By; DONALD SEVILLA
PART TWO: A LOOMING RICE CRISISHOW SHOULD GOVERNMENT ADDRESS THE RICE PROBLEM
A MATTER OF BUSINESS
As in any problem there are a variety of solutions, some conventional and others non-traditional or innovative. Thinking outside the box helps to address important issues that may hound us.
In the case at bar – the rising price per kilogram of rice in the market, our initial reaction would be to regulate and put a cap on how far it can increase.This is a temporary reprieve’ that may solve it for the meantime, but can it sustain?
This early, traders and retailers have complained that they will lose money and are asking for government subsidies to tide them over. It is understandable as they may have bought their stocks at a higher cost prior to the issuance of such government directive.
THE PRICING TIER
But in order to understand the business dynamics involved, let us examine closely how rice is priced in the market.
Farmgate buying of palay has risen to about P20′-25/ kl. Say we bought palay at P20/ kl., 50kl would cost us P1000. Milling/ drying it further would entail an additional cost say a conservative estimate of P3.00/ kl. or an additional cost of P150/ 50 kl for a total cost of P1, 150/ bag .The recovery of milled rice, is at an average of 65%. So for every 50 kilos of palay that means we get a finished product of 32. 5 kls of rice. Our cost for every kilo of finished product (regular milled rice) is about P35.38/kl. or P1,769.00/ 50kl.bag. At the mandated price cap for regular milled rice of P41/kl., a 50kl bag translates to P2,050 in gross revenues. When deducting our cost of P 1,769.00 we can still make a decent profit of P281.00/ bag.
But how much profit is enough for everyone? Farmers want higher farmgate prices so they could earn more vis a vis their inputs.Traders and retailers want to keep their costs much lower than the existing price cap so they can earn a generous profit. So we see, it now becomes a question of how much income are we contented with? How enough is enough?
If one of the links in the supply chain disrupts it by resorting to any means available, such as hoarding , thereby creating an artificial shortage of product in the market to gain more, the balance is upset and ultimately the buying public suffers from the expensive price of rice.
A NOT SUSTAINABLE MODEL
As we have shown above, to keep the price of rice down, we have to do away with the middlemen. We have assumed that selling at the level of the rice price cap, the trader/wholesaler/retailer are one and the same. But in reality and in practice this is almost impossible to do. With lack of government support the farmer/producer relies on another party( trader)to finance his inputs/fertilizer etc. and to whom he is obligated to sell his harvest.
As is often the case, the trader/wholesaler does not sell direct / retail to the consumers yet they are the ones with the most capital. They supply product to the retailers and control its distribution.
Yet at the very least there are three players in the supply chain. The farmer, trader/wholesaler and the retailer. But is a profit of P281/bag enough to be split between two parties( trader and retailer) ? Having spent the most capital and financial exposure would traders not want a lion’s share of the profits?
Clearly then, even if government intervenes and interferes in the market, it has to know where along the supply chain it can be most effective. If it intervenes by regulating the mechanisms of trade, like putting a price cap to control prices it can only do so for the short term.Similarly reducing import tariff rates to lower costs of imported rice can only be an interim solution. Both these measures will do more damage to the industry in the long run. So what must government do?
BALANCE IMPORTS
Because of our huge demand for rice, we eat it three times a day or even more, we have now become the world’s number one importer of rice.This is astounding since we import more than China with its over a billion people in population. This has put us in a precarious situation wherein we have to do a delicate balancing act for our economy to survive.
We cannot be relying so much on imports otherwise we will kill our local agricultural industry. But then we cannot do away with importation because we do not have enough production of the staple. Striking a balance is crucial for our economy’s survival. To move into the future we must be self-reliant to a certain extent. Maybe not to a 100% of our needs but at a level that would not plunge us into a crisis.
IMPROVE LOCAL RICE PRODUCTION
This is foremost to our survival.We must strive to be self-reliant and produce what we need locally and abundantly. We must strengthen support to our farmers, production and post-harvestwise.
This is the key area where government intervention is most needed and most effective. If we can increase our production output at the least cost then it follows that we can lower our palay-buying price and still earn our farmers enough to survive. When the buying cost of palay is reduced it creates a ripple effect that translates into a much lower end product price that benefits consumers.
Ideally this is the scenario that we would like to achieve. But government must always be vigilant when any party or player in the chain is tempted to take in more profit to himself. While this would be contrary to laissez faire or a free market without government interference, sometimes it becomes necessary when prices start to spiral out of control.
CONCLUSION
Human greed always plays a role in business and we must learn to control or moderate it. Rice being a staple commodity is big business and whoever controls it makes tons of money. Yet we cannot just allow big business to take over and run our lives. We must not allow it to dictate government policy. It should be the other way around and government should rein it in.
The price of rice must be affordable within reach of everyone. People should have access to it at all times. No rice no dice.