Philippine Institute

for Development Studies

Policy Notes
Surian sa mga Pag-aaral
Pangkaunlaran ng Pilipinas ISSN 1656-5266 No. 2008-12 (December 2008)

Addressing policy issues and constraints

in agricultural diversification: the potential
contribution of the fruits and vegetables subsector

Roehlano M. Briones to industry and services. Within agriculture

itself, the process of development is also
accompanied by diversification as noted by

F
Rosegrant and Hazell (2000), at least for Asia
(p. 57):
As economies grow, there is a gradual
ruits and vegetables comprise a large movement out of subsistence food-
and dynamic subsector within Philippine crop production (mostly of basic staple
agriculture. Many of the vaunted “high value crops) to a diversified market-oriented
crops” are fruits and vegetables. By other production system. The process of
measures, however, fruits and vegetables are diversification out of staple food
a minor component of agriculture. They production is triggered by rapid
account for only one-tenth of total agricul- technological change in agricultural
tural area and command less attention in production, by improved rural infra-
terms of national programs and policies structure, and by diversification in
compared to traditional crops. Assessments food demand patterns. The slowdown
specific to the subsector are also relatively
sparse. PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-
tain policy issues. The treatise is holistic in approach and aims to provide useful
inputs for decisionmaking.
Economic development entails growth of per
This Notes is condensed from a forthcoming PIDS Discussion Paper Series by
capita income, which is typically accompanied the same author. The author is Senior Research Fellow at the Institute. The views
by structural change such as the diversifica- expressed are those of the author and do not necessarily reflect those of PIDS or
tion of output composition from agriculture any of the study’s sponsors.
2

in income-induced demand growth for fruit and vegetable production which may
staple foods is accompanied by a shift constrain diversification. Finally, scale econo-
of diets to higher-value foods such as mies may lead to a low-level equilibrium for a
meats, fish, fruits, and vegetables. particular village or crop, in which insuffi-
cient market size constrains investments in
In general, under perfectly functioning marketing; this simultaneously represses
markets with no transaction costs, there supply because of the absence of marketing
should be a smooth transition from traditional services (Emran and Shilpi 2002).
to diversified agriculture. However, in reality,
the transition is constrained by many factors, This Policy Notes discusses in more detail
including: low investments in and diffusion of some of these constraints and points out the
new technology; inadequate rural infrastruc- various policy issues dealing with the fruits
ture leading to market fragmentation; inse- and vegetables subsector development.
cure property rights, including faulty contract
enforcement; and government interventionsFruits and vegetables subsector
in the Philippines
such as restrictions on marketing and foreign
trade, ostensibly to promote self-sufficiency
Since the 1970s, the share of fruits and
and food security (Rosegrant and Hazell vegetables in agricultural output has been
2000). Environmental shocks and other increasing, albeit fairly slowly and erratically,
factors likewise introduce considerable risk in
from 23 to 31 percent. Its share in total area
though has been fairly stable over
Figure 1. Shares of the fruit and vegetable subsector in agricultural the same period (Figure 1).
ouput and area, 1970–2005 (in percent)
As shown in Table 1, some of the
major fruits and vegetables deserve
their reputation as high value crops
both in terms of yield and net return
per hectare. Nonetheless, despite
these, about three-quarters of the
country’s agricultural area continue
to be planted to the main traditional
crops, namely, rice, corn, coconut,
and sugarcane. Contrary to what
would be expected under competitive
markets, land does not in fact move
Source: Food and Agriculture Organization Statistics from low-return to high-return crops.

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This inertia may explain the lack of robust- Table 1. Cost and returns indicators per cycle, major fruits
and vegetables, 2004
ness in the growth of the agricultural sector
(World Bank 2007). Inertia may be attributed Yield (kg/ha) Net returns Profit/cost ratio Cash cost
(P/ha)
in part to entry barriers in the high value
sector such as high working capital require- Pineapple 36,842 120,529 2.25 41,020
ment (i.e., cash cost) combined with an Mango 6,087 77,523 1.71 27,423
Yellow corn 2,302 10,055 0.56 10,972
imperfect credit market. In general, total and Onion 10,121 56,100 0.56 74,113
cash costs are much higher for fruits and Tomato 9,744 28,258 0.42 49,463
Palay, irrigated 3,919 9,635 0.35 11,925
vegetables compared to cereals; similarly, Cabbage 12,042 23,362 0.29 482,528
fertilizer, pesticide, and hired labor account Palay, rainfed 2,664 4,900 0.24 7,651
for larger shares in total cost. White corn 1,426 1,282 0.11 4,787

Source: Bureau of Agricultural Statistics

For those able to overcome
market entry barriers, Figure 2. Shares of the major fruits and vegetables in total agricultural
financial rewards can be exports and imports by value, Philippines, 1994–2007 (in percent)

large since many of the

country’s fruit and vegetable
products are internationally
competitive and command
relatively high prices in
global markets (Figure 2).
The subsector accounts for a
large share of total agricul-
tural exports, far out of
proportion to its area and
output shares. Being only a Source: Bureau of Agricultural Statistics
minor component of agricul-
tural imports, the subsector
is therefore a significant net earner of foreign engaging in more sophisticated supply chains
exchange. but their farm sizes place them in the small-
holder category. The same characterization
Unfortunately, many vegetable farmers remain may hold for fruit farmers (e.g., Intal and
resource-poor; they tend to supply only to the Ranit 2004) but a crucial difference is that
traditional wholesale and retail wet markets. large-scale integrated production and process-
Those with resources and management know- ing may be observed in major fruits such as
how are able to realize higher returns from bananas and pineapples (Pabuayon 2000).

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This includes long supply chains that link sedimentation, water pollution, and worsen-
independent producers, processors, and ing pest and disease problems, and impose
traders. serious negative externalities off-site (e.g.,
diminishing irrigation coverage) as well as
Policy issues and development threaten long term on-site productivity (e.g.,
constraints from topsoil loss).
Given the potentials for the fruits and veg-
etables subsector, what prevents its full Property rights. Property rights reform remains
development and its contribution to the a problem in private lands, despite decades of
diversification of the agriculture sector? agrarian reform. Protracted implementation
undermines farm investments, particularly in
Basically, the set of policy issues affecting permanent land improvements (Briones 2004).
agriculture as a whole, as identified by In the case of permanent crops such as fruit
Balisacan et al. (2007), is the same set of trees, land reform may be implicated in the
factors that are at work within the fruits and absence of new planting by traditional
vegetables subsector. These include: landowners (World Bank 1998). Moreover,
most awarded land (72%) is covered by
Resource degradation. Briones (2006) identi- collective rather than individual land title
fies a set of environmental problems associ- (Asia Pacific Policy Center 2007), undermining
ated with agricultural practices and farming investment incentives for agrarian reform
systems, particularly intensive cultivation in beneficiaries. Finally, land reform brings with
the lowlands, and encroachment of annual it an array of formal restrictions on the
crop cultivation in the uplands wherein transfer, sale, conveyance, and rental of
vegetable farming is implicated to the extent agricultural land, imposing grave distortions
that it is widely practiced in the uplands (in on rural land markets (Ballesteros and Cortez
the case of temperate crops) and in the 2007).
lowlands (for tropical crops). These problems
include: soil erosion, loss of biodiversity, Market price policy. With the country’s acces-
sion to the World Trade Organization (WTO) in
With the country’s accession to the World Trade the 1990s, the pattern of protection shifted
Organization (WTO) in the 1990s, the pattern of in favor of agriculture unlike in previous
protection shifted in favor of agriculture unlike in decades when agriculture was the penalized
previous decades when agriculture was the penalized sector (David 2003). In the course of
sector...In the course of tariffication, the Philippines tariffication, the Philippines (like many
(like many developing countries) negotiated for high developing countries) negotiated for high
ceiling rates. ceiling rates. Based on the nominal rate of

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assistance, the major import-competing Table 2. Nominal rates of assistance by agricultural

commodity, in percent
products now receive strong market price
support, with the highest rates observed for 1980–84 1985–89 1990–94 1995–99 2000–04
sugar, corn, chicken, and rice (Table 2). Coconut -27.1 -20.6 -15.3 -7.8 -14.1
Domestic protection is implemented through Banana -4.0 -0.8 0.0 0.0 0.0
both tariff and nontariff policies. The Rice -16.3 14.5 20.9 52.7 50.7
Maize 20.1 59.8 62.6 78.5 54.5
country’s food security policy has skewed its Sugar 59.5 123.2 49.3 97.2 79.3
public spending priorities and deprived Beef 5.0 17.0 28.0 28.0 10.0
Pigs 35.8 51.0 25.1 20.6 -8.3
funding for worthy initiatives such as invest- Chicken 38.4 42.9 56.5 42.2 52.1
ment in agricultural diversification toward
Source: David, Intal, and Balisacan (2007)
high-value crops.

Rural finance. In general, smallholder agricul- percent higher on very bad roads (Intal and
ture has been largely bypassed by the formal Ranit 2004).
credit system. Expansion of the rural financial
sector has been hindered by inconsistent An even greater concern is shipping. Domes-
policies such as credit subsidies, directed tic port operations are inefficient, making
sector loans, and loan targeting (Balisacan et service costs the highest in the region. In the
al. 2007). The tree crops sector faces an even North Harbor, servicing time is very long,
more acute problem owing to the absence of accounting for 50–70 percent of domestic
long-term finance. liner vessels’ operating time. Port inefficiency
is linked to the regulatory environment. The
Marketing infrastructure. Given the country’s Philippine Ports Authority (PPA) is designated
archipelagic layout, the distribution of goods as the regulator of private port operations
from agricultural areas to population centers and is in charge of issuing operating permits.
requires long transport links over land and However, it also owns and operates many of
sea. However, the country’s distribution the country’s major ports, leading to a
system is costly and inefficient. Farm-to- conflict of interest (Llanto, Basilio, and
market roads are insufficient, depreciated, Basilio 2005).
and of poor quality. Sea and air transport
facilities (outside a few urban enclaves) are Technological change. Adoption and impact
small and antiquated (Digal 2001). Transport assessment studies in the Philippines, as
cost forms the bulk of distribution cost. summarized in Balisacan et al. (see e.g.,
Inadequate infrastructure raises transport Mangabat et al. 2002), identify several
costs, with vehicle operating cost becoming adoption constraints such as bureaucratic
50 percent higher on poor roads and 100 barriers; shortage of essential facilities,

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Policy Notes
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equipment and/or expertise; limited field clearly a need for a sustained, high-quality
trials and demonstrations; competition from training program as well as continuing
cheaper alternatives; time lags in research equipment upgrade.
and commercialization; and the absence of
markets or poor infrastructure to support Concluding remarks
industry development. In conclusion, to accelerate technological
change, particularly among smallholders,
These findings are also shared by other investment and policy reform should aim at
studies. According to a review by Gapasin integrating markets and removing policy
(2006), while some types of R&D investment distortions. The national agricultural research
posted high rates of return, these returns are and extension system must also be synchro-
realized for only a few cases and commodi- nized with the wide-ranging and fast-chang-
ties. In general, adoption rates are low (about ing requirements of agribusiness enterprises
25%), indicating a gap due to incompatibility along the value chain. Addressing these
of the technology to farm-level conditions, policy and governance issues would have a
weak extension, inadequate support services far-reaching impact on the fruits and veg-
including credit, and low market demand. For etables subsector, in particular, and on the
instance, commercialization of new varieties agricultural sector as a whole through the
for papaya and duck were hindered by a lack dynamic benefits to be realized from diversifi-
of planting materials and animal stocks. cation and transformation within agriculture.

Poor quality of technology may be due to the
traditional commodity orientation of research, References
involving the generation, verification, and Ali, M. 2000. Dynamics of vegetables in Asia: a
promotion of productivity-enhancing tech- synthesis. In Dynamics of vegetables in Asia,
nologies. Furthermore, the organization of the edited by M. Ali. Shanhua, Taiwan: World
public agricultural R&D system has evolved Vegetable Center.
into a complex, sprawling set of institutions Asia Pacific Policy Center. 2007. Study on the
impact of CARP on poverty reduction and
that are rigid, difficult to coordinate, and
prospects for long-term growth. Report
resistant to more demand-driven approaches
prepared for the Department of Agrarian
to R&D. A similar set of problems plague the
Reform.
extension system; there are too many autono-
Balisacan, A.M., S. Cuthbertson, M.S. Sombilla, and
mous extension units in a dispersed system,
J. Corbishley. 2008. Philippines’ policy
with tenuous links to R&D and private sector linkages scoping study. PLIA/2005/151.
institutions. There is no M&E system or Canberra: Australian Centre for International
mechanism to ensure accountability. There is Agricultural Research.

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Policy Notes
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Briones, R. 2002. Agricultural investments and the Esplana, M. Rondon, J. Lantican, N.M. de
pace of land reform. Loyola Schools Review Leon, and E.V. Tepora. ____. Impact assess-
(Social Sciences Edition) 2:29–42. ment of 25 ACIAR-supported projects in the
Briones, N. 2007. Environmental sustainability Department of Agriculture of the Philippines.
issues in Philippine agriculture. Asian Journal Impact Assessment Program Working Paper
of Agriculture and Development 2(1/2):67–78. Series No. 42. Canberra: Australian Centre for
David, C. 2003. Agriculture. In The Philippine International Agricultural Research.
economy: development, policies, and chal- Pabuayon, I.M. 2000. Fruits program area research
lenges, edited by A. Balisacan and H. Hill. planning and prioritization: background
Quezon City: Ateneo de Manila University analysis. PIDS Discussion Paper Series No.
Press. 2000-18. Makati City: Philippine Institute for
David, C., P. Intal, and A. Balisacan. 2007. Development Studies.
Distortions to agricultural incentives in the Rosegrant, M. and P. Hazell. 2000. Transforming
Philippines. Agricultural Distortions Working the rural Asian economy: the unfinished
Paper No. 28. Washington, D.C.: World Bank. revolution. Oxford University Press (China)
Emran, M.S. and F. Shilpi. 2002. Marketing exter- Ltd., Hong Kong, for the Asian Development
nalities and market development. Policy Bank, Manila.
Research Working Paper 2839. Washington, World Bank. 1998. Philippines: promoting equi-
D.C.: World Bank. table rural growth. Report No. 17979-PH.
Gapasin, D.P. 2006. Agricultural research, develop- Rural Development and Natural Resources
ment, and extension. Philippines: rural growth Sector Unit, East Asia and Pacific Region,
and development revisited study. Rural World Bank, Washington, D.C.
Development and Natural Resources Sector ———. 2007. Philippines: agriculture public
Unit, East Asia and the Pacific Region, World expenditure review. Technical working paper of
Bank. World Bank, Washington, D.C. the Rural Development, Natural Resources and
Intal, P. and P. Ranit. 2004. Literature review of Environment Sector Unit, World Bank, Wash-
the agricultural distribution services sector: ington, D.C.
performance, efficiency, and research issues. In
Special issues in agriculture, edited by E.
Ponce. Makati City: Philippine Institute for
For further information, please contact
Development Studies.
Llanto, G. M., E.L. Basilio, and L. Basilio. 2005. The Research Information Staff
Philippine Institute for Development Studies
Competition policy and regulation in ports and NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City
shipping. PIDS Discussion Paper Series No. Telephone Nos: (63-2) 894-2584 and 893-5705
Fax Nos: (63-2) 893-9589 and 816-1091
2005-02. Makati City: Philippine Institute for E-mail: rbriones@pids.gov.ph; jliguton@pids.gov.ph
Development Studies.
The Policy Notes series is available online at http://www.pids.gov.ph. Reentered
Mangabat, M.C., N.T. Yanson, E. Sanguyo, A. as second class mail at the Business Mail Service Office under Permit No. PS-
Natividad, N.D.M. Carambas, M.A. Ilagan, E. 570-04 NCR. Valid until December 31, 2008.

PN 2008-12

Policy Notes
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Publications released in 2008

Books
Human capital and development in the Philippines: a festschrift in honor of Alejandro N. Herrin
(edited by Joseph J. Capuno and Aniceto C. Orbeta Jr.)

Research Papers
RPS 2008-01 Rice and Philippine politics (Ponciano S. Intal Jr. and Marissa C. Garcia)
RPS 2008-02 Rice production practices (Eulito U. Bautista and Evelyn F. Javier)
RPS 2008-03 Rice in the Filipino diet and culture (Filomeno V. Aguilar Jr.)

Policy Notes
PN 2008-01 Fishpen and fishcage culture in Laguna de Bay: its importance and problems (Danilo C. Israel)
PN 2008-02 The autobus is leaving...can the Philippines catch it? (Rafaelita M. Aldaba)
PN 2008-03 Ensuring a more evidence-based policy for basic education
(Dalisay S. Maligalig and Jose Ramon G. Albert)
PN 2008-04 Regional cooperation in East Asia amid global economic turmoil (Josef T. Yap)
PN 2008-05 Dealing with the soaring price of rice (Roehlano M. Briones and Arsenio M. Balisacan)
PN 2008-06 Microinsurance: does traditional regulation apply?
(Gilberto M. Llanto, Joselito Almario, and Maria Piedad Geron)
PN 2008-07 Are recent gains in BIR tax effort sustainable? (Rosario G. Manasan)
PN 2008-08 Restructuring the Philippine Statistical System in response to new challenges
(Jose Ramon G. Albert, Celia M. Reyes, and Mari-Len R. Macasaquit)
PN 2008-09 Make ‘deliberate’ haste in rolling out the 4Ps (Gilberto M. Llanto)
PN 2008-10 Lessons for the Philippines from the US financial crisis (Gloria O. Pasadilla)
PN 2008-11 Issues on counting the poor (Jose Ramon G. Albert)
PN 2008-12 Addressing policy issues and constraints in agricultural diversification: the potential contribution
of the fruits and vegetables subsector (Roehlano M. Briones)

Economic Issue of the Day

EID Vol. VIII No. 1 Summing up: some basic poverty notes (Fatima Lourdes E. del Prado)
EID Vol. VIII Nos. 2&3 What caused the global financial crisis of 2008? (Josef T. Yap)
EID Vol. VIII Nos. 4&5 Diaspora: explaining a modern Filipino phenomenon (Sheila V. Siar)

____________
The Policy Notes Series and Economic Issue of the Day can be downloaded from http://publication.pids.gov.ph/

PN 2008-12

Policy Notes