Rice Quandary

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The Philippine government announced last week that it would roll back a programme of tariffs and quotas protecting the nation's farmers. The move comes after weeks of rising political tension over soaring prices of the country's main staple - rice.

The cereal makes up 20% of the consumer price index's food subcomponent and 9.4% of the total consumer price index weight. This means that a 10% increase in rice prices translates into 1% inflation. Given the fact that rice prices have doubled in many parts of the world since the beginning of 2008, one can understand why the Philippine government was quick to liberalise one of the nation's most protected markets.

The first shift in policy came on April 8, when President Gloria Macapagal-Arroyo approved the lifting of private-sector import quotas on rice and corn. Previously the private sector was limited to a maximum of 300,000 metric tonnes of rice imports annually. This represents a mere 13% of the country's overall rice imports, with the remainder managed by the government-run National Food Authority (NFA).

While applauding the spirit of the government's actions, many in the international and local investment communities complained that an end to the quota regime would do little to increase supply or ease prices. Tariffs, they argued, were the main obstacle to importers.

Excise taxes, which increase the cost of imported rice by 50%, have priced most importers out of the market for years. This is most clearly demonstrated by the fact that only around 30,000 metric tonnes of rice - a mere 10% of the allowed quota - has been imported in the last two years.

Realising the futility of the quota removal, the government quickly moved to revise the tariff regime as well. Philippine Agriculture Secretary Arthur Yap announced on April 9 that instead of charging importers a 50% tariff, the government would instead charge a service fee of two pesos per kg of imported rice.

At the current world market price of $700 per tonne, the two-peso service fee translates into a 7% tax on imported rice. Many analysts and industry insiders believe the new scheme will leave room for private-sector operators to flourish.

Whether a thriving import sector will translate into lower prices for Filipino consumers, however, is less clear. The underlying forces that pushed up the price of rice in the first place are still present.

Demand from Asia's growing economies is at an all-time high and competition with biofuel production is only likely to increase in the coming years. For this reason, many economists and international organisations such as the International Monetary Fund and the United Nations are expecting the price of wheat, corn, rice, soya, and many other agricultural products to register double-digit growth by the end of the year.

To make matters worse, many of the world's traditional rice exporters are closing their doors to exports in an effort to stabilise prices. China, Vietnam and Egypt have all imposed limits on the amount of rice they will export. India has banned the export of low cost "non-basmati" rice shipments. Thailand, the world's largest rice exporter, has also hinted that they will do what is necessary to stabilise prices at home at the expense of the export markets.

Despite the loss of these imports, the Philippines is unlikely to suffer a rice shortage. The US has assured the country that American producers are willing and able to supply the country with as much rice as it needs.

"We will always make our supplies available for export if the Philippines needs rice supplies," said US ambassador to the Philippines Kristie Kenney, adding that, "rice is an important dish in the Philippines, however, less important in the US so it's great partnership for us."

While US imports may ensure that Filipino consumers will not go without their favorite staple, relying on imports still leaves the country vulnerable to the ups and downs of international markets - a situation which is unlikely to be resolved any time soon.

Despite a doubling of the nation's rice production over the past decade, most experts agree that the Philippines does not have adequate farmland to sustain its needs. Imports have been rising steadily over the past several years making the Philippines the world's largest rice importer, with levels expected to reach a record high of 2.7m metric tonnes in 2008.

There are indications that more reforms may be on the way. Many are arguing that trade liberalisation should be matched with a comprehensive land policy, which would allow for greater international investment and economies of scale.

Proponents of such policies point to the fact that Philippine production costs are close to 30% higher than those in Thailand - $96 per tonne versus $74. Transport costs are equally out of balance with international standards.

Closing these gaps requires large investments from private-sector players who have stated they are unwilling to invest without long-term land leases and greater government contributions for improved agricultural infrastructure.

These demands are as politically sensitive as rice prices. For this reason few in the government are willing to support them as of yet but rising agricultural prices may change this. Ultimately, the Philippines may have to choose between inexpensive plentiful rice and maintaining its traditional land ownership laws that deter large investment-grade operations.

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