NFA reforms that the Rice Tariffication Law failed to carry out

(First of two parts)

Despite the adequate rice supply in the country since the issuance of the 2019 Rice Tariffication Law (RTL), some of us continue to disagree that the RTL was good legislation. The RTL converted rice farmers’ protection from import quantity restrictions (QRs) into ordinary import tariffs. The move ended the import monopoly of the National Food Authority (NFA) and enabled the private sector to import rice. The RTL made rice import decisions more transparent, reducing the country’s vulnerability to rice import shortages and high rice prices.

The RTL also reduced tariff protection in 2019 for the benefit of rice consumers. It reduced the rice import tariff rate from 50% to 35%, an important component of the RTL. The law was introduced to rein in food price inflation, primarily fueled by high rice prices.

Besides ending the NFA’s import monopoly on rice, the RTL clipped all of the NFA’s mandates and functions under its charter, PD 4 as amended, except one on managing the emergency buffer stocks. Once a model in the region in the 1970s of how to keep a country food secure with all its powers and functions under its charter, the NFA was transformed into a mere public warehouse firm for the country’s rice buffer stock.

The NFA before the RTL had several mandates in addition to its monopoly on rice imports and exports — although the country had not exported rice since the 1970s. It supported farmgate palay (unmilled rice) prices, subsidized rice prices for the poor, managed the country’s emergency rice stocks, and regulated the domestic rice and corn trade. It also helped increase the productivity of rice farms and reduced post-harvest waste.

The agency’s structure before the RTL dismantled it, was patterned from the idea in the 1970s of fusing into one agency the functions of developing and regulating the rice trade. In the 1970s, its mandate covered corn until in the 1980s — most of the corn got was used as animal feed, and not as food for the population. It was back then called the National Grains Authority (NGA). But in the 1980s, its mandate diversified into other food items regularly purchased by the poor, keeping rice of course as its main commercial business.

Other countries in the region, like Indonesia, copied the NFA’s set up. The trade monopoly on grains accorded profits to the agency, which it used to pay for the cost of the food grain subsidies for the population. The NFA in the 1970s, and perhaps early 1980s, was financially self-sufficient. It was not a fiscal problem of the National Government.

But since the 1990s, the monopoly profit of the NFA in rice evaporated as the world rice market pushed up rice prices. In the 1990s, it sought and acquired fiscal subsidies to pay for its rice import tariff obligations. Because it continued to fulfill its other mandates on subsidizing food consumption and farmgate prices of palay without the import monopoly profits, it borrowed commercially. It started to become a fiscal burden on the National Government. The financial situation continued to deteriorate until in the 2010s, its commercial debt ballooned to about half a trillion pesos and continued rising. It was second to the National Power Corp. (NPC) in the list of agencies monitored by the economic oversight committee led by the Department of Finance.

The NFA then needed to be reformed, but no one was bold enough to process the appropriate changes into a new charter of the agency. There were several bills for the reforms, but Congress then paid lip service to the cause of reforming the NFA as it was seen as an anti-rice farmer reform. The NPC charter was reformed with the EPIRA (Electric Power Industry Reform Act) law, but the NFA escaped its legislative dismantling until the RTL in 2019.

Senator Cynthia Villar, who introduced the RTL bill with then Senator Franklin Drilon and succeeded in getting it approved by Congress, focused on ending the import monopoly of the NFA.

It was to comply with the country’s legal obligation to impose tariffs on import quantitative restrictions or QRs in agriculture as a member of the World Trade Organization (WTO). That was done for other agricultural products in 1996, but the government kept deferring it for rice, saying that the rice farmers were not ready for it. But the tariffication could no longer be kicked forward by 2019, and the Finance department had to urge Congress to impose tariffs on the rice QR.

The RTL amended the NFA charter to impose tariffs on the import QR, which is the agency’s rice import monopoly. However, in the process it cut the other functions of the NFA, which in my view was done without a thorough rethinking about how to keep those in a manner that is more effective and financially sustainable. The RTL could have been more thorough, if, in addition to tariffication, it also reformed the NFA with respect to its other functions.

The legislature could have taken more time to look up as well the important services of the NFA to the population. But they must be done in my view, to maximize the net benefit of RTL to our country. Without the added reforms, the adverse effects of the RTL on specific stakeholders are unnecessarily high. I take up three of these, namely the countervailing role of the NFA in rice markets, implementing price supports for rice farmers, and delivering rice subsidies to lower income households.

The RTL did not allow the NFA to engage in rice trading, except for keeping the emergency buffer stocks. This provision, just to point out its lack of a more thorough rethinking of what to do with the NFA, lacks its function of replenishing the buffer stocks to prevent waste. Agriculture Secretary Francisco Tiu Laurel, Jr. had to come up with his own definition of a food security emergency so the NFA could sell and replenish its aging buffer stocks.

The larger problem of not permitting the NFA to conduct commercial operations is it deprives the National Government of a capacity to effectively countervail rice price manipulation by a few rice traders/importers. Those who oppose the RTL have been saying that it has only marginally reduced rice prices, when it was primarily issued to reduce rice price inflation, and that the small decline of rice prices it had delivered was inadequate to offset the more significant drop of farmgate palay prices.

With President Ferdinand “Bongbong” Marcos, Jr.’s EO 62, implemented in July 2024, which reduced the rice import tariff by over 50% to bring down rice prices and reduce their contribution to overall inflation, price data indicate the same pattern of marginal decline in rice prices, certainly below what the reduction of import tariff suggests. Following EO 62, rice prices fell by 0.96%, and by 0.31% for retail rice prices. In contrast, the average drop of farmgate palay prices in the same period was 4.63%.

It is time to accept that a de facto rice cartel — which could be a leader-follower arrangement — involving a few large traders and importers has set rice prices to maximize profits.

The government has resorted to using suggested retail prices (SRP) for rice, a measure that is costly to enforce and thus ineffective. It is also a big mistake to go back to introducing a rice import monopoly under the NFA. The RTL is correct in getting rid of the rice import monopoly.

The most effective measure that the National Government can use is to countervail the rice price manipulation. But the government does not have this capacity since the RTL had disallowed commercial operations of the NFA. Suppose the NFA had been permitted to conduct commercial operations, the government could instruct the NFA to use local and imported rice and sell the rice at competitive prices. The weakly enforced cartel arrangement breaks up with an effective countervailing by a significant player in the rice market — the National Government.

Another point is that with the countervailing role of the NFA, the lower rice import tariff last year could now effectively set rice prices at competitive levels and neutralize the contribution of rice prices to inflation. It is a good measure to maintain the low rice import tariff to make the countervailing measure more effective.

In my next column, I will take up the other functions of the NFA that were left out by the RTL. They are delivering rice price supports to farmers and rice subsidies for lower income households.

(To be continued)

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