Posted on October 13, 2014 09:04:00 PM
Farmers need to look far into the horizon
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PRICE VOLATILITY is a common phenomenon among traded commodities. Prices are market signals of supply and demand. Supply is affected by production and stock levels. Production is influenced by farm yield, biological factors, supply disruptions, and climate. Demand is influenced by economic activity, population growth, product substitution, and speculation, among others.
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Many farmers cannot understand this volatility. They are happy when prices are high, and very unhappy when prices are low. For them, high prices should last forever, and low prices, transient.
Take rubber, for example. The recent price was P26 per kilo of raw rubber (at 50% dry rubber content) in Cotabato. It was about twice the level in 2011. China demand is a factor. When prices were high, there was so much interest in planting. Farmers bought even poor seedlings from uncertified nurseries. Lately, prices collapsed 50% and farmers are hurting. They complain. They lost interest in rubber. They want the government to do something. But in fact, the best time to plant is when prices are low.
Why are the rubber farmers complaining? Obviously, it is because their incomes are down. If they made more than P50,000 per hectare three years ago, now it is at best P26,000. They are much poorer. Price is beyond their control.
What comprises farm income? Principally, it is price and farm productivity. For traded products, price is driven by supply and demand. Productivity is driven by technology, such as use of good planting materials, planting density, and farm management.
The impact of price and productivity on income is multiplicative. High price and low yield can mean low income. Low price and high yield can mean the same. However, high yield is a very good buffer in times of low prices.
Farm yield is an important factor. The typical Filipino rubber farmer produces only 600 kilos of dry rubber (about 1,200 kilos of raw rubber) per hectare as compared to about 1,500 to 1,800 kilos per hectare for an Indian, Thai or Vietnamese farmer.
A rubber farmer getting only 1,200 kilos a hectare of raw rubber will get about P31,000 at a price of P26. At triple the yield, that is P93,000. In good times when farm prices are double, the low-yield farm gets P62,000 per hectare, and the high yield farms get a bonanza of P187,000!
A seasoned farmer once told me that he must keep excess cash from good times to tide over the bad times. His rule of thumb: one year of boom time, two years of average time, and two years of bad times. But the one year of good times can more than cover the bad times.
Many years ago while attending a rubber conference, I asked a seasoned Malaysian plantation executive how they recover from times of losses. His response was, they rode the ups and downs of a 30-year price cycle. They always come out ahead. For tree crops, an investor cannot think of only a five-year horizon, much less a one-year horizon.
Another example is Cavendish banana. In the past two months, the export price of Cavendish banana rose to an unprecedented $12 per box, more than double that of two years ago. Thus, even farms producing a dismally low 1,500 boxes per hectare are reportedly making money. One industry expert said that the dreaded Panama disease has ravaged banana farms worldwide. So, there was a lot of interest in expanding into Maguindanao. Soon, prices will correct, the unproductive farms will probably close shop and the productive ones will continue operating.
Let us analyze the price behavior of some commodities in the global market in the past 15 years. Bear in mind that actual farm prices would be based on world price times foreign exchange rate less internal costs, such as transport, processing recovery and margins. In the past 15 years, world prices posted “highs” in the last seven years.
• Coconut. Prices are high due to supply disruptions, from biological cycle to typhoons like Pablo and Yolanda. Prices are also correlated with the prices in the world market of vegetable oil, such as palm oil and soybean oil. Even at the price of P30 per kilo of copra, the farmers and workers remain dismally poor with yields averaging less than 1,000 kilos of copra per hectare per year, or just about P30,000 per hectare to be shared with the landowner, encargado and harvesters. Note that the poverty threshold is near P100,000 per family per year.
Given the reported shortage of good seedlings and the long gestation of coconut (from three to six years, depending on variety), the best way to get results is to intercrop with coffee, cacao and saba banana (18-24 months). This will have a faster impact on poverty reduction.
• Coffee. The price, specifically Robusta, was around P95 per kilo of beans in the last week of August depending on the bean quality. They were less than P80 per kilo about two years back. If the farmer produces only 500 kilos per hectare, he is poor. One needs about 1.5 hectares and a good yield of at least 1,000 kilos per hectare. The typical Vietnamese farmer produces more than 2,500 kilos from a one-hectare plot.
• Cacao. Prices are up by about 20% today (about P100 per kilo dried, fermented beans) from two years ago. But, as in coffee, a low yield of one-half kilo per tree under coconut trees will not bring farmers out of poverty. A minimum of 1.5 kilos per tree will bring in above-poverty income for a 1.5 hectare multi-crop plot. That is doable, as a new generation of cacao clones under good practice can yield two to three kilos per tree.
• Palm oil. The delivered price of fruit bunches to mills in Agusan, Maguindanao and Sultan Kudarat is about P4,500 per ton as of late August. At an average yield of 20 tons per hectare, a farmer needs about 1.5 hectares to earn above poverty income — less area if the yield rises to 25 tons per hectare or better. Oil palm’s advantage is its harvest of every 10 to 15 days.
• Sugar. This is saddled by low productivity, especially among small farms, among them agrarian reform beneficiaries. Exposing the industry to world prices means only the efficient farms will survive. The Thai farmers average 75 tons of cane per hectare. By contrast, half of the Filipino farmers make less than 60 tons of cane a hectare. In the arena of competition, there are far more efficient farmers in Thailand.
What are the main lessons? Price multiplied by productivity equals farm revenues. Deduct the costs, and there is net income. Commodity prices are uncontrollable. The law of supply and demand cannot be repealed or amended. But farmers have the handle on productivity, and to a certain extent on costs.
In agribusiness, the farmers’ horizon should be long-term because there will be years of bounty and years of scarcity. One has to average: to save during good times to cover the deficits of bad times. The equation is that simple. n
Rolando T. Dy is the chair of the MAP Agribusiness and Countryside Development Committee, and the executive director of the Center for Food and AgriBusiness of the University of Asia & he Pacific.