Annual cost of current rice price policy: P27B

The author is Professor at the School of Government of Ateneo de Manila University. He is former undersecretary for policy and planning, Department of Agriculture, 1986-1992

The intentions of current rice price policies in the Philippines are eminently laudable. But there is a vast gulf between policy intentions and actual effects.

For the past 30 years, the National Food Authority (NFA) has implemented the country’s rice price strategy – one often described as: “Buy high, store long, sell low.”

Per Presidential Decree 4 (1972), only NFA may import or export rice.
Given this monopoly, the NFA builds up rice stocks by importing milled
rice or procuring paddy (unhusked rice or palay) from local farmers.

Government Monopoly

The intention of the NFA monopoly is to maintain control of the
domestic rice market, believing that government control is necessary to
“stabilize” domestic prices, to ensure that Filipino farmers and
consumers are protected from the so-called “volatile” world market.

Private Filipino entities may participate in international rice trade
if they have NFA’s permission. NFA permits are rarely provided, and
usually only for limited quantities of specialized rice.

Under the monopoly, the volume of rice trade is subject to quantitative
restrictions (QRs) or quotas. These QRs are set administratively by an
interagency committee (IAC) chaired by the Department of Agriculture
(DA). The IAC recommends trade volumes to the DA secretary and NFA
administrator.

Prices and price differentials between domestic and world prices do not
enter into the IAC’s analysis of the rice QR. Since the IAC’s decision
making is administrative in nature, it is constrained by the
bureaucracy’s ills: corruption, politics and delay.

Delay happens often in NFA’s trade decisions. From 1971 to 1998, NFA
imported an average of 730,000 metric tons (MT) of rice per year. Of
all imports, some 31% arrived during the harvest season, resulting in
further lowered farmgate prices!

Philippine rice prices have behaved more erratically than world prices.

NFA Price

NFA sets its paddy procurement price at higher than market, intending
to support farmgate prices at above-market level. The procurement price
is set based on average production costs and is the same country-wide,
regardless of isolation, marketing, supply or demand conditions.

The current NFA procurement price is P9/kilogram (kg) in the wet/ main
harvest season (September-February) and P10/kg in the dry/ minor
harvest/lean season (March-August). Over the second semester of 2001,
the open market farmgate price of paddy was P8.21/ kg.

Over the 1990s, the NFA procured only an average of 2.8% of total
annual paddy produced – about 300,000 MT. Given such a small volume,
only about 67,000 farmers (or 3% of all two million rice farmers) have
directly benefited from procurement. In 2000, a survey of the Bureau of
Agricultural Statistics asked farming households if they have ever sold
their rice directly to NFA, and only 12% replied “Yes.”

NFA Borrowing

NFA borrows from commercial banks at commercial rates to finance its operations.

The Department of Finance has authorized the NFA to borrow up to P20.1 billion under a sovereign government guarantee.

Bank loans to NFA are deemed by Bangko Sentral ng Pilipinas as
compliant with PD 717 – the Agri-Agra Loan Quota Law (which mandates
banks to direct at least 25% of loans to agriculture and agrarian
reform beneficiaries).

In1995-2001, NFA annually imported an average of 885,000 MT of rice. In
paddy terms the NFA imported four times the volume bought from local
farmers. NFA profits from imports, but loses from local procurement. At
current world rice prices, the landed price of rice imported by NFA
into Manila is P9-P10/kg and NFA makes P3-P4/kg. On domestic
procurement, NFA loses between P7 and P8/kg of paddy handled.

When the NFA imports rice, the 50% tariff set in the tariff code is not
collected. On the average over 1995-2000, the tariff income forgone by
government resulting from the NFA’s imports has averaged P4 billion.

NFA’s rice inventory target is at least 30 days of consumption, based
on an assumed per capita annual consumption of 103 kgs. The NFA’s stock
is the sum of imported and domestic rice. NFA’s capacity to influence
consumer prices far exceeds its capacity to support farmgate prices.

Year-round, NFA sells regular milled rice at a single national price of
P13/kg to Targeted Rice Distribution Program outlets and rolling
stores, and P14/kg to traders. NFA’s rice sales are intended to protect
consumers from high rice prices, but a Social Weather Stations survey
found that only 15% of Filipinos avail of NFA rice.
Furthermore, while NFA rice may be priced lower than domestic market
retail, such is still twice or thrice that faced by Thais or
Vietnamese. The average retail price of regular-milled rice in Manila
is currently P20/kg. For the same rice, Vietnamese pay only P6.50/ kg.
while Thais pay P7.60/kg.

The gap between world and Philippine rice prices has continually
widened. Between 1982 and 2000, average world prices of rice fell by
0.6% yearly while Philippine wholesale prices rose by 10.6% yearly.

NFA’s sales hurt farmers. The market uses the NFA release price and
procurement capacity as references. The wholesale price is sensitive to
NFA’s release activities. Rice merchants maintain their trading margins
in response to NFA release and procurement by adjusting their paddy
buying prices.

Costs and Benefits

The AGILE study of 1999 estimated the annual costs and benefits of current rice price policy, including:

  1. Appropriations for NFA procurement = over P1 billion;
  2. NFA commercial borrowing with sovereign guarantees = P2 billion;
  3. Forgone tariff income on NFA imports = P4 billion;
  4. NFA operating costs = 30% of value of domestic procurement or P0.9 billion;
  5. net welfare cost to farmers who could have received higher prices
    if NFA releases were not made – the difference between current farmgate
    prices and the no-intervention farmgate price, net of the gain to
    67,000 farmers able to sell directly to NFA, about P8 billion; and
  6. net
    welfare loss to consumers, who suffer high domestic prices
    instead of enjoying lower world prices, net of benefit to the 15% who
    do get access to NFA rice, estimated at P11 billion. In sum, the total
    cost of current rice price policies is about P27 billion a year.

By being linked to rice price policies, the P27 billion used for rice
price subsidies is diverted from the truly significant interventions
for sustainable agricultural growth and food security: irrigation,
seeds, extension and efficient transport.

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