Farmers are Rolling On and Rolling Off to Increased Revenue in the Philippines
RORO transport systems can help level the playing field and diminish the use of middlemen as farmers get their products to market.
Agricultural production in the Philippines is dominated by small-scale farmers. The Agricultural Census of 2012 indicates that close to 90% of agricultural land holdings are less than three hectares, and most farmers rely on multiple layers of intermediaries to consolidate and transport their products to final markets.
The dependence of farmers on these marketing channels increases the further they are from their markets. In these settings, intermediaries often bargain down prices without passing on the reduction to consumers.
One of the reasons for the lack of bargaining power by farmers in dealing with intermediaries is high trade costs, which allow the latter to engage in price gouging. When trade costs are low, more intermediaries compete in both producer and consumer markets, and prices tend to decrease while farmers benefit. Studies have shown that lower trade costs take pricing power away from intermediaries. For example, intermediary profits tend to be larger for remote locations in Sub-Saharan African countries and are also associated with higher consumer prices. Reducing trade costs can alter the distribution of profits along the marketing chain and benefit farmers.
The Roll-On Roll-Off (RORO) Terminal System in the Philippines, introduced in 2003, presents an opportunity to examine how lowering trade costs can increase income for small farmers.
Domestic maritime trade costs in the Philippines are high. It cost three times as much per nautical mile to move a twenty-foot equivalent unit container in domestic waters than in international shipping. The RORO-based transport program aims to bring down trade costs by promoting the use of ships that allow trucks and other vehicles to easily drive off and on vessels for more efficient inter-island trade. This dispenses with the need for cargo handling, leading to significant time savings.
The RORO program in the Philippines strategically connected ports with major roads to ease transport, trade and travel. The program started with 36 routes in 2003 and grew to more than 150 by 2016.
By enabling direct deliveries, ROROs help firms cut inventory and warehousing costs. These savings are valuable for perishable agricultural products. The smaller size of RORO ships compared to conventional liner vessels also makes them more suitable for regular short-distance inter-island trade.
The figure below shows that before RORO services, retail prices could be 240% higher than farm prices. Afterward, they were in the range of 180%. In more rigorous analyses that control for factors that may affect prices in supplier and demand provinces, such as product seasonality and province characteristics, this translates to a difference between farm and retail prices that is on average 28% lower for provinces with short-distance RORO connections.
However, the smaller price difference does not necessarily imply lower intermediary markups. Estimating the effect of ROROs on markups involves examining a scenario where trade costs by RORO status do not change but markup opportunities do change. This can be mimicked using price shocks from typhoons that affect some provinces but not others.
For example, the Philippine provinces of Agusan del Norte, Cebu, and Negros Oriental, are major suppliers of mangoes to Southern Leyte. Imagine a typhoon that damages supplies in Agusan but leaves supplies in the other two provinces unscathed. Because Agusan is a major supplier of mangoes to Leyte and supplies cannot be immediately obtained, the typhoon in Agusan translates to an overall price increase of mangoes in the local markets.
Intermediaries keen to make money off the situation try to source mangoes from Cebu and Negros. But because Cebu has direct RORO access to Leyte, while Negros does not, more intermediaries can compete for sources in the former. This should translate to farmers in Cebu receiving a higher share of the price increase than farmers in Negros.
The results confirm that farmers in provinces unaffected by the typhoon all obtain higher prices during typhoons. Based on average prices in the sample, farmer revenues can increase by 9 percent during these times of scarcity. However, the price increase is up to three times larger in producer provinces with RORO services, by an additional 10 to 19 percentage points. Meanwhile, the increases in retail prices by RORO connection are consistently lower than the farm price rise, in line with a squeezing of intermediary markups.
The use of RORO systems improves the welfare of farmers. Farmers receive higher revenues without raising consumer prices. During episodes of typhoons, the higher passthrough of positive price shocks to farmers without the corresponding price increase in retail markets indicates greater competition and lower markups for go-betweens.
The impact is potentially substantial. Nearly all farms in the Philippines are household operated. A quarter of the Philippine labor force rely on farming as livelihood, and agricultural products account for over 20% of the total volume and value of domestic maritime trade in 2019. From this perspective, the RORO transport program can be a powerful tool for spurring rural development.