Over the years, corn has become an increasingly important crop, replacing the traditionally dominant rice. As a share of total area harvested, corn rose from 25 percent in 1972 to 32 percent by 1991, while rice area declined from 33 percent to 28 percent (Figure 1). Corn's share in real gross value added in agriculture grew by 3.9 percent a year, but the share of rice, the primary food crop, grew by only 3.3 percent during the same period.

This increase in the use of corn for feed has mirrored the expansion in the country's livestock and poultry sector. In 1991, the livestock and poultry sector contributed nearly 24 percent to the total value of agriculture (in 1985 constant prices). Production of pork, the major source of meat in the Philippines, expanded at an annual rate of 3 percent during 1971-89. Poultry production grew nearly 5 percent a year during the same period. Most of the growth in pork and poultry production occurred in the commercial sector--5 percent in pork and 14 percent in poultry.

Changes in the patterns of corn varieties grown reflect the growing importance of corn as feed. Today, more yellow corn, the type preferred for feed use due to its higher carotene content, is being grown than white corn, the variety preferred as food. The growth in area of corn cultivated can mostly be attributed to growth in yellow corn, which grew by 9 percent a year during the period 1973/74-1988/89, compared with only 0.05 percent annual growth in white corn area (Figure 3).

This accelerated growth in feed demand is expected to put pressure on the existing local marketing system to absorb the higher levels of output and on the efficiency of price signals to direct investments in corn production and to effect a balanced flow of corn between surplus and deficit areas.

There are reasons to be concerned about the performance of the existing marketing system and the accuracy of prices generated in local markets. Beyond the farmgate, commodity markets in the country (including those for corn) are controlled by only a few traders. In such concentrated markets, prices tend to be inaccurate and rigid, and thus they are slower to adjust to economic shocks. This means that scarcity could persist for some time in some areas before markets could adjust to this information by increasing the flow of goods to these areas. Domestic marketing is highly decentralized. It is mostly conducted on farms, bypassing central markets; therefore, there is concern about thin markets and the precision of prices reported from these low-volume markets.

Farmers blame opportunistic traders for erratic price fluctuations and other aberrant price behavior. Perceived to be better informed than farmers, traders have been accused of exploiting them, manipulating prices to the disadvantage of farmers. Therefore, distrust of traders is pervasive. This sentiment is shared by policymakers and is reflected in the government's market intervention policies. Policies such as price controls, standardized grading and measurements, direct procurement from farmers, and collectivization of farmers are all aimed at strengthening farmers' bargaining power over the unscrupulous traders.

Despite the widely held belief that traders take advantage of ill-informed farmers, this report finds that Filipino corn farmers are knowledgeable about prevailing market prices. They grow corn on farms averaging 3.4 hectares and derive most of their income from corn. Their access to market outlets in nearby towns is limited by inadequate and costly transportation and poor infrastructure. Nevertheless, they seldom allow traders the opportunity to manipulate prices. Because farmers have regular contacts with several traders and neighboring farmers, they obtain information quickly and are able to verify its accuracy, thus squelching traders' ability to manipulate prices.

The regular visits of an increasing number of itinerant traders from other towns or cities passing through villages on their way to the city intensify competition for the moderate volume of corn marketed on farm. Although farmers tend to sell their corn to the traders with the highest price, they also consider several nonprice factors in their final choice of traders. For example, traders are a chief source of credit for most Filipino farmers; a farmer may choose to sell to the trader who offers the best credit package and the best prices for farm inputs, even if the price offered is lower than that of other traders. A trader's character or reputation, good credit standing, and status within the community are also weighed heavily by farmers.

Price regulation policies promulgated by the government were ineffective in tempering wide swings in prices during 1980-89, the period used in the time series analysis in the report. At 40 percent, prices in Manila varied less than those in Cagayan Valley and Northern and Southern Mindanao, where variation generally exceeded 52 percent. Storage smoothes the month-to-month changes in retail prices where there are adequate bonded warehouses at major retail centers, whereas prices fluctuate more at the farm and wholesale levels, where storage is not commonly used due to unavailability or high cost. Without access to storage, farmers and wholesalers are compelled to immediately dispose of their corn, which often results in a market glut during the harvest season and consequently triggers dramatic drops in farm and wholesale prices. Clearly, retailers reap the largest profit from a highly unstable market, leaving farmers and wholesalers to operate on a very narrow margin.

The report reveals a regional corn market in which prices are transmitted slowly and imperfectly. Yellow corn, which is extensively traded, is better integrated than white corn, which is traded within a narrower market boundary. Manila, the major commercial market for corn, plays a central role in influencing prices. External shocks result in price changes in Manila first. After a lag, these changes are reflected as price changes in the other markets where trading is established. Estimates of the period of adjustment, the amount of time it takes for shocks to be reflected in price changes, support theoretical expectations. A market situated nearby will respond quicker to shocks emanating from the lead market than those located farther away. For example, Cagayan Valley, a region located close to Manila, responds almost instantaneously to price changes in Manila. Northern and Southern Mindanao markets, located farther away, may take up to two months to adjust their prices to Manila's prices. For white corn, the report finds that wholesalers in Central Visayas took two months to respond to price shocks from Southern Mindanao, whereas traders in Northern Mindanao took about one month to change their prices as a result of a price change in Central Visayas.

The report finds that although the market is imperfectly integrated, pricing is not discriminatory, as one would expect in a highly concentrated market. Absolute price margins between the regional market and the Manila market did not exhibit discernible price differences; that is, they did not widen as markets were located farther away from the base market.

Infrastructure improvements should include better interisland shipping vessels and upgrading of roads to reduce the high cost of transportation. Regular shipping schedules between major producing and consuming areas would help ensure that corn can be transported when needed. The availability of better storage and marketing facilities both in towns and villages and on-farm would make it possible for farmers to hold corn, rather than dumping it on the market immediately after harvest.

Although the report indicates that farmers are more knowledgeable about prevailing prices than expected, dissemination of knowledge was better in some areas than others. Improvements in the methods of collecting and disseminating public market information could result in more transparent prices and improve the ability of farmers and traders alike to read price signals accurately and to make correct marketing decisions.

Impaired market knowledge also exists because traders rarely follow grades and standards in setting prices. Although the government has set standards of 14 percent moisture content and 98 percent purity, these standards are seldom enforced. Because the demand for corn is such that even poor-quality corn can be sold, farm prices do not accurately reflect the demand for higher-quality corn. Inadequate and improper drying and storage facilities also adversely affect the quality of the corn and prevent farm prices from accurately reflecting the retail demand.