The price of rice

The government recently ordered to set the retail market ceilings for rice prices in an effort to bring down rice price inflation.

Rice price ceilings. As far as I know, this is the first time in decades that the government has decided to set direct price ceilings for rice being traded at retail at a national level. It is true that in times of emergency (especially natural disasters), price controls are imposed in localities affected by local disasters and emergencies. It is different to do so at a national level.

The government has been using indirect measures of to influence the price of rice: imports, tariff protection, adjusting the prices paid to farmers for their harvests through the operations of the National Food Authority.

Executive Order 39 set the price ceilings on regular and well-milled rice in the whole country, which took effect on Sept. 5. The government price order is justified under the Price Act, a law passed in 1992 (R.A. 7581) as further amended in 2013 (R.A. 10623).

The price ceiling for “regular milled” rice is P41 per kilo while for “well-milled” rice at P45/kilo.

According to data from the Department of Agriculture, the average price per kilo of regular milled rice in 2022 was P38 and for well-milled rice, P42. But the price in August last month was in the range of P42 to P45 for regular milled rice and P47 to P55.

The rice order was justified under the Price Act. In general, the provision of the Price Act is that price ceilings are designed to cover special emergencies and are temporary in character. As far as it seemed, the order was reacting to price developments that were being influenced by global price changes. But there is no imminent national emergency.

The general provision on price control under the Price Act is sufficiently well-stated in the law: Unless sooner lifted by the President, price control of basic necessities shall remain effective for the duration of the condition that brought it about, but not for more than 60 days.

In short, the price control ceilings under the EO were intended to be temporary. But it is a very sharp order, designed to be followed by traders, with heavy penalty provisions for infractions.

Since costs are changing, such an order could even worsen the market situation. Traders dependent merely on distributing goods could be severely caught in heavy losses. Big traders could protect their interests, but not the myriad small traders in the land.

And explanations undertaken by the Department of Agriculture about future harvests expected and import supply contracts executed were designed to reassure the general public.

Setting price ceilings on a national level caught the nation by surprise. There is no national emergency calling for it, and there are gentler and more effective ways of dealing with the impact of such price movements.

It is unfortunate that – as revealed by a statement of Finance Sec. Ben Diokno – that the economic managers were not consulted on the matter of the price ceiling order. (They were on mission abroad when the order was signed.)

Our country is a rice deficit country in production. Thus, we are not insulated from global price developments because we are a major importer of rice. In order to satisfy our national consumption needs, some supply needs to be bought as imports.

However, there are alternative remedies for short-run actions that are less disruptive to the market for rice than setting price ceilings.

For instance, the external tariff on rice is very high. Reducing the tariff on rice imports would help reduce the price of rice. Domestic measures to help the production sector become more highly productive needs to be put in place as a development measure.

This is part of the program that is designed to introduce greater efficiency in the matter of domestic rice agriculture.

Such a program, however, is the more challenging component of raising the capacity of the nation in agriculture and in the rice industry in particular.

Why rice prices have risen recently. For most of the years between 2010 and 2021, the level of grain prices – and that of rice – was relatively steady despite their occasional volatility.

Recently, rice prices have gone upward and threatening. These developments are part of the inflation story that many other countries are also experiencing. External factors have been dominant in explaining price developments.

Two major external forces have combined to make grain prices move upward.

(1) The Ukraine war has been a major source of grain market developments since February 2022 when Russia started the war. Ukraine and Russia are two major exporters of wheat (and fertilizer inputs) to the world. The disruption to the global supply of wheat is large and is a major cause of the current price turmoil in grains. The impact of wheat supply disruption also tightens the demand for rice.

(2) Climate change events have been very severe in the last year and have continued in intensity. The recent dry seasons and heavy rains have caused disruptions in the harvests of rice-growing areas within East Asia and elsewhere.

Recently, the announcement of rice export restrictions by India to protect domestic consumption has added uncertainty to the supply of grain in the global context. Such actions have heightened global tensions in rice and grain prices.

Price controls, as a matter of economic policy, never work well. They lead to greater economic scarcities because they influence the behavior of the affected economic agents – producers, consumers, traders – in unpredictable ways. Price controls can become a breeding ground for market disruptions.

The government needs to device a better approach to the rice price problem for the moment.

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