Planting rice is costly

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

The cost of producing rice in the Philippines is uncompetitive. Why? Because rice is very expensive in the Philippines.

Filipino consumers suffer rice prices that are double to triple those borne by Thai or Vietnamese households.

As of March 2002, the retail price of regular-milled rice in the major
Manila wet markets averaged P20 per kilo. In peso terms, for the same
quality of rice, Vietnamese households pay only about P6.10
(extrapolated, base data sourced from UN Food and Agricultural
Organization) per kilo, while Thai households pay P7.65 (average
wholesale, Thailand National Statistics Office) per kilo. The cheapest
rice sold in the Philippines is regular-milled rice at P14 per kilo
from the National Food Authority (NFA) in its relatively few “rolling
stores.”

Since rice is so expensive in the Philippines, rice exports are not
feasible. Philippine rice can only be profitably sold to Filipinos in
the Philippines. Philippine rice can only be profitably exported to
countries where consumer prices are substantially greater than those
prevailing in the Philippines.

Since rice in the Philippines is priced much higher than in Vietnam or
Thailand, it is very profitable to import or even smuggle rice from
those countries into the Philippines. Price differentials are the
greatest incentive or disincentive for smuggling.

Rice is relatively expensive in the Philippines because the cost of
producing rice in the country is much greater than in other countries
such as Thailand, Vietnam, Indonesia and China. Under the current
domestic price and policy conditions, Filipino rice farmers are not
competitive.

The International Rice Research Institute conducted surveys of the
“rice bowls” across Asia in 1999. The surveys were conducted in the
principal rice-growing regions of the countries. All of these areas are
irrigated and produced at least two crops each year.

A careful study of some information is very revealing. Indeed, rice
production in the Philippines is much more costly than in other
countries covered by the survey.

In Philippine pesos in 1999, on a per hectare per year basis, Filipino
rice farmers spent a total of P44,387, while Thai farmers, P31,798;
Vietnamese farmers, P34,169; Indonesian, P33,509; and Chinese, P36,560.

In 1999, it cost Filipino farmers about P4.82 to produce a kilo of
paddy (unhusked/ unmilled rice or palay). In contrast, Thai farmers
spent only P2.94; Vietnamese, P3.71; Indonesians, P3.45; and Chinese,
P2.92.

In percentage terms, the costs of production per kilo incurred by Thai
and Chinese rice farmers amounted to only 61% of Filipino rice farmers;
Vietnamese only 77%, and Indonesians, 72%.

Across countries, the distribution of costs follows a similar pattern:
The greatest bulk of costs, 33% in Thailand up to 70% in Indonesia, are
accounted for by labor.

Fertilizer expenditures make up the next larger portion, 11% in
Indonesia up to 28% in China. Machine rental takes up 23% of costs in
Thailand, but only four percent in China. The rest of expenditures are
made up of seeds and pesticides.

Why is the cost of production per ton of paddy higher in the Philippines? Because rice is expensive in the Philippines.

The payments for labor and other services used in rice production are
paid for in terms of a share of the harvest. Therefore, the farmgate
price of paddy is an important aspect of rice farming costs.

Workers who help in land preparation, harvesting and threshing are
compensated by shares of the harvest, with shares determined by
long-standing community customs and traditions. Wages and labor costs
are determined by multiplying the price of paddy with the paddy share.

Thus, since the farmgate price of paddy in the Philippines is higher
than in most other countries, the cost of rice production contributed
by labor, the largest input, is large.

Note that the Philippines employs much more hired labor in rice
production than other countries. This finding is worth careful
investigation, particularly in relation to the dynamics of agrarian
reform. RA 6657 – the Comprehensive Agrarian Reform Law (CARL) –
prohibits the transfer of ownership of land covered by land transfer
but still not fully paid for. Yet ownership transfers or at least
usufruct is common practice in the countryside. Thus consolidation of
ownership may have in fact taken place, with fewer owner-operators and
more farm laborers emerging out of the process.

Finally, land rents are relatively high in the Philippines, given the
combined effects of population growth, urbanization, the CARL and
excessive trade protection for rice.

The other important reason why the cost of rice production in the
Philippines is higher than in other countries is average wages across
sectors in the country are higher than most. In US dollar per day, the
wages of Filipinos are highest at over $5, while Vietnamese laborers
get by on $0.93, less than a fifth of Filipino wages.

The Chinese earn $1.21 per day, while the Thais earn $3.39 per day and finally Indonesian laborers receive $1.24 per day.

Even though there are clear differences between agricultural and
non-agricultural wages, overall the wages across sectors are linked and
move together. In the first place, minimum wage laws and a complex
system of wage-setting negotiations cover wages. Furthermore, the labor
sector is relatively highly organized and much more free to mobilize
than in other countries. Finally, since food costs more in the
Philippines than in say, Thailand or Vietnam, then the pressure to
bring wages up is much more intense in the Philippines.
The overall result is a higher wage structure across sectors in the Philippines.

The combination of a high wage structure and high paddy prices sets off
a vicious cycle of high food prices and high wages. High paddy farmgate
prices lead to the defense of high retail prices by government. High
retail rice prices underlie the food component of the consumer price
index and thus figure prominently in wage bargaining that is largely
about wage adjustments to the cost of living.

Fully two-thirds of all Filipino families spend up to 80% of their
expenditures on food. Filipinos source about 41% of their calories from
rice consumption.

Ultimately, any increases in the price of rice lead to increased upward pressures on wages and also increased rice prices.

The incentives for imports due to the growing price gaps also grow.
Such pressures lead organized farmers and government to attempt to
increase domestic procurement prices and minimize imports – but with
negligible success. The vicious cycle ever worsens.

The key to breaking the vicious cycle in paddy and rice prices and
wages is the implementation of an honest to goodness, sustained program
to significantly increase productivity in rice.

Improved productivity will reduce production costs per ton. Reduced
production costs will enable rice to be sold at lower prices while
still compensating farmers appropriately for their efforts.

The most important components of a rice productivity program are as
follows: (a) irrigation, particularly incentives for farmers to set up
privately owned and operated systems; (b) technology, made operational
in the use of high-yielding seeds, especially certified inbred and
quality hybrid seeds; (c) transport systems, particularly roads and
interisland shipping; and (d) revitalized extension, co-financed
between the Department of Agriculture (DA) and local government units
(LGUs) which implement their own local agricultural productivity
programs.

In fact, co-financed and co-implemented programs between the DA and
LGUs help the DA spend its large budget – one that has grown despite
devolution – and a budget that the DA is most often able to spend only
P0.65 out of every peso.

As the program for rice productivity takes effect, the system of quotas
or quantitative restrictions (QRs) on rice imports should be abolished.
Experience over the last 30 years has clearly shown that the QRs have
failed. The QRs have in fact worsened the situation of high rice and
paddy prices and poverty, particularly among its intended beneficiaries
– the farming population.

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