Required Report - public distribution

**Date:** 2/6/2004

**GAIN Report Number:** RP4006

RP4006

**Philippines**

**Grain and Feed**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)David C. Miller

FAS Manila

**Prepared by:**

Perfecto G. Corpuz

**Report Highlights:**

Rice and corn production will grow considerably in MY03/04 as the use of
hybrids accelerates, but growth will likely slow in MY04/05 due to
possible changes in agricultural policies. Food and feedgrain demand are
expected to increase through MY04/05 as the Philippine population
increases. Rice imports are expected to remain significant in MY03/04,
but will likely decline in MY04/05 due to adequate supply. Corn imports
will increase in MY03/04 and remain flat the following year, while
imports of wheat will likely decline in MY03/04 and increase the
following year as grain prices stabilize.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Manila \[RP1\]

\[RP\]

Executive Summary

Rice production is expected to surge in MY03/04 as adoption of hybrid
rice has accelerated and favorable weather conditions prevail.
Uncertainty in relation to possible effects of the upcoming national
elections on agricultural policy is expected to dampen investment in the
sector. Rice demand will continue to grow through MY04/05 commensurate
with the rapidly growing Philippine population. Considerable spoilage in
MY02/03 and MY03/04 will bloat consumption estimates but losses will
decline the following market year and consumption will normalize. The
country is expected to be closer to rice self-sufficiency in MY04/05
after successive years of record rice production and heavy importation.
Rice imports will slightly decline in MY03/04 but will still be
significant at around 1.3 MMT. The decline in imports will be more
pronounced in MY04/05 and is expected to be primarily for buffer stock
purposes.

Despite a damaging typhoon in July 2003, corn production in MY03/04 will
dramatically increase from the previous year's MY02/03 level. Area
planted is expected to be higher due to increasing prices as a result of
strong feed grain demand, and better yields are expected in MY03/04.
High feed wheat and corn prices in the world market are expected to
favor more local corn consumption and output the following year is
expected to increase as area planted to Bt corn expands. Overall
production will likely slow in MY04/05 from the previous year's growth
rate. Continued expansion of the Philippine population, on the other
hand, will result in marginal but steady growth in consumption of food
corn and milling wheat through MY04/05.

Despite higher production in MY03/04, corn imports are expected to
increase in MY03/04 due to incongruities in corn production and
consumption. Although overall wheat imports during the year are expected
to decline from the previous year's level, feed wheat consumption is
expected to increase during the year and accelerate in MY04/05. Wheat
imports are expected to recover and increase during the period while
imports of corn are expected to stay flat compared to the MY03/04 level.

Production

\-\-\-\-\--

# Rice 

**\-\-\-\-\--**

Milled rice output was adjusted upwards in MY02/03 consistent with
revisions made by the Bureau of Agricultural Statistics (BAS) in its
October 2003 Rice and Corn Production Survey. Paddy rice output is
expected to surpass its previous year's level mainly due to good
production in the regions of Cagayan Valley, Ilocos, Central Luzon,
Bicol, and Caraga. The higher output is attributed to increased area
planted as well as higher yields brought about by increased use of
hybrid and certified seed.

For 2004, the Philippine Department of Agriculture (DA), through its
Ginintuang Masaganang Ani (GMA-Golden Bountiful Harvest) rice program,
hopes to attain 97 to 100 percent rice self-sufficiency. The program
strongly encourages higher adoption of hybrid and certified rice seed.
The DA reportedly is contemplating raising its hybrid rice target from
300,000 to 600,000 hectares to reach an acceptable level of
self-sufficiency. The DA is hoping to reach a higher rice production
level of 14.98 MMT, 11 percent more than last year\'s record harvest of
13.46 MMT of paddy rice. Post expects rice production in 2004 to exceed
the previous year's output, but fall short of the DA target, considering
the resources available for the year.

The DA had proposed a P20.9 (\$380.0 M) billion budget for 2004 but the
Philippine Congress only approved a P15.4 B (\$280.0 M) budget for the
department this year. The approved amount is lower than last year's
budget of P16.8 (\$305.4 M). The budget cut will likely negate whatever
production gains may be made by increased use of hybrid rice seed as
funding for other support programs, e.g., extension, credit, etc, are
likely to be reduced.

On a market year basis, rice production for MY03/04 is expected to
exceed the previous year's level due to an expanded area harvested and
improved yields. A greater use of hybrid and certified rice seed is
likely to be complemented by more favorable weather conditions in 2004.
According to the DA, the tail end of the El Nino dry spell in the first
half of 2003 resulted in isolated dry spells in some parts of the
country which subsequently affected production. Rice harvests for both
CY2004 and MY03/04 are expected to reach record levels - in the vicinity
of 14 MMT.

Rice self-sufficiency is likely to be nearer DA's expectations in 2005
as imports the year before significantly increased buffer stock levels.
Local production is likely to remain high, although production in
MY04/05 is expected to be marginally higher than its MY03/04 output.
Sustaining this level of self-sufficiency, however, is not likely to be
maintained as a result of the growing food demand of the rapidly
expanding Philippine population.

National elections are scheduled in May 2004, and this could affect
agricultural policy, as well as agricultural program implementation in
the near term. Investment in the agricultural sector is expected to slow
as investors adopt a wait-and-see attitude.

\-\-\-\-\--

Corn

\-\-\-\-\--

Corn production estimates were increased in MY02/03 consistent with the
2003 data from the BAS although production during the market year is
expected to be lower than its level the previous year.

The BAS reports that corn output in 2003 will surpass the 2002 level
despite damage caused by a dry spell in the second quarter of the year
as well as from the very destructive typhoon *Harurot* in July 2003
(refer to RP 3044). The typhoon significantly damaged the first
commercial planting of Bt corn in Northern Luzon. Overall area planted
to Bt corn is estimated to be less than 20,000 hectares in 2003.
Production gains in the last quarter of 2003, however, more than
compensated for the damaged third quarter corn crop. The increase in
corn production is attributed to increased area harvested as well as to
better yields.

Corn production in MY03/04 is expected to increase considerably from its
MY02/003 output due to strong feed demand and higher use of better
quality corn seed. Relatively high prevailing prices are likely to
encourage more farmers to shift to high yielding corn varieties such as
hybrids. Hybrid corn is estimated to be cultivated in around 500,000
hectares during the year or roughly 20 percent of total corn area
planted. Contract growing schemes offered by large companies with feed
milling operations are becoming popular. These companies specify and
provide quality seeds and extend technical assistance, on top of the
traditional buy-back guarantee.

It should be pointed out that incongruities in corn production and
consumption in the Philippines exist resulting in supply and demand
imbalances not accurately captured in the PSD table. Traditionally,
around 60 percent of corn production is concentrated in the southern
island of Mindanao with the majority harvested in the third quarter of
each year. Corn demand, on the other hand, is highest (around 75
percent) on the main island of Luzon in the northern part of the
country, where the majority of the feed mills, livestock and poultry
farms are located. Corn production in Luzon accounts for roughly 30
percent of national corn output, the majority of which is harvested in
the first semester.

The majority of the Luzon corn crop, which is harvested in the 2Q of
each year, is found in the Cagayan Valley region (where damage by
typhoon *Harurot* was most pronounced). The imbalance between feed
demand and corn harvest in Luzon is traditionally filled by imports due
to very high inter-island freight costs (see CONSUMPTION).

For MY04/05, corn output is expected to increase moderately, but like
rice, will likely slow from the previous year's rate of growth. Adoption
of Bt corn technology is expected to gradually improve. An estimated
50,000 hectares will be planted to the GM variety in 2004. Bt corn is
expected to displace a portion of hybrid corn areas in the coming 3 -- 5
years, according to the International Service for the Acquisition of
Agri-biotech Applications (ISAAA). Corn production during the year,
however, is still expected to fall short of overall domestic demand.

\-\-\-\-\-\-\--

Wheat

\-\-\-\-\-\-\--

There is no commercial wheat production in the Philippines.

**Consumption**

Last year, the agricultural sector grew faster (3.8 percent) than
expected (3.4 percent) with total crop output rising 5.21 percent. Rice
production was up 1.73 percent reaching a record 13.5 million tons
before milling. The performance of the farm sector helped achieve the
country's GDP growth of 4.5 percent in 2003, exceeding the previous
years growth rate of 4.4 percent. Economic planners forecast GDP growth
at 4.9 - 5.8 percent this year with farm production expected to improve
its 2003 performance as no major weather disturbance (like the El Nino)
is expected. Inflation remained at single-digit levels last year and is
expected to remain as such in 2004.

#########  

Good agricultural production and overall growth of the economy will
translate into continued increases in food grain consumption in MY02/03
and onwards. Rice is expected to remain as the dominant feed grain
consumed although food corn and milling wheat demand are likely to post
marginal increases in MY03/04 and MY04/05 due to the rapidly growing
Philippine population (2.36 percent). According to the latest estimates,
the population of the Philippines will reach 84 million in 2004.

While some quantities of wheat of European origin are used to blend with
US wheat, it is highly unlikely to replace wheat from the United States
for flour milling, according to industry contacts. Local bread
manufacturers still prefer US wheat for its precise characteristics in
bread making. The closest quality rival of U.S. wheat for flour milling
purposes is Canadian wheat, according to industry sources.

######### 

As mentioned in GAIN RP 3007 and RP 3065, the surge in rice consumption
starting MY02/03, is mainly attributed to postharvest-handling losses
including spoilage of imported inferior-quality rice. Estimates on rice
postharvest losses vary, although the volumes involved are quite
significant. The Bureau of Post Harvest Research and Extension (BPHRE)
estimates the country\'s total postharvest losses for rice at around 15
percent of total annual production of paddy rice. This translates to
about 1.3 MMT of milled rice lost in MY03/04 and it is not surprising
that the National Food Authority (NFA) has revised upwards its national
daily consumption estimate for rice from 26,400 MT last year to 26,900
MT for 2004.

######### As a general rule, postharvest losses are highest during years of abundant supply and these have a bloating effect on consumption estimates. The decline in rice consumption in MY04/05, therefore, will reflect more on the actual rice consumed for food and less on postharvest wastage. Actual rice consumption for food, however, will continue increasing during the period. 

######### 

Rice prices (retail) for the first nine months of 2003 averaged
P20.25/kg. (\$0.37), slightly higher than the average milled rice price
for 2002 of P19.96/kg (\$0.37). Prices were higher in the first half of
2003 compared to the same period in 2002.

  -------------------- --------------- ------------------ ----------------
  **Prices Table**                                        

  **Country**          Philippines                        

  **Commodity**        Rice, Milled                       

  Prices in            Peso            per uom            Kg.

                                                          

  Year                 2002            2003               \% Change

  Jan                  19.30           19.92              3%

  Feb                  19.38           19.85              2%

  Mar                  19.38           19.86              2%

  Apr                  19.40           19.92              3%

  May                  19.47           20.13              3%

  Jun                  19.68           20.44              4%

  Jul                  20.14           20.70              3%

  Aug                  21.00           20.89              -1%

  Sep                  21.31           20.57              -3%

  Oct                  20.55                              

  Nov                  20.02                              

  Dec                  19.94                              
  -------------------- --------------- ------------------ ----------------

Source: Bureau of Agricultural Statistics

######### The growth of the Philippine feed grain industry is tied to the expanding livestock, poultry and aquaculture industries. Yellow corn is the dominant feed grain used, constituting about 40 percent of the production cost of swine and 60 percent of poultry. It is the preferred feed grain by the feed milling industry, but inadequate supply has resulted in the increasing use of corn substitutes such as feed wheat. 

######### 

######### Corn demand increased slightly in MY02/03 due to higher than expected corn production as reported by the BAS. 

######### 

######### Shifting in yellow corn and feed wheat consumption are expected in the next two years, but overall feed grain demand is expected to increase. Although it suffered a slowdown in 2003, the domestic poultry industry is expected to recover in MY03/04 due to recent bans on poultry meat imports from most Asian countries in response to the Avian flu outbreaks. Relatively high hog prices, are also likely to enhance swine production during the year. Local meat demand is expected to remain strong in 2004 despite these developments.

######### Feed corn demand is expected to surge during the year as local production increases, with some shifting away from feed wheat likely. Tighter global wheat supply and increasing feed wheat prices (faster than that of corn prices) are expected to fuel feed corn demand in MY03/04. Renewed weakness of the Peso likewise will dampen growth of feed wheat use by the feed-consuming sectors during the year. All these favor the use of more local corn in feed rations.

As mentioned in the Production Section, disparities in timing, location
of corn production, and consumption patterns exist, and shortages may
prevail in a particular area when, in fact, there is adequate supply.
Studies show that it costs P1.81 (\$0.04) to move a kilogram of corn, or
P1,810 (\$32.91) per ton, from a farm in Valencia, Bukidnon, in Mindanao
to a wholesaler/buyer in Caloocan City, Metro Manila. Oftentimes, due to
these disparities in transportation cost, it is cheaper for a feed
miller in Luzon to import corn than to buy local corn from Mindanao (see
TRADE).

Lack of appropriate postharvest infrastructure is evident in the high
cost of transporting corn. Postharvest losses for corn are likewise
significant and are included in consumption estimates. Losses are likely
to be lower than that of rice, however.

Average yellow corn price for the first nine months of 2003 was
P8.49/kg. (\$0.16), lower than the average price of P9.28/kg. (\$0.17)
in 2002. Corn prices started to increase in the last quarter of 2003 as
a result of significant damage to the corn crop by typhoon *Harurot.*
Philippine feed millers and hog raisers have since petitioned the GRP
for more corn imports (see TRADE).

  ---------------- ------------------ ----------------- -----------------
  **Prices Table**                                      

  **Country**      Philippines                          

  **Commodity**    Corn                                 

  Prices in        Peso               Per uom           Kg.

                                                        

  Year             2002               2003              \% Change

  Jan              9.28               8.49              -9%

  Feb              8.85               8.53              -4%

  Mar              9.38               8.35              -11%

  Apr              8.76               8.26              -6%

  May              8.65               8.42              -3%

  Jun              9.06               8.58              -5%

  Jul              9.30               8.71              -6%

  Aug              8.76               8.53              -3%

  Sep              8.62               8.50              -1%

  Oct              8.14                                 

  Nov              9.05                                 

  Dec              8.40                                 
  ---------------- ------------------ ----------------- -----------------

Source: Bureau of Agricultural Statistics

#########  

######### For MY04/05, corn demand will likely continue to increase but is expected to slow from the previous year's growth rate. Feed wheat use, on the other hand, is predicted to accelerate from its MY03/04 level. This is based on the premise that corn and wheat prices will stabilize. 

######### **Trade**

######### 

######### The GRP has approved a total of 810,000 MT of milled rice imports for 2004. The NFA will bring in 500,000 MT while farmer groups have been allocated 310,000 MT. Smuggled rice is expected to decline from the previous year's level due to adequate stocks and more vigilance by the GRP in curbing the practice. An assumed 140,000 MT of undocumented rice imports are still expected in MY03/04. Coupled with the dramatic production increase expected in MY03/04, the situation should result in reduced imports during the year. Rice imports during the year do not include U.S. rice supplied under various food aid programs of USDA.

The FY03 PL480 Title 1 Agreement was signed in July 2003 and amounted to
a \$40 million rice package. It resulted in the procurement of 118,000
MT rice and was the single largest country allocation during the fiscal
year. A small portion of NFA's procurement was fortified rice. The
purchase of fortified rice was in response to a local fortification law
(See POLICY). The entire rice volume under the FY03 Agreement is
expected to arrive in the first quarter of 2004.

######### Rice imports in MY04/05 are expected to decline from the previous year's level, as production will remain high and illegally imported rice will likely decline. Rice imports during the year will likely be brought in by the NFA duty free to beef up buffer stock levels. Rice imports for both MY03/04 and MY04/05 are likely to come from Vietnam, Thailand and China.

######### 

Rice tariffs will remain unchanged through 2005 from their 2003 level of
50 percent except for paddy rice seeds that are suitable for sowing,
which may be brought in duty-free.

For corn, estimates of imports in MY02/03 were raised consistent with
data from the National Statistics Office (NSO). The imported corn during
the period was mainly from the United States and China.

Although corn production is expected to increase considerably during
MY03/04, market year imports are still expected to increase from their
year-ago levels due to strong demand by the feed consuming sectors, as
well as an expected decline in feed wheat imports. A feed corn deficit
as the result of damage by typhoon *Harurot* prompted the NFA to tender
for the importation of 150,000 MT in October 2003. That volume is the
first tranche of the proposed 300,000 -- 350,000 MT importation to cover
losses from the typhoon. The tender did not succeed, however, as bids
were considered too high. As a result, buying prices of yellow corn in
Luzon increased. The higher prices likewise resulted in higher prices of
poultry meat and pork prices (see POLICY).

In late 2003, wheat prices increased as a result of the decline in
available feed wheat supplies from India, China and Eastern Europe.
Because of this, overall wheat imports in MY03/04 are likely to decline
from their previous year's level as local feedmillers use more local
feed corn. Australian wheat is expected to increase its market share
during the year. Milling wheat imports are likely to remain flat from
the previous market year's level, and U.S. wheat is expected to dominate
the market. Canadian wheat, however, may be close behind. While milling
wheat from European sources may offer competitive rates, industry
contacts say the cost of freight is more.

In the following market year, overall wheat imports are likely to
recover and increase as global wheat supply improves and prices
stabilize. Corn imports, on the other hand, are expected to remain flat
in MY04/05 compared to the year before.

Food wheat will be assessed a 3 percent tariff rate through 2005,
unchanged from its 2003 level while feed wheat will be levied a uniform
7 percent rate. Like feed wheat, in-quota feed corn imports will be
charged a 35 percent duty through 2005, unchanged from its 2003 level,
while corn imports outside the tariff quota will be levied a 50 percent
tariff through 2005. Out-quota corn tariffs were 65 percent during the
2003 January to June 30 period, but declined to 50 percent if it arrived
between July 1 to December 31 of 2003.

**Policy**

In the field of biotechnology, eight corn varieties representing all GE
corn varieties grown in the United States with export potential to the
Philippines, were added to the list of approved transformation events
under Administrative Order No. 8 (AO 8) on August 2003. Under AO8, all
GE plant varieties ("regulated article") must be assessed for food, feed
and environmental safety by a third party panel of Philippine scientists
prior to entering the Philippines. The approval allows access of all
U.S. GE corn to the Philippine market.

After the failed NFA bidding of 150,000 MT of corn in October 2003,
Philippine feed millers and hog raisers, in early 2004, requested DA's
approval to import 300,000 -- 350,000 MT of yellow corn to address the
increasing prices of feeds and meat. Local corn farmers, however,
objected to the proposal saying the arrival of the imported corn would
coincide with the harvest season in Northern Luzon. The request is
currently under review by the DA and the Office of the President (OP).

Republic Act 8976 (RA 8976) or the Philippine Food Fortification Law of
2000, requires that all staple foods - rice, sugar, flour, salt and
cooking oil -- be fortified with Vitamin A, iron or iodine. RA 8976 is
to be fully implemented on Nov. 7, 2005. The law applies to all
manufacturers or producers, importers, traders, tollees, retailers,
repackers of staple foods, as well as restaurants and food service
establishments where such fortified food products are likely to be
served. Post believes these sectors are not yet equipped with the
adequate technology and infrastructure to implement the law (see
MARKETING) and expect that the implementation date of RA 8976 may be
deferred.

In June 2003, acknowledging the potential of rice hybrids in raising
local production, President Gloria-Macapagal-Arroyo signed Executive
Order No. 219 (EO 219), returning the Philippine Rice Research Institute
(PhilRice) from the OP, to the DA to allow for closer supervision.
PhilRice was originally attached to the DA as provided for by EO 161 of
November 1985, which established the agency. When President Arroyo
assumed office in January 2001, she issued EO 76 which amended EO 161
and placed PhilRice under the OP.

  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                      

  **Country**          **Philippines**                                               

  **Commodity**        **Corn**                                (1000                 
                                                               HA)(1000              
                                                               MT)                   

                       2002              Revised    2003       Estimate   2004       Forecast

                       USDA Official     Post       USDA       Post       USDA       Post
                       \[Old\]           Estimate   Official   Estimate   Official   Estimate
                                         \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                          07/2002               07/2003               07/2004
  Begin**                                                                            

  Area Harvested       2375              2375       2450       2485       0          2550

  Beginning Stocks     352               352        202        262        102        250

  Production           4300              4430       4400       4845       0          5000

  TOTAL Mkt. Yr.       100               130        250        200        0          200
  Imports                                                                            

  Oct-Sep Imports      100               170        250        180        0          200

  Oct-Sep Import U.S.  11                11         0          10         0          100

  TOTAL SUPPLY         4752              4912       4852       5307       102        5450

  TOTAL Mkt. Yr.       0                 0          0          0          0          0
  Exports                                                                            

  Oct-Sep Exports      0                 0          0          0          0          0

  Feed Dom.            3050              3150       3200       3525       0          3650
  Consumption                                                                        

  TOTAL Dom.           4550              4650       4750       5057       0          5200
  Consumption                                                                        

  Ending Stocks        202               262        102        250        0          250

  TOTAL DISTRIBUTION   4752              4912       4852       5307       0          5450
  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------

  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                      

  **Country**          **Philippines**                                               

  **Commodity**        **Rice, Milled**                        (1000                 
                                                               HA)(1000              
                                                               MT)                   

                       2002              Revised    2003       Estimate   2004       Forecast

                       USDA Official     Post       USDA       Post       USDA       Post
                       \[Old\]           Estimate   Official   Estimate   Official   Estimate
                                         \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                          07/2002               07/2003               07/2004
  Begin**                                                                            

  Area Harvested       4100              4100       4100       4115       0          4000

  Beginning Stocks     3407              3407       3807       3807       3747       3945

  Milled Production    8450              8450       8840       9098       0          9100

  Rough Production     13000             13000      13600      13997      0          14000

  MILLING RATE (.9999) 6500              6500       6500       6500       0          6500

  TOTAL Imports        1500              1500       1350       1290       0          350

  Jan-Dec Imports      1300              1300       1000       900        0          50

  Jan-Dec Import U.S.  0                 0          0          0          0          0

  TOTAL SUPPLY         13357             13357      13997      14195      3747       13395

  TOTAL Exports        0                 0          0          0          0          0

  Jan-Dec Exports      0                 0          0          0          0          0

  TOTAL Dom.           9550              9550       10250      10250      0          9915
  Consumption                                                                        

  Ending Stocks        3807              3807       3747       3945       0          3480

  TOTAL DISTRIBUTION   13357             13357      13997      14195      0          13395
  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------

  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                      

  **Country**          **Philippines**                                               

  **Commodity**        **Wheat**                               (1000                 
                                                               HA)(1000              
                                                               MT)                   

                       2002              Revised    2003       Estimate   2004       Forecast

                       USDA Official     Post       USDA       Post       USDA       Post
                       \[Old\]           Estimate   Official   Estimate   Official   Estimate
                                         \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                          07/2002               07/2003               07/2004
  Begin**                                                                            

  Area Harvested       0                 0          0          0          0          0

  Beginning Stocks     350               350        400        350        300        200

  Production           0                 0          0          0          0          0

  TOTAL Mkt. Yr.       3000              2900       2800       2800       0          3100
  Imports                                                                            

  Jul-Jun Imports      3000              2900       2800       2800       0          3100

  Jul-Jun Import U.S.  1500              1300       0          1300       0          1350

  TOTAL SUPPLY         3350              3250       3200       3150       300        3300

  TOTAL Mkt. Yr.       50                0          50         0          0          0
  Exports                                                                            

  Jul-Jun Exports      50                0          50         0          0          0

  Feed Dom.            1250              1250       1100       1275       0          1375
  Consumption                                                                        

  TOTAL Dom.           2900              2900       2850       2950       0          3075
  Consumption                                                                        

  Ending Stocks        400               350        300        200        0          225

  TOTAL DISTRIBUTION   3350              3250       3200       3150       0          3300
  -------------------- ----------------- ---------- ---------- ---------- ---------- ----------