Thursday, 12 May 2011

Impressive agricultural numbers

Business Mirror

The numbers are good, the data important.

From the BusinessMirror: “The country’s farm sector posted a seven-year high growth of 4.1 percent in the first quarter on the back of a record-high palay output for the January-to-March period, according to the Department of Agriculture (DA).

“The growth of the agriculture sector in the first quarter was the highest since the first quarter of 2004, when the sector grew by 7 percent, the DA said on Tuesday. It attributed this growth to palay output, which registered an all-time high growth of 15.63 percent. Other contributors were corn, which grew by 19.5 percent, sugar cane, 26.73 percent, and banana, 2.72 percent, in the first quarter.”

From the Inquirer: “Philippine agriculture grew 4.1 percent in the first quarter of the year on the back of strong crop output, including an “unprecedented” palay (unmilled rice) harvest, the DA said Tuesday. The rice sector expanded to 4.03 million metric tons in the first quarter, “the highest rice volume we have seen since Filipinos started planting rice,” Agriculture Secretary Proceso Alcala told the media. “This was unprecedented.”

Why these increases? Secretary Alcala continued, “The biggest contributor here was our fast action in irrigation repairs. We gave priority to the repairs or rehabilitation of the irrigation systems.”

Twenty years ago it was easy to predict the Philippine gross domestic product (GDP). Take the percentage increase in agricultural production and multiply by 1.5. A 3-percent increase in the agricultural sector equaled a 4.5-percent increase in GDP. Almost like clockwork.

The reason for this direct correlation between the agricultural production and total economic activity was that, according to some very reliable studies, the total direct and indirect impact of agricultural on the economy was as high as 70 percent of the total economic output.

This is because of the Velocity of Money and the consumer spending multiplier effect. The Velocity of Money measures the rate at which money in circulation is used for purchasing goods and services. From Investopedia: “The rate at which money circulates, changes hands, or turns over in an economy in a given period. Higher velocity means the same quantity of money is used for a greater number of transactions and is related to the demand for money.”

There are only two things we can do with the money we earn; we can spend it or we can save it. Investments of any type are a form of savings as we do not exchange our cash for goods or services.

The savings rate of individuals here in the Philippines is low in comparison to those in other countries and by common thinking, this is not necessarily a good situation. However, it is not necessarily a bad situation, either. The savings rate in the United States is virtually zero because excess funds beyond basic necessities are used to pay off consumer debt. Here in the Philippines, the savings rate is low because of two factors—a large lower-middle class uses excess money to buy goods and services to increase their standard of living, and the fact that the country has a low consumer debt, meaning we buy with cash not credit.

In the agricultural sector, income is absolutely determined by production. More rice means more money and that money is spent not only on goods like a new television set, but also on services like education. Farmers earn and then they spend. Therefore, an increase of agricultural production has a very positive multiplier effect on the economy as the velocity of the farmers’ income is fast and the multiplier effect is wide.

A friend who owns a biscuit- manufacturing company sells almost all of their large tins of product in the rural provinces. A 4-percent rise in agricultural output means he increases his production by about the same amount, thereby increasing his work force, raw-material purchases, and other associated production and distribution costs by the same amount as the agricultural output increase. While a shrinking percentage of GDP, the agricultural sector is crucial to the economy for the individual income that it produces, not only just to fulfill the need for food self-sufficiency.

Now back to what the secretary said: “The biggest contributor here was our fast action in irrigation repairs. We gave priority to the repairs or rehabilitation of the irrigation systems.”

Unfortunately, the Philippines has, in effect, centered its agricultural policy on the Comprehensive Agrarian Reform Program (CARP), which has had some production successes but is not the jewel in the agricultural crown that its creators envisioned.

The key to Philippine agricultural is specific ground-level projects that will increase production and these can only be implemented through increased funding that requires increased funds. That is obvious.

Perhaps what is not so obvious is that there is a major problem with the way the Philippine government does business; there are too many overlapping areas of responsibility. Go to the DAR web site and you will read of the farm-to-market roads that agency has built. Go to the DA web site and read that this agency will spend some P5.3 billion on farm-to-market roads this year. Is this an overlap of reporting the same roads twice? If not, does the Philippine government truly need two agencies (or more, if the Department of Public Works and Highways is also involved) to handle the building of these roads?

The DAR offers farmer-training programs. The DA offers farmer-training programs. If “the Department of Agriculture is designated as the lead agency to boost farmers’ income and reduce poverty incidence in the rural sector,” wouldn’t it make more sense, be more efficient and less costly to make the DA the only agency “to boost farmers’ income and reduce poverty incidence in the rural sector?”

The agricultural numbers for this first quarter of 2011 are impressive and seem to indicate that the country is doing something right to achieve rice self-sufficiency by 2013. However, more needs to be done more effectively. The government needs leadership, genuine competent and visionary leadership at the highest levels.

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