Feb 7, 2011

Analyzing The Rice Crisis in the Philippines

Academics, Research and Development Department of Ateneo Economics Association

Rice is the staple food of the Filipinos. It is a politically sensitive commodity with which supply disruption causes people distress. The Philippines consumes about 33,000 tons of rice daily. Approximately, 80% of the total population spends almost 1/4 of their income on rice alone. This shows that a slight increase in the price of this commodity will greatly affect the standard of living for most Filipinos.

Currently, the world is experiencing a global food crisis. There has been an increase in demand for rice all over the world especially in China, Africa, the Middle East and India. To offset the increase in price, the top exporting countries of rice have reduced their exports significantly to keep domestic prices low and to counter inflation. The Philippines, being the world’s top importer of rice, is directly affected by the global crisis. Every year, the Philippines imports around 15% of its rice supply  (equivalent to 2.2 Million tons of rice), most of which comes from Vietnam and Thailand. But why does an agricultural nation like the Philippines import rice?

In an article entitled Food Security and Rice? Dr. Onofre Corpuz provides us some background on shortages and crises regarding rice. Based on this article, the Philippines has been importing rice since the Spanish era. This article by Dr. Cruz seems to tell us that our notion that the Philippines is a top exporter of rice is incorrect. Also, the reasons for the rice crisis before are more or less similar to what we are already encountering today. He attributes the recurrent rice shortages to the following: feudal system, cash crops being favored over rice for exports and primitive technology. In addition to these, he also blames the practice of idleness during the Spanish era.

The Philippines has intrinsic disadvantages in the production of rice. First, the country lacks water sources for its cultivation. Unlike our neighboring countries, their agricultural lands are situated near flowing bodies of water. Furthermore, the Philippine agricultural lands are scattered all over the country on different islands. This means that transportation, cultivation, maintenance and production are quite expensive because economies of scale hardly arises from a disjointed production process.

Another reason for the rice crisis is government negligence. The government could improve market outcomes. However, with wrong intervention and mishandling, the matter could become even worse. This negligence is evident in the high-cost of domestic rice production compared to out neighboring countries. Our country has more or less 4 million hectares utilized for rice production. We cultivate about 3 metric tons of rice per hectare. According to the PHILRICE, this figure is insignificant compared to the country’s production potential which is 12 metric tons per hectares.

A study done in 1999 by the International Rice Research Institute (IRRI), indicates that the cost of rice production in the Philippines is almost 50% more than that of our neighboring exporting countries’, Thailand and Vietnam. The annual cost of producing rice for Vietnam and Thailand is $683 per hectare and $636 per hectare, respectively. While in the Philippines, our cost of production is $888 per hectare. Based on this given data, the principle of comparative advantage begins to set in. We could conclude that if production of rice is cheaper in neighboring countries, then importation of rice is indeed an economically wise decision. However, an implication of such dependence on rice importation makes us very susceptible to global crises like the one we are currently experiencing. The reason why no serious damage (relative to other countries involved) is felt by the Filipinos is that most of our daily consumption is being produced inside the country. A much seemingly feasible action that the government must undertake, is to make the production of rice less costly by enhancing its production process.

Aside from its failure to lower the cost of production, another sign of government negligence comes into mind when we talk about the failure of the NFA to procure large amounts of rice. The primary function of the NFA is to ensure food security and stable rice prices and supply through diverse strategies such as the procurement of rice supplies, thereby gaining significant influence over the market price. From the peak of its procurement in 1979 which is 10% of the total rice supply, it now dropped to less than 5% of the total rice supply. A number of studies have shown that in order for the NFA to effectively influence the market price of rice, it must procure 15% more of the total rice supply.

Another government failure is the ill-action of subsidizing bio-fuel crops. The subsidized bio-fuel program of most countries in the world, including the Philippines, has lead to a decrease in agricultural land allotted for wheat, rice and other agricultural crops.

To add to the long list of government blunders is its failure to impede conversion of arable land to industrial centers, parks and offices. Just recently before the rice crisis issue, there was this problem regarding the Sumilao farmers’ agricultural land being converted into industrial center by a private corporation. Even though the economic gains we get from these sectors are substantial, the arable lands suitable for agriculture is very scarce. Moreover, there are idle lands in the country that are not being developed.

And making matters even worse is government corruption, which has already seeped through the system. One study indicates that a reduction of one bag of fertilizer per hectare leads to a 10% reduction in the grain yield. The money, which was used by the current administration in funding for their electoral campaign in 2004,  was suspected to be intended for the agricultural sector’s budget.

Aside from the aforementioned, there are factors that contribute to the current rice crisis which are completely out of the government’s discretion. First among these, are the skyrocketing crude oil prices in the world market. One notable consequence of this is that it makes fertilizers and other input materials in the production of rice much more expensive. Another is that it also contributes to the increase in the price of rice since transportation is a cost incurred by suppliers.

Besides rising crude oil prices, another factor which contributes to the aggravation of this crisis is global warming. It has been shown in some studies that a 1 degree Celsius increase in temperature in the overall climate leads to 15% less agricultural yield. This poses a much serious problem in the Philippines where agricultural lands lack abundant water sources. Other things to be considered are natural calamities such as flood and drought which also contribute to lesser food crop yield.

Of all the rice shortage causes that are beyond the control of the Philippine government, probably the most detrimental is overpopulation. Ever since, it has been a known fact that the country’s capacity to produce food has struggled to cope with its rate of population growth. The average growth rate during the years 1990-2000 was 2.34% for the population while the increase in rice yield, was around 1.6%. Clearly, if such trends continue, it would be hard for the Philippines to lessen its dependence on rice imports because its production of rice grows at a rate much lower than the rate at which its population is growing.

There is no denying that today, the world is facing a global shortage in rice and other agricultural products such as wheat. This is probably because 2/3 of the world’s population (4 billion people) considers rice as essential to their daily diet. Among the 36 countries named by the United Nations Food and Agriculture Organizations that are experiencing rice shortage, the Philippines is not included. Does this mean that we are not suffering the so-called rice shortage? It seems that it’s a yes: we are not facing the kind of rice shortage that the UNFAO identifies with the 36 countries. This is because, as mentioned earlier in this study, 85% of the country’s rice needs are being produced locally. The other 15% (2.2 Million tons of rice) have already been secured, to be imported from Vietnam in a signed contract between our government and their’s. Therefore, no rice shortage threatens the country. This situation, of course, is only short-term and it cannot be ascertained whether next year, our country would be as fortunate. But a major factor that exaggerates the current crisis, is the hyped reaction of both producers and consumers to this artificial rice shortage. Because the media makes too much of a big deal out of this crisis, consumers tend to panic-buy while producers hoard their supplies. Thus, the interaction of both increase in demand by the consumers and decrease in supply caused by the hoarding of suppliers raise the market price of rice disproportionately.  This is why the price of rice is very high even if there is actually no shortage.

In basic economic courses, shortages could be eliminated by increasing price up to a point where quantity demanded equals quantity supplied. This is exactly why in the Philippine market, the price of rice increases in order to meet its demand.
But why are there long lines in NFA stores if there isn’t any shortage? Aren’t long lines indicative of such? There are long lines in NFA stores because they sell subsidized rice. If a shortage really occurs, one thing the government could do is flood  the market with imported rice. Naturally, the price of rice should go down since supply is augmented. However, this is not what is happening. The government imports rice, which is what they have been doing ever since, and sells it at a much lower price. Therefore, the main problem that the Philippines is really facing is the abrupt price increase in rice, not a shortage of supply, which is caused by the interplay of all the factors mentioned earlier. Thus, there is no point for either the consumers or the producers to deviate from their usual economic activities. The media can also contribute by not overstating the issue.

After analyzing the probable causes of the current rice crisis, it might be worthwhile to ask what implications this crisis has on both the consumers and producers. For the Filipino consumers, the implication is quite serious. As mentioned earlier, about 68 million Filipinos expend 24% of their income on rice alone. This huge proportion of rice in the Filipinos’ income makes us incredibly worse off with even a slight increase in the price of rice. The effect of large price increases of rice for the Filipinos is a lower standard of living because the more they spend on rice alone, the less they could afford other necessities of life. Moreover, a bigger share in the consumer’s income could also mean that it takes up a considerable amount in the yearly basket of goods that determines the consumer price index. It follows then that significant increases in the price of rice translate into higher inflation and thus makes general consumer welfare drop. In April 2008, the CPI rose to 8% – one of the highest rates ever reached, even exceeding the BSP’s target of 3-5%. If the crisis is not solved immediately, experts predict long-term inflation for the Philippines.

On the producers’ side, one would expect them rejoicing over large increases in the price of rice. After all, large increases in the price give them greater incentive to produce and earn more. However, this is far from reality. Because they are not the ones that dictate prices, they are at a loosing end here. Their profits do not equate to what the classroom demand and supply mechanism tells us because they sell their yield at prices dictated by traders that, more often than not, take advantage by lowering their buying prices. Asymmetric information and unjust socio-political institutions (the small-scale farmers are usually indebted to these traders) are to be blamed for the farmers’ plight.

After the mentioned implications, it would be essential to discuss the feasible solutions to this crisis. In the short-term, the importation of rice from other countries is one proper way to address this problem. Flooding the market with more supply of rice, provided the amount is significant, could influence the market price to some degree. The NFA serves its purpose indirectly through a subsidized system of buying imported rice and selling it cheap. Another short-term solution that is proposed is to lessen the consumption of rice included in the Filipinos’ diet. The government, in accordance to this proposal, could encourage restaurants and fast-food chains to implement the half-cup rice servings for every meal (which is already in effect in many establishments). Also, the government should have a keen eye on unscrupulous hoarders of rice supply, and render their activities unlawful and detrimental to the economy. Furthermore, the consumers are advised to calm down and be rational in dealing with the current crisis. Panic-buying would just worsen the current situation because the shortage crisis which the world is facing, although certainly relevant, is not yet evident in our country.

Most of the long-term solutions that are being proposed by the government are geared towards the country attaining food security. One of these must be aimed at revolutionizing the production process and lessening the cost of production. Such a goal could be achieved  through investments in research. The 1 billion peso budget granted by President Arroyo for research would surely benefit this purpose. Aside from that, agricultural education for farmers and improvement of irrigation and transport systems are other strategies that could be pursued.

In addition to these, agriculture-related technology should be developed so as to increase the quality of rice. A study indicates that the Philippines has the least developed methods of production. While neighboring countries have shifted to advanced methods of production using high-technology capital, the Philippines still depends on carabaos.

Lastly, the government can certainly end this rice conundrum if it puts the conversion of arable lands into industrial centers to a halt.

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