Theory and Reality of the Tariffication of Rice

Posted on Posted in News

Written by: Ignacio Villareal

Illustration by: Lexa Burroughes

 

The Tariffication Theory

What is Rice Tariffication?

On February 14, 2019, President Duterte signed into law RA 11203 (Ranada, 2019) which is also known as the Rice Tariffication Law. The official name is “An Act liberalizing the importation, exportation, and trading of rice, lifting for the purpose the quantitative import restriction on rice.” (Ranada, 2019). 

The law has two main provisions: first, it replaces the quantitative restrictions (QR) on the importation of rice with a tariff. Prior to this law, there was a maximum amount of rice that can be imported, and all importation was controlled by the National Food Authority (NFA). Now, there is no cap to the amount of rice that can be imported. However, imported rice are slapped with a tariff of 35% if it is exported by an Association of Southeast Asian Nations (ASEAN) country, a tariff of 40% if within the 350,000 mt minimum access volume (MAV) for imports from non-ASEAN countries, and 180% for imports above the 350,000 mt MAV and from non-ASEAN countries. (PhilRice, 2019, “Rice Tariffication Law”, 5) Although different, quantitative restrictions, and tariffs, along with subsidies, are types of protectionist policies aimed at protecting local producers from the more competitive global market.

Second, the revenue from the tariffs will be used to create the Rice Competitiveness Enhancement Fund (RCEF). It is mandated that for 6 years, P10 Billion is allocated for the improvement of the rice industry. P5 Billion shall be used to fund machinery and equipment, P3 Billion for the technological development of seeds, P1 Billion for credit assistance, P1 Billion for extension services. (Yacub, 2019)

The World Trade Organization (WTO), which normally prohibits QR, allowed the special exception for the Philippines for almost 25 years starting from 1995. (Yacub, 2019) The Philippines was granted 2 extensions, which ended in 2017. (Yacub, 2019) This law also aims to align with the requirements of the WTO. (PhilRice, 2019, “Rice Tariffication Law”, 3)

Although the law has impacts to other stakeholders, the two main stakeholders that are discussed by the theory, and subsequently this article, are the rice consumers and rice producers or farmers.

How should this benefit consumers?

Cheaper Rice

Filipinos pay more than double the amount our neighbors pay for rice. (PhilRice, 2019, “Rice Tariffication Law”, 7) In 2018, the Philippine price of well-milled rice was P45 per kilo, while the Thai price was only P22 per kilo. (PhilRice, 2019, “Rice Tariffication Law”, 7) An increase in imports will drive the prices down as we will have greater access to more competitive options. The Bangko Sentral ng Pilipinas (BSP) and National Economic and  Development Authority (NEDA), according to PhilRice, claim that prices will drop by P2-7 per kilo. (PhilRice, 2019, “Rice Tariffication Law”, 7) Some other reports say that price is expected to fall to as low as P27 per kilo. (Rivas, 2019, “Rice prices still not”) This is because imported rice, which is still cheaper from other countries despite the tariff, will be more readily available to consumers.

Effects on Inflation

This is also expected to decelerate inflation. Rice makes up 9.6% of the Consumer Price Index  (CPI), which is the heaviest individual commodity in the CPI. (Bangko Sentral ng Pilipinas, 2019) The government expects that with the removal of QR, a 0.6% cut in headline inflation this year. (De Vera, 2019)

Reducing poverty

Cheaper rice prices will especially help those under the poverty line. Poor households spend around 20% of their family budget on rice. (PhilRice, 2019, “Rice Tariffication Law”, 9) Decreasing the cost of rice would then allow for greater expenditure on other things.

A study from DLSU generated simulations on different policy actions and their effects on poverty and income inequality. (Cororaton & Yu, “Poverty and Distributional”) The results of SIM 3, where the quantitative restriction is replaced by the tariff equivalent which is 48.9% and lower income households receive the revenue from the tariffs, showed that the poverty incidence will decline by 1.587% or 394,000 people. (Cororaton & Yu, “Poverty and Distributional”) If it becomes more liberalized, like in SIM 4, where over the span of 10 years, tariffs become reduced to 25%, poverty incidence is expected to decline by 15.989% or 4 million people. (Cororaton & Yu, “Poverty and Distributional”) It is important to note, however, that these two simulations are a bit different from the law as the initial tariff rate for ASEAN countries is 35%, and tariff revenues do not go directly to households but is used for increasing rice productivity.

According to the National Nutrition Survey, as cited by PhilRice, 1 out of 3 Filipino children under 5 years old are stunted. (PhilRice, 2019, “Rice Tariffication Law”, 9) Increasing access to rice would mean that around 4.2 million children will be able to access better nutrition. (PhilRice, 2019, “Rice Tariffication Law”, 9) This is not only beneficial for child welfare but also in the development of our country’s human capital.

How does this benefit farmers?

Increasing productivity

The Rice Competitiveness Fund (RCEF) aims to increase the productivity of our rice industry. According to Bordey, as cited by PhilRice, the target of the DA is to reach 6 tons per hectare at a production cost of P8 per kilo. (PhilRice, 2019, “DA targets a”) Right now, our farmers can produce 3.87 tons per hectare at a production cost of P12 per kilo. (PhilRice, 2019, “DA targets a”) When comparing our crop yield, which measures the farm output per unit of area, from 2012-2014 to some of our ASEAN neighbors like Indonesia, Malaysia, Thailand and Vietnam, we ranked 3rd in rice production, while we are behind Vietnam and Indonesia who rank 1st and 2nd respectively. (Dy, 2017) When comparing how much we grew from 1986, we rank 4th, beating only Malaysia, in growth. (Dy, 2017)  Increasing the use of mechanization and the development of other agricultural innovations will hopefully improve our efficiency in producing rice. The Philippines only mainly mechanizes land preparation and threshing using two-wheel tractors and axial threshers. (Bordey, Moya, Beltran & Dawe, 2016, 82) We also have a low amount of adoption of combine harvesters, which, when used, has historically shown to improve labor efficiency and reduced post harvest losses by 2.2%. (Bordey, Moya, Beltran & Dawe, 2016, 82)

Increasing real income

Cheap rice also benefits rice farmers as they too are consumers. (PhilRice, 2019, “Rice Tariffication Law”, 8) Over 50% of the 2.9 million rice farming households are considered small holders, which means that they plant less than one hectare and majority are net consumers of rice. (PhilRice, 2019, “Rice Tariffication Law”, 8) During non-harvest seasons, rice farmers would also need to buy rice. (PhilRice, 2019, “Rice Tariffication Law”, 8) Thus, lowering rice prices may increase their real income. (PhilRice, 2019, “Rice Tariffication Law”, 8)

Critiques to the Theory

While based on my informal survey of different sources on the internet, many academic sources agree that rice tariffication is a net good to the Philippines, there are some who critique the theory that rice tariffication will be good for consumers and farmers.

What will happen to the price of rice?

 The Ibon Foundation argues that prices of rice will not necessarily drop. They claim that global prices are volatile and thus prices can drastically increase depending on exporting countries.(IBON Media, 2019) For instance, Vietnam and Thailand, whose rice production is cheap because it is subsidized and incentivized, can opt to prioritize local consumption which would lead to a shortage and a price surge in the Philippines. (IBON Media, 2019)

The Ibon Foundation claims that about 5% of global rice production ends up in the global market as most are consumed locally. (IBON Media, 2019) Relying on imports implies that we would be incredibly dependent on other countries for our food security, while they are not as dependent on us by their rice.

What will happen to farmers?

The theory behind how this could harm farmers is quite intuitive. Because more competitive imported rice enters the market, farmers will struggle to be able to compete. Hence, their incomes can drastically decrease to a point where they will have to exit the industry. One can claim that the RCEF is not enough to mitigate the impacts on farmers.

The Rice Reality

Given that the law promised two main benefits – cheaper rice prices and increased productivity for rice producers, it is only fair to examine how it has affected both of these things.

On Prices

Retail Prices

According to the PSA, as of the first week of September, the preliminary price of well milled rice retailed at P42.26, while regular milled rice retailed at P37.83. Last year, the prices of well milled rice and regular milled rice were at P49.05 and P45.85 respectively. (Philippine Statistics Authority, 2019) This means that rice prices dropped by around 16% and 21% respectively. Throughout the month, one could also observe a general decrease of the rice prices. (Philippine Statistics Authority, 2019) While lower, this is obviously still far from the projected P27/kilo retail prices. (Rivas, 2019, “Rice prices still”)

Farm-gate Prices 

According to the PSA, as of the first week of September, the average farm-gate prices, or the prices the farmers sell their harvest for, is P16.28 per kilo. (Philippine Statistics Authority, 2019)  At the same time last year, the farm-gate price was P23.10 per kilo. (Rivas, 2019, “Rice prices still”) The average price to produce rice in the Philippines is around P12 per kilo. (Rivas, 2019, “MAP: Palay prices”) Hence, the profit margins of farmers are around P4.28 per kilo for this year and around P11.10 per kilo last year. This indicates that profit margins for farmers are less than half of last year. This also does not account for the variance among different provinces. For the 2nd week of August, for example, farmgate prices in Cavite registered around P12.00, which is approximately the breakeven point. (Rivas, 2019, “MAP: Palay prices”) Nueva Ecija 1st District Congresswoman Estrellita B. Suansing, as cited in BusinessMirror reported that the farm-gate price of rice in her province dropped to as low as P7 per kilo. (Ordinario, 2019) It is also important to note that the price of unhusked rice is usually higher from the months of July to September. (Ordinario, 2019) This must be very hard for farmers whose already small income is significantly reduced.

Accounting for an “Irregular” Year

According to DOF Strategy, Economics, and Results Group (SERG) Director Joseph Louie Limkin, in his talk on October 8, 2019 at the Ateneo de Manila University (ADMU), one cannot compare the current prices with last years prices as it was an irregular year given different factors for an increase in price. If one were to compare current prices with the same time in 2017, the price differences, he claimed, are significantly less. The retail prices of well milled rice and regular milled rice of the first week of September were P42.24 and P38.03 respectively. (Philippine Statistics Authority, 2017) Farm-gate prices were P19.58 for dry palay at that time. (Philippine Statistics Authority, 2017) With this, one can see that the decline in retail prices is almost equal to the prices in 2017. However, the prices for farm-gate prices dropped P3.3 below the 2017 level. This implies that, as of now, farmers are being harmed more than consumers are able to benefit from lower prices. This does not even account for the marginal value of each peso drop to farmers when compared to consumers.

Rice Prices for First Week of September:

Source: Philippine Statistics Authority

On Inflation

According to the PSA, the headline inflation rate decelerated to 1.7 percent in August. (Lucas, 2019) They claimed that it was “mainly due to the slower annual increase in the index of the heavily-weighted food and non-alcoholic beverages at 0.6 percent.” (Lucas, 2019)  Food and non-alcoholic beverages make up 38.3% of the CPI, and as stated earlier, rice makes up 9.6% or approximately one fourths of the total food and non-alcoholic beverages category. (Bangko Sentral ng Pilipinas, 2019) The headline inflation rate in September has further decelerated to 0.9%, which is the country’s lowest inflation rate since June 2016. (Mapa, 2019)

On the RCEF

Tariff Collections

Intuitively, for the tariffs to be useful, they must first be collected. The national manager of the Federation of Free Farmers (FFF), Raul Q. Montemayor, as cited by BusinessWorld on July 8, 2019, claims that there is an estimated P4.24 billion in unpaid tariffs. (Galang, 2019) He expresses concerns that tariff collections may not reach the P10 billion needed for the RCEF. (Galang, 2019)Assuming its true, underdeclared tariffs would not only hurt the ability of the government to implement the RCEF; farmers will also have a harder time competing as the prices get further depressed. (Galang, 2019)

Despite this, as of August 2019, which is six months after the law took effect, The Bureau of Customs (BOC) deputy commissioner Edward Buco, as cited in Philstar, claimed that the government has collected P9.2 Billion. (Simeon, 2019) They project that in the remaining four months, they could reach a total of P15 billion if the issuance of SPSIC (sanitary and phytosanitary import clearance) is not halted. (Simeon, 2019) The collection averages about P1.5 billion monthly. (Simeon, 2019)

It’s likely that we will indeed reach the target of P10 billion. However, there is still a potential opportunity cost to being able to benefit from unpaid tariffs, assuming this allegation is true. 

“Not used for RCEF”

Last December 2018, the Department of Budget and Management (DBM) in anticipation of the signing of the Rice Tariffication Law, released P5 billion to the Department of Agriculture (DA). The DA claimed that P4 billion went to the agency’s rice program, which is separate from the RCEF, while P1 billion was used for the loans to farmers. (Rivas, 2019, “Where’s P4 billion”) This was, according to the DA as cited by BusinessWorld, came from unprogrammed funds, which may be used fully or partially for rice programs. (Tadalan, 2019) According to Senator Cynthia Villar, as quoted by BusinessWorld, this P4 Billion should have been used for the RCEF since the Rice Program has a P7 Billion budget already. (Tadalan, 2019) Therefore, the benefits from the RCEF cannot be immediately seen.

RCEF Rollout

Towards the end of September, the DA announced that P2.5 Billion of the RCEF will already be released. (Cahiles-Magkilat, 2019) In order to fund the RCEF’s credit program for individual farmers and DA-accredited cooperatives and associations, the DBM released P244 million to the Development Bank of the Philippines and P180 million to the Land Bank of the Philippines. (Cahiles-Magkilat, 2019) Moreover, the DBM also released P2.038 billion to PhilRice to “promote, acquire, and distribute certified seeds of NSIC Rc222, Rc160, Rc216, and 16 other location-specific varieties in the regions.” (Cahiles-Magkilat, 2019) The seed distribution, according to the DA as cited in Manila Bulletin, will start this October for the Dry Season 2019 to 2020, and will cover 57 provinces. (Cahiles-Magkilat, 2019) Farmers will be given a maximum of 80kg of seeds for two consecutive seasons based on the size of their farm. (Cahiles-Magkilat, 2019) Funding for the mechanization and extension service programs will also be available soon according to the DA as cited by the Manila Bulletin. (Cahiles-Magkilat, 2019)

The delay in the RCEF rollout is incredibly unfortunate for farmers as it fails to mitigate their decrease in revenue with the decline in prices. 

The End Evaluation

An End?

Numerous politicians and groups have called for a reevaluation of the law. Congresswoman Josephine Ramirez-Sato from Occidental Mindoro, and Congressman Jose Christopher Belmonte of Quezon City proposed amending the law. (Yap, 2019) The Makabayan bloc, on the other hand, is calling for a repeal of the law. (Yap, 2019) Other farmer’s groups and food security advocates, such as the National Movement for Food Sovereignty (NMFS) also demand the immediate repeal of the law. (Miraflor, 2019) According to the Manila Bulletin, they claim that it is necessary “to protect the livelihoods of 2.4 million farmers in the country.” (Miraflor, 2019)

Too early to tell

A significant chunk of the discrepancy between the results and the theory can be explained by the policy still being in the initial stages. It will take time for the effects of the imports and the RCEF to be clearly seen. It has only been around 8 months since the law has been implemented.

Amending or repealing the law is incredibly premature. There are some aspects that will take a bit more time before we can accurately measure it. Agriculture Secretary William Dar, as cited by Rappler, explains the price discrepancy by saying that some imports have not reached the market yet, as some traders are holding onto the stocks. (Rivas, 2019, “Rice prices still”)  While issues with respect to the releasing of funds may be indicative of the implementation capacity of government agencies, the effect of the RCEF on rice productivity is still uncertain as the initial tranches were only very recently implemented. The initial delay with the release of funds may have been caused by confusion or uncertainty, but it is unlikely that this will continue after surpassing the initial inertia. Moreover, the possibility of corruption and misallocation may also take time before information or whistleblowers start speaking out. Changing the law at this juncture might just create even more uncertainty that could jeopardize the farmers as well.

This is not to say that the tariffication will go exactly as planned. Just like any policy, there will always be inherent imperfections with how it is applied. The nature of economic models and predictions is that they are always limited by specific assumptions and the inability to foresee unpredictable circumstances.

This is also not to say that the short term is not important. Given the effects particularly to farmers, the desire for an immediate solution is understandable. I fundamentally agree that it is immoral to allow them to disproportionately suffer in pursuit of benefits in the future. In grade school, we were constantly taught that the farmers are the backbone of our country. It is no joke being a farmer, and so we shouldn’t take their issues lightly.

There are, however, mechanisms to help address this issue without changing the law. Especially in areas with very low prices, the NFA can aggressively purchase rice as buffer stock from Filipino farmers to mitigate the impact of low farm-gate prices. (Go, Cantos, Montesa & Sta. Ana, 2019) They should be willing to dispose of current stock at low prices. (Go, Cantos, Montesa & Sta. Ana, 2019) Local Government Units (LGUs) can also help out in buying rice from local farmers. (Go, Cantos, Montesa & Sta. Ana, 2019) The DA giving out no-interest loans of P15,000 for every farmer that are payable in 8 years also helps mitigate the effects. (Go, Cantos, Montesa & Sta. Ana, 2019) These loans should be expanded even more. The government can also chase after exploitative traders and middlemen who make farmers sell at even cheaper prices. With the proper attention and intentions, the country’s backbone does not have to be left out.

A Final Note

When discussing the issue of Rice Tariffication, it is easy to fall to either one of two extremes. It is either one makes the impassioned claim that we ought to protect the welfare of farmers at all costs. Or, one claims that they are an easy trade-off for the overall well being of the economy as shown in the various economic models. Economic issues shouldn’t be about one or the other. Economic issues should be about both. It is good to make decisions based on numbers and data points. But, it is important to take note of the individual stories remind us that there are humans behind those figures. Stories need to be quantified, while numbers ought to be qualified. If not, what are we studying Economics for?

References

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