Commodity price stabilization and trade liberalization: the case of corn and livestock in the Phillippines

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Virginia Tech

This study was conducted to analyze the impacts of different trade and pricing policies on the grains and livestock sector in the Philippines. Four trade policy alternatives were evaluated: (a) base 1990 trade policies; (b) full trade liberalization in the grains and livestock sector: (c) a uniform 20 percent import tariff system for both grains and livestock commodities; and (d) price stabilization of rice and corn. Two price stabilization instruments, buffer-stock and variable import levy, two target prices, and two price band band widths were evaluated. The economic surplus measure of costs and benefits was used as the basis for economic efficiency comparisons among the different trade and pricing policies.

The study simulated the operations of grains and livestock markets in the Philippines. Supply and risk response parameters were estimated with profit function approach using time-series data on prices, production, and input usage. Food demand elasticities were adopted from previous works in the Philippines. A separate set of demand functions were estimated for corn as livestock feed with the use of pseudo-data generated by varying the prices of the different feed ingredients in a process model of least-cost feed rations of hog and poultry. The ten-year period simulations were iterated 250 times, using world prices of wheat, rice, and corn drawn from their historical price distributions along the trend projected by the World Bank.

Results of the study revealed that most economic gains can be attained by shifting to full trade liberalization of grains and livestock markets. With full trade liberalization, the economy gains by importing lower priced corn and producing higher-valued livestock products for domestic consumption and exports. The effect of a uniform 20 percent tariff is similar to that of full trade liberalization, but with lesser economic benefits.

On the other hand, due to positive supply response to stabilized prices, there are small economic gains that could be achieved by the operation of a stabilization scheme for rice and corn over trade liberalization. These benefits, however, are offset by the heavy financial exposure required from the government. The variable import levy that defends rice and com prices at average expected world prices gives the best results among the different price-stabilization schemes.