Inflationary price drop harms farmers
There is a proposed diesel price decline that is surprisingly inflationary and will harm farmers. It recommends that diesel price should be lessened by replacing the 2 percent expensive coconut methyl ester (CME) diesel component at P60 a liter with regular diesel which is priced at P45 a liter. This will allegedly help curb inflation.
But by doing this, demand for coconut will further go down due to the loss of the CME market. This will consequently result in further decline in coconut farm-gate price, which has already fell to P4.50 from P11.50 over the last six months, and in the farmers’ income. Even now, many are already cutting and selling their trees just to survive, jeopardizing their source of livelihood.
The 2006 Biofuels Act mandated that CME should constitute 5 percent of diesel by 2020. CME is now at 2 percent, which has been unchanged for the last 12 years. The proposed CME elimination will decrease the price of diesel fuel by only 0.8 percent from P45 to P44.70. But given a broader view, this decrease can be inflationary.
Inflation means getting less value for P1 spent. If you spend P0.30 less for a liter but sacrifice 12-15 times (or P3.60 to P4.50) of the corresponding diesel value because of less mileage used due to inefficient fuel without CME, there is a huge net loss. Therefore, you get less value for a peso spent.
CME for efficient fuel use is analogous to fertilizer for a plant. While eliminating fertilizer decreases cost of production, the resulting decline in the value of production is much more than the fertilizer cost. Therefore, it makes sense not to decrease the plant production cost by eliminating fertilizer. Instead, the added fertilizer cost should be spent because of the much higher value from the increased plant’s production.
The same holds true for CME. On Aug. 13, a senior Department of Energy (DOE) official told us that the perspective of looking at CME in this context was not made clear when the proposal of eliminating the CME to cut fuel price was made.
According to Rafael Diaz of the Asian Institute of Petroleum Studies, the University of the Philippines (UP) with DOE supervision conducted a 2013 study on this issue. For the first 1 percent of the CME made as a diesel component, the return was 12-15 percent in Metro Manila, and more than 20 percent in less congested provincial roads. Therefore, removing even 1 percent CME today will already lose at least 12 times the return from increased mileage use due to cleaner fuel. This does not even include the benefits CME contributes to the environment.
The Agri-Fisheries Alliance (AFA) has submitted a position paper to the DOE strongly opposing the proposed CME elimination. Other ways of decreasing fuel prices, such as temporarily lessening it’s excise tax, can be used to help curb inflation. The AFA instead recommends increasing the CME component to 5 percent. The UP study showed this would have at least 5 times the return in terms of added mileage from cleaner more efficient fuel.
Increasing CME to 5 percent is not only counter inflationary and economically correct. It should be done with utmost urgency to the address the coconut farmers’ sad plight. In 2012, because of an announced (but not implemented) CME increase to 5 percent, farm-gate price rose by some 50 percent. If the 5 percent CME content in diesel is implemented, coconut farm-gate price will increase and farmers’ incomes will improve.
Coconut farmers are waiting for the coconut levy release, which still needs another law. They need more responsive government initiatives, such as intercropping in the two out of three million coconut hectares that are largely idle and coconut processing that can multiply their incomes. Meanwhile, Increasing the CME requirement to 5 percent makes economic sense and addresses the coconut farmers’ crisis today.
