Case Study of Rice Manufacturing Industry in Davao City

ABE 158 Industrial Organization of Agricultural Markets

GROUP 4

Banguis, Eloisa Lynne P.

Dacuyan, Rose Joy. T.

Garcia, Ma. Karysa F.

Yap, Lyen Queen

Submitted to:

Prof. Nikko L. Laorden

May 17, 2017

 BACKGROUND OF THE INDUSTRY

Rice is one of the most important crops in the country because like many Asian
countries, rice is considered a staple food in the Philippines. According to the International
Rice Research Institute, more than 90% rice produced is consumed in Asia. More
importantly, in the Philippines, the rice trend shows an increase in per capita consumption.

A study authored by Aguilar (2005) discusses how rice is part of the Filipino Diet and
Culture. He mentioned that in the precolonial period, rice was considered a food for the
elites. It was only produced in a regulated amount. It was not a staple food back then but
instead it was a prestige food. However, because of urbanization, industrialization, and the
Green Revolution, the production of rice was observed to be increasing. Fast forward to
2016, the Philippines have already produced a total of 17 million metric tons of Palay. In
Davao City alone, 13,594 MT of rice are needed to be milled.

Table 1 Volume of Production of Palay in 2016 (Source: http://countrystat.psa.gov.ph/selection.asp)

With the high volume of production of rice in the Philippines, it is understandable that
there is also an increase of firms in the rice milling industry. Rice milling industry is an
important industry because according to the Rice Knowledge Bank, milling is a crucial step
in post-production of rice. Rice milling is a process where machines are used to remove
foreign material, husks, bran, and broken kernels from rice to produce an edible and
properly milled rice for consumption.

In order to achieve a sufficiently milled rice for consumption, the grains have to first go
through a series of machines: paddy cleaner, destoner, paddy husker, paddy separator,
thickness grader, abrasive whitening, VBF rice polisher, KB rice polisher, rotary sifter, length
grader, color sorter, and packing. However, the Philippine Rice Research Institute a
subsector of Department of Agriculture, has introduced a new machine: the Micromill. This is
a portable milling machine which is easy to operate and maintain. Moreover, it is a low-cost
machine but is very efficient.

Rice milling industry in the Philippines has an Oligopoly market structure. There are a lot
of rice milling firms in the country, however, some of the firms include VJ Rice Mill,

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Primavera Rice Mill Corporation, Family Choice Grains Processing Centern Inc., and
Goldmine Rice Marketing. In Mindanao, there are over a hundred milling companies. In Toril,
Davao City, there are approximately three milling companies in the area. One of which is the
METAVCO Agricultural Development Corporation; it is the biggest rice milling firm in the
area.

Figure 1 Supply chain of METAVCO

METAVCO is considered a processor, distributor, and a wholesaler of rice. The figure

above shows suppliers and buyers of METAVCO. The firm gets its supplies from the local
rice farmers, and cooperatives. METAVCO then processes these produce; Lastly, they
distribute these sufficiently milled rice to wholesalers and retailers from the different cities in
Mindanao.

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 ENTRY AND EXIT CONDITIONS

How to enter? government requirements, capital cost requirements,

Is it difficult to enter the industry? Why? Why not? [based on interview and literature]

SPECIFIC - Government policies in this industry na maka-affect sa manufacturing

firms structure, conduct [& performance]

particularly in consolidation, processing (quality requirements), distribution

Import and trade laws in rice (recent)

Naa bay mga anti-collusion laws ang PH government sa rice industry?

Check Sir Nikkos ppt on Entry and Exit for more guide

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 MEASURE OF MARKET POWER

The previous sections discusses the background and the entry and exit conditions of
the rice manufacturing industry. To obtain data about the rice industry organization in
Davao City, the group have interviewed a rice manufacturing firm located in Toril, Davao
City.

METAVCO Agricultural Development Corp. is a rice manufacturing firm based in

Davao City with buyers all over Mindanao. For clarity, manufacturing is defined as the
function of aggregating, processing and distributing of rice. According to the
interviewees, Mr. Mark Wee (Vice President) and Mr. Mar Dexter Tan (Human Resource
Manager), METAVCO _________.

What is this company? (nature, size of enterprise)

When started?

Where is it located? Where ang scope?

Who suppliers and buyers?

How do they operate?

Other company facts (c/o Eloisa)

NOTE: Based sa supply chain functions: aggregator, processor and distributor si

METAVCO

3.2 Structure-Conduct-Performance (SCP) Analysis

To be able to measure the market power of METAVCO in the rice manufacturing

industry in Davao City, a structure-conduct-performance analysis is conducted. Based on the
interview and the secondary data, the entire rice industry is composed of big and small
players who varied from production and distribution functions. This paper focuses on the
sub-industry of rice which is the manufacturing industry.

Structure

The structure of the rice manufacturing industry in Davao City is oligopoly. Although
there are small consolidators, processors and distributors in the firm, big firms such as
METAVCO dominates the industry. Particularly in Toril, there are three (3) rice manufacturing

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firms identified. Moreover, METAVCO alone mill and sell around 1000-1500 bags of rice per
day. They usually source out their supply from cooperatives and local farmers. On the other
hand, they have many buyers who are usually traders in Davao City and in other parts of
Mindanao (i.e. Davao, Butuan, Surigao).

Based on the entry conditions, rice manufacturing business requires high capital cost
due to facilities and equipment. It also requires large operations to experience high profit and
economies of scale. As for METAVCO, we learned that they can still supply to their
customers during lean season because they have big operations. In addition, being in the
industry for 14 years gained them an advantage over new entrants in terms of market share.

Unlike other industries (i.e. cellphone manufacturing), rice industry does not require
product differentiation. Since it is not a homogenous product, competing firms compete in
the quality such as the weight of rice, appearance and uniformity of grains as well as to their
services to the customers. According to Mr. Wee, their firm uses digital scale to know the
real weight of the rice and to gain the customers trust. They also have whitening and
polishing equipment to add value to their products. Moreover, they separate the broken
grains as another value-adding activity. In terms of services, they deliver the need of the
customer at what time they want. He added that they would even pull an all-nighter in order
to deliver orders from distant places (e.g. Butuan) the following day the order was placed.
These product differentiation strategies and services are achieved by METAVCO because
they are big business.

Conduct

Performance

Review rice industry and interview for SCP analysis

SCP analysis i-himay-himay na ang bawat aspects sa structure, conduct

and performance based on background info and entry and exit conditions

i-connect ang structure sa conduct and performance, i-connect ang conduct

sa performance

Based sa supply chain functions: aggregator, processor and distributor si METAVCO

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 BASIC MARKET CONDITIONS
Supply and Demand Conditions

STRUCTURE
-High entry conditions
-Many buyers, few sellers (Big processor-distributors)
-Differentiation in terms of quality & service
GOVERNMENT POLICIES
-Absolute cost advantage for old firms
-Importation policies
-Quality requirements (NFA)
-DTI
-DENR
-DA
-City Health Office
-Republic Acts CONDUCT
-Take into account complaints and suggestions of buyers
-Key players share information
-Dont engage in advertising

PERFORMANCE
-Efficiency (depends on variety and place of origin)
-Profitable
-Progressiveness

Is there a market power? As a buyer from coops and farmers? Or as a supplier to

traders in Davao and other place in Mindanao?

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Figure 2. SCP Paradigm in the Rice Manufacturing Industry in Davao City.

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 ACQUIRING AND MAINTAINING MARKET POWER

Predatory Pricing

The fact that METAVCO is the biggest milling firm in the area implies that they are
the strongest, and has a high market power. To maintain this market power, METAVCO can
resort to predatory pricing; this means to decrease their price when a new firm enters the
rice milling industry. Predatory pricing would hopefully lead the new entrants to leave, then
METAVCO can increase its price back to its original price after the new entrants left.

How do firms acquire and maintain market power? quality of products are maintained,
meeting demand, establish good relationship with customers (yung break-even-losses story
ng Metavco), dependency of buyers especially during lean seasons, sharing information with
other key players

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 References

Aguilar, F.V. (2005). Rice in the Filipino Diet and Culture. Philippine Institute for Development
Studies. Retrieved from http://dirp3.pids.gov.ph/ris/dps/pidsdps0515.pdf.
Machines. (n.d.) Retrieved from http://www.philrice.gov.ph/products/machines/
Mohanty, S. (n.d.) Trends in Global Rice Consumption. International Rice Research Institute.
Retrieved from http://irri.org/rice-today/trends-in-global-rice-consumption
Ricepedia (n.d.) The global staple. Retrieved from http://ricepedia.org/rice-as-food/the-
global-staple-rice-consumers
Wee, M. & Tan, M.D. (2017, March 28). Rice Manufacturing Industry and MEDAVCO
Agricultural Development Corp. (E.L. Banguis, R.J. Dacuyan & M.K. Garcia,
Interviewers.)