Pricing policy in the Philippine feedgrain and livestock sectors

Abstract

Government policies have over the years created an incentive structure in the Philippine livestock sector that is significantly adverse to the hog and cattle industries and favourable to the poultry industry. Previous studies indicate that the country enjoys a comparative advantage in the former but not in the latter. The government may not have put the country's scarce resources to their best possible use and policy reforms should therefore be undertaken. This study provides an insight into the possible consumption, production, foreign trade and welfare effects of an alternative price policy scenario consistent with the objectives of the Philippine Tariff Reform Programme. The study, however, deals with a more radical change - a total elimination of effective price distortions in the hog and poultry industries - than the Reform Programme. Quarterly data from 1974 to 1983 were used for stochastic simulation model of the Philippine livestock and feedgrain sectors. The model features three-commodity dynamics, endogenous price policy behaviour and endogenous stock-holding behaviour. The model exhibited reasonable econometric properties and fair forecasting accuracy despite the limitations of the model and the data used. The policy experiment indicates that a movement towards equal zero effective protection of the hog and poultry industries would be desirable on overall social welfare grounds and consistent with the country's pattern of comparative advantage. Producers, primarily the hog raisers, are the 'gainers' from the policy change while consumers generally are the 'losers'. Backyard or 'poor' hog farmers would gain more than the commercial or 'rich' hog farmers. In the poultry sector, a proportionately smaller amount of the sector's total loss is shared among the backyard farmers. The differential nature of consumption between the 'poor' and 'rich' consumers, although not very significant, may also suggest that 'poor' consumers are less penalized by the change in policy than 'rich' ones. An interesting outcome of the policy experiment is the projected transformation of the country from a net meat Importer under the reference forecast to a net meat exporter under the new policy forecast. This comes about mainly from the large increase in pork production resulting from a marginal increase in the nominal protection rate.