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Science

DECISIONMAKERS
VOL. 4 NO. 1 DEC 2013 ISSN 2094-8409

Rice
FOR

CURING THE CAUSE RATHER THAN THE SYMPTOM:


Smuggling refers to the international trading of goods without paying the rightful custom duties. It can be carried out in two forms: (1) outright smuggling or use of illegal trade channels; and (2) technical smuggling or manipulation of trade declarations (Alano, 1984). Technical smugglers evade duties and taxes through misdeclaration, undervaluation, or misclassification of a shipment. Misdeclaration is reporting an item as something else that incurs lower tariff. Undervaluation is declaring a lower-than-actual value of goods for lower taxes. Misclassification is incorrectly categorizing an item under a cheaper tariff heading. Both outright and technical smuggling are resorted to in the case of rice. However, most of the apprehended ones are technical smugglers.

THE CASE OF RICE SMUGGLING


KEY P INTS
Rice import smuggling happens in PH because traders want to avoid high import taxes. In addition, the price difference between domestic and world markets lures traders to smuggle. Rice import smuggling robs government of revenues, hurts domestic rice industry, and distorts supply-and-consumption data used as reference for sound policy-making. Allowing the domestic price to approximate the world price can eliminate incentives from smuggling. This can be attained by adopting input-saving and yield-enhancing technologies, and by liberalizing trade.

EVILS OF SMUGGLING
Rice smuggling is detrimental to the development of the local rice production and marketing1 sectors. Cheap smuggled rice can lower the price of paddy rice particularly during harvest season, which discourages local farmers to plant and prevents domestic traders from engaging in the rice business. Smuggling also distorts data on rice supply and demand that are commonly used as reference for making a sound policy on food security. Since smuggled rice is an unaccounted supply, it makes the estimated figure of Per Capita Net Food Disposable (PCNFD) for rice seem smaller. A lower PCNFD, in turn, could underestimate the real rice import requirement of the country, which could put the countrys food security at risk. On top of this, smuggling robs government of revenues from unpaid tariff. Currently, the tariff rate for rice imports within the quota set by the government is 40% while imports beyond the quota are levied 50%. But perhaps, the biggest evil that smuggling brings is the corruption of government officials, which destroys the moral fabric of the nation.

inspection (Gordoncillo, et al., 2013). In addition, the government maintains anti-smuggling task groups that monitor, examine, seize, and prosecute smuggling cases. Despite these efforts, rice smuggling remains rampant in the country. In port of Manila alone, BOC apprehended a total of 53,298 bags of rice with a value of 63.79 million pesos from 2004 to 2013. BOC also captured in Manila International Container Port some 3.90 and 8.35 million pesos worth of smuggled rice in 2008 and 2011, respectively. In 2013, BOC has seized in port of Cebu around 600,000 sacks of smuggled rice with a value of over a billion pesos. This is higher than the 420,000 sacks confiscated in Subic port last 2012. Judging from its volume and value, rice smuggling is a lucrative business in the Philippines.

UNVEILING THE ROOT CAUSE OF SMUGGLING


Obtaining greater profit motivates rice smugglers. The opportunity to rake-in higher profit from rice smuggling arises due to the large discrepancy between the domestic and world price of rice. Domestic price of rice had been higher than the world price by 75% in 2000 and 30% in 2012 except in 2008 (Figure 1). This huge price difference can be attributed mainly to: (1) rice trade policies of the government; and (2) higher cost of producing rice in the Philippines relative to exporting countries.

ANTI-SMUGGLING MEASURES
To deter smuggling, the government imposes measures, such as pre-shipment inspection, accreditation of importers, access to cargo manifests, boarding protocols, color coding for cargo classification, and post-border cargo
Fig. 1. Domestic and World Price of Rice, 2000-2012.

Wholesale Price, Well-milled Rice (US$/t) US$/t 900 800 700 600 500 400 300 200 100 0 Thai 5% Broken, CIF Manila (US$/t)

777 674 677 402 601

230
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source of basic data: IRRI, BAS, and BSP

includes rice traders, millers, wholesalers, and retailers

Philippine rice trade policies


The Philippines has adhered to quantitative restriction (QR) on rice as its international trade policy since 1995. QR involves a Minimum Access Volume (MAV), which is the amount of rice that may be imported at 40% import duty (in-quota tariff). Procuring beyond the MAV poses a greater barrier as importer pays a higher duty of 50% (out-quota tariff) and undergoes a more stringent process of obtaining import permit (Piadozo, 2012). QR limits the entry of supply-augmenting rice that consequently sets the domestic price higher than when under free trade (i.e. unlimited entry of imports). QR is intended to protect both farmers and marketing players2. It avoids influx of cheap imported rice in the market and it brings better profit for them. Based on the study of Dawe, et. al. (2008), traders, millers, wholesalers, and retailers receive 30% of the unit price of rice as profit. Farmers, on one hand, get 40-53% of the unit price of paddy rice as their profit. Assuming that production cost is maintained at 11.003 per kg of paddy rice, a raise in the domestic price of rice would mean higher earnings for both farmers and marketing players, but at a cost to consumers. Smuggling, however, tends to be more rampant in markets with high import duties and quantitative or qualitative restrictions (Gordoncillo, et al.,

2013). Smugglers avoid tax payments on imported rice, minimizing their costs, and giving them price advantage over sellers who source rice locally. Therefore, smuggling undermines trade restrictions, such as QR that is supposed to protect producers and marketing players from competition with cheap rice imports.

Relatively higher cost of producing rice


The Philippines produces almost the same paddy rice yield as selected neighboring Asian countries, but spends more in producing it. Records show that in 2012, the Philippines farm-level price is relatively higher than its neighboring countries, except for China (Figure 2). Yield of the Philippines (3.84 mt/ha) in 2012 is close to the yield of India (3.59 mt/ha) and Thailand (3.00 mt/ha), which are exporters of rice. However, based on key informant interviews, Philippines farm-level price is still higher in these countries. Indonesia and Vietnam produced higher yield but their farm-level price is still relatively lower than the Philippines (Figure 2). This relatively high farm-level price is partly attributed to high production cost in the Philippines because of higher labor cost and lower government support provided to farmers than in neighboring countries.

Fig. 2. Yield and Farmgate Prices, Philippines and Selected Asian Countries, 2012.
1/ Yield 2/ Farmgate Price US$/kg 0.60 0.50 0.40 0.30 0.20 0.10 Philippines 3.84 0.40 China 6.74 0.50 India 3.59 0.21 Indonesia 5.14 0.40 Thailand 3.00 0.38 Vietnam 5.63 0.22 0.00

mt/ha 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.01/ Yield 2/ Farmgate Price

1/ Source: Food and Agriculture Organization (FAO) 2/Based on key informant interviews that were conducted for the project Benchmarking Rice Industries in Selected Asian Countries. This is still an ongoing project; farm surveys are still being conducted to verify results of key informant interviews.

2012 data from Bureau of Agricultural Statistics (BAS).

Based on key informant interviews, labor cost for land preparation, crop establishment, harvesting, and threshing in the Philippines totaled to an average of US$484.50 per ha (Table 1). This is twice as much as the cost of the same activities in India (US$ 268/ha), Thailand (US$192/ha), and Vietnam (US$198/ha). In these countries, most farmers practice direct seeding and use combine harvesterthresher, thereby, minimizing their labor cost.
Table 1. Labor Cost for Land Preparation, Crop Establishment, Harvesting, and Threshing based on Key Informant Interviews, Selected Asian Countries, 2012. Province, country Labor cost for land preparation, crop establishment, harvesting, and threshing (In US$/ha) 484.50 533.00 268.00 430.50 192.00 198.00

Philippines (US$4.65/ha) is higher than in other countries. China and Vietnam decreed free tax on agricultural land, while land tax in India and Thailand are less than a dollar per hectare. Interest on agricultural loan is also more affordable in other countries. Government bank in India provides 0% interest if agricultural loan is paid within 6 months. Government bank in China offers interest of 5% per annum for agricultural loan, 80% of which is shouldered by the government. Thailands Bank of Agriculture offers 6% per year while government bank in Indonesia and Agri Bank in Vietnam both charge 12% per annum. On the other hand, Filipino farmers have to be content with 24% per year from borrowing in cooperatives, which charge lower compared with informal money lenders. Governments of China, India, and Vietnam offer support on acquiring machines. China shoulders 30% of acquisition cost of tractors and combines, and 50% for mechanical dryers. On the other hand, India provides custom services for combine, leveler, mechanical transplanter, and tractor at 50% lower rental rate though they can only give service to 2% of the area. Vietnam offers credit for 70% of acquisition cost of machine at lower interest rate. The Philippines also extends support by shouldering 85% of the procurement cost of machine but only to farmers who are members of qualified organization or irrigators association. Indonesia and Thailand do not offer any government support on farm machinery. Except Indonesia that procures paddy from traders, all countries have a government procurement program similar to the Philippines. However, the volume of procurement by the Philippine government is minimal compared with other countries. China procures all inbred rice produced in the early season. India procures at least 60% of rice harvest. Thailand buys all ordinary rice grain locally produced except for special rice varieties. Vietnam procures paddy through its state-owned enterprise at a price that gives 30% profit margin to farmers. On the contrary, the Philippines through the National Food Authority (NFA) buys less than 5% of the countrys produce. Meanwhile, the World Trade Organization (WTO) intends to avoid trade-distorting subsidies. The organization categorized subsidies based on its degree of distorting effects. Those that are highly

Nueva Ecija, Philippines Zhejiang, China Tamil Nadu, India West Java, Indonesia Suphan Buri, Thailand Can Tho, Vietnam

Filipino farmers receive relatively low government support compared with farmers in other countries (Table 2). China provides free seeds to large-scale farmers, while India and Indonesia provide partial seed subsidy. There were subsidies for inbred and hybrid seeds in the Philippines before but these were removed in 2010. India and Indonesia both provide subsidy to their respective fertilizer industries, which makes fertilizer affordable to their farmers. In the Philippines, fertilizers are unsubsidized. Urea is sold at US$27.91 per bag that is 67% and 82% higher than the subsidized price of India and Indonesia, respectively. All countries covered in the study, except the Philippines, provide free irrigation water. In Indonesia, farmers pay only the laborer who opens and closes the main canal, but payment for the use of water is free. In the Philippines, farmers pay US$49/ha and US$69/ha in wet and dry seasons, respectively, as irrigation fees. Filipino farmers can ask exemption from irrigation fees only if they experience crop failure because of calamity. Except in Indonesia where agriculture land is taxed heavily, annual tax for agricultural land in the

Table 2. Government Support Services in the Philippines and Selected Neighboring Asian Countries.
ITEMS Nueva Ecija, Seed Subsidy Philippines1 No subsidy Zhejiang, China2

Table 2. Government Support Services in the Philippines and Selected Neighboring Asian Countries.
PROVINCE, COUNTRY Tamil Nadu, West Java, Suphan Buri, Can Tho, Vietnam6 No subsidy

Price of Urea Irrigation/Water

27.91 US$/bag 49 $/ha (wet season); 69 $/ha (dry season); Irrigation fee is free if crop is damaged 28 US$/ha/year 24% per annum from cooperatives

India3 Indonesia4 Thailand5 Free inbred 0.2 $ subsidy per 0.91 $ subsidy per No subsidy seeds; free hybrid kg of seeds kg of seeds seeds only to cooperative members. 20.83 US$/bag 5 US$/bag 9.10 US$/bag 24.38 US$/bag (subsidized) (subsidized) Free Free Free Free

26.43 US$/bag Free

Land tax Interest on Credit

Free 5% per annum but gov't pays for 80% (4% is paid by the gov't and 1% is paid by the farmer) Machine Acquisition 85% discount on 30% discount on farm machinery tractors and and post harvest combine facility for harvesterqualified thresher; 50% on irrigator's mechanical dryer. association and farmer cooperatives. Government paddy procurement Gov't procures less than 5% of production at a support price.

0.21 US$/ha/year 56 US$/ha/year 0% interest if loan 12% per annum from gov't bank is from gov't bank paid within 6 months

0.98 US$/ha/year Free 6% per annum 12% per annum in from Bank of Agri Bank Agriculture

Gov't procures through stateowned companies at a price giving 30% profit margin to farmers. Source: Key informant interview for the study "Benchmarking Rice Industries in Selected Asian Countries" conducted by PhilRice, IRRI, Source: Key informant interview for the study Benchmarking Rice Industries in Selected Asian Countries conducted by PhilRice, IRRI, and NAFC. 1/ 1 USD = 43 Philippine Peso 3/ 1 USD = 60 Indian Rupees 5/ 1 USD = 32 Thailand Baht 1/ 1 USD = 43 Philippine Peso 3/ 1 USD = 60 Indian Rupees 5/ 1 USD = 32 Thailand Baht 2/11USD USD Chinese Yuan 1 USD = 11,000 Indonesian Rupiah 6/ 6/11USD USD 21,000 Vietnam Dong 2/ == 66 Chinese Yuan 4/4/ 1 USD = 11,000 Indonesian Rupiah == 21,000 Vietnam Dong

Gov't custom hires combine, leveler, mechanical transplanter, and tractor at 50% lower rental rate. However, gov't can service only 2% of area. Gov't procures Gov't procures inbred rice around 60% of production. Gov't harvest. Gov't has offers protection minimum support price for inbred price. rice.

No subsidy

No subsidy

70% of the value of principal have low interest during the 1st year.

Gov't does not Gov't procures all procure paddy production at a from farmers but guaranteed price. from traders

distortive were given expenditure limits. In the case of the Philippines, the government is given a domestic-support limit equivalent to 10% of the value of production (de minimis). According to Cororaton (2013) and based on the Handbook of Agriculture Notifications by WTO, the de minimis level is applicable only to market price support, which is categorized under product-specific aggregate measurement of support, called the Amber Box by the WTO. Input subsidies are exempted because these belong to special and differential treatment, which is an exempt support.

In his report, Cororaton (2013) noted that expenditures on general services (e.g., research, training, and extension), public stocking for food security purposes, payment for relief from natural disasters, subsidies, and agricultural investments increased significantly as a result of increased budget allocation for the Department of Agriculture (DA) in 2012. However, market price support for rice is still less than the 10% de minimis level because of the National Food Authoritys limited capacity to procure considerable amount of paddy rice.

LONG-TERM PROTECTION AGAINST RICE SMUGGLING


While the government can impose legal sanctions to maintain discipline among importers, a more effective strategy that could result in long-term protection against rice smuggling is to allow domestic price of rice to approximate the world price. This will eliminate the incentive from engaging in smuggling. As a first step, quantitative restriction can be replaced by a tariff level that would give equivalent protection. This tariff level should be gradually reduced at an agreed phase. With or without smuggling, the country has to eventually do this because of its commitments to ASEAN Free Trade Agreement (AFTA). However, doing so without proper safeguard mechanisms can only mean sunset to the Philippine rice industry. Therefore, farmers need to be more competitive. Rice trade liberalization is a countrys best option under a perfect market condition wherein a level playing field exists between exporting and importing countries. However, earlier discussions point out that international rice trade is not an even playing field. Each major rice-producing country in Asia supports their rice industry at a level that far

exceeds that of the Philippines. The government then should devise ways to reduce domestic price but at the same time secure economic gains of producers. One way to secure economic gains of the rice farmers is to encourage them to diversify farming activities. Specifically, this is to engage them in nonrice income-generating activities that utilize the resources of the rice environment. Some of these are production of mungbean, corn, mushroom, vermicast, ducks, and fish. In this manner, the low income from rice farming can be supplemented by high income from non-rice farming activities. Rice smuggling is only a symptom of a worse disease the inability to compete. The Philippines is currently in the middle of rice trade negotiations. While Philippines trading partners negotiate for lower trade restriction on rice, the government should take the opportunity to improve the farmers competitiveness level. The Philippines needs to reform institutions and policies to take advantage of trade liberalization on rice. The world rice market is not a level playing field as each rice-producing country provides support to their rice stakeholders. Every rice-producing country in the world puts premium on its own interest. The Philippines should continue guarding its own.

CALL FOR ACTI N:


ENHANCING COMPETITIVENESS OF THE RICE FARMER
The price of milled rice greatly depends on the price of paddy rice. If farm production cost can be minimized without sacrificing the yield level, price of milled rice can reduce, shrinking the gap between domestic and international prices. The following are possible ways to reduce production cost: 1. Encourage the use of non-fossil fuel-based inputs. The use of vermicast can be promoted to farmers. This technology uses earthworms to decompose organic matter and produce nutrient-rich castings. Additionally, previous studies have shown that Azolla and mungbean are effective nitrogen fixers, which can reduce the need for fossil fuel-based nitrogen. Using these agents can also reduce ammonia release into the air, thus, reducing nitrogen loss. Crop rotation requires speed in farm operations, which is possible with mechanization. It also

requires a steady supply of irrigation water. Lastly, the use of farm-produced renewable fuel for farm machinery, such as bioethanol, will provide the farmer a more sustainable supply of fuel. 2. Enhance farmers access to technologies, such as high quality inbred and hybrid seeds, integrated crop management system (PalayCheck), and farm machinery, specifically direct seeding machines and combine harvester-thresher. This can be done through continuous support to research and development coupled with a strengthened national and local extension system, and a well-designed subsidy system for farm inputs similar to that provided by rice exporting countries to their farmers. 3. Find ways to reduce price of inputs. Some of the interventions may deal on fertilizers, mechanization, irrigation, and labor. Reduced tariff on imported fertilizers and machinery can be explored. Furthermore, shipping cost of these inputs throughout the archipelago may also be reviewed. If it would result in healthy competition that can eventually reduce transportation cost, foreign vessels can be allowed to transport cargo between ports in the Philippines. Hence, the government might want to review the rules and regulations implementing Republic Act 9295 An Act Promoting the Development of Philippine Domestic Shipping, Shipbuilding, and Ship Repair and Ship Breaking, Ordaining Reforms in Government Policies toward Shipping in the Philippines, and For other Purposes. The government may also consider injecting subsidies directly to the input industries, such as fertilizer and machinery. In this way, the government could effectively influence the market price of inputs. Some farmers are unable to supply the required nutrients for their plants because of financial constraint. Increased fertilizer usage has a direct positive effect on rice yield level. Using the estimates of Bordey (2010), a 50% subsidy on the prices of urea and complete fertilizers could increase demand by 1.56 and 1.22 million bags. Based on current prices, the government would need P12.63 billion to finance the 50% subsidy on urea and complete fertilizers.

The government may also consider providing free use of irrigation water. If irrigation water will be fully subsidized, the forgone earnings of NIA will be around PhP 8.53 billion. This entails reorganization of NIA into a bureau to ensure funding for maintenance and other operating expenses (MOOE). On another matter, studies should be done on proper allocation of water given free irrigation. Without irrigation fees, farmers near the main canals may overuse water leaving less water for use in irrigation tail ends. Industrializing the rural areas can create jobs for the rural people and may lead in mechanization of rice farming. In other countries, industrialization in rural areas led to labor scarcity and eventually to mechanization of farm activities. Meanwhile, mechanization can be promoted in rice areas where labor cost is already high. Intensification, integration and diversification in the rice environment, such as the Integrated Rice-Based Agri-Biosystem Program (IRBAS) being carried out by PhilRice, will create farm employment in rice areas aside from increasing the income of rice farmers. 4. Bring down the interest cost of credit. One way to reduce interest cost is to minimize the credit risk related to rice farming. This entails strengthening of crop insurance services. Adoption of a weather index-based insurance system may be relevant, wherein farmers are compensated at weather-based threshold. It will cost about PhP 5.13 billion should the government pay for crop insurance premium in irrigated areas4. Lowering transaction cost is another way to reduce interest cost. This can be done by hastening the establishment of national farmers registry. Once established and made accessible to financial institutions, it will be easier for banks to conduct credit background investigation on farmer clientele. It will be easier for formal lending institutions to provide credit to farmers if their identifications are well-established.
4

This assumes a premium of PhP2,000/ha during wet season and PhP1,200/ha during dry season. Furthermore, all irrigated areas will be insured.

REFERENCES CITED
Alano BP, Jr. 1984 Import Smuggling in the Philippines: An Economic Analysis, Journal of Philippine Development, 11(2). Bordey FH. 2010. The impacts of research on Philippine rice production. PhD dissertation, University of Illinois. Retrieved from https://www.ideals.illinois.edu/ handle/2142/16072. Accessed on October 8, 2013. Cororaton, CB. 2013. Philippine WTO Domestic Support Notification, an updated discussion paper on the domestic support notification prepared for a chapter in the book Philippines in WTO Disciplines on Agricultutal Support: Seeking a Fair Basis for Trade of the International Policy Research Institute (IFPRI). Gordoncillo PU, CB Quicoy, JA Delos Reyes, and AB Vista. 2013. An Assessment of Informal International Trade of Selected Crops in the Philippines, a paper presented at the conference of the Federation of Crop Science Societies of the Philippines (FCSSP) held in Cagayan de Oro City, March 2013. Piadozo MES. 2012. Background on the Philippine Rice Trade Policies, a paper presented in the policy seminar-workshop on Philippine Rice Trade Policies and Rice Security: Future Directions held at the Asian Institute of Management, Makati City, 26 September 2013.

WTO Secretariat. 2012. Trade Policy Review: Philippines, http://www.wto.org/english/ tratop_e/tpr_e/s261_sum_e.pdf. Accessed October 3, 2013. World Trade Organization (WTO). 2010. Handbook on Agriculture Notifications Requirements: Under the Agreement on Agriculture, http://www.wto.org/english/tratop_e/ agric_e/ag_notif_e.pdf, Accessed December 4, 2013.

ABOUT THE MATERIAL


Rice Science for Decision-Makers is published by the Department of Agriculture-Philippine Rice Research Institute (PhilRice). It synthesizes findings in rice science to help craft decisions relating to rice production and technology adoption and adaptation. It also provides recommendations that may offer policy triggers to relevant rice stakeholders in search of opportunities to share their knowledge on rice-related products. The articles featured here are grounded on solid basic and applied research in agronomy, biology, chemistry, and engineering; but it also underscores major contribution from the social sciences. This issue analyzes the root cause of smuggling rice in the Philippines. It details the process of illegally trading rice from other countries. Specifically, it presents the value of smuggled rice, its consequences, and the existing legal measures governing it. It also identifies some factors that lure smugglers to engage in the activity and proposes long-term protection which may be adopted to curtail rice smuggling. Understanding the dynamics of illegal rice trading and the undesirable consequences it brings to the local rice industry is an important step toward devising strategies to safeguard farming profitability. This aspect is of great significance to achieving rice self-sufficiency. .
For comments and requests for additional copies, please write to:

Development Communication Division


Philippine Rice Research Institute Maligaya, Science City of Muoz, Nueva Ecija Email: mglayaoen@email.philrice.gov.ph Trunklines: (44) 456-0258, -0277, -0285 loc. 511, 512 Vol 4 No 1 December 2013 Authors: Flordeliza H. Bordey Aileen C. Litonjua Managing Editor: Myriam G. Layaoen Editorial Advisers: Anne Marie Jennifer E. Eligio Constante T. Briones Karen Eloisa T. Barroga Eufemio T. Rasco Jr. Design and Layout: Carlo G. Dacumos Rice Science for Decision-Makers is published as a quarterly policy advocacy material by the Philippine Rice Research Institute, Science City of Munoz, Nueva Ecija, Philippines. ISSN 2094-8409. This material is also available at: http://www.scribd.com/doc/195441664/RS4DM-The-Case-of-Rice-Smuggling

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