Case 5Case 4. Supply Analysis in the Philippine Corn IndustryThe Philippine Corn IndustryA robust corn industry is vital to the Philippines food security. White corn is an important grain served on the table of at least 20% of the Filipino population. Yellow corn, on the other hand, is the main ingredient in formulating animal feed mixes. Domestic corn production provides livelihood to over 2 million farming families. On a larger scale, the corn industry provides jobs for many other Filipinos in the feed milling, hog and poultry, food processing, and other support industries. On this note, the strength of the corn industry is a fundamental factor in successfully achieving the goals of the swine and poultry industries to provide affordable food for the population and to sell choice meat cuts in the region. The corn outlook is clear and optimistic. The corn sector has an immense opportunity to supply the demand of the swine and poultry growers who, in reality, prefer locally produced corn as inputs to the feedmill industry. A vibrant domestic corn sector gives security in livestock supply, a hedge against foreign exchange fluctuations, and a greater flexibility in production.

Recent updates reveal that the corn sector is expected to grow in the first nine months of 2004 (January to September) by 18% from year-ago levels. Production increase is expected as farmers with higher-yielding seeds are likely to plant bigger areas due to favorable weather conditions and in anticipation that prices would remain firm and profitable. If sustained, there is a big possibility that the country will be self-sufficient in corn and would even export surplus in the coming years.

In more specific terms, corn is expected to hit 4.12 million metric tons, or 629,000 metric tons increase. This is more than its previous years level of 3.49 million metric tons. The increased output will be caused in part by an expansion in area harvested, with the size of corn farms seen to expand by 8.4% to 1.97 million hectares. Better grains performance is also expected to be attained due to increase in yield of corn by 9.3% to 2.11 tons per hectare.

The governments intensified campaign in the application of modern agricultural technologies are contributing significantly to higher grains output as more and more farmers are using hybrid seeds and adopting better production techniques to increase production.

Table 1.a: Summary of Philippine Corn Figures

Average Growth Rate (1991-2003)

2003 Growth Rate

Production

0.23%

(4.3 million mt/yr)

6.86%

(4.6 million mt)

Hectare

0.68%

(2.48 million has/yr)

0.60%

(2.4 million has)

Yield

4.14%

(1.73 mt/ha/yr)

(1.94 mt/ha)

Demand

2.03%

(5.5 million mt/yr)

4.7%

(6 million mt)

As seen in the table above (Table 1.a), the figures on Philippine corn industry have been encouraging, with all production, land area, yield, and demand showing positive average growth rates. For instance, the average corn yield and demand have been relatively substantial at 4.14% and 2.03%, respectively. Though these figures are still below international rates, 2003 figures are showing optimistic numbers. Production in particular increased by 6.86% and demand grew by 4.7%.

Increasing Consumption

The Gross Value Added (GVA) of the livestock and poultry sectors has been relatively stable in recent years (Table 1.b). In 2002, the GVA of the livestock industry reached Php 26.57 million from Php 25.51 million or a growth rate of 4.15% in 2001, which is substantially higher from the 2.94% growth rate in 2000 to 2001. The poultry sector, on the other hand, posted Php 22.07 million in 2001 and Php 23.44 million in 2002 or a growth rate of 6.21%. From 1998 to 2002, the livestock sector grew by 3.65% and 5.51% for the poultry sector.

Table 1.b: Growth Rates of GVA of Livestock and Poultry Industries 2000-2002 and 1998-2002

GVA

2000

(in M pesos)

2001

(in M pesos)

2002

(in M pesos)

GR

(00-01)

GR

(01-02)

GR

(98-02)

Livestock

24,783

25,511

26,569

2.94%

4.15%

3.65%

Poultry

20,475

22,077

23,448

7.82%

6.21%

5.51%

It has to be noted moreover, that the main end-user of corn products, the livestock industry, has been increasing. This is mainly accredited to the increase of consumption of livestock food products.

For instance, pork consumption in the country has been increasing at a rate of 4.67% - that is from 1997 to 2002, the consumption of the pork increased by 22%. Annually, the demand for pork is registered at 1.03 million metric tons. Broiler production is likewise increasing at a 5.18% annually, which as of 2003 figures totaled to 492,000 metric tons.

It is also noteworthy to cite that pork production at 4.18% keeps pace with consumption growth of 4.67% within the period of 1998 to 2002 (Table 1.c). This is likewise true for b

roiler production, which experienced 4.86% growth as against consumption rates of 5.18% growth.

Table 1.c: Growth Rate of Production Corn, Pork, and Broiler,

Philippines, 1998-2002

Year

% Growth

Corn

Pork Growth

Broiler

Import

1998

-10.21

3.52

-1.10

52.48

1999

25.33

4.27

1.06

-67.75

2000

-5.03

3.48

7.39

199.33

2001

-0.55

4.40

10.11

-49.55

2002

-3.26

5.25

6.82

23.56

Average

1.256

4.184

4.856

31.61

In the near future, as pork production grows at 4.2% and broiler at 4.9%, corn production has to grow faster than its present rate of 1.3%

. This partly explains why corn imports have been growing through the years, with figures reaching as much as one million tons annually. Experts agree that the livestock industry will grow faster if and when the corn industry is able to offer a reliable domestic source of feed. Therefore, the growing livestock sector offers an opportunity for the local corn sector because on the demand scale, the gap the supply of corn offers the industry with a burgeoning market for the existing and potential corn lands in the country.

This potential is worth capturing because the swine industry sector has set its mind on a vision to market its product aggressively and to make pork meat more affordable to a greater number of Filipinos. Moreover, the swine industry aims to export packaged special cuts of meat by 2005. To support this goal, the Meat Inspection Law (or Republic Act 9296) was passed by Congress this last May. This bill establishes an internationally recognizable standard for slaughter and inspection, equivalent to USDA standards.

The Philippines is also starting to export poultry to Japan after the Philippine poultry sector was spared from the onslaught of the bird flu virus that plagued the rest of Asia. The Philippine International Trading Corporation (PITC) recently completed the shipment of some Php 5 million worth of frozen chicken from Cagayan de Oro and San Fenando, Pamapanga. Succeeding orders from Japan were expected to about US$ 120,000 per month.

During the Asian bird flu outbreak earlier this year, prices of live chickens in the domestic markets had dropped to about Php 40 per kilogram from around Php 65 per kilogram, despite the country remaining free of the bird flu, as consumers shunned chicken meat. However, current prices were again back to Php 65 per kilogram and industry experts predict that prices in the local market would remain at these levels for the rest of the year.

Supply DriversIt is important to probe the underlying factors that determine the behavior of corn production and consumption in order to understand the industry and design effective development strategies. As highlighted in the previous chapter, supply cannot catch up with demand. Hence, demand factors may not be as critical as supply factors. Moreover, demand is expected to expand as Filipinos become more affluent and increase their demand for meat products. The key issue therefore is to understand the underlying factors that drive supply so appropriate strategies can be mapped out to address the lack of supply. There are a number of factors that affect the decisions of farmers to produce corn. These include price of corn, prices of inputs such as labor, capital, agricultural chemicals, and land. Weather and level of corn imports also affect production of corn. Normally, as price of corn increases, farmers will increase production. However, if prices of inputs or costs of production as well as imports increase, farmers will not be encouraged to increase production. In what follows, each of these supply factors is first examined descriptively, particularly their effect on volume of production before modelling or statistically analyzing the simultaneous effects of this set of factors on the volume of production. To effectively compare trends of these variables in graphical form, the data were converted into indices with 1983 as the base. Thus, all figures in 1983 are converted to a base of 100. Indices above 100 implies an increase from the base and those below imply a decrease from the base period.

To do:

Considering the pressing issue on the lack of supply of yellow corn due to high demand, supposed you are asked by the National Corn Competitiveness Board (NCCB) composed of representatives from the private sector, government and non-government organizations to examine the drivers affecting production corn. The board needs to understand some key supply issues in order to formulate strategies.

A.Using Table 1 data, analyze the factors that affect supply or production of yellow corn.

1) Qualitative analysis

1) Convert the data into indexes with 1992 as the base year ie divide all years by 1992 figure.

2) Understand trends or behavior of data by plotting volume of production and each of the factors affecting it against time or year. ie volume and price vs time (plot volume and price in the y axis and time or year in the x axis), volume and area vs time, etc. (Note: data plotted are in indices).

3) Analyze trends ie describe the graphs

2) Quantitative analysis

1) Define a supply/econometric model using the volume as dependent variable and the other variables in table 1 as independent variables

2) Estimate the model using excel or spss.

3) Analyze results including validity of the model

Table 1. Corn supply statistics, 1983-2001.

Year

Dependent

Independent

Volume

Corn price

(Pesos)

Corn wage

(Pesos)

fertilizer price (Pesos)

Corn area (hectares)

Corn imports (metric tons)

Total area for banana, pineapple and sugar

Machinery

(million P)

1983

778260

1.79

15.2

157.56

588060

528,441

61948.8

637

1984

961767

2.92

18.65

236.32

689300

182,401

59707.6

159

1985

885028

3.57

23

229.47

667450

281,178

58684.8

66

1986

1165606

3.47

25.64

172.08

832260

159

61484.6

89

1987

1513409

3.58

28.01

169.05

989980

55,814

63715.1

138

1988

1569073

2.93

32.46

197.63

1000220

25,132

61055.2

293

1989

1599282

4.54

37.98

218.86

986850

153,944

61502.5

529

1990

1888334

4.74

46.93

231.83

1081020

343,007

39865.5

517

1991

1749335

3.39

52.59

318.94

1006090

314

38063.8

499

1992

1919265

5.03

59.83

294.74

980520

604

40345.4

445

1993

2170928

4.57

65.84

245.24

1050970

648

43320.4

693

1994

2429341

6.2

74.03

271.51

1139950

894

44383.4

815

1995

2266087

7.39

86.98

310.71

1022014

208,024

44643.7

687

1996

2268245

7.71

91.29

325.1

1040108

405,440

45768.4

822

1997

2453208

7.63

96.86

313.28

1026911

302,957

41126.1

1012

1998

2202719

8.36

104.1

345.29

902959

470,032

38327.5

806

1999

2760759

8.51

120.57

335.76

1034453

149,460

38092.3

833

2000

2621766

9.26

137.4498

349.72

936934

447,938

44102

881

2001

2715061

9.43

156.6928

386.53

959795.2

172,729

44768.5

850

Sources: Philippine Institute for Development Studies and Philippine Fertilizer Authority

B.Using the analysis or findings you have in 1, what strategies can you recommend to the NCCB?

An econometric model on demand for corn was estimated in this study and shows significant relationship between volume of corn produced (as proxy of corn consumption) and livestock and poultry inventory.

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