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Another way of solving the pork price crisis

 

Several national and local government agencies — the Department of Agriculture, the Department of Trade and Industry, the Metro Manila Development Authority, and the National Capital Region mayors — recommended that President Rodrigo Duterte order that pork prices be held below P300 a kilogram. Last I heard from household pork buyers was that the going retail price was reaching P400 a kilogram, about a 77% jump over its 2019 level.

That move, if taken by the President, is not a good start in solving the pork price crisis. As with price controls in the past — not just here but in other countries as well, and not just on food items but on other necessities like housing and medicines — a price cap does not solve the problem of rising prices of pork. On the contrary, it will only worsen it.

By fixing the price at below its market level, the government in effect taxes producers, causing supply to contract further and feeding more fuel to the price spike. The problem calls for assisting producers to produce more in order to restore normal levels of supply, and relieve pork buyers of high prices. Telling hog producers to sell scarce pork at below market value kicks them out of the pork business instead, and blows away our prospects of quickly normalizing production.

Price capping will not even help pork consumers, particularly the poorer ones, that it is intended to assist. Price freezes, particularly on essential food items, tend to be difficult to enforce. The measure will just create a parallel or black market for pork, the price of which exceeds their official level. If water seeks its own level, prices of essential food items will likewise gravitate to their respective equilibrium levels as dictated by the law of their respective supplies and demands. People will have to consume pork, and those who can find supply and afford its price will buy it. Those who cannot switch to substitutes like chicken meat and vegetables, bringing up their prices.

In the past, whenever we had price fixes on food items, retailers in wet markets were selling price-controlled items at prices they thought made most sense. Buyers then just accepted them as their families needed to eat, trashing government orders of freezing those prices. Yes, there were a few buyers who, thinking that laws can moderate the working of the economic law of supply and demand, warned retailers against violating official prices or face the consequences of ignoring price controls. Retailers simply told them to buy their food from the Departments of Agriculture or Trade and Industry. No arrests were made.

I am not condoning those acts against the law of the land, but I would not be surprised if the law breaking would be repeated should there be price controls imposed on pork, chicken meat, and vegetables. If they need to enforce price control on food items, the authorities would need to spend on enforcement, arresting violators. But that is like arresting jaywalkers on a very busy street that is heavily congested. It can be done if authorities have more informers and enforcers in every wet market and retail store. But what will it accomplish? It will only destroy the retailing of food items, aggravating further the shortage and price spike.

The more the government invests in enforcing the official price, the more the price cap looks like a wrecking ball destroying our pork production and marketing capability, evaporating the pork supply further in the process. In the end we all get a triple whammy with a price control on pork: pork producers will quit the business, pork buyers will be hungry and angry, and the authorities will waste public resources in enforcing an order that is difficult to enforce.

ADDRESSING THE SHORTAGE
The current pork price crisis stems from a sharp reduction of pork production starting about two years ago. As the Table accompanying this column shows, the country then produced about 1.625 million tons of pork. A year later, output nosedived to 1.608 million tons of pork. Which was not that bad and may have passed as one of those fluctuations we expect in agricultural production. But the fall persisted last year when output hit 1.331 million tons, a fall of about 17.23%.

We of course know that that is because of the African Swine Fever (ASF) outbreak. The spread of ASF to all the major island groups of the country is unfortunate, and is a testament to the weakened capability of our authorities in protecting our country from such destructive and contagious disease affecting our hog population. Let that be for now as I focus on alternative approaches to solving the pork price crisis.

Using data from the Table, the apparent per capita consumption from 2008 to 2018 is illustrated in the Figure accompanying this piece.

If there was no new supply of pork available in the market, per capita consumption would have fallen to 17.3 kilograms in 2019 and 13.5 kilos in 2020. That would certainly induce a lot of instability in our country considering that pork is a staple meat of our people.

Suppose we get the linear time trend of average pork consumption from 2008 to 2018, and project what their values may be in 2019 and 2020. Based on the linear equation defining the time trend, the country’s per capita consumption in 2019 and 2020 would be 18.001 and 18.243 kilos, respectively. Multiplying these numbers by the country’s population in these years, the demand for pork would be 1.946 million tons and 1.999 in 2019 and 2020 respectively.

Comparing these numbers with the apparent supply (local output and net imports), we have a shortage of 81,000 tons in 2019 and 516,000 tons in 2020. Those numbers may explain why pork prices have been spiraling. No price ceiling can remedy this problem. This problem has to be addressed with additional supply. Since local output cannot immediately expand because of ASF, we have to tap the rest of the world for additional pork.

The Department of Agriculture is aware of this solution and proposes to implement it with an expansion of the minimum access volume (MAV). This is the amount of pork our laws allow to be imported at a lower tariff of 30%. It is not really that low, but it is at least lower than the tariff on pork importation allowed without any volume constraints. The tariff on those imports is 40%.

Expanding the minimum access volume can help. But if the agriculture department expands the MAV by about 100,000 metric tons, the country will still have a deficit of about 400,000 metric tons. Pork prices will still go up, which in turn will put pressure on authorities to resort to an unenforceable price freeze.

Pork prices, even under this scenario, will still be at least 30% above world prices. That will not give consumers and processors enough relief. MAV may just moderate the price increases.

Why don’t we get rid of the MAV system and bring tariff rates down to 5%? The problem with the MAV is its archaic allocation system. Most of it is allocated to existing players, some of whom, like producers and existing large traders, have a conflict of interest in importing pork. How fast can they bring in imports when it is in their interest to slow down the flow of imports to increase their profits? A better approach is to let market competition decide on a better equilibrium price. Let us open up the import market some more and predictably, and bring down pork prices quickly like what we did with the rice price increase in 2019.

What about our hog producers? Producers will adjust to the new price structure. This can be an opportunity for them to become more competitive as they produce local pork at near world prices. Look at rice tariffication — there were those who said rice farmers would reduce rice output. So far, that seems to have not materialized. This year, despite the bad typhoons we had seen at the tail end of 2020, Agriculture Secretary William Dar announced that the country has a very good rice output. And rice imports, which spiked in 2019, started to moderate and adjust to the new equilibrium.

 

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.

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