by: Terence Mordeno Grana
The rice farmers, particularly in the Central Luzon area, have recently been experiencing low production and minimal harvest of rice due to the high cost of farm inputs such as fertilizers and pesticides aggravated by the effects of the El Nino phenomenon which hit the country, forcing them to sell their palay to private rice traders at a very low price. On the other hand, the rice traders who are allegedly organized dictate the buying price of palay.
These conditions have pushed the farmers into hard times, thus House Resolution No. (HR) 272 was filed by Nueva Ecija Representative Josefina M. Joson to ask President Joseph Ejercito Estrada to direct the National Food Authority (NFA) to increase its buying price of palay from farmers nationawide at a minimum of P10.00 per kilo from the current price of between P6.00 and P8.00.
Representative Joson said in her Resolution that there is an “urgent need to uplift the economic well-being of farmers who have long been marginalized despite that they carry the burden of producing” the country’s staple food which is rice.
During the deliberation of HR 272 in a hearing conducted by the House Committee of
Agriculture and Food presided by Bulacan Representative Angelito M. Sarmiento, NFA Deputy Administrator for Operations Gregorio Tan disclosed that the NFA considers three factors in determining the NFA support price for palay.
The first factor that Tan stated is the cost of production, which would determine the profit margin of the farmers. He said that in 1995, the production cost was P5.85 per kilo of palay and the support price was increased to P8.00 per kilo. This cost of production increased to P6.60 per kilo in 1997, posting a 13% or 75 centavo per kilo increase.
The second factor is the domestic and international market condition. Tan said that if the NFA support price is higher than the prevailing domestic prices, the NFA will be a market leader, thus buying anywhere all throughout the year. In principle, the NFA buys during the harvest season in surplus areas and distributes during the lean months to stabilize prices.
At present, he added that the landed cost of imported rice is P13.75 to P14.00 per kilo without tariff. With a tariff of 50%, the cost would increase the to P20.00/kilo. Based on this, he explains that there is room to increase the support price to P10.00, since normally, the NFA follows the rule of thumb where the cost of rice is twice the cost of palay.
From the standpoint of the domestic market, Tan disclosed that the increase to P10.00 would mean that the NFA would be intervening in the market even in the deficit areas. From the standpoint of the international market, he said, if the tariff protection of 10% is maintained, there is room to allow the price of palay to P10.00/kilo.
The third factor is the capability of the government, through the NFA, to sustain the increased price. Mr. Tan said that any increase in the support price should have a corresponding increase in funding. He explained that with the NFA holding period of nine months and overhead costs, the P10.00/kilo price of palay would result to a P22.35 per kilo break-even price of NFA rice. Applying the rule of thumb, the cost of rice will to be increased, or the P2.35 difference will have to be subsidized by the government. If the NFA sells on the average one million metric tons per year, this would translate to an additional P2.35 Billion of subsidy per year. The NFA therefore feels that any increase in the support price should be properly funded to be implemented effectively.
On the proposal of the Resolution that the increased price will be straight pricing, Mr. Tan said that the NFA must set standards for the palay to be bought. The NFA buys palay with moisture content of 14% and purity of 95%. If the straight pricing is imposed, the NFA will be buying the wettest and dirtiest palay of the farmers. This would result to an even greater loss for the NFA, and would further jack up the price of rice.
Representative Simeon Garcia of the Nueva Ecija, a coauthor of HR 272, said that in the past years, the rice farmers especially of the Central Luzon have had a hard time because of low production and a low buying price of their palay. He alleged that the palay traders took advantage of this and organized themselves to dictate the buying price of palay. Thus, the author hopes that with the increase in the NFA’s buying price of palay, the traders will also increase their buying price. His measure recommends that this price be applied to palay with 14% moisture content and 95% purity to ensure the quality of rice and stability of rice prices.
However, there are conditions to be considered before increasing the NFA support price of palay set by the Committee. In the domestic markets, if the support price is higher than the local prices, the NFA would become a market buyer. NFA will be buying in production seasons and surplus areas, since private traders will not buy at a high price. Moreover, following the 1:2 ratio in computing the price of rice, with the price of palay at P10.00, the traders would sell rice at a minimum market price of P20.00 per kilo.
The 1:2 rule of thumb estimated by the NFA takes into consideration three factor: 1) the conversion of palay to rice, where one kilo of palay would yield an average of 0.65 kilo of rice; 2) the transportation cost; 3) the profit margins of the traders.
There is also the question of the government’s ability to sustain the buying price. At P10.00 per kilo of palay, the resulting break even release price of rice would be at P22.35 per kilo. This is because of the NFA’s long holding period of nine months and overhead costs. The P2.35 difference may have to be sourced by the NFA from an additional government subsidy or credit facilities.
The extent of NFA intervention to influence the market depends on the following factors: 1) if the season’s production is self-sufficient, the NFA buys 10% of production; 2) if there is a deficit in production, the NFA can buy less than 10% of the produce; and 3) if there is a surplus, the NFA must buy 35% of the surplus. For this year, the NFA can buy 400,000 metric tons with a support fund of P4.5 billion. This is about 8% of the projected harvest.
The Committee recommended that HR 272 be adopted on the condition that the palay to be bought at P10.00 per kilo shall be of the same standards presently followed by the NFA. That is, the palay should have moisture content of 10% and purity of 95% and that the price increase be supported by a corresponding financial support for the NFA to effectively implement its buying operations. Assuming a sales target of one million metric tons (1999 figures), a P2.00 per kilo increase in the NFA buying price of palay would need an additional funding support of about P4 billion.
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