IMPACT OF RISING PHILIPPINE FOOD PRICES

UNCLAS SECTION 01 OF 03 MANILA 001031

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EAP/MTS
EEB/TPP/ABT/ATP FOR JANET SPECK

E.O. 12958: N/A
TAGS: EAGR ECON RP
SUBJECT: IMPACT OF RISING PHILIPPINE FOOD PRICES

REF: A) SECSTATE 39410, B) MANILA 00838


1. Summary: Rising international food prices will hurt the
Philippine economy and most Filipinos because of widespread poverty
and dependence on grain imports. The Philippine government's
intervention to make rice available for low-income families at
subsidized prices has prevented major public protests or violence.
Philippine President Gloria Macapagal Arroyo has committed P43.7
($1.05 B) billion in support of a package of programs to guarantee
stable supply and prices in rice and other food crops. Growing food
subsidies will challenge efforts to balance the government budget.
We believe Washington should consider providing some funding for the
International Rice Research Institute, an excellent institution
which the USG has supported strongly in the past. End summary.

Philippine Demand for Grain
--------------


2. The Philippines is a net importer of rice, corn and wheat. Rice
sold by the state-controlled National Food Authority has remained at
a subsidized rate of P18.25 per kilo (about $0.43 at the current
exchange rate of P41.7:$1) while commercial rice has risen to around
twice the subsidized price. Corn grits, priced at P16 per kilo in
December 2007, currently sell at P30 per kilo. The price of wheat
flour per 25-kilo bag has gone up from P840 in January to P990 in
April. Bread, meat, fish, poultry, and vegetables have all
increased in price this year. Domestic production of rice equals 90
percent of consumption, and domestic corn production equals 80
percent of consumption, while wheat is 100 percent imported.

Living on the Edge
--------------


3. The food consumption habits of the 40 percent of Filipinos who
survive on less than two dollars per day are very price sensitive.
Consumption of (subsidized) rice increases as prices of other foods
go up. Food expenditures take 60-70 percent of the income of the
poorest 30 percent of Filipino families. Surging food prices will
worsen the country's already high poverty rate. Recently released
government poverty statistics indicate that the ratio of poor
Filipinos not able to afford basic food and non-food needs increased
from 30 percent in 2003 to 33 percent in 2006, or about 28 million
Filipinos who did not have adequate income to meet basic needs in

2006. About 45 percent of these poor Filipinos subsisted below
government-established food-poverty thresholds. The Philippines has
large income disparities between regions: the National Capital
Region has a 10.4 percent poverty rate, while Muslim Mindanao has a
62 percent poverty rate. It is worth noting, however, that the bulk
of the poor in the Philippines live in rural areas, many earning
their livings from agriculture. The increase in agricultural prices
is benefiting many of them.

Food, Inflation, and the Balance of Payments
--------------


4. Food accounts for 47 percent of the Philippines consumer price
basket. Grains comprise nearly 30 percent of overall food
expenditures in the basket, followed by meat and poultry at 16
percent. Rice alone makes up 20-25 percent of the food basket.
Year-on-year consumer price inflation has been accelerating, led by
food. Inflation averaged 5.6 percent during the first quarter of

2008. Food price inflation accelerated to 8.4% in March 2008, with
average (subsidized and non-subsidized) rice prices up 11 percent,
corn by 8.4 percent, cereal preparations by 11.3 percent, and
meat/poultry up by 7 percent. Current plans are for the Philippines
to import 2.1 million metric tons of rice during 2008 (up from 1.8
million metric tons purchased in 2007). The total import bill for
rice in 2008 could jump to about $1.7 billion - up from $600 million
in 2007. However, the government expresses confidence that the
balance of payments will end 2008 in surplus since international
reserves and overseas workers remittances both reached news high in
March 2008.

Where will it come from?
--------------


5. Currently, Philippine rice cultivation covers 2.3 million
hectares of land. This year the country aims to increase domestic
production of un-milled rice to a record 17.32 million tons, up
seven percent from last year (16.24 million tons),but the National
Food Administration will still need to import well over two million
tons of rice to meet demand. Corn production has also been
increasing due to the rise in corn prices. Studies indicate that
after a good harvest in 2007, rural household stocks of rice
increased. Rice farmers store 20 to 40 percent of their harvest at
home. Due to increasing prices, rural households have been selling

MANILA 00001031 002 OF 003


more rice to commercial traders, but less to the Food
Administration, which pays less than the top commercial rates. As a
result, agricultural experts estimate that current household and
commercial rice stocks are high, while Food Administration stocks
are low. The current national rice inventory should be sufficient
for roughly 50 to 55 days, well within the normal range for this
time of year.

Limits to Growth
--------------


6. Budgetary constraints will limit recent policy initiatives to
increase food production and agricultural investment. The
government has temporarily halted conversion of lands classified as
agricultural to other purposes, and hopes to increase the amount of
land devoted to the rice production. Current loses during drying,
storage, transport, milling, and distribution of rice and corn range
from 20 to 40 percent. Waste and inefficiency characterize each
link in the existing supply chain. USAID has programs in the
Philippines that promote agricultural productivity and elimination
of transport and supply-chain bottlenecks. U.S. agencies also
support agricultural biotechnology and the use of biofuels. As
requested, U.S. agencies will work with the government on a review
of current grain policy and programs, particularly the operation of
the National Food Authority.


7. Rising international rice prices are aggravating the already
shaky finances of the National Food Authority, which, as of
end-2007, had a negative net worth of over 50 billion pesos ($1.2
billion) and outstanding liabilities of about 70 billion pesos ($1.7
billion). Food Authority officials estimate that a $1,000 per
metric ton import price equals about P50 pesos per kilo, over twice
the subsidized price. The Authority's debt represents contingent
obligations on the part of the National Government and poses a
growing threat to the longer-term stability of public sector
finances.

Political Impact
--------------


8. There have been no major public protests or violence associated
with the rice issue thus far, only a few scattered protests
involving a few people. The government's extraordinary efforts to
make subsidized rice available during the month of April (described
ref B) ensured that, for now, low-income families have rice at
affordable prices. However, there is still the possibility that
people will take to the streets if food prices continue to rise.
The situation has given traction to labor groups that seek wage
hikes. There could be food-related demonstrations during the May 1
Labor Day holiday. The food price increases have served as a
wake-up call for the Arroyo administration to reassess its overall
agricultural policies and programs. President Arroyo is responding
to concerns about the impact of higher food prices in part by
supporting a legislative proposal to exempt minimum wage earners
from income tax.


9. Over the longer term, rising food prices may add to pressure on
the country's natural resources. Much depends on policy choices
regarding land use patterns. The rice issue has sparked public
debate about whether to suspend implementation of the recently
passed Biofuels Act. A senior Philippine Senator has charged that
biofuel production threatens the availability of food. However,
others argue that biofuels are not a factor in recent food price
increases.


10. Philippine legislators resumed sessions April 21 with pledges
to help solve the rice/food issue. Proposals include funds for
upgrading and repair of irrigation systems, financial assistance for
farm inputs, and re-aligning roles for the Philippine National Food
Authority. President Arroyo committed to allot P43.7 ($1.05 B)
billion for an agricultural package aimed at providing the country
with a stable food supply. The President also announced her
intention to fund hybrid rice seed subsidies to farmers, increased
irrigation and higher Food Authority buying prices for un-milled
rice.

The International Rice Research Institute
--------------


11. The USG has supported the International Rice Research Institute
(IRRI),an excellent organization which has made a huge contribution
to rice production worldwide, to the tune of more than $200 million
since 1970. A tight budget led to elimination of the small
remaining funding for IRRI this year. Post believes that, if
funding could be found, providing some resources to IRRI would have
tremendous public diplomacy advantages while making a real

MANILA 00001031 003 OF 003


contribution to the long-term solution to food price issues.

Kenney