Rice tariffication problems and measures to deal with them

Calls for the review of the rice tariffication law at this point are premature as it has been less than a year since it started being implemented. Farmers have yet to receive the assistance which the rice competitiveness enhancement fund (RCEF) offers. Agriculture secretary William D. Dar had just assumed his post, pledging to implement the law effectively. I don’t see any evidence at this point that the lawmakers of the 17^th Congress made a big mistake passing this law.

Problems have emerged, the effects of liberalizing rice imports in the country’s largest agricultural industry. Farmgate prices of palay or unhusked rice plummeted this quarter by 17%, while rice consumers’ savings have not been as large as expected. Observers point to the traders/importers who may be the biggest winners of the rice law. Retail prices only fell by 4% according to data from the Philippine Statistics Authority. Millers have stopped milling, and feed millers are short of darak (rice bran) because of that.

It is expected that the members of the local rice value chain — i.e. farmers with significant marketable surplus, seed traders, and millers, traders who have yet to learn the business of importing rice — find the net value they received from the industry are significantly lower.

It is the rice consumers and the government who are better off. Rice prices had gone down and the tariff revenues which will go to the RCEF had accumulated to at least P6 billion, based on a casual read of reports coming from the Department of Finance.

I add to the list of winners the importers who have shifted to importing rice, particularly higher value rice, whose local demand is significant thanks to a growing middle class. Although they pay the 35% import tariff, the local rice market is still far from competitive, and these initial players are still at liberty to earn margins higher than the taxes they pay the government. Such net incomes can be made even higher if importers undervalue rice imports, as some observers claim. But if Customs does its work well, its post-entry audit can take this illegal trade margins from importers.

The direction of these changes is expected, and validated by the statistics that we read at this point. Calls to revert to restrictions on imported rice and the role of the National Food Authority (NFA) in the rice industry are, in my view, misinformed, because short-term measures can be taken to mitigate the adverse effects without losing sight of the fundamental goal of rice tariffication.

One short-term measure is supporting palay prices: let the NFA, which continues to have a commercial role in the industry by procuring local rice for buffer stocks, procure more rice and at a higher price. The sharp fall of palay prices may indicate a significant withdrawal of commercial rice traders and millers from the local palay market. While the private sector is finding its commercial bearings in the local rice and palay markets, the public sector may come in significantly to create a market for our rice farmers, temporarily.

We are approaching the start of the main planting season and I share with all observers the view that low farm prices can discourage rice farmers from planting rice. The rice tariffication law wants farmers to continue growing rice and not drive them out — only now, because of RCEF, the farmers should grow their rice more productively. However, RCEF is not ready yet, and certainly the productivity gains it can potentially help generate have not been not realized yet. The situation calls for immediate measures to keep rice farming going, while long term measures to make rice farming more productive have yet to be taken. By design, the government can only use RCEF starting next year.

Incentives to rice farmers may also be provided through conditional cash transfers for beneficiaries staying in the rice industry. The program however, is not ready yet. We need to properly identify rice farmers and adopt rules to ensure effective implementation and prevent abuse. Special safeguards may also be used following a provision in the rice tariffication law, but safeguards raise taxes on imports and make less affordable to rice consumers.

The NFA has to be reimbursed appropriately for the subsidy implied by the contingent short-term measure, and for the procurement service it is doing for the national government.

But the government’s winning move is the long-term effective use of RCEF. Secretary Dar, who has yet to warm his seat at the Department of Agriculture (DA), has to think beyond what several past administrations in the DA had been doing to deliver development funds to improve the productivity of our rice sector. For example, the performance of past DA administrations when it came to the Agricultural Competitiveness Enhancement Fund or the Agriculture and Fisheries Modernization Act was disappointing.

It may be time to think of alternative delivery mechanisms of the assistance to be funded from RCEF. I have advocated for consolidated management of our rice farms. There is simply very little productivity gain that can be realized in small rice farms. The application of improved technologies and farming practices, access to required farm inputs and credit, and effective access to final markets of rice, all these can be facilitated and likely if several small rice farmers bind themselves together to jointly manage their combined rice farms. One can think of several organizational forms for this. But in this way, the benefits of RCEF can be delivered at a lower cost, and upstream inputs like farm machinery put to better use.

The government can also start now to design a conditional cash transfer for rice farmers, which can be ready in a year or two.

Another group of players in the value chain are the millers. The frontier milling conversion rates (palay to milled rice) these days is 65%, but to my recollection we still have many rice mills with 60% conversion rates. The government can negotiate with the Asian Development Bank (ADB) private sector support office to finance a fund for modernizing the rice mills in our country. A local development bank, like the Development Bank of the Philippines, can retail the loan to millers. If on average we can push milling conversion rates to 65%, that would give millers more space to compete effectively with rice imports which are taxed at 35%.

On the import side, the risk remains that exporting countries may restrict rice exports for one reason or another such as what transpired in 2008. I had worked on this type of risk while doing some work for the ADB for the ASEAN Food Security Reserve Board (AFSRB). ASEAN cooperation is important to provide us with an effective early warning system for this type of risk or to avoid it. Perhaps, the DA can check on the progress of the ASEAN rice forum.

The features of the rice tariffication law has the potential of becoming an inclusive trade liberalization reform. Consumers benefit from the reform, and are partly taxed for it with the 35% import tariff. Its revenues go to RCEF, which can accumulate at least P10 billion a year to give rice farmers the opportunity to retool and make rice farming in the country more productive, or even to assist them to shift to other farming businesses. With the fund, adjustment costs of rice farmers can be lowered, resulting in fewer farmers exiting the agriculture sector.

The design for an inclusive trade reform is in the law. The rest is with Secretary Dar, with all our support.

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.