UNIVERSITY OF SANTO TOMAS

IMPACT OF LABOR, TRADE LIBERALIZATION, AND CREDIT ACCESS TO THE DOMESTIC SUPPLY OF COFFEE AND COCOA

A Thesis Proposal Submitted to the Business Economics Department, College of Commerce and Business Administration

of the University of Santo Tomas

In Partial Fulfilment of the Requirementsfor the Degree of Bachelor of Science in Business Administration Major in Business Economics

by:

BUAN, MARIEL LIZETTE R.ORTIZ, EMILY JANE S.

VISMONTE, LOLLIE ERINA M.4E4

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CHAPTER 1

INTRODUCTION

Coffee is the world’s second most traded commodity next to oil. The Philippines is one of the

fewest countries that can produce all of the four varieties of coffee: Arabica, Robusta, Excelsa,

and Liberica. According to the International Coffee Organization, Robusta accounts for 75% of

the country’s total production and the remaining three accounts for 5 – 20% of the country’s

coffee produce. An estimation of 300,000 Filipinos depends on the coffee industry. The national

average yield is 400kg/ha is very low compared to leading coffee producing countries such as

Brazil where they produce for about 2,000kg/ha.

However, the hope for the coffee industry is not dying. Speculators like Agriculture Secretary

Proceso Alcala once mentioned that coffee growing is proving to be a profitable business venture

due to a ready market in the country. President Aquino renewed its commitment to help coffee

growers. He had already talked to some Nestle officials and two other countries to have their

interest in sourcing coffee from the Philippines. This would entice more work force in the coffee

fields due to increasing demands of coffee.

Worldwide consumption of cocoa products continues to grow at about 2-3 percent or 60,000-

90,000 MT per year. Global production remaining behind the increasing demand indicates that

there is a clear need for expanded production of cocoa.

The Philippines can be a potential producer of cocoa and it has been cultivating cocoa since the

17th century. International demand for cocoa increased the interest of local farmers to produce

more. The country produces approximately 5,000 MT of cocoa beans per year and most of which

is used domestically. However, domestic processing industry demands approximately 32,000

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MT. Importing cocoa beans is necessary since there is still deficit in supply. Remedies from the

government and some private institutions are in the process in order to raise the cocoa industry.

It holds a lot of promise not only in increasing the income of farmers but also in supporting the

country’s economy.

The researchers’ study focuses on determining the relationship of domestic supply of crops and

the factors that might affect its movement. The factors referred to by the study include labor,

trade liberalization, and credit access. Its scheme is to identify the connection of domestic supply

of coffee and domestic supply of cocoa with regards to labor, trade liberalization, and credit

access.

The objective of the study is to examine the significance and relationship of labor, trade

liberalization, and credit access, with its dependent variable domestic supply of coffee and cocoa.

As we all know, agriculture is dominant in the country and yet it is not sustainable and slowly

deteriorating. As a result, this study will identify the effects of the problems that the government

might address in order to come up with policies that will be useful for the agricultural sector,

particularly its farmers in order to uplift the domestic supply of cash crop in the country.

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CHAPTER 2

REVIEW OF RELATED LITERATURE

COFFEE

Labor

Labor and chemical fertilizers are the most important economic resources in the production of

coffee (B.F. Giannetti, Y. Ogura, S.H. Bonilla, C.M.V.B Almeida, 2011). Another group of

researchers K. Lal Poudel, J. Yamamoto, Y. Sugimoto, A. Nishiwaki and H. Kano (2010) agreed

with B.F Giannetti et al. (2011) that labor is a momentous factor and is statistically significant in

explaining coffee production. (K. Lal Poudel et al, 2010) observed that average production of

coffee is higher in high altitude farms along with higher level of labor and organic fertilizer

consumption than other altitude categories. Coffee production is labor intensive enterprise in

hilly regions. The effect of labor is however very prominent in explaining the coffee output

compared to other explanatory variables that they used.

Coffee is economically more profitable in the present context among the farmers as compared to

other cereal crops in the hilly region stated by Bajracharya, 2003 (as cited by Lal Poudel et al.

2010). It supports livelihood for many rural and marginal people in mid-hill region. Membership

in cooperatives improves farmers’ production performance and ability to cope with the effects of

the coffee crisis (Wollni and Brummer, 2011). Cooperatives add number of labors which

contributes greater productivity. Labor requirement for cocoa closely resembles with coffee

noted by Lass, 1985 (J. Leiter, S. Harding, 2004).

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Trade Liberalization

Karol C. Boudreaux stated that trade liberalization of the coffee sector had a number of positive

effects. By freeing the coffee sector from the heavy-handed involvement of the government, the

government has provided more incentives to the coffee sector and created greater scope for

citizens to pursue opportunities. Farmers have an incentive to increased income that will shift

some production of fully washed coffee. Exporters are competing for opportunities to sell

Rwandan coffee to foreign buyers. Other entrepreneurs have established cafés that feature local

coffee. It has created a wider and deeper space for smallholder farmers and local exporters. In

other words, along a value chain, Rwandans are benefiting from the opportunity to produce and

sell specialty coffee. As a result, Rwanda is producing more high-quality coffee and demand for

the country’s specialty coffee is increasing.

According to the Information Centre for Agricultural and Rural Development (ICARD) Central

Highlands’ coffee industry of Vietnam has contributed much from trade liberalization. Owing to

market development, it has become Vietnam’s biggest coffee-specialised area, and contributes

considerably to overall supply chain. In general, compared to other crops, coffee has enjoyed

favourable trade policies inside and outside the country.

The goal of economic liberalization is a more open economy. Rieber (1981) stated tariff levies

on a commodity can induce a country which has a single producer since to protect its developing

industry until to become internationally competitive. (Nishijima and Macchione Saes, 2010).

The reformed policy included the opening up of economic activities to the free play of market

forces. For instance, Rwanda’s coffee-sector liberalization has raised income, rather than costs

for the rural poor, and is less likely to promote conflict than those where costs are widely spread

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and benefits are narrowly concentrated. These costs and benefits are pertaining to the removal of

subsidies and privatizations, respectively. (Nyemeck, Gockowski, and Nkamleu, 2007).

Vegh wanted the idea that the fair trade system aims to provide fair prices for exports, direct

relationships between producers, buyers and consumers, democratic organizational support, and

access to loans and developmental incentives. Fair trade cocoa production can increase farmer

income in the case of low-intensity cocoa production.

Credit Access

Credit access is important in the agricultural industry because it helps the farmers to continue to

produce and market their crops in order to have stable living conditions. Micro-financing activity

could supply particular capital for producers of coffee. This will help the development of coffee

production and on the positive side, it makes coffee growers available in supply sufficient inputs.

(Le, 2008). Also, credit provision in coffee had become an important economic activity. (Eakin,

Tucker, Castellanos, 2006). In order to adopt coffee production, rural credit is one of the major

determinants in production to increase supply.

Hypotheses

Hypothesis 1: Labor supply is significantly and positively related to the supply of coffee.

Hypothesis 3: Trade liberalization has a significant and positive impact on the domestic

production of coffee.

Hypothesis 5: A significant and positive implication on the domestic production of coffee is

portrayed when credit access is available.

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COCOA

Labor

Labor is a socio-economic factor and a human activity that provides the goods and services in an

economy. According to Lukanu, Green and Worth (2007), labor is one of the most important

factors affecting smallholder cultivation of cash crops. Cultivation then will create impact on the

supply of these crops.

Cocoa industry experiences a major constraint in peasant production as Gocowski and Oduwole

(2003) stated. Available labor force comprised mostly of old people and as result, it gives a

declining effect on agricultural productivity (Oluyole and Lawal, 2010; E.N.A Dormon, A. Van

Huis, C. Leeuwis, D. Obeng-Ofori, O Sakyi-Dawson, 2004). Lack of available labor is a

positively related with the number of household rejecting or discontinuing certain cash crop

owing as what.

From Larson & Frisvold’s (1996) viewpoint, the amount of production depends on the size of the

field that can be cultivated, which in turn depends on the availability of labor. Abalu (1987)

asserted that insufficient labor can limit the ability to a sow large area quickly and that results to

inadequate production because the area cultivated land is reduced (Lukanu, Green, and Worth,

2007). Abekoe stated that in Nigeria, another reason that would be attributed for this decline

include the plantation of low-yielding varieties and incidence of pests and diseases (as cited by

Dormon, Van Huis, Leeuwis, Obeng-Otori, and Sakyi-Dawson, 2004). Inadequate crop

management due to lack of labor would project low yields of cocoa; farmers doesn’t have the

capacity to replant. And for that reason, low yields of cocoa are faced by Adarkwa farmers in

Ghana.

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Young people within the active working age migrate to urban centres in search of white collar

jobs and improved standards of living and this development has not helped agricultural

productivity as it has left farming in the hands of the old and non-literate farmers. Farm income,

farm size, as well as wage rate significantly affected the use of labor for cocoa production in the

study (Oluyole and Lawal, 2010). Labor supply is positively related with supply of cocoa.

Trade Liberalization

Trade liberalization affects the trade in the agriculture sector. It increases the production of

agricultural commodities through the relaxation of tariffs and providing subsidies. According to

Gilbert and Varangis (as cited by Yeboah, Shaik, Wozniak, and Allen, 2008), market

liberalization has been the major driving force in increasing cocoa bean exports. It is done by

eliminating government marketing agencies and administered prices, reducing taxes on cocoa,

and privatizing government-owned. It resulted in fewer taxes on producers and reductions in

marketing costs.

As producers’ share of world price of cocoa through trade liberalization grows, production

increases and the volume of export rises. Free trade causes supply of cocoa to expand

accompanied with improved price signals and world welfare (Yeboah, Shaik, Wozniak, and

Allen, 2008)

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Credit Access

Access to credit helps raise productivity in cocoa production. It is a smart alternative in

overcoming production constraints and it will help enhance the capacity in cocoa production. It

is also noticed that this is much needed in the poor rural households in the developing countries

for the reason of insufficient access. Negative effects on incomes of the totality and households,

agricultural productivity, and welfare will likely to happen at the same time (Nyemeck,

Gockowski, and Nkamleu, 2007).

Farmers who are well-connected with each other are most likely to have access to credit facilities

in order to acquire improved technologies to be able to produce ample yields of cocoa (Oluyole,

Egbetokun, Oni, and Aigbekaen, 2011).

According to Von Pischke and Adams, credit is given a high importance, especially to rural

smallholders in agriculture, in multifold parts of the world in response to the less privileged

entrepreneurs with limited capital base in the sector. In order to be competitive throughout the

supply chain, high quality requirements are needed to be accomplished. According to Killick,

farmers are hindered due to consequent denial of access to credit, especially in developing

countries (as cited by Nyemeck, Gockowski, and Nkamleu, 2007).

If improved access to credit is made, it will help poor rural farmers to engage in more productive

income-generating activities inside and outside the farm and to alleviate the standards of living

and productivity (Diagne and Zeller, 2001) and welfare improvement will likely to occur due to

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increased information flows and reduced transaction costs, as mentioned by Bastalaer (as cited

by Lawal, Omonona, Ajani, and Oni, 2009). .

.

Credit access, without any doubt, is a smart alternative in overcoming production constraints

which in turn hinders the positive outcomes of supply of agricultural crops. Having an increase

in output gives a good market to farmers for their produce. It ensures their food security and

general welfare in the midst of poverty for the farming households (Lawal, Omonona, Ajani, and

Oni, 2009).

Hypotheses

Hypothesis 2: Labor supply is significantly and positively related to the supply of cocoa.

Hypothesis 4: Trade liberalization has a significant and positive impact on the domestic

production of cocoa..

Hypothesis 6: A significant and positive implication on the domestic production of cocoa is

portrayed when credit access is available.

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Research Simulacrum

H1

H3

H5

H2

H4

H6

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Labor

Trade Liberalization

Credit Access

Domestic Supply of Coffee

Labor

Trade Liberalization

Credit Access

Domestic Supply of Cocoa

CHAPTER 3

RESEARCH METHOD

The research design used by the researcher is quantitative in nature. It is an inferential research

and it made use of a time series data for the reason of conformity with the past studies conducted

by other researchers. The area of the study is limited to the national level and years 1990 to 2010

were covered. Measurements for the domestic supply of coffee and cocoa is in quantity in

kilogram; trade liberalization from the difference between the domestic supply and exports then

added it to the total imports; labor in thousands employed in the agricultural sector; and credit

access in agricultural production loans granted by commodity in million pesos. The gathered data

came from the Department of Agriculture (DAR), Bureau of Agricultural Statistics (BAS),

Agricultural Credit Policy Council (ACPC), Philippine Statistical Yearbook (PSY) of the

National Statistics Coordination Board (NSCB) and Foreign Trade Statistics of the Philippines

from the National Statisitcs Office (NSO). In order to know the results, the researchers used

EViews, a statistical tool, to identify the significance of explanatory variables, labor, trade

liberalization, and credit access to the explained variable, domestic supply of coffee and cocoa.

The Ordinary Least Squares method (OLS) was used with the assumption of Best Linear

Unbiased Estimator (BLUE) to indicate the significance of the said variables. In interpreting for

the results F-statistic, T-statistic, Coefficient of Determination and R Squared are required for

further analysis and interpretation.

Eq. (1) Domestic Supply of Coffee = β0+ β1Labor+ β2Trade Liberalization+ β3Credit Access+ ε

Eq. (2) Domestic Supply of Cocoa = β0+ β1Labor+ β2Trade Liberalization+ β3Credit Access+ ε

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CHAPTER 4

RESULTS AND DISCUSSION

The objective of this study is to show the relationship of labor, trade liberalization, and credit

access, with its dependent variable domestic supply of coffee and cocoa. In this chapter, the

researchers thoroughly elaborated the study by running their data samples gathered from

different institutions, regressed the collated data using EViews 4,a statistical tool used to regress

data, interpret the outcomes, and discussed the findings with contemplation and accuracy.

Considering the situation of the domestic production of coffee and cocoa in the Philippines, the

researchers are determined and confident with whatever outcome this calculation process may

hold and will account for any discretion.

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Regression Output of Coffee

According to the regressions result of our model, R-squared (R²) value of 0.965585, the

goodness of fit of the model, shows that at 96.55% the explanatory variables explain changes in

the dependent variable. This means that at 96.55% of the independent variables explain changes

on the Domestic supply of Coffee. This simply means that the explanatory variables explain the

behavior of the dependent variable at 96.55%. The calculated F-statistics of 0.000000 which is

less than the level of significance 0.05 implies that all the variables’ coefficients in the regression

result are all statistically significant to the domestic supply of coffee.

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Dependent Variable: DSCOMethod: Least SquaresDate: 07/09/12 Time: 20:22Sample: 1990 2010Included observations: 21

Variable Coefficient

Std. Error t-Statistic Prob.

C 1.55E+08 63863371 2.423808 0.0268LA -15132.09 5595.259 -2.704448 0.0150LO 4.224331 3.581902 1.179354 0.2545

TCO 0.984615 0.047573 20.69706 0.0000R-squared 0.965585 Mean dependent var 1.93E+0

8Adjusted R-squared 0.959512 S.D. dependent var 7404913

2S.E. of regression 14899973 Akaike info criterion 36.04126Sum squared resid 3.77E+15 Schwarz criterion 36.24022Log likelihood -374.4332 F-statistic 158.9894

Durbin-Watson stat 1.257969 Prob(F-statistic) 0.000000

Labor

The result obtained from the regression shows that all the variables have a positive relationship

on the domestic supply of coffee except for labor. Having a t- Statistic Probability of 0.0268

which is less than α, level of significance of 0.05, labor is significantly related but is negatively

related to the domestic supply of coffee with -15132.09 coefficient.

Labor greatly affects the production of the said crop especially because it is labor intensive.

According to K. Lal Poudel, J. Yamamoto, Y. Sugimoto, A. Nishiwaki and H. Kano (2010)

agreed with B.F Giannetti et al. (2011), labor is a momentous factor and is statistically

significant in explaining coffee production. Labor is significant in the study but that doesn’t

necessarily mean that it has a positive relationship. Like in the Philippines, for example, greater

labor negates its impact on the domestic supply of coffee. One factor to consider is the

urbanization that causes urban migration. Parallel to what Oluyole and Lawal, 2010 cited, young

people within the active working age migrate to urban centres in search of white collar jobs to

improve standards of living and this development has not helped agricultural productivity as it

has left farming in the hands of the old and non-literate farmers. The impact of the said factor

creates a diminishing supply of coffee due to the fact that people left in farming does not have

interest in long hours of physical labor or they don’t have enough skills for them to adapt

technological changes that might take place in the coffee farming and that will make their labor

less productive.

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As cited from an online blog, in US and Canada, there is a consequent increase in labor costs due

to the acute shortages, particularly at harvest time. The labor cost concomitants rise in

agricultural prices that create a positive impact or it makes the farming community

uncompetitive since people will choose market foods or cheap processed items. In short, as labor

increases, output decreases due to cost incurred. That study is somewhat similar to the Philippine

setting since the result of the relationship between labor and domestic supply of coffee from the

regression is also negative. Therefore, labor cost is a factor why increasing the number of labor

result to a decrease in output. In line with this is that the situation wherein the Philippines’ coffee

industry suffered a huge drop in production from 1989 to 2002 as cited in an article in Manila

Bulletin. Many have closed down and the fertile land sold to real estate developers. Sons and

daughters of coffee farmers leave for other professions. There was a shift in the field of careers

that these people have, from farming to other urban professions. Number of total labourers is still

the same and is increasing over time due to other agriculture labourers that enters but not on the

coffee sector, still that result to a decline in output. Like cocoa, since coffee is not a major crop

that Philippines cultivate, it is also let in the hands of peasant farmers that need support from

local investors to support them in cultivating the said crop.

Another reason why labor has a reciprocal effect to the supply of coffee is because laborers are

not motivated to do their work. Especially that here in the Philippines, the farmers are one of the

poor sectors of the society, according to the 2006 Poverty Statistics presented by Ms. Lina Castro

of National Statistical Coordination Board, and that they can’t even support their own family.

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Trade Liberalization

Trade liberalization affects the trade in the agriculture sector in which it increases the supply of

different commodities through relaxation of tariffs and giving subsidies. The result obtained

from the regression indicates that there is a significant and positive relationship between trade

liberalization and domestic supply of coffee having a coefficient of 0.984615 and t-stat

probability of 0.0000.

As stated by Karol C. Boudreaux trade liberalization of coffee sector had a number of positive

effects. By freeing the coffee sector from the heavy-handed involvement of the government, the

government has provided more incentives to the coffee sector and created greater scope for

citizens to pursue opportunities. Farmers were given an incentive to raise their income that will

shift some production of fully washed coffee. Just like the Philippine government, it unveiled

some of its plans to strengthen the coffee industry which has failed to supply the country's

growing demand in years. During the first Philippine Coffee Investors Forum last March 2012,

the Department of Agriculture said it is coordinating with concerned agencies to help Filipino

coffee growers back on their feet through tax incentives, financing schemes, technical training,

and interventions to prospective investors and producers. Likewise, President Benigno Aquino

III renewed last February 2012 his commitment to help the agriculture sector particularly those

in the coffee production industry. Nestle Philippines mentioned to him that the company uses

80% imported coffee and only 20 % locally produced in the country were used in the creation of

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coffee products. Having a scenario like that, the government aims to reverse the figure where it

targets to fill the 80-percent that Nestle needs and help local coffee growers. He stated that at

least two other countries expressed their interests in sourcing coffee from the Philippines. This

just shows the existence of free trade gaining the support of the government with reduced

boundaries to trade that made local producers increase coffee production.

Exporters are competing for opportunities to sell Rwandan coffee to foreign buyers. In Rwanda

many entrepreneurs have established cafés that feature local coffee. Smallholder farmers and

local exporters were given the chance to freely play in the market having decreased trade

limitations. It just implies that along a value chain, citizens are benefiting from the opportunity to

produce and sell specialty coffee that resulted to producing more high-quality coffee.

Correspondingly, as what Agriculture Secretary Proceso Alcala said coffee growing in the

Philippines is proving to be a profitable business venture because there is a ready market locally

and internationally. Due to emerging cafés established like Starbucks that somehow features

locally produced coffee many farmers are encouraged and supported by the government to plant

more coffee bean of different varieties. The need for greater local consumption and greater

demand of coffee supply internationally that is accompanied with free trade will encourage

coffee sectors to increase the domestic supply of coffee.

Credit Access

The regression result showed the obvious relationship between credit access to the coffee’s

domestic supply. It is positively related and significant. This is because the computed values

satisfy the given significance level of 0.05.

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Coffee ranks first among the non-staple food and is rated as fifth most important agricultural

product in the global trade. The Philippines is struggling in order to be competitive since planting

coffee beans in the country is likely to be possible because we have available factors of

production. Still, even though they are available, it is not enough to suffice the production. The

Philippines needs at least 64,000 metric tons of coffee in order to meet the local demand. In

order to give light to this problem, one course of action should be and is done and that is through

making credit access available to the coffee bean-planting sector. From the journal of Le (2008),

he stated that micro-financing activities could provide capital to be used for production. This is

exactly what the government and some private institutions are doing. In August 14, 2012, coffee

growers and stakeholders attended a consultation meeting in Benguet. The activity was lead by

the Rocky Mountain Arabica Coffee Company in partnership with the Department of Agriculture

– Cordillera. Financing will bring the production to a success because it will be able to provide

the right kind of resources to be used. Having this kind of credit or financing access would

bridge the gap between those who have money to lend and those who need to borrow.

Taking an example on the international level (from the research of Eakin, et al.) is a case in La

Campa, Honduras and Guatemala. Agricultural credit is most widely available and inevitably,

these farmers who were engaged in this type of activity are into organic production of coffee.

Comparing it to the Philippines, a coffee-chain run by a Filipino encourages the revival of the

coffee farming. Organic production is contemplated though it may take a while. The Department

of Agriculture realizes this insight and it has financed for about 1.2 million pesos to boost the

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coffee production. The funds will pay for 50 kilograms of coffee seeds to be distributed to coffee

growers and 20 bags of organic fertilizers and farm tools for clearing and rejuvenation of land.

On February, Philippine senator Francis Pangilinan initiated a program called “Sagip Saka”

(Farm Rescue) sets out to modernize the country’s agriculture and improve the quality of life in

the rural areas and make the Philippines food-sufficient. It encourages the farming industry to be

competitive so that it may also cater the global market through exporting. The said program will

provide interventions on credit and market access. In line with this, it agrees to a writing which

Diagne and Zeller has mentioned. They stated that the betterment of access to credit will help the

poor rural farmers to participate in worthwhile and income-generating activities inside and

outside the four corners of the farm to improve their standard living conditions.

Looking through the lens of the Philippines and its coffee production, the industry seems to be

struggling. Many are keeping their hopes up and if it could get the right support from the right

people, the coffee industry will resurrect. The country alone consumes about 70,000 to 80,000

metric tons (MT) of coffee a year. However, it can only produce for about 25,000 MT and the

rest shall be imported from different coffee-bearing countries. Nicholas Matti, president of the

Negros Coffee and Grain Milling and Trading Co., Inc. once said that credit access is a must in

order for the operations to continue and survive this crisis. Despite the obvious fact that the

Philippines is producing coffee more than the other cash crops, it really needs loans or micro-

financing in order to sustain and add value to the coffee itself.

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Regression Output of Cocoa

From the regressions result of the model, R-squared (R²) value of 0.764761, the goodness of fit

of the model, shows that at 76.47% the explanatory variables explain changes in the dependent

variable. This means that at 76.47% of the independent variables explain changes on the

Domestic supply of Cocoa. The calculated F-statistic of 0.000014 which is less than the 0.05

level of significance implies that all the variables’ coefficients in the regression result are all

statistically significant to the domestic supply of cocoa.

Labor

The result obtained from the regression shows that there is a significant impact with a t- Statistic

Probability of 0.0182 which is less than the 0.05 level of significance and a negative relationship

of labor on the domestic supply of cocoa with -957.1270 coeffiecient. This denotes that the [Ho]

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Dependent Variable: DSCAMethod: Least SquaresDate: 07/09/12 Time: 18:57Sample: 1990 2010Included observations: 21

Variable Coefficient Std. Error t-Statistic Prob. C 20394877 3535606. 5.768425 0.0000

LA -957.1270 366.5371 -2.611269 0.0182LO 0.114344 0.200818 0.569392 0.5765

TCA -0.157869 0.042808 -3.687806 0.0018R-squared 0.764761 Mean dependent var 6822668.Adjusted R-squared 0.723248 S.D. dependent var 1454390.S.E. of regression 765113.7 Akaike info criterion 30.10308Sum squared resid 9.95E+12 Schwarz criterion 30.30204Log likelihood -312.0823 F-statistic 18.42231Durbin-Watson stat 1.963368 Prob(F-statistic) 0.000014

which states that labor availability is positively related to domestic supply of cocoa is rejected.

Therefore, we will accept the alternative hypothesis [Ha] that labor availability has a negative

impact on the dependent variable, meaning that for every increase of labor, domestic supply of

cocoa decreases. The previous studies about the relationship of labor with the supply of cocoa

tell that there is a significant impact. That study corroborates with the journals that the

researchers gathered from other researchers who also made a study on this. As asserted by

Lukanu, Green and Worth (2007), labor is one of the most essential factors affecting smallholder

cultivation of cash crops that will eventually create impact on supply. Abalu (1987) also stated

that, inadequate labor can limit the ability to a sow large area promptly and that results to scarce

production because the cultivated land area is reduced (Lukanu, Green, and Worth, 2007). The

number of labor available creates impact on the domestic production and supply of cocoa. The

impact of the former doesn’t necessarily mean that it has a positive effect. In some countries like

in Ghana, inadequate crop management due to lack of labor would project low yields of cocoa.

And for that reason, low yields of cocoa are faced by Adarkwa farmers. The researchers’

hypothesis is that there is a positive relationship between labor availability and the output level.

This means that the more labor available, the more cocoa they can produce and thus, the supply

of the said crop will increase. But in the context of the Philippines however, it is negatively

related. The more labor available, the lesser the output is. One possible reason is that the

majority of the land area is used to cultivate other crops that have a greater demand in other

countries that Philippines could export like coconut, sugarcane and banana. Meanwhile, rice and

corn occupy 41 and 24 percent, respectively, of the total agricultural area. Leaving only a small

portion of land to other crops likes cocoa for farming which then yields a lower output. And that

is why the supply of cocoa decreases at an increasing rate.

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By nature, this crop is labor intensive therefore private entrepreneurs have to hire more labourers

in order to produce the said crop. Now these laborers render a corresponding cost, meaning that a

greater budget will now be allotted to the cost of hiring these labourers, which is now a part of

the production cost. According to the cost of production theory, the price of an object or

condition is determined by the sum of the cost of the resources that went into making it and labor

cost is included as one of the factors of production. So as labor cost increases, production cost

will increase as well, making the level of output decrease. Other reason that could be related

would be an increase in the labor is not proportionate to the increase of another variable. One

example factor is the area that they use for planting cocoa. Over the time, farmers in the

Philippines increase the area where they plant the said crop but is not sufficient enough

compared to the increase of labor. The country, however, declined the land used by 2006 to less

than 10,000 ha for planting cocoa, according to Department of Agriculture. In effect during that

same period, the reported production fell from 9,990 tons to about 5,400 tons, with two thirds of

the production coming from Davao region alone.Forest degradation accounts for the destruction

of agricultural lands, thus decreasing the possible area that farmers can use in planting crops.

Forestry’s share declines from 1.7% in 1986 to 0.1% in 2006, reflecting the rapid rate of

deforestation that had taken place.

Here in the Philippines, aside from the disproportionate area it uses for planting cocoa, it also

practices seasonal planting. Field planting must be started at the onset of the rainy season. Unless

irrigation is available, field planting during the dry season is not advisable. Farmers plant cocoa

for only a specific season of the year, because the rest of the time will be allotted for other crops.

Putting in mind that these farmers engage in other activities that are also essential in producing a

cocoa bean, aside from planting, such processes are also necessary like fermenting, drying,

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shuffling, and treading which are labor intensive. Even if labor increases, with the limited time

that a farmer can sow cocoa, output will still not increase but will decrease. It only signifies that

the harvested cocoa is not enough to sustain the need of the country because it will only yield a

little amount of output.

Another factor is that some farmers are diverse when it comes to planting because cocoa is

highly suitable for intercropping. It leads to a case wherein an additional laborer would not add

much in producing cocoa because they have other options of what crops to plant on. Instead of

focusing on one crop, they will just plant a few of every crop available and eventually will result

to a lower output. Therefore, if the number of laborers will increase over the time and yet they

only have fixed or disproportionate factors, it will only make the relationship of labor and

domestic supply negative.

Trade Liberalization

As what Gilbert and Varangis mentioned (as cited by Yeboah, Shaik, Wozniak, and Allen,

2008), free trade is a major driving force in increasing cocoa bean in which government

marketing agencies were eliminated, taxes were reduced and government-owned were privatized

that resulted to fewer taxes on producers and lesser marketing costs. In other countries it is

noticeable that trade liberalization increases the production of agricultural commodities.

Similarly, free trade in the Philippines is significantly related having a t- Statistic Probability of

0.0182 yet has a negative relationship (coefficient of -0.157869) on the domestic production of a

commodity like cocoa based on the regression results.

Local domestic grinders require at least 30,000 MT cacao beans every year so there is a big local

demand for it. Based on statistics, the country’s supply reached a deficit of 44,349 MT a year

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against local consumption and coming also from Agricultural Cooperative Development

International and Volunteers in Overseas Cooperative Assistance worldwide consumption of

cocoa products continue to grow at about 2-3 percent or 60,000-90,000 MT each year, having a

limited supply which means that production is left behind by the increasing demand for cocoa.

There is indeed a great need for expanded cocoa production. As producers’ share of world price

of cocoa through trade liberalization grows, production increases also. Therefore free trade

causes supply of cocoa to expand (Yeboah, Shaik, Wozniak, and Allen, 2008). Accompanied

with free trade among countries, world prices of cocoa beans have gone up to US$3,200 per MT

in 2008 compared to previous year’s US$1,007 per MT that encourages farmers to increase their

production. With a reduced number of restrictions in supplying cocoa domestically and exporting

it to other countries, the Philippines can be a potential producer of cocoa and better trading

relations among countries can be developed. Since there is a high demand of cocoa beans in the

world market and an increase in price with the help of trade liberalization, more farmers would

be willing to produce cocoa beans that will affect the domestic production of cocoa at a

decreasing rate. If more and more farmers would continuously cultivate cocoa beans, the amount

of export rises without noticing that domestic supply ready for consumption decreases. Through

trade liberalization more opportunities provided by the government can increase the interest of

local farmers to produce more cacao beans.

Credit Access

The regression result of the relationship of credit access to the domestic supply of cocoa has an

interesting side. The computed t-Statistic passed the 0.05 significance level, telling that there is a

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positive relationship between the former and the latter. However, the regression output showed

that the credit access variable is insignificant to the cocoa’s domestic supply.

This is in contradiction to the articles used in this study. Like for instance, in some West African

cocoa countries, rural credit and insurance markets are seriously deficient. Thus, conflict

between cash shortage and cocoa agricultural investment arises. Obtaining credit by cocoa

farmers helps enhance the investment capacity in production activities is a smart alternative in

overcoming production constraints (Nyemeck, et.al, 2007). Meanwhile in Nigeria, social capital

can be a way to reduce the credit access constraints faced by the cocoa farmers. In this way, they

will become more receptive to adoption of technologies that can improve their productivity and

output (Lawal, et al, 2009).

However, credit access given to cocoa farmers might not have the same repercussions as to other

cocoa-growing countries. Having access to credit will help poor farmers engage in more

productive activities. But in the Philippines, it has another scenario to be looked at.

Agricultural lending or micro-financing is available and is currently being implemented by both

public and private institutions, as well as the government, in order to give way to cocoa farmers a

chance to increase the quality of cocoa, yields, and revenues. They are placing the obtained

credit in upgrading the equipment or buying new machines that will be of best use in cocoa

farming. Edward David, president of Cocoa Foundation of the Philippines (Cocoaphil) sought for

the help of government financial institutions to provide loans that carry terms which farmers can

afford.

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Another issue that might cause the insignificance of credit access to the cocoa’s domestic supply

is that in order for a cacao tree to be fruitful, it would need at least 3 years for its gestation

period. It might take a while in order to produce a cacao but its yield is 33% larger than the

starting amount. The amount of money that these institutions might have lent will not bring a

significant increase in the production of cocoa. Planting such might take time and effort and that

the effect of having a farmer sufficient resource will lag.

Although this is, without any doubt, a smart alternative in overcoming production constraints, let

us look back into the technical aspect of the results. Credit access might be positively related but

its insignificance dominates the whole content. It would be of worth in a expanded span of time,

but for short term basis, it will not be applicable.

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CHAPTER 5

CONCLUSION, POLICY IMPLICATION, RECOMMENDATIONS FOR FURTHER

STUDY

Identifying the impact of labor, trade liberalization and credit access to the domestic supply of

coffee and cocoa are essential in making programs suitable for the expansion of production of

the said crop in the Philippines considering that both have a great potential in the local and

international market. This study also identified the problems in the production of coffee and

cocoa that the government should address in policy making that will help the agricultural sector

especially the smallholder farmers. The Ordinary Least Squares Method was used to test the

relationship and significance of the independent variables namely labor, trade liberalization and

credit access to the dependent variables, domestic supply of coffee and cocoa. Through further

analysis of the regression results, conclusions have been drawn.

COFFEE

The output of the regression denotes a significant yet negative relationship between the domestic

supply of coffee and agricultural labor. Coffee continues to be an exporting commodity of the

Philippines but it is not considered to be on the top. Philippines used to be one of the four largest

coffee producing nation. But now, only .012% of the world’s coffee supplies can Philippines

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produce. Some Filipino owned coffee chain like Figaro is encouraging the revival of the said

crop not only for domestic consumption but for export as well. Private companies or businesses

can play a great role in improving the supply of coffee since they are capable of paying higher

labor cost that can sustain a farmers’ living.

The result obtained from the regression indicates that there is a significant and positive

relationship between trade liberalization and domestic supply of coffee. Coffee growing in the

country is proving to be a profitable business venture because there is a ready market locally and

internationally. Many smallholder farmers are encouraged and supported by the government to

cultivate more coffee beans because of emerging cafés and firms that produce coffee products

and there are potential investors from other countries. The need for greater local consumption

and greater demand for coffee supply both locally and globally accompanied with free trade will

encourage the coffee sector in expanding domestic supply of coffee.

The regression result showed that access to credit has a positive relationship and significant

effect to the domestic production of coffee. The coffee production industry in the Philippines is

well-established and therefore it needs a little boost in order to be competitive once more.

Gaining access to credit supports the hope of the country in providing a just amount of cocoa

outputs for meeting the demands of the many. Interventions of some private organizations and

government agencies are now being materialized and is willing to lend or shed out large sums of

money for the coffee farmers to ensure the stability of the industry.

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COCOA

The regression result indicated a significant relationship but a negative impact between

agricultural labor and the domestic supply of cocoa. Contrary to our hypothesis which states that

labor supply is positively related to the supply of cocoa. Labor continues to increase but the

output level of cocoa consistently decreases. There is a huge number of labor in agriculture

sector which together employ 39.8 percent of the labor force but not all of those are into

farming and cocoa is not a main agricultural crop in the Philippines so they don’t give much

attention to the said crop. Also, there are factors that restrict the farmers or laborers to produce

more, like the season, labor cost, and a disproportionate increase/ decrease in some other factors

like the area where they plant that causes the domestic supply to decline.

Free trade in the Philippines is significantly related yet has a negative relationship on the

domestic production of a commodity like cocoa based on the regression results. Due to high

demand for cocoa both locally and internationally and an increase in price through trade

liberalization, more farmers will be encouraged to produce more that will affect the domestic

production of cocoa at a decreasing rate. Continuous cultivation of cocoa beans will increase the

amount of export without noticing that supply ready for local use decreases. With trade

liberalization, more opportunities provided by the government can provide more incentive for

farmers to cultivate more cocoa beans.

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There is a positive relationship between credit access and domestic production of cocoa.

However, the regression output showed that the credit access is insignificant to the cocoa’s

domestic supply. It is agreed that farmers who have their way in to get a credit from lending and

government financial institutions can be accommodated. However, the effects would not be the

same just it is expected; the notion here is to increase cocoa production. But in doing so, we

could see that the technology used in the production process is lifted and upgraded first. Also, it

would take an ample amount of time to see the whole production results due to the time allotted

for the cocoa beans to grow and be sowed. Credit access to such farmers may be of effect, but

not in the soonest phase.

POLICY IMPLICATION

Cocoa is still a reviving industry in the Philippines. Government, though they extend help to the

farmers or land owners of the said industry still our supply is inefficient to meet the demands of

our local investors and the world market. The presence of Non Government Organizations

contributes in the development in the cocoa industry. Government implemented a law for NGOs

from (Article XIII Section 15) states that “The State shall respect the role of independent

people's organizations to enable the people to pursue and protect, within their legitimate and

collective interests”. This law supports organizations like Cocoa Foundation of the Philippines,

and it will aid in generating employment in cocoa industry and will also provide programs that

focus on increasing supply of cocoa.

Section 7 of Republic Act 6657 states that all lands foreclosed by government suitable for

agriculture shall be acquired and distributed immediately upon the effectivity of the said Act and

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with implementation to be completed within a period of not more than four (4) years there from;

The International Coffee Agreement 2007 will also be needed in the revival of the domestic

supply of coffee in the country. It will support the International Coffee Organization’s role in

facilitating international trade and promoting a sustainable coffee economy for the benefit of all

stakeholders particularly small-scale farmers in coffee producing countries like the Philippines.

Its main objective is to strengthen the global coffee sector and promote sustainable expansion in

a market-based environment for the betterment of all participants in the sector.

House Bill No. 183 will greatly help in guiding local production in the expansion of the domestic

supply of coffee and cocoa because it seeks to create a law for the protection of trade and

commerce against undue restraint, monopolies and trade malpractices. Similarly, it shall

promote efficiency by effectively nurturing healthy competition thus resulting in increased

output, faster growth, and lower price of goods, particularly commodities. Fair Trade Act of

1998 is an act penalizing unfair trade practices and combinations in restraint of trade, creating

the fair trade commission, appropriating funds and for other purposes. It is the policy of the State

to create, restore and preserve a free, fair and full competition in trade; prohibit and penalize

anyone restricting trade or commerce and provide all sectors the best possible opportunity to

develop within the context of economic efficiency and consumer welfare.

Since there is a need for resolution in order for the cocoa and coffee industry to improve, policies

that will address the credit access inadequacy must be made. The Presidential Decree 717 (Agri-

Agra Law) must be amended. The decree states that it “shall provide agrarian reform credit and

financing system form beneficiaries through banking institutions”.

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Another policy must be observed and improved is the Republic Act 8435 or the Agriculture and

Fisheries Modernization Act (AFMA). A part of this act is the reform of government’s

agricultural credit programs. It strongly provide promotes the growth of the countryside

economy through access of credit farmers, fishfolk, women, and the small- and medium-scale

enterprises involved in the production, process, and trading of agriculture and fisheries products.

RECOMMENDATIONS

The researchers highly recommend the following:

Labor:

NGOs such as World Cocoa Foundation must place their programs more actively

in promoting their interest since these create employment in the agriculture sector.

Cooperation with private groups with the concern for coffee and cocoa planting

should be made into action.

Install irrigation systems in order for the supply of crops, like coffee and cocoa,

will be sustained throughout the year.

Provide machines that will make production easier and faster, in that way the

volume of coffee and cocoa produced will increase.

Higher government institutions such as the Department of Agriculture should

assign regions that have a high potential for planting coffee and cocoa in order to

maximize the regions’ comparative advantage.

Intercropping may still be practiced, but it should be limited to those regions that

have crop specializations.

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The distribution of land foreclosed by the government should apply to all plant

crops – including cash crops, such as coffee and cocoa, among others.

Trade Liberalization:

Free trade agreements must be utilized in order to make better trading relations

among other countries and help encouraging local farmers to expand agricultural

commodities.

Good trading relations among other countries must be established in order to

attract potential investors and generate an efficient exchange of commodities.

Laws or policies that will protect the trade of these agricultural products from

malpractices of exchange must be observed utmost.

Expansion for public expenditures and government support for coffee and cocoa

must be noted.

Restoration of the country’s free, fair, and full competition in trade should be

continuous and strengthened.

Credit Access:

Banks should have more incentives to lend to the agriculture sector in order to

remove the bias against smallholder agriculture farmers who want to acquire

loans.

Crop insurance, loan guarantees, and other risk-reducing mechanisms should be

strengthened.

Loans with affordable terms should be devised.

The local government should be able these farmers by assisting them their needs

with regards to technological advancements in the agribusiness.

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Attract more foreign investors in the local market. They would serve as a stimulus

for farmers to be more productive.

The national budget for agriculture should be assessed – allow more subsidies for

the said sector.

Implement credit policies to the agriculture sector; if such policy is already

existent, improvements shall be made in order for them to be more effective.

Recommendation for Further Studies

In order to give light to the country’s staggering supply of coffee and cocoa to the domestic

market, the Department of Agriculture, with the participation of some public and private

institutions could be the main drivers of improvement and implementation for the said crops. The

Senate of the Philippines could also draft laws that will be of best use to the farming sector.

Meanwhile, the Office of the President could also issue executive orders to ensure the

sustainability and justly practice of the agriculture sector and its lower components inside the

country.

Moreover, this study could still be improved with the presence of the following: availability of

specific data for each variable used in order to come up with more detailed and accurate results;

addition of other essential variables (e.g. land use, etc.) that could influence the outcome of the

domestic supply of coffee and cocoa; and usage of lag effects in order to interpret the long-run

outcomes.

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Notes:

http://www.agribusinessweek.com/cacao-the-resurrection-crop-for-farmers-in-the-philippines/ http://www.bar.gov.ph/agfishtech/crops/cacao.asp http://www.businessmirror.com.ph/home/53-agri-commodities/16516-cacao-growers-seek-government-help-to-boost-outputhttp://www.businessmirror.com.ph/component/content/article/53-agri-commodities/19413-dried-cacao-output-seen-at-7000-mt-for-2011 http://www.acdivoca.org/cocoahttp://www.edgedavao.net/index.php?option=com_content & view=article & id=6919:cacao- making-a-comeback & catid=37:agri-trends & Itemid=71 http://www.bar.gov.ph/bardigest/2001/julsep01_thephilcof.asphttp://www.sunstar.com.ph/manila/business/2011/03/09/philippines-unveils-support-coffee-industry-143978http://www.sunstar.com.ph/breaking-news/2012/02/24/aquino-commits-assist-coffee-industry-207926 blog.coffeereview.com /sustainability- and -coffee-causes http://www.mb.com.ph/articles/227080/coffee-farming-revival-under-way http://nscb.gov.ph/poverty/2006pov_asof%2025jun09/Final%20-%20presentation%20on%20the%202006%20basic%20sectors,%2025jun09.pdf http://pinoybusiness.org/2011/03/12/coffee-fund-to-finance-coffee-production-to-be-set-up/http://www.mb.com.ph/node/222331/revival-philippine-coffee-farming-pu http://www.preda.org/en/news/human-rights/philippine-coffee-farmers-trapped-by-nestles-low-buying-price/ http://car.da.gov.ph/index.php?option=com_content&view=article&id=226:coffee-growers-convened-for-financing-consultation&catid=1:latest-news&Itemid=1137 http://www.businessmirror.com.ph/component/content/article/53-agri-commodities/2196-coffee-industry-still-struggling-but-hopeful

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