Is there a rice shortage?

MANILA, Philippines--If we are seeing long lines of people queuing up to buy subsidized government rice these days, doesn't this mean there is a shortage of rice in the market?

The standard answer from government has been: No, there is no shortage because there are ample supplies of rice in the country. What we have, we are told, is a problem of rising rice prices, not of insufficient supplies. As if to prove the point, the President is constantly shown on TV making the rounds of well-stocked rice warehouses of the National Food Authority (NFA) and those belonging to private traders.

But doesn't the law of supply and demand tell us that rapidly rising prices precisely result from reduced supplies and/or increased demands? And that rationing queues are indicative of insufficient supplies, a.k.a. excess demand, a.k.a. shortage?

Distorted market
Well, normally, yes. My own sense, though, is that the government is probably right in saying there is enough rice around to meet our current needs. The shortage argument above holds where the market functions efficiently, meaning there are no market distortions and there is ample competition, especially among the sellers. But neither can be said of the rice market in the Philippines.

The single biggest distortion is NFA itself. For a long time, it had monopoly over rice importation. Even the recent "opening" of rice imports to certain qualified private parties remains so restricted that the distortion remains.

NFA also tries to influence prices at both farm level and retail, by buying high in the former for farmers' sake (at a designated "support" or minimum price for palay, recently raised to P17 a kilo) and selling low in the latter for consumers' sake (at a highly subsidized price, now at P18.25 a kilo).

Anyone can tell that buying high and selling low is not the normal way to do business, and is a sure-fire formula for making huge losses, which NFA has perennially incurred at taxpayers' expense. And yet its interventions hardly affect market prices, as it never has enough funds to buy more than a tiny 1-2 percent of total rice production anyway. Under such conditions, one wonders if NFA should even be doing it at all.

Immoderate greed?
Meanwhile, it has long been alleged almost to the point of being open knowledge that tons of money are being made by the wrong people with every rice importation done by NFA.

Lately, critics are again pointing to the significant discrepancy between rice import prices announced to be paid by NFA, and published export prices for rice from our usual sources (especially Vietnam and Thailand). If true, this is actually a ZTE-type scam that has been going on under our noses for decades! Even the sacks used to pack the imported rice, we are told, are a source of immoderate profits for favored suppliers and their government sponsors.

Would it be any surprise, then, that we continually fail to achieve rice self-sufficiency, when certain powerful individuals could be making fortunes out of government-controlled imports?

Worse, such windfalls are being made on the backs of poor rice farmers, who have consistently been at the losing end of the highly distorted rice market. In particular, when the imports come in at the wrong time, i.e., at or around harvest season--which in our experience has too often been the case--farmgate prices are depressed by the abundant supplies even lower than what they would be.

It's the farmers who suffer from all this, of course, while certain people end up laughing all the way to the bank.

Undue margins
Apart from NFA's role, the other market distortion, long perceived but supposedly never proven, is the undue control over the commercial rice market by suspected rice cartels. It's also a well-known fact that rice traders corner palay supplies from farmers by loaning them money in lieu of formal credit which is largely inaccessible to small farmers.

At harvest, the latter end up with no choice but accept the usually lower price offered by the trader-lender. Without adequate competition in rice trading, the margin between prices paid by consumers for milled rice and prices received by farmers for their palay would be wider than necessary. We have a long-accepted "rule-of-thumb" of a 2-to-1 ratio (actually a little more) between these two prices.

Curious, I checked data from the UN's Food and Agriculture Organization (FAO) and found that this ratio has only been around 1.6-1.8 to 1 in Thailand and India through the years. But Indonesia, which also has an NFA-like agency (Bulog), has the same 2-to-1 ratio as ours.

Self-sufficient
So is there in fact a rice shortage? If you believe government data showing rice production growth of 10.1 percent in the fourth quarter and 6 percent for the full-year 2007, then we ought to be swimming in surplus. A retired government statistician sent me calculations based on the government's rice Supply and Use Accounts (SUA), showing that we are in fact self-sufficient in rice even now.

Why, then, are we frantically looking for rice to import? Is it because certain people have millions of reasons for doing so? Is the President being misled into believing that huge rice importations are critical to her political survival? Or worse, is she in on the profitable secret?

Comments are welcome at chabito@ateneo.edu

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