Dissecting the Poverty Trap in Agriculture: An Agribusiness Approach
"Farm products especially food are essential to the survival and security of society. As such, farming should be treated like public utilities to keep commercial farmers economically healthy and reliable suppliers of raw materials and food at reasonable costs to industries and consumers."
Photo by Al Benavente
These were the salient points identified by Mr. Edward S. Tayengco during the SEARCA Agriculture and Development Series (ADSS) held January 12, 2010. Mr. Tayengco is the president of the E.S. Tayengco Development Options and Economic Research Services.
His lecture titled "Agribusiness Approach to Eradicating Mass Poverty in Agriculture" aimed to discuss the Philippine agribusiness commodity systems concept as an approach to understanding the marketing of farm products and their impact on farm prices and income.
Agribusiness commodity system "consists of institutions and processes involved in the production and marketing of a farm commodity until it reaches final consumers. It includes suppliers of farm inputs, farmers, processors, wholesalers, retailers, final consumers as well as coordinating institutions and devices involved in the production flow of a commodity."
Mr. Tayengco pointed out that the Philippines operates in a free market policy environment where there are no marketing boards governing supply management of agricultural products. A free market has no economic intervention and regulation by the government; as such, product prices are arranged via transactions between buyers and sellers.
"There is a poverty trap in agriculture which makes our farmers poorer. Free market policy is the root cause of low income and mass poverty in agriculture," he said. He explained that the free market system results to competition in the farm sector. There are too many farmers selling undifferentiated products to a few or single buyers. However, farmers cannot price their products; buyers have more and better quality market information on agricultural products than the farmers.
Production output of each farmer or group of farmers is also microscopic in size compared to total supply and demand of the commodity. The irony is that from an individual farmer’s point of view, the demand for his product is unlimited and that he can sell everything he can produce.
In the long run, this results to an excess in supply. Since farm products are perishable, bargaining and market powers are weakened because farmers are constantly under pressure to sell their produce before they spoil. They are then predisposed to accept prices offered by buyers even at low prices. This cycle continues to trap the farmers; thus, they remain poor.
How then can farmers escape this poverty trap in agriculture? Mr. Tayengco cited how agricultural economic policy evolved in developed countries. He said that mass poverty thrived among farmers of developed countries when they adopted the free-market policy but poverty incidence decreased upon adoption of the public utility policy. The Philippines, currently operating under free market, may have hope should policy makers opt to change the system.
Under a public utility policy the symbiotic relationship between the agriculture and industry sector is strengthened. The farm sector then becomes economically healthy, reliable supplier of food and raw materials, and an adequate market for products and services from industries. This strengthened relationship can contribute to the rapid and stable economic growth of developing countries.
He also mentioned a new policy "producer-controlled marketing boards." This system involves organizing farmers into compulsory cooperatives and legally vesting them with monopoly powers to organize the marketing of commodities. The objective is to control supply in order to 1) raise farm prices and income; 2) produce market power; and 3) increase production and marketing efficiency.
Mr. Tayengco recommends that the Philippine Department of Agriculture should organize a team to study the desirability of organizing and operating producer-controlled marketing boards in the model of developed countries such as, Canada, New Zealand, Israel and Taiwan. This way, the Philippines may be a step closer to eradicating mass poverty in agriculture.