By The BusinessMirror Broader Look Team
RIGHT from the get-go, experts had projected the opening up of the Philippine rice market as the gateway to a better life for Filipinos: lower staple prices leading to slower inflation and lesser hunger.
Indeed, the liberalization of the country’s rice industry allowed the unabated entry of cheaper imported staple.
As figures released by the Bureau of Plant Industry (BPI) showed, about 1.614 million metric tons (MMT) of rice from seven countries entered the Philippine market, from March 5, when Republic Act 11203 (the rice trade liberalization law) took effect, to October 4.
The BPI data showed over 208 rice importers were behind the volume of imports. Surprisingly, more than half of these are farmer-members of cooperatives or irrigators’ associations.
The BPI data also revealed that, as of August 30, over 120 farmers’ cooperatives and associations applied to import rice since RA 11203, or the rice trade liberalization law, took effect.
They accounted for 51 percent (about 1.427 MMT) of the 2.776 MMT applied volume for rice imports, BPI data showed.
The BPI approved all of these applications with sanitary and phytosanitary import clearances (SPS-IC): the last piece of paper that allowed these groups to proceed with their importation.
From NFA scheme to dummy games
BUT one may wonder: why are Filipino rice farmers importing rice?
Industry sources told the BusinessMirror this is not the first time rice farmers did. In fact, they have been doing it for years now, even with the pre-RA 11203 era.
Mario Pilapil (not his real name), a long-time farmer-leader privy to the dealings of farmers cooperatives, told the BusinessMirror that importation of rice has been a regular “sideline” business for these cooperatives.
Pilapil explained that these farmer groups learned the ropes of “importation” through the importation programs of the National Food Authority (NFA), the government’s grain trade overseer.
Since the inception of the NFA’s “farmers-as-importers,” or FAI, program more than a decade ago, cooperatives were introduced to the business of importation, including its good side and its bad side, according to Pilapil.
However, he said that big players started to prey on cooperatives when the country’s minimum access volume (MAV) for rice imports rose to 805,200 MT in recent years.
The NFA’s cap on the allowable volume that every eligible importer could bring into the country gave birth to the dummy scheme, he added.
Pilapil said a private trader—for example, one with a cap of 50,000 MT—connives with farmers organizations to corner additional volumes provided in the importation program.
Farmers’ organizations, in previous NFA importation programs, were allowed to import a maximum of 5,000 MT.
PILAPIL said it was by tapping the allowed importation capacity of farmers’ groups that big rice industry players secured more control of the stocks coming into the country. Hence, this allowed these big players to easily calibrate the release of the staple in the market to maintain high profits, he added.
Further, unscrupulous rice traders undertake such scheme to take advantage of privileges provided to importer-cooperatives, such as leniency in documentary requirements and even tax exemptions, he added.
These rice traders also serve as the financiers of the cooperatives so the latter can comply with government requirements for rice importation, such as bank statements, proof of warehouse and exporter networks.
“The NFA is aware of this scheme but cannot do anything about it because there was no sanction for selling your import rights or permits that time,” Pilapil told the BusinessMirror. “It’s technically legal. They didn’t see anything illegal about it. You applied for the quota and sold your rights.”
He further revealed that the dummy scheme cuts across the country; there is even a Mindanao cohort that engages cooperatives based in that island-group for such business transactions. To date, that group is still alive and working, Pilapil said.
“Imagine, some of the cooperatives in Mindanao are in the mountains—way outside the city proper—and yet they are able to import,” he said.
NFA documents confirmed that almost all of the rice-importing farmers’ cooperatives today were also participants in the agency’s MAV programs in the past years.
Source of income
THE BusinessMirror found out that government regulators were well aware, and even foresaw, that such unscrupulous scheme would be the inevitable fruit of the original NFA scheme.
Former Agriculture Undersecretary Segfredo R. Serrano told the BusinessMirror the NFA created the FAI program so that rice farmers would have an alternative source of income in times of production shortfall. This was especially during the time that the country was way below self-sufficiency.
Serrano explained during an interview at his home in Victoria, Laguna, that the FAI program had two key goals. The first is to allow farmers to engage in importation and earn additional money, which they could invest for competitiveness. The second goal was to expose farmers to the international market and, hopefully, appreciate price signals.
“The intention of the program was to lessen the prejudice of importation to the principal sector that will be affected by the importation, which are the farmers,” he said.
“Technically, the program also allows the farmers to exercise restraint and control over additional imported volumes,” Serrano added. “So if they see the market is being flooded with rice, they can choose not to import, hence, stabilizing prices.”
FORMER NFA Administrator Gregorio Tan Jr. told the BusinessMirror they had foreseen that farmers participating in the FAI program would just eventually sell their rights to bigger players since they don’t have the financial and operational capabilities.
But, Tan pointed out, there was another possibility: farmers entering into joint-venture agreements with bigger players.
“These possibilities were recognized. And these were accepted bottom lines,” Tan explained.
“Since the farmers would be the ones adversely affected by rice importation, then why not give them the opportunity to make some money out of it? Whether selling rights or entering into joint venture,” he added.
According to Tan, who headed the NFA from 2004 to 2006, they wanted the farmers to become the “gatekeepers” of importation so that they could influence the market in terms of supply and stabilize farm-gate prices.
No harm, no foul
THE issue of cooperatives as dummies were not a big issue back then, since the FAI was only a new program and the players were fewer compared to today, Tan said.
Further, he said the purpose of the importation, which is to provide additional supply for the domestic market, wasn’t defeated—whether these be by legitimate cooperatives or by dummies.
Tan said there were also penalties for unused import allocation since it would jeopardize the whole program and put the country’s supply at risk.
“And maybe for these cooperatives, if there is no harm, then [there’s] no foul,” he said. “But now, I don’t see any reason why farmers would be the ones importing since it is an open market.”
Serrano said connivance between unscrupulous rice traders and farmers cooperatives was inevitable.
“Unfortunately, the issuances did not contain safeguards for abuse or misrepresentation. And this is a perennial problem in rule-making,” he said.
“When you provide for special privilege or flexibility for something, a positive action, in the absence of safeguards, leads to a lot of abuses,” he added.
UNIVERSITY of Asia and the Pacific (UAP) Center for Food and Agribusiness Senior Management Specialist Senen U. Reyes explained that the aim of the FAI was to pave the way for farmers to become “agri-entrepreneurs.”
Through this program, farmers organizations (FOs), multipurpose cooperatives and irrigators’ associations participated in the NFA’s out-quota rice importation program for the private sector.
Reyes, who occupied various positions at the NFA prior to joining the academe, echoed Serrano’s view. He explained that, at that time, the government wanted to help farmers directly access the international market and give them exposure on the rice economy through importation.
The primary loophole in the program is the farmer organizations’ capacity or capability to import. Reyes said these groups, along with cooperatives, “may not have the financial capability and administrative skills to comply with the requirements.”
“This flaw may have been taken advantage of by some private sectors who ‘assisted’ farmers organizations in qualifying for import permits,” Reyes told the BusinessMirror. He said there are anecdotes that some of these organizations are being given, “and became content with, a few pesos as fee per bag or lumpsum amount offered by private financiers.”
Reyes explained there are two reasons why farmers’ organizations, multipurpose cooperatives and irrigators’ associations continued to import. For one, they may have already reached a certain level of maturity that allowed them to compete. For another, “the usual financiers/importers” continued to act as their backers.
In return, Reyes said, these financiers are able to get the supply they need while hiding behind the tax perks enjoyed by the cooperatives.
Sans surges, smuggling
REYES said the total imports of cooperatives ranged from 50 tons to as much as 31,479 tons as of August 30, based on data from the BPI.
He reckoned that based on their NFA import permits of 260 tons at $400 per ton, freight on board (FOB), this could mean at least P5.2 million in cost for 5,200 bags of rice. This does not yet include insurance, freight, tariff, trucking and storage costs.
Considering the costs of importation, Reyes said it would be imperative for the government to validate the credentials and capabilities of farmers’ organizations, multipurpose cooperatives and irrigators’ associations, in order to distinguish between those who are legitimate and those who do their business without suspicion.
“It is unfortunate that farmers’ organizations and co-ops are being used, and this practice must be stopped. This is not something new. However, with the RTL [rice trade liberalization], it may not make sense to perpetuate this practice as importation is open to all interested parties without import volume and timing restrictions,” Reyes said. “Hopefully when the situation has normalized, import volume and price movements will be driven by supply and demand sans surges and smuggling.”
Spawned an industry
MONETARY Board Member Bruce Tolentino agrees with Reyes, saying that instead of empowering farmers, the system that allowed cooperatives to import rice “spawned an industry where the licenses were sold.”
Tolentino said this was one of the reasons cited to justify the removal of NFA’s regulatory functions under the RTL law. He said the NFA’s powers to grant licenses is one of the issues why the rice sector has “distorted” the rice trade.
Unfortunately, these permits issued by NFA continue to be in effect. Prior to the passage of the RTL in January 2019, Tolentino, who used to be the Agriculture Undersecretary for Policy and Planning during the term of Finance Secretary Carlos G. Dominguez at the helm of the Department of Agriculture, said there were already licenses and permits issued and some have not been used. And these are still being honored by the Bureau of Customs. Nonetheless, he said, the numbers of these permits have already declined.
As opposed to the sanitary and phytosanitary import clearances, Tolentino said, the primary goal was to ensure health and safety. The clearance did not grant any volume or attempt to impose price controls on rice imports.
Tolentino said under an RTL regime, the SPSIC should not only be strict enough to protect Filipinos, but should also not become a barrier to trade. Otherwise, this would open the Philippines to trade disputes and complaints from its main trading partners at the World Trade Organization (WTO).
A PERSON privy to matters concerning rice importation among local cooperatives explained that many of these groups do not have the capacity to import and were just “dummies” for Metro Manila-based traders.
Renato Cruz, not his real name, said there are over 20 cooperatives who import rice in his province. However, many of them not only lack the funds to import large volumes of rice, but also do not own warehouses that can be used to store their purchases.
Nonetheless, such practice is deemed within the law.
Cruz said that in order to “purchase” rice, they declare their warehouses as “leased” properties and not part of the assets of the cooperative. This “legality” allowed these cooperatives to import rice under the MAV importation of the NFA.
The farmer explained to the BusinessMirror that importing rice at the time of the MAV allowed cooperatives to earn substantially. Cruz further said that big traders in Metro Manila pay these farmers’ organizations, cooperatives and rice millers to earn P50 per bag of imported rice. The liberalization of the rice trade limited their earnings to around P3 per bag to P5 per bag. Despite the 90-percent to 94-percent decline in the payments they receive, Cruz said farmers continued the practice.
It’s better than nothing, he said. At least under this system, they are able to make P100,000. Before, under the MAV, they were able to earn millions from Manila traders, Cruz added.
The co-ops’ ironic role
ACCORDING to Cruz, the cooperatives did not even know who these traders are simply because they also operated through middlemen.
He said he has alerted the cooperatives for their role in the steep decline in rice prices: the very reason for the decline in their primary income, which is rice farming.
Cruz said traders are just using cooperatives because these groups enjoy privileges granted to them by government such as tax exemptions. He said no less than the governor begged cooperatives to stop importing any more rice.
Cruz added that cooperatives are also submitting legal documents to financiers who use these to continue enjoying the privileges meant for cooperatives. He said officials of cooperatives also issue these financiers a Special Power of Attorney.
Cruz said the cooperatives apparently only saw the income they could derive from such a scheme—and for them, whatever income that is, is enough, regardless of how much those big players who are using them are actually raking in.
After all, he said, many of the co-ops were able to pay bank loans, build offices and even warehouses. While he does not believe that the cooperatives bought farm equipment such as tractors, Cruz said he also knew of some officials and members of cooperatives who were able to buy new cars.
Further, Cruz said that despite the tons of imported rice being imported in the name of the cooperatives, only a small volume reach the province. Majority of their rice still come from local production.
Permit to import
ANOTHER source privy to rice importation, Ricardo Magsaysay (not his real name), said cooperatives have no financial capacity to import rice. He even received an offer to buy imported palay at P70 per sack to P100 per sack.
Magsaysay said currently there is an “over-inventory of rice” due to the decision of the DA to grant cooperatives a permit to import prior to the passage of the RTL law. While this has translated to lower rice prices, many wholesalers are also reaping the benefits of the RTL.
In his capacity as a businessman, he was only able to import a small amount of rice because he did not want to contend with low rice prices when it comes to commercial rice due to the “over-inventory of rice.”
Meanwhile, a farmer in Luzon who requested anonymity said that the RTL and big-ticket infrastructure projects being built in his province are displacing farmers and robbing them of a decent livelihood.
Arturo Pagkalinawan (not his real name) said that, with the harvest already small as it is and the price of unmilled rice very low, many farmers may eventually resort to other means to earn their keep.
Further, Pagkalinawan said farmers in his province are still unable to sell their palay or unmilled rice to traders and the government at this time. This was also a strong argument against any plans of the cooperatives in the province to import rice. This will be the cause of the “death” of their own local rice produce.
Pagkalinawan said the prevailing system in their province still involves traders buying palay from farmers. These traders are the ones who bring these products to the market. The problem now is that under the RTL, what the government did was to encourage the proliferation of middlemen, instead of removing them from the equation.
“For us farmers, there is no guarantee that we can still continue planting rice during the dry season because even in the wet season, we are not given any water allocation,” Pagkalinawan said in Filipino.
PHILIPPINE Competition Commission (PCC) Chairman Arsenio M. Balisacan told the BusinessMirror there will likely be a large variation in the capacity of cooperatives, millers and other farmers organizations. This will affect their ability to import rice.
Rice importation, he said, has a “thin market” where there are only a few players and, more often than not, volumes matter. The bigger player will always have an advantage because it can bring down retail costs compared to smaller players who import in smaller quantities.
Balisacan, who was also an Agriculture Undersecretary for Policy and Planning prior to becoming head of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture (Searca) and Socioeconomic Planning Secretary, said evidence is key to proving the capacity and capability of these cooperatives and other organizations to import rice.
However, he said he has already heard allegations that some cooperatives are being used as dummies. However, there has never been any evidence proving this claim.
Balisacan said it is possible that the transaction between cooperatives, rice millers and other farmers’ organizations was purely a “business deal,” which was legal.
IT could also not be a competition issue outright because evidence should be established that these business deals actually had a hand in reducing competition in a sector, in this case, the rice sector.
Asked whether some cooperatives could be dummies, Balisacan said in a mix of Filipino and English: “Yeah, well, we’ve heard that before but evidence is [something] I don’t have, not that I ask [for it] but it is possible that they were able to get an import quota and, since they are small, they don’t have the capacity to renew it themselves,” he said. “So they subcontract it to large firms who already are in business.”
In general, Balisacan said the RTL law aims to promote more competition where consumers and even producers benefit. As long as firms have the capability to pay the required tariffs, they can import rice from anywhere in the world.
The law also serves as a deterrent to firms or even cooperatives who intend to behave like a cartel or become a dominant player.
“Now, anybody [who wants] to import could import provided that the tariffs are paid. And that import could serve as competitive pressure on anyone who wants to behave like a cartel or a dominant player.”
RELIABLE government sources told the BusinessMirror that “four big groups” are into the dummy scheme of trading rice.
These are in Pangasinan, Bulacan, Pampanga and Mindoro.
BPI data analyzed by the BusinessMirror showed that Bulacan leads all provinces in terms of applied importation volume with 603,012.25 MT.
This was followed by Pampanga at 274,388.83 MT, Tarlac at 127,075 MT, Occidental Mindoro at 104,703 MT, and Pangasinan at 69,830 MT.
An import application by a farmer cooperative ranges from 50 MT to almost 70,000 MT. In terms of value, the BusinessMirror estimated this would be worth from P910,000 to P1.274 billion at a conservative average of $350 per MT.
Serrano said it is not surprising that rice-producing provinces are also the ones leading the list of rice importers since farmers in these areas are already well-organized.
“Farmers’ cooperatives are strong in production areas because they are the ones that are able to avail themselves of government assistance. In terms of resource and influence endowments, they are the ones that have the capability and power through their overlords,” he said.
IF there are lapses in the system, particularly on how cooperatives conduct their daily routines, Tolentino said, this should be looked into and regulated by the Cooperative Development Authority (CDA).
Cruz said the local CDA in his province also threatened to impose sanctions on erring cooperatives, especially if they allow themselves to be used by unknown financiers. He said the CDA warned that if the cooperatives are found to have misdeclared their reports, they can be sanctioned.
In July, the CDA warned duly-registered cooperatives to take “extreme precautionary measures” in dealing with unscrupulous traders that are into illegal rice trade operations.
The CDA added that cooperatives that allow unscrupulous traders to use their documents for illegal rice importation or smuggling shall face sanctions under pertinent laws.
“All cooperatives engaging in rice importation are warned to take extreme precautionary measures not to be used by unscrupulous traders/importers in rice smuggling/illegal importation and other entities/persons to use cooperative documents such as Certificate of Registration and Permits including other acts not within the provision of RA 9520,” the CDA said in its public notice.
“Please be reminded that such violation of law shall neither be tolerated nor condoned. The public is hereby advised to report directly any knowledge pertaining thereto to the [CDA] for appropriate action,” it added.
BASED on Article 8 of the RA 9520, “No cooperative or method or act thereof which complies with this Code shall be deemed a conspiracy or combination in restraint of trade or an illegal monopoly, or an attempt to lessen competition or fix prices arbitrarily in violation of any laws of the Philippines.”
In terms of taxes and exemptions, RA 9520 provides that registered cooperatives that “do not transact any business with non-members or the general public shall not be subject to any taxes and fees imposed under the internal revenue laws and other tax laws.”
For cooperatives that do transact with non-members and the general public, RA 9520 provides that if cooperatives were able to accumulate “reserves and undivided net savings” of under P10 million, they will not be taxed. But if they have, they will be charged with income taxes, value-added tax and other taxes stated in the law.
However, cooperatives shall also be exempt from paying “all court and sheriff’s fees payable to the Philippine government for and in connection with all actions brought under this Code or where such actions is brought by the Authority before the court, to enforce the payment of obligations contracted in favor of the cooperative.”
SERRANO pointed out that it would be more difficult for the government to police the rice trade today since the industry has been deregulated.
For one, the NFA has been stripped of its powers to inspect warehouses and revoke licenses of erring rice industry stakeholders.
Serrano said the government, particularly the BPI, should do a detailed verification of the capacity of rice importers to ensure they are really a viable business for such venture.
“There should be an investigation over the track records of these cooperatives. Check for indicators of operational capabilities such as capitalization,” he said.
“If there is a disjoint between their capitalization and capacity, which could be proven by their books, they should be excluded from the importation,” he added.
Sen. Francis Pangilinan, a former Presidential Adviser on Food Security and Agricultural Modernization, said the government should exert more effort in enforcing its police powers to weed out dummy cooperatives.
Pangilinan said the government has all the tools and authority to conduct warehouse inspections and check the profile of current rice importers.
Enforce the law
PANGILINAN is recommending that government should “go after the dummies.”
“Enforce the law against those who are taking advantage of the law, going around the law. Manipulation has corresponding penalties especially those who do profiteering,” he told the BusinessMirror “Revoke their licenses and business permits. File charges against them.”
Pangilinan recalled the time when the government pressed charges against dummy cooperatives and traders in 2015 due to unscrupulous rice trade dealings. The NFA was then under Pangilinan’s office and attached to the Office of the President.
In 2015, the National Bureau of Investigation discovered that some farmers’ cooperatives participating in the NFA rice importation acted as dummies for unscrupulous rice traders.
The malpractice proliferated as traders wanted to corner bulk of the import volume and take advantage of cooperatives’ privileges such as tax exemption.
Further, the malpractice led to the hoarding of rice stocks since the traders were in control of the imported volume.
Opposed to safeguards
DOCUMENTS obtained by the BusinessMirror showed that some farmers’ cooperatives, which are rice importers as well, opposed the move of the DA to impose safeguard duties on imports last month.
During the DA’s preliminary safeguards investigation, eight entities—one rice miller and seven cooperatives—submitted a templated position paper expressing their opposition to the trade remedy.
All of the eight position papers were submitted on the same day, September 24, and contained exactly the same comments.
Five of the cooperatives are located in Pampanga, while one is in Mindoro and the other one in Bulacan. The rice miller is registered in Metro Manila.
Government sources told the BusinessMirror they were surprised when they received the position papers, with some saying it was “disheartening” to some extent.
“Why are these farmers’ cooperatives complaining about a measure that is aimed to protect them? So, the decline in farm-gate prices, due to higher imports, is a self-inflicted injury?” the person privy to the matter said.
Registered as importer
IN their position papers, the cooperatives and the rice miller argued that the imposition of safeguard duties would lead to “tightening of the supply of rice and spiraling of the prices of rice.”
Further, they argued that it would “encourage smuggling, as others declare rice as other commodity and with government losing billions of pesos in customs revenues.”
The BusinessMirror cross-checked the eight entities with publicly available BPI data and found out that all of them were registered with the agency as rice importers.
In fact, the seven cooperatives alone applied for a total import volume of 94,308.33 MT, which has an estimated value of at least $33 million (or over P1.7 billion) from March 5 to August 30.
As of October 4, BPI data showed that the seven cooperatives have imported already nearly 85,000 MT of rice, which is estimated to be worth $29.75 million or P1.547 billion.
Image credits: Junpinzon | Dreamstime.com