CARTELS in the agricultural sector are often blamed by the Department of Agriculture (DA) as the main reason why, despite low farmgate prices, agricultural and food prices remain high.
In the past, economists, including this writer, believed that traders were unfairly being used as bogeymen by the DA for its failure to increase overall farm productivity. We argued that the presence of thousands of traders, say in the rice sector, would not allow an oligopoly — a market structure where only a small number of firms — a cartel — have control.
But closely observing the political economy of Philippine agriculture now, I believe that there are really cartels, operating across various agricultural commodities that influence market prices as a way of ensuring a hefty profit for themselves. A good example is the rice industry, where prices remain high despite repeated DA assurances that these would fall because of programs and policy interventions.
Rice prices trended upward when India decided in the middle of last year to ban exports of non-basmati (white) rice. Since India accounts for around 40 percent of the global rice trade, the decision put pressure on rice prices. There was a consequent rush to build our rice stock, and DA announced late last year that we had nearly 2 million metric tons (MT), enough for over 50 days at the onset of 2024.
With this, DA spokesman Arnel de Mesa assured the public that come dry palay (unmilled rice) harvest season starting late February to April, prices of regular milled rice would settle to around P38 per kilo. Unfortunately, they remained elevated at over P45 per kilo.
Note that this was happening despite the fact that nearly 400,000 MT per month of rice imports had entered the country from January to June. With the healthy ending stock, the onset of the palay harvest season and the entry of more than 2 million MT during the first half, rice prices should have stumbled.
They did not because a reliable source from the rice industry told me that traders built stocks during the first half to hedge against a possible significant supply deficit due to the onset of the El Niño weather phenomenon and rising global rice prices.
It was at this point when the President decided to issue Executive Order (EO) 62, further reducing the tariff on rice to 15 percent from 35 percent. Combined with a decline in the world rice prices, the lowering of tariffs should have triggered the entry of cheaper rice imports.
But it did not. It was reported by the DA that rice import arrivals from July (the EO was signed on June 20 and took effect in July) to August 22 was around 376,000 MT, or around 188,000 MT per month. This is significantly lower than the 400,000 MT per month registered during the first half of this year. Thus, instead of consumers immediately benefiting, they continue to suffer from high rice prices.
The DA secretary last week explained that the reason for this was that traders were still unloading previous rice imports bought at a higher tariff of 35 percent. This is an implicit admission that traders hoarded stocks instead of releasing them to the market to maintain high prices and guarantee their profit. This is undoubtedly a cartel-like operation.
Curiously, the DA secretary predicted in the same interview that rice prices would start declining, which he calculated to be in October, when traders had cleared their stocks and started massive importation at a lower tariff of 15 percent. Something is amiss here.
First, October is the peak palay harvest season and historically, rice prices decline during this month. And second, why can’t the DA do something to lower rice prices after the effectivity of EO 62 instead of defending the cartel-like behavior of rice traders? Why can’t it not prioritize the interests of the vast majority of the consumers?
This clearly reveals why agricultural and food prices remain elevated in the country. The DA advocates the maintenance of a high tariff wall against imported agricultural products or imposes quantitative restrictions or import bans. The latter comes in the form of requiring the issuance of a certificate of necessity to import (CNI).
While the goal is purportedly to protect our small farmers, in reality the main beneficiaries are the traders. This is manifested in the huge disparity between farmgate prices and final retail prices. While small farmers get a pittance for their produce, traders are assured of hefty profits at the wholesale and retail ends because of this protection.
The practice of requiring the issuance of a CNI (on top of paying relatively high tariffs) and then allocating imports to selected traders ensure that traders’ profits are guaranteed as it allows them to maintain prices at high levels.
We have seen this in the case of sugar where imports were allocated to just three traders. While it offered little reprieve to small sugar farmers in the form of farmgate prices just hovering above their production cost, it immensely benefited traders: imported Thai sugar is at around P25 to P30 per kilo while local traders/importers sold at no less than P80 per kilo.
This practice similarly applies for fish and many vegetable products where the issuance of a CNI is required prior to importation. As such, the presence of cartels in the Philippines is an induced state policy which purportedly attempts to protect the small farmers but in reality mostly benefit rich traders. This is what we refer to as “state-sponsored cartels.”
It is convenient for the government to do this because the cartels are the noisiest and most vociferous lobby groups in the media and legislative proceedings, given their immense wealth and influence, whenever policy decisions meant to lower food prices negatively impact their profit. And of course, the state can always justify its action by stating that it is merely protecting the interest of small farmers.
As for the vast majority of the Filipino consumers, they can always be influenced toward a desired direction by paying off mainstream media outlets and social media influencers.
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