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Food Policy 33 (2008) 455–463

Contents lists available at ScienceDirect

Food Policy
journal homepage: www.elsevier.com/locate/foodpol

Rice marketing systems in the Philippines and Thailand: Do large numbers

of competitive traders ensure good performance?
David C. Dawe a,*, Piedad F. Moya b,1, Cheryll B. Casiwan c, Jesusa M. Cabling c
a
Food and Agriculture Organization, Rome 00153, Italy
b
International Rice Research Institute, DAPO Box 7777, Metro Manila, Philippines
c
Philippine Rice Research Institute, Maligaya, Science City of Muñoz, Nueva Ecija, Philippines

a r t i c l e i n f o a b s t r a c t

Article history: Rice marketing margins are substantially greater in the Philippines than in Thailand despite many sim-
Received 31 August 2006 ilarities between the two systems and despite the fact that Philippine rice marketing has a competitive
Received in revised form 16 January 2008 structure. We found that rice marketing costs in the Philippines are higher than in Thailand mainly
Accepted 25 February 2008
due to higher interest rates in the financial system. Other fundamental factors that also result in higher
costs include endowments of water and land, rice price and trade policy, road quality and lack of non-
farm job growth. However, the greater costs can only account for about a fourth of the difference in gross
margins, implying much higher returns to management in the Philippines despite similar levels of risk
Keywords:
Rice
and no evidence of collusion. The ‘‘excess profits” in the Philippine marketing system suggest there is
Marketing much to learn about how developing country commodity markets with competitive structures function
Philippines in actual practice.
Thailand Ó 2008 Elsevier Ltd. All rights reserved.

Introduction
Rice marketing costs in Southeast Asia have received scant
attention in the economics literature, probably due to the difficulty
of collecting such data (Hayami et al., 1999). When such analyses
are conducted, it is generally found by economists that rice
marketing is relatively efficient in the sense that there are large
numbers of participants, barriers to entry are low, product differ-
entiation is small, the ability of other agencies (e.g., government,
cooperatives) to compete with private traders on a cost-effective
basis is limited, and marketing margins rewarding risk and innova-
tion are not excessive (e.g., Ruttan, 1969; Mears, 1974, 1981; Ellis
et al., 1991; Hayami et al., 1999). However, this small literature is
at odds with the common belief among the general population that
middlemen exploit farmers and consumers by inflating marketing
margins between farmgate and retail levels.
These contrasting views date back many years. The first president
of the Philippines, Manuel Quezon (President from 1935 to 1944), in
referring to ethnic Chinese rice traders, stated that ‘‘One of our short-
comings is that we permit others to hold the rice industry for us, and
they are the ones who make a lot of profit. The profiteers are like a
saw: the saw eats be it pulled up or pushed down, and we Filipinos
are the ones being eaten” (cited in Houston, 1953, p. 44). On the
other hand, a study of rice marketing conducted around this time
in Nueva Ecija, a province in the main rice-producing area of the Phil-
ippines, concluded that ‘‘the Chinese merchants are performing
essential marketing services at a fairly low cost” (Miller, H.H.,
1932. Principles of Economics applied to the Philippines, Boston,
pp. 198–199, cited in Wickizer and Bennett).
Hayami et al. (1999) suggest that one of the reasons for this dis-
parity in viewpoints is a lack of data. This is one possible reason, but
it is also true that even when the data exist, they can be quite diffi-
cult to interpret. For example, during the past ten years, rice market-
ing margins in Thailand have been consistently and substantially
lower than the same margins in the Philippines. At the same time,
rice marketing technology is broadly similar in the two countries.
Does this, therefore, indicate collusion in rice marketing in the Phil-
ippines, or are there other explanations? This paper attempts to
explain this puzzle by measuring marketing costs in some detail
in the two countries and interpreting those data in order to provide
insights into the performance of the marketing systems.

General description of rice marketing and margins in the study

* Corresponding author. Fax: +39 06 5705 5522. areas
E-mail addresses: david.dawe@fao.org (D.C. Dawe), p.moya@cgiar.org (P.F.
Moya), cbcasiwa@philrice.gov.ph (C.B. Casiwan), jmcabling@philrice.gov.ph (J.M.
Cabling). Comparison of rice marketing margins between the Philippines
1
Fax: +63 2 580 5699. and Thailand at the country level is difficult. First, the Philippines is

0306-9192/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.foodpol.2008.02.001
 Author's personal copy
456 D.C. Dawe et al. / Food Policy 33 (2008) 455–463
140
120
100
US$ per ton dry paddy
80
60
40
20
0
1994:WS 1995:DS 1995:WS 1996:DS
-20
Fig. 1. Gross marketing margins, 1994 to 1999 Nueva Ecija to Manila (Philippines) and Suphan Buri to Bangkok (Thailand) Units are in US$ per ton dry paddy. Notes: WS
indicates wet season, DS indicates dry season. No farm price data for Thailand were collected for 1996 WS and 1997 DS. Source of farm price data: Moya et al. (2002). Sources
of secondary wholesale price data: BAS (2005) and BOT (2005). Price data were converted from local currency to US$ using exchange rates from IMF (2005).
an archipelago, with much transport being done by sea, while Thai-
land is located on the southeast Asian mainland. Second, rice is
produced and consumed in many different areas of each country,
and the average distance that rice moves may be very different
in the two countries. Because of these problems, we decided to
compare the rice marketing margin between Suphan Buri in the
Central Plain and Bangkok (Thailand) with the margin between
Nueva Ecija in the Central Luzon region and Manila (Philippines).
Comparison of these two marketing channels is appropriate for
several reasons. First, both production areas (the Central Plain and
Central Luzon) grow similar types of modern varieties without any
aroma or other salient quality characteristics, and are the major
rice-growing areas in their respective countries.2 Second, both des-
tinations (Bangkok and Manila) are the capitals and largest cities of
their countries. Third, both rice-growing areas are connected by land
to wholesale markets in the capital city, so that no sea transportation
is involved. Fourth, the driving distance between the rice-growing
area and the capital city is about 120 km in both cases.
Moya et al. (2002) conducted farm surveys for nearly all rice-
growing seasons between 1994 and 1999 in Suphan Buri province
in the Central Plain of Thailand and in Nueva Ecija province in the
Central Luzon region of the Philippines. Farm price data for paddy
of comparable quality from these surveys were adjusted to dry
paddy terms, and then compared with wholesale price data from
secondary sources for average quality non-aromatic (i.e., excluding
jasmine rice) rice in the respective capital cities (Bangkok and
Manila). The wholesale price data were adjusted to dry paddy
terms using a milling ratio of 0.65 in both countries, and then
the adjusted farm price was subtracted from the adjusted whole-
2
Thailand grows substantial quantities of jasmine rice (nearly 20% of national
production), an aromatic variety that commands a premium price on world markets.
However, jasmine rice prefers arid conditions, and most of it is grown in the
Northeast of Thailand. There is little jasmine rice grown in the Central Plain.
1996:WS 1997:DS 1997:WS 1998:DS 1998:WS 1999:DS 1999:WS
Philippines Thailand
sale price to calculate the margin. This calculation is relatively sim-
ple in that it ignores the value of by-products from the milling
process (we have no time-series data on the value of such by-prod-
ucts) and assumes identical milling ratios in the two countries.
These data show that margins are substantially larger from Cen-
tral Luzon to Manila than from the Central Plain to Bangkok (Fig. 1).
Although the size of the margin varies from year to year and season
to season, the margins in Thailand are consistently smaller by a
substantial amount. In fact, for one season, margins are even neg-
ative in Thailand, representing a temporary disequilibrium condi-
tion. The disadvantage of these data and this calculation is that
none of the marketing details are known, and there is no light shed
on the reasons for the differences in margins. However, the advan-
tage of these data is that they cover several years, and show that
there is a difference in margins that is consistent and is worth
explaining. The data in Fig. 1 are used only to establish that there
is a consistent difference in margins over time; they are not used
subsequently in the paper’s main analysis.
The large margins in the Philippines are surprising given that
Hayami et al. (1999) found the rice marketing system in the Phil-
ippines to be competitive and that rice marketing technology is
broadly similar in Central Luzon and the Central Plain. In both loca-
tions, the crop is brought to mills after harvesting via trucks. Most
storage is of paddy, not rice. The paddy is milled predominantly by
fixed mills with rubber roll hullers. Finally, the milled rice is trans-
ported to wholesale markets by large trucks. There is little hand
pounding, milling using mobile mills, or milling using steel hullers
as discussed for the case of Indonesia by Timmer (1973).
However, there are also some differences in the two marketing
systems that are worth noting. First, farmers in the Central Plain of-
ten sell their harvested paddy at wholesale markets, although recent
government policies may be reducing the role played by these mar-
kets. To our knowledge, such markets are non-existent for paddy in
the Philippines, although they are common for milled rice. Second,
 Author's personal copy
D.C. Dawe et al. / Food Policy 33 (2008) 455–463
the existence of paddy wholesale markets in Thailand has strongly
reduced the role played by private traders who function only as trad-
ers (not millers) and buy and sell paddy on their own account. In-
stead, Thai (Central Plain) farmers tend to sell directly to private
millers or their agents. On the other hand, private, own-account,
traders who are not millers are an important fixture of the Philippine
marketing system. Third, a much larger percentage of the paddy crop
is dried mechanically in Thailand compared to the Philippines, con-
sistent with the higher level of economic development and wages in
Thailand that has led to a substitution of capital for labor. Fourth,
trucks and mills have larger capacity in Thailand than in the Philip-
pines. Subsequent analysis shows that some of these differences
play an important role in explaining the difference in marketing
margins between the two sites, while others are not so important.
Data and methods
We used a data gathering approach similar to that of Hayami et al.
(1999) and traced paddy from the farm level as it moved along the
marketing chain to the wholesale level, collecting data on both prices
and costs. Because traders are more difficult to interview than farm-
ers, the authors spent several weeks during the second half of 2003 in
each of the two study areas visiting farmers, traders, millers, equip-
ment manufacturers, and government officials. Our questionnaires
were semi-structured. It was necessary to collect a large amount of
quantitative information, but it was also important to understand
the details of the marketing systems, and most of our conversations
departed from the questionnaires. Some of the people we inter-
viewed were very forthcoming with lots of information, while others
were less so. We crosschecked all of our data both between agents of
similar function (e.g., millers) and across different types of agents
(e.g., comparing selling prices reported by farmers with buying prices
reported by traders and millers) to make sure that answers were sim-
ilar. By following these procedures, we collected high quality data on
both prices and costs in the marketing systems in the two areas.
Rice, the commodity that is cooked and eaten by consumers, is
produced through the milling process from paddy, the product
grown by farmers. In addition to the rice grain inside, freshly
harvested paddy also contains moisture, a hull, and some other
by-products located between the hull and the grain.
Our definition of gross marketing margin (GMM) for this study
was the difference between two terms, GMM ¼ ðV  p0f Þ. The first
term V represents the final value of product when traders or mill-
ers sell 1 kg of milled rice to wholesale markets and associated by-
products to other outlets:
X
V ¼ ðpw ÞðMRÞ þ pi qi
i2B
where pw is the price of rice at wholesale markets; pi is the price of
by-product i belonging to the set of by-products B; qi is the yield of
by-product i during the milling process, as a fraction of one; and MR
is the milling ratio, i.e., the yield of milled rice as a fraction of one.
Thus, V is a weighted average price of the various products that re-
sult from the processing of paddy. Wholesale rice markets were
chosen because they are more homogeneous than retail markets,
facilitating data comparison across time and across countries.3
3
Our data collection stopped at the entrance to the wholesale market for milled
rice. This sidesteps the question of whether there is a cartel of traders at the
wholesale level, a claim often heard in the Philippines and other countries (as of 2002,
there were only 97 registered wholesale grain traders in Metro Manila). Indeed, the
gross margin between milled rice wholesale buying and selling prices is larger in the
Philippines than in Thailand. However, the difference in that margin between the two
countries is a small fraction of the difference in gross margin between the two
countries from farmgate up to wholesale level. Thus, if the objective is to increase
prices for farmers and lower prices for consumers, this paper addresses the
quantitatively more important segment of the marketing system.
457
The second term is p0f , defined as the price at farmgate level (pf)
adjusted to 15% moisture content, the typical moisture content
when paddy is milled:
ð1  0:15Þ
p0f ¼ pf
ð1  MCÞ
where MC is the moisture content of wet paddy as sold by the farm-
er (as a fraction of one). The adjustment made to pf to generate p0f
does not include the costs of drying, but is just a physical adjust-
ment factor to ensure that the units of V and p0f are identical: local
currency per kilogram of dry paddy.4
The main focus of the paper is to measure the costs that are
responsible for the gross marketing margin (GMM). Unless other-
wise specified, whenever we use the word margin in this paper,
the reference is to the GMM and does not include any costs. In
order to make comparisons, all units of local currency (peso in
the Philippines, baht in Thailand) were converted to US dollar
equivalents using exchange rates of 55 pesos to the dollar or 40
baht to the dollar. These rates were typical of those prevailing in
2003.
Our data on marketing costs are a comprehensive measure of all
costs incurred in the marketing process, other than returns to man-
agement. A non-exhaustive list of these costs includes the cost of
hired labor (both manual labor and skilled labor such as accoun-
tants and engineers); the annualized value of capital assets includ-
ing machinery, buildings, weighing scales, sacks, and cement floors
(using the capital recovery factor described in Monke and Pearson,
1989); interest on working capital; the cost of raw materials (e.g.,
gasoline for transportation and electricity for mill operation);
maintenance costs for machinery; and trading fees.
Most of our analysis compares marketing costs between the
two locations for particular functions, because the marketing func-
tions of transportation, drying, storage, and milling are similar in
the two areas. Although marketing agents performed different
combinations of those functions in the two study areas, we do
present and discuss data on net margins by agent, as this provides
insights into the distribution of these margins. Also, we compared
marketing costs in terms of currency, not percentage terms. The
main reason for this is that rice farm prices are much higher in
the Philippines than in Thailand. Thus, if margins were compared
as a percentage of the farm price, the different base in the Philip-
pines would complicate the analysis. Nevertheless, to supplement
this analysis, we do compare some margins and markups in
percentage terms because traders and millers may operate on a
percentage markup basis.
Results and discussion
Our detailed field surveys confirmed the preliminary conclu-
sions showing that gross marketing margins in Thailand were
substantially lower than in the Philippines (Table 1). The GMM
in Thailand was calculated as just $15.52 per ton of dry paddy,
compared to $66.74 per ton of dry paddy in the Philippines
(all costs and margins in the remainder of this paper will be
reported per ton of dry paddy, unless otherwise specified). Mark-
ups in the Philippines are also greater in percentage terms. The
fact that the margins calculated using our primary data are sim-
ilar to the margins shown in Fig. 1 (which come from indepen-
dent sources) suggests that our primary data on gross margins
are credible.
Given the disruptions that occurred in Asian currency markets
in the aftermath of the 1997 financial crisis, it is possible that
4
The costs of drying are not included in the calculation of the GMM, nor are any
other costs. However, the costs of drying are included in the subsequent analysis.
 Author's personal copy

458 D.C. Dawe et al. / Food Policy 33 (2008) 455–463

Table 1 the Philippine marketing system are not due to some disequilibrium
Rice prices at different steps of the marketing chain, 2003, Nueva Ecija to Manila phenomenon resulting from exchange rate movements after the
(Philippines) and Suphan Buri to Bangkok (Thailand)
financial crisis.
Level, form Price (US$ per ton of % Markup over There are three main observations that emerge from an exami-
dry paddy) previous step nation of the cost data (see Table 2). First, not surprisingly, given
Philippines Thailand Philippines Thailand the smaller gross margins, marketing costs are substantially lower
Farmgatea 164 108c – – in Thailand than in the Philippines. Second, marketing costs in
Millgate 184 115 12 6 Thailand equal the gross margin, implying zero returns to manage-
Wholesaleb 231 124 25 8 ment in the marketing system.6 Third, the difference in marketing
Gross marketing margin (GMM) 67 16
costs between the two countries explains only about one-fourth of
Source of data: surveys conducted by the authors. Price data were converted from the difference in gross marketing margins. Each of these observa-
local currency to US$ at exchange rates of 55 Philippine pesos to the dollar and 40 tions requires some explanation.
Thai baht to the dollar.
a
The farmgate price was converted from a wet paddy basis of 23% moisture to a
dry paddy basis of 15% moisture. These values were obtained during our interviews. Differences in marketing costs
b
The wholesale price includes the value of by-products, and is not the price of
milled rice alone. Based on our surveys, milled rice at the wholesale level was The importance of the financial system
converted to dry paddy using conversion factors of 0.64 in the Philippines and 0.66
in Thailand. Conversion factors for by-products were also determined through our
surveys. The single most important reason why marketing costs are low-
c
Very few transactions take place at the farmgate in this part of Thailand. Thus, a er in Thailand is the level of interest rates and the services provided
farm price was imputed by subtracting farm to paddy wholesale market transport by the financial system. In Thailand, millers and traders cited nom-
costs from the price received by farmers at the paddy wholesale market. The total
inal interest rates for borrowing of about 4% per annum, and this
percentage markup in prices by the miller, from paddy wholesale market to milled
rice wholesale market, is 5%. was confirmed in interviews with several banks. Interest rates
were similar for either working or investment capital. By contrast,
interest rates from banks in the Philippines were about 15% per an-
num.7 Furthermore, millers and traders in the Philippines do not
Table 2 borrow much from banks for their working capital needs because
Marketing costs by function, 2003, Nueva Ecija to Manila (Philippines) and Suphan
Buri to Bangkok (Thailand); units are in US$ per ton of dry paddy
of excessive paperwork for such short-term loans. Instead, they bor-
row from moneylenders, who charged higher interest rates of 24% on
Item Philippines Thailand Differential an annual basis.8 A simulation of counterfactual costs assuming that
Transport costs real interest rates in the Philippines were the same as those in Thai-
Fuel 3.88 1.29 2.58 land explains 58% ($7.64 per ton) of the $13.07 per ton difference in
Trading/search 3.03 1.93 1.10
marketing costs between the two countries. This is an underestimate
Labor 3.84 1.76 2.08
Investment capital 1.26 2.10 0.84 of the true effect, because it assumes no substitution of capital for
Maintenance 0.64 0.24 0.40 labor in response to the lowering of interest rates, and thus a sub-
Subtotal 12.65 7.32 5.32 optimal capital to labor ratio. Unfortunately, it is not possible for
Drying costs us to quantitatively simulate this substitution process (as Timmer,
Fuel 0.00 1.14 1.14 1973, does for rice milling in Indonesia) because capital is used in
Labor 2.01 0.00 2.01
many different parts of the marketing process, and we do not have
Investment Capital 0.50 1.40 0.90
Maintenance 0.00 0.22 0.22
the necessary data to construct the relevant isoquants for all of these
Subtotal 2.51 2.76 0.25 processes. Thus, we must be content with an estimate of the lower
Storage costs
bound importance.
Sacks 1.85 0.96 0.89 In terms of function, the lower interest rates in Thailand make a
Investment Capital 0.60 0.25 0.35 difference in two main ways. First, lower interest rates lead to low-
Working Capital 5.11 0.10 5.02 er working capital requirements, which are shown in Table 2 as
Subtotal 7.56 1.31 6.26
reduced costs of storage. Second, lower interest rates reduce
Milling costs investment capital requirements by lowering the effective pur-
Electricity 1.29 1.27 0.02
chase price of trucks, buildings, sacks, and milling equipment.
Labor 1.88 1.82 0.07
Investment Capital 2.34 0.61 1.73
Maintenance 0.36 0.44 0.08 Seasonality of production and openness to trade
Subtotal 5.87 4.14 1.74
Total costs 28.60 15.53 13.07 While interest rates are clearly the single most important factor,
they are not the entire story. In the Central Plain of Thailand, there
Source of data: surveys conducted by the authors. Price data were converted from
local currency to US$ at exchange rates of 55 Philippine pesos to the dollar and 40
Thai baht to the dollar.
6
As a point of comparison, Fafchamps and Gabre-Madhin (2004) estimated median
marketing margins net of costs (i.e., returns to management) of $13.13/ton in Benin
the high margins in the Philippines relative to those in Thailand are and $47.39/ton in Malawi. These margins are calculated across different commodities
and types of traders. Maize, beans, and pulses were the main commodities traded in
the result of exchange rate conversions. However, since the peso
both countries.
depreciated against the baht after 1997 (compared to its relatively 7
Interest rates are determined jointly with exchange rates, and any government
constant level from 1990 to 1996),5 this factor would have made interventions in foreign exchange markets could affect the level of interest rates. In
Philippine rice marketing more competitive compared with Thailand both the Philippines and Thailand, however, foreign exchange markets are subject to
when converted to a common currency. Thus, the high margins in only very limited occasional intervention, and actual exchange rates closely approx-
imate true market-determined rates. Thus, the lower interest rates in Thailand are not
due to policies in the foreign exchange market.
8
Real interest rates were used in our analysis. They were computed from nominal
5
With the exception of a brief period in the second half of 1997 and the first half of interest rates using average annual inflation rates from 1996 to 2003 (3.2% in
1998 that is not relevant to our study. Thailand, 6.0% in the Philippines).
 Author's personal copy
D.C. Dawe et al. / Food Policy 33 (2008) 455–463
is less seasonality of harvesting due to more abundant water sup-
plies in the Chao Phraya River delta. Some farms in the Central
Plain harvest three crops of rice in a year, and different farms in
nearby areas often have quite different harvesting dates. The result
is a cropping system that resembles continuous factory production.
Seasonality of rice production in Central Luzon is much less pro-
nounced than it was 35 years ago (the Green Revolution led to a
large expansion of cropping in the dry season), but it is still more
seasonal than in the Central Plain.
Furthermore, international trade plays a much larger role in
Thailand’s rice economy (exports were 42% of domestic production
from 1996 to 2003) than it does in the Philippines (where imports
were 14% of domestic consumption during the same period). This
difference is due to policies, not endowments: despite domestic
prices that are much higher than world prices, the Philippines con-
tinues to restrict rice imports. In Thailand, however, world prices
and domestic prices (adjusted to the same point in the marketing
chain) are equal. More openness to international trade allows for
some of the seasonality of supply to be shunted off to (or absorbed
by) world markets in the face of intertemporal rice consumption
demand that is roughly constant and exhibits little seasonal
pattern.
The reduced seasonality of production and greater openness to
trade combine to result in reduced storage requirements in Thai-
land (two months from harvest to wholesale on average in the
Philippines, compared to just one month in Thailand). Confirming
the reduced storage requirements that we found in our interviews9
is the fact that farmgate paddy prices exhibit less seasonality in Thai-
land. Our simulations indicate that the reduced storage require-
ments due to endowments and policies account for $2.56 of the
difference in marketing costs between the two systems.
Lack of openness to rice trade in the Philippines raises storage
costs through another channel as well. Government restrictions
on imports have raised domestic farm prices to very high levels –
in fact, farm prices for paddy in Central Luzon from 1994 to 1999
were on average 89% higher than in the Central Plain during the
same period of time. High farm prices mean that millers and trad-
ers in the Philippines have much larger borrowing requirements to
finance purchases of the more expensive crop, even apart from the
higher interest rates that prevail in the Philippines. Our simula-
tions estimate that the size of this effect amounts to $1.92 per
ton in additional carrying costs.
Land prices, road infrastructure, lack of mechanization, and other
factors
Several other factors are important as well. One is land costs for
the mill and storage warehouse, which are cheaper in Suphan Buri
by $1.61 per ton compared to Nueva Ecija. Land is cheaper in the
rice-growing areas of Thailand, where the mills are located, for at
least two reasons. First, the supply of arable land per capita is three
times as large in Thailand as in the Philippines (raw data from FAO,
2006). Second, the main use of land in both Suphan Buri and Nueva
Ecija is for rice, and, as noted above, paddy prices in the Philippines
are kept substantially above world prices through import restric-
tions. These very high levels of domestic rice prices inflate land
values, as has occurred in Japan (Trewin et al., 2000).
The Thai marketing system also has a cost advantage of $2.58
per ton in terms of fuel consumption despite similar levels of fuel
prices. The difference is due to several factors that collectively al-
9
Millers and traders were reluctant to discuss how long they stored paddy for fear
of being branded as hoarders: the word storage has negative connotations. However,
they were more responsive when we asked how long it took from harvest until arrival
of rice at the wholesale market, without mentioning the word ‘‘storage.” In any event,
the latter concept is in fact storage for the marketing system.
459
low Thai marketing agents to haul more tons per liter of gas. First,
trucks in the Philippines typically transport only about 70% of a full
load of grain, compared to trucks in Thailand that travel full most
of the time. This underutilization appears to be due to an excessive
number of marketing agents in the Philippines that makes it diffi-
cult to optimally coordinate transportation. Second, Thai trucks
that shuttle between rice-growing areas and the capital typically
have a capacity of 30 tons, double the capacity of the trucks used
in the Philippines. Larger trucks are impractical in the Philippines
because the quality of roads is considerably worse than in Thai-
land. Philippine roads have more potholes, tend to pass through ur-
ban areas instead of passing the outskirts, and have fewer lanes. All
of these factors make it difficult to drive large trucks. Third, higher
interest rates also make it more difficult for Philippine traders to
finance the purchase of larger trucks, which are of course more
expensive than smaller trucks.
Transportation labor costs per ton are also much lower in Thai-
land (by $2.08 per ton), even though transportation capital costs
per ton are similar in the two countries. Part of this differential
can be traced to the use of smaller trucks that do not travel full
in the Philippines (as noted above), which means employment of
more drivers and higher labor costs per ton of grain hauled despite
lower hourly wages. More important, there is a substantial amount
of manual loading and unloading of grain in the Philippines. This
process has been mechanized in Thailand because of higher wages
and lower interest rates. Of course, the lower price of labor relative
to capital in the Philippines suggests that less mechanization is
optimal, but this does not appear to be the entire explanation.
Mechanization would likely lower costs in the Philippines, but
manual laborers are often able to resist such changes.10 Faster
job growth in the non-farm sector would provide alternative jobs
for these laborers and pave the way for more mechanization, but
the Philippine economy’s lack of growth has hindered the creation
of such jobs. Measured in constant local currency terms, GDP per ca-
pita in the Philippines grew just 0.2% per annum from 1980 to 2003,
while it grew at an annual rate of 4.5% in Thailand during the same
period (raw data from World Bank, 2007).
Perhaps surprisingly, differential search costs were not large
(just $1.12 per ton) despite the innovation of paddy wholesale
markets in Thailand. The fees paid to agents in the Philippines
who deliver paddy to mills or traders are just a tiny fraction of
the farm price, and have not changed in years. Furthermore, paddy
wholesale markets in Thailand also charge per ton fees, in addition
to the commissions paid by millers to their agents who buy from
farmers at the wholesale market. There is no doubt that the inno-
vation of wholesale markets has reduced search costs, but the cost
reduction is not that large, perhaps because of the low opportunity
cost of agents’ time in the Philippines (i.e., the transaction costs of
informal trade are small).11
Lower milling ratios in the Philippines (0.64) compared to Thai-
land (0.66) made no difference to differential costs. The reason for
this lies in the relative prices of milled rice to by-products and the
greater output of husks (which were considered worthless in both
countries) in Thailand (0.25 compared to 0.23 in the Philippines).
We also investigated trade policy regarding intermediate inputs
(e.g., machinery) as a potential explanation for higher costs, but
found that tariff rates on milling equipment and trucks are very
low in the Philippines at 0–3%.
10
In fact, this is the situation that prevails regarding mechanization of harvesting in
the Philippines. Use of a combine harvester in the Philippines would lower rice
production costs, but we met several farmers who either had their combine sabotaged
by workers worried about loss of employment, or were hesitant to purchase one for
fear of the same.
11
Fafchamps and Gabre-Madhin (2004) place more emphasis on search costs in
their comparison of Benin and Malawi. One hypothesis is that search costs are more
important where population densities are lower and infrastructure is more limited.
 Author's personal copy

460 D.C. Dawe et al. / Food Policy 33 (2008) 455–463

Summary of cost differences Table 3

Breakdown of marketing margins and costs by marketing agent, 2003, Nueva Ecija to
Manila, Philippines (Phil) and Suphan Buri to Bangkok, Thailand (Thai)
The sum of all these effects adds up to a difference in costs of
$19.51 per ton, which is greater than the observed difference of Gross Cost (US$ per Absolute % markup
$13.07 per ton. There are two reasons for this ‘‘over explanation”. marketing ton dry markup over over costs
margin (GMM) paddy) costs (US$ per
First, there are interaction effects between different factors that (US$ per ton ton dry paddy)
make simple addition of the effects of individual changes mislead- dry paddy)
ing. For example, the combined effects of hypothetically lower Phil Thai Phil Thai Phil Thai Phil Thai
interest rates and reduced storage time in the Philippines would Assembly trader 20.02 – 15.95 – 4.07 – 26
lead to a reduction in costs of $7.79, which is less than the sum Miller 46.72 15.52 12.64 15.53 34.07 0.01 269 0
of $7.64 and $2.56 (the effects of the two changes made individu- Total 66.74 15.52 28.60 15.53 38.14 0.01
ally). Second, the Philippines has a cost advantage in some compo- Source of data: surveys conducted by the authors. Price data were converted from
nents (e.g., drying), mainly due to lower wages. local currency to US$ at exchange rates of 55 Philippine pesos to the dollar and 40
Thai baht to the dollar.

Differences in margins
It is interesting, however, that differential marketing costs ex-
plain just one-fourth of the differential gross margin. Explaining
this differential gross margin is important because it is so large.
If returns to management were equal in the two countries (i.e.,
gross margins in the Philippines were larger only due to higher
costs), then wholesale rice prices in the Philippines would be lower
by 18% (15.22 pesos per kg of milled rice instead of 18.50 pesos per
kg). Most of the larger net margin in the Philippine case occurs at
the milling stage, as can be seen from an examination of the costs
and margins disaggregated by agent in Table 3.
Data quality
Given the difficulties involved in measuring marketing costs, it
is legitimate to ask whether our data are of good quality, both in
Thailand and in the Philippines.
Table 2 shows that marketing costs (excluding management
costs) in Thailand essentially equal the gross margin, implying zero
returns to management for the marketing system. This is a striking
finding, and may cast doubt on the quality of the data, since zero
returns to management are not possible in the long run. However,
such a finding is possible in the short run.12 In fact, during our inter-
views, many millers in Thailand mentioned that competition had
intensified in the past few years because of low interest rates that
facilitated new entry and expansion of existing millers. Thus, capac-
ity utilization had declined in spite of a record rice crop in 2003. Sec-
ondary data on national level farm and wholesale rice prices show
that 2003 was indeed an unusual year, with gross margins at their
lowest point during the period from 1995 to 2004.13 Presumably,
there will need to be some consolidation of the industry during
the next few years so that either gross margins increase or costs de-
cline further, either of which would allow some positive returns to
management.14
Since costs are more difficult to measure than the GMM, and
our measure of costs equals the GMM, this provides confidence
that we did not miss any important cost components. On the other
12
Fig. 1, which uses independent data, shows that the GMM is even negative on
occasion in Thailand, which is yet more extreme than a situation where gross
marketing margins equal costs.
13
Unfortunately, these secondary data cannot be used to quantify the level of the
GMM, as the farm price data are collected at national level and confound a number of
very different rice qualities at the farm level (in particular, fragrant jasmine rice and
white rice). A comparison over time, however, does indicate that 2003 was an unusual
year.
14
Furthermore, because the volumes handled by Thai millers are large, only a very
small return to management on a per ton basis is necessary for viability of the mill.
For example, a $1 per ton return to management in Thailand would generate an
annual income of $90,000, a high income in a developing country. Inclusion of such a
small margin would not affect the conclusions of the paper, and could easily be within
the measurement error of our cost data.
hand, since 2003 was an unusual year, our estimate of the differen-
tial gross margin is biased upwards, i.e., in a normal equilibrium
situation the differential gross margin between the two countries
will be smaller than we have measured. This is a problem to some
extent, but Fig. 1 shows a consistent large difference in GMM be-
tween the two countries, with an average difference of US$56,
which is similar to our measurement of US$51. Thus, the extent
of the bias is small. It remains true that differential costs can ac-
count for only a small percentage of the differential gross market-
ing margin.
The Philippine data are also potentially at issue. First, we
believe that the gross margin data for the Philippines are not in
dispute, because they are very similar to the five years of data re-
ported earlier in the paper in Fig. 1.15 They are also very similar to
margins calculated using only data from government secondary
sources. Second, our estimates of milling costs are similar to esti-
mates from a separate, independent study by Cabling (2002). Since
milling is the stage where the net margin is so large, this separate
estimate of costs gives us added confidence in our results. Third,
our estimates of the returns to management are strikingly similar
to those of Hayami et al. (1999). Converting their estimates of net in-
come earned by agents, traders, and millers per ton into dollars, we
calculate returns to management of $35.90 per ton (using their data
and the exchange rates prevalent during the period of their survey),
which is very close to our estimate of $38.14 for the Philippine mar-
keting system considered as an aggregate. Thus, we strongly believe
that we have good estimates of marketing costs and margins in the
Philippines (and in Thailand).16
Collusion among traders?
One possible explanation for the differential gross margin (after
accounting for differential costs) is collusion among traders, as
found by Banerji and Meenakshi (2004) in Indian wheat wholesale
markets. While there are no organized wholesale paddy markets in
the Philippines at which this type of collusion could occur, we con-
sidered the possibility that some market segmentation takes place
in the Philippines. For example, perhaps traders and millers parcel
up the market amongst them, and agree not to ‘‘invade” each
other’s territory. This possibility, however, is not consistent with
repeated observations we made in the field, similar to those of
Hayami et al. (1999) that farmers have a wide choice of millers
and traders to sell to, and that millers and traders often cross-pro-
15
The same holds true for Thailand.
16
We tried asking millers about profit rates, but they were unwilling to answer that
question (and many others, e.g., about levels of stocks) directly. Accountants formerly
involved in the industry told us (without prompting) that the profit rates for millers
were very high, without citing specific numbers. Even if they had cited specific
numbers, it is not clear they would calculate profit in the same manner as an
economist would. Thus, a direct quantitative comparison is not likely to be useful.
 Author's personal copy
D.C. Dawe et al. / Food Policy 33 (2008) 455–463
vincial boundaries in search of paddy to buy. Furthermore, these
cross-provincial ‘‘raids” are not just confined to neighboring prov-
inces, but often occur over long distances.17
Other possible barriers to trade include the ‘‘suki” system,
whereby farmers preferentially sell to a specific trader because
the farmer is familiar with that trader (most suki relationships
are not due to credit tying). These arrangements are very informal,
however, and confer no strong obligations on the farmer. In fact,
farmers with a suki often sell to non-suki traders. Only a tiny pro-
portion of farmer sales are made to providers of input credit. But if
neither marketing costs nor collusion are responsible for the differ-
ence in gross margins, then we must examine the residual, or re-
turns to management, more closely.
Risk and trade barriers?
Why are returns to management so much higher in the Philip-
pines? A possible explanation is greater risk, but we find this uncon-
vincing. First, prices are slightly more stable in the Philippines,
where the government has successfully stabilized prices vis-à-vis
the world market, than in Thailand, where free trade means that
domestic prices are dictated by world prices and the exchange rate.
Second, we are unaware of any millers or traders who have had their
assets expropriated by the government, or were even threatened
with such. Thus, neither price risk nor risk of expropriation is able
to explain the large returns to management.
Another possibility is that the import protection of rice produc-
tion in the Philippines contributes to high marketing margins
through rent seeking behavior.18 But this protection is for rice pro-
duction, not rice marketing. Further, government marketing interven-
tions do not artificially lower farm prices or artificially raise retail
prices, at least one of which would be necessary in order to increase
millers’ margins. Indeed, farm prices are high due to import restric-
tions, and the government further supports the high domestic prices
with procurement at above market prices. In addition, the govern-
ment tries to lower retail prices, usually unsuccessfully, by selling sub-
sidized rice. Finally, the Philippines has more than 10,000 widely
dispersed rice mills (PhilRice-BAS, 2004), and we are unaware of any
organized lobbying efforts by rice mills at the national level. It is easy
to register a rice mill, and there are no restrictions on entry.
To the best of our knowledge, then, it seems as though market-
ing agents in the Philippines are earning excess profits, with the
word ‘‘excess” being defined relative to the profits earned in Thai-
land.19 If true, how do these ‘‘excess” profits persist? If there is no
collusion, why are they not competed away? Undoubtedly there is
no single answer; but there are several possibilities that could be
important.
Capital markets and capacity utilization
One possible reason for the persistence of ‘‘excess profits” is
that high interest rates hinder the ability of efficient millers to
build bigger mills and drive out less efficient millers. But this
17
Interestingly, some local governments at the village level try to hinder such
competition by enacting laws that prohibit traders from outside jurisdictions from
entering the locality. The number of local jurisdictions with such restrictions is small,
however, and farmers are still free to move paddy outside of their villages, so these
restraints on trade do not have major effects.
18
The discussion here is distinct from the other effects of protection discussed
earlier (e.g., higher working capital requirements, longer storage time and higher land
values).
19
Fafchamps and Gabre-Madhin (2004) find a similar phenomenon in their
comparison of Benin and Malawi, suggesting that cross-country comparisons can be
useful for making policy recommendations to improve marketing systems (i.e., the
issue is more than simply the efficiency of a marketing system given its existing
constraints).
461
explanation is probably not of major importance, as there is sub-
stantial excess capacity in the Philippine milling system. Assuming
operation at 8 h per day, 6 days per week, and 48 weeks per year
(allowing four weeks for maintenance), data from PhilRice-BAS
(2004) on the capacity of registered millers and total production
indicate that national average capacity utilization is slightly less
than 80%, which indicates a reasonable amount of unused capacity.
Further, mills in Thailand are striving to operate two to three 8 h
shifts per day, with only rare shutdowns, in marked contrast to
the vast majority of millers we interviewed in the Philippines,
who were content to operate on 8 h days. When asked if they could
expand to two shifts per day, they expressed little interest in doing
so but gave no reasons as to why it was difficult or impossible. If
capacity utilization in the Philippines is defined relative to 16 h
per day instead of eight, then capacity utilization would be less
than 40%. If Philippine mills want to increase throughput, it should
be fairly easy to increase the number of shifts per day without re-
sort to additional investment capital.
A more important shortcoming of capital markets in the Philip-
pines is that moneylenders (who finance working capital require-
ments) do not typically loan the large amounts of money
necessary to buy 90,000 tons of paddy per year to individual bor-
rowers, probably because they are unwilling to take on such large
amounts of risk. And banks seem unable to perform the service of
satisfying the working capital requirements of traders and millers
in the Philippines. We were surprised by some of our interviews
that even very large wealthy mill owners were unable to tap the
banking system for adequate working capital and were forced to
resort to moneylenders. These capital market constraints create a
situation where it is difficult for efficient traders to expand opera-
tions and drive out inefficient marketing agents, thus accounting
for the large number of marketing agents in the Philippines, as
noted above. Ellis et al. (1991) found evidence in Indonesia that
fewer links in the rice marketing chain in some locations led to
lower overall margins in those locations, which is consistent with
the results here.
While the Philippine system is characterized by large numbers
of small mills and low capacity utilization, consolidation has taken
place during the past 15 years. The number of mills declined by
29% from 1987 to 2002, while total capacity grew by 7% during
the same period (raw data from PhilRice-BAS, 2004). At the same
time, rice production increased 48%, so that capacity utilization in-
creased from 57% to 79% (based on 8 h days). Thus, the system is
headed in the right direction.
‘‘Making a living” and business uncertainty
Another way to explain the high margins in the Philippine sys-
tem is that millers (and traders) must make a living from their re-
turns to management (Harriss, 1981). If the quantities milled or
traded per agent are low, then margins will need to be high in or-
der to properly reward people with management skills and access
to capital. Thus, restricted access to working capital and the need
for traders to earn a reasonable living given their skills interact
to create high margins. As noted earlier, the magnitude of profits
in the Philippines as measured by Hayami et al. (1999) was similar
to ours, and they suggested that the profits they measured pro-
vided a reasonable standard of living for the traders and millers in-
volved (who were operating at a smaller scale than the typical
miller in our study area). They did not conclude that there were
‘‘excess” profits because they did not have data from Thailand with
which to make a comparison and were thus not led to examine the
possibilities for consolidation and economies of scale.
Lack of paddy wholesale markets may also contribute to larger
net margins by increasing the number of market intermediaries
who must earn a living. If wholesale paddy markets drove out
 Author's personal copy
462 D.C. Dawe et al. / Food Policy 33 (2008) 455–463
assembly traders in the Philippines, and their current margins
disappeared from the system (because millers are already earning
enough to make a living), this would have an important impact on
marketing margins.
Another possibility is that management skills will earn higher re-
turns in an uncertain business environment. Filipino businesses are
more likely to cite corruption (35%) and labor regulations (25%) as
major business constraints than their counterparts in Thailand
(18% and 11%, respectively). Filipino businesses also spend a greater
percentage of management time dealing with officials (7% versus 1%
in Thailand). As a result, it is much easier to do business in Thailand
than in the Philippines. Indeed, Thailand had the lowest (best) rank-
ing in the World Bank’s ‘‘ease of doing business” index among all
developing countries in 2005 (no data for 2003 are available), and
was ranked number 19 in the world, compared to the Philippines’
ranking of number 121. These data (all from World Bank, 2007) sug-
gest that the business environment is more uncertain in the Philip-
pines than in Thailand, and to the extent that Filipino businesses
must be compensated for these ‘‘costs of doing business”, returns
to management will be higher than in Thailand.
Restrictions on foreign investment
Finally, another possible reason is foreign investment regula-
tions. Before 2000, only citizens of the Philippines had the right
to participate in the rice and corn industry. Republic Act 8762 re-
pealed previous restrictions (e.g., Republic Act 3018) and allowed
foreign investors to own 100% equity in companies involved in rice
milling and trading (other than retail trade). Even with the new
more liberal regulations, however, non-Filipinos must divest 60%
of the equity in any such company (not necessarily to a single
investor) after 30 years. It is not clear to what extent this divesti-
ture requirement hinders foreign investment. To our knowledge,
we are unaware of any foreign investors in the rice milling and
trading industry in the Philippines, but that may be due to factors
other than government regulations. In the near future, investors
from fellow ASEAN countries (of which Thailand is one) may be ex-
empt from this regulation and be treated in essence as Filipino
nationals. Certainly, it would seem that Thai millers could increase
their profits markedly by operating in the Philippines. In order to
do so successfully, they would probably need to partner with Fili-
pino investors to take advantage of local contacts while using their
access to Thai capital markets. Alternatively, paddy wholesale mar-
kets would make it easier for foreign millers to procure local paddy
supplies without having to rely on local contacts.
Conclusions
The main contribution of this paper has been to document,
through analysis of a specific case study, that marketing systems
with a competitive structure may not generate competitive out-
comes, at least when the outcomes are compared with those in
other countries. Some analysts may find the conclusion that ‘‘ex-
cess profits” are not competed away is difficult to believe. But we
went to great lengths to collect high quality data and to cross check
our data in many different ways, and our analysis clearly points to
very high ‘‘excess profits.” Other analysts will assert that the lack of
a competitive outcome is because of the market failures that per-
vade all developing countries, and is so common that it is hardly
worth noting. But this study has shown that many of the standard
market failures (e.g., risk, collusion) that are often used to augment
models of perfect competition are not relevant, at least in this par-
ticular case.20 In turn this suggests that there is much that remains
20
But see Fafchamps and Gabre-Madhin (2004) for another example.
to be learned about the actual functioning of developing country
commodity markets with competitive structures. It also suggests
that we cannot be entirely certain in making recommendations
about how to reduce marketing margins in the Philippines.
Nevertheless, despite our imperfect knowledge of the reasons
behind the differential margins, some suggestions can be made.
First, by far the greatest impact would come from capital markets
that provide lower interest rates and expanded access to working
capital. Second, margins might be reduced if the government took
the initiative to organize wholesale markets for the purchase of
paddy. This would directly lower search costs, but more impor-
tantly it might help to reduce the number of agents involved in
the marketing system, which could lower transaction costs more
broadly by eliminating the margins of assembly traders ($4.07
per ton; see Table 3). In addition, the consolidation of trading made
possible by wholesale markets would reduce coordination prob-
lems in rice transport and reduce fuel and labor costs per ton. Such
markets would also improve the credibility of traders’ weighing
scales (assuming effective government regulation) and reduce
the opportunities for defrauding farmers. In Thailand, the first
paddy wholesale markets were organized by the government, but
later private investors (often rice millers) came to dominate the
market. However, these privately owned markets are still
regulated by government, e.g., through unannounced inspections
of weighing scales.
Third, another possibility would be to further liberalize for-
eign investment regulations by removing divestiture require-
ments. It is not clear that this is the obstacle that discourages
foreign investment in rice milling, but removing this barrier
might bring some benefits. Such foreign investment could help
to substitute for a rudimentary capital market. The entry of
foreign capital would likely be facilitated by the innovation of
paddy wholesale markets that would make it easier for outsiders
without local contacts to procure large volumes of paddy for
milling. A more supportive business environment in general
would also be helpful.
Fourth, a more open policy as regards rice imports would lower
working capital requirements, reduce storage time, and reduce
land values, all of which would lower marketing costs. Fifth, im-
proved road infrastructure would also reduce marketing costs.
As a final note, despite looking hard, we could find no evidence
that collusion plays an important role in the wider Philippine mar-
gins. Thus, enactment of anti-trust regulations seems unlikely to
create narrower margins.
Acknowledgements
The authors would like to gratefully acknowledge the com-
ments and suggestions received from the editor and anonymous
referees, which greatly helped to improve the paper.
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