Republic of the Philippines Philippines - Agriculture and Agribusiness AAA

Transcription

1 Report No: AUS4473 Republic of the Philippines Philippines - Agriculture and Agribusiness AAA Estimates of Domestic Resource Cost in Philippines Agriculture By Roehlano M. Briones EASPS EAST ASIA AND PACIFIC Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank

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3 Estimates of Domestic Resource Cost in Philippine Agriculture Roehlano M. Briones Senior Research Fellow, Philippine Institute for Development Studies EXECUTIVE SUMMARY/POLICY NOTE Overview The country's vision for agricultural development is "a competitive, sustainable and technology-based agriculture and fisheries sector." Competitiveness though should not be simply assumed, but rather demonstrated. The ideal of efficiency implies specialization of an economy in competitive sub-sectors, whilst relying on international markets to satisfy demand from other sub-sectors. This is the "comparative advantage" interpretation of competitiveness. A well-known indicator of comparative advantage is domestic resource cost (DRC). This study provides updated estimates of DRC for major agricultural commodities in the Philippines, towards evaluating competitiveness and comparative advantage as a guide for policy. Patterns of trade and specialization in Philippine agriculture The agricultural sub-sectors matching the subject commodities account for 91 % of agricultural gross value added (Figure 1 ). The largest single subsector is paddy rice at nearly a quarter of agricultural GVA; fishing is 16% (of which milk fish is one of the top commodities); livestock (mostly hogs) account for 13%, and poultry another 10%. Next to paddy rice, the largest crop share is for banana, followed by corn and coconut. Sugarcane, mango, and pineapple account for much smaller shares, but the values are still sizable in absolute terms (64.4 billion pesos, over 1.5 billion dollars.) Figure 1: Shares in gross value added of agriculture by sub-sector, 2012 (%) 1% 2% Source: BAS CountrySTAT. A simple measure of competitiveness is revealed comparative advantage (RCA), which relies entirely on existing patterns of specialization. Based on the RCA measure, the products in which the country has comparative advantage are: Sugar, Mango, Banana, Pineappk~, and Coconut oil (Figure 2). Of these the highest RCA is observed for coconut oil, followed by banana, then pineapple and mango. These are the main agricultural exports of the country. RCA below unity is observed for the rest, with the lowest observed for hogs, followed by

4 Maize, then rice. Conversely these are the country's important agricultural commodity imports. Figure 2: Revealed comparative advantage of selected agricultural commodities, 2012 Coconutoil ) "i Banana MiRfl I t!lj!ti1ilimtifi"j Pineapple 1xzs~m m~ ~ Mango l. m mmf Sugar ~ 2.88 ~ Poultry j ~ Rice I < Maize I i Hogs I Note: Disaggregation for mi/kfish not available in the data set. Source of basic data: Trademap. The DRC measure The advantage of RCA is that it is readily calculated, and 'easy to understand. However, it fails to make adjustments due to government interventions due to taxes, subsidies, or regulations (e.g. import restrictions); revealed patterns of trade may be simply the distorted outcome of these interventions. The DRCR here calculated as a ratio (DRCR). The thrust of DRCR is to take the ratio of returns to nontradable domestic factors (namely land, labor, and capital) to tradable value added (measured as output less tradable inputs). If DRCR < l then the commodity is produced with comparative advantage; if DRCR > I then domestic production does not have comparative advantage. DRCR < 1 is equivalent to social profitability, warranting expansion, conversely, DRCR > 1 is equivalent to loss, warranting contraction. When there are distortions, then a distinction can be made between financial DRCR and economic DRCR, as well as financial and economic profitability. It may be the case that a commodity is financially profitable (thus explaining apparent competitiveness) but economically unprofitable (thus not truly competitive under corrected market prices). Gergely (2010) obtains the DRCR calculations in Figure 2. Only hogs, White maize, and rice are produced with DRCRs above unity. Tree crops are more profitable than cereals except for traditional coconut farming. Highest profitability is shown for pineapple, followed by mango. White maize is unprofitable from an economic perspective, and so is rice. Yellow maize is close to neutral in terms of the DRCR. Domestic sugar is also socially profitable. For the noncrop commodities, comparative disadvantage is exhibited by hogs, whereas broilers have a comparative advantage. Hogs are economically unprofitable due to high domestic prices. Milkfish has lower DRCR than either hogs or poultry. 2

5 Figure 2: Past calculations ofdrcr for selected commodities, Rice White maize Hogs Unity Yellow maize Coconut Banana Broiler..._ ~ Mango! Coconut, improved!'"' Milkfish! Pineapple ' '?""''""'w"'"- - vv,,f~"' _,~~-"'~"'--\" 1.00 ~~ ~~ ~"'""m-.-~~-"; Updated estimates of DRCR Source of basic data: Gergely (2010). This study estimated data using 20 I 2 data. Most of the information is obtained from Bureau of Agricultural Statistics (BAS) cost and returns data; for commodities in which BAS data is unavailable, cost and returns are obtained or imputed from other sources. Estimates of DRCR are summarized in Table I, arranged in descending order of DRCR. Table I: Summary ofdrc estimates, 2012 DRCR, financial DRCR, economic DRCR,world Trade status price shock Hogs Importable Broilers Importable Rice Importable White maize Nontraded Yellow maize Importable Sugarcane Importable Mango Exportable Coconut Exportable Milkfish Exportable Banana Exportable Pineapple Exportable Source: Author's calculations. The highest-cost commodities are hogs and broilers, owing to the large discrepancy between domestic and border price. Sensitivity analysis was also conducted for DRCR in tem1s of a world price shock of I 0%. The DRCRs of the commodities are mostly unchanged after the world price shock, except for hogs. Financial DRCR for all of the subject commodities are below unity, indicating each activity is profitable from the private viewpoint. However as argued above, economic DRCR is a.better indicator of efficiency as it corrects for price distortions. The study finds, first of all, that distortions at the level of domestic resources and tradable input prices are minor. The exception is rice, an importable product which ~:njoys an expensive yet highly subsidized irrigation service. 3

6 Rather than input price policy or subsidy, the major source of distortion is output price policy. Due to output price distortions, for key importable products economic DRCR is much larger than financial DRCR. Contrary to the financial DRCR criterion, contraction of rice, hogs, and chicken at the margin is warranted. Hogs and chicken are protected by a high tariff (40%). Note the contrast with Gergely (2010), who finds that hogs and broilers are competitive. Data indicate that in 2012, border price of frozen whole chicken is only 52% of farmgate price. Likewise border price of frozen hams and cuts (the most comparable imported version of domestic output at the 6-digit level HS) is 68% of the border price. However in the case of hogs, a substantial yet plausible increase in world price can reduce economic DRCR to below unity and make domestic hogs competitive in the world market. This is due to the dominance oftradable inputs in the cost of producing hogs. Rice is a special case. The domestic price is propped up above the world price by a national policy imposing a quantitative restriction on imports. This policy supports a self-sufficiency target that does not sufficient target as well an affordable price of the key staple. Given the large share of rice in agriculture GDP, a shift from quantitative restriction to a moderate tariff may effect a major transformation of the entire sector. Among the major importables, yellow maize and sugarcane have (at least in 2012) achieved competitiveness. For the former, as the sub-sector consolidated productivity gains, world prices have continued to climb, making domestic output a financially viable option for the livestock and poultry industries. Nevertheless maize continues to be protected by high tariffs, necessity of which may need to be reviewed. Likewise despite the presence of high import barriers, the country appears to have a comparative advantage for sugarcane under current prices. Apparently, the barriers were not essential to continued growth of the industry, particularly in recent years given the world sugar price boom. Parenthetically, this suggests that opening up of the sector to foreign competition - especially in view of the reduction of intra-asean tariffs to 5% - is not expected to cause significant industry dislocation. Lastly, for exportable products, divergences between financial and economic DRCR are small. There is minimal divergence between financial and economic valuation for exportable products. DRCR estimates are far below unity. Hence, allocation of resources towards exportables at the margin is justified on efficiency grounds. 4

7 I r 1. INTRODUCTION Estimates of Domestic Resource Cost in Philippine Agriculture Roehlano M. Briones Senior Research Fellow, Philippine Institute for Development Studies The country's vision for agricultural development is "a competitive, sustainable and technology-based agriculture and fisheries sector, driven by productive and progressive farmers and fisherfolk, supported by efficient value chains and well-integrated in the domestic and international markets, contributing to inclusive growth and poverty reduction." Competitiveness though should not be simply assumed, but rather demonstrated. Indeed the ideal of efficiency and economic integration implies specialization of an economy in the competitive sub-sectors, whilst relying on international markets for the other sub-sectors. This is the "comparative advantage" interpretation of competitiveness. A straightforward measure of comparative advantage uses existing patterns of specialization and trade. However such patterns are subject to government interventions, such as taxes, subsidies, and regulations (such as import restrictions), which may well introduce distortions in market prices and the resulting specialization. More rigorous measures are needed to correct for these distortions. One measure that does make corrections for domestic resource cost (DRC). This study provides estimates ofdrc for major agricultural commodities in the Philippines, thereby evaluating competitiveness and comparative advantage of these commodities. This study is part of a World Bank review of major issues in agribusiness in the Philippines that aims at (i) strengthening the analytical underpinnings of the current and future portfolio of operations of the Bank in the ARD sector of the Philippines, conso Ii dating analytical work carried out in the past two to three years and provide critical inputs for project design; and (ii) building capacities and developing a common understanding and platform with counterparts on how the results of this analysis could inform future policies and programs in the agriculture and agribusiness sector of the Philippines. The study updates the last round of DRC estimations done by Gergely (2010), and continues work done on agricultural policy indicators for the Philippines (see Annex). The rest of this report is organized as follows: the methodology for DRC analysis is presented in Section 2. A review of commodity profiles and past estimates is provided in Section 3. Section 4 presents the results and analysis of applying the DRC method. Section 5 summarizes and makes recommendations. 2. METHOD 2.1. ' Concept Economic theory posits the undistorted pattern of trade and specialization in the global economy is decided by comparative advantage. A common measure of comparative advantage is Domestic Resource Cost (DRC). To fix ideas, suppose production uses only primary factors, i.e. total output equals value added. Let market prices equal opportunity cost. DRC analysis posits that some domestic resources (e.g. labor and land) are nontradable while the product is tradable. Consider the replacement of one unit of the imported product by its domestic counterpart. DRC is defined as follows: I I ~ l 5 f

8 DRC = cost of nontradable inputs, pesos border price, dollars Assuming the market exchange rate ER is the opportunity cost of a dollar, then DRC <ER implies comparative advantage: expanding domestic production by a dollar worth of imports incurs domestic cost lower than the value of a dollar in domestic currency. The reverse holds when DRC >ER: saving a dollar worth of value added, incurs a higher cost of domestic resources, compared to the amount of domestic currency saved. The argument works even for goods that are exported: consider shifting a unit of the commodity from the domestic to the foreign market. DRC <ER implies that shifting a dollar worth of output to exports, incurs lower domestic cost, compared to the foreign exchange earned; DRC > ER of course implies that domestic cost incurred is higher compared to foreign exchange earned. An indicator that is closely related and perhaps easier to comprehend is the DRC ratio or DRCR, defined as follows: DRCR= DRC ER Hence 0 < DRCR < I implies comparative advantage; in a useful sense, the farther DRCR is from unity, the greater the degree of comparative advantage. Likewise DRCR > 1 implies comparative disadvantage; again the farther DRCR is from unity, the greater the degree of comparative disadvantage. Note that DRCR may be calculated as follows: DRCR = cost of nontradable inputs, pesos border price, pesos The foregoing assumes that output equals value added. In fact most production requires intermediate goods. Suppose some of the intermediate goods are tradable; hence the above reasoning needs to be rephrased in terms of value added, that is: DRCR = co_s_t_o_f_n_o_n_tr_a_d_ab_l_e_i_np_u_t_s,_p_e_s_o_s border price less tradable intermediate inputs, pesos Another important simplification is that market prices accurately estimate opportunity cost. However market prices may diverge from opportunity cost due to distortions; prices that are corrected for these distortions are called "shadow" or economic prices. Obvious examples are divergences due to taxes and subsidies. Valuation of costs and benefits using shadow prices makes the DRCRmore consistent with efficiency. Obviously the adjusted DRCR may not be consistent with market decisions; for instance, a high tariff may lead to import substitution even when economic DRCR is above unity Gergely's approach Gergely (2010) selected the following commodities for the analysis: rice, maize (yellow and white), coconut, sugar, banana, pineapple, coconut, hogs, broilers, and milkfish. He computed DRCR at the wholesale and farmgate level where feasible. Shadow prices were computed using border prices adjusted to the wholesale or farmgate level ("import parity price"). Production cost data was derived from cost and returns surveys of the Bureau of Agricultural Statistics (BAS). For sugar, additional data were obtained from the milling association. Bananas used figures from World Bank (2010). Data are mostly national averages, except for rice and sugar, where data from the areas with largest production (Central Luzon and Negros island, respectively) were used. 6

9 Two of the commodities are perennial crops (mango and coconut), which requires investment before harvesting. Annual establishment costs were computed for the non-productive~ period, discounted to net present value (using 8% discount rate), then annualized over a 20 year period (average lifetime of the trees). Other post production costs were derived from agricultural supply chains studies, namely for corn, rice, hogs, broilers, and banana (from a previous World Bank study). For mango, pineapple, coconut, coconut, and fish, no data on post-production cost was found, hence DRCR is calculated at the farmgate level. According to Gergely, subsidies and taxes are minimal, except for some import dufo~s. as well as subsidy for rice (mainly for improved seed and irrigation). In his study, only maize, rice, sugar, hogs, and broilers have economic costs diverging from financial or market costs. For exportables namely mango, coconut, and pineapple, market farmgate price is the: estimate of the shadow farmgate price. Nontradable inputs include: labor costs, land costs, and capital costs, estimated as either interest on crop loans or opportunity cost of working capital. For cost items where bireakdown between tradable and nontradable inputs is available (namely transport and processing costs), share of nontradable cost was imputed based on cost data (even from other countries, as needed). Gergely also conducted a sensitivity analysis using the following factors: a 50% decrease of the irrigation cost (for rice only); a 20% decrease in transport and logistics costs, following improvement in transport infrastructure; a 20% increase in yields (for crops); a 20% increase in the feeding efficiency (for animal husbandry); a 20% decrease in the cost of fertilizers and animal feeds; and a I 0% increase and a 10% decrease in world prices Approach of this paper This paper follows Gergely (2010), updated to 2012, with a some key changes: First, additional comparison is made by computing Revealed Comparative Advantage or RCA. According to World Bank (2010), RCA is the share of i in the total exports of country j divided by the share of i in total world exports. RCA> 1 implies a country is more specialized in product i than the world economy as a whole. Second, the same information in the DRC analysis is organized as a Policy Analysis Matrix (PAM), arranged as in Table I (Monke and Pearson, 1989). The PAM provides a succinct summary of financial and economic payments to value added and domestic costs. TI1e analysis is applied to one hectare of land, in case of crops; for animal products, analysis is conducted for a suitable unit of scale, e.g. 1 hectare of fishpond. Table 1: Policy Analysis Matrix Revenues Costs Profit Tradable inputs Domestic factors Financial prices A B c D Economic prices E F G H Divergence I J K L t J f I f Source: Katie et al (2013) The following relationships hold: D= A-(B+C) f 7 I~

10 H =. E-(F + G) I= A-E J = B-F K=C-G L=D-H c DRCRjina11cia/ =-- A-B G DRCReconom1c = -- E - F Suppose DRCR > 0. The following hold: c DRCRjina11cial = D + c < l <=> D < 0 G - DRCReconomic = --< l <=> H < 0 H+G Financial DRCR is below unity if and only if financial profit is negative; conversely, financial DRCR exceeds unity if and only if financial profit-is positive. This is consistent with private incentives to reduce output (negative financiai profit) or expand output (positive financial profit). Likewise, economic DRCR is below unity if and only if social profit is negative; conversely, economic DRCR is above unity if and only if social profit is positive. This is consistent with the social criterion for reducing output (negative economic profit) or expanding output (positive economic profit). Third, some distortions omitted by Gergely are included. These are taxes on nontradable inputs, i.e. value added tax (pesticide, fuel) and excise tax (fuel). Gergely also omitted the distortion in the exchange rate; in this paper the shadow exchange rate is used in the sensitivity analysis, with an upward adjustment of the market exchange rate by 5%, as explained in Bautista (2003). Fourth, for rice and sugar this paper maintains consistency with the treatment of the other products by using national averages. This is in contrast to Gergely who used the largest growing regions. In effect his estimates pertain to comparative advantage of these regions rather than of the country as a whole. The more comprehensive analysis is to disaggregate the DRCR estimation by region; any implied expansion (contraction) of output would likely involve areas with the greater (lower) profitability, generally the same areas with higher (lower) DRCR. As region-specific data becomes available, a better insight on the dynamic reallocation of resources across regions can be reached particularly as government removes from distorting market prices. Fifth, this paper is limited to the level of primary production: Gergely's approach to include the wholesale level is more comprehensive. However, data for post-harvest stage is insufficient - even Gergely resorts to a conversion factor when moving from primary to 1 The official adjustment is 20%, as adopted by NEDA Investment Coordinating Committee (2004). 8

11 J processed stage. In contrast, data for primary production is relatively more abundant. Hence, this paper makes calculations at the farmgate level; where relevant, border price is converted to a farmgate equivalent using fixed marketing margins and a conversion factor (from primary to processed product). 3. OVERVIEW OF THE SUBJECT COMMODITIES The agricultural sub-sectors matching the subject commodities account for 91 % of agricultural gross value added (Figure 1 ). The largest single subsector is paddy rice at nearly a quarter of agricultural GVA; fishing is 16% (of which milkfish is one of the top commodities); livestock (mostly hogs) account for 13%, and poultry another 10%. Next to paddy rice, the largest crop share is for banana, followed by corn and coconut. Sugarcane, mango, and pineapple account for much smaller shares, but the values are still sizablle in absolute terms (64.4 billion pesos, over 1.5 billion dollars.) Figure 1: Shares in gross value added of agriculture by sub-sector, 2012 (%) Source: BAS CountrySTAT. Trade figures are shown in Table 2. The commodities with the most imports are rice and poultry, followed by maize; significant imports (over $1 million) are observed for swine and sugar. The biggest exports are observed for coconut oil, followed by bananas and pineapple; imports of these commodities are negligible or nil. The Philippines also exports a small amount of rice, and a significant amount of sugar (much more than its imports of sugar). Table 2: Imports and exports of major agricultural products, 2012, in SUS '000 lmeorts ExEorts Rice 424,024 1,268 Maize 87, Coconut oil 2 1,025,986 Banana 0 647,880 Sugar 23, ,002 Mango (with guavas and mangosteen) ,986 Pineapple 0 101,362 Livestock (swine) 71,572 l Poult!}'. 113,987 33,337 Source: Trademap. 9

12 In terms of the RCA measure, the products in which the country has comparative advantage are: Sugar, Mango, Banana, Pineapple, and Coconut oil (Figure 2). Of these the highest RCA is observed for coconut oil, followed by banana, then pineapple and mango. RCA below unity is observed for the rest, with the lowest observed for hogs, followed by Maize, then rice. Figure 2: Revealed comparative advantage of selected agricultural commodities, 2012! Coconut oil ~t lllllm lllllm lllllm-lllllmlllllm.i ~ Banana.~ '":::; E,~; ;;,~.:,,. Poultry } Rice J Maize Hogs la.:???9.~, Note: Disaggregation for milkfish not available in the data set. Source of basic data: Trademap. Note that the RCA is an imperfect measure of comparative advantage. It is static, i.e. based on a snapshot of relative specialization over a reference period. A country may be less specialized in a commodity compared with the rest of the world, but over time still benefit from expanding production of that commodity. Conversely a country may be more specialized in a commodity compared with the rest of the world, but over time benefit from the reduction in output of that commodity. Moreover, RCA does not account for distortions due to taxes, subsidies, and regulation, unlike the OCR measure which explicitly seeks to correct for these distortions. Gergely (2010) obtains the DRCR calculations reported in Figure 3. Only hogs, White maize, and rice are produced with DRCRs above unity. Tree crops are more profitable than cereals except for traditional coconut farming. Highest profitability is shown for pineapple, followed by mango. Figure 3: Past calculations of DRCR for selected commodities, Hogs Unity Yellow maize Coconut Banana Broiler Mango Coconut, improved Milkfish Pineapple i i

13 Source of basic data: Gergely (2010). White maize is unprofitable from an economic perspective, as is rice. Yellow maize is close to neutral in terms of the DRCR. Domestic sugar is also socially profitable. For the non-crop commodities, comparative disadvantage is exhibited by hogs, whereas broilers have a comparative advantage. Hogs continue to be economically unprofitable due to high domestic prices. Milkfish has lower DRCR than either hogs or poultry. f 4. RICE Milled rice is the country's staple food. Production of paddy rice has been consistently.increasing at the national level; over the past decade (since 2002), production has been growing at a rate of 3.1 % annually, divided evenly between growth in area harvested and growth in yield (Table 3). Production is mostly from irrigated systems; in 2012 the share of irrigated paddy rice was 74.4%. Irrigated systems have the edge over rainfed systems both in terms of area harvested and yield. Since 2002 though growth in production has been faster in rainfed systems (some of which are serviced by private pumps), though area harvested has grown more slowly; hence, yield growth has been faster for rainfed systems (0.5 percentage points above the average growth). Rice is mostly produced in smallholder systems. Table 3: Paddy rice production, area harvested, and annualized growth rate, by system, Output (millions oftons) Irrigated Rain fed Total Area (millions of ha) Irrigated Rain fed Total Yield (tons/ha) Irrigated Rain fed Total Growth {%) I I1 t I I t I I Source: CountryStat. Government has heavily supported domestic rice production. Budgetary support is concentrated on irrigation. Figure 4 presents a historical summary of public expenditures on irrigation; from minimal levels in the 1960s, it rose dramatically in the 1970s when the Green Revolution was in full swing. Since then investments have fallen; in the 2000s the lc!vel of support was only 20-40% of that in the late 1970s. 1 Production has risen mainly as a response to growing domestic demand, which has also stimulated imports (Figure 5). In the 2000s the country would intermittently rank as the world's top rice importer. The importance of rice in the livelihood of small farmers has been used to justify barriers to rice importation. Since 1972, the government has monopolized rice importation under a state enterprise, the National Food Authority (NFA). The NFA sets an annual quota, and within it the amount it will directly import; the remainder is allocated for private importation (including imports by farmer organizations). This quantitative restriction 11 1

14 (QR) has survived the country's accession to the World Trade Organization (WTO) by virtue of a special treatment on rice. Special treatment lapsed in 2012; in the meantime, the Philippines maintains the QR while its application for extension of special treatment to 2017 is pending before the WTO. Figure 4: Government expenditures on irrigation, P Bn In 1985 prlc@ 5 ; Others... CIS NIS ' i!' 3 i t l [! 1., Source: David et al (2012) Figure 5: Rice imports (HS 1006), Philippines, , in tons 3,000,000..,.... 2,500,000 2,000,000..,... 1,500, aviet Nam a other countries Source: TradeMap. Tariffs are also high: the most favored nation (MFN) rate is 50% out-quota, and 40% inquota, the same rate extended to ASEAN exporters. These distortions drive a large wedge between domestic and foreign price of rice. A simple indicator of the wedge is the nominal protection rate or NPR, defined as follows: NPR =domestic price - border price border price 12

15 In the 1970s to mid-1980s, technological change and budgetary support for rice allowed selfsufficiency at import parity price; in fact David et al (2012) estimated the NPR to range from - 1 to -18%, i.e. domestic prices were below border prices. This is consistent with the findings of Herdt and Lacsina (1976) and Unnevehr (1986) which compute a DRCR below unity and falling from the 1970s to the early 1980s, as rice production technology improved, and the peso depreciated sharply during the financial crisis. Figure 6 presents the author's calculations of the NPR for milled rice since The NPR started out low in 2004 to 2007, owing to an expensive dollar (the market exchange rate exceeded P50 per dollar) and cheap rice (from $200 per ton, inching up to $300 per ton by 2007). Briefly the NPR turned negative during the rice price crisis of 2008 (in fact Vietnam rice exports disappeared in the early months of the year) when domestic prices rose but not commensurate with the surge in the world price. From 2009 onwards the world price collapsed (though at $400 - $500 per ton, the world price remains considerably above precrisis levels). Despite the decline in world price, domestic prices remain elevated, raising the NPR in excess of 40%; in 2013, due to the low world price, the NPR approached 50%. Figure 6: Monthly nominal protection rate of milled rice, ( 0 /o) 60.0 T ,,...,, l!.....,.. O~ ~o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ i ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ 0 0 N N 0 N N N N 0 N 0 N N N N 0 N N N N 0 N 0 N N N N N N N N Notes: I. The domestic price proxy is Metro Manila wholesale price of regular milled rice. 2. The border price proxy is FOB Vietnam White Rice 5% broken, adjusted upward by 6% for landed cost and P2.00 per kg handling from ship to warehouse, as estimated by Gergely (2010). Sources: PIDS EconDB for exchange rates; BAS CountryStat for Metro Manila regular milled rice; World Bank Pink Sheet for Vietnam Rice 5% FOB. PAM estimates are presented in Table 4. Based on market prices, DRCR is below unity, and financial profit is 22 thousand pesos per ha of area harvested. Compared with financial prices, tradable inputs incur lower cost under economic prices, with a penalty of of Jess than 300 pesos per ha; domestic resources however cost much more, implying an implicit transfer of about I 0, 700 pesos per ha. A much bigger transfer is effected through border policy, which raises domestic rice price far in excess of the border price, resulting in a transfer of over 32,000 pesos per ha. Th~: net transfer is just under 43,000 pesos. Based on shadow prices, the DRCR is 2.00; that is, 2 pesos worth of domestic inputs were spent to save on just one peso worth of foreign exchange. Even with world prices being higher under the shadow exchange rate, domestic rice price continues to exhibit comparative disadvantage, as seen in the DRC/SER ratio of 13 J

16 1.90. Table 4: Policy Analysis Matrix for Rice per ha, 2012, in pesos (unless in ratios) Revenue Tradable Domestic Net DRCR DRC/ in(!uts resources SER Financial 62,366-9,572-30,731 22, Economic 30,023-9,278-41,454-20, Divergence 32, ,723 42,771 Economic, adjusted 39,030-9,278-41,454-11, Divergence, adjusted 23, ,723 33,764 Source: Author's calculations. Suppose in calculating the economic border price an upward adjustment of as high as 30% is provided, whereas domestic prices remain the same. This incorporates risk from relying on imports, supposing that world markets become unreliable. The large risk premium still fails to justify a domestic sourcing policy fo rice; net transfers still amount to about 33,000 per ha. The DRCR is now lower at 1.39 (1.33 using the SER), but still far above unity, owing to high domestic production cost. Table 5 provides a breakdown of cost items. Table 5: Cost items in paddy rice production, in pesos Tradable inputs Seed, purchased Fertilizer, purchased Pesticide, purchased Fuel and transport, purchased Seed, other Fertilizer, other Pesticide, other Fuel and transport, other Tradable inputs, total Domestic resources Labor Hired labor Own labor Labor share Other labor Land Irrigation Rental Tax Capital Working capital Rental and other capital cost Financial value 886 4,896 1, ~. t' 1,215 ' ,572 6,342 4,749 7, , ,309 3,252 Economic value 886 4,896 1, , ,278 6,342 4,749 7, ,559 5, ,309 3,252 Sources: Market values from BAS CountryStat; shadow values from author's calculations. Pesticides and fuel is assessed a value added tax (and for the latter, an excise tax), which 14

17 accounts for a small discrepancy between market and shadow value. By far the bigg~~r divergence is observed for irrigation, based on the estimated discrepancy reported in David et al (2012) for 1999, updated to 2012 using the consumer price index; compare this with Gergely's (20 I 0) estimate of 11,435 per ha in 20 I 0. Estimation of import parity price is broken down in Table 6. The CIF milled rice is only Pl 7.10 per kg, or 57% of the domestic wholesale price. After making adjustments, the import parity price at farm gate is only 48% of the domestic farmgate price. Hence the borde:r control is making a sizable indirect transfer to domestic rice farmers. Table 6: Breakdown of estimation of import parity price of paddy rice at farmgate level,.2012 Milled rice, CIF (I) Milled rice, CIF, pesos per kg (2) Paddy equivalent, imported rice (3) Wholesale price (4) Palay equivalent (5) Farmgate price (6) Margin (7) Value Farmgate price equivalent, imported rice (8) 7.81 Remarks Unit value of imports in 2012 Market exchange rate in % milling recovery ratio, from BAS National Capital Region wholesale price, 65% milling recovery ratio National farmgate price for ordinary rice Difference, farmgate and wholesale price Sources: TradeMap.org; BAS CountryStat; PIDS EconDB. 5. MAIZE Since the mid-1990s, the domestic maize industry has on the whole been expanding (Figure 7), though exhibiting episodic contraction due to unfavorable weather. The two major varieties are white maize, grown for food, and yellow maize, grown for feed. White maize production has been fairly stable at around 2 million tons; the increase in overall production is mostly due to production of the yellow variety. Figure 7: Production of maize by major product type, ('000 tons) 8,000 7,000 6,000 5, ,000., ,000 2,000 1, ,. - o - -, ; r White Corn 111 Yellow Corn Source: BAS CountrySTAT. Imports have been very erratic over the past decade (Figure 8). Annual imports are at low levels, with peaks up to 288 thousand tons, and in some years drop to nil. Note that the ratio of domestic production to domestic utilization has averaged 97% since 1990, with a standard 15

18 deviation of only 0.03 over the same period. There is a high level of self-sufficiency, which suggests imports take up the residual when domestic production falls short of utilization. Indeed the correlation of imports with domestic production is -0.28, and the sum production plus imports shows a coefficient of variation of0.2, compared to 0.21 for domestic production only. Fluctuation of value imported is much lower than that of import quantities, for the simple reason that when world prices are high (as shown in unit values of imports), quantity imported tends to drop, and conversely when world prices are high. Since 2009 unit value of imports have jncreased by 57%. Figure 8: Maize imports (HS 1005), value (dollars) and quantity (tons) "'"'-- r -::---',,..-"' Total quantity Total Value llllunitvalue Source: Trademap. The increasing trend of world prices is reflected in domestic prices (Figure 9). Farmgate and wholesale prices for yellow com have been increasing. Note that inflation in the general price level since 2002 has been 4.8%, and since 2005 has been 5.1 %; however 2012 farm gate prices are 19% higher than in 2009, i.e. growth in price has far exceeded that of the CPI. The wholesale to farmgate margin after 2008 is somewhat higher than in the pre-crisis years (i.e. P3.10 in the former, Pl.80 in the latter). In proportional terms though the wholesale to farmgate margins are slightly lower after The movement has not been. as dramatic for white com wholesale prices - which are actually lower in 2012 than in but white com farmgate prices are also elevated, being 14% higher in 2012 than in Figure 9: Farmgate and wholesale prices of corngrain by variety, pesos per kg, ,..., corngrain Yellow, farmgate -Corngrain Yellow, wholesale -corngrain White, farmgate -corngrain White, wholesale 16

19 Source: BAS CountrySTAT. The PAM is presented in Table 7. DRCRs for yellow and white maize are below unity; this contrasts with Gergely's findings for white maize. Admittedly figures for white maize are much closer to unity compared with yellow maize. This holds whether using financial or economic prices. In the case of yellow maize, net transfers are positive due to a border policy that keeps the domestic price high; nevertheless yellow maize remains socially profitable. Cost details for maize production are shown in Table 8. Table 7: Policy Analysis Matrix for Yellow and White Maize, per ha, 2012, in pesos (unless in ratios) Revenue Tradable Domestic Net DRCR DRC/SER inputs resources Yellow maize Financial 50,814-13,193-20,312 17, Economic 46,714-12,714-20,169 13, Divergence 4, ,478 White maize Financial 22,041-3,458-15,239 3, Economic 22,041-3,391-15,155 3, Divergence Tradable inputs Source of basic data: BAS CountryStat. Table 8: Cost items in yellow maize production, 2012, in pesos Seed, purchased 4, , Yellow maize White maize Financial Economic Financial Economic Fertilizer, purchased 6, , Pesticide, purchased 1, , , Fuel and transport, purchased Seed, other Fertilizer, other Pesticide, other Fuel and transport, other Tradable inputs, total 13, , , , Domestic resources Hired labor 6, , , , Own labor 2, , , , Labor share 1, , , , Other labor 1, , , , Irrigation Rental 3, , , , Tax Working capital 1, , Rental and other capital cost 2, , , , Domestic resources; total 20, , , ,: Source of basic data: BAS CountryStat. 17 J

20 Fertilizer and seed cost is much higher for yellow than for white maize, which is understandable as the latter is more often grown as a subsistence crop. The somewhat higher cost of pesticide application in White maize is therefore rather puzzling; nevertheless overall tradable input cost in White maize is only 26% that of Yellow maize. Domestic resources for yellow maize also cost more, with higher labor cost, and even higher imputed rent for land - mainly because white corn tends to be planted in. the more marginal areas. There is no large outlay for irrigation as in dee, nor is a subsidy correction applied to the small irrigation outlay as this is likely to be drawn from private systems. rhe farmgate price for white maize is also higher. Nevertheless profitability is much higher for yellow maize, due to the much higher yield achieved. Correction applied for the financial price to obtain the economic price (Table 9), which follows a similar approach as in Table 6, shows a wedge of only 9%; removing transfers from the net return still results in social profitability. Table 9: Breakdown of estimation of import parity price of yellow maize at farmgate level, 2012 Milled com, CIF Milled com, CIF, pesos per kg Wholesale price Farmgate price Margin Farmgate price equivalent, imported rice Value Sources: Milled com price from Trademap; domestic prices from BAS CountrySTAT. 6. COCONUT The Philippines is the leading world exporter of coconut oil. Coconut has hundreds of uses; the predominant utilization is the extraction of coconut oil from the meat, which in dried form is called copra. Based on BAS data, production of coconut has been on an upward trend, except for a dip in (Figure 10). Figure 10: Production and export of coconut, in millions of tons copra-equivalent OS Exports... Domestic use ~Production (nuts) S S S Sources: Production data from BAS CountryStat; export and domestic consumption from PCA. 18

21 l I I l I i ' '1 This was due to the El Nino episode of 2010, which continued to affect coconut yield in 2011 ; good weather conditions in 2012 contributed to a recovery of output (BAS, 2010, 2011, 2012). PCA data in copra equivalent diverges somewhat from BAS data in terms of overall trend; what it consistently shows is that exports account for the bulk of domestic production (from 60 to 80%). Domestic farmgate prices have been quite volatile, as seen in monthly copra prices (Figure 11 ). Coconut can be harvested year-round as nuts can be picked every three to four months with different farmers harvesting at different times. Annual prices in the early to mid-2000s ranged from 5 to 17 pesos per kg, though in , prices reached 21 to 27 pesos per kg. It was in when prices hit an annual average of 23 to 39 pesos per kg; monthly prices peaked at 49 pesos per kg (April 2011 ); since then prices have tapered off but remain elevated compared to the early 2000s Figure 11: Monthly prices of copra resecada, in pesos/kg l :~=--"""' _._ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec f I I I I Source: BAS CountryStat. DRC estimates are presented for two alternative production systems (Table l 0). First is the salt fertilization, the technology being promoted by PCA. Coconut farming is high!~ profitable from the private and social viewpoint, with quite a low DRCR (even corrected for the shadow exchange rate). The other system is no fertilization, the standard practice~ in the country, where inputs are concentrated in the harvesting and copra drying stages. The divergence between financial and economic value is due only to land tax. Compared with salt fertilization, yield is lower, and so are revenues; despite lower costs, DRCR is highe:r. Nevertheless DRCR remains far below unity even with the exchange rate correction. Table 10: Policy Analysis Matrix for coconut under alternative production systems, per ha, 20112, in pesos (unless in ratios) l j I ~ t l Revenue Tradable Domestic Net DRCR DRC/SER inputs resources Salt fertilization: Financial 35,572-2,072-12,194 21, Economic 35,572-1,722-12, , Divergence No fertilization Financial 24, ,194 12, Economic 24, , , Divergence Source of basic data: PCA. 19

22 Cost details are found in Table 12 for salt fertilization (with the accompanying Note describing the no-fertilization system). Tradable inputs are limited to salt and fuel from hauling; labor is for harvesting, copra drying, weeding, and fertilizer application (by operator); and capital cost is for working and fixed capital. Table 11: Cost items for coconut farming under salt fertilization, 2012, in pesos Tradable inputs Financial value Economic value Seed, purchased Fertilizer, purchased 1, , Fuel and transport, other Tradable inputs, total 2, , Domestic resources Hired labor 6, , Own labor Labor share Other labor Irrigation Rental 2, , Tax Working capital Rental and other capital cost 2, , Domestic resources, total 12, , Note: Under no-fertillization, purchased fertilizer and fertilizer application under own labor are set to zero; output is set to 1,289 kg, derived from the ratio of production value to area harvested, divided by farmgate price. 7. SUGARCANE Source of basic data: Dy (2011); Centennial (2010); Magat (n.d.); BAS CountryStat. The Philippines was the seventh top global producer of sugarcane in 2012; other countries (in order of decreasing output) are: Brazil, India, China, Thailand, Pakistan, Mexico, USA, Indonesia, and Australia. Sugarcane output has been on an upward trend over the past decade (Figure 11 ). Figure 12: Yield (in tons/ha), output index, and area harvested index (2002 = 1.00), Outputindex! Areaharvestedindex -+-Yield L.... Source: BAS CountryStat. 20

23 Starting from 21.4 million tons in 2002, by 2012 output had risen by nearly one-third. This translates to about 2.2 million tons of raw sugar in There has been considerabl1~ fluctuation of output along the trend, with the steepest drop in 2010 due to El Nino. Area harvested generally mirrors the change in output, though with less erratic changes, reaching 433 thousand ha in 2012, up one-fifth from its level in Hence, growth has. been achieved largely by yield increases, which reached 64.5 tons per ha in 2012, compared to just under 60 tons/ha in Compare this with yields in tons per ha from other top ten producers (based on FAOStat data), namely: Australia (77), USA (75), Thailand (74), and Brazil (71 ); however the country's yield exceeds that oflndonesia (58) and Pakistan (55). Import and export trends are shown in Figures 12 and 13. Import quantities and volumes range widely, from nearly zero ( ) to as much as 285,000 tons valued at $186 million. Peak imports over the past decade occurred in 2010, when domestic production faltered due to bad weather. The following year imports plummeted as domestic production recovered and world prices soared; unit value of imports averaged $914/ton. This is consistent with World Bank (2013), which reports world prices at $570 FOB per ton for raw sugar; in 2008 and 2009 prices were respectively $400 and $470 per ton. Figure 13: Imports of sugar (HS 1701), value, volume, and unit values, , , , , , , Unit values ---Import values, in '000 dollars -+-Import quantities, in tons Source: BAS CountryStat. Figure 14: Exports of sugar (J{S 1701), value, volume, and unit values, , , , , ,000 I 200, , '*-Unit values ---Export values, in '000 dollars -+-Export quantities, in tons Source: BAS CountryStat. 21