Technical Assistance Consultants Report

Project Number: TA 7495-REG January 2012

Support for the Association of Southeast Asian Nations Plus Three Integrated Food Security Framework
(Financed by the Japan Fund for Poverty Reduction)

The Philippine Rice Situation

Prepared by Beulah de la Pea for the Asian Development Bank The author is a freelance agriculture policy professional.

This consultants report does not necessarily reflect the views of ADB or the Government concerned, or the institutions at which the consultant works, and ADB and the Government and these institutions cannot be held liable for its contents. ADB does not guarantee the accuracy of data and presentations included in this report and accepts no responsibility for any consequences of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.

ABBREVIATIONS
CCT CSQ DA DOF DSWD ha GRECON KMP LGU MAV MMT mt NFA NRFC PAKISAMA Philcongrains PhilMech PhilRice PITC QR R1 Seednet WB WTO Conditional Cash Transfer country-specific quotas Department of Agriculture Department of Finance Department of Social Welfare and Development hectares Confederation of Grains Retailers Association of the Philippines Kilusang Magbubukid ng Pilipinas local government unit Minimum Access Volume million metric tons metric tons National Food Authority National Rice Farmers Council Pambansang Kilusan ng mga Samahang Magsasaka Philippine Confederation of Grains Associations Philippine Center for Post Harvest Development and Mechanization Philippine Rice Research Institute Philippine International Trading Corporation quantitative restrictions Rice Watch and Action Center National Rice Seed Production Network World Bank World Trade Organization

Note: In this report, "$" refers to US dollars.

ABSTRACT

Rice production in the Philippines has been growing faster than in previous decades. Rice imports, on the other hand, have been growing at an average of 14% annually from its level in 2000 and are seen to increase continuously. Due to the perceived importance of rice for political and economic stability, the rice sector has been receiving a substantial and increasing share of the governments agriculture budget. However, despite years of preoccupation with rice selfsufficiency, the Philippines continues to grapple with significant food insecurity. Hunger incidence persists for a sizable part of the population. Programs for rice supply and price stabilization have proved costly, bloating the losses and borrowings of the state-run National Food Authority. The Aquino administration has moved to reform rice policy but its mix of strategies is limited. This paper is written to support the analytical requirements for developing an integrated food security framework in the region.

This draft report was prepared for the Asian Development Bank by Beulah de la Pea, National Rice Economist for the Philippines, under TA 7495-REG: Support for the Association of Southeast Asian Nations Plus Three Integrated Food Security Framework. The draft report is part of the TAs diagnostic study on the food security of five ASEAN member countriesCambodia, Indonesia, the Philippines, Thailand, and Viet Nam with a special focus on rice. The draft report is an abridged version of a full country research paper on the Philippines, which is available upon request. The draft report is being published to disseminate the findings of work in progress to encourage the exchange of ideas. The emphasis is on getting findings out quickly even if the presentation of the work is less than fully polished.

CONTENTS
I. II. INTRODUCTION ................................................................................................................ 1 Rice Situation ...................................................................................................................... 1 A. B. C. D. E. Supply and Utilization .................................................................................................. 1 Value Chain ................................................................................................................. 2 Food Security Situation ................................................................................................ 4 Prospects..................................................................................................................... 5 Data Availability ........................................................................................................... 6

III. Public Policies and Key Institutional Players ....................................................................... 6 A. Public Policies on Rice .................................................................................................. 6 B. Institutional and Private Sector Players ........................................................................10 IV. Problem Analysis ...............................................................................................................12 REFERENCES .........................................................................................................................14

THE PHILIPPINE RICE SITUATION

I.

INTRODUCTION

The Philippines continues to grapple with significant food insecurity. Efforts toward selfsufficiency and stability in rice supplies pursued over the years have proved costly and unrewarding. The stability of rice supply at the aggregate level remains vulnerable. Hunger incidence also persists as an issue for a sizable part of the population. The countrys susceptibility to natural calamities is an added complication. The new Aquino administration has moved to reform rice policy but its mix of strategies is limited, among domestic political and resource considerations, by the observation that the international rice market can not be trusted to provide the supply when needed. This paper is written to support the analytical requirements for developing an integrated food security framework in the region. II. RICE SITUATION A. Supply and Utilization

Philippine paddy production in 2009 was about 16.2 million metric tons (MMT) or 10.6 MMT in rice terms. This covered about 3 million hectares of irrigated farms with an average yield of 3.95 MT per hectare and close to 1.5 million hectares of rainfed farms with a much lower average yield of 2.83 MT per hectare. Production has been growing faster than in previous decades. Production in 2009 was about 3 MMT higher than production in 2000, posting an average 3% annual increase. This growth rate is higher than the average annual increases of 2.8% and 2.0% attained in the previous two decades. Production, hectarage, and yield in 2010 declined due to the effects of El Nio that hit the country during the year. Production increases in the decade were attained with yield and hectarage growths. Yield increases of 2.4% annually account for most of the production growth but area expansions of 1.28% annually also contributed. In contrast, growth in the 1990s came largely from area expansions while that in the 1980s relied solely on yield increases. Growth came from irrigated and rainfed farms. Irrigated farms provided much of the production and production increases. But rainfed farms, which contributed about a quarter of production in the decade, also showed significant gains. Hectarage expanded by 1% annually and average yield increased by 2.7% for an average production increase of 3.9% per year for rainfed farms. Irrigated farms, with much higher 2000 levels, showed lower hectarage, yield, and production increases in percentage terms.

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Table 1: Paddy Production, Rice Imports, and Utilization 2010 Production (MMT paddy terms) Irrigated Rainfed Yield (mt/ha) Irrigated Rainfed Hectarage (million has) Irrigated Rainfed Utilization (MMT rice terms) Food Food (% to total) Imports (MMT) 15.8 12.0 3.8 3.6 3.9 2.8 4.4 3.0 1.4 11.9 10.6 89.2 2.4 Growth Rate 20002009 3.1 2.8 3.9 2.4 1.4 1.1 1.3 1.4 2.7 3.3 3.4 11.8

Source of data: Bureau of Agricultural Statistics 2010a.

Total rice use in 2010 is estimated at about 11.8 MMT, a 4% decline from the previous year. During 20002009, rice use increased at about 3.3%. Food use growth in the period accelerated from the previous decade while those for other uses slowed down. Food use accounted for close to 89% of total use from 2000 to 2010. Rice imports in 2010 amounted to about 2.37 MMT, some 600 thousand mt (metric tons) more than imports in 2009. Imports grew at an average of 14% annually from its level in 2000. Annual imports from 2000 to 2010 averaged at about 15% of domestic production, compared to 9% in the previous decade. There is no record of exports in the period. Intermittent exports were recorded in previous years, notably in the 1970s and early 1980s, with the highest export volume observed in 1980 when exports reached 5% of production. Rice stocks as of beginning 2010 is estimated at about 2.6 MMT or some 3 thousand MT more than the average year-end stocks in 20002010. Average stock levels have been increasing through the decades. However, the stock to use ratio, which averages 21% in the 2000-2010, has been declining due to the faster growth of rice use. B. Value Chain

Paddy rice undergoes several processes to get to the consumer after it is harvested threshing/shelling, drying, transportation, milling, packaging, and storage. Threshing is generally done at the farm right after harvest. The bulk of the threshing is done by mechanical thresher but manual threshing by farmers remains popular. Drying is done mostly by sun-drying on highways, roads, and multi-purpose drying pavements. Milling, which converts the paddy to the rice form that is eaten, is done mostly in improved conventional mills that use rubber balls to hull the paddy and have a separator and a friction- type whitener. However, also still widely used are conventional multi-pass cono mills that use an under-runner disk huller, separator, and abrasive cone-type polishers; and kiskisan mills that hull and polish in one pass. Storage is done mostly in 50-kilo bags. As paddy rice goes to the mill, it can pass through several players in the market, which

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include the traders, viajeros, and commission agents. Traders and viajeros are paddy assemblers. The viajeros are itinerant traders who bring their trucks, buy from farmers and small traders, and sell to mills. Commission agents are generally attached to traders or millers and get a fee for matching them with supplies. Traders are more established in their areas of operation; they buy from producers directly or through agents, and pass on the paddy directly to mills or through mill agents. Traders and viajeros generally bear the hauling and transport costs of palay (unhusked rice) from farm to mill. Millers buy paddy from farmers, traders, and viajeros and sell the milled rice to wholesalers. They are mostly located in the market centers or towns. Most millers just do milling but some big millers also have drying and storage facilities and transport the rice to markets. The Philippine Center for Post Harvest Development and Mechanization estimates postharvest losses in rice at about 15%20% of production. Drying, piling, harvesting, and threshing, which all happen while paddy is still with the farmers, make up about 60% of the estimated losses. Most of the postharvest losses are attributed to the lack or maldistribution of postharvest facilities. An assessment of the adequacy of postharvest facilities by region indicates that there is a surplus capacity of 54 MMT of threshers in surplus regions while there is a deficit capacity of 784 thousand mt in deficit regions, which means a net surplus nationwide. The same can be said of milling where the surplus in surplus regions is greater than the deficit in deficit regions. But in drying and storage, the deficits are greater than the surpluses so that there are net deficits nationwide. This could be driven by policy issues as there are investment incentives and viable options for acquiring threshing and milling equipment. The price of paddy is defined by variety and moisture content. Paddy with moisture content not exceeding 14% get the highest prices. As to variety, fancy varieties are priced higher, which include glutinous, aromatic rice and those with excellent eating and nutritive qualities such as Dinorado, Sinandomeng, Sampaguita, and Milagrosa. With respect to rice, price is defined by variety and grain characteristics. Rice is differentiated as fancy, premium, well-milled, or regular milled in price monitoring. Premium rice is any variety other than fancy that meets the highest grade in rice standards, including having 5% or less broken kernels. Well-milled rice has remaining bran layers less than 20% of the kernels and not more than 10% broken kernels. Regular-milled rice has 10%40% remaining bran layers and 15%45% broken kernels. Prices move together but are generally higher for fancy varieties, followed by premium varieties and then well milled rice, while regular milled rice gets the lowest price. Margins from farmer to wholesaler generally follow the hierarchy of classification, i.e, they are generally highest for fancy varieties, followed by premium varieties and well milled rice, and are lowest for regular milled rice. From wholesaler to retailer, the biggest margins are maintained for fancy rice followed by well-milled rice. The retailers margins for premium rice, however, approximate that of regular milled rice. The wholesalers margin, which includes those of the assemblers, traders, and millers, is not big when it is further broken down by intermediaries and costs. A study that documented the marketing flow of paddy from Isabela in 2004 indicates that marketing costs are highest for tradermillers who, contrary to popular belief, do not get the biggest profits in the rice flow. Profits are shown to be bigger for farmers and retailers and smallest for assemblers and

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wholesalers. If the tradermiller is also the wholesaler, then their profit is bigger. Postharvest losses are biggest for famers. Data indicate that farmers margins have been increasing over time. The net profitcost ratio for rice farming is estimated to rise steadily, from 0.26 in 2002 to 0.44 in 2009. A study comparing margins in the Philippines and Thailand concludes that margins are higher in the Philippines and marketing costs explain one-fourth of the difference (Dawe et al. 2006). Marketing cost is higher because of (1) road quality which increases transport costs; (2) seasonality and lack of openness to trade, making storage time longer; and (3) inefficient financial services, which increase the cost of money. The study theorizes that the other threefourths of the difference may be explained by too many marketing agents. The same study looked for evidence of collusion in the market and concludes that none can be found from farm to wholesale and at the retail level. Collusion at the wholesale level could not be proved or ruled out due to inadequate data. This conclusion of too many agents is consistent with the large numbers of business entities licensed by the National Food Authority (NFA) to do business in rice. Indeed policy, specifically the NFAs participation in the market, as will be discussed later, creates significant market uncertainty for the private sector and discourages bigger investments. C. Food Security Situation

The consumption of rice from 2006 to 2009 is estimated between 105 and 120 kilos per capita per year. The highest estimates, 118 and 120 kilogram per capita, in 2006 and 2009, respectively, are those in the Supply and Utilization Accounts of the Bureau of Agricultural Statistics, which estimates food use by disappearance method using domestic production, imports, and change in stock. Being computed in such way, the figure is really an estimate of rice available for consumption instead of rice consumed. The other estimates of 105 kilogram per capita in 2006 and 119 per capita in 20082009 rely on surveys, as part of the Family Income and Expenditure Survey for the National Statistics Office and of food demand for the Bureau of Agricultural Statistics, respectively. The survey of the Bureau of Agricultural Statistics has the advantage of being focused on food demand, which includes estimates of consumption outside the house. As such, it may be more reliable than the National Statistics Office survey which looks at the pattern of expenditures of households, possibly excluding the value of rice consumed while eating out. The Family Income and Expenditure Survey indicates that 20% of households were within the estimated 2009 poverty threshold while some 7.9% were within the estimated 2009 food or subsistence threshold. Consistent with high poverty incidence, indicators of nutrition show high levels of the incidence of underweight and under height, 26.2% and 27.7%, respectively, for children 5 years old and younger, and 25.6% and 33%, respectively, for children 6 to 10 years old in 2008. Moreover, the incidence increased from 2005. Underweight and chronic energy deficiency among teenagers and adults are also quite prevalent. The Family Income and Expenditure Survey further shows that, on average, households spent about 7.7% of total expenditures and 18% of food expenditures. The poorest household spent 34% of food expenditures or 22% of total expenditures on rice as against 8% and 2%, respectively, for the richest households. The poorer households also spent more on corn, noodles, and roots and tubers when measured in terms of the share of total food expenditures.

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In value terms, the highest expenditures for rice was made by households in the 2nd decile or those beyond subsistence but still below the poverty line. Expenditures on rice decline thereafter as household income increases. The subsistence households (in the 1st decile) spent less on rice compared to households in the 2nd to 6th deciles. The Survey of Food Demand undertaken by the Bureau of Agricultural Statistics in 2008 2009 show the reasons for substitution of rice by other commodities for all households. Some 23.4% of households say they cannot afford rice and another 28% indicate that the substitute is affordable. Some 4% say that rice is not available, 2.8% reason that their residence is far from the source of rice, while another 8.5% say that the substitute is available. This means that a little more than 50% substitute because of price while only around 15% substitute for reasons of availability or accessibility. Only 19% substitute due to preference. D. Prospects

With no changes in basic rice policy, projections indicate that the area harvested to rice will grow at about 1% a year until 2013 and will decline thereafter. However, sustained increases will see yield reaching to about 5.09 mt/hectare by 2019 while paddy output will reach 20.9 MMT for the same year. The projected production trend is a little slower compared to the own estimates of the Department of Agriculture (DA) on rice production without its food self-sufficiency program. The projections, without interventions, place production at 17.0 MMT in 2011, rising steadily to 21.3 MMT in 2016. Under its rice self-sufficiency program, the DA has set targets to increase yield to 5.0 mt/hectare and to expand the planted area to 5.2 million hectares, to attain a much higher 25.44 MMT production in 2016. The DA believes that there is much potential for increasing yield and hectarage by addressing the causes of postharvest losses and by increasing irrigation service areas.
Table 2: Rice Supply and Use Targets and Projections Production (MMT paddy) Department of Agriculture Targets 2016 Projections 2016 2019 20.7 20.9 4.5 4.1 4.6 5.0 14.5 15.3 2.9 3.1 25.4 5.2 5.0 14.7 0.0 Hectarage (million has) Yield (mt/ha) Food Use (MMT rice) Imports (MMT rice)

Source: Department of Agriculture for its own targets, authors computations for projections.

Total demand inclusive of food, other uses, and ending stock will reach 20.6 MMT in 2019. Food demand is forecast to increase, initially at rates of around 3% and slowing down to 1.3%, to hit about 15.3 MMT in that year. Feed and waste and processing use are estimated as a percentage of production while seed use is a percentage of area.

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The DA projects total rice requirements to rise slower, reaching only 14.6 MMT in 2016. This seems to be because (1) the DA projects smaller stock levels, and (2) the self-sufficiency program includes demand management strategies that will shift rice consumption to other cereals. The projected rice derived from the paddy production will be augmented by imports that are seen to increase continuously, though at a much slower clip compared to the previous 2 decades. Imports are estimated to hit 3 MMT in 2011. Stock levels will also rise and are seen to be higher than imports in all years. However, stocks will remain at 13% to 19% of total supply, which are consistent with the record in previous decades when stocks were at 16% to 20% of supply. E. Data Availability Time series and updated rice data are generally available from the Bureau of Agricultural Statistics. Quarterly rice production and area harvested estimates for the past quarter and forecasts for the next two quarters are released 10 days after each end of the quarter. A situation and outlook report in January will show estimates of production and area harvested for September to December of the previous year as well as forecasts for the quarterly periods of JanuaryMarch and AprilJune. Price data for the previous week are made available every Monday and the average monthly prices can be accessed one week after the reference month. Data are collected through quarterly nationwide surveys of farmers intention to plant, planting (standing crop) and area harvested, and twice a week monitoring of prices in markets nationwide. Monthly rice stock data are also released by the Bureau of Agricultural Statistics 10 days after the reference month. The bureau generates the estimate for household stocks using surveys but gets the estimates for commercial and NFA stocks from the NFA. However, the figures from the NFA are perceived as a major weakness in Philippine rice statistics. The estimates are generated from submissions of the NFA regional offices, which are sourced from field offices where any unchecked irregularities in operations will come with data fudging. The use of paddy/rice for seeds is estimated using a parameter applied on planting estimates while those for feed and waste and processing use parameters are estimated from surveys and applied for paddy production. Rice available for consumption is computed as a residual, and thus carries whatever errors are made on estimates on stocks and other rice uses. Data on government participation in rice trade are available with the NFA while data on poverty are provided by the National Statistical Coordination Board. III. PUBLIC POLICIES AND KEY INSTITUTIONAL PLAYERS A. Public Policies on Rice The Agriculture and Fisheries Modernization Act of 1997 defines food security as meeting the food requirements of present and future generations and ensuring the availability and affordability of food to all. It also mandates that the production of rice and white corn should be optimized and given adequate support. With this mandate, and the perceived importance of rice for political and economic stability, the rice sector has been receiving a substantial and increasing share of the governments

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agriculture budget. In 2010, government appropriations for the rice program reached more than half of the total allocation to the Department of Agriculture although the rice sector is estimated to account for less than 20% of agricultural production. An issue with this budget configuration is that the programs for agriculture diversification and competitiveness have been compromised. Sectors that are considered starved for support but where the country has comparative advantage have not expanded enough to provide significant income opportunities in the rural areas. In particular, the agriculture sectors associated with higher poverty incidence like coconut have likewise not received the support necessary to improve productivity and increase producers incomes. The drive for rice self -sufficiency has eclipsed all other objectives in the rice sector with big negative impacts on agricultural and rural incomes. The government appropriations for the rice program have three distinct components irrigation, productivity enhancement, and the subsidy for the NFA. Of these, irrigation gets the lions share. The substantial appropriations reflect the long-standing aim to pursue self-sufficiency in rice. The Food Security Roadmap, the latest in a succession of programs with such objective, will be implemented from 2011 to 2016 at a cost close to P20 billion a year. A previous plan, programmed for 2009 to 2013 at about P15 billion a year, was cut short by the change in administration. Both programs aim for rice self-sufficiency and to reduce, if not stop, imports. This is to be accomplished through irrigation development and rehabilitation; postharvest facilities and mechanization assistance; support for seeds, fertilizer and other inputs; and research and extension. The programs differ only in priorities, technologies promoted, and service delivery models. Also, the later program includes demand management strategies. The appropriations and budgets do not quite show the picture with respect to the resources devoted to market interventions in rice marketing. These interventionsprocuring paddy from farmers and their organizations, maintaining buffer stocks, dispersing these in strategic locations nationwide, and releasing rice to various marketing outletsare done by the NFA, a government corporation with the mandate to ensure food security through the stability of the supply and price of the rice staple. The NFA has been operating with increasing losses, which are covered by subsidy allocations from the national government and commercial borrowings guaranteed by the state. Government subsidies to the NFA may be insignificant relative to the rice program budget, at least prior to 2010, but the NFAs outstanding loans have ballooned from some 47 billion ($868 million) in 2005 to 176 billion ($3.98 billion) in 2010 ($1=44 exchange rate). The NFA buys paddy from farmers and farmer organizations at a support price, which is set to allow farmers adequate returns and enough incentive to continue farming rice. The NFA procurement aims to give the farmers an option of last resort and to influence private traders buying prices. The record indicates that the NFA has been able to buy only up to 5% of paddy production on an annual basis in the last 10 years while its support price has been within 0.98% to 1.25% of average farm gate prices. The NFA maintains buffer stocks dispersed in strategic locations across the country. The buffer stock levels the NFA needs to maintain are the equivalents of the 30-day requirement at the start of the 3-month rice lean season of JulySeptember and the 15-day requirement at any other time. The stocks are meant to stabilize supplies in the market, especially during the ricelean months and in abnormal situations such as natural calamities and other emergencies. For

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the latter cases, the NFA targets to respond within 48 hours with the rice requirements and to restore within 2 weeks the supply and price of the staple to levels immediately prior to the calamity or emergency. Data from 2000 to 2009 show that the NFA held less than its required 30-day stock at the beginning of July in all but 2 years. It also held less than its required 15-day stock at the beginning of January in 4 years (20052008) within the reference period. The deficiency in stock relative to mandated holdings may be explained by the fact that with improvements in transport systems, the NFA has been counting stocks already contracted for import in compliance with the required holdings. From 2004 to 2007, the NFA was essentially relying on imports for stocks as it had not been buying from the domestic market, as its paddy buying price made this uncompetitive. In terms of share of total stock, records indicate that the NFA generally held an average 25% at the beginning of the year in 20002010; the rest of the rice stocks were in commercial and household holdings. The NFA held an average 36% and at least 19% of total stocks at the start of the lean season in the same period. Starting July 2008, the NFA held much higher shares of total stock, reaching as much as 60% in July 2010. Under its mandate, the NFA releases rice to various market outlets to maintain consumer prices at reasonable levels. Records show that the NFA distributed some 10% to 17% of rice food requirements from 2000 to 2009. The NFAs release price is set lower than prevailing levels in the wholesale rice market. Outlets sell NFA rice to consumers at a price set by the NFA, which is about 15% to 20% lower than average prices for well-milled rice in the retail market. With its implied subsidies, the NFAs rice distribution came to be viewed not only as an intervention to stabilize the market which is its mandate but as a social program to provide the poor access to lower cost rice. The NFA was asked to focus rice releases to outlets that cater to the poor and to areas where the poor reside. The NFA, for some time, deployed mobile stores (in vans and small boats) to sell NFA rice and other essential goods in poor communities. It also accredited nontraditional outlets, including religious and social organizations, to participate in NFA rice distribution. Among these are the tindahan natin (our stores), which are stores located in depressed communities that sell NFA rice only to poor households; family access cards are issued specifically for the purpose. The NFA also delivers rice directly to schools for distribution to pupils in exchange for school attendance under the Food for School Program of the Department of Education, where children of poor households are provided 1 kilogram of iron-fortified or regular milled rice per week. But the bulk of the NFA rice sales remain in regular retail outlets where anyone, rich or poor, could buy. At the height of the 2008 rice crisis, when international rice prices rose as high as $1,000 per mt, the NFA had to increase its consumer price to 25.00 to delay the drawdown of its stocks and to temper its losses. However, the old price of 18.25 was later restored and maintained for holders of family access cards until the change in administration in mid-2010. The NFAs rice distribution has been criticized for being costly and ineffective in protecting the poor as well as being prone to diversion and corruption. Studies show that NFA outlets appear limited in the poorer regions, restricting access of the poor. Rice prices in poorer provinces have risen faster, indicating the NFAs inability to temper the market in these areas.

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Proportionately, more poor households consume NFA rice but non-poor households buy more NFA rice. The government spends 4.00 to 6.00 per peso of rice subsidy delivered by the NFA to the poor. Some 48% of rice that the NFA distributed is unaccounted for in household consumption estimates (Jha and Mehta 2008). Rice imports remain under quantitative restrictions, with the NFA as sole importer or having the first right to import, as indicated in Philippine commitments to the World Trade Organization (WTO) under the Agreement on Agriculture. The NFAs import authority is consistent with Presidential Decree 1773,1 which maintained the NFAs monopoly power on rice imports. This special treatment of rice was negotiated in 1995 to last for 10 years. It was extended for 7 years, from July 2005 until 30 June 2012. The volume of imports in any given year is determined using projections of production and the supplydemand gap. Imports are targeted to arrive for use mostly during the rice-lean months. The NFA generally starts the bidding process for imports in November and December of the previous year. Additional imports are bid out from January to July after consideration of the results of the Bureau of Agricultural Statistics Survey on Standing Rice Crops and the recommendation of the Inter-Agency Committee on Rice and Corn. The import bidding process generally follows the requirements of the Government Procurement Reform Act that was passed in 2003. This process takes about 3060 days from the required publication of the invitation to bid for the awarding of the contract to the winning bidder. This process is eliminated in the presence of government-to-government memoranda of agreement on the supply of rice import requirements. Minimum Access Volumes (MAVs) were also committed to the WTO, starting at 29.2 thousand mt in 1995 to increase to 238 thousand mt in 2005 with in-quota tariff at 50%. The MAVs are maintained at 350,000 mt for the duration of the extension period with in-quota tariffs set at 40%. Out-quota tariffs are set at 50% although the computed implicit tariff was higher until 2003 when it began to decline, reaching only 2% in 2008 when international prices peaked and 18% in 2009. The entire MAVs and more are recorded as imported. The NFA generally imports rice tarifffree, making the in-quota and out-quota rates immaterial, except in 2003 and 2004 when the NFA was made to pay tariff to level the playing field with the private sector. After 2004, the dutyfree privilege was reinstated amid concerns about the NFAs mounting losses and borrowings. While the NFA is identified as the sole importer of MAV commitments made in 1995, it allocated some volumes for famers to import. This allocation implements the Agriculture Tariffication Act of 1995, which gave the NFA the power to import the MAVs itself or to allocate import volumes to certified and licensed importers. With the extension of the special treatment of rice after 2005, country-specific quotas (CSQ) or minimum market access amounting to a total 163,000 mt were committed to Australia, Peoples Republic of China, India, and Thailand. The NFA allocates the CSQs to the private sector on a first come-first served basis. Farmers groups are allocated a total of 100,000 mt while other groups get 63,000 mt, with a maximum of 5,000 mt per importer. Imports have to arrive before mid-August, purportedly so as not to depress farm gate prices at harvest, which starts in October. Private sector imports have remained minimal, sharing a mere 4% of total imports over
1

Presidential Decree 1771 created the NFA from the National Grains Authority in 1981.

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20002009, with the highest share recorded in 2003 at about 25%. The Philippine International Trading Corporation, a government corporation engaged in countertrade, also imports but shared less than 1% of total imports in the reference period. Private sector imports in 2008 and 2009 were extended the duty-free privilege of the NFA. The import restrictions that maintain high levels of protection for rice is politically popular as many believe that such import restrictions support the effort for rice self-sufficiency. Not a few studies have argued otherwise. The higher domestic rice prices that result from protection means welfare losses because of higher prices and lower consumption of rice. This reduction of consumer welfare is estimated at about 72 billion a year from 2000 to 2005, and 116 billion a year from 2006 to 2009 (Habito et al. 2011). There were gains to producers, but this amounted to only 23% and 47% of consumer losses in 20002005 and in 20062009, respectively. The NFA regulations on rice also include the registration and licensing of all rice business entities, which include those engaged in rice retail, wholesale, milling, warehousing, threshing, shelling, transport, and fortification. The NFA also sets standards and sanitary measures for packaging and storing rice, including those in retail establishments. The sanitary measures apply to imported rice, which is inspected by the Bureau of Plant Industry for compliance at the port of entry. B. Institutional and Private Sector Players The DA oversees development in the agriculture sector and, in such role, formulates the government program on rice. The latest program is the Food Security Roadmap for 20112016, the components of which have been discussed earlier. The DA implements the production support components of the program in partnership with local government units (LGUs). The National Irrigation Administration, a government corporation attached to the DA, takes charge of planning, constructing, maintaining, and rehabilitating water resources projects for irrigation, a primary lever for rice productivity. Other DA units that have significant roles in the rice program are the Bureau of Plant Industry for seed development and regulation; the Fertilizer and Pesticide Authority for fertilizer industry regulation; the Philippine Center for Post Harvest Development and Mechanization (PhilMech) for postharvest concerns; and the Philippine Rice Research Institute (PhilRice) for technology concerns and to buffer stock foundation and registered seeds used by seed producers. As discussed previously, the NFA implements the market intervention programs on rice, including buying paddy, buffer stocking, and selling rice. It holds monopoly authority on rice imports and it allocates to importers the private sector share of imports. It also registers and licenses the various rice business entities in the country. The NFA Council is the governing body of the NFA. It considers and approves the NFAs operational policies. It is chaired by the DA Secretary and has 11 membersall but one are ex-officio representatives of national government agencies and banking institutions, notably the Department of Finance, Department of Trade and Industry, Bangko Sentral ng Pilipinas (Central Bank of the Philippines), government financial institutions, Office of the President, and a farm sector representative. The Department of Finance (DOF) through its Corporate Affairs Group monitors the financial performance of government corporations, including the NFA. A priority concern of this group is the fiscal condition of the NFA, in particular its sustained losses and increasing commercial borrowings. The DOF recommends the ceilings for the NFAs commercial borrowings to be covered by government guarantee. The ceiling is important because the NFA finances most of its market participation, notably importing, through commercial borrowings.

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The Department of Social Welfare (DSWD) and LGUs are the institutions charged with providing social protection to the poor and vulnerable in general and in times of crisis. When the NFA adopted two tiers of prices in its rice distribution program, the LGUs identified and the DSWD verified the families that would be entitled to the lower priced rice. The DSWD and LGUs undertake the distribution of rice, generally sourced from the NFA, along with other goods during times of emergency. The President generally exercises his executive authority over rice policy because of its apparent substantial implications on food security, farm productivity, and fiscal and political issues. Key policy controls guiding NFA market operations such as level of imports, tariff privileges, paddy buying price, and rice release and consumer prices are generally approved by the President, using inputs from the NFA Council and his economic ministers.2 The private sector stakeholders in rice policy include the traders and millers, the producers and producer organizations, the consumers, the seed producers, and input providers. The regular private sector dialogue partners of the government include the association of rice tradermillers known as the Philippine Confederation of Grains Associations (Philcongrains); the association of NFA-accredited rice retailers known as the Confederation of Grains Retailers Association of the Philippines (GRECON); and various farmer associations, among them, the National Rice Farmers Council (NRFC), the Philippine Farmers Advisory Board (PFAB), the Pambansang Kilusan ng mga Samahang Magsasaka (PAKISAMA) (National Confederation of Farmers Groups), the Kilusang Magbubukid ng Pilipinas (KMP) (Peasant Movement of the Philippines), Bantay Bigas (rice watch), and others. The farmers groups and retailers, especially those able to distribute for the NFA, are generally supportive of the NFAs continued participation in trade and the retention of quantitative restrictions (QR) on rice import. The wholesalers would want to reduce the uncertainties created by the NFAs participation so they prefer that the NFA adopt a more predictable QR regime and more market-oriented pricing policies. The various private sector partners in implementing the rice self-sufficiency programs are the National Rice Seed Production Network (Seednet), for providing farmers access to quality seeds; the Fertilizer Industry Association of the Philippines, for ensuring availability of chemical and organic fertilizer inputs; and the various irrigators associations, for safeguarding water supply. These groups generally favor a strong production support program in rice policy as do the farmers groups. At the civil society front, the Rice Watch and Action Center (R1) is the most active in monitoring and advocating reforms in rice farming systems and trade policies. The R1 advocates sustainable agriculture aimed at fostering an economically and environmentally viable rice industry. It lists its agenda as promoting sustainable rice farming; strengthening community and farmers rights over seeds; retaining the QR on rice; and increasing domestic support for the rice industry.

Comprised of the Secretaries of the DA, Department of Trade and Industry, Department of Finance, Department of Budget and Management, and the Director General of the National Economic and Development Authority.

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IV.

PROBLEM ANALYSIS

The Philippines continues to grapple with significant food insecurity. Years of preoccupation with rice self-sufficiency and rice supply and price stabilization have not made a dent on the problem. Regular surveys undertaken by the Social Weather Station to measure self-declared hunger incidence indicate little progress in stemming such hunger incidence. Some of the food insecurity stem from aggregate rice supply issues and high domestic prices. These may not be apparent in recent years but current trade policies do not augur well for long-term supply and price stability. In the early 1990s, the government was importing too little and consumers generally paid high prices for rice. In 1995, the government imported too late, initially restricting imports but only to see domestic prices spike up, consumers getting alarmed, and the government eventually scrambling to restore stability in the market. Thereafter, the government has imported aggressively and domestic prices have moved considerably closer to international prices in the last 3 years. But the supply stability achieved had cost too much, bloating the NFAs losses and borrowings and drawing attention to the fact that the strategy is unsustainable. The countrys susceptibility to natural calamitiestyphoons, earthquakes, volcanic eruptionsthat disrupt domestic rice production and distribution complicates the supply stability equation. For small area supply disruptions, the NFAs buffer stocking and dispersal strategies have been effective in restoring normalcy in rice supply. Likewise, the emergency response strategies of the DSWD and LGUs with civil society have, as a rule, been able to address the immediate food needs of affected communities. However, when calamities affect large areas and populations, as they do when there are successive destructive typhoons during La Nia and widespread drought during El Nio, the NFAs ability to smooth out supply disruptions is vulnerable. Administrative constraints, specifically the required procurement processes for government agencies, hinder the NFAs facility to immediately bring in imports. The Aquino administration has said that it will limit NFA imports and let the private sector bring in a bigger share of the rice QR. It also appears inclined to give up the quantitative restrictions on rice in 2012 when the special treatment negotiated under the WTO will expire. The reforms will bring longer term supply and price stability but it will have short-term costs. Imports will, in the short run, become more restrictedhow much will depend on how the new policy is operationalized. Recall that the NFA imports duty free and it shared this privilege with the private sector in the past, making the tariff immaterial. It is expected that the private sector will now be asked to pay full tariffs, which are 40% or its equivalent. It can also happen that the quota, in place until 2012, will move back to being limiting. The DA, under its program to attain rice self-sufficiency in three years, may be compelled to be conservative in recommending import levels and the NFA will have no reason to recommend higher rates. The big part of food insecurity comes from unchecked poverty. The incidence of families living within subsistence incomes has hardly changed from 2003 to 2009. By the end of the period, the government estimates that some 9.4 million individuals were food-poor, with about 8% of families living on food threshold incomes. This is, in fact, an underestimate because it cannot be assumed that those who live above the food threshold income are not food-poor. Government acknowledges that addressing widespread and chronic poverty is its immediate and most important concern. The problem requires a multidimensional approach with focused and coordinated action from the entirety of government. Because data indicate that the poor are mainly in the rural areas and work in agriculture, the DA should aim to prosper

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agriculture, not only to assure food supplies but also to create rural employment and incomes. Rice self-sufficiency strategies should support a bigger program for broad, income-enhancing, and sustainable agricultural growth. The government wants to protect the vulnerable through targeted subsidies. The NFA model of distributing low-priced rice as a food security measure has been shown to be ineffective and unsustainable. The Aquino administration has said it will transfer the NFAs food subsidy functions to the DSWD, transformed into the Conditional Cash Transfer (CCT) program. Such programs, where the poor are essentially paid to avail of important social services in education and health, have had good outcomes elsewhere in the world. Some of the food insecurity can be eased if the government can deliver an efficient administration of the program, including good targeting of the poor, and ensure the stability of the rice market in the poorest localities, which is the target of the CCT. Will reforms happen? The DA will not back down on its rice self-sufficiency program and it has wide support for the same. Not only does the public believe that growing the countrys food requirements is cost-effective because it provides incomes to farmers and saves foreign exchange; the government also believes, with basis, that the international rice market can not be trusted to supply the rice when it is needed. This was the thinking behind the successive huge-volume tenders in 2008. The privatization of imports and the removal of QRs will be met by strong opposition among sectors who continue to believe that rice-self sufficiency is a precondition for food security as well as those who are beneficiaries of the current systemthe rice producers and the businesses supporting rice production as well as the many traders doing business with the NFA. They will be vocal in their opposition as they have been in the past The Philippine government will need to muster the political will, with little support against strong public sentiment, to push reforms. Favorable conditions in the regional rice market will help. International prices would need to remain stable and supply, available and accessible. That way, domestic shocks from calamities and policy changes will not be compounded, making them less difficult to manage. The government has said it will support regional strategies to promote market stability, including enhancing market information sharing for an efficient management of and access to regional rice emergency reserves.3

Views expressed by Philippine representatives in the 2nd meeting of the Technical Working Group on Rice Trade Enhancement of the ASEAN Food Security Board.

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