Report No: AUS4473

Republic of the Philippines Philippines - Agriculture and Agribusiness AAA

Estimates of Domestic Resource Cost in Philippines Agriculture By Roehlano M. Briones

EASPS

EAST ASIA AND PACIFIC

Document of the World Bank

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Estimates of Domestic Resource Cost in Philippine Agriculture

Roehlano M. Briones

Senior Research Fellow, Philippine Institute for Development Studies

EXECUTIVE SUMMARY/POLICY NOTE

Overview

The country's vision for agricultural development is "a competitive, sustainable and technology-based agriculture and fisheries sector." Competitiveness though should not be simply assumed, but rather demonstrated. The ideal of efficiency implies specialization of an economy in competitive sub-sectors, whilst relying on international markets to satisfy demand from other sub-sectors. This is the "comparative advantage" interpretation of competitiveness. A well-known indicator of comparative advantage is domestic resource cost (DRC). This study provides updated estimates of DRC for major agricultural commodities in the Philippines, towards evaluating competitiveness and comparative advantage as a guide for policy.

Patterns of trade and specialization in Philippine agriculture

The agricultural sub-sectors matching the subject commodities account for 91 % of agricultural gross value added (Figure 1 ). The largest single subsector is paddy rice at nearly a quarter of agricultural GVA; fishing is 16% (of which milk fish is one of the top commodities); livestock (mostly hogs) account for 13%, and poultry another 10%. Next to paddy rice, the largest crop share is for banana, followed by corn and coconut. Sugarcane, mango, and pineapple account for much smaller shares, but the values are still sizable in absolute terms (64.4 billion pesos, over 1.5 billion dollars.)

Figure 1: Shares in gross value added of agriculture by sub-sector, 2012 (%)

1% 2%

Source: BAS CountrySTAT.

A simple measure of competitiveness is revealed comparative advantage (RCA), which relies entirely on existing patterns of specialization. Based on the RCA measure, the products in which the country has comparative advantage are: Sugar, Mango, Banana, Pineappk~, and Coconut oil (Figure 2). Of these the highest RCA is observed for coconut oil, followed by banana, then pineapple and mango. These are the main agricultural exports of the country. RCA below unity is observed for the rest, with the lowest observed for hogs, followed by

Maize, then rice. Conversely these are the country's important agricultural commodity imports.

Figure 2: Revealed comparative advantage of selected agricultural commodities, 2012

Coconutoil ) "i

Banana MiRfl I t!lJ!Ti1ilimtifi"J 24.02

Pineapple 1xzs~m·m~·~···1 20.24

Mango l . m mmf 15.62

Sugar ··~ 2.88 ·~

Poultry j 0.43563 ~

Rice I 0.01979 ·<

Maize I 0.00094 ·i

Hogs I 0.00001

0 10 20 30 40 50 60

Note: Disaggregation for mi/kfish not available in the data set.

Source of basic data: Trademap.

The DRC measure

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The advantage of RCA is that it is readily calculated, and 'easy to understand. However, it fails to make adjustments due to government interventions due to taxes, subsidies, or regulations (e.g. import restrictions); revealed patterns of trade may be simply the distorted outcome of these interventions. The DRCR here calculated as a ratio (DRCR). The thrust of DRCR is to take the ratio of returns to nontradable domestic factors (namely land, labor, and capital) to tradable value added (measured as output less tradable inputs). If DRCR < l then the commodity is produced with comparative advantage; if DRCR > I then domestic production does not have comparative advantage. DRCR < 1 is equivalent to social profitability, warranting expansion, conversely, DRCR > 1 is equivalent to loss, warranting contraction.

When there are distortions, then a distinction can be made between financial DRCR and economic DRCR, as well as financial and economic profitability. It may be the case that a commodity is financially profitable (thus explaining apparent competitiveness) but economically unprofitable (thus not truly competitive under corrected market prices).

Gergely (2010) obtains the DRCR calculations in Figure 2. Only hogs, White maize, and rice are produced with DRCRs above unity. Tree crops are more profitable than cereals except for traditional coconut farming. Highest profitability is shown for pineapple, followed by mango. White maize is unprofitable from an economic perspective, and so is rice. Yellow maize is close to neutral in terms of the DRCR. Domestic sugar is also socially profitable. For the non­crop commodities, comparative disadvantage is exhibited by hogs, whereas broilers have a comparative advantage. Hogs are economically unprofitable due to high domestic prices. Milkfish has lower DRCR than either hogs or poultry.

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Figure 2: Past calculations ofDRCR for selected commodities, 2010.

Rice

White maize

Hogs

Unity

Yellow maize

Coconut

Banana

Broiler

~-------------- 2.60 ..._ _______ 1.39

..._ _____ 1.10

----- 0.90 ...__ ___ 0.70

--- 0.56

--- 0.54

Mango !-- 0.43

Coconut, improved !'"'--- 0.42

Milkfish !--- 0.32

Pineapple '-- 0.19

1.00

'?""''""'w"'"-·••-·vv,,f~"'-·----_,~~-"'~"'--\" ·~~·~~----·-.·------~"'""m-••.-~~-";

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Source of basic data: Gergely (2010).

Updated estimates of DRCR

This study estimated data using 20 I 2 data. Most of the information is obtained from Bureau of Agricultural Statistics (BAS) cost and returns data; for commodities in which BAS data is unavailable, cost and returns are obtained or imputed from other sources. Estimates of DRCR are summarized in Table I, arranged in descending order of DRCR.

Table I: Summary ofDRC estimates, 2012

DRCR, financial DRCR, economic DRCR,world Trade status price shock

Hogs 0.90 2.78 0.93 Importable

Broilers 0.91 2.04 1.72 Importable

Rice 0.58 1.90 1.67 Importable

White maize 0.82 0.72 0.69 Nontraded

Yellow maize 0.54 0.56 0.50 Importable

Sugarcane 0.47 0.56 0.44 Importable

Mango 0.54 0.50 0.44 Exportable

Coconut 0.50 0.47 0.43 Exportable

Milkfish 0.30 0.27 0.24 Exportable Banana 0.26 0.24 0.24 Exportable

Pineapple 0.14 0.13 0.12 Exportable

Source: Author's calculations.

The highest-cost commodities are hogs and broilers, owing to the large discrepancy between domestic and border price. Sensitivity analysis was also conducted for DRCR in tem1s of a world price shock of I 0%. The DRCRs of the commodities are mostly unchanged after the world price shock, except for hogs. Financial DRCR for all of the subject commodities are below unity, indicating each activity is profitable from the private viewpoint. However as argued above, economic DRCR is a.better indicator of efficiency as it corrects for price distortions. The study finds, first of all, that distortions at the level of domestic resources and tradable input prices are minor. The exception is rice, an importable product which ~:njoys an expensive yet highly subsidized irrigation service.

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Rather than input price policy or subsidy, the major source of distortion is output price policy. Due to output price distortions, for key importable products economic DRCR is much larger than financial DRCR. Contrary to the financial DRCR criterion, contraction of rice, hogs, and chicken at the margin is warranted. Hogs and chicken are protected by a high tariff (40%). Note the contrast with Gergely (2010), who finds that hogs and broilers are competitive. Data indicate that in 2012, border price of frozen whole chicken is only 52% of farmgate price. Likewise border price of frozen hams and cuts (the most comparable imported version of domestic output at the 6-digit level HS) is 68% of the border price. However in the case of hogs, a substantial yet plausible increase in world price can reduce economic DRCR to below unity and make domestic hogs competitive in the world market. This is due to the dominance oftradable inputs in the cost of producing hogs.

Rice is a special case. The domestic price is propped up above the world price by a national policy imposing a quantitative restriction on imports. This policy supports a self-sufficiency target that does not sufficient target as well an affordable price of the key staple. Given the large share of rice in agriculture GDP, a shift from quantitative restriction to a moderate tariff may effect a major transformation of the entire sector.

Among the major importables, yellow maize and sugarcane have (at least in 2012) achieved competitiveness. For the former, as the sub-sector consolidated productivity gains, world prices have continued to climb, making domestic output a financially viable option for the livestock and poultry industries. Nevertheless maize continues to be protected by high tariffs, necessity of which may need to be reviewed.

Likewise despite the presence of high import barriers, the country appears to have a comparative advantage for sugarcane under current prices. Apparently, the barriers were not essential to continued growth of the industry, particularly in recent years given the world sugar price boom. Parenthetically, this suggests that opening up of the sector to foreign competition - especially in view of the reduction of intra-ASEAN tariffs to 5% - is not expected to cause significant industry dislocation.

Lastly, for exportable products, divergences between financial and economic DRCR are small. There is minimal divergence between financial and economic valuation for exportable products. DRCR estimates are far below unity. Hence, allocation of resources towards exportables at the margin is justified on efficiency grounds.

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Estimates of Domestic Resource Cost in Philippine Agriculture

Roehlano M. Briones

Senior Research Fellow, Philippine Institute for Development Studies

1. INTRODUCTION

The country's vision for agricultural development is "a competitive, sustainable and technology-based agriculture and fisheries sector, driven by productive and progressive farmers and fisherfolk, supported by efficient value chains and well-integrated in the domestic and international markets, contributing to inclusive growth and poverty reduction." Competitiveness though should not be simply assumed, but rather demonstrated. Indeed the ideal of efficiency and economic integration implies specialization of an economy in the competitive sub-sectors, whilst relying on international markets for the other sub-sectors. This is the "comparative advantage" interpretation of competitiveness.

A straightforward measure of comparative advantage uses existing patterns of specialization and trade. However such patterns are subject to government interventions, such as taxes, subsidies, and regulations (such as import restrictions), which may well introduce distortions in market prices and the resulting specialization. More rigorous measures are needed to correct for these distortions. One measure that does make corrections for domestic resource cost (DRC). This study provides estimates ofDRC for major agricultural commodities in the Philippines, thereby evaluating competitiveness and comparative advantage of these commodities.

This study is part of a World Bank review of major issues in agribusiness in the Philippines that aims at (i) strengthening the analytical underpinnings of the current and future portfolio of operations of the Bank in the ARD sector of the Philippines, conso Ii dating analytical work carried out in the past two to three years and provide critical inputs for project design; and (ii) building capacities and developing a common understanding and platform with counterparts on how the results of this analysis could inform future policies and programs in the agriculture and agribusiness sector of the Philippines. The study updates the last round of DRC estimations done by Gergely (2010), and continues work done on agricultural policy indicators for the Philippines (see Annex).

The rest of this report is organized as follows: the methodology for DRC analysis is presented in Section 2. A review of commodity profiles and past estimates is provided in Section 3. Section 4 presents the results and analysis of applying the DRC method. Section 5 summarizes and makes recommendations.

2. METHOD

2.1. ' Concept

Economic theory posits the undistorted pattern of trade and specialization in the global economy is decided by comparative advantage. A common measure of comparative advantage is Domestic Resource Cost (DRC). To fix ideas, suppose production uses only primary factors, i.e. total output equals value added. Let market prices equal opportunity cost. DRC analysis posits that some domestic resources (e.g. labor and land) are nontradable while the product is tradable. Consider the replacement of one unit of the imported product by its domestic counterpart. DRC is defined as follows:

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DRC = cost of nontradable inputs, pesos border price, dollars

Assuming the market exchange rate ER is the opportunity cost of a dollar, then DRC <ER implies comparative advantage: expanding domestic production by a dollar worth of imports incurs domestic cost lower than the value of a dollar in domestic currency. The reverse holds when DRC >ER: saving a dollar worth of value added, incurs a higher cost of domestic resources, compared to the amount of domestic currency saved. The argument works even for goods that are exported: consider shifting a unit of the commodity from the domestic to the foreign market. DRC <ER implies that shifting a dollar worth of output to exports, incurs lower domestic cost, compared to the foreign exchange earned; DRC > ER of course implies that domestic cost incurred is higher compared to foreign exchange earned.

An indicator that is closely related and perhaps easier to comprehend is the DRC ratio or DRCR, defined as follows:

DRCR= DRC ER

Hence 0 < DRCR < I implies comparative advantage; in a useful sense, the farther DRCR is from unity, the greater the degree of comparative advantage. Likewise DRCR > 1 implies comparative disadvantage; again the farther DRCR is from unity, the greater the degree of comparative disadvantage. Note that DRCR may be calculated as follows:

DRCR = cost of nontradable inputs, pesos border price, pesos

The foregoing assumes that output equals value added. In fact most production requires intermediate goods. Suppose some of the intermediate goods are tradable; hence the above reasoning needs to be rephrased in terms of value added, that is:

DRCR = ____ co_s_t_o_f_n_o_n_tr_a_d_ab_l_e_i_np_u_t_s,_p_e_s_o_s ___ _ border price less tradable intermediate inputs, pesos

Another important simplification is that market prices accurately estimate opportunity cost. However market prices may diverge from opportunity cost due to distortions; prices that are corrected for these distortions are called "shadow" or economic prices. Obvious examples are divergences due to taxes and subsidies. Valuation of costs and benefits using shadow prices makes the DRCRmore consistent with efficiency. Obviously the adjusted DRCR may not be consistent with market decisions; for instance, a high tariff may lead to import substitution even when economic DRCR is above unity.

2.2. Gergely's approach

Gergely (2010) selected the following commodities for the analysis: rice, maize (yellow and white), coconut, sugar, banana, pineapple, coconut, hogs, broilers, and milkfish. He computed DRCR at the wholesale and farmgate level where feasible. Shadow prices were computed using border prices adjusted to the wholesale or farmgate level ("import parity price"). Production cost data was derived from cost and returns surveys of the Bureau of

·Agricultural Statistics (BAS). For sugar, additional data were obtained from the milling association. Bananas used figures from World Bank (2010). Data are mostly national averages, except for rice and sugar, where data from the areas with largest production (Central Luzon and Negros island, respectively) were used.

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Two of the commodities are perennial crops (mango and coconut), which requires investment before harvesting. Annual establishment costs were computed for the non-productive~ period, discounted to net present value (using 8% discount rate), then annualized over a 20 year period (average lifetime of the trees). ·

Other post production costs were derived from agricultural supply chains studies, namely for corn, rice, hogs, broilers, and banana (from a previous World Bank study). For mango, pineapple, coconut, coconut, and fish, no data on post-production cost was found, hence DRCR is calculated at the farmgate level.

According to Gergely, subsidies and taxes are minimal, except for some import dufo~s. as well as subsidy for rice (mainly for improved seed and irrigation). In his study, only maize, rice, sugar, hogs, and broilers have economic costs diverging from financial or market costs. For exportables namely mango, coconut, and pineapple, market farmgate price is the: estimate of the shadow farmgate price.

Nontradable inputs include: labor costs, land costs, and capital costs, estimated as either interest on crop loans or opportunity cost of working capital. For cost items where bireakdown between tradable and nontradable inputs is available (namely transport and processing costs), share of nontradable cost was imputed based on cost data (even from other countries, as needed).

Gergely also conducted a sensitivity analysis using the following factors: a 50% decrease of the irrigation cost (for rice only); a 20% decrease in transport and logistics costs, following improvement in transport infrastructure; a 20% increase in yields (for crops); a 20% increase in the feeding efficiency (for animal husbandry); a 20% decrease in the cost of fertilizers and animal feeds; and a I 0% increase and a 10% decrease in world prices.

2.3. Approach of this paper

This paper follows Gergely (2010), updated to 2012, with a some key changes:

First, additional comparison is made by computing Revealed Comparative Advantage or RCA. According to World Bank (2010), RCA is the share of i in the total exports of country j divided by the share of i in total world exports. RCA> 1 implies a country is more specialized in product i than the world economy as a whole.

Second, the same information in the DRC analysis is organized as a Policy Analysis Matrix (PAM), arranged as in Table I (Monke and Pearson, 1989) . The PAM provides a succinct summary of financial and economic payments to value added and domestic costs. TI1e analysis is applied to one hectare of land, in case of crops; for animal products, analysis is conducted for a suitable unit of scale, e.g. 1 hectare of fishpond.

Table 1: Policy Analysis Matrix

Revenues Costs Profit

Tradable inputs Domestic factors

Financial prices A B c D

Economic prices E F G H Divergence I J K L

Source: Katie et al (2013)

The following relationships hold:

D= A-(B+C)

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t J

f I f

f

I ~

H =. E-(F + G)

I= A-E

J = B-F

K=C-G

L=D-H

c DRCRjina11cia/ =--

A-B

G DRCReconom1c = --

E - F

Suppose DRCR > 0. The following hold:

c DRCRjina11cial = D + c < l <=> D < 0

G -DRCReconomic = -- < l <=> H < 0

H+G

Financial DRCR is below unity if and only if financial profit is negative; conversely, financial DRCR exceeds unity if and only if financial profit-is positive. This is consistent with private incentives to reduce output (negative financiai profit) or expand output (positive financial profit). Likewise, economic DRCR is below unity if and only if social profit is negative; conversely, economic DRCR is above unity if and only if social profit is positive. This is consistent with the social criterion for reducing output (negative economic profit) or expanding output (positive economic profit).

Third, some distortions omitted by Gergely are included. These are taxes on nontradable inputs, i.e. value added tax (pesticide, fuel) and excise tax (fuel). Gergely also omitted the distortion in the exchange rate; in this paper the shadow exchange rate is used in the sensitivity analysis, with an upward adjustment of the market exchange rate by 5%, as explained in Bautista (2003).

Fourth, for rice and sugar this paper maintains consistency with the treatment of the other products by using national averages. This is in contrast to Gergely who used the largest growing regions. In effect his estimates pertain to comparative advantage of these regions rather than of the country as a whole. The more comprehensive analysis is to disaggregate the DRCR estimation by region; any implied expansion (contraction) of output would likely involve areas with the greater (lower) profitability, generally the same areas with higher (lower) DRCR. As region-specific data becomes available, a better insight on the dynamic re­allocation of resources across regions can be reached particularly as government removes from distorting market prices.

Fifth, this paper is limited to the level of primary production: Gergely's approach to include the wholesale level is more comprehensive. However, data for post-harvest stage is insufficient - even Gergely resorts to a conversion factor when moving from primary to

1 The official adjustment is 20%, as adopted by NEDA Investment Coordinating Committee (2004).

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processed stage. In contrast, data for primary production is relatively more abundant. Hence, this paper makes calculations at the farmgate level; where relevant, border price is converted to a farmgate equivalent using fixed marketing margins and a conversion factor (from primary to processed product).

3. OVERVIEW OF THE SUBJECT COMMODITIES

The agricultural sub-sectors matching the subject commodities account for 91 % of agricultural gross value added (Figure 1 ). The largest single subsector is paddy rice at nearly a quarter of agricultural GVA; fishing is 16% (of which milkfish is one of the top commodities); livestock (mostly hogs) account for 13%, and poultry another 10%. Next to paddy rice, the largest crop share is for banana, followed by corn and coconut. Sugarcane, mango, and pineapple account for much smaller shares, but the values are still sizablle in absolute terms (64.4 billion pesos, over 1.5 billion dollars.)

Figure 1: Shares in gross value added of agriculture by sub-sector, 2012 (%)

Source: BAS CountrySTAT.

Trade figures are shown in Table 2. The commodities with the most imports are rice and poultry, followed by maize; significant imports (over $1 million) are observed for swine and sugar. The biggest exports are observed for coconut oil, followed by bananas and pineapple; imports of these commodities are negligible or nil. The Philippines also exports a small amount of rice, and a significant amount of sugar (much more than its imports of sugar).

Table 2: Imports and exports of major agricultural products, 2012, in SUS '000

lmEorts ExEorts

Rice 424,024 1,268

Maize 87,564 89

Coconut oil 2 1,025,986

Banana 0 647,880

Sugar 23,324 111,002

Mango (with guavas and mangosteen) 428 70,986

Pineapple 0 101,362

Livestock (swine) 71,572 l

Poult!}'. 113,987 33,337

Source: Trademap.

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In terms of the RCA measure, the products in which the country has comparative advantage are: Sugar, Mango, Banana, Pineapple, and Coconut oil (Figure 2). Of these the highest RCA is observed for coconut oil, followed by banana, then pineapple and mango. RCA below unity is observed for the rest, with the lowest observed for hogs, followed by Maize, then rice.

Figure 2: Revealed comparative advantage of selected agricultural commodities, 2012

!

Coconut oil ~t -----------lllllM•lllllM•lllllM-lllllMlllllM.i ~

Banana .~ 1 24.02

'":::; E,~; ;;·,~.:,,. Poultry } 0.43563

Rice J 0.01979

Maize . 0.00094

Hogs la.:???9.~,-0 10 20 30 40 50 60

Note: Disaggregation for milkfish not available in the data set. Source of basic data: Trademap.

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Note that the RCA is an imperfect measure of comparative advantage. It is static, i.e. based on a snapshot of relative specialization over a reference period. A country may be less specialized in a commodity compared with the rest of the world, but over time still benefit from expanding production of that commodity. Conversely a country may be more specialized in a commodity compared with the rest of the world, but over time benefit from the reduction in output of that commodity. Moreover, RCA does not account for distortions due to taxes, subsidies, and regulation, unlike the OCR measure which explicitly seeks to correct for these distortions.

Gergely (2010) obtains the DRCR calculations reported in Figure 3. Only hogs, White maize, and rice are produced with DRCRs above unity. Tree crops are more profitable than cereals except for traditional coconut farming. Highest profitability is shown for pineapple, followed by mango.

Figure 3: Past calculations of DRCR for selected commodities, 2010.

Hogs

Unity

Yellow maize

Coconut

Banana

Broiler

Mango

Coconut, improved

Milkfish

Pineapple

------1.10

i------ 0.90 i----- 0.70

--- 0.56

--- 0.54

0.00

0.43

0.42

0.32

0.19

0.50 1.00

1.00

1.50 2.00 2.50 3.00

10

1

I 1

Source of basic data: Gergely (2010).

White maize is unprofitable from an economic perspective, as is rice. Yellow maize is close to neutral in terms of the DRCR. Domestic sugar is also socially profitable. For the non-crop commodities, comparative disadvantage is exhibited by hogs, whereas broilers have a comparative advantage. Hogs continue to be economically unprofitable due to high domestic prices. Milkfish has lower DRCR than either hogs or poultry.

4. RICE

Milled rice is the country's staple food. Production of paddy rice has been consistently .increasing at the national level; over the past decade (since 2002), production has been growing at a rate of 3.1 % annually, divided evenly between growth in area harvested and growth in yield (Table 3). Production is mostly from irrigated systems; in 2012 the share of irrigated paddy rice was 74.4%. Irrigated systems have the edge over rainfed systems both in terms of area harvested and yield. Since 2002 though growth in production has been faster in rainfed systems (some of which are serviced by private pumps), though area harvested has grown more slowly; hence, yield growth has been faster for rainfed systems (0.5 percentage points above the average growth). Rice is mostly produced in smallholder systems.

Table 3: Paddy rice production, area harvested, and annualized growth rate, by system, 2002 - 2012

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Growth

{%)

Output (millions oftons)

Irrigated 9.9 10.3 10.9 11.2 11.6 12.3 12.6 12.1 12.0 12.4 13.4 3.0

Rain fed 3.3 3.2 3.6 3.4 3.7 4.0 4.3 4.2 3.8 4.3 4.6 3.4

Total 13.3 13.5 14.5 14.6 15.3 16.2 16.8 16.3 15.8 16.7 18.0 3.1

Area (millions of ha)

Irrigated 2.7 2.7 2.8 2.8 2.8 2.9 3.0 3.1 3.0 3.1 3.2 1.6

Rain fed 1.3 1.3 1.3 1.3 1.3 1.4 1.4 1.5 1.3 1.5 1.5 1.3

Total 4.0 4.0 4.1 4.1 4.2 4.3 4.5 4.5 4.4 4.5 4.7 1.5

Yield (tons/ha)

Irrigated 3.7 3.8 3.9 4.0 •. 4.1 4.2 4.1 4.0 4.0 4.0 4.2 1.4

Rain fed 2.5 2.5 2.7 2.6 2.8 2.9 3.0 2.8 2.8 3.0 3.0 2.1

Total 3.3 3.4 3.5 3.6 3.7 3.8 3.8 3.6 3.6 3.7 3.8 1.6

Source: CountryStat.

Government has heavily supported domestic rice production. Budgetary support is concentrated on irrigation. Figure 4 presents a historical summary of public expenditures on irrigation; from minimal levels in the 1960s, it rose dramatically in the 1970s when the Green Revolution was in full swing. Since then investments have fallen; in the 2000s the lc!vel of support was only 20- 40% of that in the late 1970s.

Production has risen mainly as a response to growing domestic demand, which has also stimulated imports (Figure 5). In the 2000s the country would intermittently rank as the world's top rice importer. The importance of rice in the livelihood of small farmers has been used to justify barriers to rice importation. Since 1972, the government has monopolized rice importation under a state enterprise, the National Food Authority (NFA). The NFA sets an annual quota, and within it the amount it will directly import; the remainder is allocated for private importation (including imports by farmer organizations). This quantitative restriction

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f

I I 1

t I I t

I I I

(QR) has survived the country's accession to the World Trade Organization (WTO) by virtue of a special treatment on rice. Special treatment lapsed in 2012; in the meantime, the Philippines maintains the QR while its application for extension of special treatment to 2017 is pending before the WTO.

Figure 4: Government expenditures on irrigation, 1965- 2008

P Bn In 1985 prlc@ 6

5 ;

' i ' !

3 i t

l [

! 1 .,. .... ·······························

0 1965 1970 1975

®Others ..........................

•CIS

•NIS

1980 1985 1990 1995 2000 2005

Source: David et al (2012)

Figure 5: Rice imports (HS 1006), Philippines, 2001 - 2012, in tons

3,000,000 ..,. .......... ·········································

2,500,000

2,000,000 .. , ................................................... ······················•············

1,500,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

aviet Nam a other countries

Source: TradeMap.

Tariffs are also high: the most favored nation (MFN) rate is 50% out-quota, and 40% in­quota, the same rate extended to ASEAN exporters. These distortions drive a large wedge between domestic and foreign price of rice. A simple indicator of the wedge is the nominal protection rate or NPR, defined as follows:

NPR =domestic price - border price border price

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In the 1970s to mid-1980s, technological change and budgetary support for rice allowed self­sufficiency at import parity price; in fact David et al (2012) estimated the NPR to range from - 1 to -18%, i.e. domestic prices were below border prices. This is consistent with the findings of Herdt and Lacsina (1976) and Unnevehr (1986) which compute a DRCR below unity and falling from the 1970s to the early 1980s, as rice production technology improved, and the peso depreciated sharply during the 1982-83 financial crisis.

Figure 6 presents the author's calculations of the NPR for milled rice since 2004. The NPR started out low in 2004 to 2007, owing to an expensive dollar (the market exchange rate exceeded P50 per dollar) and cheap rice (from $200 per ton, inching up to $300 per ton by 2007). Briefly the NPR turned negative during the rice price crisis of 2008 (in fact Vietnam rice exports disappeared in the early months of the year) when domestic prices rose but not commensurate with the surge in the world price. From 2009 onwards the world price collapsed (though at $400 - $500 per ton, the world price remains considerably above pre­crisis levels). Despite the decline in world price, domestic prices remain elevated, raising the NPR in excess of 40%; in 2013, due to the low world price, the NPR approached 50%.

Notes:

Figure 6: Monthly nominal protection rate of milled rice, 2004- 2013 (0/o)

60.0 T ·

50.0

40.0 .,,...,,.... __

-10.0

l

!. ............................................................................................................................ ., ..

O~ ~o ~ ~ ~ ~·~ ~ ~ ~ ~ ~ i ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~ 0 ~ 0 0

N N 0 N N N N 0 N 0 N N N N 0 N N N N 0 N 0 N N N N N N N N

I. The domestic price proxy is Metro Manila wholesale price of regular milled rice.

2. The border price proxy is FOB Vietnam White Rice 5% broken, adjusted upward by 6% for landed cost and P2.00 per kg handling from ship to warehouse, as estimated by Gergely (2010).

Sources: PIDS EconDB for exchange rates; BAS CountryStat for Metro Manila regular milled rice; World Bank Pink Sheet for Vietnam Rice 5% FOB.

PAM estimates are presented in Table 4. Based on market prices, DRCR is below unity, and financial profit is 22 thousand pesos per ha of area harvested. Compared with financial prices, tradable inputs incur lower cost under economic prices, with a penalty of of Jess than 300 pesos per ha; domestic resources however cost much more, implying an implicit transfer of about I 0, 700 pesos per ha.

A much bigger transfer is effected through border policy, which raises domestic rice price far in excess of the border price, resulting in a transfer of over 32,000 pesos per ha. Th~: net transfer is just under 43,000 pesos. Based on shadow prices, the DRCR is 2.00; that is, 2 pesos worth of domestic inputs were spent to save on just one peso worth of foreign exchange. Even with world prices being higher under the shadow exchange rate, domestic rice price continues to exhibit comparative disadvantage, as seen in the DRC/SER ratio of

13

1.90.

Table 4: Policy Analysis Matrix for Rice per ha, 2012, in pesos (unless in ratios)

Revenue Tradable Domestic Net DRCR DRC/ in(!UtS resources SER

Financial 62,366 -9,572 -30,731 22,063 0.58 0.55

Economic 30,023 -9,278 -41,454 -20,708 2.00 1.90

Divergence 32,343 -294 10,723 42,771

Economic, adjusted 39,030 -9,278 -41,454 -11,701 1.39 1.33

Divergence, adjusted 23,336 -294 10,723 33,764

Source: Author's calculations.

Suppose in calculating the economic border price an upward adjustment of as high as 30% is provided, whereas domestic prices remain the same. This incorporates risk from relying on imports, supposing that world markets become unreliable. The large risk premium still fails to justify a domestic sourcing policy fo rice; net transfers still amount to about 33,000 per ha. The DRCR is now lower at 1.39 (1.33 using the SER), but still far above unity, owing to high domestic production cost. Table 5 provides a breakdown of cost items.

Table 5: Cost items in paddy rice production, in pesos

Tradable inputs

Seed, purchased

Fertilizer, purchased

Pesticide, purchased

Fuel and transport, purchased

Seed, other

Fertilizer, other

Pesticide, other

Fuel and transport, other

Tradable inputs, total

Domestic resources

Hired labor

Own labor

Labor share

Other labor

Irrigation

Rental

Tax

Working capital

Labor

Land

Capital

Rental and other capital cost

Financial value

886

4,896

1,439

960

~. t' 1,215 '

153

23

0

9,572

6,342

4,749

7,586

964

662

5,693

174

1,309

3,252

Economic value

886

4,896

1,285

822

1,215

153

21

0

9,278

6,342

4,749

7,586

964

11,559

5,693

0

1,309

3,252

Sources: Market values from BAS CountryStat; shadow values from author's calculations.

Pesticides and fuel is assessed a value added tax (and for the latter, an excise tax), which

14

accounts for a small discrepancy between market and shadow value. By far the bigg~~r divergence is observed for irrigation, based on the estimated discrepancy reported in David et al (2012) for 1999, updated to 2012 using the consumer price index; compare this with Gergely's (20 I 0) estimate of 11,435 per ha in 20 I 0.

Estimation of import parity price is broken down in Table 6. The CIF milled rice is only Pl 7.10 per kg, or 57% of the domestic wholesale price. After making adjustments, the import parity price at farm gate is only 48% of the domestic farmgate price. Hence the borde:r control is making a sizable indirect transfer to domestic rice farmers.

Table 6: Breakdown of estimation of import parity price of paddy rice at farmgate level, .2012

Milled rice, CIF (I)

Milled rice, CIF, pesos per kg (2)

Paddy equivalent, imported rice (3)

Wholesale price (4)

Palay equivalent (5) Farmgate price (6)

Margin (7)

Value 405

17.10

11.11

30.04

19.53 16.22

3.31

Farmgate price equivalent, imported rice (8) 7.81

Remarks

Unit value of imports in 2012

Market exchange rate in 2012

65% milling recovery ratio, from BAS

National Capital Region wholesale price,

65% milling recovery ratio National farmgate price for ordinary rice

Difference, farmgate and wholesale price

Sources: TradeMap.org; BAS CountryStat; PIDS EconDB.

5. MAIZE

Since the mid-1990s, the domestic maize industry has on the whole been expanding (Figure 7), though exhibiting episodic contraction due to unfavorable weather. The two major varieties are white maize, grown for food, and yellow maize, grown for feed. White maize production has been fairly stable at around 2 million tons; the increase in overall production is mostly due to production of the yellow variety.

Figure 7: Production of maize by major product type, 1994 - 2012 ('000 tons)

8,000

7,000

6,000

5,000 +·······························································································································-···-

4,000 .,.... • ........ ··-··············-

3,000

2,000

1,000

0 1994

.,. 1999 2004

111 White Corn 111 Yellow Corn

Source: BAS CountrySTAT.

-··o··-·····-····, ····;·· ··r

2009

Imports have been very erratic over the past decade (Figure 8). Annual imports are at low levels, with peaks up to 288 thousand tons, and in some years drop to nil. Note that the ratio of domestic production to domestic utilization has averaged 97% since 1990, with a standard

15

deviation of only 0.03 over the same period. There is a high level of self-sufficiency, which suggests imports take up the residual when domestic production falls short of utilization. Indeed the correlation of imports with domestic production is -0.28, and the sum production plus imports shows a coefficient of variation of0.2, compared to 0.21 for domestic production only.

Fluctuation of value imported is much lower than that of import quantities, for the simple reason that when world prices are high (as shown in unit values of imports), quantity imported tends to drop, and conversely when world prices are high. Since 2009 unit value of imports have jncreased by 57%.

Figure 8: Maize imports (HS 1005), value (dollars) and quantity (tons) "'"'--···r·-::---',,..-"'-·-------

350 370 370 400 341

350 300

300

250

200

150

100

50

0 2001 2006 2011

•Total quantity •Total Value llllUnitvalue

Source: Trademap.

The increasing trend of world prices is reflected in domestic prices (Figure 9). Farmgate and wholesale prices for yellow com have been increasing. Note that inflation in the general price level since 2002 has been 4.8%, and since 2005 has been 5 .1 %; however 2012 farm gate prices are 19% higher than in 2009, i.e. growth in price has far exceeded that of the CPI. The wholesale to farmgate margin after 2008 is somewhat higher than in the pre-crisis years (i.e. P3.10 in the former, Pl.80 in the latter). In proportional terms though the wholesale to farmgate margins are slightly lower after 2008. The movement has not been. as dramatic for white com wholesale prices - which are actually lower in 2012 than in 2009 - but white com farmgate prices are also elevated, being 14% higher in 2012 than in 2009.

Figure 9: Farmgate and wholesale prices of corngrain by variety, pesos per kg, 2002 - 2012

18 , .............. , ............................................................................................. .

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-corngrain Yellow, farmgate -Corngrain Yellow, wholesale

-corngrain White, farmgate -corngrain White, wholesale

16

J '

Source: BAS CountrySTAT.

The PAM is presented in Table 7. DRCRs for yellow and white maize are below unity; this contrasts with Gergely's findings for white maize. Admittedly figures for white maize are much closer to unity compared with yellow maize. This holds whether using financial or economic prices. In the case of yellow maize, net transfers are positive due to a border policy that keeps the domestic price high; nevertheless yellow maize remains socially profitable. Cost details for maize production are shown in Table 8.

Table 7: Policy Analysis Matrix for Yellow and White Maize, per ha, 2012, in pesos (unless in ratios)

Revenue Tradable Domestic Net DRCR DRC/SER inputs resources

Yellow maize Financial 50,814 -13,193 -20,312 17,309 0.54 0.51 Economic 46,714 -12,714 -20,169 13,831 0.59 0.56 Divergence 4,100 -479 -143 3,478

White maize Financial 22,041 -3,458 -15,239 3,344 0.82 0.78 Economic 22,041 -3,391 -15,155 3,495 0.81 0.77 Divergence 0 -67 -84 -151

Source of basic data: BAS CountryStat.

Table 8: Cost items in yellow maize production, 2012, in pesos

Yellow maize White maize Financial Economic Financial Economic

Tradable inputs

Seed, purchased 4,125.00 4,125.00

Fertilizer, purchased 6,666.00 6,666.00 106.00 1106.00

Pesticide, purchased 1,104.00 985.71 2,682.00 2,682.00

Fuel and transport, purchased 614.00 525.87 305.00 272.32

Seed, other 307.00 307.00 12.00 10.28

Fertilizer, other 272.00 0.00 319.00 319.00

Pesticide, other 104.00 104.00 33.00 0.00

Fuel and transport, other 1.00 0.00 1.00 1.00

Tradable inputs, total 13,193.00 12,713.59 3,458.00 3,390.60

Domestic resources

Hired labor 6,809.00 6,809.00 2,339.00 2,339.00

Own labor 2,864.00 2,864.00 6,699.00 6,699.00

Labor share 1,441.00 1,441.00 1,031.00 1,031.00

Other labor 1,265.00 1,265.00 1,045.00 1,045.00

Irrigation 12.00 12.00 7.00 7.00

Rental 3,419.00 3,419.00 2,137.00 2,137.00

Tax 143.00 0.00 84.00 0.00

Working capital 1,955.00 1,955.00 469.00 469.00

Rental and other capital cost 2,404.00 2,404.00 1,428.00 1,428.00

Domestic resources; total 20,312.00 20,169.00 15,239.00 15,:155.00

Source of basic data: BAS CountryStat.

17

Fertilizer and seed cost is much higher for yellow than for white maize, which is understandable as the latter is more often grown as a subsistence crop. The somewhat higher cost of pesticide application in White maize is therefore rather puzzling; nevertheless overall tradable input cost in White maize is only 26% that of Yellow maize. Domestic resources for yellow maize also cost more, with higher labor cost, and even higher imputed rent for land -mainly because white corn tends to be planted in. the more marginal areas. There is no large outlay for irrigation as in dee, nor is a subsidy correction applied to the small irrigation outlay as this is likely to be drawn from private systems. rhe farmgate price for white maize is also higher.

Nevertheless profitability is much higher for yellow maize, due to the much higher yield achieved. Correction applied for the financial price to obtain the economic price (Table 9), which follows a similar approach as in Table 6, shows a wedge of only 9%; removing transfers from the net return still results in social profitability.

Table 9: Breakdown of estimation of import parity price of yellow maize at farmgate level, 2012

Milled com, CIF

Milled com, CIF, pesos per kg

Wholesale price

Farmgate price

Margin

Farmgate price equivalent, imported rice

Value

350.00

14.78

15.78

12.43

3.35

11.43

Sources: Milled com price from Trademap; domestic prices from BAS CountrySTAT. •

6. COCONUT

The Philippines is the leading world exporter of coconut oil. Coconut has hundreds of uses; the predominant utilization is the extraction of coconut oil from the meat, which in dried form is called copra. Based on BAS data, production of coconut has been on an upward trend, except for a dip in 2010 - 2011 (Figure 10).

Figure 10: Production and export of coconut, in millions of tons copra-equivalent

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00 01 02 03 04 OS 06 07 08 09 10 11 12

-Exports ... Domestic use ·~Production (nuts)

16.5

16.0

15.S

15.0

14.S

14.0

13.S

13.0

12.5

12.0

Sources: Production data from BAS CountryStat; export and domestic consumption from PCA.

18

l I I I

l I ' i ' '1

l j I ~

t l

This was due to the El Nino episode of 2010, which continued to affect coconut yield in 2011 ; good weather conditions in 2012 contributed to a recovery of output (BAS, 2010, 2011, 2012). PCA data in copra equivalent diverges somewhat from BAS data in terms of overall trend; what it consistently shows is that exports account for the bulk of domestic production (from 60 to 80%). Domestic farmgate prices have been quite volatile, as seen in monthly copra prices (Figure 11 ). Coconut can be harvested year-round as nuts can be picked every three to four months with different farmers harvesting at different times. Annual prices in the early to mid-2000s ranged from 5 to 17 pesos per kg, though in 2007 - 08, prices reached 21 to 27 pesos per kg. It was in 2010 - 2012 when prices hit an annual average of 23 to 39 pesos per kg; monthly prices peaked at 49 pesos per kg (April 2011 ); since then prices have tapered off but remain elevated compared to the early 2000s.

Figure 11: Monthly prices of copra resecada, in pesos/kg

50.00

40.00

30.00 l :~=--"""'·

10.00 _._..

0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-2010 -2011 -2012

Source: BAS CountryStat.

DRC estimates are presented for two alternative production systems (Table l 0). First is the salt fertilization, the technology being promoted by PCA. Coconut farming is high!~ profitable from the private and social viewpoint, with quite a low DRCR (even corrected for the shadow exchange rate). The other system is no fertilization, the standard practice~ in the country, where inputs are concentrated in the harvesting and copra drying stages. The divergence between financial and economic value is due only to land tax. Compared with salt fertilization, yield is lower, and so are revenues; despite lower costs, DRCR is highe:r. Nevertheless DRCR remains far below unity even with the exchange rate correction.

Table 10: Policy Analysis Matrix for coconut under alternative production systems, per ha, 20112, in pesos (unless in ratios)

Revenue Tradable Domestic Net DRCR DRC/SER inputs resources

Salt fertilization: Financial 35,572 -2,072 -12,194 21,306 0.36 0.35 Economic 35,572 -1,722 -12, 110 21,740 0.36 0.34 Divergence 0 -350 -84 -434 No fertilization Financial 24,852 -350 -12,194 12,308 0.50 0.47 Economic 24,852 -350 -12, 110 12,392 0.49 0.47 Divergence 0 0 -84 -84

Source of basic data: PCA.

19

f

I I I I

Cost details are found in Table 12 for salt fertilization (with the accompanying Note describing the no-fertilization system). Tradable inputs are limited to salt and fuel from hauling; labor is for harvesting, copra drying, weeding, and fertilizer application (by operator); and capital cost is for working and fixed capital.

Table 11: Cost items for coconut farming under salt fertilization, 2012, in pesos

Financial value Economic value

Tradable inputs Seed, purchased 0.00 0.00

Fertilizer, purchased 1,722.00 1,722.00

Fuel and transport, other 350.00 0.00

Tradable inputs, total 2,072.00 1,722.00

Domestic resources

Hired labor 6,460.18 6,460.18

Own labor 400.00 400.00

Labor share 0.00 0.00

Other labor 0.00 0.00

Irrigation 0.00 0.00

Rental 2,137.00 2,137.00

Tax 84.00 0.00

Working capital 407.37 407.37

Rental and other capital cost 2,705.00 2,705.00

Domestic resources, total· 12,193.55 12,109.55

Note: Under no-fertillization, purchased fertilizer and fertilizer application under own labor are set to zero; output is set to 1,289 kg, derived from the ratio of production value to area harvested, divided by farmgate price.

Source of basic data: Dy (2011); Centennial (2010); Magat (n.d.); BAS CountryStat.

7. SUGARCANE

The Philippines was the seventh top global producer of sugarcane in 2012; other countries (in order of decreasing output) are: Brazil, India, China, Thailand, Pakistan, Mexico, USA, Indonesia, and Australia. Sugarcane output has been on an upward trend over the past decade (Figure 11 ).

Figure 12: Yield (in tons/ha), output index, and area harvested index (2002 = 1.00), 2002 - 2012

1.40 80.0

70.0

60.0 1.20 .

50.0

1.10 .. 40.0

30.0

20.0

10.0

0.0 2002 2004 2006 2008 2010 2012

-Outputindex !11111100111Areaharvestedindex -+-Yield L. ...

Source: BAS CountryStat.

20

Starting from 21.4 million tons in 2002, by 2012 output had risen by nearly one-third. This translates to about 2.2 million tons of raw sugar in 2012. There has been considerabl1~ fluctuation of output along the trend, with the steepest drop in 2010 due to El Nino.

Area harvested generally mirrors the change in output, though with less erratic changes, reaching 433 thousand ha in 2012, up one-fifth from its level in 2002. Hence, growth has

. been achieved largely by yield increases, which reached 64.5 tons per ha in 2012, compared to just under 60 tons/ha in 2002. Compare this with yields in tons per ha from other top ten producers (based on FAOStat data), namely: Australia (77), USA (75), Thailand (74), and Brazil (71 ); however the country's yield exceeds that oflndonesia (58) and Pakistan (55).

Import and export trends are shown in Figures 12 and 13. Import quantities and volumes range widely, from nearly zero (2007 -2009) to as much as 285,000 tons valued at $186 million. Peak imports over the past decade occurred in 2010, when domestic production faltered due to bad weather. The following year imports plummeted as domestic production recovered and world prices soared; unit value of imports averaged $914/ton. This is consistent with World Bank (2013), which reports world prices at $570 FOB per ton for raw sugar; in 2008 and 2009 prices were respectively $400 and $470 per ton.

Figure 13: Imports of sugar (HS 1701), value, volume, and unit values, 2002 - 2012

300,000 1000

900 250,000 800

200,000 700

600

150,000 500

400 100,000 300

50,000 200

100

0 0 2002 2004 2006 2008 2010 2012

-Unit values -+-Import quantities, in tons

---Import values, in '000 dollars

Source: BAS CountryStat.

Figure 14: Exports of sugar (J{S 1701), value, volume, and unit values, 2002 - 2012

700,000 700

600,000 600

500,000 500

400,000 400

300,000 I 200,000

100,000

0 0 2002 2004 2006 2008 2010 2012

'*-Unit values -+-Export quantities, in tons

---Export values, in '000 dollars

Source: BAS CountryStat.

21

Imports are subject to a 50% in-quota tariff (for a minimum access of 64,050 tons); the out­quota rate is 65%, the highest tariff rate for an agricultUral ~roduct in the country. Imports are tightly regulated under permit system administered by the Sugar Regulatory Administration (SRA). Meanwhile exports after 2004 were fairly stable; note that the Philippines enjoys a quota allocation in the US market. As with imports, exports dropped in 20 I 0, before recovering sharply during the world price peak of 2011. Exports returned to trend in 20 I 2.

Farmgate prices react to both domestic supply and demand conditions, as well as global market conditions (Table 13 and Figure 15). Seasonality though is not evident. In 2009 farmgate prices were in the range of 15 to 30 pesos per kg, before soaring to the range of 30 to 50 pesos per kg in 2010, due to tight domestic supply. Since then farmgate prices have retreated, although remain elevated compared to 2009.

Table 12: Monthly farmgate prices of sugar, 2009- 2012, in pesos/kg

Jan Feb Mar AEr Ma~ Jun Jul Aug SeE Oct Nov Dec Year!~

2009 18.37 17.79 19.02 18.94 17.92 17.79 16.33 15.17 19.15 19.99 23.98 26.58 19.25

2010 30.40 29.52 28.72 28.67 28.97 26.54 27.29 28.54 33.09 48.73 41.82 37.77 32.51

2011 44.14 39.58 37.39 36.12 29.78 27.10 26.72 28.78 26.25 25.88 24.42 23.94 30.84

2012 24.81 25.05 26.48 27.23 28.14 31.56 31.11 36.28 30.91 25.33 24.22 25.24 28.03

Source: BAS CountryStat.

Figure 15: Monthly farmgate prices of sugar, 2010 - 2012, in pesos/kg

60.00

45.00

40.00 ! ....... ·•\·w:.: ................................................................................................. ..

35.00

30.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

-2010 ~-2011 -2012

Source: BAS CountryStat.

The policy analysis matrix (Table 14) indicates financial profitability of about 20 thousand pesos per ha and a DRCR of 0.47. Breakdown of cost items is found in Table 15; as the survey data divide cost by activity type, allocation between tradable and nontradable inputs is done by an assumed percentage share following Gergely (2010). Valuation based on economic prices leads to a lower estimate of profitability at 12,500 pesos; the main correction is for import parity price, estimated as in Table 16.

According to the estimate, the border price equivalent (farmgate level), is only 87% of the domestic farmgate price. The decline in economic profitability is partly offset by including taxes on inputs and the land tax. Ultimately DRCR remains below unity, though higher than financial DRCR; this holds even with adjustment for the shadow exchange rate.

22

The economic profitability of about $300 per ha compares favorably with profitability in Thailand of about $260, based on 2007 data (Ekasing et al, 2007). Profitability of sugarcane farming in the Philippines and Thailand contrasts sharply with outcomes in Indonesia, where milling districts in Java tended to show low or even negative profit even on financial terms (World Bank, on-going).

Table 13: Policy Analysis Matrix for sugarcane, 2012, in pesos per ha (unless in ratios)

Revenue Tradable Nontradable Net DRCR DRC/SER

Financial 91,717 -53,590 -17,866 20,261 0.47 0.45

Economic 79,530 -49,334 -17,676 12,520 0.59 0.56

Divergence 12,187 -4,256 -190 7,741

Notes:

I. Data pertains to averages for Luzon, Eastern Visayas, Iloilo, and Mindanao mill districts for 2003-2004, with prices updated to 2012. SRA follows a decentralized-administration for Negros island; as data collection was the initiative of the Central Office, Negros Island is unfortunately not represented in the survey.

2. Assuming the miller's share just covers processing and related costs, revenue is simply the value of the farmer's share at prevailing farmgate prices.

Source of basic data: SRA Planning and Policy Department.

Table 14: Cost items, sugarcane farming, 2012, in pesos

Cost Tradable Nontradable Nontradable %

Fertilization 5,621 5,621 0 0.00

Pesticide application 4,128 4,128 0 0.00

Land preparation 3,350 2,345 1,005 30.00

Land rent 1,461 0 1,461 100.00

Working capital . 4,432 0 4,432 100.00

Planting 1,867 1,307 560 30.00

Cultivation 2,438 1,707 731 30.00

Weeding 2,382 1,667 714 30.00

Irrigation 40 28 12 30.00

Harvestin8 and haulin8 14,158 9,911 4,248 30.00

Source of basic data: SRA Planning and Policy Department.

Table 15: Estimate of import parity price and adjustment factor at farmgate level, 2012

Farmgate (a)

Wholesale (b)

Margin

Farmgate price adjustment

Domestic 1,402

1,551

150

Import parity Remarks

977 Adjustment: farmgate to wholesale margin

I, 127 Following Gergely (20 I 0)

150 Apply the margin of farmgate to wholesale

0.8671

Sources: BAS CountryStat; World Bank Pink Sheet (2013).

23

I '

J

8. CARDAVA BANANA

The Philippines is the third top producers of bananas worldwide. The most important variety of banana grown in the country is Cavendish, which is primarily for export (Figure 16). The second largest is Cardava banana, accounting for a third of banana output. This variety is typically used as ingredient for food preparation and processing. The remainder is taken up by Lacatan variety (and small amounts of other varieties) consumed as table fruit.

Figure 16: Production of Banana by variety, 2002 - 2012, in million tons

9

8

7 :

6 !

5 ~

2.20

4 1 I ! 2.01 2.02 2.02

2 1 I

2.29

3ill l'' 1 j ,.1, o .L .,_. ,.. -

2002 2004 2006

2.39

I I al ..

2008

2.64 2.63

2010

Ill Banana Cavendish •Banana Lacatan ill! Banana Cardava

Source: BAS CountryStat.

2012

Banana exports have been on an upward trend over the past decade, though the most rapid increase has been observed since 2010 (Figure 17). A sizable chunk of these exports are in the fonn of banana chips (from cardava), valued at $50 million in 2011(DTI,2012). Export quantities have been erratic, but also trending upward since 20 I 0, exceeding 2.5 million tons in 2012.

Figure 17: Exports of banana in value and quantity, 2002 - 2012

2002 2004 2006 2008 2010 2012

-Quantity ('000 tons) -+-Value ($'000)

Source: BAS CountryStat.

24

j

I

I 1

Among the crops evaluated so far, banana exhibits the highest profitability at about 147,000 per ha (Table 17). Economic profitability is even higher, at about 149,000 per ha (the divergence due only to taxes). It turns out that DRCR is also the lowest thus far at 0.25 (economic) to 0.26 (financial), with only a slight correction for the shadow exchange rate. Breakdown oftradable and nontradable input costs is shown in Table 18.

Table 16: Policy Analysis Matrix for cardava banana, 2012, in pesos per ha (unless in ratios)

Revenue Tradable Domestic Net DRCR DRC/SER

Financial

Economic

Divergence

input

227,668 . -30,427 -50,408 146,833

227,668 -28,230 -50,093 149,344

0 -2,196 -315 -2,511

Source of basic data: DTI (2012).

Table 17: Cost items for cardava banana, 2012, in pesos

0.26

0.25

0.24

0.24

Cost Share ofnontrada.ble (%)

Land development 23,167 0.66

Farm inputs 20,500 0.00

Labor 28,400 1.00

Hauling 3,000 0.30

Rent 1,301 1.00

Land tax 315 1.00

Interest on working capital 4,152 1.00

Return 227,668

Notes:

I. Land development is a five-year annuity equivalent of land development cost (92,500).

2. Return is 25-year annuity equivalent of the net present value of output over a 25-year span with fixed 2012 farmgate price.

3. Shadow values adjust for taxes (12% ad valorem rate for inputs).

· Sources: DTI (2012); BAS CountryStat for rent, land tax, and farmgate price.

9. PINEAPPLE

Production of pineapple in the Philippines has been growing at a 4% clip over the past decade (Table 19); in 2011 the country was the world's fourth top producer (after Thailand, Brazil, and Costa Rica).

Table 18: Supply and utilization of pineapple, 2002 - 2012 (in '000 tons)

Production Gross supply Exports Feed Processing Net food (fresh) disposable

2002 1,639 1,639 179 88 643 730

2003 1,698 1,698 195 90 661 752

2004 1,760 1,760 204 93 685 778

2005 1,788 1,788 211 95 694 789

2006 1,834 1,834 262 94 692 786

2007 2,016 2,016 276 104 766 870

25

Production Gross supply Exports Feed Processing Net food (fresh) disposable

2008 2,209 2,209 292 115 844 959 2009 2,198 2,198 205 120 877 997 2010 2,169 2,169 165 130 882 992 2011 2,247 2,247 263 135 873 976 2012 2,398 2,398 397 144 880 976

Source: BAS CountryStat.

Export of fresh pineapple is only about 8 - 11 % of domestic production, though a considerable quantity of processing does end up as exgorts. (see Figure 18). Since 20.10 fresh pineapple exports have increased at an annual rate of 120%. Pineapple juice exports became significant only from the mid-2000s; in 2012 value of exports approached $100 million, about one-fourth of total export value.

Figure 18: Value of pineapple exports by product type, 2002 - 2012 ($'000)

350,000 +····"""""""'""""""""""""""""""""""""""""""'"""""""""""""""""""'""'""

300,000

250,000

200,000

150,000

100,000 ....... .-..._--1 ______ --19'---r---------t-50,000

0 '""r""' .__, ____ ,.....-._,-.-......,

2002 2004 2006 2008 2010 2012

•Juice •Fresh

Source: TradeMap.

Since 2006 farmgate prices have generally trended upward (Figure 19). The native variety exhibits the sharpest fluctuation, followed by Formosa (African Queen). After an initial phase of fairly flat prices, Hawaiian (Smooth Cayenne) has enjoyed rapid price growth, exceeding 50% in two years.

Figure 19: Pineapple farmgate prices by variety, 2006 - 2012 (pesos per kg)

8.00 T ..................................................................................................................................................................................................... .

7.50 ., ....................................................................................................................................................................................... ..

6.50 + ........................................................ ,""'£~ ............ ::~..:::· 6 .00 + . . ................... c;#.e'.'..

5.50 t ........................... ----·--... - ..... - ..... ,,... ............................ _.

5.oo I-... -~'.':::'.:::::=;:;_ ..... ~~"".::'.':~ 4.50 +·····c;"""·

4.00 +------.----.----..,,..---~------,..--.....,

2006 2007 2008 2009 2010 2011 2012

-Formosa ..._Hawaiian ""*""Native

Source: BAS CountryStat

26

Financial profitability of pineapple is superior even to that of banana, exceeding P 190,000 (Table 20). While cost of production per ha and farmgate price are comparable with banana, pineapple output is higher per ha (with a yield of about 40 tons). DRCR is lowest thus far at O. I 4 (with no appreciable change when adjusted for economic prices and the shadow exchange rate). Cost details are shown in Table 2 I.

Table 19: Policy Analysis Matrix for pineapple, 2012, in pesos per ha (unless in ratios)

Financial Economic Divergence

Tradable inputs

Seed, purchased

Fertilizer, purchased

Pesticide, purchased

Revenue

264,696 264,696

0

Fuel and transport, purchased

Tradable inputs, total

Domestic resources

Hired labor

Own labor

Labor share

Other labor

Irrigation

Rental

Tax

Working capital

Rental and other capital cost

Domestic resources, total

Notes:

Tradable Domestic Net inputs resources

-40,986 -30,609 193,101 -40,427. -30,294 193,976

-559 -315 -874

Source of basic data: BAS CountryStat.

Table 20: Cost items, pineapple, 2012

Financial value

18,643.00

17,753.00

2,730.00

1,860.00

40,986.00

11,689.00

7,728.00

6.00

846.00

162.00

1,301.00

315.00

4,192.00

4,370.00

30,609.00

I. Adjustment for economic prices due to taxes.

DRCR DRC/SER

0.14 0.13 0.14 0.13

Economic v~1lue

18,643.00

17,753.00

2,437.50

1,593.04

40,426.54

11,689.00

7,728.00

6.00

846.00

162.00

1,301.00

0.00

4,192.00

4,370.00

30,294.00

2. Revenue applies 2012 farmgate prices on average output for 20 I 0 - 2012, taking into account 18-month production cycle over a 50-year period.

Source of basic data: BAS CountryStat.

IO.MANGO

The country hit its peak production of mango at I million tons in 2007; since then output has been falling owing to unfavorable weather. Output is currently ranging below 800 thousand tons (Table 22). Exports account for only a small share of output, i.e. between 2 to 4%. Exports quantities have been erratic. By value though exports tripled between 2002 and 20 I I, hitting $96 million, before tapering off to $71 million tons in 20I2 (Figure 20). Sinc:e 2007, exports have been tracking the unit values; note though that unit values are capturing both

27

increase in world prices as well as product upgrading. Meanwhile farmgate and retail prices have generally kept pace with the overall inflation rate, with a growth of around 4% per year since 2002 (Figure 21)

2007 2008 2009 2010 2011 2012

Table 21: Supply and utilization accounts, mango, 2002-2012 ('000 tons)

Production ExEorts Feeds and waste Net food disEosable 1,023,907 26,338 59,854 937,715

884,011 20,845 51,790 811,376 771,441 20,381 45,064 705,996 825,676 24,322 48,081 753,273 788,074 32,149 45,355 710,569 768,234 27,826 44,424 695,983

Source: BAS CountryStat.

Figure 20: Export and unit values for mango, guavas, and mangosteens, 2002 - 2012

2.50 80,000 ............................................................................................................ .

60,000 ., ................................................................................................................................................. _

1.50

1.00

20,000 ..... 0.50

.-....,....-.. ..,.--. . ..,.. 0.00

2002 2004 2006 2008 2010 2012

-Unitvalue -Exports

Source: TradeMap.

Figure 21: Farmgate and retail prices of mango, in pesos per kg, 2002 -2012

70.00 r ..... -----.. --........................... -........... ---·--..................... -................. . 60.00 r·

I 50.00

40.00 ................................................................................................................................................... .

::::: .. :.:=:::~~;=;u· m1:::, ...... 10.00 l" ... l .. ~• .. ,I.... "r" ,_.l.,l ... ,I,.. .... ,... .

2002 2004 2006 2008 2010 2012

-Farmgate prices ...... Retail prices

Source: BAS CountryStat.

The policy analysis matrix (Table 23) indicates profitability of around 36,000 pesos per ha, lower than either pineapple or mango, but still relatively higher than cereals and coconut. The financial DRCR is only 0.54, far below unity. Divergence between financial and economic prices are small, hence economic DRCR is 0.52 (with almost identical ratios when adjusting for the shadow exchange rate).

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Table 22: Policy Analysis Matrix for mango, 2012, in pesos per ha (except in ratios)

Revenue Tradable Domestic Net DRCR DRC/SER

Financial 105,002 Economic 105,002 Divergence 0

inputs resources

-26,006 -42,730 36,266 -24,912 -41,931 38.159 -1,094 -799 -1,893

Source of basic data: BAS Country Stat.

0.54 0.52

0.52 0.50

Table 23: Cost items for mango farming, 2012, in pesos per ha

Tradable inputs Item

Seed, purchased

Fertilizer, purchased

Pesticide, purchased

Fuel and transport, purchased

Tradable inputs, total Domestic resources

Labor:

Hired labor

Own labor

Labor share

Other labor

Land:

Rental

Tax

Capital:

Working capital

Rental and other capital cost

Domestic resources, total

11. HOGS AND BROILERS

Financial value

Source: BAS Countrystat

0.00 16,522.00

7,349.00 2,135.00

26~006.00

11,362.00 5,323.00

607.00 1,194.00

5,236.00

799.00

3,199.00

15,010.00

42,730.00

Economic value

0.00

16,522.00 6,561.61

1,828.57

24,912.18

11,362.00

5,323.00

607.00 1,194.00

5,236.00

0.00

3,199.00

15,010.00

41,9211.00

Livestock production in the country has been growing consistently over time (Figure 22). The two main livestock products are hog and chicken; over the past thirty years, output in both industries has more than tripled. This is consistent with rising domestic demand, dm~ to population growth and diet diversification as purchasing power of households increases. As production has generally kept pace with demand, farmgate prices have generally kept pace with the overall inflation rate (Figure 23).

In the 2000s imports of hog and chicken have been increasing rapidly in value terms, partly in response to rising domestic demand (Figure 24). Note that chicken is often traded in parts, whkh creates product variety and the possibility of intra-industry trade. In fact, the country's exports of chicken (mostly cuts) have also been increasing, approaching $90 million in 2011.

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Figure 22: Production of hog and chicken, 1982 - 2012, in '000 tons

2,000 ......................................................................................................................................................................................................... .

1,800 1,600 +""---·-........ _ ............... - ................ --·-·-............... , __ _

1,400 1,200 +---................... _ ......... ___ ............................. :21"'"

1,000 +------~·-....... .,.c::::::::

800

600 400 ........ ,,__...,,,..:: .................................................................................................................................................... .

200 , .................................................................................................................................................................................. .

0

1982 1987 1992 1997 2002 2007 2012

-Hog -Chicken

Source: BAS CountryStat.

Figure 23: Farmgate prices of hogs and broilers, 2002 - 2012 (pesos per kg)

100

90

80

70

60

50

40

30

20

10

0 2002 2004 2006 2008 2010 2012

II Hogs •Chicken broiler (commercial)

Source: BAS CountryStat.

The global meat market has been enjoying a rapid expansion, with exports growing over 40% in less than ten years. Mounting demand from East Asia will lift pork exports, while Middle East and Sub-Saharan Africa will be the main driver of broiler meat (USDA, 2013).

Over the past decade, growth of unit value of pork and chicken imports has accelerated (Figure 25); in addition to demand, rising cost of com-based feed has also been a price driver. Rising world meat prices has also contributed to the .~hove-mentioned increase in the value of hog and chicken imports of the country.

Imports of both hogs and chicken are tightly controlled. Tariffs are 40%, with the same in­quota rate for chicken; the in-quota rate for hogs is 30%. Import permits for pork and chicken, as with other sensitive commodities (typically with high tariffs), are implicitly allowed only when the DA deems a local "shortage" is prevailing (David et al, 2011 ).

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Figure 24: Imports of hog and chicken, and chicken exports, 2002 - 2012 ($ '000)

120,000 90,000

80,000 100,000 '·· ·········

70,000

60,000

50,000

40,000

40,000 30,000

20,000

10,000

0 0 2002 2004 2006 2008 2010 . 2012

!i1$ilt®Chicken exports -Swine imports -Chicken imports

Source: TradeMap.

Figure 25: Import unit values of chicken and hogs, 2002 - 2012 ($per ton)

1,600

1,400

i 1,200 l 1,000

!j ~Ill ili~---~-800

600

400 2002 2004 2006 2008 2010 2012

•Chicken, whole, frozen •Hams, shoulders and cuts, frozen

Source: TradeMap.

In the following, data is based mostly on stereotypical information (based on estimates done by producer service providers in Department of Trade and Industry); the cost structure is broadly similar to that found in Tanchuling (2007), and Gergely (20 I 0). Based on financial prices, domestic broiler production is borderline competitive with DRCR of 0.91 (Table 25), with the ratio slightly lower using the shadow exchange rate. Details of the cost breakdown are shown in Table 26. On the input side, economic price of feed is adjusted downward by 60%, as implied by the tariff rate on com. Note that this adjustment overstates the distortion on feed price, as current feed prices already reflect cost-minimizing behavior of live:stock producers (e.g. switch to feed wheat).

On the other hand, the CIF unit value of whole frozen chicken (in equivalent pesos per kg) is only 52% that of the farmgate price; use of this value understates the actual divergence between border and domestic price as farmgate parity must lie below the CIF unit value. These caveats aside, the net divergence between financial and economic values still exceeds financial profit, by over 14,000 pesos (for a set of 500 heads). The DRCR therefore is high, i.e. domestic resources cost 2 pesos for every peso of foreign value added saved. Th is contrasts sharply with Gergely (2010).

31

Table 24: Policy Analysis Matrix, broilers and hogs, 2012, in pesos (unless in ratios)

Revenue Tradable Nontradable Net DRCR DRC/ SER

Broilers (set of500 heads)

Financial 58,867 -29,231 -26,986 2,651 0.91 0.87

Economic 30,577 -17,963 -26,986 -14,372 2.14 2.04

Transfers 28,290 -11,268 0 17,023

Hogs (set of 10 heads)

Financial 76,976 -68,435 -7,691 850 0.90 0.86

Economic 52,395 -49,761 -7,691 -5,057 2.92 2.78

Divergence 24,581 -18,674 0 5,907

Note: I. Financial broiler revenue based on survival of 480 heads, 1.6 kg each; fanngate price of P76.65/kg. 2. Financial hog revenue based on 85 kg carcass weight; farmgate price of P90.56/kg.

Source of basic data: DTI (2009)

Table 25: Cost items for broiler and poultry production, 2012, in pesos

Qt~ Unit cost Financial cost Economic cost

Broiler Day old chick 500.00 21.22 10,611.00 10,611.00

Feeds booster 35.00 14.69 514.00 308.40

Feeds starter 630.00 22.31 ,i; 14,058.41 8,435.04

Feeds finisher 630.00 21.58 13,597.15 8,158.29

Medication 500.00 2.12 1,061.10 1,061.10

. Investment 11,069.40 11,069.40

Utilities and labor 5,306.50 5,305.50

Total 56,216.55 44,948.73

Hogs Piglets 10.00 2,122.00 21,220.00 21,220.00

Feeds 40.00 1,167.10 46,684.00 28,010.40

Medication 530.50 530.50

Utilities 712.99 712.99

Labor 1,663.65 1,663.65

Investment 5,314.55 5,314.55

Notes: I. Cost per unit inflated by CPI index from 2009 base values. 2. Investment is annualized value of cage/pen assuming 5-year lifespan at 8% interest rate.

Source of basic data: DTI (2009)

Similar adjustments are made for hogs. As with broilers, there is a small financial profit from hog production, equivalent to a DRCR almost identical to that of broilers (with or without adjustment for the shadow exchange rate). The CIF cost of frozen ham shoulders and cuts is only 68% that of the farmgate price of hogs; using this value, economic revenues are only 52,000 pesos, only slightly higher than even the economic value oftradable inputs. DRCR is even higher than that of broilers.

32

12. MILKFISH

Milkfish (Chanos chanos) counts among the top aquaculture fish species in the Philippines by quantity (Figure 26). It continues to account for about 18% of domestic aquaculture production, and has been growing fairly rapidly over time (about 5% p.a.), though somewhat slower than the overall growth of aquaculture (7% p.a.)

Figure 26: Finfish aquaculture production, 2002 - 2012 (in tons)

3,000,000 .. , ......................................................................................................................................................................................................................................... .

2,500,000 +---....... _ ....... --·-·----------

2,000,000 +----·-----··-··-.. -·-·-..... _. .... _ - -- - ... _ ---- ,......

1,500,000

1,000,000 ·~···· .......... . 500,000 .. .... . ......... .

0 ·-2002 2003 2004 2005 2006 2007 200~ 2009 2010 2011 2012

•Other aquaculture • Milkfish

Source: BAS CountryStat.

The Philippines exports and imports small quantities ofmilkfish; exports are mostly frozen whole (excluding livers and roes), while imports are mostly live fish for breeding. According to SPC, the Philippines is the world's major exporter of whole milkfish.2 Data from DA (20 I 0) indicate an export value of 4Q.8 million dollars, from just 4,266 tons of exports, or about $10/kg FOB. Compare this with the retail price of milkfish in the Philippines of Pl 14 per kg ($2.40). The country appears to be a highly competitive producer of milkfish. DRC estimates confirm t~is (Table 27).

Table 26: Policy analysis matrix for milkfish aquaculture, 2012, in pesos per ha (except for ratios)

Revenue Tradable Non-tradable Profit DRCR DRC/ SER

Financial 77,920 -19,194 -17,660 41,066 0.30 0.29

Economic 77,920 -17,871 -17,261 42,788 0.29 0.27

Transfer 0 -1323 -399 -1722

Source of basic data: BAS.

One ha of fishpond yields 41 - 42 thousand pesos of profit (using either financial or economic prices), corresponding to DRCR of 0.29 to 0.30 (slightly lower using the shadow exchange rate). Details of cost are provided in Table 28.

2 www.spc.int/aquaculture/images/commodities/pdt7Milkfish page.pd[

33

Table 27: Cost items for milkfish aquaculture, 2012, in pesos per ha

Financial values Economic values Shadow factor

Commercial feed 3,145.00 3,145.00 1.00

Fertilizer 2,820.00 2,820.00 1.00

Other feed 777.00 777.00 1.00

Other material inputs 426.00 380.36 0.89

Fuel, utilities, transport costs 690.00 616.07 0.89

Stocking materials 10,088.00 10,088.00 1.00

Capital 5,866.00 5,866.00 1.00

Labor 6,604.00 6;604.00 1.00

Land 4,791.00 4,791.00 1.00

Others 45.00 45.00 1.00

Tax 399.00 0.00 0.00

Revenue 77,920.00 77,920.00 1.00

Source of basic data: BAS CountryStat.

13. SUMMARY AND RECOMMENDATIONS

Summary and sensitivity analysis

DRCR estimates (both financial and economic) are summarized in Table 29. The second to last column provides re-estimated DRCR when world prices increase by 10%. The last column assigns status as to whether the commodity is Importable, Exportable, or Nontraded, primarily based on RCA. (Sugarcane is italicized owing to the concessionary nature of its exports to the the USA, the biggest export destination). The assessment of DRC leads to the following observations. ·

Table 28: DRCR estimates for selected agricultural commodities in the Philippines

DRCR, financial DRCR, economic · DRCR, world price Trade status shock (10%)

Hogs 0.90 2.78 0.93 Importable

Broilers 0.91 2.04 1.72 Importable

Rice 0.58 1.90 1.67 Importable

White maize 0.82 0.72 0.69 Nontraded

Yellow maize 0.54 0.56 0.50 Importable

Sugarcane 0.47 0.56 0.44 Importable

Mango 0.54 0.50 0.44 Exportable

Coconut 0.36 0.34 0.31 Exportable

Milkfish 0.30 0.27 0.24 Exportable

Banana 0.26 0.24 0.24 Exportable

Pineapple 0.14 0.13 0.12 Exportable

Source: Authors' calculations

The DRCRs are generally robust to changes in assumptions, as tested by a 10% increase in border price. The exception is hogs, where the alternative assumption causes a dramatic improvement in DRCR (sending it below unity). The pattern of DRCRs can be summarized

34

as follows:

Financial DRCRfor all of the subject commodities are below unity, indicating each activity is profitable from the private viewpoint. Note that there are variations in financial DRCR, with the lowest belonging to exportables such as coconut, banana, pineapple, and milkfish; for these products, doinestic resource cost is a relatively small proportion of value added (i.e. gross output net of cost of tractable inputs). However as discussed previously, economic DRCR is a better indicator of efficiency in resource utilization as it corrects for price distortions.

Divergence between prices of domestic resources and tradable inputs are minor. In Philippine agriculture, most inputs (fertilizer, feeds, seed, etc.) are not subject to large price distortions, due to taxes, subsidies, or other regulations. The only exception appears to be for rice, an importable product which enjoys a highly subsidized irrigation service.

For importable products, economic DRCR is much larger than financial DRCR, with the exception of yellow maize. Contrary to the financial DRCR criterion, contraction of rice, hogs, and broilers at the margin is warranted. The large import-competing commodities in the country are generally protected by severe import restrictions and taxes, especially rice, hogs, and broilers. The distortions are severe enough to reverse the prescription indicated by the financial DRCRs, i.e. based on economic DRCR, production of rice, hogs, and broilers should decline; reallocation of resources from these sectors is being restrained by distortionary price policies.

Interestingly, despite the presence of high import barriers, the study finds comparative advantage for yellow maize and sugarcane in 2012. For the former, productivity gains domestically have coincided with rising world prices. Meanwhile in the case of sugar, import barriers appear to be unnecessary for continued growth of the industry, particularly under the recent world sugar price boom. Parenthetically, this suggests that opening up of the sector to foreign competition - especially in view of the reduction of intra-A SEAN tariffs to 5% - is not expected to cause significant industry dislocation.

For exportable products, divergences between financial and economic DRCR are small. Further expansion of export ables is .warranted. In Philippine agriculture, there are no serious distortions for agricultural export activities, i.e. there are no significant export taxes or subsidies, implicit or explicit. Combined with observation 2 above, this leads to a minimal divergence between financial and economic valuation for exportable products. As a corollary, allocation of resources towards exportables at the margin is justified based on the efficiency criterion.

Annex: World Bank-supported w~rk on agricultural support in the Philippines

In 2006, the World Bank undertook a global research project in to quantify the changing extent of distortions to agricultural incentives, covering Asia, Africa, Latin America, and European transition economies. For study on the Philippines (David, Intal, and Balisacan, 2009) reports that the policy regime placing direct and indirect burden on agricultural had reversed since the mid-1980s. The shift in protection towards agricultural import-competing commodities artificially raised their profitability, increased the cost ofland for producing other crops, and reduced the competitive advantage of exportable agriculture. For rice, the inefficiency of price intervention policies is amplified by reliance on quantitative trade restrictions.

35

In 2008, the World Bank launched a Monitoring and Evaluation of Agricultural Policy (MEAP) project for the Philippines (David et al, 2012). Following OECD methodology, the project of the World Bank estimates a set of indicators for monitoring and evaluation of agricultural policy, namely: producer support (incorporating indirect market support, and direct input support through irrigation, credit, and land transfer); general services support; and public expenditures for agriculture. Price policy continues to play the biggest role in agricultural support. From the 1990s onward, rising protection in favor of agriculture resulting in expanding producer support. This was further enhanced by increasing budgetary outlays for agriculture, which was mostly accounted for by irrigation in the 1970s, but in the past decade has been skewed towards provision of private goods (such as fertilizer and seed subsidies).

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Bureau of Agricultural Statistcs. Performance of Philippine Agriculture, 2011, 2012, and 2013 issues. BAS, Quezon City.

David, C., R. Briones, A. Inocencio, P. Intal. P. Geron, and M. Ballesteros (2012). Monitoring and Evaluation of Agricultural Policy Indicators. Report for the World Bank. Philippine Institute for Development Studies DP No. 2012-06. PIDS, Makati City.

Gergely, N., 2010. Quantitative assessment of comparative advantage for major agricultural crops in the Philippines, FAO/World Bank.

Herdt, R., and T. Lacsina, 1976. The Domestic Resouce Cost of increasing Philippine rice production. Food Research Institute Studies 15(2): 213 - 231.

Katie, P., R. Namara, L. Hope, E. Owusu, H. Fujii, 2013. Rice and irrigation in West Africa: Achieving food security with agricultural water management strategies. Water Resource Economics 1(1): 75-92.

Monke, E., and S. Pearson, 1989. The Policy Analysis Matrix for Agricultural Development. Food Research Institute, Stanford University, Stanford, CA.

Unnevehr, L., 1986. Changing comparative advantage in Philippine rice production: 1966 -I 982. Food Research Institute Studies 20(1 ): 43 - 70.

World Bank, 2010. The Philippines: Agribusiness, infrastructure and logistics for growth in Mindanao.

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