THE government should conduct a tripartite meeting prior to imposing a flexible floor price for palay, according to an economist.
Roehlano Briones, a senior research fellow at the òòò½´«Ã½ (òòò½´«Ã½), said the scheme for palay floor price should be patterned after the mandated price-control settings in tobacco and minimum wages.
“These two floor-price setups have common elements if you look at the statutes that established each of these schemes. It has flexibility and tripartite price-setting,” Briones said during a Senate hearing on Wednesday.
He explained that for tobacco, it’s the government represented by the National Tobacco Administration (NTA), farmers, and buyers represented by cigarette manufacturers, dealers, and exporters.
Under the law, NTA is authorized to set or fix tobacco floor prices by holding a tripartite consultative conference every two years.
Outside the agriculture sector, Briones cited determining minimum wage by the Regional Tripartite Wages and Productivity Boards (RTWPBs), worker representatives, and employers’ representatives in respective regions.
“With both of these features, we can ensure that price setting is realistic and consistent with the market-clearing price,” Briones said.
He explained that the market-clearing price is the price where supply and demand more or less match. As such, there would be no surplus or shortage, resulting in a balanced market.
However, Briones said price controls could also fail.
“When does a price control fail? When it involves a prolonged and significant divergence between the mandated price and the market-clearing price.”
Citing a study from the World Bank, Briones noted that depending on the nature of the price control, prolonged and significant divergence between the statutory and market-clearing price could result in several setbacks.
This includes chronic shortages of goods, the formation of parallel markets with higher prices, and substitution towards lower-quality alternatives.
As such, the producers of price-controlled goods might turn to black markets, which lack basic regulation, and likely encourage production to shift to firms in the informal sector.
While not a floor price, Briones cited the mandated price cap for regular milled rice and well-milled rice in September 2023 at P41 per kilo and P45 per kilo, respectively, following the surge in retail prices.
In the same month, Briones said retail prices exceeded the ceiling and retailers claimed dwindling profit margins since they purchased the staple grains at wholesale. This prompted the government to dole out P15,000 financial aid for small retailers affected by the measure.
After a month, the government lifted the price cap on rice due to increased supply from the harvest season.
“This is a lesson that we should take to heart that floor prices or price controls in general can work if flexible and based on negotiation of the stakeholders involved, so that you can have a more realistic price setting responding to changing market conditions,” Briones said.
“But in practice, as we saw in the price ceiling example for retail, it is difficult to enforce. It creates winners and losers […] and depending on how prolonged and how far from realistic price it is, it introduces unsustainable distortion in the market.”
