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Journal of Economics, Management & Agricultural Development Vol. 4, No. 1 77

Introduction

A country‘s productivity in the agriculture sector often translates to a certain

level of competitiveness which may also be revealed through various measures or indices. One of the commonly used tools of European Union countries in measuring

competitiveness is the Domestic Resource Cost (OECD 2011). Looking into the

Philippines‘ agriculture sector, there have been studies which have determined the competitiveness of various commodities that are being imported and even produced

domestically. The study of Briones (2012) indicates that key agricultural commodities

of the country which include rice, yellow and white corn, sugarcane, mango, coconut, banana, pineapple, hogs, broilers, and milkfish have the competitive advantage based

on DRC values below unity.

Cost and Price Competitiveness of Soybean Production in Isabela,

Philippines

Jessa Danica Villa L. Agcopra1 and Ma. Eden S. Piadozo2

Abstract

The study was conducted to determine whether local soybean production can replace

importation through cost and price competitiveness analysis. A complete enumeration of

the 58 farmers with harvested soybean for crop year 2015 was done in the Municipality of

Burgos and Ilagan City in Isabela province. The soybean farmers are engaged in either

organic or conventional production practices. This is in line with the current program of

the government to increase the production of organic soybeans through the Soybean

Development Program of the Department of Agriculture-Bureau of Agricultural Research.

The result of the study reveals that the province of Isabela cannot be a major producer of

soybean in the immediate short run since domestically producing soybeans would incur

higher costs to society. The Resource Cost Ratio (RCR) in producing soybean for both the

conventional and organic practices are 6.00 and 3.26, respectively, under comparative

advantage; and 4.60 and 2.22, respectively, under competitive advantage. Under both

scenarios, organic farming involves higher production costs than conventional farming due

to higher labor cost. Further, comparing the import parity price vis-à-vis the domestic

wholesale price, the computed ratio is 0.75 indicating the lack of competitiveness of

Isabela province to domestically produce soybean. As a result, the Philippines has to

continue importing soybean to meet the demand of the feed and food industries which

utilize soybean in producing various commodities.

Keywords: price competitiveness, local production, importation, domestic resource cost

1Economic Development Specialist, National Economic and Development Authority, [email protected]

(corresponding author) 2Department of Agricultural and Applied Economics, College of Economics and Management, University of the

Philippines Los Banos, College, Laguna, mspiadozo1@ up.edu.ph

78 Agcopra and Piadozo

Soybean (Glycine Max L.) is known as one of the ―world‘s wonder crops‖ due to its nourishment ability and minimal growth requirement. The utilization of soybean is

mainly for feeds but these can also be processed as food products. According to FAO-STAT (2016), the United States of America (USA) was the world‘s top producer of

soybeans in 2015 producing approximately 107 million metric tons (mt). Brazil was

the top exporter of soybeans in 2013 with a total volume of 42.8 million mt accounting for 52.4% of its production. USA ranked second among the top exporters

of soybeans with a total volume of 39.2 million mt or 42.9% of its total production in

2013. On the other hand, China was the top importing country of soybeans in 2013

with total imports amounting to 63.4 million mt.

In the Philippines, soybean is one of the major imports along with other agricultural commodities such as wheat and milk. From 1995 to 2014, the average

volume of imported soybean comprised 99% of the total supply of soybean in the

Philippines while domestic production comprised only one percent. In 2013, soybean and its products ranked 7th with a total volume of 173.4 million kilograms and c.i.f.

value of PhP 4.5 billion. Since the domestic production of soybean is nil, the Philippines imports large volume of soybean from other countries in order to meet the

demand of both the food and feed industries.

For a country to lessen its imports, it can adopt import substitution strategy. This is practiced mostly by less developing countries wherein the production of a certain

commodity is made domestically rather than importing it elsewhere (Liang 1997).

Import substitution can be a solution for the commodities heavily imported by the Philippines, such as soybean, in order to reduce the costs incurred by the country on

importation and therefore save foreign exchange. Instead of importing these commodities, the government along with its concerned agencies, can introduce the

domestic production of these crops and help farmers increase their income and also to

generate more jobs.

The Department of Agriculture–Bureau of Agricultural Research (DA-BAR)

launched the ―Soybean Development Program‖ in 2011 which aimed to increase the domestic production of soybean. This five-year program intends to develop the

organic production of soybean all over the Philippines. The vision-mission of the

program is to create farming communities which would produce organic agricultural goods to be provided to fellow Filipinos and other Asian countries by building

community-based production, and to develop a processing industry through

public-private partnerships (De Lima 2010). The DA is currently implementing the National Organic Agriculture Program (NOAP) which aims to engage the farmers to

organic farming in order to improve the income, livelihood, and health of farmers; protect the environment; and improve resiliency of the sector towards climate change.

Thus, the NOAP provides the guiding principle for the DA and its attached agencies

and bureaus in crafting programs related to organic agriculture.

The province of Isabela is the top producer of soybean in Luzon under the

Soybean Development Program of DA-BAR. This study is an attempt to 1) determine

whether Isabela can replace the imported soybeans by producing soybeans domestically in the short run, and 2) differentiate the farmers engaged in organic or

conventional production practices. In the event that the province of Isabela can fully replace the imported soybeans, the country can save foreign exchange, promote

further the domestic production of soybean, and improve the income of soybean farmers.


Conceptual Framework

Figure 1 shows the conceptual framework used in the study in order to

determine the cost and price competitiveness of soybean production in the province of Isabela. The production of soybean in Isabela and all over the country is being

supported by the Soybean Development Program of the DA–BAR. In this study, the

production of soybean in Isabela follows either organic or conventional production practices. Cost of production differs between the two production systems, and thus

the competitiveness of soybean produced in Isabela for the two systems.

Figure 1. Conceptual framework to determine the cost and price

competitiveness of soybean production in Isabela

Comparative and Competitive

Advantage of Soybean

Production in Isabela

Cost of Production of

Soybean

Import Competitiveness of

Soybean Produced in Isabela

vis-à-vis Imported Soybean

Soybean Production in Isabela

Soybean Development Program of

DA-BAR

Organic Production

Use of organic fertilizer

and biopesticide

Higher labor input

Lower production

Conventional Production

Use of inorganic fertilizer

chemicals and pesticide

Higher output

World Prices of Soybean and

Inputs

Exchange Rate

Storage, Port and Transfer Costs


3Out of the 80 soybean farmers listed under the master list from the Department of Agriculture – Cagayan Valley

Research Center, only 58 soybean farmers had harvests for the time period covered.

The following hypotheses were tested. 1) The province of Isabela has a comparative and competitive advantage in producing soybeans. The domestic

production of soybeans in Isabela is competitive vis-à-vis importation since the price of domestically produced soybeans is lower compared to the import parity price of

soybeans. 2) The opportunity cost of domestic resources spent in soybean production

is relatively smaller as compared to the foreign exchange that it saves by substituting domestic production for imports. 3) Producing organic soybeans is, however, less

competitive than conventional production due to higher cost incurred.

Methodology

Data and Data Collection Methods

The study used both secondary and primary data from various sources. The

primary data were obtained from 58 completely enumerated soybean farmers in the

Municipality of Burgos and Ilagan City in Isabela who had harvests for crop year

20153. The 58 soybean farmers were classified based on their production practice; whether the soybean farmers engaged in organic or conventional production of

soybean. On the other hand, the secondary data on the volume of imports, value of imports (in CIF prices), sources of imports, world prices, official exchange rate, and

tariff amount and rates were obtained from the Bangko Sentral ng Pilipinas (BSP),

Philippine Statistics Authority (PSA), World Bank, Bureau of Customs, and the

Manila International Container Terminal.

Analytical Tools

The competitiveness of soybean production was determined using the cost and price competitiveness analyses. Cost competitiveness analysis involves determining

the Domestic Resource Cost (DRC) and Resource Cost Ratio (RCR) coefficients. The price competitiveness analysis involves a comparison of the domestic wholesale

price and import parity price.

Cost Competitiveness Analysis

Domestic Resource Cost (DRC) is the ratio of the domestic costs used in the

production of a unit of commodity as an output in domestic currency to the difference between the world price or border price and foreign costs per unit of output which are

expressed in foreign currency. Domestic costs can either be evaluated using market or

financial price (for competitive advantage) or in shadow or economic prices (for comparative advantage). DRC under comparative advantage was computed using the

formula:

domestic costs evaluated in shadow prices per unit of output

(border price of output) - (foreign cost per unit of output in border price) DRC =


For competitive advantage, the formula is as follows:

The Resource Cost Ratio (RCR) was used for identifying comparative

advantage which is a measurement of comparative efficiency (Arcilla 2003). This was

be obtained using the formula:

where:

RCR = Resource Cost Ratio DRC = Domestic Resource Cost

SER = Shadow Exchange Rate

If RCR < 1, comparative advantage exists; if RCR = 1, neutral or neither

comparative advantage or disadvantage exists; and if RCR > 1, comparative disadvantage exists. A value of RCR less than 1 (RCR < 1) implies that producing a

commodity in a country would have a lesser social cost compared to importing the

product. Also, domestic production is cheaper than importing it elsewhere. An RCR value greater than 1 (RCR > 1) implies that social cost is less in imports compared to

domestic production. This means that domestic production is more expensive relative

to imports. If the value of the RCR is 1 (RCR = 1), the situation is said to be neutral which means that the production of a commodity in a country neither has a

comparative advantage or disadvantage.

Following the studies of Balangue (2011), Cataquiz (1997), and Elca (1997), the

shadow exchange rate was computed to be 20% higher than the official exchange

rate. This is computed using the formula:

SER = OER + (OER x 0.20)

where:

SER = Shadow Exchange Rate

OER = Official Exchange Rate

Resource cost under competitive advantage which is a measurement of

competitive efficiency (Arcilla 2003) was computed using the formula:

where:

RCR* = Resource Cost Ratio

DRC* = Domestic Resource Cost

OER . = Shadow Exchange Rate

domestic costs evaluated in market prices per unit of output

(border price of output) - (foreign cost per unit of output in border price) DRC* =

DRC

SER RCR =

DRC*

OER RCR* =


If RCR < 1, competitive advantage exists; if RCR = 1, neutral or neither competitive advantage or disadvantage exists; and if RCR > 1, competitive

disadvantage exists.

Since competitive advantage takes into consideration market distortions and

government interventions, the first relationship wherein RCR < 1 implies that actual

cost of production is less when a commodity is produced domestically than when it is imported. This also suggests that the country could compete in the international

market. On the other hand, RCR > 1 implies that a country cannot compete in the

international market; importing the commodity would be better than producing it

domestically.

Price Competitiveness Analysis

Import competitiveness requires taking the ratio of the import parity price to the

domestic wholesale price of soybean. The ratio determines whether import

competitiveness exists in the area. Import competitiveness indicates whether the domestic production of soybean can replace the imported soybean as revealed by its

price ratio. This was computed using the formula:

where:

IC = import competitiveness

Pi = import parity price (PhP/mt)

Pd = domestic wholesale price (PhP/mt)

Following Balangue‘s (2011) methodology, import parity price (Pi) was

computed using the following formula:

Pi = (CIF x ForEx) + Tariff + PC + STC

where:

Pi = import parity price

CIF = cost, insurance and freight equal to FOB (US$/metric ton) + freight and

insurance

ForEx = foreign exchange rate (PhP/US$)

PC = Port cost (PhP/mt)

STC = Storage and transfer cost from pier to warehouse (PhP/mt)


Results and Discussion

Overview of the Domestic Production and Trade of Soybean

The domestic production of soybean comprises less than 1% of the total world production of soybeans. On the average, the domestic production of soybean is

approximately 1,000 mt while the global production of soybean is around 91 million

mt (PSA 2015). From 1995 to 2014, the average volume of imported soybeans comprised 99% of the total supply of soybeans in the Philippines with only 1% from

domestic production (PSA 2015). During this period, the average annual total supply

of soybeans was 147,629 mt with average annual growth rate of 12%. The average volume of imported soybean reached 146,541 mt. On the other hand, the domestic

production of soybean was observed to be declining by 6% per year. The total volume

of soybeans produced from 2011 to 2014 in Region II was 1,299.50 mt. which is the

second highest total volume produced next to the Caraga Region which produced

6,510.30 mt for the same period. On the average, the volume of soybeans produced in the Caraga Region was 1,627.57 mt per year while Region II‘s average volume of

soybeans produced was 324.88 mt per year.

Aside from the declining domestic production, the land area devoted to soybean

production had also decreased at a rate of 6.37% annually (Figure 2). On the average,

the land area devoted to soybean in the country was only 850 hectares (ha). This decline may suggest that farmers in the country have shifted to planting other crops

such as corn and rice which exhibited an increasing trend in production from 1995 to

2014 (Figure 3). Specifically, the province of Isabela posted an average growth rate of

4% for rice production and 10% for corn production.

Figure 2. Land area (hectares) devoted to soybean production, 1995-2014 Source: FAOSTAT 2015


Characteristics of Soybean Farmers in Isabela

Table 1 shows the summary characteristics of soybean farmers in Isabela.

Majority of the soybean farmers (57%) are engaged in conventional soybean production. Fifty-three percent of the respondents are male and the average age of the

respondents is 46 years old. About one-fourth of the farmers finished only elementary

education, 43% completed high school, and 31% earned a college degree.

On the average, the respondents have been farming for 20 years, and engaged in

soybean production for only two years. Among the 58 respondents, 71% are land

owners while only a few respondents rent, borrow, and use public land for soybean production. More than half (57%) of the respondents are members of a farmer‘s

organization. Half has undergone training related to soybean production or processing which was sponsored by either a government agency or private sector. The farm lands

of the respondents are in plain and sloping areas, with 53% and 47% of the

respondents, respectively.

Farm Characteristics of the Soybean Farmers in Isabela

Table 2 summarizes the farm characteristics of the soybean farmers in Isabela.

Organic and conventional soybean farmers have almost similar characteristics. On the

average, the total farm size of the respondents is 3.42 ha wherein 0.96 ha is devoted

for soybean while 2.47 ha are devoted for other crops. Generally, the land area of the soybean farmers in Isabela is approximately twice as much as the national average

farm size reported by the Philippine Statistics Authority (PSA) in 2015 which is 1.29

ha. However, the land area devoted to soybean production is below the national average and has also decreased from the average land area in the 1990s of 2 to 3 ha.

The average distance of the farm from the farmer‘s residence is 4.01 kilometers (km)

while the average distance of the respondent‘s farm to market is 20.94 km.

Figure 3. Volume of production (mt) of rice and corn, Isabela, 1995-2014 Source: PSA 2015


Table 1. Distribution by socio-demographic characteristics, 58 soybean farmers,

Isabela, 2015

Characteristic

Organic

(n=25)

Conventional

(n=33)

Total

(n=58)

No. Percent No. Percent No. Percent

Gender

Male 14 56 17 52 31 53

Female 11 44 16 48 27 47

Age

< 20 0 0 1 3 1 2

21-30 4 16 1 3 5 9

31-40 5 20 7 21 12 20

41-50 10 40 9 27 19 33

51-60 5 20 8 24 13 22

61-70 0 0 4 12 4 7

> 70 1 4 3 10 4 7

Average 44 49 46

Highest Educational

Attainment

Elementary 6 24 9 28 15 26

High school 11 44 14 42 25 43

College 8 32 10 30 18 31

Years in Farming

1-10 12 48 10 31 22 38

11-20 7 28 8 24 15 26

21-30 2 8 7 21 9 16

31-40 1 4 4 12 5 9

41-50 1 4 0 0 1 2

> 50 2 8 4 12 6 10

Average 18 22 20

Years in Soybean Farming

< 1 1 4 2 6 3 5

1-2 20 80 28 85 48 83

> 2 4 16 3 9 7 12

Average 2 2 2

Land Ownership

Owned 18 72 23 70 41 71

Rented 6 24 6 18 12 21

Borrowed 1 4 2 6 3 5

Occupant in public land 0 0 2 6 2 3

Membership in Farmer

Organization

Yes 15 60 18 55 33 57

No 10 40 15 45 25 43

Has Undergone Training

Yes 12 48 17 52 29 50

No 13 52 16 48 29 50

Topography

Broad plain 13 52 18 55 31 53

Sloping 12 48 15 45 27 47

Source: Survey data 2015


4The computed shadow exchange rate was PhP 56.68, which is 20 percent higher than the official exchange rate.

Table 2. Farm characteristics, 58 soybean farmers, Isabela, 2015

Comparative and Competitive Advantage of Soybean Production

The summary of the domestic and foreign costs components of the input materials used in soybean production in Isabela is shown in Table 3. In Isabela, the

soybean farmers are classified as organic producers and conventional producers.

Among the cost items, hired labor has the highest cost, accounting for more than 50%.

For competitive advantage, the computed DRC values, 221.55 for organic

production and 108.39 for conventional production, are greater than the prevailing official exchange rate which was PhP 47.23 at the time of the study. These computed

values suggest that import substitution of soybean in the province is not cost

competitive. The computed RCR values (4.69 for organic production and 2.29 for conventional production) are greater than one which implies that the soybean

production in Isabela has a competitive disadvantage for both production practices. Expanding the production of soybeans in Isabela would not be competitive since the

actual cost of producing soybean domestically is greater than the import cost of the

commodity.

Comparing the computed RCR values for both comparative and competitive

advantage, the RCR values are higher under shadow prices than under market prices.

This suggests that there is a higher private profitability in engaging in soybean production than social profitability which suggests that soybean production is

beneficial from the farmers‘ perspective as opposed to the society.

Soybean farmers engaged in organic production have incurred higher costs than

those engaged in conventional production. This is mainly attributed to the cost of

hired labor which is relatively higher under organic production. Engaging in organic

production is observed to be more labor-intensive as compared to conventional

production which has greatly affected the competitiveness of organic soybean

production.

Farm Characteristic Organic Conventional Average

Average farm size (ha) 3.44 3.40 3.42

Average farm size for soybean production (ha) 0.91 1.00 0.96

Average farm size for other crops planted (ha) 2.53 2.40 2.47

Average distance of farm from house (km) 4.04 3.97 4.01

Average distance of farm from market (km) 21.64 20.24 20.94

Source: Survey data 2015


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Import Competitiveness of Soybean Production

Table 4 summarizes the price comparison and import competitiveness of

soybean production in Isabela based on the secondary data obtained from various sources and key informants. For the purpose of this study, the US No. 2 Yellow

Soybean was compared with the PSB 2 (Tiwala 6) local variety of soybean since

these two varieties have similar characteristics in terms of quality.

Following the methodology for computing for the import competitiveness, the

cost, insurance and freight (CIF) price is composed of the world price of soybean,

freight cost, and insurance in US dollars. The computed CIF price of soybeans per metric ton is US$ 440.50. Import price was then converted into peso by multiplying

the CIF price with the official exchange rate. The computed import parity price of

soybean per metric ton is PhP 20,804.82. Upon arrival in the Philippines, a tariff rate

of 1% is charged along with port, storage, and transportation costs. Problems

regarding port congestion greatly affect the transportation of the imported goods in the country. One main cause of the delay of transportation is the truck ban

implemented in Manila which prohibits trucks from transporting goods during the day. Port congestion surcharges along with additional storage fees are included to

take into consideration the current situation in the Port of Manila. The computed

import parity price of soybeans amounts to PhP 33,311.44 per metric ton which is

also the total cost of transporting the soybeans from the US port to the Manila port.

Table 4. Price comparison and import competitiveness of soybean production,

Isabela, 2015

Price Comparison Component Currency Amount (Per Mt)

From the US port

World price US$ 352.00

Freight costs US$ 81.46

Insurance US$ 7.04

CIF price US$ 440.50

Conversion from US$ to PhP

CIF price US$ 440.50

Foreign exchange rate PhP/US$ 47.23

Import price PhP 20,804.82

Arrival in Manila port

Import price PhP 20,804.82

Tariff rate (%) 1.00

Tariff amount PhP 208.05

Port costs PhP 8,551.00

Storage and transportation cost PhP 2,278.36

Additional storage charges PhP 54.08

Port congestion surcharges PhP 1,415.13

Import parity price PhP 33,311.44

Isabela to Manila

Farm gate price PhP 40,000.00

Transportation and distribution cost PhP 4,500.00

Domestic wholesale price PhP 44,500.00

Import Competitiveness Ratio 0.75

Source: Authors‘ estimates based on secondary data 2015


The domestic wholesale price was computed by tracing the transported soybean from the producers in Isabela to the market in Metro Manila. Since soybean is sold

usually at PhP 40.00 per kilogram, a metric ton of soybean costs PhP 40,000.00. With this, the computed domestic wholesale price of soybean is PhP 44,500.00/mt

considering the transportation and distribution cost which amounts to PhP 4,500.00/

mt. The domestically produced soybean in Isabela is usually sold within the area but

there is also soybean which is transported and sold in Manila.

The ratio of the import parity price to domestic wholesale price resulted in an

import competitiveness ratio of 0.75 which suggests that the province of Isabela is not yet fully capable of replacing imported soybean. This is because the imported price of

soybean is lower as compared to the domestic price. This also suggests that the cost of producing soybean in other countries is lower as compared to the province of Isabela.

In this case, import substitution cannot take place yet since continuously producing

soybean domestically would incur higher costs than importing soybean. In addition, soybean production in Isabela can only be considered as a supplemental livelihood for

farmers and not for import substitution.

Conclusion and Recommendation

The results of the study suggest that the Philippines cannot be a major producer

of soybean in the immediate short run since domestically producing soybean would incur higher costs to the society. The Philippines has to continue importing soybean to

meet the demand of the feed and food industries which utilize soybean in producing

different commodities.

The cost of labor is the highest among all the cost items incurred in soybean

production. Soybean farmers employ hired laborers to perform the different cultural management practices with minimal labor-saving equipment. If they will continue

producing soybean, labor-saving equipment such as seeders, weeders, and harvesters

should be introduced to lessen the number of laborers employed as well as the man-days spent on these activities. The use of cost-saving equipment or machineries

is upheld under Republic Act No. 1061 which is known the Agricultural and Fisheries Mechanization Law or AFMech Law (gov.ph 2013). Aside from the use of

machineries and equipment to decrease cost and save labor, the AFMech Law aims to

enhance the productivity, efficiency, and the income of farmers.

Another important factor to consider is the production practice performed by the

soybean farmer. Organic soybean farmers incur higher costs than conventional

soybean farmers. Labor costs are higher under organic than conventional production

which can be attributed to the frequency of application of various organic and/or

biological controls to induce growth and avoid pest infestation. Another observation is that organic soybean farmers have lower yields than conventional farmers. Organic

soybean farmers are not maximizing the usage of inputs such as fertilizers and pest

control. For instance, while it is recommended that organic soybean farmers apply 10 bags of fertilizers per hectare, they only apply three (3) bags of fertilizers per hectare.

For pest control, organic soybean farmers were observed to be applying only one (1)

colony of earwigs per hectare against the recommended four (4) colonies per hectare. Likewise, only 10 packs of Metarrhizium (fungi) are applied versus the recommended

28 packs. Thus, the organic soybean farmers do not achieve the maximum volume of

soybean production per hectare.


Another factor which may have contributed to the low production of soybean in the province is the presence of El Nino in 2015-2016. The Philippine Atmospheric,

Geophysical and Astronomical Services Administration (PAGASA 2017) describes El Nino as a ―large-scale oceanographic/meteorological phenomenon that develops in

the Pacific Ocean and is associated with extreme climatic variability‖. In the

Philippines, the presence of El Nino has brought drought and dry spell in different provinces including Isabela which has declared a state of calamity in 2015. The

farmers in the province have experienced massive losses most especially the corn

farmers due to the dry spell in the region (Pillien 2015).

With the uncertainties in the weather conditions brought about by climate

change, the government, most especially the implementing agencies, must incorporate strategies on how to address climate change effects in their plans and programs. These

strategies may include the provision of capacity building activities for farmers and

even the local government units in order to enhance their knowledge and skills in climate change adaptation such as introduction and provision of climate- resilient crop

varieties to farmers, among others.

The study also shows that the import parity price of soybean is lower than the

domestic wholesale price of soybean which is due to the low world price of soybean.

Despite the presence of the additional costs in importing soybean such as port congestion surcharges and additional storage charges, the import parity price remains

lower than the domestic wholesale price. Decreasing the volume of imported goods,

particularly soybean, can greatly affect the feed and food industries. Decreasing the volume of imports will only be favorable if the cost of producing soybean in the

Philippines is less than the cost of importation but the study reveals otherwise.

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