|Economics of the Philippine Milkfish Resource System (UNU, 1982, 66 pages)|
The milkfish resource system analysed in the preceding chapters is entirely dependent upon the occurrence and capture of milkfish fry along the coastline. Though found to be economically efficient, the concession arrangement under which the fry fishery is managed is of little benefit to fry gatherers unless they can be organized to serve as their own concessionaire. One successful case of a concession co-operative was cited as evidence of the advantages to gatherers from this approach.
Several factors reinforce tendencies toward a hierarchically structured fry procurement sub-system, including nation wide fry demand and more localized supply points, economies of scale in transport, and the nationwide concession system which awards exclusive rights of first purchase to the highest bidders. However, the development of market hierarchies is tempered by risks and uncertainties brought about by price fluctuations resulting from a highly seasonal catch, the perishability of fry, and opportunistic behaviour of buyers and sellers. Strategies of intermediaries to minimize these risks, through vertical and horizontal integration and various financing arrangements, shorten the marketing chain to an average of 2.7 title exchanges, and have resulted in a very prominent role played by Manila area nursery-pond operators.
Comparisons of rates of return to participants in the procurement sub-system indicate a high degree of correlation between rates of return and sub-sector concentration ratios. Rates of return are lowest in the fry gathering sub-sector, where thousands of fry gatherers participate, and highest in the nursery-pond sub-sector, where the activity is concentrated in the hands of a relatively small number of individuals.
Monthly average fry prices (1976-1977) among 11 major trading regions were significantly correlated, indicating a high level of information flow in the procurement subsystem. Spatial price differentials significantly exceeded transfer costs only during the non-peak season. Form price differentials, however, consistently exceeded costs of rearing fry to fingerling. More in-depth analysis of the nursery pond sub-sector is required to identify the causes of high net returns. If these high net returns have persisted since 1977, and can be shown to be consistently above opportunity costs, one could hypothesize that they prevail because of lack of competition among nursery-pond operators.
Besides showing that the transformation sub-system has the capacity to greatly increase its production and profits from existing fishponds, this study has also identified seven variable inputs which are significant in explaining variations in milkfish output from farm to farm. These are age of pond, milkfish fry and fingerling stocking rates, organic and inorganic fertilizers, land (farm size), and miscellaneous operating costs. In addition, to increase profits, the rates of use of the following inputs should be increased: milkfish fry and organic and inorganic fertilizers.
The analysis of the delivery sub-system shows that it is economically efficient in directing the flow of milkfish from fishponds and fishpens to consumers. However, the marketing system can be made more technically efficient if more ice and better means of transportation are made available.
To date, fry supply has shown itself to be highly resilient in meeting the shifting demand from fishponds and fishpens for stocking materials. However, if fishpen expansion continues and stocking rates of fishponds are increased, fry and fingerling prices will undoubtedly increase. A network of fryseed banks and, eventually, hatcheries to supplement supply from the natural fry fishery would be extremely helpful to reduce price fluctuations and assure year-round supply of fry in large numbers.
The milkfish resource system described in the preceding chapters does not, of course, exist in a vacuum. General economic conditions in the Philippines have an effect upon the efficiency of the system, and upon the returns to the various "creators of utility" within each of the subsystems of procurement, transformation, and delivery. Although this paper does not rigorously examine factor shares, returns to the factors of production (land, labour, and capital) in the system approximate the opportunity costs of these factors. This implies that from the social point of view, them factors would not contribute significantly more to the Philippine economy if they were used elsewhere, in a different productive activity. Some changes could be implemented in the interest of equity, however.
The low returns to fry gatherers reflect, in part, the lack of other income-generating opportunities available to them, and also the effect on fry prices of the concession arrangement. Because gatherers are restricted to selling only to the concessionaire, they receive a lower price than would prevail if there were open-access to the fry fishery and they could sell freely in the open market. It can be argued that because the municipalities "own" the resource, they are, thus, theoretically free to spend the rent (licence fee) earned in such a way as to redistribute wealth to benefit gatherers. However, because of the extremely low income levels of most municipalities, fry ground income is most often used to support basic social services in the form of salaries for municipal officials. The result is that fry gatherers, who are among the poorest sectors in the Philippines, are not benefiting from municipal ownership of the resource. One solution to this dilemma is to encourage the formation of gatherer co operatives to be awarded concession rights for a possibly reduced fee, in which case they could earn the profits that formerly accrued to concessionaires plus a share of the resource rent.
In contrast to the fry gatherers who, along with hired labour in the procurement, transformation, and delivery sub-systems, earn the lowest remuneration, returns to nursery-pond operators are high. But, here too, these high returns reflect the presence of other investment opportunities available to nursery-pond operators. The current opportunity cost of capital, particularly in the Manila area where most of the nursery ponds are located, approaches 30 per cent for large scale investments with a fair degree of risk (long-term commercial notes pay approximately 20 per cent). The presence of substantial though non discriminatory barriers to entry in the form of pond development costs and costs of establishing trusted suki relationships with suppliers and buyers also contributes to the high returns to nursery-pond operators, and to the more successful rearing-pond operators. In general, returns to capital and labour in the resource system are highest where such entry barriers exist, and lowest where entry is easiest, such as in fry gathering.
The relative opportunity costs within the milkfish resource system should thus be seen as reflecting the pattern of development in the Philippine economy as a whole, where growth (and hence increased opportunities and returns for the factors of production) has been centred in urban areas, particularly Metro Manila.71 If development were more rurally centred, opportunity costs of rural factors of production, including labour in the milkfish resource system, would be higher.
The finding of positive returns to scale in the transformation sub-system has special equity implications. The fishpond sector is characterized as having a clear dualistic structure with a small number of highly successful producers and a large number of marginal producers. Indeed, if one values the land of marginal producers at its opportunity cost, many of them are operating at a loss. Not only has the production function analysis of the transformation sub-system found that most milkfish ponds in the country are grossly underutilized, it has also shown that further improvements in production efficiency within this sub-system can also be obtained by taking advantage of the presence of economies of scale in the sub-system. Both intensified production on existing farms and expansion to larger farm sizes suggest the application of larger quantities of supplemental inputs to boost per unit productivity of the milkfish ponds. The extent to which pressures to achieve economies of scale will arise depends greatly upon the relative rates of increase in output price and in costs of production.
For discussion purposes we can assume that the average farm faces a perfectly elastic demand curve, and the average cost (AC) curve for the sub-system is the usual U-shape (fig. 40). If output prices increase faster than costs of production, then the range over which various farm sizes can compete will become larger in the short run. In the long run, these higher profits (average revenue minus average cost) would attract new entrants. However, in the case of the milkfish transformation sub-system, barriers to entry will increase because with limited mangrove area available for fishpond expansion, existing farms of all sizes will be favoured. Land prices should rise, making entry for newcomers more difficult.
The optimum of the competitive farm is to produce at the level where marginal revenue (MR) equals marginal cost IMC). The shaded portion represents profit at the optimum point.
However, if output prices increase slower than costs,72 then the range over which differing farm sizes can compete will narrow, and favour those with lower average costs of pro auction. Smaller farms with higher average costs will find it more difficult to compete as profits (AR-AC) decline. An equity issue is a way to inhibit concentration of the transformation sub-system in the hands of fewer producers, while not denying consumers the advantage of milkfish at lowest cost. One possible way out of this problem is to organize group or co-operative farming among the many small producers through the use and management of common resources (i.e., fry or seed banks), bulk purchases of fry and supplemental inputs, and co-operative marketing.
It is extremely difficult to predict future relative price increases of milkfish and of production costs. With capture fishery catches levelling off as the limits to the resource are reached and population expanding, milkfish prices will certainly increase. How much they increase depends, in part, upon the supply and prices of other protein substitutes from the agricultural sector.
What will be the supply response of producers? As the prices of milkfish rise, so, too, will the prices of fry. Increased fry prices may, in fact, be a blessing in disguise in that they should encourage better fry handling and acclimatization practices. They will also lend further support to efforts to breed the milkfish in captivity. The response of producers to higher milkfish and fry prices will depend upon the extent to which they are motivated by economic considerations. As the preceding analysis has shown there are large numbers of marginal producers who are apparently motivated by other considerations. Consequently, it is likely that the large producers will be the first to respond.
Efforts to encourage milkfish producers to apply larger quantities of supplemental inputs must be accelerated by an active extension service. The task of convincing pond operators of the advantages will be made easier as land values increase. In the past, technical information and research results have not been reaching the bulk of the country's milkfish producers. Inequitable access to such technical information has partly been responsible for the perennial low productivity of Philippine milkfish farms. There is, in fact, a tendency for research stations to respond more readily to the information needs of big producers rather than to the information needs of small producers. Since there are less than two extension workers on average per province, this tendency to serve only a small number of producers is not surprising. The problem of technology transfer to the marginal producers is also made more difficult by their reluctance to join the Philippine Federation of Aquaculturists (PFA), which they see as being primarily for the "big-timers." The anomalous situation that these attitudes produce is one in which the small producers only infrequently participate in the information-sharing activities that characterize the PFA, though they are potentially the greatest beneficiaries from such information exchange.
If managed for society's benefit, the milkfish fry fishery is a renewable resource, and the milkfish resource system (procurement, transformation, and delivery sub-systems) which at present depends upon it can be continuously relied upon to supply a part of the protein needs of the Philippines. The authors hope that the preceding analysis of the milkfish resource system will be useful to government planners as they implement programmes and activities that will promote increased milkfish production in the coastal zone and inland bodies of water. In particular, increases in productivity per unit area through intensification in milkfish rearing will lead to increased efficiency in resource use, thus keeping price increases for milkfish to a reasonable minimum.