Issues in Inter-regional Transport of Fruits and Vegetables: The Case of Papaya, Tomato and Lettuce (A Work in Progress)

Gilberto M. Llanto, Mercedita A. Sombilla and Francis Mark Quimba 3rd Agribusiness Economics Conference Davao City, July 19-22, 2011

Background From ACIAR funded “Philippine Policy Linkages Scoping Study”

“…. , the benefits of the research have been reduced through the lack of markets or market access as well as high transportation costs…” “….policies have to be rectified to enable a more vigorous development of the transport system, especially the maritime/shipping industry that could facilitate the integration of development efforts not only across the country’s numerous island regions but also with other countries.”

Rationale • Limited research in the Philippines on improving the efficiency in logistics services and transport infrastructures to lower marketing costs and ultimately increase financial returns to supply chain players while lowering the cost to consumers through competitive prices . • Most of these studies are on the macro level.

Rationale (continued)

• Mindanao is considered the food basket of the country owing to its favorable climate and availability of land for production of grains, fruits and vegetables. • High transportation cost of moving agricultural products from Mindanao to demand centers in Metro Manila and the Visayas. • Postharvest loss during the storage and transportation stages of the production to market continuum (Rapusas 2006;

Objectives • Analyze inter-regional trade of agricultural products (Lettuce, Papaya and Tomato) by looking at how the flow of the goods across regions has changed through the years (1990-2008). • Quantify the effects of inter-island transport and logistics costs to inter-regional trade of agricultural products through econometric analysis. • Analyze the intra-island and inter-island trade of agricultural products through an

Objectives (continued)

• Identify and analyze the factors that contribute to high transportation costs and other problems in relation to the flow of goods, focusing on the possible influence of government regulations; and • Recommend policy directions and development approaches to meet the demand for transportation infrastructure in relation to the attainment of growth potentials and competiti eness of the region

Reasons for selecting Lettuce, Papaya and Tomato • The analysis will build on the earlier work of Digal et al that has looked at the different supply chains of the said commodities • The commodities are among the top 25 fruits and vegetables produced in Mindanao – Papaya (rank 11), 70.4% of local production; – Lettuce (rank 13), 52% of local produce is from Mindanao; T t ( k 18) 32% f l l d i

Methodology • To analyze inter-regional trade of agricultural products (Objective 1), we will use and tabulate data from the commodity flow survey conducted annually by the National Statistics Office • To provide a background that describes the macro environment, Gravity model for inter-regional trade analysis in the Philippines will be used • Analysis at the level of specific players in the supply chain will use primary data from survey interviews and focus group discussions

Food and Live Animals Inter-island Commodity Flow Pattern

O rigin

Origin

Luzon

Visayas

Mindanao

Total

Luzon

1,082

595

383

2,060

Visayas

733

624

212

1,568

Mindanao

909

966

197

2,072

2,723

2,185

792

5,700

TOTAL Source: NSO

Destination (million tons)

Trends in the inter-regional trade of agriculture commodities

The flow of agricultural commodities by destination island group shows the following: 1.Mindanao has been consistently the smallest destination. 2.Luzon has been the largest recipient of agriculture commodities but the share to volume has been diminishing since 2002. 3.The value of agriculture commodities being shipped to the Visayas has been increasing

Trends in the inter-regional trade of agriculture commodities (continued)

The flow of agricultural commodities by source island group shows the following: 1. Mindanao has been consistently the largest source of agricultural commodities. 2. After 1997, Luzon has overtaken Visayas as the second largest source of agriculture commodities being traded in the country.

Trends in Intra-island trade of agriculture commodities (Share to total of the island group)

• • •

The share of agricultural commodities produced in Luzon traded within Luzon has been increasing from 1994 to 2001 but has declined from 2002-2004, recovered in 2005 but has declined since. The share of Visayas and Mindanao has been relatively steady except slight fluctuations in 2008 and 2007, respectively. Compared to Luzon, the amount of agriculture commodities traded within the island group has been relatively small for Visayas and Mindanao.

Gravity Model Hypothesis: Improvements in transport services increases volume of agricultural commodities across regions

Model: ln Dij

ln Mij = β0 + β1 ln Yi + β2 ln Yj + β3 ln Nj + β4 + β5 ln Lij +β6 ln INi + β7 ln Inj

where: Mij is the trade flow from Region i to region j Yi and Yj is the GDP of regions i and j, respectively Nj is the population of the exporting region INi, INj is the level of infrastructure in region i and region j, respectively. Dij is the distance between region i and j. Lij if the number of trips from region i and region j of shippers This model will show that the volume and efficiency of

Initial Results of Gravity Model Variable

active

GDP-reporting

• •

•

OLS Coefficient t-stat 9.31 13.44

GDP-partner

5.25

8.2

5.24

7.56

Distance

-0.43

-8.18

-0.44

-7.73

Infrastructure Index

0.04

1.66

0.04

1.66

-115.88

-4.98

-125.66

-15.28

Constant •

Panel Random Effects Coefficient t-stat 8.14 3.01

A one percent increase in GDP of reporting region is associated with 8.14 percent increase in trade of agriculture products A one percent increase in the GDP of the partner region is associated with 5.25 percent increase in the trade of agriculture products A one percent increase in the infrastructure index is associated with 0.04 percent increase in trade of agriculture products. Infrastructure index is composite length of national roads and number of ports. All results are significant and follow expected signs.

What are indicated so far… • Inter-island trade suggests the importance of the producers of Mindanao as the source of agriculture commodities and the importance of the consumers/markets in Luzon (and increasingly in the Visayas) as the destination. • At the macro level, the gravity model tells us that improvement in infrastructure is associated with increase in trade of agriculture commodities

Subsequent activities for the Macro Part • Observe the annual flow pattern by commodity and mark any significant shifts in the flow through the years and re-estimate the model based on the specific commodity flow and markets. • Determine what caused these shifts: Are these influenced by changes in policy, industry organization and other factors or special circumstances. • Analyze and quantify the effects of interisland transport to inter-regional trade.

The Micro Part of the Study……

The following slides would present the issues at the micro level and how the study plans to tackle the issues towards identifying policy recommendations to improve efficiency of commodity markets, primarily for Papaya, Tomato and Lettuce.

Primary Data Collection Instrument • survey questionnaire targeting traders of the selected fruits and vegetables, the determinants of the performance of the supply chain are identified and analyzed • Questionnaires for the following were formulated: – – – – –

Growers Viajeros, traders, shippers Truckers Wholesalers/retailers Shipping lines

• The survey is to be conducted in major markets in Mindanao, principally Davao City, Cagayan de Oro City and other major urban centers where fruits and vegetables are actively traded.

Profile of Surveyed Growers

• • •

A total of 143 growers were surveyed with 103 growers completed data processing. Basic profile of the growers show that majority are males (almost 80 percent) . In terms of educational attainments, significantly fewer tomato and lettuce growers belong to those who completed college or higher studies. In contrast, papaya growers have more college graduates or above than HS grads or at

Growers: Going to the Market Row Labels

Average Average cost Average frequency Number of Average time to go to the Distance to going to the growers to Market market round Market (kms) market (days trip (Pesos) in a week)

Lettuce

20

NA

NA

NA

NA

Papaya

43

7.29

24.01

66.9

1.6

Tomato

40

15.79

37.07

170.0

1.2

•

•

While the 20 respondents who grow lettuce say they do not go to the market to sell their goods, their counterpart growers of papaya and tomato travel on the average 7 kilometers (about 24 minutes) and 16 kilometers, respectively. The cost of going to the market is considerably higher for Tomato growers than for papaya growers which explains the less frequency of going to the market.

Growers: Production and Marketing Characteristics Average of cost of production (Pesos per Hectare)

Average of Volume of Production (Kilos per hectare)

Lettuce

99,965.88

14,160.01

34.25

484,980.34

Papaya

63,019.37

48,058.34

4.03

193,865.11

Tomato

78,466.67

27,887.71

10.15

282,990.52

Row Labels

•

•

Average price at Average which crops revenue were sold (Pesos (Pesos per per kilo) hectare)

While papaya has the largest average volume of production, the low price at which the crop is sold results to a relatively less average revenue (assuming all crops are sold) Lettuce has the highest average price at which the crops are sold resulting to about .5M Pesos revenue

Distribution of Growers by method of disposing their crop

• • •

The method of disposing their crops is mainly dependent on traders (both bringing to traders and trader buying from the farmer) Small role of product consolidators Others is mainly contract growing

Percentage of Growers by reason for the choice of selling their crop We get to sell at Row Labels the highest price

It has been the custom

Most convenient No other choice

Lettuce

55

25

40

25

Papaya

49

51

28

14

Tomato

63

55

43

18

• The most selected reason for Lettuce and Tomato has been economic (selling at the highest price) • For Papaya, there is a slight edge for “customary” over economic reason • There is also a significant proportion (around 10-20 percent) of growers who feel that there is no other choice for selling their crops except for the current method they are applying.

Average Selling Price by availability of options for disposing Crops

Do they have other options for selling their crops? No

Yes

Lettuce

1.42

1.10

Papaya

3.91

5.12

Tomato

1.83

12.07

• Growers with options for selling their crops have, on the average, a relatively higher price for selling their crops, as can be seen for Papaya and Tomato. • An option for disposing crops can empower farmers

Observations from Shippers • The transport and logistics infrastructure for pineapples and bananas is more formalized and better managed. Hence, supply chain of these commodities are more efficient. • Small farmers producing papaya, lettuce and tomatoes do not have an efficient supply chain comparable to pineapples and bananas. • Domestic shipping costs for papaya, lettuce and tomatoes tend to be much

Observations from Shippers (continued) • Access to shipping facilities does not seem to be a problem but costs could be brought down by doing FCL rather than LCL for farm produce • The problem with LCL is that it is more tedious because there is a need for an area where the shipper has to assemble or aggregate commodities before loading them LCL • Shipping procedure through RORO may be more efficient than shipping LCL (with its problem of aggregation and individualized costs per shipper) and FCL (with problem about filling a 10 footer or 20 footer container when volume is difficult to produce.)

Initial Findings • Growers have always relied on traders in order to sell their crops especially since other options are limited or not avilable. • The data collected and key informant interviews are consistent in saying that traders are better prepared to get purchasing arrangements favorable to them at the expense of small farmers/producers

Policy Recommendations • Infrastructure in ports also need to be upgraded like increasing the number of operational gantry cranes • Formulate and impose standards to better regulate the shipping lines and vessels • RORO ships also offer a better deal for small farmers but these need to equipped with trucks – transport vehicles- which when fully loaded can be driven in the RORO ships and driven out upon docking at the port of destination.

Thank you very much.