What’s up, pork? (Part Two)

March 19, 2021

by Rosario Guzman

(Read Part One)

Mishandling ASF

As with the COVID-19 pandemic, the initial official reaction to ASF was denial. As the plague spread, the next government line was to reassure the public that pork was safe to eat, which was even communicated in a joint declaration by the agriculture and health secretaries.

But not for long, government’s default would be more apparent in the lack of efficient and adequate border controls and quarantine checkpoints and lack of compensation for hog raisers’ losses.

The DA initially implemented the 1-7-10 protocol in suspected areas to control the disease. Hogs within a 1-kilometer (km) radius from the site of infection are prohibited from entering or leaving the area and are to be eventually culled. Hogs within the 7-km radius are under surveillance and for testing, while within the 10-km radius, the DA implemented mandatory monitoring and reporting of disease occurrences.

The government at first decided to compensate backyard farmers Php3,000 for every pig culled, which however means only about one-third of the estimated market value of Php10,000 per pig. As a result, many farmers did not volunteer when their hogs were sick, which did not help in containing the disease.

The DA then made an earnest request to the president’s cabinet to increase the compensation amount and to tap the “contingency fund” of the office of the president for this. The DA’s “quick response fund” apparently could not be instantly used. President Duterte raised the compensation to Php5,000 per culled pig and approved a Php1-billion fund. By simple computation, the government was apparently expecting only about 200,000 pigs to be depopulated.

The government obviously underestimated the problem, or simply chose to belittle it, as several farmers and hog raisers groups have observed. By May 2020 and without extensive communication, the DA would modify the protocol through its Administrative Order 22 of 2020 to subject only the pigs within 500 meters from the affected farm to mandatory culling. The DA justified this by saying that only 13% of the pigs culled were actually ASF-infected, which if  true only reflected badly on government’s testing and monitoring. But the true reason is government’s lack of funds to contain ASF and to indemnify the hog raisers.

The latest DA press statement claims that the government has already released about Php1.3 billion to ASF-affected hog raisers. But the latest official number of hogs culled is 425,867, which should cost around Php2.1 billion in hog raisers’ compensation. Still, farmers and hog raisers groups as well as industry players contest that the actual figure of culled pigs is around 4.7 million. The government it seems has simply downplayed the figures and allowed huge losses to happen.

The country’s hog industry is largely backyard, comprising 71% of inventory as already mentioned. Despite the fact that commercial farms lost more than two-fifths of their hog population in 2020, losses of backyard farms are far more devastating and irrecoverable. Backyard raisers have minimal profit margins between feed and medicine costs and farmgate prices that do not yet include transport costs. Not only is the compensation amount problematic in this regard; the government’s price cap reflects only the commercial farmgate price, which has only forced the backyard raisers to liquidate sows and smaller hogs and go bankrupt. This is the main reason why the situation does not merit importation.

Faulty logic of importation

The oft-repeated justification by economic managers for liberalizing importation is that it lowers domestic retail prices for the benefit of consumers. There is a dose of irrationality when the government pits consumer welfare against the very continuation of domestic producers, and especially now under the lingering economic effects of the pandemic. In our agrarian economy, majority of consumers are the direct producers themselves, who on the other hand are still reeling from the impact of one year of lockdown.

In short, government’s main concern should only be recovering the domestic economy and spurring demand through substantial budgets for economic relief and stimulus. But this does not appear to be its economic logic.

The government argues that the high pork retail prices will eventually seek the level of the low imported pork price only if government increases the imports volume and lowers the tariff. But there appears to be anomalies in this argument. 

The DA has proposed to Malacañang to make a giant leap in the MAV of pork imports from the current 54,210 MT to 404,210 MT. The agency also wants to lower the bound tariff rate on pork imports from the current 30% on quantity within the MAV to 5% in the first six months of the implementation of the proposal, then to 10% in the succeeding six months. The current out-quota tariff of 40% (applied on quantity outside the MAV) is also being proposed to be reduced to 15% in the first six months and 20% in the next six months.

This is anticipated to be a huge, overwhelming onslaught of pork imports unprecedented in the country’s history. Indeed, we had imported pork higher than the MAV – an annual average of 182,000 MT in the last 12 years, reaching the highest 332,000 MT in 2018. The Bureau of Animal Industry (BAI) reports a total of 233,000 MT of pork imports in 2020. But the country has never yet imported more than 400,000 MT and at such vastly reduced, very low tariff rates.

But what is perplexing is that import-licensees do not fully utilize their MAV allocation every year. In 2020 for instance, only 47,612 MT were imported under the MAV allocation of 54,210 MT. Yet, the country is importing beyond the MAV also every year. In 2020, 185,363 MT of pork imports arrived without MAV allocation.

This does not make sense if one is simply to assume that a liberalized foreign trade regime is fair and benign; but it is not. The only plausible explanation why importers seemingly would rather pay the out-quota tariff of 40% instead of the in-quota tariff of 30% is the prevalence of technical smuggling. In short, they do not pay the tariff.

Pork importers may go around the two-tiered tariff system and break through these tariff walls by mis-declaring pork imports as pig fats and pig offal, which are slapped with only 0-5% tariff and 3-10% tariff, respectively. Indeed, pig fats (with rind and skin) and pig offal consistently comprise about 65% of pork imports volume.

Gira compared ‘mirror data’ that is based on major exporters’ declarations of product shipped to the Philippines with the ‘direct data’ of importation that is reported by the Philippine system. The firm found out that part of the imports reported by the Philippines as offal are in fact pig meat.

Increasing the MAV and lowering tariff thus appears to be only about legalizing the huge importation of prime pork cuts and bellies at 5% tariff, which is already happening.

The other anomaly is price. The 204,000 tons of pork imports in 2019 arrived at an average import price of US$1,878 per ton. At the prevailing average exchange rate of Php51.80 that year, the landed cost per kilo is estimated to be Php126.45 at 30% tariff or Php136.18 at 40% tariff. Adding about Php35 per kilo to the landed cost (with 30% tariff), based on calculations by industry players to represent storage and delivery costs, imported pork was ready for retailing at Php161.45 per kilo.

On the other hand, the farmgate price of hogs upgraded for slaughter in 2019 was at Php105.69 per kilo for backyard raisers (Php110.47 for commercial raisers). As carcass, the price reached Php157 per kilo CWE. Hog raisers and meat sellers estimate that production cost plus mark-up across value chain is about Php200-250 per kilo.

This shows that prior to retailing mark-up, imported pork is indeed cheaper by Php39-89 per kilo than the domestically produced pork, notwithstanding the former being frozen.

Having said that, the retail price remained high. Pork retail price in 2019 reached Php330 per kilo, based on Gira calculations. Of course, government will argue that it’s because the volume of imports was not large enough to affect prices. On the other hand, based on PSA data, the average retail price of pork lean meat in 2019 was Php215.96 per kilo, which means that domestic meat sellers (unlike their importer counterpart) were selling at a very minimal mark-up. But then again of course, the government will argue that it’s because the volume of imports was not large enough for meat sellers to choose the more profitable commodity.

But despite government’s uncompromising adherence to importation, statistics show an opposite trend – retail price goes the same direction as imports volume. For instance, from 2010-2012 when volume decreased from 174,000 MT to 149,000 MT, retail prices also went down. Likewise, when importation heightened afterwards, especially from 2016 to present day, retail prices also increased so much. This only suggests that the Philippine pork market may be too concentrated or monopolized for one to project a straightforward price structure and direction.

The other anomaly related to price is the global market. Global pork prices have risen due to tight supply, and China has absorbed higher volumes off the world market. It is the elevated global prices that incentivize global producers.

The US Department of Agriculture (USDA) forecasts global pork production and exports to be 2% and 3% higher, respectively in 2021. China will recover from ASF, as its producers are also aggressively taking advantage of high hog prices, although remaining below pre-ASF levels. At any rate, China’s import demand will remain high by historical standards, still pushing up global prices.

Still, the Philippine government has opted to rely on pork imports, while neighboring countries are already rebuilding their growth post-ASF.

Hogging all benefits

The Duterte government is clearly thinking of the welfare of businessmen. Meat importers and traders, the meat processing industry (whose main commodities apparently are pork offal and pork fats, along with bellies and mechanically deboned meat) as well as the big hog raisers stand to benefit from lower tariffs. In the Philippine economic system, we may well be talking of the same entities. For instance, San Miguel Food of the country’s largest conglomerate San Miguel Corporation is the largest pig grower and also the number one meat processing company.

Import liberalization also definitely benefits the global exporters, particularly the US hog and meat corporations, that are taking advantage of China’s slump. It also benefits the ‘commissioning’ DA officials who get kickbacks from importers, whom Senator Panfilo Lacson has recently alleged.

Import liberalization will only increase the amount of money that big businesses already have, instead of benefitting the consumers in the short and long term, and while leaving the backyard hog producers and small meat sellers to attempt to rise above the deluge of imports.

Simulating the 2019 figures aforementioned, importers profit Php168.55 per kilo, or a profit rate of 104%, while local meat producers are barely breaking even. Lowering tariff to as low as 5% will only add Php59.31 per kilo to the importers’ profits and tremendously increase their profit rate to 223%; it will not benefit the consumers, much less recover the hog industry.

Industry players and consumer advocates estimate that the government stands to lose on the other hand tariff revenues of about Php11.8 billion. This is while hog raisers are asking for just Php8 billion in production support.

Simulating the 2019 importation data alone, a shift from 30% to 5% tariff applied on 400,000 MT will result in Php9.7 billion in revenue losses. The amount is enough to provide Php15,000 each to more than half a million of the estimated 1.5 million hog farms in the country, which farmers’ groups are demanding. The amount may be used to give almost a million of the affected farmers cash aid of Php10,000 each – the relief they never had in one year of lockdown.

The amount also proves that the government, only if its priorities are straight and sensitive to the majority, does not have to provide so-called assistance to the farmers and hog raisers in the form of loans. It can ensure direct support as well as socioeconomic relief for the millions of farmers worst affected by the lockdown.

Certainly, the Duterte government can do a lot of things to recover domestic hog production, consumer capacity and the national economy. But it has just opted to cater to private profits, foreign pressures and whims of public officials. And they have just been hogging everything to themselves, as they have done during the pandemic lockdown and beyond.