Agricultural Diversification and The Fruits and Vegetables ...

ROEHLANO M. BRIONES2

1 This study was financially supported by The Australian Center for International Agricultural Research (ACIAR).Able research assistance was provided by Kristhel Anne Millera. The paper was improved by constructivecomments of John Mullin and two anonymous referees. Remaining errors and omissions, as well as any opinionsexpressed, belong exclusively to the author and not to any institution or individual involved in the research.2 Senior Research Fellow, Philippine Institute for Development Studies. Email [email protected] forcorrespondence.

Philippine Journal of DevelopmentNumber 65, Second Semester 2008

Volume XXXV, No. 2

Agricultural Diversification andThe Fruits and Vegetables Subsector:Policy Issues and DevelopmentConstraints in the Philippines1

ABSTRACTFruits and vegetables comprise a large and dynamic subsector withinPhilippine agriculture. However, the country’s agriculturaldevelopment strategy continues to emphasize traditional crops.Evidence points to a significant role for fruits and vegetables inagricultural diversification and rural development. They representa significant set of “high-value” activities, some of which areproduced within organized supply chains. As the economy develops,fruits and vegetables should become increasingly important, bothas a share in agricultural output and in the food basket.Diversification could be propoor as it may raise incomes ofsmallholders and workers.In the Philippines, the major fruit crops are banana, mango,pineapple, and calamondin; the major vegetables are tomato, garlic,onion, cabbage, and eggplant. There are clear benefits to bothproducers and consumers from the expansion of the fruits andvegetables subsector. Fruits and vegetables output has indeed grownmore rapidly than agriculture as a whole. However, there remainimpediments in reallocating resources to the high value crops.Agribusiness supply chains have arisen to overcome some of these

78 PHILIPPINE JOURNAL OF DEVELOPMENT 2009

obstacles, though these chains may be inadvertently promotinginequitable and unsustainable patterns of agricultural growth.Despite numerous policies and programs to overcome theseimpediments and promote agricultural growth and diversification,constraints to development persist. These include: resourcedegradation; weak protection and tradability of land rights;distortionary policies in favor of traditional crops; geographicdispersion, inadequate marketing and logistics infrastructure, andfailure to realize scale economies in marketing; and inadequate supplyof producer services such as agricultural credit, technology innovation,and technical assistance to smallholders. Changes in policy, investmentprogramming, and institutional reforms are essential for the fruits andvegetables subsector to realize its potential for agriculturaldiversification and rural development.

INTRODUCTIONThe fruits and vegetables subsector is a large and dynamic sector within Philippineagriculture. It accounts for 31 percent of agricultural output (by value). In thepast three decades, it has been growing at a rate of 2.8 percent per year comparedto just 1.8 percent for agriculture as a whole. Many of the vaunted “high valuecrops,” such as those identified in the government’s official programs, fall underthe fruits and vegetables classification.3

In common with the rest of agriculture, development of the fruits andvegetables subsector was highly dependent on technological change (Weinbergerand Lumpkin 2007). For example, yield improvement for banana and pineapplebegan in large plantations with access to international knowhow, which then spreadto smaller farms For mango, for example, chemical spraying promoted its rapidexpansion and yield growth (David 2003). Hence, understanding the developmentof the subsector requires an examination of research and development (R&D)and technology adoption issues.

By other measures, however, fruits and vegetables are a minor componentof agriculture. Only one-tenth of total agricultural area is planted to fruits andvegetables. The subsector receives less attention from national programs andpolicies compared to traditional crops, particularly after the 2007–2008 “ricecrisis.” Recent reviews of the agricultural sector treat fruits and vegetablesperipherally. Moreover, these are little-informed by burgeoning literature ondiversification and the role of nontraditional crops in the transformation of

3 Based on data from FAOStat, accessed November 2008. The official definition includes: coffee, cacao, fruitcrops (citrus, cashew, guyabano, papaya, mango, pineapple, strawberry, jackfruit, rambutan, durian, mangosteen,guava, lanzones, and watermelon), root crops (potato and ubi), vegetable crops (asparagus, broccoli, cabbage,celery, carrots, cauliflower, radish, tomato, bell pepper, and patola), legumes, pole sitao (snap beans and gardenpea), spices and condiments (black pepper, garlic, ginger, and onion), and cutflower and ornamental foliageplants (chrysanthemum, gladiolus, anthuriums, orchids, and statice).

BRIONES 79

policymakers continue to focus on traditional staples (Weinberger and Lumpkin2007).

This policy review attempts to address this gap. While written as a stand-alone work, this paper also intends to support an ongoing Australian Center forInternational Agricultural Research (ACIAR) project on ‘Improved domestic andexport competitiveness of selected fruit value chains in the Southern Philippines(HORT/2007/067). The economic analysis component of the ACIAR projectfocuses on: i) value chain analysis; ii) profitability and impact of projecttechnologies; and iii) policy constraints that may affect adoption of technologies.This paper supports objective iii.4 Specifically, this review paper aims at thefollowing:

1) develop a framework for understanding the role of fruits and vegetablesin agricultural and rural development and the impact of the policyenvironment and technological change on the development of thesubsector;

2) analyze the fruits and vegetables subsector patterns and trends andidentify constraints to development; and

3) assess policies and programs relevant to the sector and draw implicationsfor policy reform.

The remaining sections of this paper roughly correspond to these objectives:section 2 develops the framework; section 3 describes the sector; section 4 identifiesconstraints, describes policies programs, and evaluates these policies. Section 5concludes with suggestions for further research and policy reform.

THE ROLE OF FRUITS AND VEGETABLES SUBSECTOR INDEVELOPMENT

Agricultural diversificationEconomic development entails growth of per capita income. Accompanying thisquantitative increment is a qualitative change in the economic structure, namelythe diversification of sector composition of output from agriculture to industryand services. This is one of the best established patterns of economic development(Kuznets 1959; Johnson 1997). Explanations of this pattern cover both demandand supply factors. On the demand side there is the Engel effect combined withnontradability of most of agriculture (Timmer 1988). On the supply side is theshift in resources, such as labor, from low productivity (traditional) to highproductivity (modern) sectors (Ranis and Fei 1961). Factor proportions or

4 The ACIAR project focuses on the following vegetables and fruits: tomatoes, potatoes, cabbages and otherbrassicas, bell peppers, and leafy vegetables; mango, jackfruit, durian, and papaya. This review retains thiscommodity breakdown where data permits, but would maintain consistency with actual patterns of commodityimportance in the country.


Rybczynski effects may also be at work—as capital accumulates relative to labor,the output of the relatively capital-intensive sector rises while that of the labor-intensive sector declines (Martin and Warr 1993).

Within agriculture itself, the process of development is likewise accompaniedby diversification. At least for Asia, Rosegrant and Hazell (2000) offer thefollowing stylized fact:

As economies grow, there is a gradual movement out of subsistencefood-crop production (mostly of basic staple crops) to a diversifiedmarket-oriented production system. The process of diversification outof staple-food production is triggered by rapid technological changein agricultural production, by improved rural infrastructure, and bydiversification in food-demand patterns. The slowdown in income-induced demand growth for staple foods is accompanied by a shift ofdiets to higher-value foods such as meats, fish, fruits, and vegetables.

According to Rosegrant and Hazell, the food-demand diversification is dueto income elasticities for staples and the urban transition (i.e., the dependence ofan urbanizing population for high-quality, nutritious, marketed food).Diversification to commercialized high-returns agriculture may also be driven bysupply factors. The process of rapid agricultural growth is sustained by not onlythrough raising yields of traditional crops but also by shifting resources towardscrops with higher net returns per hectare (i.e., the “high value” crops).

Diversification at the household levelFactors affecting diversification choices at the farm level can be moresystematically explored with the help of the agricultural household model (Taylorand Adelman 2003), which herein elaborated with the minimum of formal notation.The behavior of a household is assumed to be consistent with maximizing a payofffunction: ( , )t

t ttV EU C Lβ=∑ ,where t is a time period index, C an index of

consumption, L an index of leisure, EU an expected utility function, and β adiscount factor. Presumably, leisure time allows the household to pursue home-based production of utility from the act of consumption.

Several constraints may be identified:i) Budget constraint: consumption in each period equals income plus

borrowing, less investment, savings, and net interest payments. Incomeis obtained from several sources, namely:a. profit generated from sale of outputs, obtained by combining inputs,

which are either purchased from the market or utilize householdendowments;

b. returns from financial assets; andc. transfers.

ii) Time constraint: time for leisure, self-employed production, human

BRIONES 81

capital formation, and outside wage employment, must add up to a fixedduration per period.

iii)Asset accumulation: financial wealth accumulates every period throughinterest income and savings; capital accumulates every period throughinvestment, net of depreciation.

Note that under expected utility, uncertainty is a factor in household decisionsand outcomes. Hence, multiperiod expected utility maximization leads to a reducedform in which the level of production for each product type per period is a functionof the following factors:

• the risk associated with alternative product combinations, security ofrights over assets, and the household’s aversion to risk;

• the rate of time preference (i.e., the discount rate);• level of technology;• prices of outputs and inputs, including the market wage;• interest rate on financial assets;• interest rate on borrowing.

This framework can explain technology adoption and the role of policiesand institutions. In general, a technology would be adopted if the long-termmaximum payoff with adoption is higher compared to without adoption.Meanwhile, the policy environment sets the conditions under which theabovementioned factors are determined. Policies can influence the prices of inputsand outputs, through regulation of the marketing and logistics sector, as well asdirect or indirect price policies. Institutions can determine property rights overassets. Programs can determine the quantity and quality of public good investments,such as rural infrastructure. This type of general framework would not, however,be able to ascertain directions of effect, e.g., whether a higher discount rate maylead to more or less diversification. More specific analysis would entail moreprecise forms of the objective function and constraints.

Constraints to agricultural diversificationAli (2000) notes that hot, humid, lowland tropics are generally unsuitable forcultivating many types of vegetables, hence, are much less diversified comparedto uplands. Agroclimatic factors also account for the high degree of seasonalityof supply. Similarly, many fruits, often grown from trees or other perennials, alsoexhibit climatic sensitivity and seasonality. They tend to require greater postharvestcare (to avoid damage and spoilage) exacerbating the distribution problem.

Environmental shocks and other factors also introduce considerable risk infruit and vegetable production, which may constrain diversification. As discussedpreviously, what matters to producers is not simply profit, but expected profit.Nevertheless, the enormous differences in net returns per hectare suggests that,even adjusting for risk, the incentive to diversify may remain strong. Furthermorewith well-developed financial and insurance markets, risk can be diversified by ajudicious selection of the insurance and asset portfolio.


In general, under perfectly functioning markets with no transaction costs,a smooth transition from traditional to diversified agriculture may be expected.However, in reality, the transition is constrained by many factors, including:low investments in and diffusion of new technology; inadequate ruralinfrastructure leading to market fragmentation; insecure property rights includingfaulty contract enforcement; and government interventions such as restrictionson marketing and foreign trade ostensibly to promote self-sufficiency and foodsecurity (Rosegrant and Hazell 2000).

One significant form of market failure is the existence of scale economies.Emran and Shilpi (2002) point out that fixed costs in marketing and transportservices lead to thick market effects and pecuniary externalities. That is, tradersfind it more worthwhile to visit villages that offer a higher marketable surplus,as more units of output are available for a given fixed cost. Hence, the trader(who can be a multiproduct intermediary) can offer better prices to a farmhousehold residing in a village with higher aggregate surplus (whether of asingle or multiple commodities). In this way, each farmer generates pecuniaryexternalities for other farmers in the village.

Under increasing returns, equilibrium may not be unique. Lower levels ofequilibrium may result when marketable surplus is low, supply of marketingservice is deficient, thereby discouraging output expansion. On the other hand,higher levels of equilibrium may result when market surplus is high, encouragingthe entry of traders, and thereby encouraging more production. Emran and Shilpi(2000) distinguish three types of equilibrium corresponding to the stages ofmarket development. The first is the isolated market, in which market size istoo small for long distance traders (who link villages to urban centers) to operate.The second is the intermediate stage, in which long distance traders do operate,but there remain cross-commodity externalities. And the third is the developedstage, in which traders specialize in one commodity and no cross-commodityexternalities prevail. They test this model against Bangladesh household dataand find that the rice market is at a developed stage whereas the vegetablemarket is at an isolated stage.

Underdevelopment and thick market effects can extend to a wide range ofproducer services, linked, but not exclusive, to marketing (such as transportand logistics, processing, handling and storage, communication, and finance).Ali (2000) notes that cash requirements of vegetable production are high relativeto staples, owing to higher intensity of intermediate and labor input. For instance,labor requirements may be three times higher on average for vegetables comparedto cereals. In the case of fruits, which are mostly grown from trees and perennials,long-term finance is required making the absence of financial services an evenmore daunting challenge. Owing to underdeveloped markets, Delgado andSiamwalla (1999) note that the natural pace of diversification may be too slow.Accelerated diversification may be an intentional targeted by a coherent strategyof agricultural development.

BRIONES 83

Supply chainsIn the presence of transaction costs, the private sector has itself evolvedinstitutional arrangements to coordinate production and distribution in the highvalue crops sector. Even in traditional agriculture, traders often act as sourcesof working capital for farmers, within a tied marketing-credit relation (Floroand Yotopoulos 1991).

Modern systems elevate these relationships into a supply chain, typicallyassociated with agribusiness organization. The supermarket “revolution” extendsthe chain all the way from retail to primary production. Large-scale organizationat the retail end caters to mass consumption of standardized food products.Procurement by retailers is moving away from traditional systems based onspot markets at the wholesale level towards preferred suppliers with transactionscoordinated indirectly through a specialized wholesaler or even directly by theretailer (Reardon and Timmer 2007).

Impact on the poor and the environmentThe expansion of coordinated supply chains raises concerns about the exclusionof resource-poor farmers. Reardon and Timmer (2007) note that smallholdersdo participate in the high-value crops supply chains. However, thesesmallholders tend to be “asset-rich,” both in financial and human capital.Hence, such supply chains would appear to exacerbate inequalities in thecountryside.

On the other hand, diversification may have propoor impacts (Barghoutiet al. 2004). Onfarm labor intensity of vegetable production is nearly doublethat of cereal production when all types of related activities are considered,such as seed and seedling production, precision land preparation, irrigation,harvesting, cleaning, grading, and packaging (Ali and Abedullah 2002).Likewise, labor requirements for a rice-vegetable cycle (involving onions,vegetables, and other high-value crops) are much higher than laborrequirements of rice monocrop due to greater requirements for drainage, landpreparation, planting, weeding, maintenance, harvest, postharvest activities,and supervision (Pingali 2005).

Diversification may also have a beneficial effect on the environment asit usually breaks existing cereal-cereal cropping practices, which are ofquestionable sustainability (Ali 2000; Cassman and Pingali 1995).Furthermore, fruits grown from trees and perennials are associated withpermanent crop cover which limits soil erosion and land degradation. On theother hand, other forms of diversified cropping may have its own adverseimpact on the environment. Annual vegetable crops grown in the uplands areabout as erosive as coarse grains such as corn (Sidle et al. 2006). High-inputvegetable farming systems are themselves problematic due to the externalitiesfrom fertilizer and pesticide application as well as massive nutrient miningand the subsequent challenge of soil nutrient management.


FRUITS AND VEGETABLES SUBSECTOR IN THE PHILIPPINES

Patterns and trendsDiversification at the sectoral level has been observed over the course of Philippineeconomic development. In 1970, two-thirds of the labor force was in agriculture;by 2004, this share had dropped to just 38 percent. The share of agriculture ingross domestic product (GDP) started out much lower, at just 30 percent, attestingto past structural transformation since the 1950s. By 2001, this share had alreadyhalved to 15 percent (Figure 1).

It is noteworthy that the rate of decline of employment share has laggedbehind that of output share suggesting the inability of low productivity labor inthe sector to move to higher productivity sectors such as industry and services.Moreover, there was a slowdown in sector growth, from an average of over 6percent in the 1970s (Bautista 1997), down to 0.1 percent in the 1980s, beforegradually picking up to 1.7 percent in the 1990s, then accelerating to 3.3 percentin the 2000s.

Over the same period, the share of fruits and vegetables in agricultural outputand area was also rising, although fairly slowly and erratically, from 23 percent to31 percent (Figure 2). Meanwhile, the area share of fruits and vegetables hardlybudged. Hence, agriculture is apparently diversifying but at a slow pace comparedto the overall rate of structural change.

Figure 1: Agriculture share in GDP and labor force, 1970–2004

Note: GDP share in constant 2000 US dollars.Source: WDI and FAOStat.

80

70

60

50

40

30

20

10

01970 1975 1980 1985 1990 1995 2000

Share in GDP Share in employment

BRIONES 85

Within the subsector, the major fruits are banana, pineapple, mango, andcalamondin (kalamansi); the major vegetables are peanut, mungbean, tomato,garlic, onion, cabbage, and eggplant. One must, however, keep these proportionsin perspective (Figure 3). Even excluding rice and corn, the major fruits andvegetables account for just 38 percent of agricultural output. The top fruits aloneaccount for 32 percent, leaving the top vegetables with only 6 percent share.Banana alone accounts for 17 percent. Among the vegetables, only eggplant andonion round-off to 1 percent share of output value—the other vegetables combinefor the remaining 3 percent. The biggest shares belong to the lowland vegetables(e.g., onion, garlic, legumes); some high-altitude areas (notably Benguet province)specialize in growing temperate vegetables.

The major fruit and vegetable crops by output are, as expected, the samecrops with relatively large sizes of cropping areas (Table 1). Among the fruits,banana and pineapple have experienced the most rapid growth in production andfarm area over the past decade. Banana, in particular, has benefited from a veryrapid yield growth. Area growth in mango has also been impressive but yield hasfallen so drastically that overall production has also declined over the same period.Among the vegetables, meanwhile, favorable trends in output, cropping area,and yield are observed for most of the major types. The most impressive is foronion, tomato, and cabbage.

In the Philippines, many vegetables exhibit seasonal responses to temperaturefluctuations, rainfall, and the frequency of typhoons. In general, prices of most

Figure 2: Shares of the fruit and vegetable subsector in agricultural output and area (in percent) 1970–2005

Source: FAOStat.

40

35

30

25

20

15

10

5

01970 1975 1980 1985 1990 1995 2000 2005

Share in output Share in area


Figure 3: Share of major crops in output of agriculture (excluding rice and corn) (inpercent) 2007

Source: Department of Agriculture - Bureau of Agricultural Statistics (DA-BAS) (2008).

Table 1: Production, area planted, and yield of major fruits and vegetables

FRUITSBananaMangoPineappleCalamondin

VEGETABLESTomatoGarlicOnionCabbageEggplantMungbeanPeanut

8,687,624 884,0112,209,336 199,675

195,810 11,348128,923128,865199,579 29,617 30,247

438,593186,770 58,251 20,956

17,646 3,84914,579 8,59621,29939,92327,726

19.8 4.7

37.9 9.5

11.13.08.8

15.09.40.71.1

7.9-0.83.51.7

4.00.46.94.62.10.52.1

2.23.73.11.6

1.8-1.74.31.4

3.000.71.0

5.6 -4.5

0.30.2

2.21.93.22.9

-0.6-0.11.1

Production (t) Area (h) Yield(t/ha) Output Area Yield

2008 figures Average growth rate p.a.1998-2008 (%)

Source: BAS.

BRIONES 87

5 The pineapple cycle lasts about 18 months; the fruits are typically on an annual cycle, while vegetablesand cereals can be harvested at least one to several times a year.

vegetables are higher during May–July and October–December compared toFebruary–April (Librero and Rola 2000). Seasonality also characterizes some ofthe major fruits, such as mango, rambutan, lanzones, durian, and so on. Given itseven climate and absence of typhoons, Mindanao has emerged as the major supplierof temperate vegetables to Metro Manila during the wet season of June to November(Batt et al. 2007).

Some of the major fruits and vegetables deserve their reputation as high-valuecrops (Table 2). The data are from cost and returns surveys conducted by the Bureauof Agricultural Statistics (BAS) of the Department of Agriculture; costs cover bothcash and noncash costs. The table presents yield, net returns per hectare, and theprofit/cost ratio (roughly, the return in pesos per peso outlay). Large disparities inyield is expected owing to differences in plant physiology and cropping practices.There are also tremendous differences in net returns and returns to capital. Thehighest profit-cost ratios belong to the fruit crops (pineapple, mango, and calamondin)with only potato breaking into the top rank; returns per hectare are also highest,even considering returns from multiple cropping for the other crops, as well as thegestation periods for the fruit crops (e.g., 5 years, in the case of mango).5 The lowestreturns per hectare are clearly those of cereal production. Whereas white (food)corn exhibits inferior profit/cost ratio, yellow (feed) corn outperforms the vegetables,while palay is well within the range of some of the less profitable vegetable crops.

Table 2: Cost and returns indicators per cycle, major fruits and vegetables, 2004

PineappleMangoCalamondinPotatoDurianYellow cornOnionTomatoPalay, irrigatedCabbageEggplantGarlicPalay, rainfedPapaya (2001)White corn

36,8426,0878,945

12,7543,1482,302

10,1219,7443,919

12,0428,6742,8242,664

15,1731,426

Yield (kg/ha) Net returns (P/ha) Profit/cost ratio

120,52977,52364,813

127,73444,41310,05556,10028,258

9,63523,36222,91225,8114,900

17,4171,282

2.251.711.601.240.740.560.560.420.350.290.260.250.240.210.11

Source: BAS.


Despite the relatively high returns of these fruit and vegetable crops, thebulk of the country’s agricultural area continues to be planted with the maintraditional crops, namely, rice, corn, coconut, and sugarcane. These crops combinefor nearly three-quarters of the total agricultural area; rice alone accounts fornearly one-third in 2008. Contrary to what would be expected under competitivemarkets, land does not, in fact, move from low-return to high-return crops. Thisinertia may explain the lack of robustness in the growth of the agricultural sector(World Bank 2007).

Inertia may be attributed in part to entry barriers in the high-value sector,such as high working capital requirement (i.e., cash cost) combined with animperfect credit market. In general, total and cash costs are much higher for fruitsand vegetables compared to cereals. Similarly, fertilizer, pesticide, and hired laboraccount for larger shares in total cost (Table 3).

For those able to overcome market entry barriers, financial rewards can belarge as many of the country’s fruit and vegetable products are internationally

Table 3: Cost per hectare and shares in total cost (in percent) 2004

Total cost Cash cost Fertilizer Pesticide Hired Labor NoncashItem Shares

Source: Basic data from BAS

PineappleMangoCalamondinPotatoDurianYellow cornOnionTomatoPalay, irrigatedCabbageEggplantGarlicPalay, rainfedPapaya (2001)White corn

53,49045,31340,205

102,97859,69117,979

100,57367,03827,39981,04286,727

103,33120,27875,85211,737

24.714.111.515.814.919.613.322.913.519.618.3

9.07.9

21.118.5

41,02027,42327,07859,92616,45310,97274,11349,46311,925

482,52856,98845,494

7,65157,295

4,787

3.518.7

2.67.41.12.13.6

14.64.77.3

14.23.84.06.80.9

14.515.644.513.3

5.617.319.821.813.515.113.613.811.226.112.2

23.339.532.641.872.442.326.326.256.540.534.356.050.224.259.2

competitive and command relatively high prices in global markets (Figure 4).The subsector accounts for a large share of total agricultural exports, far out ofproportion to its area and output shares. Being only a minor component ofagricultural imports, the subsector is a significant net earner of foreign exchange.

On the demand side, domestic vegetable consumption is, however, far belowthe per capita recommendations of the World Health Organization of at least 142

BRIONES 89Figure 4: Shares of the major fruits and vegetables in total agricultural exports

and imports by value( in percent) 1994–2007

40

35

30

25

20

15

10

5

01994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Share in total exports (FOB) Share in total imports (CIF)

Source: BAS

kg/capita (Figure 5). One reason may be cultural; most Filipinos treat vegetableas a small part of a meat or fish dish (Batt et al. 2007). Consumption of fruits,though, is much higher, averaging nearly 70 kg apparent consumption per yearby 2007.

Figure 5: Per capita consumption of fruits and vegetables (in kg/ year) 1998–2007

100

90

80

70

60

5040

30

20

10

0

1998 1999 2000 2001

Vegetables Fruits

Source: BAS


Supply chainsProduction and marketing of vegetables flow along two types of channelscharacterized as traditional and modern (Concepcion and Digal 2006). Under thetraditional system, growers send their produce to wholesalers, who then trade toretailers in the wet market. Occasionally, wholesalers also supply to supermarketsas well as hotels and restaurants (including fast food chains). The wholesale stageis still generally organized as a spot market (for example, 58% of transactions inthe large Northern Luzon markets of Benguet are traded in this manner). MostFilipino consumers still prefer to purchase vegetables from the wet market andmost vegetables are still transacted along the traditional route (Rasco et al. 2004).

Recently, however, modern arrangements have evolved as an alternative tothis traditional setup. First is the market specialist chain, where brand-name suppliersprovide a wide range of products to a supermarket chain (e.g., Gomez Farms). Thisis obtained from a variety of sources, such as farmers and marketing agents. Thesupermarket typically identifies a preferred supplier, who in turn commits to aschedule for delivering an assortment of products of specified quantity and quality.

Second is the product specialist chain. This chain also spans a range of sourcesbut product specialization is evident. In the case of FreshCorp, tomato farmerswho wish to supply to the company sign a marketing contract over a specificweekly volume and price band. The quantities are determined by the farmer, whoagrees to the ceiling price. Meanwhile, FreshCorp agrees to sell the product witha floor price and with a brokerage commission. FreshCorp also informs farmersabout quality specifications.

Third is the processor-managed chain, which emerged to meet therequirements of fast food operators, who demand precut and washed saladvegetables and processed coleslaw. Their suppliers either found reliable processorsor evolved into processors themselves.

Fourth is the producer-managed chain, of which the archetypal example isNorminVeggies of Northern Mindanao. This group was organized by farmers asa marketing cluster able to realize scale economies in transport, gain access todevelopment assistance from nongovernmental organizations (NGOs) and thegovernment, and share technologies and market intelligence. The clusterestablished a corporation called NorminCorp to function as a marketing arm inreturn for sales commission. Unlike in the other chains, farmers obtain the entirerevenue paid by the institutional buyer or the vegetable wholesaler.

Incidence of benefits from fruits and vegetables farmingLittle information is available on the incidence of benefits from agriculturaldiversification. One big vegetable production area is centered in Benguet province,which caters mostly to the traditional wholesalers and wet markets, especially inMetro Manila. Landholdings in the province are predominantly small (below onehectare in size); tenure is mostly informal as 90 percent of land is officiallyclassified as forest reserve or watershed areas. Meanwhile, vegetable producersin Southern Luzon (Laguna and Cavite provinces) also supply to Manila and tend

BRIONES 91

to favor specialized outlets such as hotels, restaurants, and high-end supermarkets.Cavite farmers, for instance, have been able to gain access to resources to upgradeproduct quality and postharvest handling, e.g., cold chain facilities (Batt et al.2007).

A farm household survey for Mindanao focuses on vegetable growers inLantapan, Bukidnon (Nguyen et al. 2007). The village, which hosts 513households, has about 109 vegetable farmers, of whom the majority (55%) farmedless than 1.5 hectares. A sample of 50 farmers was surveyed. While farming wasthe major occupation of 70 percent of the respondents, it turns out agricultureaccounts for just 40 percent of household income on average; 50 percent camefrom nonfarm sources, and the remainder from off-farm. These upland farmerswere overwhelmingly poor: per capita household income was only Php 2,200 peryear compared to the relevant poverty threshold of Php 14,800; poverty headcountwas 80 percent. Food insecurity was widespread—37 percent reportedexperiencing insufficient food availability throughout the year.

In summary, many vegetable farmers remain resource-poor; these tend tosupply to the traditional wholesale and retail wet markets. Farmers with resourcesand management knowhow are able to realize higher returns from engaging inmore sophisticated supply chains even though their farm sizes place them in thesmallholder category. A similar characterization may hold for fruit farmers (seee.g., Intal and Ranit 2004). A crucial difference though is that large-scale integratedproduction and processing may be observed in major fruits such as bananas andpineapples (Pabuayon 2000). This dispenses altogether with long supply chainsthat link independent producers, processors, and traders.

POLICIES AND PROGRAMS FOR DEVELOPMENT

Constraints to the development of the subsectorConstraints on vegetable supply are enumerated in Librero and Rola (2000):

1. high input cost or low output price (price); 2. losses to pests and diseases (pests); 3. lack of seeds or planting materials (seeds); 4. institutional constraints including lack of capital, inputs, or information;

poor extension, research, roads, suboptimal use of inputs, etc.(institutions);

5. lack of postharvest and storage facilities (postharvest); 6. inadequate marketing systems (marketing); 7. biological constraints including poor plant growth and poor fruit setting

(biology); 8. poor cultural practices (management); 9. excessive rains, flooding, or bad weather (weather);10. lack of appropriate variety (breeds); and11. policy constraints including size of landholding, subsidies, taxes, etc.

(policies).


Relevance of these constraints to specific crops is given in Table 4, which isbased on a review of related literature (mostly from the 1970s and 1980s). The morepractical set of problems (e.g., prices, pests, and disease) appear frequently thoughinstitutional constraints, which underlie these proximate problems, are also prominent.

Table 4: Constraints relevant to specific vegetable crops (various locations)

AsparagusCabbage

Cucurbits

EggplantGarlic

Gourd

OnionPotato

Soybean

Tomato

Vegetable Constraint

SeedsPrice, pests

Pests, institutions, biology, weather

PostharvestSeeds, institutions, postharvest

Pests

Prices, pests, institutionsPrices, seeds

Biology

Prices, pests, seeds, biology

Source: Librero and Rola (2000)

Postharvest problems are another oftmentioned problem. Serrano (2006)cites figures of postharvest loss as high as 40 percent for vegetables. There is,however, a wide range of estimates ranging from 5–30 percent. Losses tend to beleast for refrigerated transport and cold storage (the “cold chain” approach),followed by nonrefrigerated transport and ambient storage, with highest lossesfor refrigerated transport and ambient storage. Meanwhile, Rapusas (2006) reviewsestimates of postharvest loss for the major fruits, such as banana (30–40%),pineapple (28–40%), and papaya (27–42%). In the case of mango, only 50 percentof harvested produce are export grade, for which only 8–13 percent are attributedto preharvest problems and the remainder to faulty postharvest handling.

Assessment and recommendationsOur assessment of policies and programs to promote the sector follows the policyscoping exercise of the Southeast Asian Regional Center for Graduate Study andResearch in Agriculture (SEARCA)–ACIAR (Balisacan et al. 2008). This studyhighlights the problem of persistently low productivity of Philippine agricultureattributed to the following:

• degraded natural resources and weak institutions for resource protection;• problems in protecting and administering agricultural land rights;• geographic diversity resulting in economic fragmentation;• poor state of rural infrastructure for economic integration and support

farm production (i.e., irrigation facilities);• undeveloped rural financial markets;

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• archaic price and market policies which distorted commodity prices andperpetuated monopolistic and oligopolistic systems; and

• slow development and dissemination of new technologies.

While these factors afflict agriculture as a whole, a similar set of factors areat work within the fruits and vegetables subsector. Each of these factors is discussedbelow.

Resource degradationBriones (2007) identifies a set of environmental problems associated withagricultural practices and farming systems, particularly intensive cultivation inthe lowlands and encroachment of annual crop cultivation in the uplands. Vegetablefarming is implicated in these to the extent that it is widely practiced in the uplands(in the case of temperate crops) and in the lowlands (for tropical crops). Theseinclude soil erosion, loss of biodiversity, sedimentation, water pollution, andworsening pest and disease problems. (Tree crop farming tends to be lessdestructive as tree farms are less erosion-prone, although problems of chemicalcontamination and biodiversity loss remain.) These problems impose seriousnegative externalities offsite (e.g., diminishing irrigation coverage) as well asthreaten long-term onsite productivity (e.g., from topsoil loss).

To promote sustainable farming, all types of vegetable production systemsshould adopt soil conservation, plant protection, and cropping techniques. Highexternal input systems would benefit from a more judicious application of fertilizer,diversified cropping pattern, and shift to labor-saving technologies (e.g.,mechanization). Reduced application of inorganic fertilizer is not, however, auniversal prescription. In fact, low external input systems, which are also fairlywidespread, would benefit from greater fertilizer application (Poudel et al. 1998).

While the principle of sustainable development is well-ensconced in principlewithin current strategies for the subsector, implementation is complicated by a lackof resources, political will, and a myopic emphasis on short-term livelihoods.Addressing these problems entails investing in institutions, at the state andcommunity levels, for long-term and socially responsible governance of naturalresources. There is also a need to reorient and train extension personnel, especiallyin local government units (LGUs), towards supporting environmental programs atthe community and farm level. Finally, it is essential to invest heavily in R&D todevelop new technologies, as well as monitoring and evaluation (M&E) and impactassessment of natural resource management programs (Briones 2007). The newtechnologies to be developed should not only be environmentally-friendly but alsoof proven profitability so as to encourage adoption by fruit and vegetable farmers.

Property rights in private landsProperty rights reform remains a problem in private lands despite decades ofagrarian reform. Implementation of the program has been slow, having twiceexceeded its timetable, and with currently an enormous backlog. Most of the


corn is a state monopoly and is tightly regulated. Moreover, they are subject tohigh tariffs (50% for rice and 40% for corn). Importation of sugarcane is alsoslapped a high tariff (50%). Moreover, a market segmentation policy allows theSugar Regulatory Agency (SRA) to classify sugar imports as “reserve,” i.e., not

“accomplishments” have mostly occurred in government-owned lands andsettlements in which reform is reduced to a titling program rather than an actualasset transfer. Protracted implementation, however, undermines farm investmentsparticularly in permanent land improvements (Briones 2002). In the case ofpermanent crops such as fruit trees, land reform may be implicated in the absenceof new planting by traditional landowners (World Bank 1998). Moreover, mostawarded land (72%) is covered by collective rather than individual land title (AsiaPacific Policy Center 2007), undermining investment incentives for agrarianreform beneficiaries. Finally, land reform brings with it an array of formalrestrictions on the transfer, sale, conveyance, and rental of agricultural landimposing grave distortions on rural land markets (Ballesteros and Cortez 2007).

Price policiesUpon the country’s accession to the World Trade Organization (WTO) in the1990s, the pattern of protection shifted in favor of agriculture unlike in previousdecades when agriculture was the penalized sector (David 2003). In the course oftariffication, the Philippines (in common with many developing countries)negotiated for high ceiling rates. Based on the nominal rate of assistance, themajor import-competing products now receive strong market price support, withthe highest rates observed for sugar, corn, chicken, and rice (Table 5). 6

On the other hand, exportable commodities within agriculture (e.g., coconutand banana) receive a net penalty (negative nominal assistance) as domestic pricesare typically below the comparable world price. Domestic protection isimplemented through both tariff and nontariff policies. Importation of rice and

6 An index similar to the “nominal protection rate,” which is the difference between the world and domestic priceas a proportion of the world price.

Table 5: Nominal rates of assistance by agricultural commodity (in percent)

ExportablesCoconutBananaImportablesRiceMaizeSugarBeefPigsChicken

-22.6-27.1

-4.02.2

-16.320.159.5

5.035.838.4

-16.5-20.6

-0.830.214.559.8

123.217.051.042.9

-11.4-15.3

0.025.120.962.649.328.025.156.5

-5.4-7.80.0

48.152.778.597.228.020.642.2

-8.7-14.1

0.031.450.754.579.310.0-8.352.1

1980 – 84 1985 – 89 1990 – 94 1995 – 99 2000 – 04

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7 Tariffs from E.O. 264 and are out-quota rates, i.e., beyond the minimum access volumes mandated by WTOfor importation at lower rates. The negative support for pork in the 2000s is related to the stable domestic pricetrend over that period, and rising world price based on Singapore prices (CIF).

for sale in the current crop year, strongly discouraging sugar importation. Pork isalso slapped a high tariff (40%), and enjoyed considerable though decliningprotection up to the 1990s.7 The pervasiveness of market distortions in import-competing products has been justified by domestic self-sufficiency, which hasbeen conflated with food security in policy discourse. For instance the Agricultureand Fisheries Modernization Act (AFMA) asserts: “The production of rice andwhite corn shall be optimized to meet our local consumption and shall be givenadequate support by the State (Sect. 1).”

The country’s food security policy has skewed its public spending prioritiesand deprived funding for worthy initiatives, such as investment in agriculturaldiversification towards high- value crops. Rice marketing and trade has in particularbeen the object of heavy government intervention aimed at both consumer protectionand farmer support, i.e., retail prices have been kept low while procurement priceshave been kept high. This is a lethal combination for massive subsidy outlays forthe National Food Authority (the official trading arm), which may have well absorbedmuch of the public sector resources for agricultural development (World Bank 2007).

In the case of agricultural inputs, David et al. (2009) find that protection foragricultural inputs has decreased over a similar period. For instance, the consumertax equivalent of assistance to fertilizers and machinery has been down to 3 percentsince the 1990s. In contrast, the Medium-Term Philippine Development Plan(MTPDP) (NEDA 2004) takes the view that local fertilizers are overpriced as pricespaid by Filipino farmers were nearly double that of the world price – a marginattributed to monopolistic pricing as well as inefficient application of regulatoryprocedures and requirements. The difference in estimates may be due to the methodadopted—David et al. (2009) compare the ex-warehouse price to the CIF importunit value while the MTPDP (and other studies with similar findings) comparedomestic prices with a reference world price converted by the market exchangerate. More definitive measures of the market support for chemical inputs are crucialas these have downstream effects on fruit and vegetable farmers.

Rural financeAgriculture’s share in total formal sector credit shrank rapidly over the period 1980–2005 at a much faster rate than the sector’s decline as a share in total output. Of thisamount, only 35 percent are for production loans; of the production loans, only aminor share goes to small farmers. In general, smallholder agriculture has beenlargely bypassed by the formal credit system. Smallholders who desire credit mustresort to informal sources. Expansion of the rural financial sector has been hinderedby inconsistent policies, such as credit subsidies, directed sector loans, and loantargeting (Balisacan et al. 2008).


The tree crops sector faces an even more acute problem owing to the absenceof long- term finance. Government financial institutions and credit bodies shouldpilot-test new instruments for long-term credit for smallholders, perhaps withdonor assistance, while maintaining advocacy and information dissemination forprivate banks to consider long-term lending for fruit production. Obviously,prudential practices should still be maintained (World Bank 1998).

There is reason to be optimistic, however, on the expansion of rural financialservices given recent reforms in rural finance policy. These reforms have phased-out direct credit programs while supporting private sector-led finance. In particular,credit markets have witnessed the gradual mainstreaming of microfinance, with theincreasing number of accredited microfinance institutions, as well as rural banksextending microfinance. Mainstreaming was largely the result of regulatory reformsset in motion by the National Strategy on Microfinance with strong support fromthe Bangko Sentral ng Pilipinas (BSP), the country’s central bank (Llanto 2007).

Geography and infrastructureGiven the country’s archipelagic layout, the distribution of goods fromagricultural areas to population centers requires long transport links over landand sea. However, the country’s distribution system is costly and inefficient.Farm-to-market roads are insufficient, depreciated, and of poor quality. Seaand air transport facilities (outside a few urban enclaves) are small andantiquated. Fragmentation is exacerbated by the weak flow of information acrossactors as exemplified by the absence of a uniform, objective product gradingsystem. Such fragmentation undermines competitive market behavior and mayweaken bargaining power of farmers relative to traders (Digal 2001).

According to Intal and Ranit (2004), transport cost forms the bulk ofdistribution cost; for instance, it accounts for 64–78 percent of marketing costfor mungbean depending on location. Inadequate infrastructure raises transportcosts; vehicle operating cost is 50 percent higher on poor roads and 100 percenthigher on very bad roads. An even greater concern is shipping; domestic portoperations are inefficient making service costs the highest in the region. In theNorth Harbor, servicing time is too long, accounting for 50–70 percent ofdomestic liner vessels operating time.

Port inefficiency is linked to the regulatory environment. The PhilippinePort Authority (PPA) is designated as the regulator of private port operationsand is in charge of issuing operating permits. However, it also owns and operatesmany of the country’s major ports leading to a conflict of interest. To avoidcompetition between its own ports and the private sector, the PPA could simplyrestrict entry or otherwise limit service provision in the industry. The PPA’scharter should be amended to separate regulatory from operation functions,which should be left to the private sector. For port operations, the PPA shouldmove to leasing port facilities rather than collecting a percentage of revenues.Pricing can be liberalized subject to restrictions against the exercise of marketpower. Award of cargo handling contracts should be done with greater

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transparency. The institutional set-up should be transformed predicated ondecentralized port operation, administration by an independent board, andprofessionalized management staff (Llanto et al. 2005).

Technology generation and adoptionAdoption and impact assessment studies of the ACIAR research in the Philippines,summarized in Balisacan et al. (see e.g., Mangabat et al. 2002) identify severaladoption constraints, namely:

i) bureaucratic barriers that limit development and implementation ofproject results;

ii) shortage of essential facilities and/or equipment and/or expertise touse it;

iii) limited number of field trials and demonstrations to provide visibleproof of the effectiveness of the new approach;

iv) competition from cheaper alternatives;v) time lag where the results from implementing research are not imme-

diately apparent; andvi) no existing domestic market and/or poor infrastructure to support indus-

try development.These findings are not unique to ACIAR research. According to a review by

Gapasin (2006), while some types of R&D investment posted high rates of return,these returns are realized for only a few cases and commodities. In general,adoption rates are low (about 25%). Low adoption indicates a gap due toincompatibility of the technology to farm-level conditions, weak extension,inadequate support services including credit, and low market demand. For instance,commercialization of new varieties for papaya and duck were hindered by a lackof planting materials and animal stocks, respectively.

Poor quality of technology may be due to the traditional commodityorientation of research involving the generation, verification, and promotion ofproductivity-enhancing technologies. The research staff of the system remainsmost familiar with this type of R&D work. Only recently and in a limited manneris government supporting market-oriented R&D, such as for high-value crops,seaweeds, cut flowers, and so on. Furthermore, the organization of the publicagricultural R&D system has evolved into a complex sprawling set of institutionsthat are rigid, difficult to coordinate, and resistant to more demand-drivenapproaches to R&D.

A similar set of problems plague the extension system; there are too manyautonomous extension units in a dispersed system with tenuous links to R&D andprivate sector institutions. There is no M&E system and no mechanism to ensureaccountability. LGU extension workers are numerous but their technical knowhowhas been largely left behind by the pace of technological development andknowledge at the frontier. Moreover, few are assigned to the municipal level wherethey can link directly with farmers. There is clearly a need for a sustained highquality training program as well as continuing equipment upgrade.


CONCLUDING REMARKSThe review has covered numerous areas thereby uncovering many policy issuesfor which further research is warranted. The following listing is intended to beindicative rather than exhaustive, viz.:

i) Socioeconomic profile of fruit and vegetable farmers, in relation to livingstandards, poverty status, incidence of incomes earned from farming,and the nature of their livelihood possibilities and constraints includingrisk, access to markets, asset holdings, social capital, etc.

ii) The marketing side of fruit and vegetable supply in terms of:a. the role of scale economies, logistics infrastructure, the regulatory

environment (especially in transport);b. enforcement of quality and safety standards for pesticide residues,

physical and chemical contamination either by government authorityor industry groups;

c. the formation and function of agribusiness supply chains that engagesmall farmers in high value activities;

d. adequate supply chains for key inputs, in particular quality seeds andplanting materials of improved varieties

iii) The impacts of various types of R&D and extension options and identi-fying best practices and spending priorities, i.e., in natural resource ma-nagement, productivity enhancement, quality improvement, etc., bothex ante and ex post

iv) The importance of fruits and vegetables in economic diversification, theextent to which expansion of high-value activities is a cause rather thaneffect of agricultural development

v) The exact nature of market price and public expenditure policies as theyaffect resource allocation to and within the fruits and vegetables subsector

vi) Prospects for growth and development of fruits and vegetables underbusiness-as-usual and alternative scenarios

These research directions would require more extensive case work, thecollection of microdata from farm household surveys, more intensive analysisof existing secondary data, the innovation of conceptual frameworks to handlethe behavior of farm households and rural organizations, and the developmentof quantitative modeling tools, e.g., supply-demand modeling and economicsurplus analysis.

In conclusion, throughout this paper attention has been drawn to the stylizedfact of agricultural diversification and the role played by fruits and vegetablessubsector in agricultural development. The growth and sustainable developmentof the subsector has been constrained by several factors related to naturalconditions (such as geography and climate) but also strongly determined byinstitutional arrangements (such as the supply chain), quality of governance,and the policy environment. In particular, the spread of new technologies isslow as research outputs and innovations are inconsistent with adoptionincentives.

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To accelerate technological change, particularly among smallholders,investment and policy reform should aim at integrating markets and removingpolicy distortions. Finally, the national agricultural research and extensionsystem must be synchronized with the wide-ranging and fast-changingrequirements of agribusiness enterprises along the value chain. Addressing thesepolicy and governance issues would have a far-reaching impact on theagricultural sector as a whole through realizing dynamic benefits fromdiversification and transformation within agriculture.

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