COMMENTARY: Let us not wait for the resolution of the levy case; save the coconut industry now!

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DAVAO CITY (MindaNews/02 September) — Populist pitsi-pitsi  seems to best describe the approaches that had been proposed and tried by the government-civil society alliance with avowed mission to resuscitate the Philippine coconut industry. Ironically, the programs that were implemented both by civil society groups claiming to represent the best interest of the coconut farmers and by the Philippine Coconut Authority (PCA), the government agency mandated to develop the coconut industry, were at best palliatives that barely kept the coconut farmers’ noses above the rising waters of poverty, or at worst used to prop a discredited president in power. By a strange twist of irony, the man who coined the “pitsi-pitsi” description, Senate President Enrile, was among the architects and main beneficiaries of the Marcos coconut industry strategy. The Marcos coconut industry strategy led to the current long-standing political struggle that has seized the industry in a deathly gridlock.

Flawed Analysis, False Dichotomy

The populist pitsi-pitsi approach arises out of a flawed analysis of the weaknesses of the industry and an ahistorical development view that falsely dichotomizes the agricultural and industrial aspects of a single coconut agro-industry.

In accordance with Presidential Decree (PD) 1468 which mandated its creation, the PCA is “the sole government agency that is tasked to develop the industry to its full potential.” A search in its official website, however, produces no document that outlines its analysis of the industry leading to a coherent industry development strategy. If anything, this is symbolic of the lack of vision for an industry that has, over the centuries, so faithfully supported the nation’s economy. Perhaps one should stop being surprised and start being indignant as the last time the Philippine government has been known to have an industrial policy was about half a century ago.

The National Anti-Poverty Commission (NAPC) in its “Poverty Reduction Roadmap of the Philippine Coconut Industry” has analyzed the vicious cycle of poverty in the coconut farming sector thus: declining (farm) productivity causes reduced income sources for coconut farmers resulting in poverty which in turn results in low farm investments and productivity. While this may, at first glance, look like a pat analysis of a complex problem, it sadly misses the important role that markets play in stimulating investments in productivity. Thus, it misses the key element that will break this vicious cycle of poverty: a growing market that leads to an economically attractive price of the main farmgate product which is either the whole nut or its copra derivative. Price incentive is a strong driver to investments in agricultural productivity. To its credit, the anti-poverty roadmap talks about agro-enterprise development and participatory value chains. Unfortunately, because its mandate is neither about industrialization nor about market development, NAPC’s anti-poverty roadmap for the coconut farming sector will get reduced to pitsi-pitsi projects. A coconut replanting program, for example, makes sense only if farmers are interested to replant. Replanting – replacing senile trees – as an approach to increasing productivity will be attractive if copra or whole nut prices are good and stable and not behaving in a roller-coaster manner: good today, bad tomorrow, next month better, and worse the day after.

One NGO leader, a staunch campaigner for the recovery of the coconut levy and its return to the farmers, blames the predatory practice of middlemen for the poverty of the coconut farmer. Thus he proposes to use coconut levy funds to “redeem the hardship of the farmers” by setting up a “direct copra marketing” program. This is not only pitsi-pitsi, it is myopic populism. Middlemen traders in the agricultural sector had always been known for their predatory behavior and yet this did not prevent a 700% increase in hectarage from 210 thousand in 1905 to 1.6 million by 1960 and a further 42% increase to 2.3 million by 1975. It is quite clear that in those years, to the farmer, the attraction to plant more coconuts was greater than the aversion to predation by middlemen. The post-war years saw a rapidly increasing demand for copra as the market for lauric oil-based industrial products such as margarine, soaps and cosmetics grew rapidly. The resulting improvement in price encouraged coconut farming and fueled rapid expansion in coconut hectarage.

Coco Levy Fixation

There are no ifs and buts about it: the recovery of the coconut levy is important for the nation as a whole and for the coconut industry in particular. Firstly, those who used money extracted from coconut farmers by the Marcos dictatorship to aggrandize themselves through monopolistic schemes should be held to account and punished for their crimes to the people. It will help bring about the much-needed closure of that painful chapter in our nation’s history. Secondly, the capital that had been generated through this special tax are public assets that can be used to modernize the coconut industry and bring it up to the 21st century. This modernization of the industry will go a long way to uplift the conditions of coconut farmers who constitute the foundation upon which the entire coconut industry is built.

All freedom-loving and patriotic Filipinos should support the efforts to recover the coconut levy funds. But, we should stop believing that its recovery will automatically solve all the problems of the industry. This mentality has backfired on the industry and the people that are supposed to benefit from levy recovery. For one, it has allowed government an excuse not to provide a budget for developing the industry. Worse, it has taken away brain-energy and brain-time from the no-less-important task of crafting a coherent industrial strategy. The recovery of resources should be backed up by a good plan that will ensure that it will be put to good use and not squandered as it is being squandered at the present time.

The pitsi-pitsi strategy in the coconut industry works hand in glove with this fixation on the notion that recovering the coconut levy and returning it to the farmers through pitsi-pitsi programs is the magic potion that will revitalize an industry that is languishing in limbo. While we do not disparage the sincere efforts to recover the levy and punish those who were responsible for defrauding our people of resources which they had built up with the sweat of their brows, we should not be less harsh on those who have frittered away whatever had been recovered in ill-advised programs with confused objectives. It leads one to think that these programs are only devised to maintain a base for political campaigning which in the recent past included keeping an illegitimate president in power.

The task of reviving a dying industry cannot wait until all the cases surrounding the full recovery of the levy are finally resolved. That these cases are still pending resolution after almost 3 decades of litigation drives home this point. The telenovela that was the impeachment of the Chief Justice of the Supreme Court only exposed the gangrenous sore that afflicts the country’s justice system. Today, the public is again being made to grasp at false hopes that, with the appointment of the new Chief Justice, justice for the coconut farmers will finally see the light of day.

The Global Market for Coconut

Coconut products constitute the Philippine’s premier agricultural commodity export. In 2011, the aggregate value of coconut product exports ranging from coconut oil to coir was US$1.7 billion. This was 43% of all farm and fisheries export of the country in that year. Coconut oil (CNO) is the main source of revenue of the coconut industry.

The country had dominated the global market of CNO since the post war period. Since the mid-1980’s, the Philippines has controlled 60 percent of the world’s market of coconut oil (CNO), the main globally traded coconut product. This dominance, however, has increasingly been eroded principally by Indonesia and Malaysia. In 2011, out of the total 1.74 million metric tons (MMT) of total global CNO exports, the Philippines had a share of 51% (0.89 MMT) while  Indonesia and Malaysia had a share of 39% (0.68 MMT) and 9% (0.15 MMT) respectively. Philippine CNO exports were 0.22 MMT in 1964 and peaked at 1.3 MMT in the years 1994, 1997 and 2009. Starting with zero in 1964, Indonesia’s CNO exports grew steadily, peaking at 0.78 MMT in 2004. Table 1 below shows the comparative volume of exports between the Philippines, Indonesia and Malaysia.  In the ten-year period between 2000 and 2010, Indonesia has closed the gap with the Philippines in terms of volume of CNO exports. (Cf. Fig. 1) It should be noted that Indonesia has already overtaken the Philippines in terms of hectarage devoted to coconuts. As of 2005, Indonesia had a total of 3.9 million hectares planted to coconut while the Philippines had 3.1 million. During the same year, productivity in copra terms of Indonesian coconut farms was 0.81 MT per hectare annually while that of the Philippines was 0.71 MT.  The main reason why Indonesia has not surpassed the Philippines in CNO exports has been and continues to be high domestic usage of coconut mainly for household food preparation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lack of Industry Vision

 

The strategy for the Philippine coconut industry has practically ground to a halt since the 1980s. For almost half a century now, the country has relied on CNO as its main coconut product export despite the fact that it has long been eclipsed as the main globally-traded vegetable oil by palm oil which, today, dominates world trade by leaps and bounds compared to all other vegetable oils in the market.

 

This lack of industry vision and competition strategy accounts for the stagnation at all levels of the industry’s value chain – from the farm to the consumer. Since about 400 years ago when the Spanish colonial government mandated the planting of coconut trees, the country had progressed only two steps in the development and trade of coconut products – from export of whole nuts to copra in the post war years and from copra to coconut oil in the 1970s up to the present. The country continues to trade in CNO as its main export product despite the fact that it has lost whatever competitive advantage it previously enjoyed in the edible oils market. This lack of industrial strategy (hence, poor export competitiveness) accounts for the most part for one of the worst poverty conditions in rural Philippines – the other parts being the feudalistic production relations and the backward technology that continue to bedevil the coconut agricultural sector.

 

The Role of Manufacturing in Coconut Agriculture

 

The development of widespread coconut agricultural production in the Philippines is very much associated with global growth in commerce and industry. To support the Galleon Trade between Manila and Acapulco, the Spanish colonial government issued an edict in 1642 requiring each indio to plant 200 coconut trees for the production of fiber for galleon rigging and charcoal as caulking material to keep the ships watertight.

 

It was the Americans, however, who started large-scale exportation of copra starting in 1899 as raw material for the manufacture of soap and margarine.[1] It took 250 years from the time of widespread cultivation of the coconut for the shipping industry to the first export of copra for use in industrial manufacturing. Industrial manufacturing of margarine and soap using cheap vegetable oil as a main ingredient boosted Philippine copra exports to Europe and the United States at the turn of the 20th century.

 

Margarine, which is made from vegetable oil, proved to be such a cheap substitute to butter that the dairy industry lobbied for legislation to ban the use of food colors by margarine manufacturers to prevent it from mimicking the color of butter and thus discourage consumers from buying. Legislation were passed in major dairy producing countries including the US and Australia. These bans stayed on for a century and Australia was the last to allow the sale of colored margarine in the 1960s.[2] The bans, however, did not prevent the growth in demand for margarine. Coconut oil, which is a saturated fat, is a perfect ingredient for the manufacture of margarine.

 

Soap, on the other hand, started to be produced commercially in the latter half of the 18th century and became popular in the industrial world due to increased awareness in hygiene and health. With the advent of the industrial revolution, soap making became an industrial enterprise. In the early days, however, animal fat (tallow) was a main ingredient and soap was delivered to stores in large wheel-shaped chunks that were then sold to customers in custom-sized slices. A century later in the 1870s, Procter and Gamble in America started to mass-produce soaps in packaged consumer bars. This type of manufacturing required cheaper raw ingredients than tallow to be commercially viable, paving the way to the use of coconut oil as a substitute. In England in 1884, the Lever & Co. started manufacturing soap under the “Sunshine” brand which used coconut oil because it lathered “more easily than traditional soap made of animal fats”.[3] Coconut oil which is a lauric oil is an excellent raw material for soap manufacturing. It adds hardness to bar soap and has good lathering characteristics producing suds even in salty water. By 1887, the Lever (later Unilever) was producing 450 tons of “Sunshine” soap in a week, increasing up to 40,000 tons annually in the 1890s, and expanding into other countries in Europe and America as well as the British colonies.

 

The Philippine export of copra and coconut oil grew with the market for margarine and soap. Domestically, the Americans developed the coconut oil industry with the establishment of the first modern oil mill in Manila in 1906. At this time, the recorded area planted to coconut was 210,000 hectares with 42 million coconut trees. Thirty years later, in 1935, an estimated US$221.22 million were invested in coconut agriculture and industry including six big coconut oil mills mostly with American, British and Chinese capital. In addition, America was also the major destination for Philippine desiccated coconut exports.

 

During the war years, glycerin from coconut oil was in great demand for the manufacture of explosive. In the post-war manufacturing boom, oleochemicals from coconut oil were used in the manufacture of cosmetics, pharmaceuticals, emulsifiers, solvents and insecticides. Glycerin was in constant demand as the US and its allies continued to build up their weapons. During the golden years of Philippine industrialization, more coconut oil and coco-based manufacturing plants were established.

 

The strong demand for copra and coconut oil encouraged the expansion of coconut farms such that by the 1960’s a total of 1.6 million hectares were devoted to its production, increasing further to 2.3 million hectares in 1975. During these years, as new agricultural lands were opened for cultivation, coconut hectarage increased by leaps and bounds in Mindanao, surpassing those of the Southern Tagalog and Bicol regions. Copra production increased from 1.6 million metric tons (MMT) to 2.22 MMT and export earnings soared to US$484 million from US$270 million during the same period.

 

Unstable Copra Price Behaviour

 

Vegetable oil is a commodity product. Each of the specific vegetable oil – coconut, African oil palm, rapeseed, soya, corn, etc., etc. – is perfectly substitutable for each other as far as the main utilization (edible uses) is concerned. Since CNO is not the dominant product in the market, it is a price taker. Global price behavior is basically determined by soya oil. This is because the main product of soya is soya meal, which is used for animal feed. Soya oil is a by-product of soya meal production – therefore, it is cheap. If soya production is poor, vegetable oil prices go up; copra prices go up. Soya beans are the main globally traded oilseed, while the main globally traded vegetable oil is palm oil. The two are the main global price determiners for vegetable oils. The price of CNO and, therefore, the price of copra is determined by the supply situation of these two dominant vegetable oils.

 

Since the Philippine coconut industry strategy is based on competition in the edible oils market, it is in a very disadvantageous position. Wild price fluctuations are a common occurrence affecting the livelihoods of the millions of Filipino coconut farmers. No wonder, poverty is endemic in the coconut agricultural sector. A review and revision of the national strategy of the Philippines coconut industry is an urgent agenda to ensure its survival and to address the poverty situation in the coconut farm sector. The new industry development strategy should be based on non-edible oleo-chemical downstream industrialization.

 

Coco Chemicals is the Wave of the Future

 

The main commercial and industrial value of the coconut tree derives from the fact that it is the world’s main source of lauric oil which is best suited for the manufacture of bio-degradable soaps and detergents, bio-degradable plastics, cosmetics and other body care products. Thus, CNO is not simply edible vegetable oil which is used for food preparation, but it has many downstream industrial products. Cooking oil is a commodity product that is highly substitutable for each other. Frying with corn oil is about the same as frying with coconut oil, or canola, or palm oil. Price is the main determinant factor in the consumer’s choice of which frying oil to use – other factors such as taste and health issues are secondary in most markets. Because it is cheap and in abundant supply, palm oil has come to dominate the edible oils market. It is, therefore, unwise for coconut to continue competing in this market segment, no matter that edible oil continues to be the biggest segment in the vegetable oils market. Coco chemicals is the market segment where the Philippine coconut industry can play a leading role.

 

The competitive edge of the Philippine coconut industry derives from its position as the world’s leading source of lauric oil. The Philippines is the dominant player in the global lauric oils market. The other player is palm kernel oil (PKO). CNO and PKO share an almost identical chemical structure. PKO, however, constitute a very small fraction of the world production of lauric oil basically because it is only a secondary product in palm oil production.

 

Thus, even as we should encourage the development of new products (such as the sports energy drink which the President had so enthusiastically spoke about after his US trip), the country should devote more energy into CNO-based downstream industrialization in order to realize the bigger economic potential of the industry. An industry strategy in a market sector where coconut is the dominant player is key to the development of the Philippine coconut industry. It will result in good and stable farmgate prices for copra and whole nuts, which will have a widespread positive impact on the economic life of coconut farmers and farm workers.

 

The price incentive, which historically has been the driving force behind the growth of the coconut farm sector, will lift the industry from its current doldrums. In this respect, the impending sale of the Philippine Cocochem plant is ill-advised and should be reviewed immediately.

 

What is to be Done

 

To sum up, the following should be done in parallel to the current efforts to recover the coconut levy:

 

  1. A thorough evaluation of the impact of the programs funded by CIIF funds should be undertaken on top of the planned independent financial audit.
  2. A study of the global vegetable oils and oleo-chemical markets should be done to determine which areas of investments will make the most strategic value to the industry. This study should look into long-term impact of such investments on the coconut agricultural sector.
  3.  Allocate funds from the earnings of companies established or acquired through the Coconut Industry Investment Fund (CIIF) to support the necessary steps towards a strategic vision and plan for the entire industry. Put an immediate stop to the practice of utilizing these funds for palliative, pitsi-pitsi populist programs.
  4. Establish an industry-wide alliance of farmers, businessmen, industrialists and state actors that will drive the strategic modernization of the coconut industry.
  5. Revamp and revitalize the Philippine coconut industry by strengthening its mandate as a comprehensive industry-wide development agency.
  6. Encourage new investments in the coco-chemical sector. Review the plans to privatize Cocochem.
  7. Implement agrarian reform in coconut lands.

 

[MindaViews is the opinion section of MindaNews. Billy de la Rosa studied the global vegetable oils market in relation to the European Union’s Common Agricultural Policy (EUCAP) oilseeds regime. Specifically, he did research on the impact of EUCAP on the Philippine coconut industry at the Royal Agricultural College and the University of Buckingham in England in 1993. His master’s thesis was about competition strategy of the Philippine coconut industry.]



[1] Margarine was invented in France when Emperor Louis Napoleon III offered a prize to anyone who can find a cheap substitute for butter for the army and the masses. The first patent for margarine was issued in France in 1869. Margarine, however, did not become a commercial success in France, and the first major manufacturers of the product were the Dutch and Germans. The Dutch company Jurgens, which acquired the patent from the French inventor, now is part of the Dutch manufacturing giant Unilever. http://en.wikipedia.org/wiki/Margarine

[2] Ibid.

[3] http://www.unilever.com.ph/aboutus/ourhistory/18851900/

 

 

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