Rice supply and inflation

“The impact on domestic core inflation of rice supplies cannot be denied.

There is a handful of reasons behind the debilitating inflation inflicted on the public and a good portion are attributable to global forces over which we have little control. Some, however, are homegrown and within the reach of trade and industry regulators and law enforcers.

A case in point is the contribution to inflation of poor regulatory controls and the mismanagement of our rice supplies.

In President Rodrigo Duterte’s State of the Nation Address, specific warnings were directed at a sector identified as behind one of the more toxic threats to the government’s economic agenda.

While it was nearly impossible to predict the exponential increase in global oil prices from geopolitical tensions plus the exchange rate impact of increased employment in the United States that catalyzed raising rates of returns on US investments. The impact on domestic core inflation of rice supplies cannot be denied.

First, let us admit to a few realities nearly impossible to fix.

One, the Philippines remains an agricultural country comprised of numerous small-scale, family-run farms and farming communities that do not enjoy economies of scale, efficiencies brought about by capital-intensive mechanization and sufficient financial wherewithal provided by low interest long-term credit.

Any new tax quickly impacts negatively due to sectoral economic elasticities. Note that for small-scale pump-dependent farmers, the new excises on fuel increased production costs by 50 cents per kilo of palay. This diminished their net incomes by as much as 10 percent.

As a gross domestic productivity driver, agriculture remains one of the weakest.

Two, rice crops — long subjected to agrarian reform since 1963 when owner-cultivators were first conceived, are grown in small five-hectare segments of land. These need to be contiguous and integrated to make capital investments in irrigation and operating expenses in pesticide and fertilizer inputs viable. Otherwise, the pro-rata impact of capital asset inputs effectively increase the costs of production and therefore the final price at the consumer end.

Currently, our costs of production are higher than Thailand, Vietnam and India. Where imported rice is cheaper, trading margins from importations are wider.

“There are two kinds of inflation: demand-pull and cost-push. Hoarders are behind both.

Three, rice is a seasonal crop. While modern hybrid rice production increases the number of harvests in a year, incremental harvests require special cost inputs that compel constant case to case cost-benefit analyses to justify against quick and simple importations.

Finally, rice remains a staple among the basket comprising the Filipino consumer price index that determines core inflation. An aberrant increase in rice prices averages up the cost of the whole basket of goods.

These conditions effectively empower rice traders with the power to influence pricing. Unfortunately, unscrupulous hoarders are among them.

There are two kinds of inflation: demand-pull and cost-push. Hoarders are behind both.

Demand-pull inflation occurs when the demand for a product increases its price. Think of red roses on St. Valentine’s Day and Majestic ham during Christmas time.

When hoarders offer farmers marginally higher prices for rice earmarked for the National Food Authority, they not only deprive the NFA of cheaper supplies, but also increase relative demand, thus driving prices beyond the margins they had offered farmers.

Cost-push inflation is caused by increases in the cost of a product.

When we import to alleviate artificial shortages caused by hoarders, we pay with dollars whose values against the peso had recently risen to record high levels. With weaker peso values, the effective costs of importations are inordinately higher. Unfortunately, these are borne at the consumer end. As supplies normalize the highest margins go to traders when hoarded rice is then sold alongside importations whose prices carry the foreign exchange cost differentials.

It was timely that the President warned these unscrupulous rice hoarders. He called it right. Let’s start catching these crooks.