Staple Foods Sector

1. Staple Foods Sector Diagnostic Country Report Roehlano Briones Ivory Myka Galang

2. Objectives • Review trends in the rice sector, particularly policies affecting the market and competition in various components of the rice value chain • Describe the state of competition in the rice industry • Assess the impact of past and current competition reforms (i.e. reforms enhancing competition in the market) on consumers and producers, and based on this assessment make recommendations • Identify concerns (of consumers and producers) and assess the potential impact of reform measures that can help address such concern

3. Output, area, yield trends Domestic rice production has been increasing, due to both rising area and yield. Background – State of competition - Policies – Assessment of reform impact

4. Demand, Supply, Imports The increase in consumption has outpaced the growth in supply, leading to a growth in imports. Background – State of competition - Policies – Assessment of reform impact

5. Domestic and world prices The domestic price on average has been higher than the world price. Background – State of competition - Policies – Assessment of reform impact

6. Rice Supply Chain Background – State of competition - Policies – Assessment of reform impact

7. Production input system • The main variable inputs to rice production (as share of production cost) • Agro-chemicals, seed: < 3% each • Fertilizer: 10% • Seed: • Only 29% certified or hybrid seeds; the rest is "good seeds" (purchased but not certified) or farmers' own seed. • Privately-bred seeds (of large agribusiness companies) account for just 10% of all rice seeds • No subsidy programs for rice seeds since 2010. Background – State of competition - Policies – Assessment of reform impact

8. Production input system • Fertilizer: • > 70% of domestic supply is sourced from imports. Import permits are not required, although importers need to be licensed and imported products need to be registered. • Tariffs on imports are minimal; 85% of imports are from free trade partners for whom the preferential rate is zero. There have been no major fertilizer subsidy schemes since 1986. • domestic and world prices of urea (the most important form of fertilizer) are integrated. Background – State of competition - Policies – Assessment of reform impact

9. Production input system • Fertilizer: • The fertilizer distribution system is characterized by numerous players; • as of 2009 there were 483 licensed handlers in the fertilizer industry, spanning importation, distribution, repacking, export, and manufacturing. • Fertilizer handlers report no major issues in obtaining licenses and registering fertilizer products Background – State of competition - Policies – Assessment of reform impact

10. Marketing chain • Past research on rice industry shows a high degree of competition in the domestic market, from paddy production to retail marketing. • Dawe et al (2009): • marketing margin at wholesale-to-retail stage: only P0.33 pesos per kg of palay higher in Manila vs Bangkok • If collusion exists, exerts only a small influence on the market price Background – State of competition - Policies – Assessment of reform impact

11. Policies • The rice sector is regulated by the National Food Authority under a highly interventionist regime aimed at food security and price stabilization. • Procurement – support price; procurement subsidy • Licensing, regulation • Import monopoly Background – State of competition - Policies – Assessment of reform impact

12. Procurement Background – State of competition - Policies – Assessment of reform impact

13. Background – State of competition - Policies – Assessment of reform impact

14. Retail distribution Background – State of competition - Policies – Assessment of reform impact

15. Trade policy • NFA manages to stabilize retail prices, but keeps domestic prices high by means of an import monopoly. • Since 1995 the most significant reform in rice policy was its compliance with WTO rules and decisions. • Self-sufficiency policy: in 2013, quota set at 350K tons. Raised to 1.2 million tons by 2014 Background – State of competition - Policies – Assessment of reform impact

16. Potential impact of reforms: Rapid appraisal findings • Case of Metro Manila rice marketing chain • Bulacan hosts small millers/wholesalers, many in Intercity, an industrial estate where about 125 small rice mills do brisk 24-hour business buying and milling paddy and essentially acting as rice staging area for wholesalers and retailers in Manila • The interviews reveal very strong competition among the current players in practically all levels of the supply chain Background – State of competition - Policies– Assessment of reform impact

17. Rapid appraisal findings • Farmers have a choice of buyers right in their communities • Even with tied credit, traders are forced to give farmers the highest price rather than lose out to another buyer and risk not being able to collect the loan. • “what is giving up a few centavos per kilo paddy compared to losing the loan amount due to non-payment?” Background – State of competition - Policies– Assessment of reform impact

18. Rapid appraisal findings • Rice wholesalers who cater to retailers in Manila also rely on volume for profits and maintain low margins of P20 - P30 per sack to compete. They offer payment terms of 15 to 30 days to maintain regular clients. • The retailers compete by offering variety and convenience. Many make available different types of rice in terms of quality and price so that there is something suitable for every shopping budget. Background – State of competition - Policies– Assessment of reform impact

19. Rapid appraisal findings Background – State of competition - Policies– Assessment of reform impact

20. NFA Licensing data Background – State of competition - Policies– Assessment of reform impact

21. NFA Warehousing capacity Background – State of competition - Policies– Assessment of reform impact

22. Summary • To summarize: the rapid appraisal confirms the findings of the literature survey showing a competitive market structure for domestic rice production and marketing  little scope for reforms such as lifting barriers to entry • However bringing in foreign stocks of rice is highly uncompetitive, being a statutory monopoly of the NFA. Background – State of competition - Policies– Assessment of reform impact

23. Trade policy impact

24. Trade policy impact

25. Conclusion • Rice importation policies need to be rational and effective in protecting not only the interests of producers but also consumers and other market participants. • Huge differences in the costs of bringing in imports and moving domestic supplies to consumers makes smuggling lucrative. • A properly-set tariff level under a liberalized importation policy -- allowing anyone to bring in rice with the payment of tariffs -- can still give protection to producers and will provide more stability in domestic supplies and prices and deter any attempt to control substantial supplies to manipulate market prices.