VZCZCXRO1851
OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHML #1031/01 1211103
ZNR UUUUU ZZH
O 301103Z APR 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0537
RUEHRC/USDA WASHDC IMMEDIATE
INFO RUCNASE/ASEAN MEMBER COLLECTIVE IMMEDIATE
RHHMUNA/CDRUSPACOM HONOLULU HI IMMEDIATE

UNCLAS SECTION 01 OF 03 MANILA 001031 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MTS 
EEB/TPP/ABT/ATP FOR JANET SPECK 
 
E.O. 12958: N/A 
TAGS: EAGR ECON RP
SUBJECT:  IMPACT OF RISING PHILIPPINE FOOD PRICES 
 
REF: A) SECSTATE 39410, B) MANILA 00838 
 
¶1.  Summary:  Rising international food prices will hurt the 
Philippine economy and most Filipinos because of widespread poverty 
and dependence on grain imports.  The Philippine government's 
intervention to make rice available for low-income families at 
subsidized prices has prevented major public protests or violence. 
Philippine President Gloria Macapagal Arroyo has committed P43.7 
($1.05 B) billion in support of a package of programs to guarantee 
stable supply and prices in rice and other food crops.  Growing food 
subsidies will challenge efforts to balance the government budget. 
We believe Washington should consider providing some funding for the 
International Rice Research Institute, an excellent institution 
which the USG has supported strongly in the past. End summary. 
 
Philippine Demand for Grain 
--------------------------- 
 
¶2.  The Philippines is a net importer of rice, corn and wheat.  Rice 
sold by the state-controlled National Food Authority has remained at 
a subsidized rate of P18.25 per kilo (about $0.43 at the current 
exchange rate of P41.7:$1) while commercial rice has risen to around 
twice the subsidized price.  Corn grits, priced at P16 per kilo in 
December 2007, currently sell at P30 per kilo.  The price of wheat 
flour per 25-kilo bag has gone up from P840 in January to P990 in 
April.  Bread, meat, fish, poultry, and vegetables have all 
increased in price this year.  Domestic production of rice equals 90 
percent of consumption, and domestic corn production equals 80 
percent of consumption, while wheat is 100 percent imported. 
 
Living on the Edge 
------------------ 
 
¶3.  The food consumption habits of the 40 percent of Filipinos who 
survive on less than two dollars per day are very price sensitive. 
Consumption of (subsidized) rice increases as prices of other foods 
go up.  Food expenditures take 60-70 percent of the income of the 
poorest 30 percent of Filipino families.  Surging food prices will 
worsen the country's already high poverty rate.  Recently released 
government poverty statistics indicate that the ratio of poor 
Filipinos not able to afford basic food and non-food needs increased 
from 30 percent in 2003 to 33 percent in 2006, or about 28 million 
Filipinos who did not have adequate income to meet basic needs in 
¶2006.  About 45 percent of these poor Filipinos subsisted below 
government-established food-poverty thresholds.  The Philippines has 
large income disparities between regions: the National Capital 
Region has a 10.4 percent poverty rate, while Muslim Mindanao has a 
62 percent poverty rate. It is worth noting, however, that the bulk 
of the poor in the Philippines live in rural areas, many earning 
their livings from agriculture.  The increase in agricultural prices 
is benefiting many of them. 
 
Food, Inflation, and the Balance of Payments 
-------------------------------------------- 
 
¶4.  Food accounts for 47 percent of the Philippines consumer price 
basket.  Grains comprise nearly 30 percent of overall food 
expenditures in the basket, followed by meat and poultry at 16 
percent.  Rice alone makes up 20-25 percent of the food basket. 
Year-on-year consumer price inflation has been accelerating, led by 
food.  Inflation averaged 5.6 percent during the first quarter of 
¶2008.  Food price inflation accelerated to 8.4% in March 2008, with 
average (subsidized and non-subsidized) rice prices up 11 percent, 
corn by 8.4 percent, cereal preparations by 11.3 percent, and 
meat/poultry up by 7 percent.  Current plans are for the Philippines 
to import 2.1 million metric tons of rice during 2008 (up from 1.8 
million metric tons purchased in 2007).  The total import bill for 
rice in 2008 could jump to about $1.7 billion - up from $600 million 
in 2007.  However, the government expresses confidence that the 
balance of payments will end 2008 in surplus since international 
reserves and overseas workers remittances both reached news high in 
March 2008. 
 
Where will it come from? 
------------------------ 
 
¶5.  Currently, Philippine rice cultivation covers 2.3 million 
hectares of land.  This year the country aims to increase domestic 
production of un-milled rice to a record 17.32 million tons, up 
seven percent from last year (16.24 million tons), but the National 
Food Administration will still need to import well over two million 
tons of rice to meet demand.  Corn production has also been 
increasing due to the rise in corn prices.  Studies indicate that 
after a good harvest in 2007, rural household stocks of rice 
increased.  Rice farmers store 20 to 40 percent of their harvest at 
home.  Due to increasing prices, rural households have been selling 
 
MANILA 00001031  002 OF 003 
 
 
more rice to commercial traders, but less to the Food 
Administration, which pays less than the top commercial rates.  As a 
result, agricultural experts estimate that current household and 
commercial rice stocks are high, while Food Administration stocks 
are low.  The current national rice inventory should be sufficient 
for roughly 50 to 55 days, well within the normal range for this 
time of year. 
 
Limits to Growth 
---------------- 
 
¶6.  Budgetary constraints will limit recent policy initiatives to 
increase food production and agricultural investment.  The 
government has temporarily halted conversion of lands classified as 
agricultural to other purposes, and hopes to increase the amount of 
land devoted to the rice production.  Current loses during drying, 
storage, transport, milling, and distribution of rice and corn range 
from 20 to 40 percent.  Waste and inefficiency characterize each 
link in the existing supply chain.  USAID has programs in the 
Philippines that promote agricultural productivity and elimination 
of transport and supply-chain bottlenecks.  U.S. agencies also 
support agricultural biotechnology and the use of biofuels.  As 
requested, U.S. agencies will work with the government on a review 
of current grain policy and programs, particularly the operation of 
the National Food Authority. 
 
¶7.  Rising international rice prices are aggravating the already 
shaky finances of the National Food Authority, which, as of 
end-2007, had a negative net worth of over 50 billion pesos ($1.2 
billion) and outstanding liabilities of about 70 billion pesos ($1.7 
billion).  Food Authority officials estimate that a $1,000 per 
metric ton import price equals about P50 pesos per kilo, over twice 
the subsidized price.  The Authority's debt represents contingent 
obligations on the part of the National Government and poses a 
growing threat to the longer-term stability of public sector 
finances. 
 
Political Impact 
---------------- 
 
¶8.  There have been no major public protests or violence associated 
with the rice issue thus far, only a few scattered protests 
involving a few people.  The government's extraordinary efforts to 
make subsidized rice available during the month of April (described 
ref B) ensured that, for now, low-income families have rice at 
affordable prices.  However, there is still the possibility that 
people will take to the streets if food prices continue to rise. 
The situation has given traction to labor groups that seek wage 
hikes.  There could be food-related demonstrations during the May 1 
Labor Day holiday.  The food price increases have served as a 
wake-up call for the Arroyo administration to reassess its overall 
agricultural policies and programs.  President Arroyo is responding 
to concerns about the impact of higher food prices in part by 
supporting a legislative proposal to exempt minimum wage earners 
from income tax. 
 
¶9.  Over the longer term, rising food prices may add to pressure on 
the country's natural resources.  Much depends on policy choices 
regarding land use patterns.  The rice issue has sparked public 
debate about whether to suspend implementation of the recently 
passed Biofuels Act.  A senior Philippine Senator has charged that 
biofuel production threatens the availability of food.  However, 
others argue that biofuels are not a factor in recent food price 
increases. 
 
¶10.  Philippine legislators resumed sessions April 21 with pledges 
to help solve the rice/food issue.  Proposals include funds for 
upgrading and repair of irrigation systems, financial assistance for 
farm inputs, and re-aligning roles for the Philippine National Food 
Authority.  President Arroyo committed to allot P43.7 ($1.05 B) 
billion for an agricultural package aimed at providing the country 
with a stable food supply.  The President also announced her 
intention to fund hybrid rice seed subsidies to farmers, increased 
irrigation and higher Food Authority buying prices for un-milled 
rice. 
 
The International Rice Research Institute 
----------------------------------------- 
 
¶11.  The USG has supported the International Rice Research Institute 
(IRRI), an excellent organization which has made a huge contribution 
to rice production worldwide, to the tune of more than $200 million 
since 1970.  A tight budget led to elimination of the small 
remaining funding for IRRI this year.  Post believes that, if 
funding could be found, providing some resources to IRRI would have 
tremendous public diplomacy advantages while making a real 
 
MANILA 00001031  003 OF 003 
 
 
contribution to the long-term solution to food price issues. 
 
Kenney