Supply Competency Projection Of Philippine Cocowater Economics Essay

Coconut is the major tree crop in the Philippines. Gary Teves of the Landbank of the Philippines in one his speeches states that coconut products in the country serves as a source of income to an estimate of 3.4 million coconut farmers with an estimate of 491 million coconut trees, located in 3.3 million hectares (33%) of Philippines’ arable land and that these produces 12 billion nuts annually which benefits practically one-third of the Philippine population.

This paper is an assessment of production related issues in the Philippine Coconut industry which examines and analyzes literature to further calculate the probable supply curve of Cocowater endeavoring upon emphasis on the impact of the physical resource capabilities (i.e., types of soil, weather conditions, seedlings, coconut farmers and laborers, irrigation, production area, fertilizers, technological advancement, capital, etc.) to productivity yield.

The purpose of the study is to assess the competency of Cocowater production in the Philippines, concentrating on the leading coconut-producing-province in the country, Quezon.

PROBLEM STATEMENT

With the global trend towards healthier and more affordable food options, the demand for Cocowater as a healthier substitute for ordinary drinking water, energy drinks and thirst quenchers consequently increased in many Coconut producing countries. The Philippines being one of the largest coconut-producing countries in the world aims to have competitive advantage in its production to supply the growing interest for cocowater globally and in the export market.

It could only transpire if there is a factual analysis of the supply curve correlating the different inputs to formulate interrelationships that are intended to satisfy the changing demand patterns.

Proper allocation of the Philippines’ natural resources to fully utilize its value would be of advantage of the country in the economic side. Looking at the feasible profit coming from the cocowater export market, it could strengthen the growing economy of the Philippines to attain sustainable development.

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Handling our resources for cocowater production could suggest creation of permanent and long-term job for the rural community, infrastructure development in the area of production, introduction of technological advancements in the industry, integrated government policy and rural development would all be beneficial to the country to fully have inclusive growth.

RESEARCH PROBLEM:

With the expanding market for Cocowater in the international scene, how can Quezon province’s coconut producers conform to the increasing demand trend?

The objectives of the study are as follow:

To describe the resource capability of Quezon as the main coconut producing province in the Philippines;

To comparatively assess such resource capabilities and its impact on high productivity;

To provide development findings in Quezon which focuses on increasing coconut crop productivity;

To identify correlation among resources that could influence changes in coconut production;

To distinguish government support and suggest policy measures which contribute most to coconut economic prosperity;

And to use historical data (1990- 2010) vis-à-vis resource potential to effectively project the supply requirement.

SIGNIFICANCE OF THE STUDY

In line with the growing exigency of Coconut water both in the local and international perspective, an assessment of such physical resource inputs would help formulate production supply schedule for the Coconut producers and establish feasible economic gain to attract Government assistance for the coconut industry.

SCOPES AND LIMITATIONS

The study will determine the various inputs and variables that affects the supply of cocowater in the Philippines specifically that of Quezon Province. The model created regarding the correlation and impacts of the said variables to the cocowater output will be discussed and analyzed. This study will also gather pertinent data. Challenges and problems in the industry and also its strengths would be the focus of this research. However, every study has its own limitation, only the economic perspective will be studied and analyzed and less would be the focus on the agricultural processes and perspective. Also, given constraints in data gathering, a 20-year time frame from 1990 to 2010 would be used to provide significant analysis.

Coconut water as discussed in this paper refers to the processed coconut water, export-quality product which is considered waste during production of desiccated coconut. It is however different from water from fresh young coconut which must be consumed immediately after collection. Therefore, this study focuses only on the coconut water that is exported internationally.

HISTORICAL BACKGROUND

A social advocacy and networking medium- The Coconut Industry- the story of tree of life (2009) describes coconut as an agricultural product that has been with us since our initial forebears first settled this archipelago. Our ancestors found many uses for basically every part of the coconut tree.  From the coconut fruit, derived food and ingredients for; fresh juice with medicinal purposes; vinegar and wine; oil; durable building materials like fiber. Filipino ancestors treated coconut generally as an abundant renewable source of their basic needs in life and as goods for exchange.

A compilation of coconut industry performance (Dayrit) tackles the Philippine condition wherein the Filipino peasant farmers were becoming fascinated into the rising world market as a colonial producer-supplier.  Through Spain, Great Britain and the other European countries on path trading coconut products, mainly copra which is more of a raw material than a processed product.  Also, in their compilation of literatures, they cited Blair and Robertson et. al., who discussed the Philippine coconut industry starting from 1642 when the Spanish colonizers passed an edict requiring each Indio to plant 200 coconut trees in order to produce fiber for galleon rigs from coconut husks and caulking for the hulls from charcoal. By 1899, copra was being exported to Europe for the manufacture of soap and margarine. According to the Philippine Coconut Authority, the first two decades of the American occupation of the Philippines saw the development of the coconut industry. The first modern coconut oil mill in Manila was established in 1906 thus resulted in the coconut oil production commercialization. By 1927, coconut exports to the US ranked second to sugar. The implementation of Tidings-McDuffie Act and the US Revenue Act of 1934 restricted further development for the coconut industry in the Philippines. After World War II, processed coconut products, such as coconut oil and oleo chemicals, gradually replaced copra as the major export. However, the contribution of coconut products to the country’s export earnings fell from a high of 35% in the 1950s and 60s, to less than 2% in 2001. The agency also stated that the coconut represents the Philippines in many ways. It is deeply embedded in our Philippine culture. About 25% of our cultivated land is planted with coconut trees, and it is estimated that 33% of Filipinos are directly or indirectly dependent on coconuts for their livelihood. The major products derived from coconut trees are copra, copra meal/cake, desiccated coconut, coconut oil, and oleo chemicals. Other products include coconut water, vinegar, coir, coconut husk, and handicrafts. Copra was the coconut major product from the 1900s until the 1970s.

Coconut farmlands are broadly scattered nationwide, mostly in regions of Southern Luzon in the North and Mindanao in the South. There are approximately 324 million coconut trees in the country, 85% of which are considered productive. The coconut industry alone provides an annual average of 5.97% contribution to the Gross Value Added and 1.14% to the Gross National Product. Below are the stated facts about the coconut industry in the Philippines by the PCA (PCA Coconut Statistics) proving that the dominant sector of Philippine agriculture is the coconut industry:

Of the 12 million hectare of farmlands, 3.1 million hectare is alloted to coconut

68 out of 79 provinces are coconut areas

Over 324 million bearing and non-bearing coconut trees

About 3.5 million coconut farmers

25 million Filipinos are directly and/or indirectly dependent on the coconut industry

59% share in world exports of coconut

Average of US $760 million per year among the top 5 net foreign exchange earners

This industry plays a key role in the Philippine’s shaping of national development. It is among the top ten export produce of the country as exhibited by the good export piece of both traditional and non-traditional products. It provides a sustainable income source for Filipinos by way of employment creation through its many programs.

STRUCTURE OF COCONUT INDUSTRY

This section deals with the local and international marketing, the agricultural sector and the industrial sector of the coconut industry. The agricultural sector provides data on how much land is allotted to coconuts planting, the number of coconut products produced, and other indicators as well. The industrial sector provides data on the different process a coconut product undergo before it reaches the end-users such as transportation, and other agri-industries. Local marketing presents the flow of the coconut commodity from producers to end-users. The export industry, which represents the greater part of the coconut industry structure discusses the benefits as well as the drawbacks of an export-oriented industry.

Agricultural Sector

Coconut is one of the most comprehensively grown crops in the Philippines. Dy and Reyes (The Philippine Coconut Industry: Performance, Issues and Recommendations ), in their report to Economic Policy Reform and Advocacy, provides factors as to why coconut plays an important role to the country’s agriculture sector such as; (1) coconut farms are reportedly present in 69 provinces in the Philippines; (2) These farms cover 3.3 million hectares (ha), or nearly 30% of farmlands in the Philippines; (3) coconut regions host among the largest number of rural poor; (4) Agricultural exports of the country is composed nearly half by coconut products; (5) coconut lands are said to have largest potential for diversification; (6) coconut industry has an immense resource for industry’s development such as the coconut levy funds.

The coconut palm is found to grow under varying climatic and soil conditions. The ideal soil conditions for better growth and performance of the coconut tree are those with proper drainage and good water-holding capacity. It should be ensured by the farmers that there is a proper supply of moisture in the land either from well-distributed rainfall or through an effective irrigation system.

Lacking sustainable technology for vegetative method of propagation, coconuts from the Philippines are propagated through seeds. If the seed nuts happen to be of poor quality, the coconut plantation will substantiate into being inefficient and uneconomical causing significant loss not just of money of the farmer but also that of his time.

However, mere planting of good seedling does not always ensure better production. This is mainly due to misconceptions in selection of material used such as mother palm, ill management with regards to irrigation and fertilization and more. This could and would reflect in terms of poor foundation, growth, development, output produced and its quality resulting to a significant economic loss not just locally but also in the broader perspective of global export situation.

Planting system and Spacing are important factors to consider in the agricultural production of coconut products to ensure high productivity yield owing to the allowable density of young coconuts due to constraints of water availability and also the quantity and quality of sunlight in a given distance to each and every tree.

Industrial Sector

Dr. Rolando Dy (The Philippine Coconut Industry: Performance, Issues and Recommendations ) identified five factors at work for the development of the Philippines agribusiness industry. These are: markets, geographical location, natural endowment, entrepreneurship, and trainable workforce.

Markets – The Philippines has the 12th largest population in the world estimated at around 94 million. The country’s population provides huge domestic market for food products. Nonetheless, Dy said that the underperformance of the agriculture sector in the past decades has resulted in the deterioration of the purchasing power of the rural population, which comprises half of its customers. An estimated 75% of the 16 million households in the country have relatively low purchasing power.

Geographical Location – The Philippines is situated in a strategic location. It is close to the fast growing economies of China, South Korea and Japan. China has an estimated 300 million people belonging to the middle class, which spent around $405 billion on food in 2008. Collectively, South Korea and Japan has a consumer market of 168 million which are mostly from high income market. As member of ASEAN, the Philippines also has access to around 150 million middle to high income class consumers in the region. The country is also near the developed economies of Australia and New Zealand which host mostly large middle income classes.

Natural endowment – The Philippines is endowed with fertile lands and tropical climate which are favorable for growing tropical and semi-tropical crops.

Entrepreneurship – The country has many successful agribusiness entrepreneurs that have presence in the international markets.

Trainable Workforce – The Philippines boast of an abundant supply of trainable workforce that provide the backbone for the agribusiness sector

The future growth in agriculture calls agricultural diversification with the intensification of present production trend. Because agribusiness products have a higher value compared to the traditional crops, it represented a way to diversify agriculture away from traditional crops. These value-added products the same as labor-intensive products also generate rural employment, required by most governments, to maintain people in the rural area and to lessen urbanization problems. Coconut crops undergo several post-harvest activities such as, transportation of goods, storage, quarantine/ disinfection against fruit fly to utilize the full potential of coconut yields.

Gonzalez O. N. et. al. (1983) provided a developed process coconut products undergo before it reaches the market. Coconut water go through a procedure of filtration at once using either traditional method of cheesecloth filtration or through mechanically filtering machine or going through a basket centrifuge which extracts bristly unrefined particles. Immediately, coconut water is submitted to pH adjustment with the use of food-grade acid and refined sugar. Sodium benzoate is added as preservative given the level that is permitted by Bureau of Food and Drugs (BFAD). It is then pasteurized through a High Temperature Short Time (HTST) heating unit. All of which entails additional cost and to ensure profit, technological advancement must be adopted to have lowest possible average cost, thus, additional value for the product.

Local Marketing

Domestic and local marketing outlines the transmission of coconut products from the farmers, at its raw forms, and is then handed over to coconut traders, to its end-users: coconut importers.

An assessment paper- Coconut in the Mekong Delta (Smith, et al., 2009) provided an analysis of the coconut producing countries in Asia and states several weaknesses in the local marketing of coconuts in the Philippines. It is said that there is a comparatively low productivity yield in farm level, adding to the low farm gate prices which serves as long-term disadvantage for the industry. It also asserts that farmers in the Philippines are observed as being among the poorest of the agricultural producers. In Malaysia and Thailand, the other major coconut producing countries in Asia, low profit from coconuts has driven farmers to shift to other more profitable crops and an overall decline in the local coconut marketing industry.

One of the problems with marketing coconut water is its high perishability rate. Storage, prevention from spoilage and transportation of the resource are some of the significant processes if the coconut water is not pasteurized after the collection due to constraints of facilities and technology which is of great expense to producers.

However, Joson, L.M. et. al., (1984) developed a process called “Concentration of Coconut water by Reverse Osmosis (RO)” that could answer the problem by creating concentration of coconut water into a form easily rehydrated to reduce shipment, weight, volume and costs to improve coconut production stability.

Export Processing Sector

The Philippine Coconut Industry is export-oriented. The traditional coconut export products are crude oil, dessicated coconut, copra, refined coconut oil, copra solvent meal pellets, copra cake/meal expeller pellets, coconut shell activated carbon and coconut shell charcoal. Department of Agriculture provides statistics regarding the destination of Philippine coconut export in 2006 (Coconut Situationer, 2007):

COCOWATER IN THE PHILIPPINES: OVERVIEW

Right now, the Philippines is the world’s biggest exporter of coconut, mainly coconut oil. Coco oil exports, however, fell by double digits in both volume and value terms in August 2011 due in part to lower domestic output (United Coconut Associations of the Philippines). But despite of this, given the fast-growing demand for coconut water as a healthy and alternative sports drink globally, officials said the Philippines, being the world’s top coconut exporter, is taking steps to ensure sustainable supply.

Carlos Carpio, deputy administrator of Philippine Coconut Authority (PCA), once said in an interview that the government has increased its budget for coconut replanting in the country. The agency was given eight times more than last year’s budget, amounting from P60 million to P512 million this year and around P354 million was also allocated for the coconut plantations fertilization (ABS-CBN, 2011)

According to Philippine Coconut Authority, as of 2010, 26% or 3.56 million hectares of the Philippines’ total agricultural lands are planted with coconut. 68 out of 79 provinces are coconut areas including the big plantations in Quezon and Camarines Sur (PCA Coconut Statistics)

PRODUCT/ COMMODITY DESCRIPTION

Philippine Coconut Authority (2005) describes coconut water as water/juice of coconut that is also called liquid endosperm processed with the up-to-date equipment and machinery to preserve the revitalizing and refreshing quality and flavor of coconut water. It becomes a great waste as it is thrown away during copra making. Uses of coconut water include vinegar, coconut wine, and production of nata and ‘as a substitute for dextrose’

The harvesting and processing procedures allow the producers to package and pasteurize the coconut water that are in nature pure, without adding any kind of preservatives. Delicately tasting and packed of all the natural juices, nutrients, vitamins, minerals and sugars required and demanded by everyone especially by athletes. It is a luscious drink that can be used as juice-based when mixed with the supplementary fruit flavors.

PHILIPPINE PERFORMANCE

The reality that the Philippines is one of the world’s largest coconut producers, many have concluded that the Philippine coconut diversity most likely tastes, if not the most, undeniably delicious in the world. Experts at the Philippine Coconut Authority explain that this is because of our country’s unique geography as an archipelago. The natural wind patterns and sea currents that cross freshen the Philippines’ 7,107 islands combined with an ideal tropical climate and fitting sandy soil to produce the world’s best-tasting fresh coconuts allows for the best growing environment. This competitive advantage that yields a superior coconut represents a compelling argument for creating our own brand of coconut water.

Hopefully, our own brand of coconut water can revitalize our coconut industry and pave the way for backward vertical integration, supplying their own raw materials for the production of coco water.

GOVERNMENT POLICIES AND PLANS

A significant number of policies and plans have been legislated since 1970s to organize several duties on the coconut industry. Moreover, it is observed that policies imposed by the government are pro-big coco producers only to the disadvantage of small farm landholdings. With this progress, BOI (Board of Investments), NEDA (National Economic and Development Authority) and other business development team recommend an Action Plan to (Research, Development, and Extension Branch, PCA, Central Office):

Formulate a roadmap to guide the industry in tandem with the conduct of regional and national stakeholders’ summits to improve the investment climate in emerging coconut products.

Conduct investment forums to introduce available technologies, secure investments for SMEs (Small-Medium Enterprise) and provide assistance to farmer groups in setting-up SMEs.

Enforce through the LGUs (Local Government Unit), PNP (Philippine National Police) and PCA (Philippine Coconut Industry) the law that prohibits the cutting of the coconut trees.

Formulate and enforce, through PCA, BFAD (Bureau of Food and Drugs) and FDC (Freedom from Debt Coalition) the product standard for all emerging coconut products.

Supply response for non-traditional product, like Coconut water, receives a little attention for study because of modeling difficulty and data constraints. To model supply analysis appropriately, an understanding of producer’s short-run decisions (input applications) and long-term decisions (land allocation, investment levels, etc.) is required. Therefore, it is essential to understand supply response for coconut water because supply analysis helps to determine profitability of production, the impact of government policies, and the effects of input shortages (labor shortage).

The next section reviews literature on past studies that dealt with agricultural products to determine other variables and factors that can affect the supply of the given product.

CHAPTER II. REVIEW OF RELATED LITERATURE

Previous journals had studied the relationships of different variables that affects the supply of agricultural products specifically that of coconut, its relationship and correlation to one another.

Coconut Production, Total Coconut Tress in Quezon Region, Cost of establishments and maintenance, Equipment adopted by coconut producers, Irrigation system

(1) Devadoss and Luckstead in their paper “An analysis of apple supply response” (2009) discussed the data sources and the variables used to model the supply of Apple. Data was collected for the following variables pertaining to apples, cherries, and pears: yield per acre, bearing acreage, investment (new plantings), average prices for fruits, fuel costs, labor costs, service and machinery costs, material costs, interest costs, and weather for the state of Washington. The period for the data ranges from 1974 to 2005. Since their analysis deals with apple crops at the state level, they were able to obtain data for several important variables including new plantings, removals, yield, and county-specific weather information. This comprehensive data allowed them to estimate the relevant structural equations instead of relying on a single reduced-form supply equation.

This paper gives the researchers the probable variables needed to model the supply of an agricultural product that would be useful in econometric analysis and forecasting part of this paper.

Access to Credit and Finances

(2) A paper by Endaya, et.al., (2006) provides the researchers with a revision of the speculating climate and business environment of the promising coconut-based industries. For these industries to comprehend their economic prospective and add to investment and efficiency development, the government should guarantee a vigorous investment atmosphere for them.

The general representation of the investment environment in the Philippines provided by the World Bank’s and Asian Development Bank’s (ADB) investment climate surveys barbed to the upper cost of doing business in the Philippines comparative to its next-door countries (Endaya, Villegas, Espina, Tallada, & Mesias, 2006). Many of the surveyed firms in the World Bank survey measured the country’s employment regulations (e.g., wage fixing, hiring, and firing) as a chief impediment. More than half also reported paying bribes or incurring fatalities from offense and turmoil. Further factors that set off investors were the erratic analysis of policies, electrical or control outages, lack of assurance in courts keeping property rights, poor access to electricity, tax rates, and access to financing institutions. The country also did not execute well in the areas of opening a business given the prolonged measures and phase to record a business, mostly for micro-enterprises and small and medium enterprises.

These outcomes established the conclusion of the ADB survey in which most firms reported as the main to strict constraints the areas of macroeconomic volatility; corruption; towering cost and outages of electricity; extreme tax rates; reservations in economic policies; and high occurrence of crime, theft, and civil disorder as well as poor tax supervision Apparently, the accessibility of accomplished and knowledgeable employees was the merely clean factor of the Philippines. Most of the surveyed firms were also enthusiastic of the enhanced telecommunication systems in the nation in provisions of contact and charge.. (Endaya, Villegas, Espina, Tallada, & Mesias, 2006)

Surrounded by the supply and rate series of the rising coconut-based industries, the SWOT (strengths, weaknesses, opportunities, threats) study showed a pathetic rate series that is still very susceptible to worries in macroeconomic rudiments and exterior shocks. (Endaya, Villegas, Espina, Tallada, & Mesias, 2006) The connectivity and linkages between and among these section parts of the potentially powerful coconut-based agro-industrial group are also very delicate. There are some sturdy mechanism like few well-managed standard plantations (2-3 tons per hectare copra yield) and few Agrarian Reform Communities that expected methodological support from DAR and PCA as well as patron institutions. Artifact improvement appeared tough with internationally spirited industrial advances in virgin coconut oil (VCO) and its element functional food, biodiesel, geotextile, and rubberized coir breakthroughs, to cite a few. What linger very awkward are the market maturity and sales endorsement piece, and its frail linkages to product expansion and logistics and allocation succession.

(3-5) A common approach to overcoming farmer credit constraints in the past has been to provide directed subsidized credit. Several studies, Binswanger et. al (1983) in “Risk Aversion and Credit Constraints in Farmers’ Decision-Making: A Reinterpretation” and Bromley et. al (1989)in the “On Risk, Transactions, and Economic Development in the Semi-arid Tropics” suggest that chances to spread risks to other parties are not enough, hence restraining farmer use of credit and the adoption of new technologies. Krause et al. (1990) in “Risk Sharing Versus Low-Cost Credit Systems for International Development” for that reason study the effectiveness of three risk-sharing alternatives that the government can carry out instead: a system of risk-bearing credit with the repayment program adjusted against the amount of rainfall, a system of risk sharing by hired laborers in which part of the laborers’ wages paid at harvest are relative to the revenues of the cropping year, and a scheme of risk-sharing with fertilizer suppliers where payment for the inputs is relative to the revenues from the fertilizer-using technology. These methods are applied in the perspective of the adoption of new cultivation practices for cowpea and millet in Nigeria. The outcome of the study shows that offering low-interest credit is a somewhat ineffective approach in encouraging the adoption of agricultural technologies: extensive changes in the interest rate result in only modest changes in the rate of adoption. Nevertheless, all three proposed systems increased technology adoption. When at least the principal was paid off, despite a technological innovation is “yield increasing” if it increases yield per unit area and does not lessen optimal variable costs per unit area (for example, hybrid livestock) and “cost reducing” if it lessens optimal variable costs per unit area but does not increase yield per unit area (for example, improved feed formulation).

Rainfall data (mm) in various research stations in the PHL, Crop productivity index for coconut in various soil types, Monthly Observation on temperature, sunshine hours and solar radiation

The underlying factors to which are attributed the fluctuation in yield due to rainfall is complex and require a concerted and multidisciplinary approach to understand such mechanisms and formulate measures to alleviate detrimental effects. The impact of major climatic factors such as solar radiation and relative humidity should be studied along with rainfall.

(6) In Trinidad, Smith “The relation between rainfall, soil water and yield of copra in a coconut estate in Trindad” (1966) they reported a strong correlation between yield and cumulative rainfall over a period of 29 months prior to harvest.

(7) Abeywardena (1968) in his study “A Forecasting coconut crops using rainfall data – A preliminary study” he discusses the yield at Bandirippuwa Estate (BE) in the Low Country Intermediate Zone (IL,) of Sri Lanka, which showed that rainfall during the period May to August of the previous year was more influential on yield variation than rainfall during the period January to April or September to December.

(8) Prasada Rao (1986) in his “Rainfall and yield in the Pilicode region, North Kerala” reported that both high rainfall during the months of June, July and August as well as the absence of post-monsoon and pre-monsoon showers adversely affected the subsequent year’s nut yield in Kerala, India.

(9) Studies in Thailand by Dootson et al. (1989) have shown that the mean monthly temperature, number of rainy days, sunshine hours and evaporation were the factors largely correlated with yield.

(10) Prasada Rao (1991) “Agrometeorogical Aspects in Relation to Coconut Production” has indicated the necessity of further studies of the climatic requirements of coconut. These studies revealed that the crop response to major climatic variables, especially rainfall had to be further investigated and their effect should be based on distribution of rainfall and also on the soil type. An identification of the degree of influence of the climatic factors for a given location would be useful in crop-simulation models and to understand the physiological phenomena of the palm. Further, such an analysis would assist in short-term yield forecasting and consequently in determining the potential yield in a given agro-climatic region.

(11) In order to identify to what extent these bi-monthly rainfall parameters influence yield variati