Rice is the staple food in the Philippines. It accounts for 1/3 of the total food consumption (in terms of domestic utilization in metric tons) and is grown on about 4 million hectares of the total 13 million hectares of arable land (Glipo, Vibal and Cainglet, 2002). The Philippine government has made numerous attempts to influence its price.
In 1972, the Philippine government established the National Food Authority (NFA) to ensure a continuous supply of rice at stabilized prices through domestic stocks and import control. The agency procures and sells rice at administratively determined prices and stores and maintains rice stocks as a contingency against future shortages. The figure below shows average annual rice procurement and distribution by region from 2000-2012 (mil kilos).
The National Capital Region receives the lion’s share of the distribution, which is natural because it is the most populous region. Most procurement comes from Mimaropa, a region with nearly half of its economic activity coming from agriculture. Clearly, distribution outpaces procurement in the typical year, highlighting the fact that the government typically imports significant quantities of rice to support its distribution program.
Average Annual Rice Procurement and Distribution by Region, 2000-2012, million kilos
A stated goal of the NFA is to support farm gate prices and reduce the retail price of rice. To accomplish this, the NFA sells rice through accredited retailers at a fixed margin on the sale, while at the same time, offers to buy raw rice from farmers at a support price based on the average domestic cost of production plus an administratively determined mark-up. It holds buffer stocks equivalent to 30 days of consumption plus 15 days of emergency holdings by buying paddy during peak harvest; then the NFA sells rice from its stocks at strategic times when prices are at seasonal highs in order to reduce the retail price (Intal and Garcia, 2005; Yao et al., 2005). The program is expensive to maintain because it is the intent of the program to buy high and sell low.
Meanwhile, the private marketing channel operates alongside NFA. In the private channel, prices are set by supply and demand forces, while the NFA purchases and sells at administratively set prices. The two marketing channels are interrelated because farmers can decide to sell their rice to private markets or the NFA.
Below wholesale prices of rice in major producing regions are presented along with the world price of rice from 1990 through 2013. Rice prices in the Philippines generally trend with the world price of rice, but prices in the Philippines did not experience the same levels of volatility that the world price did over the same horizon.
Wholesale Price of Rice per 50 kilo Bag in Major Producing Regions, 1990-2013
It is not clear whether the activities of the NFA are responsible for this feature. The NFA influences market prices in two main ways: by changing the size of the buy price premium (difference between the NFA buy price and the farm gate market price in surplus producing regions) and by changing of the sell price discount (difference between the NFA sale price and retail market price in consuming regions).
In this research we examine whether the NFA selling discount and the NFA buying premium have an effect on wholesale rice prices in the Philippines. We use a structural vector auto-regression (VAR) approach to model differences in monthly prices from January 1990 through January 2013 to estimate the impacts of the NFA’s pricing decisions on private sector rice price levels. In the table below are the estimated coefficients and standard errors (in parentheses) of the NFA Buy and Sell price premiums on the regional prices (regions are organized in columns). Statistically significant coefficients are shaded in grey (*10%, **5%, ***1% levels).
The takeaway here is that there is some evidence that the buy price premium had some effect in the Central Luzon region (three shaded boxes) but these coefficients were significant only at the 10% level. Apart from that, there is not much evidence of the NFA price premiums having an impact on the wholesale prices of rice.
Selected VAR Results
The NFA’s procurement and distribution program has been questioned because it is an expensive program to maintain. Further, we find that the program has had limited ability to influence the price of rice within the Philippines.