THE PHILIPPINE COCONUT INDUSTRY: TAKING THE RURAL ECONOMY ON A ROLLERCOASTER RIDE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200050001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 27, 2016
• Document Release Date: March 9, 2012
• Sequence Number: 1
• Publication Date: March 23, 1987
• Content Type: MEMO

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25X1 Central intelligence Agency I _
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DOC NO C4 , h 7- ?oc 4
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P&PD
DIRECTORATE OF INTELLIGENCE
23 March 1987
The Philippine Coconut Industry: Taking the Rural Economy
on a Rollercoaster Ride
Summary
The Philippine economy has benefited from the near doubling in the
international prices of coconut oil since mid-1986, but prices have
softened in recent weeks and lower prices probably will prevail for the
rest of 1987. Increased world production of soybean oil--a leading
vegetable oil substitute--will probably push prices down slightly by
yearend. The Philippine coconut industry will probably remain relatively
strong in the short term, and should continue to stimulate the economy,
especially in the countryside, where coconuts account for at least 20
percent of agricultural production. The Aquino government should benefit
from the economic gains generated by higher coconut prices in the
congressional elections in May and local elections in August.
This memorandum was prepared byl Office of East Asian Analysis. Information
available as of 23 March 1987 was used in its preparation. Comments and queries are
welcome and may be directed to the Chief, Islands Branch, Southeast Asia Divison, OEA,
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Our long-run forecast for the coconut industry is gloomy, given the
plentiful supply of substitutes worldwide. If coconut prices plunge, Manila
may try to support them and possibly look to Washington for help. But
unless Manila develops a successful program to diversify large areas of
the country away from a dependence on coconuts, the rural economy will
remain hostage to the volatile international vegetable oils market and, like
the depressed sugar-growing areas of the country, depressed
coconut-farming areas provide fertile ground for the Communist
insurgency to thrive.
The Philippine coconut industry benefited from a doubling in prices in mid-1986;
this, in turn, has boosted the rest of the economy. Over a six-week span from
mid-September to late October, the prices of coconut oil and copra (the raw meat from
which coconut oil is milled) doubled to $.20 and $.12 per pound, respectively (Figure 1).
They have settled slightly since then--in recent weeks coconut oil prices have dropped
to $.16.
The Importance of Coconuts
The price increase is a boon to the approximately 15 million Filipinos
dependent directly or indirectly on coconuts, the country's largest commercial
crop. US AID estimates that about one-third of all Philippine households derive
some income from the coconut industry and in the principal growing areas in
the Visayan Islands and Mindanao, coconuts provide over 60 percent of the cash
income earned by farmers.
Foreign exchange earnings of about $480 million from coconut products
accounted for approximately 10 percent of all 1986 Philippine merchandise
export earnings, according to Philippine Government statistics. Coconut oil and
copra sales account for most of the earnings.
During the Marcos era, the coconut industry was controlled by Eduardo
Cojuangco--a longtime political ally of Marcos--who monopolized the industry
by controlling its governing body, the milling association responsible for 95
percent of the country's copra crushing capacity, and the industry's leading
banks. According to AID studies, the monopoly was responsible for cutting
farmers' income by at least one-third. The Aquino government has broken the
monopoly by placing the Philippine Coconut Authority (PCA) under the
Department of Agriculture, investigating and recovering funds from
Coconuts Planters Bank, and lifting the ban on the export of copra.
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Figure 1
Philippines: Copra and Coconut Oil Prices
C
0
C
0)
U
24
23
22
21
20
19
16
17~
Coconut Oil
4-
3-
2-
o 1 s r r
0
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan
85 86 87
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Although today's prices are only a third of the peaks reached in 1979 and 1984,
the government's recent dismantling of the coconut marketing monopoly has meant that
much of the impact of the price increase has gone to the country's 1.4 million coconut
farmers. The US Embassy reports that the larger share of the higher world prices
received by the farmers has helped to boost farm income and consumption in many
rural areas in recent months. Moreover, coconut prices helped spur a 5.4-percent
growth in the agricultural sector in the last quarter of 1986, according to recently
released Philippine Government statistics.
The benefits of the price increase go beyond the farmers and the rural economy.
By taking linkages to other sectors into account, the Philippine Finance Department
calculates that a price increase in copra of 1 peso per kilogram has a 1 billion peso
(about $50 million) impact on the economy. This relationship suggests that the more
than 3-peso increase experienced durin 1986 directly added over $150 million, or about
0.5 percent of GNP, to the economy. the price
rise, in combination with Manila's pump-priming program for the rural economy, is
largely responsible for the nearly 2-percent growth in GNP in the last quarter of 1986.
The last quarter spurt pushed growth for the year to 0.13 percent, reversing the
three-year decline in the economy and giving Manila hope that the stage is set for
robust economic growth this year.
Why Has the Price Gone Up?
Analyzing the coconut oil market is particularly difficult because of the
complexities of the vegetable oil market. The price of coconut oil depends, for example,
on a wide range of relationships, including such diverse factors as livestock prices in the
United States and Australia. If the demand for the soybeans used in livestock feed
increases, then the price of coconut oil will probably go up because it is easily
substituted for soybean oil in baked goods and other finished food products, as well as
in many nonfood and industrial applications. Intangible factors, such as market
psychology, also play a role in the short run. On the other side of the price
rollercoaster, the growing trend in this decade toward cheaper vegetable oil substitutes,
such as palm oil and soybean oil, weakens coconut prices. Malaysian palm oil output,
for example, has doubled since 1980. With the world coconut oil market so volatile, in
our judgment any good news--such as government reforms of the industry--will have a
positive impact on prices. Nevertheless, we believe several recent developments have
combined to boost Philippine and world coconut prices in the short run.
In our judgment, the Aquino government's reforms in the coconut sector have
played a large role in the domestic price jump. When copra exports were banned in
1983, farmers could sell their copra only to the local coconut millers, who were almost
all associated in some way with Eduardo Cojuangco. The millers kept prices low to
maintain high profit margins on the finished coconut oil. As a result of Aquino's
reforms, domestic demand for copra, for export or milling, has increased and bid up
local prices. Indeed, our analysis shows that the domestic price of copra has risen more
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than the international price of coconut oil--from a copra/oil ratio of .4 when the reforms
began to .63 early this year.
Manila appears determined to allow market forces to prevail. Late last year, for
example, the millers--squeezed by falling profit margins--proposed a 5-percent export
tax on coconut oil and a 10-percent export tax on copra, ostensibly to finance the
national coconut tree replanting program. We believe that the higher tax on copra
exports, however, would have pushed prices received by farmers back down by favoring
local mills over copra exporters. Largely for this reason, we believe Manila rejected the
proposal, which was widely regarded as antifarmer.
Philippine traders--through extensive forward sales of coconut
products--probably provided some of the initial impetus to prices, but in our judgment
trader activity has not been strong enough to explain the persistence of high prices
since October 1986. More meaningful, we believe is concern about projected
shortages of domestic supplies of copra and coconut oil. The United Coconut
Association of the Philippines (UCAP), for example, forecasts an 11-percent fall in
coconut output this year. UCAP bases its prediction on a five-year growing cycle which
indicates that coconut production tends to drop after two successive years of good
harvests such as those experienced in 1985 and 1986. Although the PCA adamantly
disputes UCAP's prediction and claims 1987 production will equal or exceed last year's,
we believe the ossibilit of tight supplies continues to provide a strong underpinning
for prices.
Our analysis indicates increases in world demand for Philippine coconut
products--either because of shortages in other countries or increased competitiveness
with substitute products--have accelerated the recent upward trend in prices.
? Global supplies have been reduced by a decrease in Sri Lanka's coconut output
because of drought and Indonesia's ban on coconut exports to ensure sufficient
domestic stocks.
Although most international commodity analysts agree that coconut prices will
probably decline later this year as the production of soybean oil recovers, opinions vary
regarding the timing:
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? The PCA and a number of traders have told the Embassy they expect prices to
stay at current levels at least through the first quarter of 1987.
Whatever the timing of the price decrease, we do not believe prices will fall to
last year's lows, and the industry will probably remain relatively strong in the short run.
The US Embassy reports that Philippine farmers appear to be giving much of the credit
for the price increase to the Aquino government, and with Congressional elections
scheduled for May and local elections in August, the government is taking all the credit
it can get.
The corollary, we believe, is equally valid. Should prices begin to fall, Manila
probably will be blamed--as Marcos was whenever copra prices fell. The danger is that
another slide in copra prices could undermine Manila's efforts to keep the Communist
insurgents from gaining additional support among impoverished farmers.
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In our view, however, the long-run forecast for the Philippine coconut industry is
not bright. World markets will probably be awash in inexpensive substitutes for coconut
oil, undercutting Philippine producers who accounted for more than 80 percent of the
global supply in 1986.
We believe Manila has no quick fixes available. During the late 1970s and early
1980s, the Philippines did not invest heavily in its agricultural sector to either increase
production of other agricultural commodities or to develop alternative uses of coconut.
Aquino's economic advisers are well aware that the rural economy is heavily dependent
on coconut, and in our judgment the danger exists that farmers will read the dramatic
turnup in prices as a signal to plant more coconut trees, which will begin to produce in
five to seven years, rather than diversify. Unless Manila develops a longer term
program to reduce the dependency on coconuts, the rural economy will remain hostage
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 1980
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Figure 2
US Imports of Philippine Coconut Oil
1980-86
(percentage of US Tmpor?ts of world vegetable oils)
1981
1982
1983
1984
1985
1986
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to a volatile international vegetable oils market in which prices have routinely increased
and decreased by as much as three-fold. 25X1
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Subject: The Philippine Coconut Industry: Taking the Rural Economy
on a Rollercoaster Ride
Nicholas Burakow, Department of State
Richard Childress, National Security Council
Michael Crosswell, Department of State
Ciro Defalco, Department of Treasury
Geraldine Chester, Department of State
Robert Duncan, Department of State
Don Eirich, Pentagon
Robert Emery, Federal Reserve Board
John Finney, Department of State
Douglas Van Treeck, Department of State
Julia Chang Bloch, New State
Richard Hermann, Department of State
Rob Huddleston, Pentagon
Byron Jackson, Department of Commerce
Dr. Karl D. Jackson, Pentagon
James Kelly, National Security Council
Sherrod McCall, New State
David Merrill, Department of State
John C. Monjo, Department of State
Bill Nance, Department of State
Majorie Niehaus, Department of State
James Norris, Department of State
Rena Epstein, Department of State
George Payne, Department of Commerce
Earnest H. Preeg, Department of State
Russell Price, Export - Import Bank
William Quinn, Department of the Treasury
Leslie Ross, Department of Agriculture
Charles Salmon, Department of State
Roger Severance, Department of Commerce
John (Jay) Sloan, Department of Defense
Mary P. Tighe, Pentagon
Lt. Col. William Wise, USAF, Pentagon
Office of the US Trade Representative
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