The recent passage of RA 11203 or better known as the Rice Tariffication Law and the sudden upsurge of posts on social media of concerned citizens about the plight of poor farmers having trouble selling their palay because of the influx of imported rice have brought to the fore the issue of the perennially mismanaged agriculture industry. I say the “agriculture industry,” because while rice farmers are the current hot topic today, the entire sector is beset by problems brought about by poor understanding of economic principles leading to poor policy formulation and management.
This post will try to tackle some of the most common misconceptions and misunderstanding when it comes to economic realities which affects our poor farmers – or indeed, all of us Filipinos.
So together with other netizens, I also ask: How about the poor farmers?
How about them indeed.
Back to basics
Before we can arrive at an understanding of the issues at play, it’s important to understand some of the basics. Much of these should have been taught at school, and some schools might even have taught it cursorily. But a solid understanding of the following economic principles I would be talking about is sadly lacking, even among college graduates. These economic principles are important, because they explain how markets and money works. Without a solid understanding of these principles, how can one even attempt to discuss a complex issue such as trade liberalization?
Supply and demand
If a good is in demand, its price will rise. If it’s not in demand, it’s price will fall. If there is more demand than the supply can meet, the price will rise. If there is more supply than there is demand, the price will fall. This statement holds true under one assumption: that we are operating under a free market and not under a monopoly, or that regulation hasn’t distorted the market. Let’s see this principle in play in a simple example:
Supposed there are 3 people (John, Peter, James) looking to buy apples. Each of them wants 5 apples at least. John has $5, Peter has $10, and James has $15. However, there is only one seller and he has only 5 apples. How much do you think the apples would sell for? If you answered $3 each, you’re off to a good start. You inherently understand that since there are more buyers than sellers, the buyers would be competing against each other to buy the apples – pushing the price up to its maximum. Let’s look at the opposite situation. Suppose there are more sellers than buyers, what would happen?
John, Peter, and James are all selling apples. Each of them have 10 apples to sell. However, there’s only one buyer looking for 5 apples. The buyer only has $10 to spend. How much would the apples sell for? Unlike the example above, the answer isn’t as simple as $2 each. In this case, the sellers don’t know how much money the buyer has. Not only that, they can only sell their apples to a price at which they don’t lose money selling the apples. So the correct answer to this question is: the cost of production + the minimum markup acceptable to the seller. Let’s say the cost of production for John is $1, for Peter $1.50, and for James $2. How much would the apples sell for?
If you answered anywhere from $1.25 to $1.45, you’re doing okay. For non-perishables, this might hold true, but since apples go bad, the seller is incentivized to sell the apples at breakeven price rather than risk the apples rotting and getting nothing for their efforts. In some cases, if the buyer knows they are the only buyer and there are many sellers, the price can be driven down to less than breakeven, forcing the sellers to take a loss. So the correct answer is $1 or less. It doesn’t matter how much money the buyer has. What only matters is how much the sellers are willing to settle for. And since they are competing against each other on who would sell the apples, a price war would ensue.
Seems simple, right? If there are more buyers (high demand) than there are sellers (low supply), prices would rise. If there are more sellers (high supply) than there are buyers (low demand), prices would fall.
Increased demand also means producers will flock to fill this demand. That’s because the prices are high, attracting producers to produce the good. This would continue until there is enough supply to meet demand. After which prices will start to drop once there is overproduction. After which producers will decrease, since the price dropping will mean producers will start decreasing again.
All in all, this process reaches an equilibrium until the price levels off at the point where supply and demand meet. This is called the price equilibrium or in market slang, the going price.
In general, the going price applies to most products, and the law of supply and demand functions in practice as described in theory. That is, until two things disrupt this process – regulation, and monopoly (let’s talk about price stickiness for another blog post, I feel I’m tackling an entire semester’s worth of lecture compressed in a short blog post).
When government regulates the prices of products, the supply and demand for something does not affect its price. So it doesn’t matter if there are more buyers or less buyers, or more sellers or less sellers. A product will sell for exactly the amount that the government dictates it will. It’s important to understand that wages are a part of this, since wages are nothing but the price of labor. So when governments mandate a minimum wage, that’s the government interfering with supply and demand. Why this is bad will take a lot longer to explain, so let’s leave that off for the moment. If you can follow the course to its logical conclusion, let me just give you this as a hint: minimum wages lead to higher unemployment. Another parting thought: if we want higher wages, we would be best served by practicing birth control (which I would then pose this question: do we really want higher wages? Or lower prices? Or more birth control?).
Another reason price equilibrium may not occur is when the market is under a monopoly (MRT/LRT), oligopoly (Philippine telecom companies), or a cartel (OPEC). In all of these instances, the price is fixed by the seller regardless of the amount of demand existing in the market.
How does this relate to rice trade liberalization?
In the Philippines, the market is captured by the rice traders, not the farmers. Those who have the ability to dry and mill palay and store them as rice can control market prices. Rice has an indefinite shelf life as long as it is kept dry and free from contaminant. Once you understand this, you will soon see why rice prices have a boom and bust cycle in the Philippines, with cyclical shortages occurring in predictable periods.
There are approximately 10,000 rice millers in the country. And they are not in (direct) competition. They have an association (PhilConGrains), that although does not participate in price fixing, does the same job unions does: negotiate for better prices. They affect market prices because they’re the ones dealing with large retailers. What prices they set will determine what the retailers will set. And what price the large retailers set will determine going market prices.
Following so far?
Now, when farmers harvest their grains, unless they’re part of a large cooperative or are a rich capitalist farmer, they have no access to drying, milling, and storing facilities, leaving them at the mercy of those who do. Un-dried, un-milled rice grain goes bad fast. As shown in the example above, the perishability of a product will affect its going price. Farmers can’t dictate their price. It’s the millers who do. They compete with each other until a going price is set. This competition is small, because naturally, a farmer will not canvass the entire millers association of the Philippines. They will only go to those that they can reach — a small subset of millers in a specific area (ano ka baliw, mag hakot ng palay region by region hangang maka hanap ka best price? lol. kung ako magsasaka, hihinto na ako dun sa pinaka malapit. fuck canvassing).
Do you see where I’m going? Points if you do.
So now you know why palay is sold at the lowest minimum the farmers can take (and often at a loss during typhoon season).
Now, let’s get to the fun part. The palay is now with the millers. They dry it, mill it, store it. They have huge warehouses. Sometimes larger than the NFAs. At this point, if kept properly, the rice will keep indefinitely.
Quiz time. If you’re the miller, when do you sell your rice? When prices are down? When prices are stable? When prices are high?
Another pop quiz. That’s what the NFA is for, right? To stabilize prices?
Oh, you poor sweet summer child. What can the NFA do when the millers can out-bid them yet outlast them? Why do you think the prices surge once the NFA starts running out of reserves? Pag naubusan na ng bala ang NFA, nagsisimula pa lang ang millers.
Btw, we are hemorrhaging more or less 7B annually in subsidizing the NFA.
And before the Rice Tarrification Law was passed, we had a shortfall of an average 1MMT (million metric tones) of rice. Compared that to when the law was passed, where for the first time in decades… to be cont.