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Rice Article: Philippines  

Rice production costs in the Philippines are uncompetitive
By V. Bruce J. Tolentino
Business World, April 9, 2002

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 per kilo, while Thai households pay P7.65 per kilo.

The cheapest rice in the Philippine market is regular milled rice sold at P14 per kilo by the National Food Authority in its relatively few "rolling stores." Yet in the most depressed areas, the NFA's stocks are not fully sold, indicating that even P14 is expensive to the very poor!

Smuggling will continue

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

Conversely, since rice in the Philippines fetches much better prices than in say, 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.

Costly production

Why is rice so expensive in the Philippines?

Fundamentally, because the cost of producing rice in the Philippines is so much greater than in other countries such as Thailand, Vietnam, Indonesia and China.

Under the current price and policy conditions prevailing in the country, Filipino rice farmers are woefully 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.

The results of the surveys became available in 2001. Table 1 summarizes the results of the IRRI surveys. (See Table 1).

A careful study of the information contained in Table 1 is very revealing:

Annual costs of rice production, selected Asian Areas, 
US$ per hectare, 1999, IRRI survey

 

Central Luzon, Philippines

Central Plain, Thailand

Mekong Delta,
Vietnam

West Java, Indonesia

Zhejiang
China

(Cost per hectare per year)

 

 

 

 

 

Labor Wages

501

207

435

472

404

Hired Labor

415

95

60

328

99

Family Labor (imputed)

86

112

375

144

305

 

 

 

 

 

 

Fertilizer

139

125

95

73

203

Machine rental and fuel cost

109

147

40

44

32

Pesticides

47

91

44

65

52

Seeds

63

61

56

9

40

Other costs

29

4

12

7

0

 

 

 

 

 

 

Total costs per hectare per year, US$

888

636

683

670

731

Total costs per ton of paddy, US$

96

59

74

69

58

Cost as % of Philippines Cost, Ha.

1

0.72

0.77

0.75

0.82

Cost as % of Philippines Cost, Ton

1

0.61

0.77

0.72

0.61

(% of total costs per hectare)

 

 

 

 

 

Labor

56

33

64

70

5

Fertilizer

16

20

14

11

2

Machine rental and fuel cost

12

23

6

7

4

Seeds

7

10

8

1

5

Pesticides

5

14

6

10

7

Other costs

3

1

2

1

0

Not included: land rental.

 

 

 

 

 

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 Philippine Pesos P4.82 to produce a kilo of paddy (unhusked unmilled rice or palay). In contrast, Thai farmers spent only P2.94; Vietnamese, P3.7 1; 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 percent of Filipino rice farmers; Vietna-mese only 77 percent and Indonesians, 72 percent.

Across countries, the distribution of costs follows a similar pattern: the grea-test bulk of costs, 33 percent in Thailand up to 70 percent in Indonesia, are accounted for by labor. Fertilizer expenditures make up the next larger portion, 11 percent in Indonesia up to 28 percent in China. Machine rental takes up 23 percent of costs in Thailand, but only four percent in China. The rest of expenditures are made up of seeds and pesticides.

Why costly rice production?

Why is the cost of production per ton of paddy higher in the Philippines than in other countries?

The most important reason is that rice is expensive in the Philippines.

The payments for labor and other ser-vices 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 in terms of shares of the harvest, with the shares largely determined accor-ding to long-standing community customs and traditions. Wages and labor costs are determined by multiplying the price of paddy with the paddy share in volume terms. To make production cost figures comparable across countries, the costs were expressed in terms of the US Dollar.

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.

It should be noted that across countries, 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. Republic Act 6657 - the Comprehensive Agrarian Reform Law - 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 has in fact taken place, with fewer owner-operators and more farm laborers emerging out of the process.

Finally, land rents are high in the Philippines. Land rent is not included in the table reported by. IRRI, but given the fact that land rents in the Philippines are paid for in terms of shares of the harvest, and since paddy prices are high, then land rental would be high.

Also, costly labor!

The other important reason why the cost of rice production in the Philippines is higher than in other countries is because wages in the country are higher than most.

Average daily wages in selected Asian Countries, US$, December 2001

Country

US$

China

1.21

Indonesia

1.24

Philippines

5.03

Thailand

3.39

Vietnam

0.93

Table 2 shows daily wages in the countries covered by the IRRI survey. In US$ per day, Philippine wages are highest at over $5, while Vietnamese get by on less than a fifth of Filipino wages. The wage figures reported in Table 2 are averages across sectors.

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 Viet Nam, 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 percent of their expenditures on food. Filipinos source about 41 percent 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 gro-wing 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.

How to break the vicious cycle?

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 far-mers appropriately for their efforts.

The most important components of a rice productivity program are: (a) irrigation, particularly incentives for far-mers to set up privately-owned and ope-rated systems; (b) technology, made operational in the use of high-yielding seeds, specially certified inbred and qua-lity hybrid seeds; (c) transport systems, particularly roads and inter-island shipping; and (d) revitalized extension, co-financed between the Department of Agriculture and Local Government Units 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 rice productivity program takes effect, the system of quantitative restrictions or quotas or rice imports should be lifted. 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 by unduly reducing domestic supply of rice to less than required by the fast-growing, and hungry, population.

Tolentino is an Ateneo de Manila University professor and former Undersecretary of Agriculture.


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