Inflation and high pork prices
The national inflation rate is too high for comfort. It stood at 4.9% and 4.8% in August and September, respectively, and eased to 4.6% in October. The Economic Intelligence Units of BDO and ADB both forecast that year-end inflation will hover at around 4.5%. This is a cause for concern since gross domestic product (GDP) is projected to grow by only 5% this year. This means spending power will likely remain static despite the growth in the economy.
One of the principal reasons for the high inflation rate is the high price of fresh pork resulting from a shortage in supply. It will be recalled that the African Swine Fever (ASF) entered our shores in 2019 through smuggled swill feed imported from China. Swill feed is composed of food scraps and/or food waste that may contain or may have come into contact with meats infected with viruses and other pathogens. In theory, the use of swill feed is illegal, but it is still widely used in the hog raising industry.
The ASF virus decimated hog supplies in the last two years, especially in National Capital Region. The national inventory of hogs dropped from 13 million heads in 2019 to just 8 million heads today. Consequently, price of pork increased from P220 per kilo to about P335 per kilo.
To augment pork supplies and to address high retail prices, the Office of the President handed-down Executive Order (EO) 128 on April 7. The EO effectively lowered the tariff rates for imported pork from 30% to 5% for imports within the import quota and from 40% to 15% for imports outside the import quota until July 7. From July 8, 2021 to April 6, 2022, tariff rates were slightly adjusted to 10% for imports within the import quota and 20% for imports outside the import quota. Further, import quotas were also increased from 54,000 tons to 404,000 tons.
The liberalization of pork importation should have driven pork prices down. Why hasn’t it worked?
Two reasons. First, only traders (wholesalers and retailers) were initially allowed to import pork. Processed meat manufacturers were not allowed to do the same.
As we all know, a large portion of the national pork supply is used by food processors to produce hotdogs, sausages, luncheon meats and the like. Unlike other Asian nations, Filipinos derive their protein not from milk and soy, but from processed meats and fish. Filipinos consume more hotdogs, on a per capita basis, than the Americans themselves.
The prohibition for meat processors to use imported pork left them no choice but to use local alternatives at high prices. This is why the liberalization of pork had no effect in arresting the continued rise in prices for canned and frozen meats products during the second and third quarter of the year. It was only last month that the Department of Agriculture (DA) issued Memorandum Circular 23 which allowed food processors to utilize imported meats. Thus, we can only expect prices of processed meats to roll back by January.
The second reason is due to the DA’s decision not to allow the sale of imported meats at room temperature. The meat can only be sold if it is stored and displayed in freezers and kept at a temperature of -18 degrees Celsius.
As we are well aware, vendors in our public markets do not operate with freezers — they do not have the financial bandwidth to purchase them. Meats are displayed at room temperature or on ice, at best. The frozen temperature requirement of the DA has impeded the entry of imported meats in public markets. Even today, public markets vendors still make do with the limited local pork supply which is why prices have remained above P300+ per kilo.
The main beneficiaries of the DA’s temperature requirement are the supermarkets. But instead of rolling back prices, supermarkets maintained their prices at sky high levels since public markets are unable to offer price competition. For those who are unaware, the landed cost of imported pork belly is only P220 per kilo. Instead selling this at P265 per kilo (adding on a decent 20% profit margin), supermarkets are selling them at P335 per kilo, the same price as local pork in public markets. This has allowed supermarkets to enjoy a windfall profit of 52% for every kilo of pork sold.
The high cost of pork has made the meat inaccessible for the majority of Filipinos. This has caused demand to drop. Importers and traders are now stuck with high levels of inventory. Millions of kilos of imported pork are tied up in cold storages which, according to DA, totaled 80 million kilos or about three times more than the normal pre-pandemic monthly inventory.
Of total pork volume in cold storage, 25 million kilos are in Metro Manila; 21 million kilos in Calabarzon, another 21 million kilos in Central Luzon, and 12 million in Cebu.
What makes the DA’s temperature requirement for imported pork contentious is that local pork is still allowed to be sold in public markets without refrigeration. This does not make sense. The chemistry of pork is the same, regardless of whether it is imported or locally raised. Why require one to be sold frozen and disallow the other? If the DA’s intention is to avoid bacterial contamination, it should impose the freezer requirement on local pork too. To impose it only on imported pork defeats the purpose.
Besides, Filipinos customarily consume their pork well done. In almost no instance is it consumed raw or rare. Bacteria dies at 62.8 degrees Celsius, which is normally exceeded in the cooking process.
The DA’s imposition of the stiff temperature requirement is the reason why millions of kilos of imported pork cannot be sold in public markets and why it is unable to reach the masses. It is the reason why prices have not rolled back despite liberalizing importations.
The only way to solve the situation is for the DA to relieve the temperature requirement in the sale of imported pork. Only then will we see the price of pork decrease. Only then will it have an impact on the national inflation rate.
Andrew J. Masigan is an economist
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Twitter @aj_masigan
