The Impact of Inflation and Increasing Costs on Profitability and Sustainability

in Small Rice Retail Business

A QUANTITATIVE RESEARCH

Presented to the faculty of Accountancy, Business, and Management

Manuel A. Roxas High school

In partial fulfillment of the requirements in Inquires, Investigations, and Immersion

Submitted By:

Silvestre, Tom John Baril

Romero, Rj Esco

Demain, Xanleijin Mackenzie

Submitted To:

Ms. Zelda Navarroza

Research Adviser

January 16, 2024

Local Literature

The substantial increase in international food commodity prices, particularly

cereals like rice and wheat, from 2005 to 2008. Cereal prices, especially for rice and

wheat, surged significantly in the latter half of 2007 and peaked in April 2008, with

annual increases of 206 percent for rice and 83 percent for wheat. The inflation rates

gradually declined in the following months. The study notes that while much analysis

focused on the impact on consumers and retail prices during the 2007/08 global food

crisis, there was a significant gap in understanding how these high prices were

transmitted to farmers or producers. This transmission is crucial for anticipating

supply responses. Despite a decline in inflation, the passage emphasizes that the

2008 price increase was not a temporary spike, as indicated by a persistent increase

in the FAO cereals price index in 2011 compared to 2008. However, the study

primarily focuses on the 2007-08 period due to limited evidence on more recent

global price trends. Rice prices in the Philippines are experiencing a rapid surge,

signaling potential warnings for other major rice-importing nations. The impact is

attributed to the aftermath of India's restrictions on rice exports, affecting regions in

Asia and West Africa. In the Philippines, rice inflation reached its highest level in

almost five years in August, reminiscent of a 2018 shock that prompted the removal

of a two-decade-old import limit. The central bank of the Philippines has indicated

readiness to implement monetary tightening if necessary. Concurrently, other nations

are engaging in diplomatic efforts and securing deals to ensure a stable supply of

rice.

The Philippines experienced a peak in inflation at 8.7% year-on-year in January

2023, driven by a combination of revived domestic demand and elevated global

commodity prices. Subsequent efforts, including aggressive monetary tightening with

a total of 425 basis points in rate hikes, coupled with a moderation in global energy

prices, have contributed to a decrease in inflation to 4.7% year-on-year as of July.

The Bangko Sentral ng Pilipinas (BSP) aims to bring inflation back within its target

range of 2-4% by the fourth quarter, but recent developments pose a potential threat

to this downward trend, particularly with renewed price pressures for key

commodities. Past instances of high inflation in the Philippines have been primarily

influenced by supply-side challenges. The nation's insufficient local rice production

necessitates imports from neighboring economies, making it vulnerable to

fluctuations in global rice prices. Additionally, dependence on imported energy for

power generation and transportation underscores the economy's susceptibility to

sharp changes in global energy prices. Three crucial items in the Consumer Price

Index (CPI) basket—rice, electricity, and transport—hold a significant weight,

accounting for 23.41% of the total. In the recent inflation episode, these "crucial

three" contributed to 41% of inflation in 2022, emphasizing the importance of

stabilizing prices for these key commodities. The country's reliance on imports for

rice and energy makes any substantial increases in the prices of these essential

items a potential catalyst for a renewed inflationary spike in the Philippines.

The pursuit of sustainability in agriculture has gained global attention, and the

Philippines, with a focus on achieving self-sufficiency in rice production, grapples

with the challenges posed by industrial and intensive agricultural practices. While the

push for increased and intensified production tends to overshadow sustainability

concerns, there are ongoing movements and initiatives to address the adverse

impacts of conventional agriculture. This paper aims to explore the factors

influencing the adoption of organic farming practices in rice production,

acknowledging the potential of sustainable farming systems. Employing probit

regression with dichotomous outcomes, the study estimates the likelihood of organic

rice adoption based on various factors. The findings reveal that certain

demographics, such as females, farmers with higher education levels, and those with

extensive experience in rice production, alongside small landholders with lower costs

per hectare, exhibit a higher propensity for adopting organic farming practices.

Additionally, the study underscores the significance of extension services, non-

governmental organizations (NGOs), and private institutions in promoting and

intensifying organic production within the rice farming sector. This research

contributes valuable insights into the dynamics and determinants of organic farming

adoption in the context of rice production in the Philippines. While numerous studies

have evaluated the Philippine government's conditional cash transfer program,

Pantawid Pamilyang Pilipino Program (4Ps or Pantawid), focusing primarily on its

impact on education, health, and nutrition, this study adopts a unique perspective by

qualitatively assessing its influence on the rice economy in Bicol, Philippines,

through a rice value chain (RVC) analysis. The RVC analysis systematically traces

and maps the value chain segments of rice demanded by 4Ps consumers, shedding

light on changes in the organization, structure, and performance of these segments

due to the demand push created by 4Ps consumers. The findings reveal notable

shifts in the rice consumption patterns of beneficiaries, both in terms of quality and

quantity, and improved access to credit attributed to the 4Ps program. Millers also

experience increased profitability as a result. Importantly, the study identifies

retailers and wholesalers as key players significantly impacted by the program within

the rice value chain. The research provides valuable evidence of the positive

unintended consequences of 4Ps on local economies, demonstrating its broader

impact on the rice economy beyond the program's primary targets of education,

health, and nutrition. This study addresses the persistent poverty among rice

farmers in developing countries, despite advancements in agricultural productivity,

and seeks to contribute insights into the factors influencing their marketing channel

choices. Drawing on 300 surveys and 45 interviews with farmers across the top 42

rice-producing provinces in the Philippines, the research unveils a multifaceted array

of factors contributing to farmers' decisions, spanning personal, social, cultural, and

external environmental considerations. Utilizing random-effects logistic regression,

the study reveals that various demographic and contextual elements influence

farmers' preferences for direct or indirect marketing channels. Younger, non-

employed, landowning farmers in proximity to trader-millers, residing in towns with

higher income classes, and operating in provinces with lower production are more

likely to opt for direct marketing channels. Conversely, those with higher education,

lower off-farm income, less training, larger product volumes, and without indigenous

origins tend to engage with indirect buyers such as agents and assemblers.

Qualitative data highlight the role of personality traits, social ties, and cultural values

in shaping these decisions, emphasizing the significance of motivation, risk aversion,

social relationships, and cultural ethos in the marketing choices of rice farmers. The

analysis of movement patterns suggests that farmers often maintain long-term

relationships with the same buyer due to factors such as credit availability, cultural

implications, risk aversion, and personal alliances.

These findings underscore the importance of considering non-economic factors,

including personality, social capital, and cultural values, when formulating

interventions to enhance the marketing income of rice farmers. The study

recommends the implementation of projects and policies that diversify farmers'

income sources, facilitate accessible loans, streamline post-production processes,

and establish effective linkages between buyers and farmers in the Philippine rice

industry. Rice, particularly paddy rice, holds a central and multifaceted role in the

Philippines, being the most widely cultivated crop in the country and a leading global

producer of this essential commodity. As the staple food, milled rice contributes

significantly to the average calorie intake, making up 35% of the population's diet.

Beyond its nutritional significance, rice has deep cultural roots in Filipino society, with

the term "rice" being synonymous with "eat" in some major languages. This cultural

and nutritional importance has rendered rice a highly politicized element, with the

population viewing the affordability of rice for consumers and the protection of paddy

rice farmers' livelihoods as crucial indicators of effective governance.

Historically, the Philippines has grappled with its role as both a rice importer and

exporter. Despite engaging in external trade with a few thousand tons of rice in the

1850s and 1860s, the nation shifted to become a consistent rice importer since the

1870s. The reasons for this rice deficit are rooted in inconsistent rainfall patterns in

Luzon, the primary rice-producing region. This geographical challenge persisted over

the years, leading to an increase in annual rice imports from 50,000 to 100,000 tons

in the 1880s to 1890s, rising to 14 million tons in the twenty-first century.

Rather than adapting to this economic reality shaped by geographic factors,

successive governments from the 1930s onwards opted for policies that protected

the local market for domestically produced rice. Strict government control over rice

imports and financial support for paddy rice production became the norm, with import

control intensifying in the 1970s and persisting until 2019 when the government

finally liberalized the rice industry. This liberalization included the decision to allow

rice imports, albeit subject to high tariffs. The complex interplay between geography,

cultural significance, and political decisions underscores the intricate dynamics

surrounding rice production and trade in the Philippines. The Philippines, being the

largest rice importer globally, faces significant challenges due to soaring global rice

prices, surpassing the growth in nonfarm minimum wages and general inflation since

mid-2007. This surge in prices has led to increased costs for farmers, including

fertilizers and labor. In response, the government has implemented various

measures, such as exploring bilateral deals, lowering rice import tariffs, permitting

limited private sector rice imports, and scaling up the distribution of subsidized rice

and the sale of buffer stocks for price stabilization. Food subsidies emerge as a

crucial tool in assisting the poor during periods of high food prices. By providing

subsidized food, households can allocate their income to other necessities, thereby

enhancing purchasing power, especially in the face of high inflation. Food subsidy

programs play a vital role in shielding households from immediate poverty and

contributing to their long-term development. However, the inherent economic rents

associated with subsidies necessitate careful management of public resources and

effective targeting to ensure benefits reach the vulnerable population. Institutional

mechanisms for good governance are pivotal in optimizing the outcomes of such

programs.
Efficiently designing safety nets tailored to a country's specific conditions poses a

challenge for governments and international development institutions. Food-based

safety nets often encounter weaknesses such as high administrative costs,

corruption, inefficient implementation, and leakage. Leakage, defined as the

diversion of benefits to non-poor individuals, is a significant concern. Studies, such

as those by Rogers and Coates (2002), indicate that untargeted food subsidies and

ration programs in various countries can experience leakage rates as high as 50–

80%. In contrast, self-targeting food programs using less desirable foods

demonstrate lower leakage rates of 10–20%. Empirical evidence, as shown by

Coady (2004), suggests that universal food subsidies tend to have high leakages to

the nonpoor and result in economic inefficiencies due to distorted consumer and

producer prices. The cost-effectiveness of such subsidies is compromised, with

governments spending an average of $3.3 to transfer $1 of food subsidy to the poor.

This underscores the importance of improving targeting mechanisms for subsidies,

implying that universal subsidies should be viewed as interim measures until more

effective targeting is achieved. This paper delves into these issues within the context

of the Philippines, offering insights into the challenges and considerations in the

design and implementation of food subsidy programs. This study employs the

Quadratic Almost Ideal Demand System to analyze food demand patterns within

Filipino households, utilizing data from the recently released 2018 Family Income

and Expenditure Survey. Due to the absence of price data on food groups, the

Stone-Lewbel price index is utilized. The results highlight that the demand for rice,

concerning both prices and expenditures, exhibits relative inelasticity compared to

other food groups. The income elasticity for rice is determined to be inelastic at 0.26,
slightly surpassing the income elasticity for sugar. Notably, the demand for rice is

found to be less elastic among higher-income households and urban residents in

comparison to their counterparts.

The study further reveals that, in the short term, a 15% decrease in income or a 20%

increase in rice prices prompts families to allocate more of their income towards rice,

often at the expense of other cereals, meat, fish, and additional food groups. This

underscores the differential impact of income and rice price shocks on low-income

and high-income Filipino families. Policymakers are advised that targeted

interventions and programs enhancing the accessibility and availability of quality

agri-fishery products could serve to mitigate the food price impacts resulting from

market shocks. These findings contribute valuable insights for crafting effective

policies aimed at addressing the varying impacts of economic and price fluctuations

on different segments of the Filipino population. The Philippines is currently

embroiled in a heated debate surrounding the implementation of a rice price ceiling,

prompted by the surge in rice prices. Given rice's pivotal role as the staple food for

millions, its affordability and accessibility are of paramount importance. President

Bongbong Marcos, serving as both the President and Concurrent Agriculture

Secretary, took the initiative to impose a price cap on rice. This decision, enacted

through Executive Order No. 39, set price ceilings for regular milled rice and well-

milled rice. The intention was to counteract alleged illegal activities like hoarding and

alleviate pressures from the global market. However, this move has triggered a

series of events, shedding light on economic disparities, government intervention

mechanisms, and the complexities of market dynamics.

The policy has generated diverse reactions from various sectors; finance officials

have resigned, economists express concerns about potential shortages, and retailers

grapple with the economic implications of the decision. Beyond the immediate impact

on rice fields and markets, the repercussions of this policy extend to broader

discussions about governance, economics, and the welfare of the Filipino populace.

As the country navigates through this intricate scenario, the rice price ceiling has

become a focal point for examining the intersection of economic policies,

governance strategies, and the multifaceted dynamics of the national economy.

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