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7th ASAE Conference, Hanoi, Vietnam
October 2011
Constraints to VCO Production Efficiency:
The Case of a Small Coconut Farmers’ Association
in Negros Oriental, Philippines
Wima M. Tejero* and Enrique G. Oracion
Silliman University
Dumaguete City, Philippines
Constraints to VCO Production Efficiency:
The Case of a Small Coconut Farmers’ Association in Negros Oriental, Philippines
Wilma M. Tejero1 and Enrique G. Oracion2
Abstract
Noticing that traditional copra production was yielding only meager returns, an
association of small coconut farmers in Negros Oriental, Philippines ventured into virgin
coconut oil (VCO) production. The primary goal was to raise members’ incomes amid
volatile copra oil prices in the world market. However, the venture had never fully taken off
because operation had remained below full capacity. If production were maximized, the
association could easily pocket at least Php 1.5 million (US$35,714.29) in net income per
year which was 34 times more than it had been earning. A study of the VCO supply chain
was conducted to determine the factors constraining the association’s operational efficiency.
The chain characteristics were mapped out to describe among others, the flow of product,
information and payments. The results indicated that the lack of raw materials for VCO
production was the primarily constraint to operational efficiency. Specifically, the production
of organic VCO promised substantial and regular demand for association’s product.
Research and development must, therefore, focus on how to increase incentives for coconut
farmers so that they would produce top quality coconuts without the use of chemical
fertilizers and allow the association to produce organic VCO that commands a price premium
over industrial coconut oil.
Keywords: virgin coconut oil, organic VCO, supply chain analysis of VCO production,
BLISCOFA, small coconut farmers
1
Assistant Professor and Chairperson of the Economics Department of Silliman University, Dumaguete City,
Philippines; e-mail address at wmtejero@yahoo.com
2
Professor and Director of Research and Development Center of Silliman University, Dumaguete City,
Philippines;
e-mail address at rdc_su@yahoo.com.ph
1
INTRODUCTION
Coconuts have, for a very long time, been an important national crop (DA, 2009) in
the Philippines. However, the price of coconut oil in the foreign and local markets had been
declining, making income from copra undependable to small farmers. Studies have argued
for alternatives for copra and claimed that if appropriate coconut-processing technologies
were in placed, these would provide farmers and farm workers higher return (Kad & Weir,
2008). The processing of virgin coconut oil (VCO) was proven to be providing much higher
value than copra oil and yielded many useful by-products in an environmentally-friendly
process, thereby, contributing to sustainable agriculture and development of the community.
However, the venture must not just be about the usual VCO but the certified organic VCO
because of its price premium over industrial coconut oil (Warner, Quirke & Longmore,
2007).
In 2007, an association of small coconut farmers in Negros Oriental, Philippines
ventured into VCO production after seeing the declining and highly volatile market price
level of coconut oil. The venture, however, had never fully taken off as it continued to
produce below its full production capacity. This condition limited the market of and income
for the association and if no proper intervention is to be done, the situation may lead to
operational and business failure which could discourage farmers from engaging more in
value-adding coconut-related projects.
Objective of the Study
This study was conducted to determine the factors constraining the association’s
operational efficiency. It also aimed to determine the economic incentives for small coconut
farmers if they sell their coconut products to a VCO processor. Specifically, the chain
characteristics were mapped to identify the key players and their respective roles, the
customers and their product requirements. The study also sought to describe among others,
the flow of product, information and payments and analyzed thereafter the efficiency,
effectiveness, and responsiveness of the players within the chain.
2
REVIEW OF RELATED LITERATURE
The Human Development Report revealed that regions with disproportionately
coconut areas tended to have high poverty incidence (Dy & Reyes 2006). Among the reasons
were price volatility of the coconut oil in the world market and the declining coconut
productivity.
But many years ago, Castillo (1979) already contended that increasing
productivity per unit area would not be enough to address the poverty of coconut farmers.
They have to supplement farming with activities that increase the value of their coconut
products. However, the passivity and contentment of farmers about what they had been
traditionally producing was a major hindrance for diversifying and improving farm
production (Castillo, 1979). The situation described, which was common several decades
ago, is still evident at present in the case of coconut farmers in Negros Oriental, Philippines.
Cubelo (2007) shared that many of the farmers participated in VCO processing
demonstrations, knew charcoal making, and had the raw materials for both activities but none
of them started a business venture of their own. The lack of entrepreneurial spirit and skill
and absence of capital and marketing opportunities were interrelated factors that may have
prevented a majority of the farmers to improve the value of the coconut products.
A study conducted by Kad and Weir (2008) revealed that community-based
production of VCO had made a significant contribution to raising the standard of living of
several villages in Solomon Islands. Warner et al. (2007) also noted that this value-adding
project was not just the usual VCO but the certified organic VCO because it has growing
demand among health conscious consumers and currently commands a price premium over
industrial coconut oil. Thus, it is not only being able to produce VCO that is important, but
this must meet the product requirements of ultimate consumers. The VCO processors have to
make sure that they buy the right quality coconut from farmers in order to satisfy the market,
and in response, the farmers must be conscious of the quality requirements in producing
quality VCO.
Theoretical Framework
Supply chain refers to the management of the entire set of production, distribution,
and marketing processes by which a consumer is supplied with a desired product (Woods,
2004). It provides producers, processors and distributors of any products the solid
3
foundations for strategic positioning, policy setting, and decision making that maximize
income (Porter, 1985). The
transformation process of adding value consists of several
primary and support activities. The primary activities include inbound logistics, production
or operation, outbound logistics, marketing and sales, and customer service; and support
activities include company infrastructure, technology development, materials management
and procurement, and human resources (Porter, 1985).
In the coconut industry, the activities under inbound logistics revolve around the
required elements in coconut production such as the selection of seedlings, planting,
maintenance of the coconut farms, harvesting, and processing of coconut products into
intermediate product or into copra, and production into coconut oil (crude, refine, or virgin
coconut oil) and other by-products into consumable commodities. Outbound logistics refer to
warehousing or storing of processed coconut by-products and their distribution while
marketing and sales are concerned with the selling and delivery of these products (Hart,
Kavallari, Schmitz & Wronka, 2006).
Human resources as the key players in the industry are also important elements in the
supply chain because they contribute to meeting the quantity and quality requirements of
products demanded in the market (Hart et al., 2006). In the coconut industry they are
categorized into the producers and suppliers; the middle-level traders who buy raw coconut,
copra or other by-products; and the exporters who buy in bulk and either sell coconuts as raw
or processed products to the international markets. Without these key players, the coconut
industry cannot move and only offers limited economic opportunities. Evidently, each of the
key players is dependent from the other but they do not necessarily enjoy the same amount of
benefits from the industry (Cubelo, 2007, Castillo, 1979). In the case of VCO production,
the supply chain may be shorter or longer depending on the presence of key players and how
they are being structured or organized. The longer the supply chain, however, the more
players will be dividing the profit and, therefore, some enjoy more than the others.
4
METHODS
Study sites and respondents. The study site was in Valencia, Negros Oriental,
Philippines where the sole VCO processor in the province was found. This VCO processor
was one of the only two VCO producers in Central Visayas, Philippines which successfully
acquired license from the Bureau of Food and Drugs (BFAD) to produce and sell VCO. A
list of suppliers of mature coconut in husk was requested from the management for
identification of samples. The identification was made using date of transaction, i.e. those
who sold coconuts within the last 12-months to the VCO producer. A total of 30 farmers
who supplied raw materials to the VCO producer participated in the survey. Aside from the
farmers, the key officers of organization were requested to participate in the survey.
Data gathering procedure. The study was carried out through value chain mapping.
It started with the identification of the key players and members of each value chain. Actual
observation of activities and processes was then conducted by the researchers. Specifically,
an in-depth interview was employed in gathering of primary data using a semi-structured
questionnaire and a checklist. The first interview with the farmers was followed by another
visit to validate some data and discuss some important issues. Moreover, personal interview
with some key officers of the entity was conducted. Actual observations of the activities of
the producer in the production plant including the general assembly of members were made.
Statistical treatment of data. Descriptive method using frequency distribution,
percentages and Likert scale were used to describe among others the characteristics of the
members of the chain and their respective activities. A set of indicators were also used to
evaluate the performance of the coconut supply chain which includes efficiency (measured in
terms of cost and revenue), flexibility (volume and delivery), and responsiveness (customer
satisfaction on price and quality). Estimation of cost and benefits were also done and
analyzed thereafter using some financial indicators.
RESULTS AND DISCUSSION
Supply Chain Map of Virgin Coconut Oil Production
The diagram (Figure 1) shows that the coconut farmers and the VCO processor were
the key players in the production of VCO in the province. Farmers brought the harvested
5
coconuts directly to the VCO processor, in a chain that was very short and simple. No
middlemen were involved unlike in the crude oil production.
RAW/INTERMMEDIARY
RODUCTS
Whole Mature
FINAL PRODUCT:
KEY CUSTOMERS
VCO
Coconut
farmers
Nuts
OF VCO PRODUCER
VCO
Producer
Barangay Traders
:
-
- Spa Centers
- Direct Customers
- Retailers
- Cosmetics and
health product
manufacturer
for international
market
Fresh Coconut Meat
Copra
City Trader
Young or Green Coconut
Crude Coconut
Oil Processor
Buko Juice
Producer
Figure 1.
Supply chain map of virgin coconut oil production in Valencia, Negros Oriental,
Philippines
Figure 1 further shows that the VCO producer had a set of buyers for its products. Its
buyers included spa center and other direct customers, the retailers, and a companymanufacturer which further processed virgin coconut oil into cosmetics and health products
for consumption abroad. Furthermore, it was observed that the coconut farmers also supplied
fresh coconut meat and copra to barangay traders and city trader, respectively and young
coconut to buko juice processors.
6
KEY PLAYERS OF THE SUPPLY CHAIN
The following are the key players in the production and distribution of virgin coconut
oil: (a) the Barangay Liptong Small Coconut Farmers’ Association (BLISCOFA)- the VCO
processor, (b) the farmers, and the (c) retailers of the VCO.
The VCO Processor: Barangay Liptong Small Coconut Farmers’ Association
(BLISCOFA)
Profile. There was only one processor of virgin coconut oil in the province of Negros
Oriental, Philippines – the Barangay Liptong Small Coconut Farmers’ Association
(BLISCOFA) which was located in Barangay Liptong, Valencia, Negros Oriental,
Philippines. It was formed and registered with the Bureau of Rural Workers of the Dept. of
Labor and Employment on June 16, 2005 with an initial capitalization of
Php 56,850
(US$1,353.57). The association had grown in size with 118 active members, 2 regular staff
(the manager and a cashier), 14 temporary skilled workers, a board of directors (BOD) and
four functional committees. Although BLISCOFA was an association, its organizational
structure was that of a cooperative where the BOD served as the policy-making body.
On July 17, 2007, the small farmers’ association was able to register and secure a
license from the Bureau of Food and Drugs (BFAD) to produce and sell virgin coconut oil.
BLISCOFA’s Production Capacity. Given the available equipment, space, and
labor force, BLISCOFA was capable of producing 60 litres of VCO a day or about 1,560
litres (approximately 26 barrels) a month. This translates to a total production of 18,720 litres
of VCO per year.
Value-adding Activities. Aware of the business potential of the association, the
management explored other coconut products using the by-products of its VCO production.
With the technical assistance of the Philippine Coconut Authority (PCA), it was able to
produce coconut vinegar and home decors, bags and other personal accessories with were all
made of coconut shells.
BLISCOFA’s Key Customers and Their Corresponding Product Requirements.
BLISCOFA’s key customers for its VCO product were the spa centers which turned the oil
into massage oil; the retailers who sold oil directly to the final consumers for medicinal
7
purposes; the direct consumers who usually visited the association’s plant and store outlets;
and a Manila- based manufacturer which further processed VCO into health and cosmetic
products and sold the same abroad. All of the aforementioned customers set out specific
product requirements for the farmers’ organization to meet and maintain (Table 1). This
includes color, packaging, chemical contents and to one customer, a more stringent
requirement, i.e., organically certified VCO.
Table 1. Product Requirements of VCO Buyers
Product Requirements
Description
Color
Colorless
Packaging
Closely packed in barrels or in PET bottles
Chemical Content
Must pass standard for moisture and volatile matter (see Table 2)
Free Fatty Acid
Fatty acid as low as 0.1 percent
Organically Certified VCO
Must pass the Hazard Analysis and Critical Control Points (HACCP);
farmers must undergo training on organic coconut farming
It must be noted that a multimillion-peso health and cosmetic manufacturing
company tapped the association to supply the same with at least 1,000 liters of VCO per
month. This customer specifically required the association to deliver organically certified
virgin coconut oil.
The PCA, on the other hand,
products for quality control purposes.
developed some regulations for selected coconut
This included the Hazard Analysis and Critical
Control Points (HACCP) for VCO, it being an emerging health and wellness coconut
product.
According to the Authority, adherence to food safety measures of good
manufacturing practices (GMP) and HACCP, allow the producers to improve their capability
to export products to other countries. The following were the activities during inspection and
evaluation: (1) on-site observation and inspection of good manufacturing practices, (2) raw
materials and product sampling, and (3) analysis of microbiological and chemical hazards. A
series of consultations with the VCO producer were done to identify possible hazards
8
throughout the production. Below shows the specific tests for quality control and possible
hazards.
Table 2. Specific Tests for Quality Control and Possible Hazards*
Microbiological Analysis
Chemical Analysis for Mixture and
Chemical analysis for heavy
Volatile Matter and Free Fatty Acid
and non-metals
Test
To include tests for salmonella,
Samples done after 6 months of storage
Iron, copper, lead, arsenic,
E-colli, molds and yeasts count,
(must pass standard for %MVM)
nickel, cadmium and mercury
colliform count, aerobic plate
(must be within the standard
count, and staphylococcus
for all metal analysis)
arureas.
*Conducted by a team of experts with supervision and approval from BFAD
A. The Coconut Farmers
A total of 30 coconut farmers composed of landowners, tenants, and lessees, participated in
the survey. Majority (93.33%) of the farmers were members of BLISCOFA. Only two (6.67%) were
not affiliated with any group, be it a cooperative, non-government organization (NGO), or
government-initiated organization.
Socio-economic Characteristics. Most of the farmers-respondents were between 39
and 69 years of age, but the oldest was 83 years old and the youngest was 30 years old.
Based on the survey, a good number (50%) of respondents had gone to college, seven of
whom finished and earned bachelor’s degrees. About 20 percent did not finish primary
education.
Forty-three percent (43%) of these farmers were regularly employed either with
private or government institutions and seven (23%) were self-employed. Furthermore, 13
percent shared that they primarily depended on remittances from children or spouses working
abroad. Only 27 percent indicated that farming was a primary source of income.
Furthermore, the household size of farmers supplying coconuts to BLISCOFA ranged
from 2 to 10 members with an average size of 5.33 (Table 3). Respondents shared they had
been farming for a long period of time, i.e, between 30 and 60 years.
One farmer said he
earned an average of Php 50,000 (US$1,190.47) a month while another said he earned
around Php 3,000 (US$71.43) a month only. As shown in Table 3, there is a wide gap of
9
income among farmers, with per capita income ranging from a low of Php 600 (US$14.29) a
month to a high of Php 20,000 (US$476.19) a month.
The 2000 Family Income and
Expenditures Survey (FIES) of the National Statistics Office (NSO) showed that the monthly
per capita poverty threshold of the country was Php 1,015.58 (US$24.18) while that of
Region VII was Php 894.67 (US$21.30).
This indicates that about 7% of farmers
interviewed lived below the poverty line with income ranging from Php 600 to Php 833
(US$14.29 – US$19.83) per month.
Table 3. Household, Farm and Farming Information
Information
Min
Max
Mean
2
10
5.3
3,000.00
50,000.00
16,700.00
600.00
20,000.00
3,662.82
5
60
30
Size of farmland (ha.)
0.385
5
1.9
Size of coconut farm (ha.)
0.25
5
1.47
Number of parcels of land
1
8
2.5
Household Size
Household income from all sources (Php)
Per Capita Income (Php)
Length farmers were farming (years)
B. The Retailers of Virgin Coconut Oil
About 15 percent of the VCO produced each year was disposed of by its regular
retailers. These include individuals and small stores located within the municipality of
Valencia and the city of Dumaguete – the capital city of Negros Oriental, Philippines. The
study found out that the transaction with these retailers was made on a consignment basis
limiting the association from maintaining enough cash on a regular basis. It must be noted
that a significant amount of the association’s collectibles was due from these retailers.
ACTIVITIES AND PROCESSESS
Majority of the farmlands in the province were owned by smallholders. This partly
explained why coconut farmers provided very low inputs for land preparation, planting, and
10
Coconut Farm land
Land preparation and
planting
Land, low or no inputs
Shades for inter-crops
Coconut by-products
such as charcoal and
firewood
Family labor
Labor saving
Maintenance
Harvested nuts,
sorting, and bagging
Family labor, low
fertilizer inputs
Labor saving
Family labor; hired
labor on a “pakyaw”
or per piece basis, jute
sacks
Household
consumption
Wage
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Scouting,
delivery/transporting
Labor, vehicle
Sorting and payment
Basic capital, labor
De-husking and meat
Extraction and VCO
processing
Wage/labor income
Wage/labor income
Basic capital, labor,
technology, tools and
equipment, direct
materials (bottles, caps,
barrel)
Wage/labor income
Virgin Coconut oil
processing
Virgin Coconut Oil
VCO by-products
such as coconut
shell crafts and
coconut vinegar
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Marketing and delivery
Figure 2. Value chain of virgin coconut oil production in Valencia, Negros Oriental, Philippines
maintenance. When they prepared their farmlands, they utilized household labor saving on
cost.
Scouting, sorting and transporting. Scouting and transporting of mature coconuts
were the first few inbound activities of BLISCOFA. It needed basic capital and labor in
scouting, transporting, sorting and buying of coconuts (Figure 2). Since farmers did not own
vehicle to transport their farm products, the association had to acquire a delivery truck to
transport raw materials from farm to its production plant. At the farm, laborer sorted the
11
nuts, separating the mature from those that were not. Those that met the size and maturity
specifications were loaded in the truck and those that did not were rejected. According to the
business manager, all payments for the products purchased were done at the business office
upon delivery of the products.
Operating Below Production Capacity. The study revealed that BLISCOFA had
never operated at its full production level. The primary reason pointed out by the
management was the lack of available mature coconuts of the right quality. On the average,
BLISCOFA produced 488 liters per month or 31 percent of the full production capacity
monthly (Figure 3).
Current Production Level
488
Full Production Capacity
1,560
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
M onthly VCO Pr oduction Le ve l (lite r s )
Figure 3. Monthly Production Level of BLISCOFA
Lack of Supply of Raw Materials (Mature Coconuts).
The management of
BLISCOFA admitted the main constraints to VCO production was the scarcity of supply of
mature whole coconuts.
There were days where production had to stop because of
unavailability of coconuts. Aside from the limited farmland area for coconut production, it
was found out that BLISCOFA was sharing supply of raw materials with coconut traders.
Specifically, 73 percent of the farmers supplying coconuts to BLISCOFA also sold fresh
coconut meat to barangay traders. The business manager of the association acknowledged
barangay traders as the association’s close competitors for raw materials as these traders can
provide farmers with cash advances when the latter request for the same. Due to lack of
working capital, the farmers’ association could not provide the same payment arrangement
with the farmers (Sogocio, personal interview: January 2010).
Farmers’ Reason in Selling Coconut Products to Copra Traders. Convenience
due to proximity of location from farm to market, free transportation services and the almost
no rejects of coconut products delivered, were some of the primary reasons cited by the
farmers why they sold fresh coconut meat to a barangay trader. Some also indicated that
they can request for cash advances from the barangay traders.
12
FLOW OF PRODUCT, INFORMATION AND PAYMENT
Flow of Product. The result of the survey further reveals that only about 35 percent
of the total volume of coconut products produced by the farmers were delivered and sold to
the VCO processor. This means that majority (62%) of these products were delivered to
copra traders (Figure 4)
Factors Considered by Farmers as to what products to produce and as to whom
to sell their coconut products. There are three major ready buyers to whom coconut
products can be sold: the VCO processor, the barangay trader, and the city trader. The
following are the reasons for the choice of market:
Whole Mature Nuts as Raw Materials for VCO Processing. Most of the farmers
(76.67%) selling whole mature coconuts said they attained better price margins with
BLISCOFA.
Sixty (60%) percent of them expressed that selling their products to
BLISCOFA was a way of support to their organization. Only 10 percent of them recognized
the fact that harvesting coconuts only when they mature (12-month cycle) allowed coconut
trees to bear more quantity and better quality of fruits.
Coconut
Farmers
VCO
Processor
Whole Nuts
(35%) to
BLISCOFA
COPRA (62%) to
Barangay and
City Traders
Young coconuts
(3%) to Buko
Juice Producer
Processed
Products
(VCO)
Buyers/
Retailers
Direct Customers
– Spa, Cosmetics
Manufacturer
Retailers
Walk-in
Buyers/Outlets
(28%)
Figure 4. Flow of Product and Distribution Shares In Raw Materials and Final Products
13
Fresh Meat for Copra Production (to a Barangay Trader)
Convenience and ready buyer of the nuts rejected by VCO processor were some of the
reasons why farmers sell fresh coconut meat to a barangay trader. Respondent-farmers also
indicated that the proximity of their farms to the market was another reason for the choice of
buyer. Cash advances were enjoyed by the farmers who brought their products to a barangay
trader.
Fresh Meat for Copra Processing (to a City Trader).
Around 7 percent of the farmers indicated that they delivered fresh coconut meat directly to a
city trader because the price was good. Eliminating middle traders in the chain makes the
supply chain for copra shorter therefore more profitable. For this process to be viable, the
farmers must have the following facilities: a vehicle and a drying facility.
Flow of Information. The main information shared by every member of the chain
was price. Farmers had relatively easy access to information about the buying price of
BLISCOFA as well as that of the barangay traders’. In scouting or contacting members and
other coconut growers in the town, mobile phones facilitated the communication.
Pricing Strategy and BLISCOFA’s Responsiveness to Competitors’ Price. Easy
access of information about prevailing buying price of fresh meat and copra was necessary as
BLISCOFA primarily based its buying price on the latter. It made sure that the price it
quoted was much higher than those offered by the barangay traders to attract farmers to sell
their produced to the association (see Table 4).
Table 4. Prices Ratings During the Past 12 Months
Buying
BLISCOFA
Barangay Traders Fresh
City Trader
Prices
Mature Nuts in Husk (Php)
coconut meat/ Kilo (Php)
(Copra)/Kilo (Php)
Highest
5.92 per nut
8.90
18.00
Lowest
4.71 per nut
6.04
14.00
Average
4.97 per nut
7.08
17.00
Note: one kilo of fresh coconut meat requires three nuts on the average
14
Flow of payment. Majority of the farmer-respondents confirmed they received cash
payment upon delivery of their coconut products. There were few instances, however, that
the VCO processor was not able to pay the farmers upon delivery of products and that the
latter waited for two to three days to collect payments from the former.
Cash Collections from VCO Buyers. The association received orders from the
regular customers located within and outside of the province and delivered the required
volume on the agreed time. Payments were made on instalments basis: usually 50 percent of
the total value was paid in cash and the balance to be collected on or before the next round of
order (Sogocio, personal interview, January 2010). When asked whether a written agreement
was made, the management answered in the negative. The difficulty of cash collection was
among the factors that contributed to the liquidity problem of the association. The problem
became more pronounced because of the association’s needed to maintain enough working
capital as scouting, transporting of raw materials and buying of raw materials were done 3 to
4 times a week if not on a daily basis. Proper timing of cash flows, therefore, was crucial to
the business operation.
LOGISTICAL ISSUES
Transportation from farm to market. Tapping of mature coconuts had always been
difficult to BLISCOFA because of the presence of competition in the market. It had to offer
transportation services to farmers with a minimal fee of 50 centavos per nut. It was observed,
however, that the distance and the volume of nuts were not considered in setting
transportation charges. The costs incurred were practically fixed and the hauling fee charged
to farmers did not vary with the volume of nuts and distance of the farm from the plant.
Low inventory level. Because of its inability to tap enough raw materials for VCO
production, inventory level was considerably low.
Cutting the Full Cycle Resulting in Low Quality of Raw Materials. Farmers often
harvested coconut products before they become mature. There were two reasons provided:
15
first, coconut was to them a source of immediate cash, and second, unlike the VCO processor
which required mature whole nuts, the barangay traders bought all fresh coconut meat
delivered to them.
Low Response to Organic Farming. Organic VCO can only be produced if raw
materials used in processing VCO were products of organic farming. However, farmers were
less responsive to organic farming technology. The management shared that it had difficulty
passing the Hazard Analysis Test because of the presence of non-organic variant in the soil
where coconut trees were planted (Sogocio, personal interview, 2009).
EXTERNAL INFLUENCES
Prolonged dry season, pests infestation, coconut tree diseases, unpredictable climate
changes, poor quality of coconut products were the common concerns raised by the coconut
growers as well as by the coconut traders and VCO producers. The government responded to
the aforementioned concerns by providing the sector with legal and technical assistance.
Table 5 shows the result of the evaluation made by the farmers and the management of
BLISCOFA on the extent of contribution the government policies and directives had
provided to the protection and preservation of coconut trees in the area.
Table 5. Rating on the Contribution of Government Policies in Protecting and Preserving Coconuts
Farmers’
BLISCOFA’s
Evaluation
Evaluation
2.71
4.0
longgisima an Invasive Pest of Coconut
2.71
4.0
RA 8048 otherwise known as Coconut Preservation Act of 1995
4.20
5.0
Government Policies and Directives
Executive Order 664 otherwise known as Emergency Measures to
Control and Eradicate the Spread and Damage in Coconuts
BPI Quarantine Order series of 2007 Declaring Brontispa
Rating Scale: 1.00-1.79 (Very weak), 1.80-2.59 (Weak), 2.60-3.39 (Moderate), 3.40-4.19(Strong), 4.20-5.00 (Very
Strong)
Furthermore, the management of BLISCOFA rated very strongly the impact of
government programs on the association (Table 6).
16
Table 6. Impact Ratings on Government Programs Availed of by BLISCOFA
Government
Rating
Agency
Reasons
Programs
Virgin coconut oil
production
Helped the association in the production of virgin
PCA/DA/
coconut oil; training was provided and new
technology
DAR
technology introduced
Quality control and
PCA/DA/
Improved the quality of VCO; had been recognized
DAR
one of the best quality VCO producers in the
monitoring training
5.0
5.0
country
Marketing and
promotion
5.0
DTI/PCA/
DTI, DA, DOST had been instrumental
DA
promoting VCO and its by-products; trade fairs
DOST
exposed the management
to broader
in
market
perspective
Credit and financial
assistance
The LGU of Valencia extended credit to the
4.0
LGU
association at a very minimal interest of 1% per
annum
Rating Scale: 1.0-1.79 (Very weak), 1.8-2.59 (Weak), 2.6-3.39 (Moderate), 3.4-4.19(Strong), 4.2-5.00 (Very Strong)
EFFICIENCY, FLEXIBILITY AND RESPONSIVENESS OF THE KEY PLAYERS
Efficiency.
The first two years of the operation posed many challenges to the
management. In 2007, the operation posted a negative return and at the end of the subsequent
fiscal year (2008), it recorded again a net loss of Php 15,749.98 or a 5.8% contraction despite
gross sales rising by 6.85 percent (Sogocio, personal interview, 2009).
Below Production Level versus Full Production Capacity. Two primary reasons
for the limited income were the inability of BLISCOFA to produce at full capacity and the
limited market it served. If the association operated at its full production capacity, a net
revenue of Php 126,371.84 (US$3,009) per month or about Php 1.516 million (US$36,095) a
year could have been attained (see Appendices A & B for detailed computation). This
17
resulted in an increase in profit margin from 3.17% to 33.75%. The following were the
financial assumptions: (1) full capacity level on the average was 1,560 litres a month or
18,720 litres a year; (2) average selling price per litre is Php 300 net of sales discounts; and
(3) 20 percent monthly inventory was observed.
Economic Incentives When Coconut Products were sold to the VCO Processor.
Financial analysis further revealed that there was price incentive when farmers brought their
coconuts to the VCO producer because its buying price was about twice that of a barangay
trader’s. The analysis used the following assumptions: (1) three mature nuts were required to
yield one kilo of fresh coconut meat (Sogocio, personal interview, Dec. 2009); (2) buying
price of barangay trader was Php 7.11 per kilo while that of BLISCOFA was Php 4.50 per
piece (net of Php 0.50 per nut as transportation charges); (3) average yield of one coconut
tree grown in Negros Oriental was 42.7 nuts per year (BAS, 2009). Since one kilo of fresh
coconut meat (Php 7.11) required three nuts (on the average), the price of one nut when sold
at a barangay trader was only Php 2.37. Comparing this to BLISCOFA’s price of Php 4.50,
the barangay trader offered almost twice below the buying price of the VCO processor.
Estimated Income for a One Hectare. Hence, for a one hectare of coconut land that
was estimated to hold 100 trees, a farmer pocketed an annual revenue of Php 4,652.76
(US$110.78) per ha when he sold his coconut products to a barangay trader but a hefty Php
12,491.50 (US$297.42) when he brought all coconut fruits to BLISCOFA (see Table 7).
Table 7. Estimated Revenue of Coconut Farmers when Sold to a Barangay Trader and to BLISCOFA
Average yield per bearing tree is 42.7*
Gross sales (peso) per tree
Barangay Trader
VCO Processor
(Php 2.37 per nut
(Php 5.00 per nut)
42.7 nuts
42.7 nuts
Php101.199
Php 213.50
Php 10,119.90
Php 21,350.00
93.47
93.47
Maintenance (Php 3,445.33/1.4 has)**
2,343.69
2,343.69
Harvest, hauling
2,529.98
5,871.25
Estimated gross revenue per hectare (100 trees per ha)
Less: Operating expenses**
Annual amortization expense
18
Transportation expense
0
50.00
500.00
500.00
Total operating expenses***
Php 5,467.14
Php 8,858.41
Estimated Annual Net Income (per has)
Php 4,652.77
Php 12,491.59
Miscellaneous
Value added if a farmer sells to BLISCOFA
+ 7,838.82 (168.5%)
* BAS using 2005 data; ** Survey data (estimated mean value per ha); *** Depreciation expense and
opportunity cost for using family labor not included in the estimates.
Flexibility. Flexibility refers to the capacity of BLISCOFA to meet customer
requirements on volume, delivery schedule and packaging. The survey showed that the
management of BLISCOFA rated itself a 5.00 (excellent) in terms of meeting volume
requirement of its customers and only 4.00 (very good) in terms of the quality of packaging
and labelling, admitting that the association needs more resources and the right technology to
make attractive yet strong containers and labels. The respondent-farmers explained they may
have not highly satisfied the volume requirement (4.0 or very good) of BLISCOFA, they
were able satisfy the delivery schedule requirement (4.47 or excellent) of the VCO processor.
The management of BLISCOFA, however, did not agree with the farmers and provided the
same with a lower mark, and indicated the need to provide its members further training and
seminars to become more responsive to the association’s need for more supply of raw
materials of good quality.
Responsiveness. When the manager was asked regarding the price it set for its
product she shared that the customers enjoyed affordable price at BLISCOFA. Also, the
management was proud of the quality of virgin coconut oil they produced adding that its
VCO was one of the top-quality oil in the country based on the result of evaluation conducted
by BFAD. But the greatest challenged the association faced was the coming up of an organic
certified VCO. This particular quality had never been met and the management continued to
prepare for the next round of hazard examination to get its organic certification.
Impact to the environment. The production of VCO did not only promise big
returns for the association but also sent a message that a small farmers’ association located in
a small barangay of Valencia, Negros Oriental, Philippines did its own share of protecting the
19
environment. The association further processed the by-products of VCO production into coco
flour, coco vinegar, coconut shell-made bags and accessories, and coco coir leaving lesser
residuals (wastes) discharged in the environment.
Distribution of benefits. The short and simple supply chain of VCO production
eliminated the unnecessary margins which usually existed in a multi-layered chain due to the
presence of middle traders along the process. This was true to the case of BLISCOFA.
Farmers enjoyed a considerably good buying price equivalent to about half of the price of a
barangay trader.
SYNTHESIS AND IMPLICATIONS
The study found out that commercial production of VCO was a profitable
undertaking. Although BLISCOFA suffered losses during the first and a half year of its
operations, it had slowly gained strength as its market had slowly expanded and that the byproducts of VCO production had provided the association opportunities to engage in other
value-adding and revenue-generating projects. At the end of 2009, the operation posted a
positive return. However, cost-effective measures were not observed and operation had
remained below its full capacity level. If production were maximized, the association could
have earned positive return of about Php 126,371.00 (US$3,008.83) a month or Php 1.516
(US$36,095.24) million a year.
The study further revealed that although the chain for VCO production, in this study,
was very short and simple due to the absence of any middleman, the farmer-suppliers who
were themselves members of the association tended to produce products for copra production
and most of these were sold to barangay traders. The following were key information worthnoting: first, the reliance of the farmers on coconut products as a source of immediate cash
tempted them to shorten the production cycle (12 months) of coconut fruits by harvesting
them before they reached full maturity; second; it was convenient to bring coconuts to a
barangay trader because all of the products (fresh meat) were bought unlike in BLISCOFA
where some of the mature coconut in husks were rejected; third, farmers were able to request
for cash advances from the barangay traders – a payment scheme which the management of
BLISCOFA admittedly could not provide due to lack of working capital. Finally when a
20
multimillion-peso manufacturer of cosmetics and health products tapped BLISCOFA to
supply 1,000 litres of virgin coconut oil per month, the association could not provide so
because it could not secure an organic certificate for its VCO.
Therefore, the limited supply of raw materials of desired quality had become the
major constraint to production and development of the VCO industry of the province. The
research and development program for the coconut industry in the province must focus on
how to increase incentives for coconut farmers so that they would produce top-quality
coconuts without the use of chemical fertilizers allowing the association to produce organic
VCO which commands a price premium over industrial coconut oil in the local and
international markets.
AREAS OF IMPROVEMENTS AND RECOMMENDATIONS
In view of the foregoing discussions, specific areas for improvement in each layer of the
chain were identified and analyzed in line with the principles of supply chain management.
These are grouped and presented as follow:
Table 8. Problem Areas and Their Causes, Implications and Recommendations for Improvements
PROBLEM
CAUSES/REASONS
IMPLICATIONS
RECOMMENDATIONS
AREA
VCO Operation Below Its Full Capacity Level
Lack of raw Cutting the production Low
materials;
cycle
of
pest
convenience
infestations
than
coconuts;
level; low income creation of added-value
rather
for
greater
and
productivity and better
production Training to be conducted for the farmers;
the
for
farmers
the
association
quality coconut fruits;
irrational behavior of
the farmers
Procurrement of Raw Materials
High
Php 0.50 charging per
Low income for Charges must consider (a) distance (b)
operational
nut was not properly the
association; volume of nuts to be picked-up
21
expense due
determined
creates
to high
disincentive
to
transportation
farmers who were
expense
located nearer the
plant
Unable to produce Organically Certified VCO
The quality of Unwillingness and
Low
oil cannot pass non-commitment of
VCO; substantial members and other farmers to adopt
international
farmers
loss of opportunity organic farming and provide share of
standard;i.e.
organic farming
to
adopt
order
of Vertical (backward) integration; contract
to expand market interest based on sales on top of the
organically
and earn more for contract price; association can lease farm
certified VCO
the association;
lands to ensure supply of mature nuts
Marketing of VCO
Low demand Weak
marketing Low sales/
low Aggressively campaign and promote
for the virgin strategy;
had
the VCO to spa and massage centers
not
coconut oil at
captured
the local level
within the province
PROBLEM
market
income
for
association
found in Dumaguete and surrounding
cities; employ radio and internet facility
CAUSES/REASONS
IMPLICATIONS
RECOMMENDATIONS
AREA
Production Delivery and Distribution
High
Cost
operational
disadvantageous
cost
due
sharing High
operational Charges on the delivery of VCO to clients
to expenses resulting outside of Negros Oriental must be based
to BLISCOFA
in lower income
on: (a) distance
high delivery
minimum
expense
determined
(b) volume ordered;
delivery
fee
must
be
Low Liquidity
Not
enough No proper timing of
working
Low
working Transaction must be done on a strictly
cash flows due to low capital
therefore cash basis; sales on credit should be a
capital (cash) collection of accounts
operation
was case-to-case basis only and a written
for
constrained
with contract must be executed between
operation
daily and fast outlay of
cash for the buying of
financial resources
raw materials
Limited
Risk-averse
parties; if sales had to be on credit, offer
credit terms to encourage fast payments.
type;
Less
competitive Re-training (capacity building) of key
22
capital
non-availability
of
due to liquidity officers on capital budgeting and other
including
credit facility for the problem
working
association
aspects of the operation
capital
Organizational Aspect
Lack
of Sense of ownership
genuine
support
not established
from
the members
Bringing products Participatory approach by calling regular
to
a
barangay and more frequent meetings to solicit
traders became an suggestions
easy
and
provide
update
to
option; members about any business develop;
adopting
of enhance members’ entrepreneurial skills
organic farming as so that they involve themselves in valuea technology will adding project; expedite application and
be
difficult
employ
to securing of license from Cooperative
Development Authority;
In view of the foregoing, the following project interventions for R&D Program of the
province and Central Visayas Region are recommended:
1. Program interventions on integrated coconut-based organic farming (ICBOF); and
2. Impact assessments after 3-5 years of implementation of organic farming.
ACKNOWLEDGEMENT
The study was made possible through the financial assistance provided by the
Philippine Council of Agriculture and Natural Resources Research and Development
(PCARRD) and Central Visayas Consortium for Integrated Regional Research and
Development (CV-CIRRD). The authors wish to thank Dr. Ernesto Brown (PCARRD) for
reviews and suggestions during the early versions of this paper. They are also grateful to
Prof. Jane Belarmino, CPA for providing valuable suggestions in order to strengthen the
financial assumptions and projections on cost and revenues made in the study. More
importantly, the authors are deeply indebted to the farmers and key officers of BLISCOFA
for the assistance they wilfully extended, but they claim sole responsibility for any opinion,
error, or shortcomings committed in this paper.
23
REFERENCES CITED
Aragon, C.T. (2000). Coconut program area research planning and prioritization.
Discussion Paper. Series No. 2000-21. Philippine Institute for Development Studies.
BAS (Bureau of Agricultural Statistics). Philippine coconut statistics. www.da.gov.ph.
Accessed: November 2, 2009; July 28, 2010.
Castillo, G.T. (1979). Beyond Manila: Philippine rural problems in perspective. Ottawa,
Ontario:IDRC
Cubelo, J.E.C. (2007). Smallhold coconut farmers in Negros Oriental: Status, problems, and
recommendations, Silliman journal 48 (1): 43-62.
DA (Department of Agriculture). www.da.gov.ph/newindex2/php/pass/programs/coco1/html:
Accessed on: July 20, 2010.
Dy, R. T. and Reyes, S. (2006). The Philippine Coconut Industry: Performance, issues and
recommendations, Economic Policy Reform & Advocacy, Ateneo de Manila University,
Manila. http://pdf.usaid.gov/pdf_docs/PNADH939.pdf. Accessed: November 2, 2009.
Hart, V., Kavallari, A., Schmitz, P.M., & Wronka, T.C. (2006). Supply chain analysis of the
olive oil market in Germany. Report prepared for the Medfrol Project under the European
Sixth Framework Program, Priority 8.1, Policy-Oriented Research, Integrating and
Strengthening the European Research Area.
Kad, S. and Weir, T. (2008). Virgin coconut oil as a tool for sustainable development in
outer islands. Pacific Economic Bulletin. Vol. 23:3. The Australian National University,
Australia. Accessed: November 5, 2009.
Porter, M. E. (1985). Competitive advantage, creating and sustaining superior performance.
New York: The True Press.
Sogocio, E. (2009). Personal interview. BLISCOFA, Liptong, Valencia, Negros Oriental.
November. 6 and December 10, 2009.
Warner, B., Quirke, D. and Longmore, C. (2007). A review of the future prospects for the
world coconut industry and past research in coconut production and product. Australian
Center for International Agricultural Research: Canberra, Australia
Woods, E. J. (2004). Supply chain management: Understanding the concept and its
implications in developing countries. In G.I. Johnson and P.J. Hofman. Ed., Agriproduct
supply-chain management in developing countries. Proceedings of a workshop held in Bali,
Indonesia, No. 19c: 18-25 August 2003: ACIAR Proceedings: 199
24
APPENDIX A. Projected Statement of Revenue and Expenses (BLISCOFA)
Current
Production Level
488
390.4
117,120.00
61,281.09
55,838.91
Monthly Production (litre)
Sales Volume (net of 20% inventory)
Gross Sales (net of discounts) *300
Less: Cost of Goods Sold (0.5232)
Gross Profit (0.4768)
Less: Operating Expenses
Salaries and wages
15,600.00
Mandatory benefits (13th mo., SSS, Pag-ibig)
2,529.60
Honorarium (Bookkeeper)
3,000.00
Office supplies
1,200.00
Meetings (members/BOD, committees)
2,000.00
Telephone/communication
2,000.00
Transportation (fixed portion)
3,500.00
Representations
3,000.00
Marketing expense (print media)
1,800.00
Utility
1,500.00
Repairs and maintenance
1,500.00
Depreciation
8,000.00
Trainings and seminars
4,000.00
Miscellaneous
2,000.00
Total operating expenses
51,629.60
Operating Income
4,209.31
Less: Interest Expense
500.00
Estimated Net Profit per month
3,709.31
Estimated Net Profit per year
Php 44,511.74
Net Profit Ratio
3.17%
*Using survey data and secondary sources; ** Tax expense not included
At Full Production
Capacity
1,560
1,248
374,400.00
195,898.56
178,501.44
15,600.00
2,529.60
3,000.00
1,200.00
2,000.00
2,000.00
3,500.00
3,000.00
1,800.00
1,500.00
1,500.00
8,000.00
4,000.00
2,000.00
51,629.60
126,871.84
500.00
126,371.84
Php 1,516,462.08
33.75%
25
APPENDIX B. Estimation of Variable Costs per Unit
Items
Cost per Unit (Liter)
Direct Labor
Scouter (1-2 workers)
Php 10.125
De-husking, splitting, extracting, grating (3-4 workers)
22.500
Sorting, fermenting, filtering, packing (9 workers)
40.505
Direct Materials
Nuts (Php 4.5 x 15)
67.500
Bottle
6.000
Cups
1.500
Sealer
2.500
Label
1.000
Factory Overhead
Electricity (dryer)
1.520
Gasoline (hauling) per 15 nuts
3.250
Delivery expense (variable portion)
0.57
Total variable cost per unit (Liter)
Php 156.97
Note: Estimates were based from survey data and information taken from personal interview.
26