Shortage

I warned, the first time I wrote about this, that EO 839 will create shortages because wholesalers and retailers will try to avert losses. The only way government can indulge in price setting is to subsidize the difference between actual cost and prescribed retail prices.

In the first few days after EO 839 was imposed, one minor oil player announced it was canceling its November importation. Now we have news that giant Petron had cancelled part of its November orders. The company estimates it will nevertheless lose P1.5 billion in a month if the order fixing fuel prices is not lifted.

There is unanimity among the foreign chambers of commerce, academic economists, Filipino businessmen and even critics of the oil industry such as Raul Concepcion that EO 839 should be immediately withdrawn. The President’s own economic adviser, Joey Salceda agrees the measure was unwise. He blames the Energy Department for this potentially ruinous measure.

Late this week, the papers carried reports that a number of retail outlets had either closed down or rationed the fuel it sold. The situation could only become worse.

Let’s put fuel aside for a moment. If import orders have been cancelled, we will likely experience shortages in some form later in the month.

There is even worse news from the market — not that amorphous “market” of large economic forces at play, but literally the market next door. Now there are shortages of pork.

It turns out that while, invoking a state of calamity, government has frozen the retail price for pork, the wholesale prices of the product are not covered. Wholesalers are free to raise the price of pork products, reflecting changes in the costs of production. Retailers are doomed to old prices, hounded by the high profile inspections by people from the DTI.

That is a gaping loophole.

Its consequences are immediately evident to the small retailers in the wet markets, even if the distortions caused by a badly thought out measure have not yet sufficiently impressed those responsible for EO 839. For the small retailers, the option is clear: avoid retailing pork products because wholesale prices are higher than the prescribed retail prices.

What is true for pork should be true for other products subjected to price controls. Since the measure prescribes retail prices and not wholesale prices, retailers will shy away from price-controlled commodities if wholesale prices adjust upwards. The result can only be shortages.

The disappearance of pork from the wet market is due to exactly the same logic as the looming disappearance of fuel products from the pumps: no business can long operate on a loss. It is wholesale prices government should try to control. But doing so will require tremendous amounts of subsidies that the state cannot afford at the moment.

Even if EO 839 is lifted immediately, I suspect the supply disruptions have already been inflicted. We will see the effects of the supply disruptions farther down the road.

The effects of EO 839 on the supply of certain commodities might just be the tip of the iceberg. We could be experiencing shortages of rice as well.

Consider these events: India, the second most populous nation on earth, has become a net importer of rice because of a serious drought the past few months. China, the most populous nation on earth, will likely also import the grain due to recent bouts with flooding. The Philippines, the world’s biggest rice importer, is now in the market for several hundred thousand tons of the grain.

As a consequence, global rice prices have begun spiking the past few days.

Last year, global rice prices hit record highs. The Philippines was the culprit for this aberration. Because our laws allow only the NFA to import rice, the agency becomes the world’s largest single buyer of the commodity. When the NFA enter the world market scrounging for large supplies of rice, the tendency is for rice wholesalers in Thailand and Vietnam to hoard the commodity, expecting the Philippine buyer to purchase at any price because of the political risks attending any rice shortage.

It is time to review this single-importer policy. It causes speculation in the international grains market. It is one thing to have ten thousand importers placing small orders to small suppliers in many places. It is quite another thing to have the NFA place one large order with grain suppliers abroad who must aggregate the commodity.

The single-importer policy is, of course, an extension of the anomalous mandate of the NFA to control supply and prices in the domestic market. The arrangement might have worked when we were a net rice exporter. It will be disastrous in the present condition where we have become the world’s biggest rice importer.

The market-unfriendly policies we accumulated through the decades will doom us in the future. These policies have created a large lumbering beast of state-owned enterprises trying to maneuver in a new economic order where agility and flexibility are the rules of survival.

Burdened as we already are with the wrong-headed policies accumulated through the decades, we now choose to compound our predicament by trying to dictate retail prices to please a citizenry brutalized by natural calamities. But we will only end up inflicting on them unnatural calamity.

There is, in European lore, a doomed monarch named King Canute. With all the power he imagined at his disposal, the king once walked to the beach and ordered the waves to be still. He invited only ridicule.

In our case, where government attempts to order market forces to be still, we invite something more severe than just ridicule. –Alex Magno (The Philippine Star)