Duterte’s misguided pronouncements on rice policy

In a speech in Ilocos Sur on July 25, President Rodrigo R. Duterte strongly alluded to a suspension of the implementation of the Rice Tariffication Act of 2019. Duterte proposed a “happy compromise” — to disallow rice imports and provide price support for local rice farmers for the upcoming harvest season, regardless of cost to government.

The “happy compromise” is illegal, as Republic Act (R.A.) 11203 explicitly provides against quantitative import restrictions and other measures which “hinder the liberalization of importation, exportation, and trading of rice.” It also starkly contradicts the President’s promise to implement the law in his recent State of the Nation Address (SONA). Worse, it will not fundamentally solve the problems of the farmers, will negatively affect the welfare of consumers, and will likely result in future food and price crises.

In other words, though concerns over the implementation of the law are valid, the President’s “happy compromise” is misguided.

This trade-off associated with liberalization — lower overall prices, but at the expense of removing trade protection to domestic rice industry, led to a long, highly politicized as well as highly ideological debate which was finally resolved with the passage of the 2019 rice tariffication law.

The Philippines was first granted a World Trade Organization (WTO) exemption from the removal of quantitative restrictions on rice in 1995. While the exemption was originally set to expire by the end of 2004, the government successfully lobbied for an extension until 2014, and then again until June 30, 2017. It took an unusual inflation spike due to mismanagement in the rice supply in the latter half of 2018 to provide the impetus for the Rice Tariffication Act to be finally legislated and signed into law this year.

The ostensible goal of the very prolonged quantitative restrictions on rice importation was to give enough time for our rice industry to enhance its competitiveness. But after over two decades, competitiveness never materialized and the welfare of farmers deteriorated. The government used the National Food Authority (NFA) subsidies to provide price support for local farmers, while having very little to show in terms of improving affordability and increasing the industry’s competitiveness. In fact, subsidies for price support became a disincentive for farmers to become efficient and competitive. Moreover, agricultural policy was generally inept and directionless, while the agencies entrusted with food security in rice was plagued by the inefficiency and corruption usually associated with bureaucratic monopolies.

There is some evidence to show that rice liberalization has been at least partially successful: according to the United Nations Commodity Trade data, the country has already imported 1.32 million metric tons (MMT) of rice through the month of April. The United States Department of Agriculture reports that we are on pace to import a total of 2.6 MMT, which will far surpass 2018’s total volume of 1.77 MMT.

Expectedly, farmgate prices for palay have fallen significantly. The average price has now fallen to just P17.78 per kilo, according to the latest Philippine Statistics Authority weekly price update, a level comparable to its 2015 price. Some farmers are even claiming that prices have fallen further to below P14 per kilo in some areas. Despite this fall however, retail prices for well-milled and regular milled rice have not fallen by such a degree. A rule of thumb is that the retail price is typically twice the farmgate price; yet, the observed prices of P42.81 per kilo (for well-milled) and P38.51 per kilo (for regular milled) are far from the expected price range of P34-35 per kilo. The theoretical gains have not been fully realized and there is a growing concern of restrictive market influences or concentration at the wholesale/trading level.

While government needs to consider mobilizing the concerned agencies, such as the Department of Trade and Industry and the Philippine Competition Commission, to investigate why retail prices have not fallen as they should have, it also needs to consider how to address the shock to farmers’ livelihoods.

The gains from the Rice Competitiveness Enhancement Fund (RCEF), the mechanism to help farmers adjust to the new rice policy, will mainly happen in the medium term and the long-term, but the urgency to help farmers exists in the now.

A program of cash transfers, similar to one that accompanied the tax reform (or TRAIN) will provide immediate assistance to the farmers. The farmers can use the cash transfers to buy, individually or collectively, the inputs they need to become efficient and increase yield, or simply to tide them over the transition.

Such a transfer is contingent on rice tariff collections. The expectation is that tariff collection will exceed the P10 billion for this year. The amount that exceeds P10 billion will be used for cash transfers as the safety net for rice farmers. Such an allocation will be subject to the usual budget process in Congress. In this case, an expedient solution, like Congress passing a supplemental budget to frontload the cash transfers, is absolutely necessary.

Meanwhile, the concerned government agencies like PhilRice and PhilMech must swiftly and efficiently allocate their respective budgets that have grown big. PhilRice in 2018 was given appropriations of P778 million, while PhilMech obtained P343 million. The former is now expected to spend P3 billion on seed development and distribution, and the latter P5 billion on mechanization.

In summary, the real concerns are how to immediately provide support to the farmers through cash transfers and how to ensure that the billions of pesos from RCEF will reach the intended beneficiaries and will be spent in a way that is transparent and that is most responsive to the real needs of farmers.

The President’s brashness is misplaced in this situation, as more nuanced and complex solutions are required.

His political will is better used to go after those unscrupulous agents who are dictating prices and reaping big margins, to the detriment of both consumers and producers. More, his political will should be used to prod both the Executive and Congress to immediately mobilize and allocate the funds for immediate intervention, specifically the cash transfers, in a manner that is consistent with the new law. Further, he must immediately appoint a new Secretary of Agriculture who is most capable to implement the new law, not sabotage it, and implement a Strategic Rice Industry Roadmap.

AJ Montesa is a program officer and researcher of Action for Economic Reforms.