Driven by economic reform and robust domestic consumption, the Philippines now ranks among the fastest-growing economies in the world, after seven consecutive years of GDP growth above 6%. Despite this, however, the agriculture sector has struggled to reach its true potential. While the country is well positioned to tap into new export markets, volatile weather conditions, land reform issues and a legacy of neglect continue to hinder agricultural output. In addition to these constraints, the Philippines lags behind regional competitors in mechanisation adoption rates, crop research and access to finance.
Despite these shortcomings, some products have had notable success in local and international markets in recent years, including Cavendish banana, pineapple and sugarcane, which benefit from large-scale production, price transparency and reliability. However, other products continue to suffer from low yields due to poor infrastructure, insufficient inputs and land fragmentation, making investment in mechanisation financially unviable. While the sector has suffered from low total factor productivity – a measure of land, labour, capital and material resources used in production, compared to total agricultural output – the country has natural attributes that make it well placed to achieve greater agricultural diversification and productivity. “With the appropriate policy adjustments, more investment can be channelled into agri-business ventures,” Rolando T Dy, head of the University of Asia and the Pacific, Centre for Food and Agri-Business, told OBG.
Players have identified the key areas that need to be improved in order to increase productivity and ensure Philippine agricultural products are globally competitive. “The three priorities for the development of the agriculture sector are access to finance, knowledge transfer and upgrading infrastructure,” Ramon Segismundo, president and COO of Hijo Resources, told OBG.
Structure & Oversight
Agricultural production is distributed across the country, with about 32%, or 9.67m ha, of the Philippines’ total landmass categorised as agricultural land, of which 51% is arable and 44% is permanent cropland. In terms of oversight, sector policy is spearheaded by the Department of Agriculture (DA) under the leadership of Emmanuel Piñol, secretary of agriculture. Other key bodies involved in the sector’s administration and development include the Agricultural Credit Policy Council, the Department of Trade and Industry, and the Fisheries Development Authority.
Production
The production of rice, known locally as palay, is largely concentrated in Central Luzon, Cagayan Valley and Ilocos, which account for 19%, 13% and 10%, respectively, of total national production. Cagayan Valley is the largest producer of corn, generating 23% of national production, followed by Northern Mindanao (17%) and Soccsksargen (16%). Meanwhile, Davao is where the most coconuts and bananas are cultivated, with a respective 15% and 38% of all production, while Western Visayas grows 59% of the country’s sugarcane.
The production of livestock breaks down into four main categories: pigs, cattle, carabao (water buffalo) and goats. Central Luzon and Calabarzon are the largest pig-farming regions in terms of production; Northern Mindanao, Ilocos and Calabarzon are the main producers of cattle; the top-three carabao-breeding regions are Western Visayas, Davao and Eastern Visayas; and the biggest producers of goats are Ilocos, Central Visayas and Central Luzon. Central Luzon is the main source of chickens, ducks and duck eggs, while Calabarzon is the main producer of chicken eggs.
Mindanao is an important contributor to the fisheries segment. The Bangsamoro Autonomous Region in Muslim Mindanao is the province with the largest volume of fish production, totalling 856,152 tonnes in 2017. In addition, the Zamboanga Peninsula region accounts for almost 70% of the country’s overall sardine production. Central Luzon also plays a leading role in the segment, with the region being the source of 40% of tilapia production and 50% of tiger prawn production. Meanwhile, Ilocos accounts for the most extensive catch of milkfish, Calabarzon of round scad and Soccsksargen of skipjack and yellowfin tuna.
Agricultural Policy
One of the most notable changes to legislation in recent years has been the lifting of restrictions on rice imports under the Rice Tariffication Law, passed by the legislature in November 2018 (see analysis). Effective from March 2019, the new law lifts quantitative restrictions on rice imports and removes the import monopoly of the National Food Authority (NFA). Aimed both at bridging the supply gap and reducing prices, the new law has been met with mixed reactions. While the previous policy of capping rice imports was aimed at protecting rice farmers, it intensified inflationary pressures when domestic producers could not meet demand.
The new law is expected to ease supply-side pressures contributing to inflation by allowing private operators to bring in rice directly from abroad, which was not an option when imports were strictly controlled by the NFA. Under the new regulations, ASEAN rice imports are subject to a 35% tariff, while non-ASEAN rice imports are subject to a 50% tariff. However, concerns that increasing rice imports could harm the earnings of small-scale Filipino rice farmers saw lawmakers approve a funding mechanism of P10bn ($186m) per annum through 2025 that will be financed through the import tariffs and used to enhance the competitiveness and productivity of local farmers. This funding mechanism is aligned with President Rodrigo Duterte’s 10-point socio-economic agenda, which highlights rural investment and value chain development as key areas. Despite the gradual shift towards a consumption- and services-driven economy over recent decades, the agriculture sector still accounts for around 30% of the labour force, with the majority being subsistence farmers, making it a vital element of governmental efforts to pursue inclusive growth.
While recent reforms are likely to boost the sector, the impact of some legacy programmes remains a source of debate. The Comprehensive Agrarian Reform Programme (CARP) was initiated in 1988 with the aim of promoting inclusive growth and enhanced agricultural productivity. Under CARP, private and public farmland of an extension greater than 5 ha was to be redistributed to landless farmers, farm labourers and tenants, regardless of prior tenurial contracts or productivity.
Since its introduction, an estimated 83% of total agricultural land in the country has become subject to CARP procedures. As a result, the average farm size has been reduced to 1.29 ha from the 1980 average of 2.84 ha. Some 57% of farms are now less than 1 ha and only 0.03% have an area of 50 ha or more. Land transactions remain complicated and continue to hinder investment in the sector. Although CARP was successful in its efforts to eliminate the hacienda estate system, save for the sugar-producing province of Negros Occidental, the programme has since lost political appeal and consequently witnessed a continued decline in funding.
Although there has been success in eliminating inefficient tenancy agreements, many smallholders still lack the expertise or access to capital and technology to enable them to transition from subsistence and smallscale farming to agri-business. In addition, CARP has been a notable hurdle to mechanisation. The fact that land is divided into smaller areas makes it difficult for businesses to expand and increase their output. Thus, it is not possible to invest in updates to farming methods.
Since 2000 Congress has significantly reduced the budget for land acquisition and distribution. In addition, Congress directed the Department of Agrarian Reform to focus on support services for land reform beneficiaries rather than the acquisition of new private land. In recent years, the Duterte administration has received criticism from some quarters for allowing the use of agricultural land for non-agricultural purposes.
Economic Contribution
In terms of gross value, agricultural production rose by more than 4% yearon-year (y-o-y) in the fourth quarter of 2018 to reach P521.2bn ($9.7bn). Agriculture, hunting, forestry and fishing contributed 8.9% to GDP in the same quarter. According to data from the Philippine Statistics Authority, crop production accounted for 50.4% of total agricultural output, equivalent to P295.4bn ($5.5bn) in value terms, during the final quarter of 2018.
Performance was mostly positive among the country’s key crops. It is true that as a result of typhoons in some of the country’s major rice-producing areas, rice production declined by 2.2% y-o-y in the last quarter of 2018. However, over the same period, corn production grew by 10.8%. Other important products, such as coconut, banana, pineapple, coffee, mango, tobacco, abacá, mung beans, tomato, onion, cabbage and rubber, also witnessed an uptick in production. In the final three months of 2018 livestock, poultry and fisheries production expanded y-o-y by 1.64%, 6.99% and 1.93%, respectively. Over the quarter, livestock production accounted for 17.7% of total agriculture output, poultry production accounted for 16.2%, and fisheries accounted for 15.7%. While the fisheries sector has long served as an important generator of national income, there are suggestions that further reforms could help ensure a sustainable future for the industry. William Tiu-Lim, founder and CEO of fisheries firm Mega Global, told OBG that the establishment of two distinct fishing zones in south-east and south-west Luzon could be positive for food security. This would allow each zone to have alternate recovery periods in commercial fishing areas, thereby enabling stocks to replenish.
Farm gate prices increased by an average of 5.6% between January and December 2018, which is marginally higher than the headline full-year inflation rate of 5.2%. Average prices received by farmers grew by 2.2% y-o-y in the fourth quarter of 2018. Meanwhile, the average price of crops increased by 1.9%, livestock by 5.7% and fisheries by 7.8%. Poultry production, by contrast, recorded a decline of 4.9%.
Agricultural Trade
At present, the Philippines is a net importer of agriculture products. During the first quarter of 2018 agriculture imports increased by 4.2% y-o-y to reach $2.99bn, compared to $2.87bn in the first quarter of 2017. Cereals continue to dominate demand, accounting for $569m of agricultural imports in the first three months of 2018. This was followed by residues and waste from food industries, which represented $383m of imports, while the miscellaneous edible preparations segment was the next-largest contributor to the import bill, accounting for $326m.
The country’s export earnings from agricultural products continue to be an important pillar of economic growth. As far as revenue is concerned, animal and vegetable fats, as well as oils and their cleavage products, remain the country’s top agriculture export, totalling $310m in the first quarter of 2018. Edible fruits and nuts are the second-largest earner of export revenue, with $271m in the same quarter, followed by preparations of vegetables, fruit, nuts or other parts of plants as the country’s third-largest export earner, with $116m over the same period. The Philippines also exported $1.16bn of farm goods, which constitutes a 26.2% decline compared to the same period in 2017.
Cavendish banana, the Philippines’ leading export commodity in terms of quantity, has witnessed a drop in production, as Panama disease – a soil-inhabiting fungus species – coupled with volatile weather continue to plague vast areas of agricultural land. A drop in demand from China, as it grappled with US trade sanctions and a domestic economic rebalancing in 2018 and early 2019, also played a part in the reduction of export revenue, and has weighed heavily on banana farmers.
According to reports from the Mindanao Banana Farmers and Exporters Association, Panama disease is the leading cause of the decrease in production in Northern Mindanao, Panabo City, Kapalong and Asuncion in Davao del Norte, as well as in Calinan in Davao City. Meanwhile, drought caused by the El Niño phenomenon has caused some farmers in Davao del Norte to abandon their banana production for corn and palm oil. As yet no cure has been found for Panama disease, which continues to affect banana production. However, in an effort to alleviate the strain imposed by the devastating fungus, the High-Value Crops Development Programme (HVCDP) under the DA in Davao Region has been helping banana farmers combat the disease. Estimates from the HVCDP suggest that in the first quarter of 2019 the disease’s extension had declined to 5000 ha, down from 15,000 ha in 2015. As part of its efforts, in 2018 the HVCDP introduced the Giant Cavendish tissue-culture variant 218, a clone that is resistant to Panama disease. While these measures have played a significant role in mitigating the effects of the disease, the clone variant has proved to have limited demand in certain important markets such as China.
Agro-Industry
The DA has set ambitious targets to become a net exporter of agricultural products, which will require substantial investment across the agricultural value chain. “The department needs to develop and implement agriculture and fishery standards that are in line with international standards,” Dy told OBG. “There are major export opportunities that can be better exploited, such as the production of high-value rice varieties, but mechanisation rates need to be improved alongside government regulatory capacity.”
Creating more resilient crops has been identified as vital to enhancing agricultural competitiveness. As such, the DA has advocated for the use of hybrid seeds to increase the rice yield, with the goal of planting 1m ha with hybrid rice by 2020, at an estimated cost of P15bn ($279m). The DA’s goal of creating more resilient crop varieties through the use of hybrid seeds has been met with wide support from the business community, as genetically modified crops should improve productivity, promote self-sufficiency and spur overall development.
In parallel with the fall in the agriculture sector’s contribution to GDP in recent decades, a number of segments have also witnessed contractions. For example, in 2018 the fertiliser segment declined by approximately 1.8% compared to the previous year.
Irrigation
A number of promising initiatives have been undertaken in recent years to spur rice yields, including efforts to enhance irrigation systems, farmto-market roads and post-harvesting facilities. In addition to local government efforts, the World Bank approved $170m of additional financing for the Philippine Rural Development Project in early 2018. The project has been designed to increase farmer incomes and develop rural infrastructure such as roads, irrigation systems, greenhouses and composting facilities.
According to the National Irrigation Administration (NIA), there are three types of irrigation systems in the country: national irrigation systems (NIS), communal irrigation systems (CIS) and private irrigation systems (PIS). The NIS are the largest in size and are operated and maintained by the NIA, with beneficiaries charged a fee for the delivery of water. CIS are smaller systems built with the participation of farmer-beneficiaries through their irrigators. Once completed, the CIS is turned over to irrigators under a cost-recovery scheme pre-agreed by both the NIA and the irrigators. PIS, meanwhile, are constructed and maintained by private investors without technical assistance from the NIA.
In a bid to boost agricultural trade and water security, the DA signed a memorandum of understanding (MoU) with Hungary’s Ministry of Agriculture in March 2019. As part of the deal, Hungary has promised to share their technology and expertise to help the Philippines improve irrigation as well as expand access to clean and drinkable water. The MoU is also expected to increase market access for agricultural products between the two countries, which will include the high-value export of coconut products, fish, mangoes, copra meal, carrageenan, abacá and seaweed-based animal feeds.
On top of these efforts, the Japan International Cooperation Agency has agreed to restore and improve the national irrigation system under the JPY6.19bn ($56.1m) National Irrigation Sector Rehabilitation and Improvement Project. The project aims to restore about 2289 ha of service area in Visayas, which will help raise productivity and the incomes of 1266 farmers in the area.
Outlook
Forecasting the Philippines’ agricultural output is a difficult task given the archipelago’s geographic location within the Pacific Ring of Fire. While uncertain weather conditions pose a significant risk, investments in key infrastructure and value chain development will provide a buffer for future yields. Under the Philippine Development Plan 2017-22 the government is targeting an increase in the value of agriculture and fishery exports by 7% in 2019 and 9% every year thereafter through to 2022.
The rollout of new regulations is critical for the agriculture sector. While achieving consensus over reform measures is unlikely, the long-term success of the sector will be determined by the ability of policymakers to facilitate necessary imports and promote exports, as well as farmers’ capacity to enhance their productivity.
It is crucial to elaborate a regulatory and investment strategy that drives value-added agri-business and, over the long term, increases regional inclusivity. The challenges farmers face in scaling up are numerous. “Poor irrigation networks, limited farm-to-market roads and the inadequate provision of extension services hinder rural development and constrain income growth,” Oscar Torralba, independent director of the regional energy solutions provider Kaltimex Energy, told OBG. “The government also needs to address land mapping to promote efficient land use.” Going forward, land reform constraints and limited infrastructure will hinder farmers’ ability to respond to market demand. Furthermore, rice producers are facing added pressures due to the Rice Tariffication Law, which came into effect in February 2019. Bearing this in mind, greater access to credit is critical to improving productivity and facilitating a shift towards high-yield and high-value crops.
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