Prepared by the Department of Agricultural and Applied Economics, College of Economics and Management, University of the Philippines Los Baños
Unintended consequences of price caps
Price caps have good intentions of supporting consumers with affordable pork prices especially during this pandemic where many people have lost jobs and incomes. However, economic theory is clearly at work in this case where the effect is a shortage of pork supply in markets. Two recent articles by JC Punongbayan in Rappler1 and Dr. Ramon Clarete in Businessworld2 have explained this clearly. An important lesson is that any policy will always have unintended consequences but some can be anticipated and avoided using basic economic theories which work.
Difficult balancing act for the DA
The current situation is a difficult balancing act for the Department of Agriculture (DA). In fairness to Secretary William Dar and the DA, they are contending with pressures from competing concerns and stakeholders. On one hand, it must provide support to farmers and other agriculture stakeholders while at the other end look after consumers’ welfare. The economic management team aims to also ensure inflation is checked and hence an added pressure to pursue policies that are tilted in favor of consumers. It is expected that farmers will appreciate higher prices while consumers will favor lower prices. In fact, this is the reason why the National Food Authority was criticized for buying high from farmers and selling low to consumers. This then goes to show that DA needs to take stock of its experience, especially from rice, that any intervention along these lines will prove unsustainable and will have dire consequences. An added serious consideration is that once started it will most likely be difficult to remove.
DA policies in place
There are several initiatives that the DA is pursuing to help remedy the current situation of the pork industry in the country. Briefly, the more prominent ones including our perspective and concerns in each of these policies are outlined below.
Price cap on pork and chicken meat: It is clear with the recent experience that price caps will not work. This should therefore be discontinued and let the market forces work. Higher prices in Manila are a consequence of limited supply. Producers will take advantage of such opportunity. It is best to let markets take its course for now while the DA focuses its efforts more on its other interventions.
Negotiated contracts with local suppliers in ASF-free areas: These again have good intentions but there are several pitfalls which the DA should have been aware of given that it is more engaged in the field. One is that these negotiated contracts may tend to become a situation of buying high and selling low. The experience in rice is already a perfect example. In addition, such intervention is prone to opportunism that is not good for society in general. Hence, this must be reviewed and if needed replaced with a different policy option (with options presented below). There are already signs that this move is facing challenges as local supply in ASF-free areas cannot meet quantity demanded. Another challenge is that local government units are not allowing transport of hogs to Manila as they are concerned also of dealing with higher local prices or possibly their own local shortage as hog producers shift to Manila markets.
Twin program of P29 billion: the Integrated National Swine Production Initiatives for Recovery and Expansion, or INSPIRE, and Bantay ASF sa Barangay, also dubbed “BABay ASF”: The priority now should be containing ASF because uncertainties as to this plaguing again new herd are discouraging farmers to continue their swine farming operations. In this regard, the BABay ASF is an excellent DA initiative and must be strengthened. However, INSPIRE needs to be reviewed further. The archipelagic nature of the country should be leveraged as an advantage because it can isolate certain islands so long as the testing and quarantine protocols are well enforced in various islands with regard to monitoring for ASF. In this view, an important consideration is that INSPIRE be launched in “green zones” or ASF-free areas instead of “red zones” or where ASF is present. Doing so in CALABARZON and Region 3, for example, may not be the best option for now given the presence of ASF. The private sector is clearly expanding in other areas and the DA should partner with these producers’ groups (both with large private companies and cooperatives). An example is the recent plan by Pilmico to increase its investments in hog raising3. What this expansion by Pilmico implies is that there is an opportunity for big businesses, especially that meat demand is expected to increase in the Philippines. Past studies have shown that demand for meat is income elastic and so meat consumption is expected to still rise as incomes rise in the future. In this regard, let market forces work and let the private sector establish itself in partnership with the BABay ASF initiative.
Increase minimum access volumes and lower tariffs: There is a need to increase the Minimum Access Volumes (MAVs) considering the local pork supply constraints. A contention though is the lowering of the tariffs as lobbied by the meat processors but which some livestock producer groups prefer to be maintained although they agree that there should be more imports. In view of competing concerns, an alternative is to take a calibrated response which could only be effective if there is consistent and timely monitoring and evaluation of the effects on both ends of the supply chain continuum. Livestock groups lament the fact that they had always been a “sacrificial lamb” or used as concession when rice quantitative restrictions were extended. Since the livestock and poultry industries are a “bright spot” of agriculture, which had demonstrated generally positive growth had it not been for the onslaught of the ASF, it is high time that they be accorded the same preferential treatment for them to recover. In this regard, it is important to also heed the concerns of producers and a workable solution is a more calibrated response (see elaboration below).
Alternative policy options (immediate and long-term solutions)
Any policy will always have unintended consequences especially so in the case of the pork industry which is interconnected with other sectors. Hence, the solution should consider a broader view that balances competing concerns of stakeholders (which is easier said than done). In this context, DA should take a clear calibrated response which is transparent to stakeholders and predictable. Calibrated response means continuous review of existing situation with the next follow-up actions spelled out.
Immediate solutions: A large portion of the population consumes pork meat, but per capita consumption is higher for upper income class groups. Low-income class group of people tend to substitute chicken as established by past studies. In fact, pork and chicken are gross substitutes based on a recent study conducted by staff from the UPLB Department of Agricultural and Applied Economics (UPLB-DAAE) in partnership with DA-PCAF. In this regard, ensuring sufficient chicken supply is important so that people belonging to lower-income brackets have access to affordable alternatives. There are indications that producer groups are shifting to broilers and layers resulting in higher prices of day-old chicks (DOCs) with prices being reportedly rising from P17 per DOC to P33 per DOC and even getting higher due also to lack of timely supply. In CALABARZON and Region 3 that are affected by ASF, an important alternative is to help displaced hog producers towards broiler production (which should take about 30 days or less to grow). DA should explore this option in “red zones” in tandem with its “BABay” initiative. It should be noted however, that even breeder broiler farms (the suppliers of DOCs) are also facing inadequacy of birds from which they could produce hatching eggs for chicken meat production, leading also to low supply relative to increasing demand. As a result of this, price of culled layers is also now on the rise. Another very important concern to factor in is the issue of supply of feed ingredients and therefore their prices as well. Poultry industry players are already facing price increases for soya because again supply is not enough. However, according to Mr. Ronald Mascariñas, president and general manager of Bounty Agro Ventures, Inc. “Sapat ang SUPPLY ng manok at kusang babalik sa dating presyo kung tugunan ang (sic) malaking kakulangan sa SUPPLY ng baboy.” The fragility of the interconnectedness of these industries is one of the main reasons why a calibrated response is being called for.
Sourcing in Visayas and Mindanao is a good option but difficult given the high transport costs. It thus become urgent to contemplate well transport subsidies. However, it is important to be selective and strategic on where and how to subsidize as subsidies are difficult to remove once implemented. For now, it will be better to improve quarantine protocols and let intra-island trade to flow as necessary based on market-determined pork prices in Manila and nearby areas. If there are profits to be made, pork producers and traders will find ways to move products based where they are most demanded. While pork prices are a big concern, it is important to monitor and support also substitutes which may not be limited to chicken. The reality is those who can afford will continue to pay for pork products while most likely majority of the people will shift consumption to chicken or to other cheaper substitutes.
Imports will have to make up for the gaps and therefore MAVs should be revised as already shared by other observers. There is no need to rush replacing MAVs with tariffs. Instead, out-bound quota can be revised if supply constraints persist even after exhausting MAV. This hopefully appeases livestock producers. However, it should also be clear that reducing tariffs further is an option the DA must have the importance of which should be made to the producers. Again, having market forces at work, if increasing MAV would not bring in sufficient supply to satisfy local demand (and therefore ease market prices), only then can tariffs reduction be contemplated.
Exploring long term solutions: Address inter-shipping, especially the long overdue revision of the “Cabotage law.” This had long been pointed out by stakeholders as a bottleneck. Capitalizing on the archipelagic nature of the country, managing disease outbreaks such as ASF could become strategic, if and only if investments in ports and related services are well in place together with test and quarantine protocols before and during transport both for humans and animals.
The higher pork prices, while painful and unfavorable to consumers, is an opportunity for the country to start exploring alternative protein sources. In the short run, this will be chicken, but it should be expanded to other options (i.e rabbit) but eventually plant-based sources of protein (i.e soybeans and nuts). Dr. Eufemio Rasco from the National Academy of Science and Technology, in a recent Businessworld article shared that the food of the future should be more plant-based4. There is a global movement now exploring plant-based diets that are good for both people and planet. See for example the EAT, which is a global non-profit startup dedicated to transforming food systems in the world5. Indigenous vegetables which used to be grown in the backyards of “bahay kubo” back then are good alternatives as they can be compatible with the limited access of people to physical markets due to disasters like the current COVID-19 pandemic. A study done by a student in the UPLB-DAAE confirmed that the stigma to indigenous vegetables as being “poor man’s diet” is now being replaced as being “good sources of nutrients for a healthy body.” Concrete programs that will capitalize on this are therefore essential.
Rationalizing support for livestock and poultry producers
Livestock producers had long managed to survive and grow. It is a sector posting consistent growth in the agriculture sector in the last decade, prior to ASF. While they have managed, with their current predicament with ASF and which is aggravated by the COVID-19 pandemic, it is important to evaluate the support extended to them and shift them to high gear. Most of the government support is still tilted in favor of rice. This is understandable given the importance of rice as a staple and the number of farmers engaged in rice production. However, there is a need to review and rationalize the support given to various players in the agriculture sector so that growth sectors such as livestock and poultry producers need not be penalized but are also supported to grow further.
1 See Rappler Article last 12 February 2021 by JC Punongbayan [ANALYSIS] Why Duterte’s pork price ceilings backfired (rappler.com)
2 See Businessworld article last 31 January 2021 by Dr. Ramon Clarete Another way of solving the pork price crisis | BusinessWorld (bworldonline.com)
3 See Businessworld article last February 15, 2021 Pilmico Foods plans further investment in hog raising | BusinessWorld (bworldonline.com)
4 See February 10, 2021 article by Ms. Patricia Mirasol in Businessworld The food of the future is mostly plantbased | BusinessWorld (bworldonline.com)
5 See EAT – The science-based global platform for food system transformation (eatforum.org)
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