the largest — 2.6% — since 1970. Indeed, annual prices fell in only eight of nearly 50 years.
But if prices remain stuck at levels significantly higher than what the 35% tariff rate implies, it may be time for the Philippine Competition Commission to compute rice import concentration ratios to check if the import business remains as strongly contestable as the rice tariffication law envisioned it to be. That inquiry should include those who continue to regulate the rice import business with the sanitary and phyto-sanitary import licenses for regulatory capture.
SAFEGUARDS AND NFA PALAY PROCUREMENT
Falling palay prices apparently kicked public’s support from rice consumers to the rice farmers in 2019. The decline of farm gate prices of palay in the first six months of 2019 was unprecedentedly sharp. If one measured the fall from its average price in 2018 to its lowest monthly level in 2019, that would be 22%. Its near second occurred in 2015, when prices fell by 19% from its average in 2014 to its lowest monthly in 2015.
Three percentage points worse, yet the intensity of the debate on the appropriateness of its cause is beyond measure. We hear muted calls of reversing the rice tariffication law, and Congress seems, for now, to prefer to give more time for the law to succeed.
The clearer message of concerned stakeholders to the government is to help rice farmers who are hurting from low palay prices. They apparently appreciate the importance of keeping rice prices low for the country’s rice consumers, many of whom are likewise as poor as the farmers. About 20% of household expenditures of the poor is just on rice. Asking Congress to repeal the rice tariffication law without a good solution to keep rice prices low and predictable is unacceptable, even to many who are unhappy about the law.
There are three safeguards in the law to protect rice farmers. One is the tariff rate of 35% if we are importing rice from ASEAN. If one is importing from India or countries outside of ASEAN, he or she pays 180%. No one is likely to do that in commercial quantities.
Two, this can be raised by up to 25% with the special safeguards law, which is all within the power of the Agriculture Secretary. There are two versions of it depending on the trigger mechanism used, the volume and price triggers. It is easier to invoke the volume safeguards, but it may also be lifted at the end of the calendar year.
But that works well for us? It is very likely that the volume trigger is breached by the third quarter of the year. Private traders would have completed their importation in the first half of the year, so that by the time of the main harvest in the last quarter, import tariffs will be higher to discourage rice imports.
Three, the NFA can still procure rice from the local markets for buffer stocking. The relatively deep fall of palay prices indicates that traders and rice millers are not buying locally temporarily. They may first be assessing how the import liberalization would play out. Like the rice market, the palay market is in the process of finding its equilibrium under the new rules. Withdrawal of commercial rice traders and millers from the local palay market may be significant as to bring down palay prices sharply.
I support the contingent measure of stabilizing the farmgate price of palay for this main harvest season, or for any other time when the low palay markets show some instability affecting incomes of rice farmers.
Two measures in support of procurement are in order. One, the NFA Council instructs the NFA to buy at an official farmgate price, calibrated to provide incentives to plant rice to rice farmers. I believe this is done. The NFA Council had decided the procurement price to be at P19 a kilo. Two, the national government gives the NFA a bigger budget for palay procurement to prop up demand of palay in the main harvest.
Historically, procurement has been about two to three percent of local production. But there were years when this reached 6% as in 1990. The higher this volume, the faster the NFA can arrest the free fall of palay prices in the main season.
Aside from cost consideration, we may also have to ask about the absorptive capability of the NFA. The NFA is limited by its logistics capacity. I talked to an NFA official who confirmed that they may go into leasing private sector warehouses to absorb more procurement, and that entails a cost to the national government.
We may start with a 5% procurement rate. This shift in demand for palay can benefit other farmers with a more stable palay price.
It is a contingent measure for when the private sector is finding its bearings following a fundamental change in the rules of the industry at a time just before the main planting season.
Conditional cash transfers to rice farmers could have been another way to help rice farmers. However, without the proper identification of rice farmers, and rules to ensure its integrity, NFA procurement is the less costly measure to mitigate the fall of rice farm incomes. In procurement, identification of intended beneficiaries is built into the program.
CREATIVE WAYS OF USING RCEF
We look forward to Secretary William Dar putting in place out-of-the-box ideas in the use of RCEF or the rice competitiveness enhancement fund. RCEF, which can accumulate at least P10 billion a year, is expected to give the rice farmers the opportunity to retool and make rice farming in the country more productive. With the fund, adjustment costs of rice farmers can be lowered, resulting in fewer farmers exiting the industry — giving meaning to the phrase “inclusive trade reform.” An ingenious way of using RCEF is key to modernizing the rice industry, and raise rice farm incomes.
