PRICE DISTORTIONS IN THE ABACA FIBER MARKET

PRICE DISTORTIONS IN THE ABACA FIBER MARKET

Prof. Ma Eden S. Piadozo

( Metro Manila Commission Professorial Chair Lecture delivered at theDepartment of Agricultural Economics, College of Economics and Management on June 30, 2005 )

This paper was primarily undertaken to describe the market structure of the abaca industry and its effect on the price distortion in abaca trading. A total of 107 farmers, 21 assembler wholesalers, 18 wholesalers, 13 grading and baling establishments (GBEs) and 33 abaca processors (3 pulp manufacturers, 6 cordage manufacturers and 24 fibercraft processors) from the three major abaca producing regions in the Philippines were interviewed.

The abaca industry is characterized by an oligopolistic and oligopsonistic market at both the farmers' and traders' levels (assembler-wholesaler and wholesaler), respectively. Meanwhile, the GBEs and pulp manufacturers come close to a monopsonistic market where the three largest traders capture 100 percent of the abaca fiber supply in the market. Southern Mindanao has the highest level of concentration with the eight largest producers controlling 93.3 percent of the market. In fact, the largest producer in the region controls 60 percent of the market. On the other hand, there is moderate concentration in Bicol and Eastern Visayas with the eight largest producers gaining control of 43 percent and 45 percent of the abaca fiber market.

At present, there are eight normal grades and two residual grades adopted for both the hand-cleaned and machine-cleaned abaca fiber. In addition to these official grades, grade variations in JK, S-S2, Y and IG are used. The large number of grades creates confusion in the market. Due to farmers' less familiarity with all the different grades there are traders who reclassify the fiber into higher grades.

There are however, barriers to entry and exit from the industry. The traders' and processors' high financial requirement (initial capital investment and maintenance and operating expenses) serves to screen potential entrants into the industry. GBEs from Bicol and Eastern Visayas and Southern Mindanao reported average capital investment of P1.93M and P1.35M, respectively. The cordage company was established with an average initial capital investment of P5M, pulp processor with P37.5M and the fibercraft manufacturers with P0.063M. Secondly, the traders' huge amount of capital loaned out to farmers and lower traders hinder from leaving the industry. Furthermore, FIDA's rules and regulations on accreditation of abaca traders, inspection and certification serve as another barrier to entry. On the other hand, the high sunk costs, production knowhow, patented processes, and forward and backward integration of the abaca fiber processors provide them the absolute cost advantage over potential entrants in the industry.

Generally, there is lack of market information in the abaca marketing system. The farmers' main source of information is the traders while the lower level-traders are mainly dependent on the higher-level traders for information about price. The more distant farms are from the trader's buying areas, the more ignorant were the farmers of the prevailing market price. On the other hand, the abaca traders, especially the GBEs, possess more market knowledge because they can rely on other traders for information on prices and the general demand and supply conditions in the market. Almost half of the processors also relied on their buyers for market information. But they also depend on the internet in their buying and selling decisions. The processors exercise secrecy when it comes to their price, sales and other marketing strategies.

The market imperfection in the industry has affected the prices set in the market. Almost all the higher-level traders have set the price at each level, (i.e., farmers have very weak bargaining power when dealing individually with the traders) while the lower-level traders accept as given the price dictated by their buyers.

Computations of the price distortion coefficients reveal a 0.65 distortion coefficient at the farm level. This is because the price differential between farm and export prices for the different grades ranges from 44 to 2446 percent for hand-stripped fiber. The distortion coefficient is 0.86 at the wholesalers' level and almost equal at 0.75 at the AW's and GBE's levels. This means that the price they got covered their marketing costs incurred. It is highest for grades G and I and lowest at OT and S3 grades. This is further confirmed by the marketing margins increasing as one goes higher through the marketing chain.

This proves the earlier analysis regarding assembler-wholesalers controlling the market in villages and GBEs approaching almost a monopsonistic market in the industry.

Thus, efforts to increase the farmer's bargaining power through establishment of market information, review of grades used, and greater support to cooperatives are recommended.

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