July 26, 2022

Commodity Reporters Guild

Latest Investing Ideas & Tips from Pros. Your daily news source covering investing ideas, market stocks, business, retirement tips from Wall St. to Silicon Valley.

Marcos stakes his presidency on agriculture

PIXABAY

By Timothy Roy C. Medina, Associate Editor

PRESIDENT Ferdinand R. Marcos, Jr.’s decision to appoint himself Agriculture Secretary dispenses with the usual expedient of appointing a fall guy to a difficult Cabinet post, to be fired later as needed, to insulate the Chief Executive from all blame. For this reason, the appointment has been called unwise, coming as it did after a campaign promise to bring the price of rice to an impossibly low P20. That’s one way of looking at it, at least. The other way is that he wants to make an honest-to-goodness effort at bringing rice prices down. To do so, unless rice productivity grows in a completely unexpected way, it is looking more and more like he will need to loosen the purse strings.

A President serving in the Cabinet is not unprecedented — President Gloria Macapagal-Arroyo was briefly her own Defense Secretary, twice, in 2003 and 2006-2007. And while Mr. Marcos has signaled that he will take on the Department of Agriculture (DA) in a temporary capacity, enough to get the ball rolling on what is likely to be a bit of housecleaning, it is not clear that a tenure as brief as Ms. Arroyo’s at Defense will be sufficient to make a dent on the inefficient agriculture industry.

There is quite a bit more precedent for up-and-coming politicians installing themselves in populist jobs as a stepping stone to higher office. As Vice-President, Ms. Arroyo ran the Department of Social Welfare and Development (DSWD), apparently on the calculation that looking after the welfare of the marginalized would boost her profile when she was ready to move on to the Palace. Senator Cynthia A. Villar, after topping her group of Senate candidates, seemed quite eager to chair the Committee on Agriculture and Food, which, at the very least, offers the opportunity to travel extensively and shake lots of hands in farms all over the country. Vice-President Sara Duterte-Carpio’s stint as Education Secretary gives her a department with a massive budget, schools to inspect in every town, and supervisory control over teachers whose summer job is counting ballots in May.

That makes Mr. Marcos’ decision to take on quite possibly the most demanding Cabinet job of the next few years all the more mysterious, because it’s a risk. The core of the mystery lies in the fact that he did not need to do so. He’s not exactly an up-and-coming politician eager to prove himself on the way to better things; he has already won the top job, and by a landslide. That he is in charge of Agriculture during the worst global food crisis in recent memory might suggest a certain recklessness, even an overconfidence in his own ability or that of his advisers.

While some experts do believe P20 rice is possible, just not immediately, the difficulty of getting rice down to that price is illustrated by the current price at which the National Food Authority (NFA) sells domestic rice to consumers. It lists well-milled rice at a highly concessional P25-P27 per kilogram, depending on variety. This NFA product is intended for poorer buyers who want to stretch their peso by not paying the asking price of commercial traders, though supply is determined by how much of the harvest the NFA actually purchases — a constraint defined by the NFA’s often limited procurement budget. Organizations that need rice for relief operations, such as the DSWD and the Red Cross, get to buy for even less — P23-25.

On the other hand, the NFA buys palay (unmilled rice) from farmers at P19 per kilogram. The gap between P19 and a selling price of P25-27 for retail buyers or P23-25 for institutions represents the margin with which the NFA hopes to recover its milling, storage, and distribution costs. This margin does not appear to be sufficient to break even — at the peak of the pandemic in June 2020, when many relief operations were in full swing and demand for concessional rice was at its height, the NFA took in subsidies from the National Government of P31.25 billion.

If the retail price of NFA rice was brought down to the P20 target, the NFA gross margin for institutional sales would narrow to P6-P8 for consumers and P4-6 for institutional sales. The NFA subsidy bill will therefore likely rise past what it was during the peak of the lockdowns, to the tune of dozens of billions of pesos every month, assuming the P19 palay buying price is not lowered.

Is there any actual wiggle room for lowering the palay buying price? Such a move would be, to put it mildly, taken negatively by farmers, who depend on the NFA palay price when commercial traders are driving a hard bargain. It’s never guaranteed that the NFA will buy the entire harvest, due to limits on the procurement budget and storage. However, the fact that it pays a higher-than-market support price signals a government commitment to step in and pay farmers a fair price for their harvest when it can. Taking away the P19 palay buying price leaves farmers completely at the mercy of commercial traders, who can offer farmers take-it-or-leave-it prices in the low teens (in extreme cases, the farmgate price has reportedly fallen into the single digits). Turning the farmers against the government, by giving consumers a subsidized price at the expense of the cultivators, defeats the purpose of going populist in the first place. Should that happen, Mr. Marcos will have taken on the DA job for nothing. The only way to please everyone, in the near term at least — happy consumers, happy farmers — is to subsidize. That is, until the promised productivity gains materialize and rice becomes cheap enough to sell at the target price while not having to prop up the NFA excessively.

The optics of Mr. Marcos’ announcement on June 20 that he was appointing himself to the Cabinet contain a key clue about his willingness to throw money at the problem. During the televised announcement, his Department of Finance (DoF) nominee, Benjamin E. Diokno, was standing behind him, just off his left shoulder, as if to signal concurrence by the very official who will have to raise the funds to pay for whatever slate of projects Mr. Marcos might dream up. If Mr. Diokno was nervous about a free-spending DA at a time of straitened government finances, he hid it well.

In fairness, Mr. Diokno does have a few tricks up his sleeve. He may have revealed some of his cards earlier this month when he said that he expects local government units (LGUs) to devote their increased allocation of National Government taxes to boosting agricultural productivity. The concept he outlined was to stage a sort of competition among LGUs to determine which one recorded the greatest productivity gains. He also warned that throwing money at the problem does not necessarily have a one-to-one correspondence with the degree to which output will rise.

If resources prove insufficient, he could also resort to public-private partnerships in agriculture, to allow companies to do the heavy financial lifting, though some legal juggling may be needed to ensure that companies can put together the large parcels of land they need to be efficient.

Whichever set of solutions is adopted, it seems clear that Mr. Marcos has at least found a way to sidestep the fiscal discipline traditionally imposed by the economic managers, who in the Duterte years had swatted away budget proposals worth hundreds of billions of pesos from the two most recent Agriculture Secretaries — Emmauel F. Piñol and William D. Dar. Final DA budgets were duly cut down to the tens of billions. It is difficult to imagine such budget-slashing when the Agriculture Secretary is also the President.

Setting aside the fact that no official ever thinks he or she has enough of a budget to work with, the view of those who know a thing or two about agriculture seems to be that the DA will need to spend in order to make rice more affordable. A party-list legislator representing agriculture called for a rice budget of at least P400 billion over a number of years, which would put a campaign for P20 rice on par with the kind of spending that was authorized to support the various Bayanihan stimulus bills.

Has Agriculture Secretary Marcos actually signaled that his program of government will consist of “Plant, Plant, Plant,” instead of “Build, Build, Build?” The magnitude of the spending plans will soon be clear once the 2023 budget proposals are revealed. Even before the May 9 elections, but with Mr. Marcos widely expected to win, his predecessor at the DA, Mr. Dar, swung for the fences by floating a 10-year agriculture funding proposal of P2.5 trillion, citing the need to insulate the Philippines from the risks of relying on imported food.

Should infrastructure lose its crown to agriculture in terms of volume of spending, a farm-heavy program might still be enough to win the cooperation of Congress. Inasmuch as Build, Build, Build was a means of persuading legislators to cooperate in exchange for their districts being showered with construction projects, Plant, Plant, Plant might similarly rain down untold riches on the agricultural provinces. This presents a dilemma for urban jurisdictions that cannot plausibly claim to be centers of agricultural production or innovation. Perhaps their only path to accessing that sweet, sweet DA money is to propose a bewildering array of urban gardening projects.

There is, in fact, an infrastructure component to Plant, Plant, Plant. Also this month, Mr. Marcos instructed the Department of Public Works and Highways (DPWH) to weight its priorities towards projects that improve food security. It’s still unclear how that will play out, but if a few billion pesos get diverted from railways and bridges towards, say, irrigation dams and post-harvest facilities, it is just possible to imagine agriculture spending growing significantly while not putting the DoF under as much pressure to raise funds.

The journey to P20 is not expected to be instantaneous — an agriculture expert who spoke to BusinessWorld last month, Roy S. Kempis, a retired professor at Pampanga State Agricultural University, thinks it is possible sometime late into Mr. Marcos’ term, though a price in the region of P30 appears to be immediately attainable. Until that happens, the P20 strategy likely will involve spending and subsidies to upgrade agricultural productivity.

Such an approach runs counter to the one adopted by former President Rodrigo R. Duterte’s economic team, which is to import grain from more efficient rice-growing countries to bring overall prices down and earn tariffs in the process. The Rice Tariffication Law, which largely defines the Duterte-era policy towards rice, has proved controversial, with farmers accusing the Duterte administration of neglecting them to satisfy the interests of importers and traders, and exposing them to foreign competition, to the detriment of their livelihoods. The Duterte government has argued that the law has eased inflation, such that rice is no longer the main source of upward pressure on the consumer price index (CPI). The previous government also appears to have taken a needs-of-the-many approach in concluding that, while farmers have claimed to suffer, consumers ended up paying less.

While Mr. Marcos has said little about amending the law, his likely policy choices could still serve to alter the basic approach behind rice tariffication. What pronouncements he has made about the law have focused on possibly expanding one of its disbursing components — the Rice Competitiveness Enhancement Fund (RCEF), which takes in P10 billion worth of rice import tariffs a year to finance mechanization, improving seed, and updating rice farming know-how. Should he expand the scope or prolong the effectivity of RCEF beyond its authorized six years, it’s clear he will need the tariff income to keep it going.

The DA job was a risk Mr. Marcos didn’t need to take, at a time when officials in charge of food are having sleepless nights all over the world. We need to entertain the possibility that he is dead serious about bringing down the price of the Philippines’ most important staple. He seems to have found a way at least to keep economic managers from summarily dismissing the DA’s funding requests. Now it’s up to the money men to raise the funds while keeping the deficit under control, and the program implementors to see to it that the funding is spent effectively. It remains to be seen whether he will reach P20 eventually. Perhaps we might also have to consider a scenario where he stops at some point between P27 and P20 and, having lowered the price by a significant amount, declares victory. When that happens, it will be up to the economists to pore over the government’s books and decide whether the price he paid was worth it.

 

Mr. Medina edits the Agriculture and Economy pages for BusinessWorld.