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• CURRENT SITUATION OF RICE SUPPLY
• Production
• Demand Situation of Rice
• Price and Rice Trade
• STRATEGIES FOR IMPROVEMENT OF RICE INDUSTRY

Rice is the staple food of the Filipinos and about 33,000 metric tons (MT) are consumed daily making it a very sensitive commodity. The Filipinos households spend about 20% of their daily budget on rice alone (Sarmiento, 2008). A slight change in the price will greatly affect the life of the Filipinos. Due to this and other reasons, the Philippines have been a net importer of rice since the 1870s when it was Spanish colony. It used to import about 45,000 MT of rice annually in the 1890s, mostly from, then Indochina. And today, the Philippines still imports rice to complement domestic production (Mong, 2009).

The Philippines is one of the more populous Asian countries with a population of at 94 million as of August of 2010. The per capita Gross Domestic Product (GDP) was $3,400¹⁾ and agriculture accounts for 14.9% of the GDP. Its irrigation system is not well developed mainly because the country consists of as many as 7,107 islands and islets. Accordingly, there exist not many plains suitable for rice cultivation (UN Population Division, 2010; US/CIA, 2010). 

¹⁾ Unless otherwise mentioned, the dollar ($) used in this paper refers to the US$.

The average farm size is 1.5 to 2 ha,²⁾and many farmers do not own the land they farm. The tenants have to pay a significant proportion of their harvest to the landlords, which may be difficult if the yield is reduced because of the many typhoons or other natural disasters such as volcanoes.

²⁾ Under the Philippines Agrarian Reform Law, a farm household cannot own a farm larger than five ha (PCARRD/DOST, Philippines, 2010).

It is for the above reasons that the Philippines together with Far-Eastern countries like Korea,³⁾ Japan⁴⁾ and Taiwan has to postpone the tariffication of rice under the General Agreement on Tariffs and Trade (GATT) - Uruguay Round (UR) / World Trade Organization (WTO) rule in December, 1993. This postponement is still maintained until today. The ensuing socio-economic issues of rice industry in the Philippines would provide important lessons for Korea on problems of self-sufficiency in rice. 

³⁾ Late in 2004, Korea reached a deal with the U.S., China, Thailand, Australia, India, Pakistan, Argentina, Egypt, and Canada, under which Korea would postpone rice tariffication until 2014 in exchange for granting them greater access to its domestic rice market. Under the deal, the rice exporters were allowed a Minimum Market Access (MMA) of 7.96% or 408,700MT, from 4% of domestic consumption as 2004. Korea also allowed the direct sale of government-imported rice to consumers. The portion of direct sale would reach 30% of the total imports by 2010 and beyond. And Korea must import 116,159MT from China, 50,076MT from the U.S., 29,963MT from Thailand, and 9,030MT from Australia in 2005-2014.
⁴⁾ Japan was allowed to postpone rice tariffication until 2000 in exchange for 4-8% MMA based on the domestic average consumption in 1986-1988. The 4% MMA was 426,000MT and 8% MMA 852,000MT. Japan, however, took tariffication from April 1, 1999. Tariff Equivalent was 351 ¥/kg in 1999, 341 ¥/kg from 2000.
⁵⁾ Joining the WTO in January, 2002, as a developed country, Taiwan was allowed to postpone rice tariffication for one year in exchange for 8% MMA of domestic average consumption of 1990-1992, meaning 144,720MT. Taiwan implemented tariffication from January 1,2003. Tariff Equivalent was 45 NT$/kg.

This paper aims to analyze the current situation of rice industry in the Philippines and will explain why the country has become ever-increasingly dependent on rice imports in recent years. The paper will share possible ways to ease the situation in the Philippines. The result might give some hints to other Asian net rice importer countries like Korea. 

CURRENT SITUATION OF RICE SUPPLY

Production

Rice is grown on 43,000 km² (or 4.3 million ha) out of 300,000 km² of land (or 30 million ha, 47% of which is agricultural land) in this archipelago⁶⁾ That means the total area devoted to agricultural crops is 13 million ha, of which about 12.34 million ha are utilized for food grains and food crops. About 34.8% of agricultural land for agricultural crops is for rice production. 

⁶⁾ Here, 1 km2 = 100 ha. Total acreage of Korea is 99,720 km², and agricultural acreage is 16,534 km²(=1,653,400 ha) whereas the Philippines agricultural acreage is 57,000 km²(=5.7 million ha), 3.4-folds of Korea (US/CIA, World Factbook, 2010).

Both rapid increasing rate of population and expanding urbanization make it more difficult to expand rice acreage. Yet, the harvest acreage of rice has increased by 12% from 4.04 million ha to 4.53 million ha during the recent period of 2000-2009 (Table 1). This means quite a bit of lands for other crops have been transferred to rice acreage.⁷⁾

⁷⁾ In the same period, rice acreage has increased by 1.2%, whereas other cereal acreage by 10.2% (UNSTAT, 2010).

Table 1. Rice Acreage, yield and production of Philippines (2000-2009).

At the same time, efforts for expanding the irrigation are continued so as to secure more acreage for all-weather farming. In fact, most crucial is efficient irrigation and the Department of Agriculture has intensified the construction of more irrigation canals nationwide in recent years (The Daily Tribune, 2012). As a result, the irrigated acreage has increased from 1.36 million ha to 1.54 million ha, which means an increase by 13% during the same period.

Rice yield of the Philippines has increased by 17% from 2,046 kg/ha to 2,394 kg/ha, in milled basis, in the period of 2000-2009. As a result, total production has increased from 8.1 million MT to 10.6 million MT in the same period. In other Asian countries, the average yield of rice per ha ranged from 1.56 MT (Cambodia) to 4.47 MT (Korea), with world average of 2.71 MT. The Philippines rice yield has been increasing by 17% since 2000,⁸⁾ which is higher than the world average of 8%. However, major rice exporting countries have recorded the increasing rates of 23% (Vietnam) and 34% (Cambodia) in the same period (Table 2). 

⁸⁾ The International Rice Research Institute (IRRI) has developed and provided 864 varieties to 78 countries around the world in the period of 1966-2009. And it is estimated 60% of rice varieties cultivated in the world were developed by IRRI. The Philippines has been growing 107 paddy varieties developed by IRRI, second to Vietnam. In 2009 alone, IRRI provided new paddy varieties such as flood-resistant, droughtresistant, and salinity tolerant ones. If the salinity tolerant paddy is cultivated in the coast area of 400,000 ha, potentially 0.8-1.0 million MT of rice could be produced. The yields of new varieties are in the range of 2.5-3.5MT/ha (IRRI, 2010).

Table 2. Comparison of rice yields in Asia (2000-2009).

According to Duncan’s multiple range test (DMRT) analysis, the null hypothesis that there exist no significant differences among the rice yields of eight countries is rejected at α = 1% level (Table 3). That is, there exist statistically significant differences among them except for India and Thailand. India and Thailand have insignificant difference each other. In terms of average yield/ha, Philippines ranked fifth among the major rice producing countries that were included in this analysis. 

Table 3. DMRT analysis on rice yields in Asia.

According to the DA of the Philippines, about 75% rice growers record 4.0 MT/ha or less in yields, whereas the rest of farmers show 4.0 MT/ha or more in palay⁹⁾ basis. Some of the major difficult factors in rice production in this country are relatively high ratio of input cost compared to profit, uncertainty in production due to pest/disease, typhoon, drought, etc., low and unstable price, and difficulties in approaching credit organizations and so on. 

⁹⁾ Unmilled rice, known as paddy in the Philippines, is called as palay. It is usually harvested when the grains have a moisture content of around 25%.

With relatively poor irrigational system, the yield is around 945 kg/ha in wet season, a decrease of 29% compared to the normal season, in palay basis.¹⁰⁾ In the Philippines, there exist some differences by region and season in that the cultivation time is divided into wet season and dry season. Regionally, it could also be divided into northern and southern areas. 

¹⁰⁾ Out of 945kg/ha, a decrease of 358kg/ha happens due to typhoon or strong winds, 250kg/ha due to pest/disease, and additional 198kg/ha by drought, respectively.

Rice is harvested between March-May in wet season in the southern region and October-December in the northern region of the Philippines. In the dry season, the harvest occurs between November-December in the south and May June in the north. The weather is tropical oceanic climate, with northeastern dry monsoon in November-April and southwestern wet and rainy monsoon in May-October. During the latter period, typhoon happens frequently mostly in the north-central Philippines. Yearly temperature is 27°C on the average during the months of April-June and on the average in the months of December-February. The climate in the Philippines could be divided into four types depending upon distribution of rainfall.¹¹⁾

¹¹⁾ Western part of Luzon, Palawan, and the Visayas islands have climate Type I. There exist heavy rain period from June to September and a dry season which lasts from 3-7 months. Most of the eastern parts of the archipelago have Type II climate. There is no dry season with a maximum rain period from December to February. Climate of Type III has no pronounced maximum rain period with a short dry season lasting only from 1-3 months. The Type IV climate covers most of Mindanao Island and the central part of the Philippines located between Types I and II. Rainfall is more or less evenly distributed throughout the year.

Total production in terms of palay was 16.4 million MT on the average in recent years of 2007-2009, of which 12.3 million MT from the irrigated farms even though the irrigated acreage accounts for a little over than one-third of total palay lands (Table 4). It means that, from irrigated lands, palay is produced as much as three-folds over the rain-fed lands. 

Table 4. Palay production & yields by irrigated/rainfed area (2007-2009).

Gross revenue from palay production was $1,130 /ha on the average as of 2009, whereas total cost was $785.65 /ha, meaning net returns of $344.76 /ha in the same year (Table 5). More specifically, the gross revenue from irrigated lands was $1,245 /ha, about 42.7% higher than that of non-irrigated lands. Over all, gross revenue was $1,255.95 /ha in dry season, and $1,026.71/ha in wet season, respectively.

Table 5. Rice production costs & returns, Philippines, 2009.

Total production cost for all season in all lands (both irrigated and non-irrigated) was $785.65 /ha. But it was $845.86 /ha in irrigated lands and $646.99 /ha in non-irrigated lands. In dry season, average production cost was $823.26 /ha, higher than the cost of wet season by 8.5%. 

Regarding this high production costs, there are some factors contributing to them. Increasing crude oil price in the world market is one of them, which led to more expensive prices of fertilizers and other materials for rice production. The high oil price also kicks up transportation costs burdened by rice suppliers. Also global warming works against rice production in that a one degree increase in Celsius would lead to reduction of productivity by 15% on the average, not to mention natural calamities (AEA, 2008). 

Production cost of palay on the average was $0.22 /kg. This is equivalent to $0.33 /kg in terms of polished rice by applying the milling rate of 66.7%. It is much higher than in Vietnam. ¹²⁾ Vietnam’s production cost of rice is in the range of $0.06-0.08 /kg, about 1/3 of the Philippines cost. More specifically, the production cost in the Philippines was $0.21 /kg for irrigated palay and $0.23 /kg for non-irrigated palay, $0.21 / kg for dry season and $0.22 /kg for wet season. Therefore, irrigated palay in dry season shows the cheaper production cost per kilogram.

¹²⁾ The Philippines imports more than 95% of total rice import from Vietnam, whose production cost was $0.06/kg in Mekong River Delta (MRD) and $0.075/kg in Red River Delta (RRD). Therefore rice production cost of Vietnam is about 18%-21% of that of the Philippines on the average. Rice production cost was 1,000-1,100 VND/kg in MRD and 1,250-1,350 VND/kg in RRD. The exchange rate of VND/$ = 17,400 at the end of 2008. The yield at MRD was 1.5 times higher than in Thailand, another big exporter in the Southeastern area. The wage rate at MRD was 1/3 of Thai wage rate. As a result, rice production cost in Thai was higher than in MRD by 12-15% (Nguyen Ngoc Que, 2008).

In terms of palay, the Philippines produced a total of 16,266,400 MT in 2009, of which Luzon Island produced 55.5%, Visayas 21.1% and Mindanao 23.4%. Rice production has increased by 54% from 6.9 million MT to 10.6 million MT in the period of 1995-2009 due to the increase in acreage and efforts for yield improvements (UN/FAO, 2010). 

As a result, the annual rice supply has been about 15.1 million MT in the last three years of 2007-2009. It included the average carry-over stock from previous year 2.36 million MT, production 10.75 million MT and imported quantity of about 2.0 million MT. The rice imported during the same period accounted for 13.2% of total supply, and 18.6% of domestic production. It accounted for as much as 22.1% of domestic production in 2008, the highest ratio ever (Table 6).

Table 6. Rice supply in the philippines (2007-2009).

In order to make a significant development in boosting rice production in the Philippines, in addition to more efficient irrigation system, other factors such as rigorous R&D, technological develoment, farm support policy and post-harvest facilities are needed.

It is known that post-harvest losses from harvesting to storage average almost 15.0% with a range of 1.13 to 31.94% (Castro, 2003). Among other things, rice drying alone leads to estimated loss of about 30% of the total postharvest losses. Other losses were arising from milling (21%), storage (18%), threshing (15%), harvesting (12%), and piling (4%) (Ibid., 2003).

The rice post-harvest industry is beset with major constraints as follows;

- Farmers cannot afford to acquire appropriate post-harvest machineries due to inadequacy of capital.

- Low adoption of efficient post-harvest facilities.

- Technical inefficiencies due to lack of farm-to-market roads, packing and appropriate storage facilities, and no sorting facilities for the farmers. 

- Insufficient post-harvesting training and extension activities, together with weak information on technologies and prices accessible to small farmers and their organizations. 

- Post-harvest facilities are not well distributed to successful cooperatives through out the nation, thereby creating more difficulties to small farmers. 

In order to improve post harvest handling and mitigate the post-harvest losses, various stakeholders such as the farmers, farm organizations or cooperatives, local/central government, non-government agencies and private sectors should work together. Especially, continued training on post-harvest management is necessary across the country. These efforts would not only reduce post-harvest losses but also help the farmers create more job opportunities, thus improve their lives. 

Demand Situation of Rice

The total population of the Philippines has increased from 42.04 million in 1975 to 93.62 million as of July, 2010 (Philippines Population, Index Mundi, 2010), with an increasing rate of 2.2% per annum. The rate, however, has slowed down as low as 1.9% annually in the last five years. At the same period, the population density has increased from 140 /km² to 312 /km² (Table 7). This kind of overpopulation is the most detrimental factor of the so-called rice crisis in the Philippines. 

Table 7. Philippines population and its density (1975-2010).

Per capita income in the Philippines has increased from $354.47 to $2,007.36 between the period of 1975-2010. Also, annual per capita consumption of rice has been increasing continuously from 83.71 kg in 1991 to 120kg in 2009. The major reasons for this increase could be explained as follows; 

Among other things, due to rapid increasing rates of both population and per capita rice consumption, overall rice consumption has been rising recently. The quantity of rice consumption in 2009 was 43% higher than that of 1991, meaning an increasing rate of 2.26% per annum during the period.

Another factor for increasing trend of annual per capita consumption of rice is the shifting in eating habits from corn to rice (Gamboa, 2010). Corn is a close substitute for rice in the Philippines. Annual per capita consumption of corn has been decreasing from 12.55 kg to 7.07 kg, by almost 44%, in the period of 1995-2009. In the same period, however, that of rice consumption has increased from 92.55 kg to 119.92kg, meaning 29.6% increase (Table 8). Because of this substitution effect in consumption, self-sufficiency ratio of rice has fallen from 96.31% to 85.83%, whereas that of corn has increased from 95.20% to 95.88% in the same period (DA, 2010).

Table 8. Per Capita Consumption of Rice (1991-2009).

Besides, the Philippines Government has been providing rice subsidies in hunger mitigation program, which plays a vital role in reducing hunger, poverty and malnutrition among poor families.

Accordingly, most of the needed energy through food in the Philippines comes from consumption of rice. Usually, demand for rice consists of seeds, feeds, processing, net food disposable for domestic consumers and export. Export amount is almost negligent in the Philippines. The average quantity of rice demanded in the period of 2007-2009 was 15.1 million MT (Table 9). 

Table 9. Rice demand in Philippines (2007-2009).

Price and Rice Trade

The producer’s price has increased by almost two-folds from $160.2/MT to $318.8/MT during the period of 2001- 2008. This increasing rate of producer's price of rice has been lower than in the U.S., Australia, India and Thailand but much higher than in China, Korea and Japan (Table 10).

Table 10. Producer’s rice price in Philippines & Major countries : 2001-2008 ($/MT).

In order to understand the different levels of rice price by nations, DMRT analysis was performed using the data of Table 10.

According to DMRT analysis, the null hypothesis of no significant price differences among eight countries is rejected at the statistically significance level of a=1%. Therefore, there do exist significant differences among the price levels among the countries listed in Table 10. Specifically, however, both Japan and Korea are significantly different from the rest. Price levels of other countries such as China, Australia, Philippines, India, U.S.A., and Thailand show no statistically significant difference (Table 11). Philippines ranked fifth in terms of price level of rice among the eight major rice producing countries.

Table 11. DMRT analysis on rice price.

During the latest 3 years of 2007-2009, average farm-level price of rice has been $0.30/kg in the Philippines. And wholesale average price has been $0.62/kg and retail price $0.67 /kg (Table 12). That means the average marketing margin has been 123% of farm-level price. It means a very inefficient marketing structure for rice. On the other hand, international prices in the same period were 0.51/kg for 5% broken rice, $0.43/kg for 25% broken rice and $0.33 for 35% broken rice, respectively. So, the domestic wholesale price in the Philippines has been higher by 22% than the world market price for 5% broken rice. 

Table 12. Rice Price in Philippines and World Market (2007-2009).

Due to the domestic high price, exporting rice is obviously infeasible. As such, it is very profitable to import or even smuggle rice from other countries into the Philippines. According to the National Food Authority (NFA) estimation, about 500 MT of foreign rice has been smuggled annually (BLITA, 2010).

During the past 49 years (1961-2009), the Philippines have exported a total of 0.81 million MT of rice, which means an annual average of 16,467 MT. On the other hand, about 22.7 million MT of foreign rice has been imported, meaning more than 28 times of export. The Philippines has been a rice importer for 47 years out of 49 years, at an average of 0.48 million MT per annum (Table 13).

Table 13. Rice Trade of Philippines : 1961-2009 (MT).

More significantly, more than 1.1 million MT of rice were imported annually since 1993, making the Philippines more dependent upon import. 

As of 2009, the Philippines imported a total of 1.76 million MT, of which 1.66 million MT of rice from Vietnam, accounting for 94.9% of total quantity, followed by 54,100 MT from Thailand (2.61%), Myanmar (0.7%), Pakistan (0.6%), and others (1.19%), respectively (Table 14). In terms of CIF (cost, insurance, and freight) price, the total amount of rice import was $1.04 billion. Import from Vietnam ranked first with $0.99 billion (95.3%), followed by Thailand with $27.1 million (2.61%), Pakistan $5.2 million (0.5%), Myanmar with $4.9 million (0.47%), and China with $4.5 million (0.43%), respectively. 

Table 14. Rice imported from major export countries (2009).

The weighted average of import price was $592.3/MT. Vietnam’s rice price was $594.3/MT, followed by Thai rice of $500.9, Pakistan $490.6, and Myanmar $382.8, respectively.

As for the total quantity of rice imported in 2007-2009, the average quantity of about 2.0 million MT was imported. Then, about $1.2 billion was used to import the rice on the average per annum. And the average price was $609.57/MT, ranging from $363.94/MT to $804.32/MT, showing drastic fluctuations year by year (Table 15). 

Table 15. Rice quantity imported, import amount and import price (2007-2009).

Based on the information above, a rice import demand function was postulated and estimated, by using the data of 1961-2010 (FAOSTAT, 2011). Key explanatory variables included import price of rice, per capita GDP (income), per capita domestic cereal production including rice and total trade surplus (total export less total import) of the Philippines. The estimated Ordinary Least Squares (OLS) shows that per capita GDP and total trade surplus lead to anincrease of rice import. However, per capita domestic cereal  production in the previous year less the current year leads to increase in rice import positively.

The estimated results are summarized as follows;

RMQ=−176821–313628RMP+1400.625PCG+11469CEQP10+62.72113EXIM
(t-value) (-1.58)     (-3.54)               (9.66)                  (2.95)                 (3.03)
R² = 0.7457 Adjusted R² = 0.7215 n = 50

where,
RMQ = Quantity of rice imported by the Philippines in MT.
RMP = Import price of rice in 1,000 US Dollars.
PCG = per capita GDP in US Dollars,
CEQP10 = CEQP_t-1–CEQP_t.
CEQP = per capita domestic cereal production, including corn in current year, kg.
EXIM = Philippines’ trade surplus,
i.e., total export–total import, in million US Dollars. 

The results reveal that rice imports are influenced mainly by international price of rice, Filipinos’ per capita GDP, and yearly trade surplus. Also, the less per capita cereal production in current year compared to previous year, the more rice import will happen. Therefore, not many variables except for domestic cereal production seem to be controllable by the Philippines.

STRATEGIES FOR IMPROVEMENT OF RICE INDUSTRY

In order to break the vicious cycle of rice shortage and maintain food security, several strategies based upon the analysis of this study could be suggested; 

1. It needs a rigorous investment in R&D for domestic rice and cereal production. About 3% of the Philippines national budget is for agriculture, much smaller than 7.6% and 10.4% of Indonesia and Thailand, respectively. It means large investment in R&D on rice industry is very limited from the beginning. This situation must be remedied among other things.

Currently, due to a low productivity, rice production cost of the Philippines is as high as three times of Vietnamese cost. Reduced production costs will enable cereals to be sold at lower prices while still compensating farmers appropriately for their efforts. 

The most important components of rice and cereal production, especially for the rice productivity program, are irrigational system, scientific farming made operational in the use of high-yielding seeds, specially certified inbred and quality hybrid seeds, and agricultural infrastructure such as transport systems, particularly roads and inter-island shipping.

2. Improvement in rice yields is very important. Up until now, rice production in the Philippines has been possible mainly because of increased palay area, not because of an increase in yield/ha. In order to achieve this goal of yield improvement, besides providing registered seeds, educating and training the farmers on appropriate production technologies are essential. 

Farmer’s access to high quality seeds must be possible. Those seeds are mostly registered seeds that yield as much as 1.2-1.5 MT/ha. Also, other upland rice varieties such as black rice, brown rice, red rice, etc. should be promoted to produce more rigorously. There varieties are need less water requirement and have a excellect aroma as well. 

3. On demand side, the rapid growth rate of population should be curved down one way or the other. According to the projections for world rice trade (USDA Briefing Rooms, Nov. 24, 2009), the Philippines would account for most of the decrease in global ending stocks of rice over the next decade. With decreased growth rate of population, per capita domestic cereal production could be increased as time goes on, which would lead to decreased rice import after all.

4. Per capita consumption of polished rice should be reduced in a way similar to Korean experience during the 1970s. In order to mitigate the problems of rice shortage, Korean Government has proposed and implemented a dietary change by means of cooking rice meals with mixed grains, mostly barley. Likewise, it is desirable to lessen the consumption of rice included in diet of the Filipinos by regulation so as to reduce rice import and smuggling as well. Recently corn consumption for dietary purpose has been decreasing mainly because of its taste as food is not as good as rice. Therefore better recipes should be developed in an effort to boost corn consumption. Besides, other promotional strategies should be made in order to consume more of unpolised rice, brown rice, white corn, sweet corn, cassava, etc. Cassava is a main staple consumed in Provinces like Tawi-Tawi, Zamboanga, Sulu, etc. Consumption of those products would certainly help reducing total consumption of polished rice.

5. Finally but not the least, a drastic improvement should be made in rice marketing so as to reduce marketing margin and ultimately the retail price. With an efficiency in marketing, price competitiveness of rice would be improved in the Philippines. Also, it could reduce financial burden for both producers and consumers.

More specifically, technical inefficiencies arise in the Philippines due to lack of farm-to-market roads, packing and appropriate storage facilities, and no sorting facilities for the farmers.