State-sponsored cartels

BANGKO Sentral ng Pilipinas Governor Felipe Medalla confirmed what I elaborated on last week: that quantitative (import) restrictions (QRs) and arbitrary issuances of sanitary and phytosanitary (SPS) clearances by the Department of Agriculture (DA) were encouraging rent-seeking (corruption) in the government. He claimed in a meeting of senior economic officials that import quotas resulted in the formation of cartels as import allocations are likely to be distributed to “mga kaibigan” (friends).

Through QRs and the selective issuance of SPS clearances, the government can regulate import volumes and the timing of their entry, and also assign quotas to favored individuals and companies. This results in a cartel-type operation where prices are manipulated to gain enormous windfall profits. Obtaining these will require little effort from the import allocation beneficiaries. All they need are capital and the proper political connections. This is why I have repeatedly argued that the overregulation and protection of our agricultural sector have resulted in its inefficiency and uncompetitiveness.

In last week’s column, I noted that a government-to-government transaction during the rice QR regime yielded a commission of around P0.35 to P0.50 per kilo. A million metric tons (MT) of imports could easily fetch around P3.5 to P5 billion. This is not to mention the logistics contracts that could be cornered (shipping, stevedoring, trucking, barging, bagging, etc.). The Rice Tariffication Law did away with these rentseeking activities as it assigned rice trading to the private sector, using its own money to determine the timing and the volume to be imported.

But QRs still exist in other important agricultural commodities. Fish is a good example. There is no tariff on fish products as it was not covered by the World Trade Organization agreement. As such, imports are heavily regulated by the DA’s Bureau of Fisheries and Aquatic Resources. Under the Philippine Fisheries Code of 1998, a priori requirement is the issuance of a certificate of necessity to import (CNI) based on a supply and demand analysis. Any decision will have to be consulted with stakeholders before the DA secretary can issue an order. Because of the so-called consultation process, the final volume is usually a far cry from the supply deficit analysis.

The problem is that we have a serious annual supply deficit (particularly for seawater fish) as a result of the wanton destruction of coastal resources. Fish catch declines started early 2000 and are much worse now. The market provides glaring proof of this as seawater fish prices are beyond the P300 per kilo mark with the more exotic ones like lapu-lapu, pompano, blue marlin, shrimp, etc., near P500 or higher. With a deficit of around 500,000 MT a year, a CNI for 30,000 to 60-000 MT of imports will hardly make a dent. What aggravates the situation is that the limited amount of imports is allocated to less than 25 fish traders. The result is the continuing high prices of seafood, which is a major source of protein for the poor.

When I was in the DA, I complained that the price of galunggong (round scad) imported from China or Vietnam was just P55 per kilo and its landed cost at around P85 per kilo yet its retail price was P240 per kilo. To drive home the point, I calculated that if 60,000 MT was allowed, and if the profit obtained was at P100 per kilo, the net gain from the transaction easily added up to P6 billion. Those involved would have hardly broken a sweat.

Another excellent example is the recent decision to import sugar amounting to 440,000 MT. Besides the improper procedure followed, the awarding of the import allocations to just three traders based on the assessment of single authority in the person of a DA undersecretary raises serious ethical questions. The same official revealed that they were targeting a retail price of P80 to P85 per kilo of refined sugar.

What is not being mentioned is that the wholesale price in Thailand is around P20 to P25 per kilo. A tariff of 5 percent is imposed on sugar coming from Asean countries, and it was reported that the landed cost of Thai sugar is around P38 per kilo. This means the transaction will easily yield a profit of around P40 to P45 per kilo. Multiply that by 440,000 MT and this means that P16 billion will benefit a few pockets at the expense of poor Filipino consumers.

Note that in May 2022, the price of refined sugar was just P52 per kilo. Why is this not being used as the target price by the DA if it really wants to help bring down food inflation? The Agriculture department also had the temerity to declare that importations were needed to reduce the price of sugar to P80 to P85 per kilo and tame inflation. Parang utang na loob pa ng sambayanan na napababa nila ang presyo ng asukal! (So it appears the people owe them a debt of gratitude for having brought down the price of sugar).

Rising rice prices also bear watching. Palay prices have gone up, reaching as high as P23 per kilo in areas in Nueva Ecija. Rice traders are complaining that the price of rice goes up by P10 to P20 per bag almost every week. While we are in the off-peak season of harvests, I am not convinced that rice prices should be rising. For one, the country imported around 4 million MT last year. Just last month, imports registered at 321,000 MT.

My sources tell me that the main

reason is not inadequate supply but an attempt by some traders to recover costs when they bought palay (unmilled rice) at the government price of P19 per kilo last year, when market prices were significantly lower, to show their support to the incoming administration. The public must remain vigilant if it wants to keep the staple affordable.