Yearender: How rising food prices exposed the agriculture sector’s weakness

by Czeriza Valencia (The Philippine Star) – Dec 25, 2018 (Part 1)

Most Filipinos never gave much thought about the growth in consumer prices in the past few years until its impact was felt with such force this year. Of all the commodity groups affected, the pinch was felt the most in food prices, particularly on items crucial to the everyday diet of Filipinos.

The spike in inflation in the second half of the year was, of course, caused by a confluence of factors such as food supply issues, depreciation of the peso, growing consumer demand, and higher oil prices in the global market.

There was also the inflationary effect of excise taxes under the new tax reform law that saw lower income taxes, but higher taxes on fuel, sugar-sweetened beverages, and tobacco.

We also cannot discount the string of weather disturbances that entered the country this year, in particular the powerful tropical cyclone Ompong that demolished P27 billion worth of agricultural assets.

Growth in consumer prices peaked to a decade-high of 6.7 percent in September as food prices rose sharply.

Inflation stabilized in October as slower price increases were seen for key food items such as corn, meat, fruits and vegetables, but faster growth was still seen in the prices of rice and fish.

Throughout the year, the highest contributors to inflation were electricity, gas, fuels, fish, rice, personal transport, vegetables and meat.

Food and beverage prices matter greatly as these make up more than half of a family’s budget among other goods and services in the consumption basket of the average Filipino.

Data from the Philippine Statistics Authority (PSA) showed that as of October, food and non-alcoholic beverages had a 55.4 percent contribution to headline inflation. Other heavily weighted items include housing and utilities that had a 16 percent contribution, and transportation that contributed 10.8 percent.

Inflation has risen steadily since the new tax reform law took effect in January. To curb the steady rise in inflation, the Bangko Sentral ng Pilipinas (BSP) began raising policy rates in May.

In August, however, Socioeconomic Planning Secretary Ernesto Pernia acknowledged the fact that an aggressive monetary policy can prevent second-round effects of rising inflation, but would have little effect on nipping the source which is the supply side of the economy, particularly on the supply of agricultural products.

Pernia also recognized that the lingering problem in food supply can be traced to the outdated legal framework for agricultural development and trade, particularly the protectionist policies for rice and sugar.

Thus in September, economic managers set in motion a series of non-tariff measures meant to ease the importation of agricultural goods in an effort to increase supply and ultimately drive down prices.

This was implemented alongside continued monetary policy tightening that saw policy rates rising 175 basis points until November 2018.

Congress also approved in November the rice tarrification bill, which liberalizes rice trade and promises to significantly increase supply and lower prices. This is expected to be signed into law before the end of 2018.

But at the same time that prices of vegetables have risen to astronomical levels in Metro Manila in October, an odd thing happened in a town in Laguna: tons of tomatoes were left to rot in farm pits as oversupply in markets caused traders to buy them from farmers at depressed prices, if offering to buy them at all.

Why are these things happening to the country’s food supply chain?

Economists attribute the strain in the country’s food supply and spikes in prices largely to the deeply rooted structural weakness in the country’s agricultural sector that, over the decades, resulted in unproductivity.

This year, with the combination of internal and external factors aggravating the food supply issue, government officials were finally prompted to recognize the situation.

On a fundamental level, Philippine farms are too small, too fragmented and lacking in investments to respond to the growing food needs of the country.

“Our food production is already below population growth. With higher income, demand and lower food supply, we will be more vulnerable to increasing food prices,” said economist Calixto Chikiamco, president of the Foundation for Economic Freedom (FEF).

But that is already going back to decades of land reform, now considered by many to be a failed experiment on asset distribution that snowballed into bigger problems.

The agriculture sector remains the laggard among three major industry groups. Growth in the farm sector declined 0.4 percent in the third quarter of 2018 from a growth of 2.6 percent in the same period in 2017 primarily, because of successive typhoons that dumped excessive rainfall, delaying the planting decisions of farmers.

In the second quarter, the agriculture sector grew a measly 0.2 percent, already a reflection of a gross deficiency in the domestic production of food.

Rice importation woes

Backtracking a few months back, increases in food prices were most pronounced in rice, fish and vegetables. Among the counter inflation measures laid out in September, response to price surges among these commodity items were strongest.

“It’s a supply challenge. (The rise in inflation) does not come only from (high global) oil (prices). Ten percent of the inflation was rice. In June, July, August, you go around the country, the issue was there was no supply of cheap NFA (National Food Authority) rice and people prefer that because of the P15 difference (with commercial rice),” said economist Alvin Ang, director of the Ateneo de Manila Center for Economic Research.

Since the first quarter of the year, buffer stocks of the NFA hit a critical level of only two to three days when it is supposed to maintain a 15-day buffer stock.

“As early as the middle of 2017, we were already seeing declining buffer stock. Stocks of NFA came to a flat volume and somehow caused panic,” said Senen Reyes, rice specialist at the Center for Food and Agri Business (CFA) of the University of Asia and the Pacific (UA&P).

This period saw the NFA stretching its rice stocks until imports arrive. At the same time, conflict erupted between Cabinet Secretary Leoncio Evasco and NFA administrator Jason Aquino over the mode of importation.

The impasse was broken in the first half of the year in favor of Aquino’s proposal for the speedier government-to-government more of procurement, but by then inflation has already started to creep into food items.

“They panicked the market, they imported too late. And of course they are assuming they could bring in the imports quite quickly whereas there are problems when the government handles it like bidding and getting logistics,” said Chikiamco. “That is the problem if the government has the monopoly of the rice situation.”

Because of the recent spikes in rice prices, Congress immediately moved to approve the bill liberalizing rice to stabilize supply and free government resources for the development of farm commodities.

“The quickest solution for now is really to import, but that does not mean that we do not address the issue,” said Ang.

The government’s fixation on attaining rice self-sufficiency in recent years, he said, has contributed to this problem as it had diverted much of the funds to a commodity the country has no natural competitiveness in, at the expense of other high-value and nutrient-rich crops.

“The fixation on rice as a major product of the country has caused this problem as well. If you look at the budget of the DA (Department of Agriculture), the rice sector is pampered but there is little improvement,” said Ang. “But we have nutrient-rich food like fruits and vegetables which are very critical farm outputs nutrient-wise. Rice is just a source of carbohydrates.”

Ang said the P15 difference between the price of locally-produced rice and NFA rice – which is mostly imported – already tells us a lot of things about the higher cost of production, harvesting and transport of rice in the country.

The rice tariffication bill expected to be signed into law by the end of the year provides for the use of tariff revenues for productivity-enhancing measures for rice farmers. While this is so, Chikiamco said the government should already recognize the country’s limitation in this commodity.

“We don’t really have the competitive advantage of rice production. We don’t have the natural irrigation of the Mekong River so let’s abandon the idea that we can become rice self-sufficient. Let’s just shift to other high-value crops. Part of the problem too is most of our money is going to rice,” he said.

He was referring to a large river flowing through China, Burma, Thailand, Laos, Cambodia and Vietnam that serves as natural irrigation.

Economist Rolando Dy, executive director of CFA at UA&P, said the country is missing out on the value-added potential of other farm commodities because of too much emphasis on rice.

“You cannot industrialize agriculture based on rice self-sufficiency unlike with fruits and vegetable which have greater value-added potential. If we do not improve the competitiveness of these, we lose out on manufacturing which is part of the industry side,” he said.

But other crops like fruits and vegetable suffer from a myriad of supply bottlenecks of their own. With numerous weather disturbances this year, issues on planting, logistics, market access and consolidation present in the form of skyrocketing prices. (To be continued)