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PHILIPPINE

INSTIXIYI_ FOR DEVEIOPI_NT

STUDIES

Working Paper 83-O9 ECONOMIC _IVES AhD COMPARATIVEAD_


corlDN INDUSTRY

IN THE PHILIPPINE

Arse_io

M. Ballsacan

PID$ Library

ECONOMIC INCENTIVES AND COMPAP_ATIVE ADVANTAGE IN' _HE PHILIPPINE COTTON INDUSTRY

Arsenio

M. Balimacan

INTRODUCTION

In support to develop

of the goverm_ent_s substitutes,

agricultural

development

objective progof

import

the national

cotton

development reintroduction

ram, which paved cotton 1970s.

the way for the commercial-scale agriculture 2, was formally were

in Philippine Rationale

launched

in the early has

given to the program

(i) the country which_

been importinE period

its cotton inv,!red studies

lint requirement an average shown

over a ten-year of $30 million; in suit-

(1966-75),

annual

outflow

and (2) research able areas More

have

that cotton

can be grown

of the country

with

a profitable have

rate of return. as potential and about systems. 150,000 The latter for As

than 530,000

hectares

been delineated cultivation cropping

areas technically hectares

suitable

for cotton

of this fall into the existing more tha_ the required

represents the country

hectarage

of i15,000

in order

to be self-sufficient

in its raw cotton

bonsumpEion.

IResearch intern, Resource Systems Institute, East-West Center, Honolulu, Hawaii, and Science Research Specialist (on leave), Cotton Research and Development institute, Philippines. This paper is based on the author's MS Thesis (Balisacan, 1982) and is part of the project entitled "The Impact of Economic Policies on Philippine Agricultural Development" funded by the Philippine Institute and Development Studies and Philippine Council for Agricultural and Resources Research and Development". 2pioneering attempts to co_=_ercialize cotton cultivation in the country were made as early as pro-Second World War. However, inadequate technical know-how, coupled with managerial and acute financial problems led to the abandonment of operations.

of crop year planted

1950~g_
,

about

17,000 hectares

of these have been 194-hectare

to cotton

a qumttum

ju_l_ from ... modest a _-. '... .

beginning

in crop year

1974-75, of cotton raises t,._o crucial eco-

As expected_ DE_ic Iss_es_ tically does

the p_omot_u

First:_.how economically cotton with respect

competitive to imported

is t_e domescotton_ i.e. cotton

produced

the c,_.'omy

have a ompaxative

advantage

in domestic

pr_oduction? encouraged.,

_nd second_ domes tic cotton

has the matrix production? these

of _overnmant

policies

This-;_a_er _attempts_ to a_S_er section describes the historical

_o

questions. trends

The firs_

de_e!oDment_

in production In the

and imports, next section_ of economic

and policies :affecting the cotton the effects of gove_nment

industry.

policies

on the structure

inceu_ive$

in the cotton

ind.ustml is analys.e.d. Lastly, economic efficiency

in the third section, of domestic

the issue of the relative

cotton production

is. co.%apreherusivelyexplored.

I.

I_mUSTR

BAC_"ROL_D

Historical

Profile

The Philippine Hispanic era.

cotton

industry

dates .as far back

as the preflourished,

Throu_=hout the lan_, hOl_Sehold weaviu_ a native fabric mad_ ancestors extracted

and '"lompotes;_
...., ,.

ef ,cottonp wa_ a renowned to (,_ina omdother parts of.

export

product _ne

of Filipino fibers we=_

Zhe gl.05e. plants

from perennial_ty_e

COttOn
,

known now today, as wild-glzowin;i"nayiv_ _otton

p!181_tS.

3 _._iththe transfer during The the Span&sh of the center the local of trade industry from Cebu to Manila began to crumble. by

regime,

cheaper

and higher-quality competed with

imported

faSrics

manufacture This

English proved

mills

the loca_.ly woven

fabrics. industry.

to be a sharp blow "iompotas"

to the local weaving to be a major varieties

In a for

short time, Chinese crops,

ceased

batter became

commodity

goods,

the locally

grown

mere backyard

and the local cotton

industry

dwindled. Land Settlement cultivation. AdministraNLSA, the

The establishment tion

of the National

in 1939 led to the revival in the country started a modest

of cotton

first agency cial scale, that year. occupation

to attempt

to grow cotton

on a commerin

100-hectare however,

cotton cul_iva_ion

The undertak/ng, of the country

was cut short by the Japanese War_ began with

d uz.i_g the Second World co,ton

A post-war _ha organization the Philippine renamed trating looked

era in the Philippine of the N_tioual Cotton Agricultural Agricultural where

industry Company

Development Corporation

in 1953 and

in 1955, the latter in 1956. of co_ton mechanized &_ annual Concencultivation all-cotton average of

as the General operations

Corporation prospects a modern

in Mindanao

good, bo_h agencies having hundreds

established

of laborer8

and planting

nearly

1,000 hectares. of _he undertaking, Overall average unfortunately, were rather after e_g_ dis= cropping

Results couraging.

seeucotton3yi_d_

3The produc_ plants.

consisting

of fibers

and seeds,

picked

from cotton

4 years, was o_.iy 326kg/ha, Teclmical inadequately, with the lowest registered at 85kg/ha. difficulty

complicated

by acute conflict_

financial within

and organization_l

and operational

the company

lad to the discontinuation A turning

of operations. cotton industry came in cotton lint

point in the Philippine and early seventies. began

the late sixties prices

At this time,

in the world market

to soar after sixties.

a long declining As a result, the

trend from the fifties country's textile

to the early

millers

who bore the Brunt

of the increasing of the local a series of Act a the

cost of cotton cotton

imports

agitetated

for the development enacted

industry.

In re.sponse_ the government first of which

!egislations,.the 4986 creating joint venture development

was the passage Research

of Republic

the Philippine

Textile

Institute

PTRI,

with the private

sector, was mandated industry. throuRh

to promote

of the country's

textile

In 1969, the Burean gran_ _romPTRi_ research project

of Plant

Industry,

a research. of a cotton of con-

took special which

in_erest

in the launching

gave special

attention

to the development and topograFhical showed

a cotton variety ditions

that best fits the climatic Kesults

of the country.

of its studies variety,

Deltapinee in

16, an American terms of yield Almost a similar a vigorous

upland medium-staple and adapatibility. Central

to be the best

in the same year_ grant from PTRi, technical

Luzon

State

University,

through

assumed

the important

role of undertaking Its

research

program

om cotton cultivation.

5 research results efforts turned out to be successful of a pioneering program and the encouraging project with called "Operaconcento

led to the launching an on-farm

tion Bulak", trated

production

operations sought

in Central cotton

Pangasiann, growing

in 1972.

This

project

reintroduce

into farmers'

cropping

systems,

The outstanding drew national with

performance Thus,

of "Operation

Bulak _' immediately culminated by

attention.

in 1973, the project Decree Cotton 350, later Corporation

the signing

of Presidential the Philippine to undertake,

amended

PD 1063, creating central authority

(PCC) as the commercial cont_io_led

implement,

and supervise A semi-government

scale-cotton corporation venture

production attached

in the country.

to the Ministry

of Agriculture,

PCC is a joint

between

the government the national

and the private development three years

sector. program formally operations_ the Cotton

TO support launched

cotton after

in crop year 1977-78 government,

of pilot

the Philippine Reeearch assigned

by virtue Institute

of PD 1432, created 1978.

and Development

in June

The Institutels current efforts in order in

the task of stren=he_ing areas of cotton objectives

and accelerating research

in the specialized tO support cotton

and development

the national

of attaining

self-sufficiency

in the shortest Raw Cotton There

time possible. Scenario are over 20 cotton Over textile millers presently of their

The Domestic _tion. operating

in the country.

the past year,

the magnitude

demand

is reflected

in the country's

.important of cotton represented

lint the

(equivalently

referred

to as raw cotton.) which

total supply before'f975. Raw cotton by inter-year (Figure l). imports over the last two decades, generally showed though marked trend by

fluctuations, The annual

a declining

average

quantity despite

of imports

dropped

i5 percent increase

in the ensuin_decade income

the c6unt%7's Partly,

significant this phenobetween

in per capital

and population.

menon was due to the intense cotton and man-made however, reaching a more raw cotton $47 million twofold

competition fibers,

that developed In terms

or synthesis importation in 1978, jump

of _mport value

in the seventies This resulted cotton

rose si_ninficantly fram the two

largely

than

im world

prices

between

decades. The observed cotton related period_ inter-year fluctuations in the volume of raw can be during this

imports, in the late sixties to the textiles The textile industry's

and early seventies principal problem

firms were

then suffer_n_ because (Morales,

from low capacity and this

utilization world demands

(60 percent)

primarily

of low domestic 1974),

for their products why the Fiscal the textile in 1970.

Presumably, of

was the reason Investment crowded in 1973

Policy

Committee

of the Board

placed

industry The sudden

in the category increase

of over-

industries

in _mportation from

could be a_tributed

to the deletion

of the industry

the same list of congested in effect_ lifted

industries

by the BOI in 1972.

This end

the restrictions (e.g., imports to 1972.

on expansion of machineries

of facilities

other disincentives imposed

and equipments)

on the firms prior

For the past decades, from the United the 1971-75 vided States

raw cotton i).

imports

originated

mainly so during were pro-

(Table

This was especially all cotton imports

period

when practically textile

to the Philippine

industry

via the agreement

the US through Domestic

its Public

La_ 480 and the Philippine Though cou_ercial-scale and

between 4 government. productsixties as in as

production.

cotton early

ion in the country mentioned the second earlier,

was pursued the efforts

in the fifties

and scale were not intensive and early eighties when

half of the seventies program was

the nationfrom

al cotton development both the government period_ domestically

pursued with sectors.

full support During

and the private produced

this latter

raw cotton began supply.

to fill a signifi0.3. percent jumped to

cant fraction

of the domestic

From a modest the proportion

share of production 13.6 percent imports

to supply in 1975,

at the beginning almost

of the eighties

(Table 2).

With

remaining

at the same

level during

the late sevenis attributed

ties and early eighties,

this increase

in proportion

4The iaw's primary purpose was to support American agriculture_ while at the same time assisting the economic development of friendly nations through the utilization of America_s surplus of agricultural commodities via provision of long-term credit for the purchase of such surplus crops. USDA's Counnodity Credit Corporation financed the sale and exportation of these commodities.

8 almost period, entirely to domestic an annual production growth which_ during the same

registered

rate of about

i00 percent. of

Interfiber man-made

competition. fibers With

The introduction in the fifties the market

and development ushered

or synthetic

in a new era fibers a stern

in the cotton largely

industry.

for man-made

concentrated developed

in apparel between

and elastomer

industries,

competition

natural

and synthetic vis man-made trends

fibers. fibers can

The competitiveness be sleaned consumption. ulosics_

of cotton vis-a world price

from the relative As s_w_

and local

fiber

in Figure

2, the price staple,

index

of nnn-cell rapidly from

represented

_, US polyester

decreaead

the fifties

down to the early markedly

seventies.

Cotton

prices,

howevers

began to increase early seventie3, by about

in the late sixties, cotton price

so that by the had declined

the polyestercompared

ratio

75 percent,

to 1960-65. consumptionp

This may be part of as reflected in the increase the relaabsorbed fibers was conproin a

the reason

that local cotton

level of .imports shown earlier, during tively greater durin8 siste_t d_ced 1972 the same period. cheaper man-made Local fibers

did not consistently textile which mills preferred

correspondingly imports

proportion the sixties

of the country's and seventies. declining from76

of textile

Also, cotton

this phenomenon content

with a steadily fabrics-ranging

on locally

percent

in 1963 to 27 percent

(Table 3).

9 The trend in relative however, increase changed after world prices of competing fi%ers, to

1973.

Prices

of man-made

fibers began depend Al-

as the price of oil_ upon which rose sharply

synthetics

for their raw materials though cotton cotton between content prices

during

this period. as fast_ the

seem to have risen produced

about

of locally

fabrics

increased

especially

1973 and 1975.

Policies, Affecting

Laws and Related Measures the Cotton Industry

The producing Cotton amended Corporation,

sector. created

As mentioned

earlier,

the Philippine

in 1973 by virtue authority

of PD 350, later

by PD 1063, is the central supervise

to undertake, cultivation in

implement,and the country. ranged

commercial=scale

cotton

Since its inception, the most

PCC has undertaken of which

a broad

of activities,

critical growing

are: the selectof necesand the of all cotton

ion of general sary financial puchasing, produced

areas for cotton and agricultural ginning,

the provision s_rices$

extension

storing,

baling,

and marketing

under

its program. price is set By PCC at the beginning are assured of the market of the croD-

Seedcotton ping season

and farmers

for their proof seedrural and

duce by the PCC which cotton. PCC, through

is the sole buyer its lending-arm

and processor

participating

commercial

banks,

gents production

credit

to farmers.

Like

I0 other supervised credit programs, cotton production loans carry

an interest For the past

rate of I0 percent seven cropping

plus

2 percent

service

charge

season,

the average per farmer_

actual productor from _i_270 terms of raw from _3,773

ion loan ranged to 22,581 cotton

from _535 to _2,001 (Table 4)

perhectare

Translated

into

(lint) production,

the average

loan ranged

per metric Payment

ton in 1975 to _9_553 for farmers' banks

per metric produce

ton in 1981o is channeled by

seedcotton which before

PCC to the lending loan obtained latter. repayment period, highest

in turn deduct remitting the lending loans_

the production to the

by farmers

the balance banks

This practice

enables

to have a high the 1975-80

rate for their

production

During which

the repayment in agricultural

averaged

85 percent, loans

is one o4 the nature.

production

of a similar

The textile

sector. mainly

In the past_ originated

domestic

cotton

suplly, of

as stated earlier, which came from ment pines between

from imports,

the bulk

United

States

through Public

the provision

of the agree-

the US

(through)its This agreement production

Law 480) and the Philipits effect in 1975, the fraction through

government. domestic

ceased

same year

started

to supply a _odest

of total supply a licensing imposed

Quantitative however,

regulation

by the government

system,

was in effect - and is still presently Under the system, the Development mills only

- on imported

raw cotton. allows produced

Bank of the Philippines after the domestically

imports

of cotton by textile

ii cntton mills' has been request allocated to import among these= mills If the textile their request

is granted,

DBP enters

and endorses

the application

of qualified

importers

to Central

Bank, which are then authorized In addition are subjected 10 percent represent cotton. produced 'a measure to quantitative duties

to open a letter of credit regulations, - I0 percent mark-up. tariff cotton imports and a

to customs

ad valorem

sales tax over 25 percent an almost 24 percent

These rates on imported on domestically interpreted As as

implicit

Since there are no sales raw cotton of nominal (lint),

taxes imposed

this rate

can be also

protection

on cotton

lint production this rate underseed production. of the textile

will be shown in the next estimates the incnetive

section_

however, cotton

to domestic

Recently, dustry

the expansion

and modernization boost.

in-

was given

a considerable

The government,

in pus h-

ing its export-orientation exchange equipment the mbdern , is encouraging in response finishes

program

for the generation millers

of foreizn

the country's

to_:retire old and to meet to Act

to tachnology

development

desired

for exports.

To give effect of Incnentive

this program,

the BOI, since them

through

the provision incentives

6135 implemented mills by allowing

1979, _ives to import

to new textile free

equipment

and machinery

of duty and taxes for a period gistrati_, Starting

of 7 years

from the date of reis tied with

1981_ however,

this incnetive

12

another requires produce.

government textile

policy

- a rational

program

which of their

mills

to export

at least

30 percent

II.

STRUCTURE

OF INCENTIVES

IN THE COTTON

INDUSTRY

Nominal

and Effective

Protection

Since the tradable seedcotton_ ers' output

commodity

is raw cotton protection

(lint) and not on cotton farm-

the estimation starts with

of nominal

the determination industry,

of overall i.eo_

(total)

nom hal protection production pine Cotton

to the cotton

to seedcotton of the Philipcan be best and border

and to processing Corporation, price

which

is a mononoly protection between

This total comparison

measured prices

by direct evaluated because

domestic

a t a comparable of the marked production adjusted

in the marketing difference price to make

chain. between cotton

However, imports

quality

and domestic

the border

of raw cotton domestic and is

was correspondingly border prices

in an attemp

directly

comparable. Ao

The adjustment

procedure

discussed

in Appendix

The impact policies, favorably nominal

of government

polieies_

notably

trade

and fiscal

measured

by these price industry averaged

comparisons_ as a whole 28 percent

was H as expected_ Total

to the cotton rate

(Table 5). during

protection

the 1975-81

13

period.

This

figure was somewhat based on tariff restrictions

close

to an independent taxes. Given

estimate the quanhow-

(24 percent) titative

and indirect (quota

import

allocation) comparison)

on raw cotton, is preferred

ever, the first estimate used for luther fails to capture analysis

(by price since

and is

the latter

(by legislated

rates)

the effect

of _his form of trade protection protectinn conferred

restriction. on the for the the pro-

From cotton

the total nominal

by policy farmers

industry,

the nominal

to cotton indirectly. First,

production estimation tection

of seedcotton method

was estimated

Briefly,

consists

of two stages.

the implicit PCC's

to processing the average

was eliminated processing

by replacing

processing pro-

cost with ducing

cost of eleven major assumption

cotton

countries.

The implicit

was that this average and protectionto the by farm-

is a close approxiation free processing.

of the cost of efficient this processin_ price

Second,

cost was added actually

lint price equivalent ers and the t6tal, pared with protection cussed

of seedcotton farm price

received

termed

in lint equivalent,

was com-

the border rate.

price

as in the estimation estimation

of total nominal are also dis-

Details A.

ofthe

procedure

in Appendix

These estimates seedcotton the 1975-81 put was,

revealed

that the nominal averaging-

protection 7 percent

rate on during out-

production period.

was negative What

this tends

to show is that the producer's not conferred with

generally_

not protected,

i.e.,

incentives,

14 by price policy ducer prices set by PCC, but rather penalized. 7percent Domestic below pro-

were pegged,

on the average,

compa-

rable world prices The nominal pletely capture protection the impact rate measure, of all price h_wever, policies does not comon the incentive to price policy of inputs Thus, the

structure on output,

in seedcotton farmers'

production.

In addition

_incentives affected rate

also depend

on the price

which are likewise effective nominal

by various

policy measures_ measure

protection

is a more

relevant

than the

rate. the implicit were tariffs on tradable inputs used in cotton protection

Because production

substantially output,

higher

than L the nominal protection (Table 6)

rate on farmers'

the effective rate

rate was generally Over the sevenioeo, returns to

lower than the nominal year period domestic percen_ considered,

protection

EPR averaged (domestic

- 12 percent,

primary

factors

value

added) were

lower by 12 and inputs. by the

as a result

of the implicit to these

tariffs

on outputs

In other words, protection

returns

factors

were penalized

system. has been made credit of the incentive policy impact of of services. has

So far, no mention the government's agricultural As mentioned

agricultural

and its funding and other

extension, earlier,

research

and development, cotton

the national

development

program

15

had an accompnying and extension production the extent

supervised Only

cr_di_: package the average

and a pool of research on

support.

impact of intervention here to determine

credit, to which

however,

has been estimated by price rate policy

the penalty

on cotton credit.

has been offset The interest

by the interest rate

subsidy

on agricultural

differential had tended 1981)o

between

agricultural

loans and points

the rest of the economy during capital bhe seventies in agriculture sector

to be about

6 percentage

(David,

Consequently, lower

the cost of than in the nonwhen exfrom 2 to

was about

6 percent paper, value

agricultural pressed

In the present of free-trade

this subsidy, added, ranged

as a proportion during

5 percent

the 1975-81. impact of credit subsidy on the overall offset protect-

_he incentive

ion to farm cotton production imposed, effective being by price policy protection only

did not fully inputs

the penalty the average

on tradsble

and output, under

rate durins

the period

consideration as a result of

raised

from -12 percent

to -9 percent

the credit

subsidy. rate would be still lower when the disincentive to foreign elsewhere, overvalued a 32 percent ex-

The protection effect change

of the overvalued is accounted

domestic

currency

relative

for in the measure, itself makes

AS mentioned currency

the protection relative

system

domestic

to foreign

exchange.

Medalla

(1979) estimated

undervaluation that indicated

of foreign

exchange.

Thus,

the net EPR is less than an average of-25

in the foregoing

measure,i.e.,

16

percent

during

the 1975-81

period.

It should be noted_ of domestic

however_ has a

that the correction neutral sector cotton effect

for overvaluation goods

currency

on all traded

industries

in the agricultural ranking of

and the geDeral production would

e=onomy.

Thus,

the relative and after

not change

before

the correction

for currency

overvaluation.

Synthesis

on Incentive

Structure

Th_;foregoing nominal protection

analysis

has shown

that despite policy

a clear positive the to be by

conferred farmers'

by price output

on raw cotton, added tended

protection negative

on cotton

and value

indicating

that cotton

farmers This

have been penalized mean,

the governmet's howeve9

price policy.

does not necessary industry

that the protection sector,

to the cotton i.e_,

accrued

totally of

to the processing PCC's profit cultural

to PCCo A considered the budget

proportion for agri-

was apparently

to supplement

extension

and research

and development_

Thus9

a part of

the overall

protection farmers

to the industry

was ultimately

channeled If the

down to cotton impact

in the form of government to domestic value added

services. could

of these servcies

be reasonably m_asure, might

quantified the picture have

and incorporated of'Dverall

in the effective recieved

protection

protection

by cotton farmers bowever, scale

to be modified.

It is not expected_

that the position of agricult_:ral

of the cotton

crop in the protection-pena)%-y

17

crops will be markedly receiving similar

altered.

Other

agricultural which

crops are also increase

government

services

may likewise

the protection

on these

crops. rates by price (Table on seedcotton policy were generally

The estimated

protection

lower than those conferred than those on export nal protection crops

on food crops, but higher the seventies, nomi-

7).5

Durin_

rates on food and export respectively.

crops were,

on the average, crops,

-3 and -15 percent, notably farmers

Considerin_

that export

sugar and:_tohacco, are the predominant in the choice for second crops in most

slternativesof cotton-growing penalty policy areas,

it may be less disheartening farmers' output since

to observe

a nominal by price

on cotton on export

the penalty However, crop

imposed

crops ismore tively slight

severe.

considerin_

that cotton

is a relathe to export per-

new agricultural output protection

in farmers

cropping

systems,

advantage

of this crop r_lative risk

crops may be easily eeived in shifting

outweighed

by greater

and uncertainly

to a new crop. that should

More6ver,

there is _= income Why should these

distribution farmers' would ment

questions

not be ignored. below what

incomes

be reduced

substantially

a free market cotton develop-

offer? program

Also, in the longer-Tun expands to other crops, targeted a more

as the national areas wh_re

food crops are policy on

mostly

grown as second

favorable

price

5 This refers to nominal rates of protection, but as tradable inputs represent only a small proportion of production costs a_d valus of output in crop production, it is likely that the ranking of agricultural crops would be roughly similar with the use of either -_"_e-v_*_ev_e_ure of _rotection. I

18 cotton may be necessary Relative ive Drotection the seventies, very low. to induce farmers to plant cotton. an effectduring was

to the manufacturing from government the protection

sector which

received

policies conferred

of about

44 percent

on the cotton

industry

Thus, government resources

pricing

policies

seem not to be dein competition centinues increasingly in

signed to attract with manufacturing the long-run, have to bear

to the cotton

industry

industries.

If this discrepancy would

it may be that the government the burden of financing

the cotton

program.

III.

STRUCTURE

OF COF]_4RATIVE ABVAN_AGE

IN THE

As raised

earlier,

one principal

issue

in the national
J

move,

to co_ner_ialize competitiveness cotton. economy

cotton production of domestically

in the country

is the relative to imported the

produced

as compared the issue

Put in i_s proper benefit

per_ective,

is, would

from substitutigng outweigh

domestic domestic

for imported

cotton

i.e., would THe analysis

the benefits is centered

cost of production? domeeti_ resource resources of cost

on the "ex post" the value cost,

(DRC) concept evaluated foreigh

which meanures

of domestic used

at social

opportunity

in saving a unit

exchange

via local cotton coefficient

production. at the farmers' input, fields, the

For "input-output present paper made

use of comparaive and major

output

and financial available

farm survey

data for cotton

alternative

crops,

19 at the Special Studies Division, Ministry of Agriculture, description features of these surveys are shown in Table 8. Some These

data wete supplemented by production statistics from the Cottm Research and Development Institute, Philippine Cotton Corporation and the Bureau of Agricultural Economics, Ministry of Agrlculture.

The !ndustry Exluding (evaluated Table 9.

DRC land rent, the average for the seedcotton period production considered are comts shown in

at market

prices)

On a per-hectare basis production costs ranged _2, 131 Labor and operating capital costs in 1981 the increases in the former mainly re-

in 1976 to _5,044 in 1981. reanched unprecedentedlevels,

sulting from increased physical labor inputs _ther market wages.

than increased

The allocati6n, of the above costs to domastic and fooeigh 6 sources is presented in Table I0 . Together with labor,cost, land rental, which was taken to be 25 percent of the valu_ of pzoductlon

6 The genral methodology followed on the allocation of costs to domestic, foreign and tax sources was that outlined in the ZEPAD Pzo_ect. BriefEy, the allocation process took into account the historical origin (source) of tradable inputs, whether they were fully or partially imported.

20 7 in tobacco growing _ the best alternative fully of cotton in present cost. of seedcotton into cotton-

areas,was

allocated earlier,

to domestic (ginning)

As mentioned cotton

processing operating

lint and marketing Corporation.

are monopolies its yearly

of the Philipaverage net ginning of

pine Cotton costs, ginning ginning

In the past,

calculated, by products costs,

as shown in Table (agricultural

ii, by deducting

the value

and industrial This During

seeds)

from total from for capa-

fluctuated

drastically4

resulted

m_inly

large excess example cities

capacity

in some years.

the seventies, of rated

actual

use ranged

from only 8 to 35 percent utilization

in contrast

to an average

rate of 67 percent can be made about

in the early eighties. the observed annual

The same explanation in average

fluctuation

marketing

cost. lint

The ountry'_ production decline

relative

comparative

advantage trend

in cotton

did not show a progressive resource cost from

Instead

of an expected

in domestic

1975 onward,

the study Rave from gave

surp_i_results _8,74/US$

with

industry

DRC generally in 1978

escalating What

in 1975 to _15,90/US$ was

(Table 22). decline

rise to these results

the general

marked

in average

7 A large proportion of the farm respondents used in the present study were share-tenants and /or Dart-ownerso From crop year 1975-76 to 1977-28, it was about 59 percent_ crop year 1978-79 to 1980-$I, 52 percent. For these farms, the most common pratce was the 75-25 sharing system. (i.eo, seven-five percent of the farm produce going to the farmer cultivator and 25 percent to the landowner, the latter not sharing production costs). From this observation it was deemed_ appropriate to measure the opportunity cost of land through the pre' vailing share rent.

21

raw cotton yield the co=ton

in the survey data was first

from 0_37/ha

in 1975, when in !:978 (or respectproduct-

program

introduced,

to 0.24 mr/ha

equivalently, 8 ively). ' This

from 1.0 mr/ha

to 0.66 mr/ha

of seedcotton, to spiralling

alone had largely

contributed

ion cost per unit of raw cottonproduced to 1978o 9 however, though sources amount Compared with the shadow price

in the country of foreign

from 1975

exchange, lower, re-

the DRCs, except

for 1978, were

still relatively

only slightly,

indicating

that the value was

of domestic

so used in cotton of domestic

production required

less than the average one dollar (the

resources

to earn

domestic

cost of foreign

exchange). better picture of the relative exchange effiappeared

}_wever, ciency during showed change

an apparently

of the industry

in saving a unit of foreign considered.

the last two years industry DRCs

At this time, below

the study

falling

substantially a strong

the shadow exadvantage As in the

rate, clearly

indicating

comparative

position

for the country

in raw cotton production. low DRCs during

above case,

the relatively

this period were

8Coincldentally or not, this was also the general trend in the actual national performance of the cotton development program. From a seedcotton yield of 1.24 mr/ha in 1975, the average dropped to 0.54 mt/ha in 1978. From hereon to 1980, average yield showed a reversal trend reaching 097 mr/ha in 1980 but subsequently declined to 0,72 mr/ha the following year 91t should be apparent that the drastic increase in DRC in 1978 was also partly contributed by an almost twofold jump in ginning and marketing costs incurred by PCC relative to that in the previous year.

22

largely

explained from

by comparatively

high average Though

raw cotton costs years

yield

estimated hectare earlier,

the survey data. increased

production

on a peras shown in ton

basis

significantly increase

from previous

the remarkable

in average

raw cotton yield cost per metric years_

1980 and 1981 was enough of lint to comparable unit production world market

to push production from previous

levels

This low perfavorable two years

cost was

strongly

reinforced during

by more

price

(CIF) of raw cotton

the last

The Seedcotton

DRC

The industry advantage

DRC does not give a clear picture production. yield time, Though

of comparative stated that

in seedcotton

it has been

fluctuations

in seedcotton DRCs over

largely

contributed

to the change that the state did likeadvan-

in the industry of efficiency wise tage_

it should be apparent

or inefficiency

in processing

and marketing comparative

exert a consSderable What is needed

influence

on overall

therefore

is a measure

of actual

comparative

advantage

in seedcotton

production

that is free from

the influence

of changing

cost parameters because

in processing

and marketing and thus, the DRC in First, the implicit does

However_

seedcotton

is not tradable_ market value,

not have an actual seedcotton

(observed)

world

production

was estimated

indirectly.

border value cotton

of seedcotton

was estimated by cotton

by deflating farmers with

the seedthe nominal

price actually

received

23

protection

rate as estimated

in the preceeeding was calculated

section

Then

the DRC in seedcotton try case. cotton

production shown

as in the industhat seedimplying to those

The results_

in Table

13_ indicated DRCs_

DRCs were

generally higher

lower DRCs

than industry

that the generally in seedcotton processing. of implicit

in the industry due to relatively

compared

production

were

less efficient average it

Since the inudstry was DRCs in processing that the DRCs DRCs. the sensitivity

in effect a weighted production_ would

and seedcotton in processing

would be expected than the industry To evaluate ions implicit structure

be higher

of seedcotton and to changes an attempt parameters ch_ng_

DRCs

to the assumpt-

in the calculation

in the price to calculate defined, to

cf inputs and output_ for the different represents change

was made

elasticities an elasticity

As commonly in DRC with

a percent

respect

a given percent held constant

in a specified

parameter_

all other

factors in

The results

of the exercise insensitive fertilizer_ and implicit yield

are summarized

Table 14o

DRCs were

relatively capital, to yield

to the opportunity and insecticide border price of but

costa of land, labor_ were highly output. sensitive

Since

the seedcotton

influences

the DRC in exactly price, only

the same nmgnitude yield

as that of the implicit examination.

border

is given a further

24

Except

for some years_

average

seedcotton the national

yields

used in yield

the base estimates This was apparently gave more

were much above

average

true in 1980 and 1981 when

the survey data higher than

than 1o5 mr/ha of seedcotton, average yield levels of 08 mr/ha are easily

or 88 percent during

the national However,

the same period_ in areas technology 1o5 to over cotton recent adeis 5 mr/ growdata

these yield

attainable

quate irrigation_ properly follwed,

Moreover, seedcotton

if the recommended yield ranging from

ha are not all farfetched, ers selected annually i0

as demonstrated

by model

in each province

and to more

from Mindanaoo

To show the range the country could have yields

of seedcotton a comparative were

yield

levels within critical

which miniaverage as

advantages

mum seedcotton seedcotton

estimated_ !I

In this exercise, was assumed constant

production

cost per hectare

lOFor crop year 1981-82, Mindanao farmers accounting for 5 percent of national production obtained an average yield of 1o5 mr/ha compared to Luzon (38% of production) and Visayas (11% production) farmers with 0.8 and 09 mt/ha yields, respectively llcritical minimum seedcotton yield is defined as that yield level at which the ratio of DRC to shadow exchange rate (SER) equals to unity, Joe., the country nether losses nor gains in domestic cotton production. Seedcotton yield below the critical minimum would mean a loss to the society, local production being more costly than importation, or vice versa.

25

given in the farm survey results, 1975 presented

and as used in the base estimates 3, showed that while close to critical estimates

The from seed-

in Figure generally

to 1979 were yileds

minimum have

yields,

cotton more

estimated

in 1980 and 1981 would respectively_ in cotton

to decrease to

than 45 and 40 percent,

for the country production.

lose its comparative estimated were about the national critical

advantage

Incidentally_

minimum lower

seedcotton

yields

for the last two years levels targeted by

20 percent cotton

than the average program

development

at the self-sufficiency

stage of the industry's

development,

CONCLUDING

REMARKS

The paper has explicitly protection conferred

shown that despite policies

the _avorable indus-

by government

on the cotten

try, the farmers the Philippine

were penalized

even by those policies the nations' program

set by

Cotton

Corporation,

implementing It also disadvantage in

arm of the national closed

cotton

development

that the country productiOn_

exhibited

a comparative

local cotton efficiency

underscoring exchange

the industryVs

relative

in ssving

foreign

for the economy. giving a considerable exten-

Since its inception, focus on cotton research

PCC has been and development the cotton

and agricultural

sion as a way of enhancing Part of the protection

industry's

performance policies on PCCVs

conferred

by government

26

processing budget

and marketing

operations While

is used

to supplement

the

for these activities are ultimately

it can be viewed of farmers, incentive

that these it should

activities

for the benefit of this

be also noted

that the incidence

is necessarily cotton progit is impe-

a long run one ram tohold rative

In the short run, for the national growth pace of recent if not all, years,

its modest

that a larger

proportion,

of the total protectpolicies should be

ion the industry shifted

is receiving

from government price

to farmers

by instituting

policies

that are more can better fully

favorable exploit

to farmers.

In this way, advantage

the country

its comparative

in domestic

cotton

production. to trathis the crop

As the relative ditional

competititveness crops

of the crop with respect in the longer-run, withdrawn and allow

alternative may need

stabilizes

protection to compete

to be gradually

in the market points needs to be stressed is an economic here ground While it

One qualifying was explicitly expansion

stated

that there

for cotton

in Philippine efficiency

agriculture,

the study does not suggest of policy in

that economic

is the only consideration promotion

the choice of crop for agricultural Other factors like employment,

or penalization. concentration of the of the

income

distribution,

of economic choice

power

and the.socio-political

implications sectors

to the agricultural are obviously

and non-agricultural in policy

society,

considered

decisions.

27 REFERENCES

Balassa, B. and Associates 1971, Developing Countries Baltimore Press

The Structure of Protection in and London: The John Hopkins

Ba_isacan, AoMo 1982. Economic Incentives and Comparative Advantage in Philippine Agriculture: the Case of the National Cotton Development Program. Unpublished MoS. thesis, University of the Philippines at Los Ba_os, AD_ilo Bruno9 Mo 1972. Domestic Resource Cost and Effective Protection_ Clarification and Synthesis. Jou=nal of Political Economy 80(i)_ 16-33o David, C.C. 1981o Credit and Price Policies in Philippine ture. Unpublished paper, CDEM9 UP at _os Ba_os. A_ricul-

David, C.Co and AoM. Balisacano 1981. An Analysis of Fertilizer Policies in the Philippines. Paper presented at the workdshop on the Re-Direction of Fertilizer Research, Tropical Palace_ Metro Manila, October 26. 218o

Medalla, EoM. 1979o E_ti_a't_the Shadow Exchange Rate under Alternative Policy AssumptlonSo In Baustita, Power and Ass_eiates ,_f_t:s. Industrial Promotion Policies in the Philippines. Medalla, EoM. and J.H. Power H979, Estimating Implicit Tariffs and Nominal Rates of Protection. In Bautista, Powwer and Associates. Industrial Promotion Policies in the Philippines. Philippine Institute for Development Studies. Morales, EoLo 1974o The Prospects of the Cotton Industry in the Philippines A research study presented to the UP ProEram in Development Economies PaBe_ J., Jr., and D. S tryker. 1981o Methodology for Estimating Comparative Costs and Incnetiveso in Pearson eto_alo Rice in West Africa Stanford: Stanford University Press, Pearson, S,Ro 1976. Net Social Profitability, Domestic Resource Cost_ and Effective Rate of Protection. Journal of Development Studies 12:321-33. Philippine Cotton Corporation. Corporation Annual 1977. Reports, National 1975-1980. Cotton Development

Philippine Cotton Program

Philippine Cotton Corporation. 1980. A Proposal for the Cotton Industry Development Program in the Philippines. Philippine Cotton Corporation 1981o The Textile Industry Survey.

28

Table

I_

Sources

of raw cotton

(lint) imports,

1963-80.

Country

of Origin

196365

1966_ 70

1971 _75

197680

Percent

of total quantity

United Mexico Brazil

States

73.6 15.1 5.5 23 0.5

753 15o6 0.7 Io_I 1.5 0.4 09 a 37 I00.0

99,0 04 03 a 0_3 I00o0

79.0 3,4 0.i 25 1.7 a 0.2 35 2.5 1o6 I.I 4.4 i00.0

Nicaragua Guatemala United Ara_ Sudan Pakistan Israel USSR India Others Total Republic

0.2 0.I 0.3 2_4 I00.0

Source of basic

data_

Foreign Trade Statistics of the Philippine, National Census and Statistics Office.

aLess

than 0oi _ercent.

2o Table 2. Domestic production supply 1975-81 of raw cotton (lint) and share _o total

Year

Production (rot)

Proportion

to Total

Supply a

1975 1976 1977 1978 1979 1980 1981


-4

97 176 437 619 802 2,6031 4,594 D

03 0.6 2.1 1o7 3.1 82 13o6 b

Source=

Production

_ata

from Philippine

Cotton

Cornorationo

aTotal

suppl_

is defined

as import plus produetion_

bEstimate. Table 3. Cotton content in locally produced fabri4s, 1963-81o

Year

Cotton

Content

(z)
1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 197Z 1978 1979 1980 1981 76 65 62 65 51 50 40 43 32 27 53 44 51 35 41 39 38 39 36

Source:

Philippine

Cotton

Corporation.

30

Table 4_

Loans granted for the cotton program, 1975-81

supervised

credit

financing

Year

Total Loan (_I000)

Average Farmer

Loan Per Metric ton of raw cotton Repayment Rate

Hectare

(_)
1975 1976 1977 1978 1979 1980 1981 366 19336 3,565 4,675 5,979 15,988 43,887 851 928 635 535 995 1,161 2,001

(_)
1,887 1,641 1,270 1,478 1,946 2,132 2,581

(_)
3,773 7,591 8,158 7_552 7,455 5,796 9,553

(_)
98 75 73 77 80 91 noa.

Source:

Philippine

Cotton

Corporation.

31 Table 5o Trends in farm price, ex-warehouse price ,border Drice, and nominal protection rates on the cotton industry , 1975-81

Year

Farm Price In seed_ In lint Cotton equivalent b (_/mt) (_/mt)

Domestic Ex-Warehouse Price c (_/mt)

Border d Price (_/mt)

Nominal Protection Rate e ( % )

Total Nominal Prote_tion Rate _' ( % ) i

1975 1976 1977 1978 1979 1980 1981

3,500 3,850 4,000 4,000 4_000 4,400 4,450

10,549 11,315 11,771 11,811 Ii_85i 12,982 13,167

13,000 13,000 15,000 15,000 16,500 19_000 18,150

11,431 11,297 13,641 11,166 ii_854 13,313 15,121

-8 0 -14 6 0 -2 i_13

14 15 i0 34 39 43 20

Weighted

average, rate h

1975-81

-7

28 24

Legislated

aprice

actually

received

by farmers.

bLint price equivalent of seedcotton price plus efficient cost of converting seedc_tton to cotton lint and marketing the product computed as shown in ADpendix Ao CSelling price of cotton Cotton Corporation. d lint to textile millers by the Philippine

Average CIF Value for imported raw cotton (lint)_ adjusted quality differential domestically produced and imported raw cotton.
e

for

Percentage price, f Percentage price g W_ighted h

difference

of farm price

(in lint equivalent)

to border

difference

of domestic

ex-warehouse

price

to border

by total raw cotton production

in each year_ raw cotton: 10% ad

Based on existing tariff rates for imported valorem and a 10% sales tax over 25% mark-upo

32 Table 6. Estimates of effective production, 1975-810 protection rates on cotton

Effective Year Protection Rate (%)

Ratio

of Credit

Effective

Pro-

Subsidy to FreeTRade Value Added

tection Rate with Credit Subsidy (%)

1975 1976 1977 1978 1979 1980 1981

-14 - 4 -21 1 -4 -6 -19

.02 .05 04 05 04 .03 _04

-12 i -17 6 0 -3 -5

Weighted 1975-81 a

average_ -12 -9

Weighted

by total

raw cotton

production

in each year

33

Table

7o

Comparison of protection rates on cotton vis-a-vis other crops and between the cotton industry and the manufacturing sector, 1970s and early 1980so

Item

Protection

Measure

Percent

Cotton industry a Seedcotton

Total nominal protection rate 28 Nominal protection rate -7 Effective protection rate -12 Effective protection rate with credit Nominal subsidy protection -9 rate 3 3 0 Nominal protection rate -21 -24 -4 Effective protection rate 44

b Food Crops Rice Corn Other food crops b Export crops

Sugar Copra Other export Manufacturing

crops

se_tor c

a Includes

seed cotton

production

and processing.

bBased on price comparisen between domestic and border prices as estimated in David, C_C. " Impact of Price Intervention Policies on Agricultural Incentives in the Philippines," paper presented at the Second Western Pacific Food Trade Workshop Kartika Chandia Hotel, Jakarta, August 22-23,1982. CBased on legislated rates as shown in Tan_ No "The Structure of Protection and Resource Flows in the Philippines _, in Bautista, R. Jo Power and Associates_ Industrial PromOtion Policies in the Philippines_, Philippine Institute for Development Studies, 1979o

..... _Tabie 8.

Some--de_scriptivJ:f_eatur-_-_ the SSD_'_-_IMa of

* farm surveys

on co--6_n_d'_l

_,

Title

Crop Year Covered

Area Covered

Total Number of Farm Respondsnt For all crops For cotton

Io Comparative Input, Output, and Finannial Data for Virginia _..:Tobacco,.Pelay,Mongo, Corn and Cotton 2oComparative Input, Output and Financial Data for Palay, Corn, Mongo, Virginia Tobacco and Cotton 3. Comparative Input, Output and Financial Data for Mongo, Cotton pa!ay, Virginia Tobacco andCorn 4. Comparative Input, Output and Financial Data for Cotton, Corn Palay, Mongo, Virginal Tobacco, and Burley Tobhcco

a 1974-75 llocos Reg on 300 60

1975-76

llocos Region

515

i00

1976-77

.llocos Region

500

180

1977-78

llocos

Region

554

91

5o Comparative Input, Output and Financial Data for Cotton, Palay Burley Tabacco, Virginia Tobacco_._ ans Native Tobacco 1978-79 6. Comparative Input, Output and Financial Bata for Cotton, Palay, Burely Tobacco, Virginia Tobacco, and Native Tobacco 7. Cost Involved in the Domestic Import 1980-81

llocos Region, Tarlac, Nueva Ecija 515 llocos Region Tarlac, Nueva Ecija, and Cagayan 304

1979-80

426

183

Production of Agri-based Substitutes- Cotton

llocos Region

201

_5"

*aSpe, ei_l_: ,ff._di.es.,._'S_:%..-.M_i/_Lrr_._..og Includes the pr_ineesof Ilocos Norte,

._-gi__.._ Ilecos Sur,

,.... . . La Union, and Pangasinan,

35 ]able 9. Average costs of seed_otton production, llocos Region*, 1975-81

Year

Labor a Cost

CapitalbService Cost

Operating Capit_ Cost c

Interest on Pre-_arvest Cost

Other. Costs e

Total

Besos per Hectare

]975 ]976 1977 1978 1979 19[_0 181

I_013 789 1,207 934 1,274 19253 1,987

240 308 609 518 614 683 949 "

1,178 892 876 -"'."729 724 1,239 1,628

139 109 135 115 125 212 " 304

41 33 44 36 61 75 176

29611 2,131 2987] 2,332 2,798 3,462 59044

* Except for 1979 and 1980 which

also

include

Nueva

Ecija9

Tarlac

and Cagayano

alncludes

hired

labor costs

and imputed

v_lues

of operator9

family and exchange

labor.

blncludes Clncludes

depreciation fertilizer,

and interest insecticides

cost of fixed and seeds

capital

assets

other

than lando

dAt 15% per .annnm_ app_rtio_ed..as.origi_ale Unclides containers, food for hired

cost._7'._%for._6.month_.._-. labom_ and tranpportation costs

and exchange

36 Table I0. Domestic and foreign cost in seedcotton production, Ilocos Region _, 1975-81.

Source

of

Cost

1975

1976

1977

1978

1979

1980

1981

Domestic Lan_ rent Labor cost Capital service cost Ope_ating capital cost ,-_u_res_ on_preha_vest cost Oth_:r costs Sub-total 1,4!5 1.013 211 350 139 41 3,169 735 789 274 287 I_9 33 2,227 1,169 1,207 446 247 135 44 3,24_ I,_46 934 342 247 115 36 3,120 988 1,274 419 247 125 61 3,114 1,695 1,253 442 369 212 75 4,046 1,241 1,987 544 462 304 176 4,714

Foreign Capital service cost Operating capital cost Su_-total Totml Iomsstic Foreign and 3,852 2,737 3_867 3,637 3,647 4,926 5,952 22 661 683 25 485 510 120 499 619 130 387 517 146 387 533 179 701 880 300 938 1,238

costs

eExcept

for 1979 and 1980 which

also include

Nueva

Ecija,

Tarlac

and Cagayan.

37 Table 11. Estimates of ginning and _.erketing costs in cotton production, Philippines. 1975-81.

Item

1975

1976

1977

1978

1979

1980

1981

GinnYng

Cost cost a 4,480 d 2,280q 2,200 d 5,442 3,182 1,630 4,511 2,745 1,766 5,298 1,643 3,655 4,993 2,271 2,722 2,159 1,255 904 3,570 d d 1,760_ 1,RIO e

Total ggnning

Less: V_lue of ginning b_-products Net ginting cost Allcated to:

Domestic Foreign Tax Mm-keti_g Cost c

1,936 220 44 790d

1,434 163 33 883

1,554 177 35 1,670

3,216 365 73 2,345

2,395 272 54 440

795 90 18 486

1,592 181 36 460 d

Sourc_

of basic data:

PCC Financial

Statements.

aApproximated cost of converting seedcotton to cotton lint. labor, manufacturing overhaed, and administrative charges. blncludes materials. Clncludes value of industrial seeds exported to Japan

Includes

expenses

for direct

and agricultural

seeds

for planting

picking

up seedcotton

from

the farm to ginnery

and transportation

cotton

lint to textilemillers.

dEstima_e.,,_.

Table

12.

Summary

of

domestic

resource

cost

components

in

cotton

lint

production,

Ilocos

Region*,

1975-81.

Year

Average Yield Lint a (rot/ha)

Domestic _roduction (Fha)

Cost Marketing (F/mr)

Ginning b (_/mt)

v 'Foreign ._.__, Production (F/ha

Cost',-.:/_ Ginning _ (_/ha)

Average CIF Value c (US$/mt)

Domestic Resource Cost ( _/US$

Comparative Advantage

1975 1976 1977 1978 1979 1980 1981 Weighted

0.37 0.26 0.28 0.24 0.31 0.58 0.57 Average,

3,169 2,227 3,248 3,120 3,114 4,046 4,714 1975-81 d

1,936 1,434 1,554 3,216 2,395 795 1,592

790 883 1,670 2,435 440 486 460

683 510 619 517 533 880 1,238

220 163 177 365 272 90 181

1,577 1,518 1,843 1,515 1,606 1,773 1,914

8.74 8.83 9.73 15.90 9.64 5.30 6.39 7.22

0.90 0.89 0.98 1.61 0.97 0.53 0.60 0.71

_Except abased

for 1979 and 1980 which on a recavery

also

include

Nueva

Ecija,

Tarlac

and Cagayan.

rate of 37% of seedcotton. by-products (industrial between and agricultural produced seeds). and imported cotton lint.

bNet of value of ginning CAdjusted dweighted eRatio for quality

differen_al

domestically

by total raw cotton resource

production

in each year, exchange rate.

of domestic

cost to shadow

39 Table 13. Summary 1975-81. of domestic resource cost tom ponents in seedcotton production, llocos Region _,

Year

Seedcotton Yield (mr/ha)

Production Cost Domestic Foreign (P/ha) (P/ha)

Implicit Border Value a (US$/mt)

Dome=tic Resource _/US $)

_st

ComparativAdvantage

1975 1976 1977 1978 1979 1980 1981 Weighted

1.00 0.71 0.75 0.66 0.85 1.57 1.55 average,

3,169 2,227 3,248 3,120 3,114 4,046 4,714 1975-81 c

683 510 619 517 533 880 1,238

525 517 628 512 542 598 647

7.36 7.46 8.38 11.65 8.02 4.92 5.57 6.19

0.76 0.75 0.84 1.I8 0.81 0.49 0.53 0.61

*Except

for 1979 and 1980 which price deflated

also include

Nueva

Ecija,

Tarlac

and Cagayan. converted at official

aseedcotton exchange rate.

by nominal

protection

rate

on seedcotton,

bThe ratio of domestic CWei_hted by total

resource

cost to shadow exchange in each year.

rate.

seedcotton

production

40 Table 14. Elasticity of DRC coefficient llocesRegion* 1975-81, in seedcotton production with respect to stated perameter,

Parameter Land rent year Labor cost Capital service cost Fertilizer cost Insecticide cost Implicit border price Year

1975 1976 1977 1978 1979 1980 1981

0.395 0o331 0.422 0.479 0,266 0o501 0284

0.268 0356 0.4B_ 0o314 0.358 0,392 0443

0.022 0.136 0,240 0.444 0.133 0.219 0,179

0,058 0.135 0,128 0,107 0,.47 0.176 0.128

0o129 0o177 0.220 O.169 0.045 0.178 0.139

-1,255 -1.213 -1.141 -io231 -1,222 -1.048 -I.150

-1,255 -1.213 -1.141 -I,231 -1.222 -1.048 -I.150

*Except

for 1979 and 1980 which

also include

Nueva

Ecija, Tarlac

and Cagayan,

41

42

44

APPENDIX

ESTIMATION

OF BORDER

AND FARM PRICE

OF FARM COTTON

This note presents estimation

the details border

of the adjustment and domestic

done in the prices. Clearly,

of appropriation was done

producer

this adjustments comparable, and border

to make domestic

and border

prices

directly domestic and

ioe._ to net out the price prices due to quality

differential between

between imports

difference

local production. solely attricbuted marked

Any wedge between to price-distorting quality difference

the two prices govermemt between

can then be

policies. and local to textile

Withou_ production, millers

imports

the domestic

price

of raw cotton

sold by PCC price,

should be directly CIF converted

omparabl_:

toborder exchange

represamted this domesimports

by average

at official

rate.

However, While

was not so during tic production were mostly

the p_miod

considered staple

in the study.

was mostly staple

medium

(about 86 percent), This was also middling

short

(60 percent).

tru in terms and strict

of lint grades: middling

local production to imports a noticeable

were mostly whiEh

in contract Thus, toborder

were mostly price

low and strict product-

low middling. ion relative higher

higher

on domestic

price of import was presumably

due to the

quality

of the former. for this discrepancy, upward. border prices were corres-

To correct pondingly

adjusted

The general ratio

adjustment

factor)l_14)

was taken as the average

price

(1976-81)

of two American

45

lint The

grades_ former

Memhis was the more

Terr. or

SM

1-1/16" comparable

and to

Orleans/Texas the quality

M of

i". local

less to

productlon_ Price complication its this price paper_

latter,

tD_t

of

imports and border prices _ output of involved is not more tradable, In was it and chain

comparison than is not for in that

between above.

farm

Since

farmers to that

directly both prices of its

comparable to be lint Any

tradable

lint. price to

comparable_

seedcotton and

translated processing border was

terms

price wedge

equivalent between point

added

(ginning) measured

cost. at as

domestic in the

producer

prices

a comparable

marketing

then

attributed_ The Since

in above_ however,

to price-distorting was that of processing by study_

government cost to

policies. quote. to cotton could

problem, the net was used

protection the concern this

conferred of the

government PCC_s

policies

farmers not be

processing the

cost

since

cost

apparently to and was

included inefficiency to replac_ cost of

effects that PCC's major that cient

of whatever

protection

conferred The

existed

in processing. cost with

alternative

processing

the

average The

processing implicit of

eleven was effi-

cotton-produclng this and average was

countries. a close

assumption the cost are of

approximation The

protection-free Table io

processing.

estimates

su_n_marized

in Appendix

46

Appendix

Table i.

Estimates 1975-81.

of farm price

of raw cotton

(lin),

Item

1975

1976

1977

1978

1979

1980

1981

Price received by farmers for seedcotton Price equivalent in cotton lint a Plus: . _rocessxng marketing . ano b costs 3.50 3.85 4.00 4.00 4.00 4.40 4.45

9.46

10.40

10.81

i0o8%

10.8]

11.89

12.03

1.09

0.91

0.96

1.00

1.04

1.09

1.14

Farm price of raw otto_

10.55

11.31

11.77

11.81

11.85

12.98

13.17

Source of basic data:

Philippine Cotton Corporation World Cotton Statistics

abased

on a recovery

rate of 37%

bAverage of eleven major cotton-producing countries. This rep= resents the approximated cost of protection-free and efficient processing (ginning) and marketing.