On managing chronic rice and fall of  grains through ‘options’

Policy conflicts over rice importations and increasing subsidies for farmer support prices through the National Food Authority (NFA) are now building up, causing confusion among policy-makers, which leads us to the idea of developing what I will call a “rice option,” an innovative form of insurance that commits or locks in future stocks for government buffer management.

Grain of truth? Traditionally, government loses in the NFA’s rice trading, resulting in accumulated outstanding debts of over P170 billion or so, only because the NFA buys at high farm prices, stores for long periods and sells at low retail prices.

The NFA normally buys at support prices, much higher than market prices, although lately its P17-per-kilo support price is lower than prevailing prices at P18 to P20 per kilo, which is good as the NFA no longer needs prop up farm prices. Unfortunately, the NFA stands to run out of stocks as it cannot compete now against private-sector prices in buying palay for buffer stock and price management.

Once it buys stocks, the NFA stores them at longer periods in its network of owned and leased warehouses, then sells them lower than market prices to help dampen retail prices. No matter how it tries to be efficient, the NFA inherently incurs losses.

Pointing fingers at each other? Meanwhile, tensions remain high between the NFA and the NFA Council over alleged collusions between NFA Administrator Lt. Col. Jason Aquino with the rice cartel syndicate, which Aquino decried as foul and baseless.

Aquino allegedly defied and bypassed the 15-member NFA Council, composed of Cabinet Secretary Leoncio “Jun” Evasco Jr. as chairman, Executive Secretary Salvador Medialdea and other top officials like Finance Secretary Carlos G. Dominguez III, Bangko Sentral Governor Nestor A. Espenilla Jr., Neda chief Ernesto M. Pernia, Trade Secretary Ramon M. Lopez, Land Bank President Alex Buenaventura and Development Bank of the Philippines Chairman Albert G. Romulo, among others.

Conflicts started in early-2017, when Aquino sought President Duterte’s approval to import 1.3 million metric tons (MT) of rice, starting with 250,000 MT and 1 million MT to follow. Apparently, Aquino wants direct government-to-government deals over private imports and rice brokens of 5 percent to 15 percent, instead of the cheaper 25 percent broken, to earn more by selling to high-end markets.

The NFA Council believes more in private imports through biddings, costing government nothing, and even earn tariffs, but if the NFA imports rice, it adds burden to the government, be less transparent and brings back the NFA’s old monopoly. As both parties point fingers at each other, while squabbling about who must do the importation, they ignore even Duterte’s preference to buy from farmers.

Too little to matter? As the NFA and traders squabble over an institutionalized slice of the lucrative rice-import business, the Philippine Institute for Development Studies (PIDS) recommends scrapping the import quota called minimum access volume, thus liberalizing imports but slapping 35 percent tariffs, which it claims is better than a higher 50- percent tariff protection that may encourage smuggling.

Here, corruption from imports is stopped, but what happens to farmers? With imports out of its concern, PIDS claims the NFA need not bother about price stabilization, and return to its mandate to buy more from farmers.

However, the NFA’s budget is too little to even matter. Worse, it could not even compete with market prices. The government gave the NFA P7 billion for 2018 to procure 388,889 MT of palay, which is actually only 2 percent of total production of 19.4 MMT for 2017, up from 17.8 MMT in 2016, says Agriculture Secretary Emmanuel Piñol, claiming 96 percent self-sufficiency, but still short of the 100-percent target by 2020.

At 2-percent market penetration or procurement rate, more so at low support prices, all this P7 billion will never make a dent, but may all go down to waste. However, the NFA, if it can ever buy, will have stocks it can use for stabilization.

Auctions to options. Apart from procuring palay stocks for milling and for sale later as the last resort, often at a loss; to stabilize prices, the NFA needs to bid out import quotas through auctions often dominated by alleged unscrupulous trader-importers even in collusion with farmer cooperatives for tax-free imports.

Another viable alternative is what we can call a “RICE OPTIONs,” which are financial instruments or a form of term insurance with corresponding amounts granted to big farmer organizations and trader-miller-wholesalers, who are committed to deliver stocks at discounted market prices when NFA needs them for emergency, buffer stock management and price stabilization. The main objective here is for NFA to always ensure there are stocks for sale in the open market, because the slightest inkling people think there is even only a perceived shortage, both traders and consumers may start panicking and hoarding, thus triggering a shortage even when there stocks are abundant, but simply stored at home by consumers and at warehouses by traders.

This system becomes all the more viable with modern systems like “just-in-time” management, which requires less warehousing inventory, and access to big data systems and analytics, Internet of Things, and faster decision-making through tele-conferencing and iPhones.

Rice options can, perhaps, be studied by PIDS and the Philippine Crop Insurance Corp. (PCIC), which is now in the forefront of many innovative reforms. Whatever it is, the NFA can later operate strictly to just manage stocks and prices through options without engaging in importation, procurement and retailing. Perhaps, it can run this jointly with PCIC.

Transform wastes to productive ways. Huge savings from the NFA’s old trading practices must be spent instead into physical investments where they will count most like catch basins and small irrigation facilities in rainfed and upland areas, thus increasing harvests from one crop to two to three crops a year. Build, too, on the over 1.3 million hectares of irrigable flatlands that are not yet irrigated.

Former Agriculure Secretary William Dar of Inang Lupa says, “that at P11 to P12 per kilo production costs, we cannot compete against Vietnam’s P6 to P7 per kilo and Thailand’s P9 per kilo owing to their vast flatlands naturally irrigated by the Mekong River.” Our focus must be on food security and higher farmer incomes and not on self-sufficiency alone. Jesse Las Marias, an agriculture practitioner, claims better farming systems, like the System of Rice Intensification, can lower production costs to P4 to P6 per kilo, which are now comparable.

With traditional spoilage as high as 11 percent to 37 percent, spending on postharvest facilities alone can generate 2.13 MMT of rice from minimum savings of 11 percent. Whatever it is, let’s try all options.

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Michael Alunan was for many years a full time business journalist tasked to mind other people’s businesses, but he tried venturing later into business going left and right, up and down, zig and zag till he broke down with heart surgeries for aortic valve replacement and two cases of aneurysm. He is now busy with pro-bono coop organizing and social entrepreneurship development for basic sectors and just keeps a weekly column for the love of writing and to have fun and make pun, while contributing to policy reforms and program development.