Country Focus: The Philippines

by Melissa Alexander
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Agriculture contributes more than 20% to the Philippine economy, and the sector's performance has a dramatic economic impact overall. For example, the El Nino drought of 1998 severely cut into agricultural output, which, along with the Asian financial crisis, pulled down national G.D.P. to a mere 0.5% rate of growth. Conversely, the next year, agriculture rebounded with a 7% growth rate, which helped to raise national G.D.P. for the first nine months of 1999 by 2.6%.

The total area devoted to agricultural crops is 13 million hectares, distributed among food grains, other food crops and non-food crops. Food grains occupy about 31%, or 4 million hectares, of the total, with maize on an average of 3.34 million ha and rice on 3.31 million ha.

Philippine agriculture is characterized by a mixture of small, medium and large farms, ranging from subsistence to commercial production. But the majority are small, averaging about 2 ha and owned by single families, and 1998 data show that 85% of all farms were no larger than 3 ha.

Agricultural policy is formulated under the 1999-2004 Agriculture and Fisheries Modernization Act (AFMA), which aims to strengthen and modernize the agricultural sector. Another policy force has been the Asian Development Bank, from which the Philippines has obtained policy guidelines as well as project loans.

As part of its policy recommendations, the ADB has recommended restructuring the National Food Authority, the Philippines' state-owned trading firm that is actively in involved in price supports and market activities for maize and rice. Privatization of the NFA, which the ADB has said is required before it will release funding for a U.S.$175 million development program, has become a controversial domestic political issue.

Another policy issue concerns import tariffs on maize and other feed ingredients. Although tariff restrictions and policies have been liberalized under global trade agreements, maize and its feed substitutes remain sensitive politically because of maize's dominance in domestic production agriculture.

The AFMA allows all producers to import all agricultural inputs duty free, but Congress excluded maize from the input list for fear of damaging domestic maize producers, a position upheld by the Estrada administration and the Agriculture Department. National livestock producer groups, heavy users of maize, took the issue to court, and although they received a favorable ruling in a lower court, the Court of Appeals ruled against duty-free imports in late 2000.

Meanwhile, the agriculture department also has called for higher tariffs on imported feed maize substitutes. These tariff increases are among those under review by an inter-agency committee charged with developing a new government-wide tariff rate to be implemented by 2004.

WHEAT AND FLOUR MILLING. Flour-based foods have played an increasingly dominant role in the Philippine diet in recent years. Although most Filipinos consume rice as their major staple food, the demand for flour and flour products has surged in the past decade.

The growth in the number and popularity of fast food restaurants in urban areas has helped boost consumption of flour-based products. Flour output also has been sparked by the fact that many major flour millers, who also are into poultry and livestock production, use flour by-products for feed use.

The first flour mill in the Philippines was established in the late 1950s, and the industry has grown into a modern, sophisticated sector. As of late 1999, the Philippines had 13 millers, with the newest entrant, Nissin Biscuits, starting operations in 1999 in Laguna.

The industry's total rated annual production capacity is 2.2 million tonnes. Capacity utilization was as high as 76.7% in 1995, with the average through the 1990s at or above 65%, according to a study by economists at the University of Asia and the Pacific.

Philippine millers are represented by one of two groups, the Philippine Association of Flour Millers (PAFMIL) and the Chamber of Philippine Flour Millers (CHAMP). Each group acts as a wheat-procurement body for its members, as the industry is entirely dependent on wheat imports. Even though individual mills may buy and ship their own wheat requirements, the mills pool their wheat requirements and buy as one.

Approximately 16,000 workers are employed in the Philippine flour milling industry, 3,200 of which are directly involved in milling operations. Others are involved in port services and trucking, the poultry and livestock industry and feed milling.

Flour sales in 1998 were estimated at 1.3 million tonnes. The 1998 level was down from the 1.35 million tonnes sold in 1997 primarily because wheat, flour and product prices became more expensive relative to other goods after the peso was devalued.

The industry has rebounded since, with PAMFIL projecting flour sales for 2000 at 1.38 million tonnes. The group's annual report also projected a further increase in 2001 sales, to 1.4 million tonnes.

Wheat and flour transportation costs make up a major portion of millers' expenses, with the location of the mill and the nearest port greatly affecting production costs. Some millers have port facilities, with the others located near ports.

Product durability is one area where competitive strategies can spell the difference for Philippine flour millers. Because flour is perishable, producing it requires a well-planned production, storage and distribution schedule.

Good storage and transport facilities also make a big difference in maintaining a competitive position. To maintain a normal supply of flour, a three-month inventory is necessary: one month's supply of finished flour, one month's supply of wheat in silo storage and another month's supply of wheat in transit.

The demand for wheat flour depends on the needs of bakeries and pastry makers (reportedly consuming 80% of total supply) and manufacturers of noodles and similar products. But because flour has few direct substitutes, some level of demand is always present, price relationships notwithstanding.

Wheat-based product consumption is determined by the price of wheat and the price of and availability of rice. Wheat flour consumption has fallen when rice is available at reasonable prices, but a study conducted by PAFMIL indicated that 85% of the population prefers to eat bread instead of rice for breakfast.

The largest flour end users are bakeries, followed by noodle manufacturers and then fast food chains. More than 10,000 bakeries nationwide constitute the largest single institutional user of wheat flour, accounting for approximately 50% to 60% of total domestic flour use. The breakdown of bakery products is 50% for pan de sal, a local bread type; 20% for loaf bread; and 30% for a variety of other goods.

Only one mill in the Philippines, Morning Star, is designed to grind durum. That mill in 1998 put plans to experiment with U.S. durum on hold after a key potential customer decided to use bread wheat farina, instead of durum semolina, in its pasta production.

LIVESTOCK AND FEED. The Philippine feed milling industry has grown rapidly in the past three decades, now producing about 7.5 million tonnes of feed per year. Like its flour milling counterpart, the feed industry is import-dependent in relation to most of its feed ingredients.

On average, the Philippines annually imports an average of U.S.$77 million worth of yellow maize, U.S.$26 million worth of fish meal, U.S.$5 million worth of meat and bone meal and U.S.$65 million worth of soybean oil, according to the Animal Feeds Standards Division of the Bureau of Animal Industry (BAI), These figures exclude the millions of dollars spent on feed additives and supplements.

The most chronic problem the industry faces is the frequent shortage of cheap raw materials, which has perennially undermined production and caused a wide gap between the available supply and demand for feeds. This problem brings with it other complications, such as volatile prices, inadequate storage and the ensuing quality deterioration.

In a BAI report, 391 feed mills were registered with the Bureau as of Dec. 31, 1999. Of this total, around 280 were commercial mixed-feed manufacturers, while the rest produced for their own consumption. The total rated capacity of all registered feed mills on an eight-hour shift was around 17,000 tonnes, but only 36 mills account for 55% of the aggregate capacity.

Some 132 small-scale feed mills produce fewer than 20 tonnes of feed per eight-hour shift, representing 6.52% of total production capacity. Only 79 feed establishments produce more than 50 tonnes of feed per eight hour-shift, and these represent 77.8% of total rated feed capacity. The balance of 15.7% capacity is accounted for by feed mills with more than 20 tonnes but fewer than 50 tonnes of capacities.

Most Philippine feed mills are located in the main island of Luzon, while demand for mixed feeds is highly dispersed all over the country. Consequently, access to feed inputs is severely hampered on both ends for procurement of raw materials and distribution and marketing of finished mixed feeds and feed products, driving up costs.

Because feed raw material procurement is very important and raw material availability is seasonal, local feed millers find it economical to channel procurement of raw materials to dealers. The tight supply of feed grains in recent years has, however, forced big feed millers to stockpile to enable more efficient production programming. This trend is expected to continue.