Absent at Eco 101 class

Our President must have been absent in his Economics 101 class in Oxford when they discussed the very basic law of supply and demand. Even then, he must have read enough articles on the economy and heard enough advice from Arsi Balisacan and Ben Diokno to know that price control is a very slippery slope and only makes things worse.

Price control is simply AIDS  – As If Doing Something. The executive order putting price caps on rice must have been prepared by clueless lawyers and bureaucrats. Poor DTI Sec. Fred Pascual had to agree to a press release saying he and the Agriculture people recommended it.

Sec. Fred is a contemporary at UP Diliman. He was a Chemistry major from what I recall, but he took his MBA too and worked for years at the ADB. So, I assume he understands basic economics. Now, Fred must lead the effort to enforce the unenforceable.

Under EO 39, the mandated price ceiling for regular milled rice is P41.00 per kilogram while the mandated price cap for well-milled rice is P45.00 per kilogram.

“The mandated price ceilings shall remain in full force and effect unless lifted by the President upon the recommendation of the Price Coordinating Council or the DA and the DTI,” the executive order stated, which will take effect immediately upon publication in the Official Gazette or in a newspaper of general circulation.

The Palace news release claimed that the DA and the DTI recommended imposing price ceilings on rice because of a surge in retail prices. As of Aug. 28, the DA reported the local regular milled rice in markets in the National Capital Region (NCR) ranged from P42.00 per kilogram to P55.00 per kilogram while local well-milled rice stood at P48.00 per kilogram to P56.00 per kilogram.

The same Palace press release also said the country’s total supply would be more than enough to cover the current demand of 7.76 million metric ton and we will have an ending stock of 2.39 MMT that will last up to 64 days. There may theoretically be enough rice, but we can expect stocks to disappear if consumers panic or if retailers decide to go out of business.

The National Economic and Development Authority (NEDA) also reported the rice inflation rate increased from one percent in January 2022 to 4.2 percent in July 2023.

This attempt to repeal the law of supply and demand makes President Marcos the second chief executive to do so. Ramon Magsaysay was a mechanic who didn’t study any economics course. But the President enrolled in at least one basic economics course in Oxford no less. I want to believe the President did this not out of ignorance, but out of panic.

So, how will the market likely react?

The rice importers will no longer even attempt to import more rice, which only they can do under the Rice Tariffication Law. Landed cost of imported rice is already at over P55/kilo and rising. No one is stupid enough to want to lose at least P10/kilo by importing rice.

As for the local rice millers, one of them told me that they would just do other things because they do not want to lose money. The price of palay (unhusked rice) is now at P25/kg and I am told there is no way they can make a profit with that. Let us look at the math.

Two kilograms of palay = one kilogram of rice. So if palay is P25 per kilo and maybe will fall to P20 during peak of harvest in two weeks – then just for the cost of palay – that’s P40 per kilo. Then you have to process, package, warehouse, transport. Everyone up the supply chain from manufacturer to wholesalers to retailers need to profit reasonably. That brings the retail price of rice up to P50 to  P52 per kilo – minimum, assuming very tight margins for everyone.

My miller friend said that the cap of P41 to P45/kg means the price of palay should be at P15 to P16 per kg max. Therefore, the miller said, the DA should cap the price of palay as well. But wouldn’t that prejudice the farmer? “No, not at all,” the miller said “because the one earning from the P25 per kg palay are the traders not the farmers. At P15 to 16, the farmers already profit. It is the traders, not the farmers, who set the price at 25 per kg.”

It was explained to me that the cost of production per hectare is around P40K. Farmers don’t use optimal fertilizers, mahal kasi. At P16 per kg palay at a conservative yield of 3.5 tons or 3,500 kilos – that’s P56K. Problem now is the farmer’s utang and the traders are taking all the earnings to pay off the debt.

In any case, the reaction of local traders to price control would be to cut their buying in the next few weeks, wait and see muna. Traders will sit on the stocks they already have. But will a trader risk warehousing what he has bought? The raiders might come, accuse him of hoarding and confiscate all that. So, the trader pays protection money.

As for running after rice smugglers, that’s just for optics. At a time of supply shortage, anyone who smuggles rice into the country is helping increase our rice stock and doing the country a favor. An economist friend of mine recalls that when he once attended a conference in Mindanao years ago, the speaker from Tawi Tawi said their governor allowed rice smuggling. With the lower price of smuggled rice, their malnutrition rate was also much lower than in Sulu where they followed the law.

Frankly, as I suggested last Friday, it is time to use rice diplomacy and convince India to sell us enough rice to make our buffer stock respectable. Lift the tariff for the meantime so importers can recover the increased cost of rice in the international market.

The problem is supply. The law of supply and demand cannot be repealed. Price control will make stocks bought at a higher price disappear, causing a bigger headache. Price control is, simply put, just AIDS… as if doing something.

Boo Chanco’s email address is [email protected]. Follow him on X (twitter) @boochanco