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 Requirements
for 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
1
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 60,00090,000 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
2
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.
3
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).
4
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
5
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
9
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
Labor
Trade Liberalization
Credit Access
Labor
H1
H3
Domestic Supply of Coffee
H5
H2
Trade Liberalization
H4
Credit Access
H6
Domestic Supply of Cocoa
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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
Dependent Variable: DSCO
Method: Least Squares
Date: 07/09/12 Time: 20:22
Sample: 1990 2010
Included observations: 21
Variable
C
LA
LO
TCO
R-squared
Coefficien
t
1.55E+08
-15132.09
4.224331
0.984615
0.965585
Adjusted R-squared
0.959512
S.E. of regression
Sum squared resid
Log likelihood
14899973
3.77E+15
-374.4332
Durbin-Watson stat
1.257969
Std. Error
t-Statistic
Prob.
63863371 2.423808 0.0268
5595.259 -2.704448 0.0150
3.581902 1.179354 0.2545
0.047573 20.69706 0.0000
Mean dependent var 1.93E+0
8
S.D. dependent var
7404913
2
Akaike info criterion 36.04126
Schwarz criterion
36.24022
F-statistic
158.9894
Prob(F-statistic)
0.000000
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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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.
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
15
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
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
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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
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.
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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 microfinancing in order to sustain and add value to the coffee itself.
20
Regression Output of Cocoa
Dependent Variable: DSCA
Method: Least Squares
Date: 07/09/12 Time: 18:57
Sample: 1990 2010
Included observations: 21
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LA
LO
TCA
20394877
-957.1270
0.114344
-0.157869
3535606.
366.5371
0.200818
0.042808
5.768425
-2.611269
0.569392
-3.687806
0.0000
0.0182
0.5765
0.0018
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.764761
0.723248
765113.7
9.95E+12
-312.0823
1.963368
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
6822668.
1454390.
30.10308
30.30204
18.42231
0.000014
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]
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
21
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.
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
22
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,
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
23
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
against local consumption and coming also from Agricultural Cooperative Development
International and Volunteers in Overseas Cooperative Assistance worldwide consumption of
24
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
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.
25
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.
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
26
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.
27
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
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
28
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.
29
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.
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
30
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
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
31
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 (AgriAgra Law) must be amended. The decree states that it “shall provide agrarian reform credit and
financing system form beneficiaries through banking institutions”.
32
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.
33

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.
34

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.
35
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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-seekgovernment-help-to-boost-output
http://www.businessmirror.com.ph/component/content/article/53-agri-commodities/19413-driedcacao-output-seen-at-7000-mt-for-2011
http://www.acdivoca.org/cocoa
http://www.edgedavao.net/index.php?option=com_content&view=article&id=6919:cacaomaking-a-comeback&catid=37:agri-trends&Itemid=71
http://www.bar.gov.ph/bardigest/2001/julsep01_thephilcof.asp
http://www.sunstar.com.ph/manila/business/2011/03/09/philippines-unveils-support-coffeeindustry-143978
http://www.sunstar.com.ph/breaking-news/2012/02/24/aquino-commits-assist-coffee-industry207926
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-lowbuying-price/
http://car.da.gov.ph/index.php?option=com_content&view=article&id=226:coffee-growersconvened-for-financing-consultation&catid=1:latest-news&Itemid=1137
http://www.businessmirror.com.ph/component/content/article/53-agri-commodities/2196-coffeeindustry-still-struggling-but-hopeful
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