AN ASSESSMENT OF THE COCONUT OIL,

OTHER BY-PRODUCTS AND COCO-CHEMICALS

By Alain M. Maulion and Restie Male

June 2006

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 TABLE OF CONTENTS

TOPIC Page
Abbreviations 4
I. Background 6
II. Objectives 6
III. Methodology 6
IV. Framework 7
V. Limitations 8
VI. Executive Summary 9
VII. Introduction 14
VIII. Profile of the Philippine Coconut Industry 15
A. Domestic Production and Consumption 15
B. External trade 15
IX. Problems and Constraints 15
X. Market Potentials 18
XI. Review of Policies and Programs of the Coconut Industry 22
A. An Overview of International Trade Policies 23
a. Production Support Policies 23
b. Indirect Income Support Policies 24
c. Other Indirect Production Support Measures 25
d. Marketing Support Policies 26
e. Consumption Support Policies 26
f. Emerging Policy Trends on New Oilcrop Varieties 27
g. Import Measures 29
h. Export Measures 31

XII. Policies Governing the Philippine Coconut Industry 34

A. Institutional Policies and Capabilities of the Philippine 34
Government: Tracing its Roots
B. Philippine Coconut Programs and Projects 37
XIII. Evaluation of Implications of the Negotiated Formulas and 39
Modalities Based on the Designation and Treatment of Special Products,
Special Safeguard Mechanism and S&D Framework
A. Trade Negotiating Issues 40
1. Market Access 40
2. Domestic Support 41
Coconut under Special Products 43
3. Export Competition 44
XIV. Identification of Strengths, Gaps and Weaknesses 45
XV. Recommendations and Roadmap 47
A. The Need for Responsive Domestic Support Policies 47
B. Strategies for Negotiations 48

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References 51
Annexes
Annex 1: Philippine Coconut Production 53
Annex 2: Export of Traditional Coconut Products 54
Annex 3: Export of Non-Traditional Coconut Products 55
Annex 4: Philippine Coconut Productivity vs. Other Countries 56
Annex 5: Philippine Coconut Production vs. Other Countries, 1995-2000 57
Annex 6: World Imports of Oils and Fats, Annual, 2000-2004 58
Annex 7: Oilseeds, oils and fats support prices in selected countries 59
List of Tables
Table 1: Production Support Policies of Selected Countries 23
Table 2: Indirect Income Support Policies of Selected Countries 25
Table 3: Marketing Support Policies in Selected Countries 26
Table 4: Consumption Support Policies of Various Countries 27
Table 5: Tariff Policies of Selected Countries 30
Table 6: Export Measures of Selected Countries 31
Table 7: Chronology of Policies Governing the Philippine Coconut 35
Industry
List of Box Stories
Box 1: The Rise of Protectionism? RP-EU Trade Relations 31
Box 2: RP-US Trade Regime 32

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 ABBREVIATIONS

ADB - Asian Development Bank

AKI - Angelo King Institute
AMS - Aggregate Measure of Support
AoA - Agreement on Agriculture
ASEAN - ASEAN Free Trade Area –
BoC - Bureau of Customs
BOI - Board of Investment
CAP - Community Agricultural Policy
CCC - Coconut Coordinating Council
CCSF - Coconut Consumer Stabilization Fund
CEDP - Countryside Economic Development Program
CEPT - Common Effective Preferential Tariff
CIDF - Coconut Industry Development Fund
CME - Coco Methyl Ester
CNO - Coconut Oil
COCOFED - Philippine Coconut Producers Federation
COIR - Coconut Industry Reform Movement
COOL - Country-of-Origin Labeling
CSI - Centro Saka, Inc.
DA - Department of Agriculture
EC - European Community
EO - Executive Order
EU - European Union
FAO - Food and Agriculture Organization
FDA - Food and Drug Administration
FGD - Focus Group Discussions
FOB - Freight on Board
GATS - General Agreement on Trade in Services
GATT - General Agreement on Tariffs and Trade
GMO - Genetically Modified Organisms
GMP - Good Manufacturing Practices
GNP - Gross National Product
GSP - Generalized System of Preference
GVA - Gross Value Added
HACCP - Hazard Analysis and Critical Control Point
HDL - High Density Lipoprotein
IPM - Integrated Pest Management
LBP - Land Bank of the Philippines
LDL - Low Density Lipoprotein
MAV - Minimum Access Volume
MFN - Most Favored Nation

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MT - Metric Tons
NACOCO - National Coconut Corporation
NEDA - National Economic Development Authority
DTI - Department of Trade and Industry
NLSF - National Livelihood Support Fund
PCA - Philippine Coconut Authority
PCCI - Philippine Chamber of Commerce and Industry
PCGG - Presidential Commission on Good Government
PD - Presidential Decree
PHILCOA - Philippine Coconut Authority
PHILCORIN - Philippine Coconut Research Institute
RA - Republic Act
RDE - Research & Development and Extension Services
RTD - Round Table Discussions
SND - Special and Differential Treatment
SP - Special Products
SPS - Sanitary Phytosanitary
SSM - Special Safeguard Mechanism
STE - State-Trading Enterprises
SUCs - State Colleges and Universities
TF WAR - Task Force on WTO Agreement on Agriculture
TRQ - Tariff Rate Quota
U-ACT - Universal Access to Competitiveness and Trade
UCAP - United Coconut Association of the Philippines
UCPB - United Coconut Planters Bank
UR - Uruguay Round
US - United States
VCNO - Virgin Coconut Oil
WTO - World Trade Organization

5
I. Background:

In line with the consensus-building program aimed at formulating an industry strategy for
trade negotiations in connection with the recently concluded Hong Kong World Trade
Organization (WTO) Ministerial Conference, the Office of the Special Envoy for
International Trade Negotiations, the Universal Access to Competitiveness and Trade (U-
ACT) Program through the Angelo King Institute (AKI) and the Philippine Chamber of
Commerce and Industry (PCCI) has engaged industry experts to prepare trade
negotiations briefs on 22 industries including coconut, coconut oil, other by-products and
coco-chemicals.

II. Objectives:

The coconut industry briefs should provide assessment of the industry based on the
following:

1. Evaluation of the implications of negotiated formulas and modalities on the

Industry premised on the designation and treatment of Special Products, key
elements of the Special Safeguard Mechanism, SND Framework for three pillars
on domestic support, export competition and market access

2. Analysis of Industry Competitiveness in relation to its experience in the

implementation of the General Agreement on Tariffs and Trade (GATT) and
General Agreement on Trade in Services (GATS) provisions;

3. Technical assistance needed by the industry to effectively adjust to the global

integration and liberalization processes;

4. Strategic framework and industry roadmap for trade negotiations.

These briefs will be the basis for industry consultations and consensus building on
industry adjustment and upgrading issues and trade negotiations recommendations. The
briefs take into consideration the results of the industry focus group discussions (FGDs).

III. Methodology:

1. Review relevant literature with focus on domestic production, consumption,

external trade, problems/constraints, and market potentials.
2. Conduct in-depth interviews, meetings, round table discussions (RTDs) with
various stakeholders (industry associations, farmers’ groups, government
agencies, etc)
3. Evaluate implications of the negotiated formulas and modalities based on the
designation and treatment of Special Products, Special Safeguard Mechanism and
SND framework.

6
 4. Assess past studies including recent FGDs/RTDs, forum or workshop
proceedings, policy/research papers on coconut, technologies generated, new
markets created, and the extent of participation of the private and public sectors.
5. Identify gaps e.g., policy and technology for the coconut industry aimed at
determining targeted interventions and enhancing competitiveness. This may
include value chain analysis and interviews/RTDs with selected stakeholders.
6. Identify strengths and weaknesses of the industry as well as research
complementation efforts to find out what type of technical assistance is required
in order to enhance its competitiveness.
7. Propose framework and roadmap for the coconut industry.

IV. Framework:

Research Framework

Market Access Domestic Support,

Export Competition

Supply Distribution Channel Demand

Support Standards
Productivity

The framework is based on a premise that the issues of the three pillars, namely; market
access, domestic support and export competition could only be addressed if there is an
enabling internal environment and responsive domestic policies that facilitate the
engagement and organization of key stakeholders in the over-all process of the
development of the coconut industry starting from the supply side – distribution channels
to local and international markets. The framework also stresses that while sequencing the
country’s reform process is vital, domestic policies as well as internal and external
inequities should also be addressed.

Looking at productivity as key to competitiveness, various factor and demand conditions

are needed to be considered. Factor conditions include much more than natural
endowments. Natural endowments alone nowadays seldom confer competitive
advantage. Factors can be created, and their quality matters as much as their quantity.

7
The key is to specialize in industries, create a (market) niche, and to continually improve.
Competition is a dynamic process that will quickly erode any advantage an industry has,
if the industry does not continue to innovate.

Domestic demand plays an important role in preparing an industry for competing abroad.
Here again, quality is as important as quantity, perhaps even more so. A nation’s
industries gain competitive advantage if domestic buyers are the worlds most
sophisticated and demanding buyers for the product or service. Furthermore, if the home
market defines what the world market will be, local firms can anticipate global trends. In
this regard, market intelligence is vital in order to anticipate global trends.
Government/business support organizations should gather data on the market trends and
demand and make this available to industry players so that they can innovate accordingly.
This should be made available as part of the domestic support and enhance export
competitiveness and facilitate market access.

Another area is economic dynamism where firm strategy, structure and competition,
public goods and services are the key factors representing the public and private sources
of influence on the business environment.

V. Limitations

The study was basically constrained by the lack of time and mobilization funds. Hence,
secondary data was utilized which was validated by round table discussions and key
informant interviews with industry players including farmers’ groups located within
Metro Manila and Los Banos.

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VI. Executive Summary

In general, agricultural policy was still characterized by high levels of support and
protection around the world. Overall support to producers in developed countries
increased slightly as a percentage of farm receipts in 2003 compared to 2002. Payments
for oilseeds were lower because of stronger prices in 2003. Many developing countries
still maintained high and escalating tariffs for oilseeds and vegetable oils. High levels of
market support and protection encouraged economically inefficient production and
distorted trade. Policy support mechanisms were channeled through production,
marketing, consumption and other related policies.

Trade policies continued to be important tools of importer and exporter countries in

pursuance of national production and consumption goals. Efforts on the part of importers
to capture the added value of crush and refining domestically strengthened seed trade
relative to product trade. WTO member countries have agreed to changes in trade
policies, but any wide-ranging impacts of these changes on trade have not yet been very
visible. Developed countries are either natural exporters or non-producing consumers of
oilseeds; naturally their tariffs have always been low. In developing countries, bound
tariffs have been high, but were rarely applied, leaving room for protective measures.

Despite some changes in the market composition, one characteristic feature of the world
oilseeds market remained that large developing importers were also significant producers.
As a result international trade volumes were only a relatively small fraction of world
consumption. Additionally, these countries did not have the means to support the income
of their farmers directly. They controlled the domestic market price via tariffs and other
border measures. Therefore these countries had a dual objective in their import policies -
assurance of sufficient supply of affordable vegetable oil and protection of domestic
farmers and processors. These applied tariff rates and other import control instruments
were frequently adjusted to react to producer or consumer needs.

Bilateral and regional agreements expanded around the world. While, they have the
potential to increase trade, they may also alter trade patterns. Oilseeds and oilseed
product tariffs were lowered by many countries, but also raised by others. The expansion
of international trade also increased the application of sanitary, phytosanitary (SPS) and
other technical standards and regulations to protect domestic consumers and the
environment. Both developed and developing countries have become increasingly
concerned with these issues and established regulations to prevent imports of sub-
standard goods. Exporters expressed fear that non-tariff measures could also be used to
restrict imports because of WTO commitments to tariff reduction in many importing
countries.

The oilseed, meal and oil complex became increasingly concentrated from a supply
perspective, with the United States, Brazil, and Argentina increasing their market shares
of production and trade. The soybean and soybean meal export sector expanded because
of growth and intensification of livestock production in importing countries. Population

9
and income growth in vegetable oil deficient countries also spurred imports. Some
traditional exporters employed policies taxing exports to assure domestic availabilities
and tax revenues, while others promoted their products to increase exports, particularly in
the vegetable oil market.

Amidst the recent trends in the global market, the Philippine coconut industry continues
to be a significant player in the national and export economy with 331Million bearing
trees spread over 3.258Million hectares (27% of total agricultural land) in 68 provinces
supporting about 25 million Filipinos.

The industry is heavily dependent on the export market at 75% of annual production,
making the Philippines the world leader in coconut trade, the bulk of which is converted
to coconut oil, and hence, the prices of other coconut–based local products are dependent
on the price level of coconut oil. Coconut products continue to be the largest agricultural
export of the country averaging US$748.1M annual revenue over the last 5 years (2001-
2005). It contributes 5.23% to the Agricultural Gross Value Added (GVA), 1% of the
Gross National Product (GNP) annually (1995-2004) and a 2.12% contribution to
merchandise exports. The Philippines accounts for 59% share in the world trade for
coconut (traditional products), exporting 52 coconut products to 63 countries. The
Philippines supplies 64% of the world coconut oil.

Despite the huge income the coconut industry delivers to government coffers, there are
problems and constraints that have not been addressed. These are domestic support to
increase productivity through increased investments in research and development and
extension services on particular coco by-products, enhance diversification of high value
coconut products, provide market access services and uplift living standards of the
coconut farmers. If not urgently addressed, this will adversely affect the competitiveness
of the coconut products wherein the livelihood of 1.4 million farmers and 1.9 million
farm workers largely depend on.

Among the problems and constraints are:

• Lack of access to credit, technology, training, market and information

• Low farm productivity
• Low farm gate price
• Low utilization value of the coconut
• Lack of infrastructure support especially for non-traditional high value by-
products of coconut
• Underinvestment in Research & Development and Extension (RDE) services
• Poverty of the coconut farmers
• Lack of control/ownership of assets by small farmers
• Lack of coherent and predictable policy and strategic plan
• Lack of safety nets covering action and budget plan for UR adjustment measures
• Lack of trade remedies to safeguard against import surges and injuries to domestic
industries

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Among the gaps identified were in the areas of human resource development, knowledge
and know-how/skills, credit, processing/manufacturing technology, common service
facility, marketing, and policies responsive to the coconut industry in general and small
coco farmers in particular.

A strong, responsive and inclusive internal reform would enhance the country’s
productivity and competitiveness which would also be tools for negotiating trade issues
affecting the industry especially in the following three pillars, namely, market access
(SPS and import surge), domestic support and export competition/subsidies via the
various boxes such as the Green, Blue and Amber. Other support policies are also given
by both developed and developing countries in the following areas: production and
indirect production support, indirect income support, marketing support, consumption
support, and import and export measures.

Need for an enabling environment:

Several policy studies have identified the industry’s weaknesses and gaps and have
forwarded a number of recommendations to enhance productivity and competitiveness of
the industry. This paper has validated some of the policy proposals and highlights the
following enablers:

• Improvement of productivity powered by organized and enlightened small coconut

farmers and farm workers;
• Liberation of the small coconut farmers and farm workers from the bondage of the
soil and providing them with the necessary support services (knowledge/training,
technology, and access to market information and capital). This includes facilitation
of the small farmers’ and farm workers’ access to technological research and
development at the ground level.
• Breaking up of merchant monopolies and facilitating organization of cooperatives or
farmers groups as distribution channels/marketing arm.
• Involvement of the small coconut farmers and farm workers in processing, marketing
and management.
• Engagement of the effective participation by the small coconut farmers and farm
workers in governance and policy-making

Complementing an enabling policy environment amidst decreasing competitiveness due

to rising competition, this paper spotlights the following research and development and
extension services strategies aimed at increasing productivity of the coconut farmers,
millers, and processors and add more value to their products.

• Coconut planting/replanting and intercropping (jetropha or tuba-tuba)

• Improved management of coconut farms
• Basic and strategic research on coconut physiology and pest control
• Improvement of processing technologies using biotechnology
• Establishment of integrated coconut processing centers

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• Development of new and novel products and uses (including market testing,
promotion) for downstream high value coconut products focusing on nutraceuticals,
health products, food (coco water), etc.
• Integration of viable enterprise modules
• On health, Clinical research on HIV/AIDS and general effect on immune system
using Virgin Coconut Oil (VCNO)
• New possibilities for value-adding to VCNO
• VCNO quality control and compliance to international standards e.g., HACCP
• Refinement of biofuel technology (coco diesel)
• Facility upgrading and human resource development particularly in the social science
fields

The coconut industry together with the farmers’ groups and national government
agencies believe that the three pillars of market access, domestic support and export
competition cannot be negotiated separately. Reform commitments in the three pillars
must be integrated and interlinked.

The strategy proposed to trade negotiation particularly in the WTO should be coupled
with internal reforms. The two policy areas should be complementary. An unfavorable
external trading regime could roll back internal reforms assuming that the latter is in the
right direction. But it is the internal reforms that build the foundation for a dynamic
agricultural development that enhances the competitiveness of the country’s coconut
products and by-products in a globalizing environment.

Hence, the following strategies on the three pillars are proposed:

Market Access

Market access is the main concern of the industry. Hence, targeted interventions should
focus on enhancing market access. Market access for coconut products also calls for
working with trading partners especially in addressing standards and SPS issues like
cadang-cadang and aflatoxin levels. Hence, the following technical assistance programs
are outlined:
• SPS measures (harmonization with international standards) e.g., European Union
(EU)/European Community (EC) Trade-related Technical Assistance with the
National Economic Development Authority (NEDA), Department of Trade and
Industry (DTI), Department of Agriculture (DA), Bureau of Customs (BoC) for
compliance with EU product standards and SPS requirements aimed at facilitating
trade and customs reforms.
• Technical barriers to trade (overcoming market access)
• Anti-dumping and anti-import surge measures (building up administrative
capacities)
• Tariffs and tariffication measures (understanding and implementation of complex
guidelines and schedules)

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Another concern is tariffication of agricultural products. Current tariffs are basically
simple average of numerous tariff lines. The same tariff is applied to imports (e.g., palm
oil and palm kernel oil) of each trading partner. The challenge is to devise a method of
calculating relative levels of tariff protection between trading partners that distinguishes
between “less important tariffs” and “more important tariffs”.

Domestic Support

In general, the Philippine level of trade-distorting domestic support, in terms of input

subsidies and price support for rice, corn and sugar, totaled P6.0 billion from 1995 to
2000 or P1.0 billion per year. These subsidies are way below the de minimis level of 10
percent of the value of production, and therefore, the Philippines is not obligated to
reduce such support. However, there has been a conscious effort to phase out input
subsidies in favor of a more enduring support for productivity such as irrigation and
market infrastructures. As of date, the applied tariff line of the coconut is 3%. However,
the industry would like to increase its tariffs to its WTO bound tariff line.

In lieu of direct government subsidy, the industry requires technical assistance in the area
of direct investments and development of market place (possible forward market for
major agricultural products like coconut), information technology and e-commerce (e-
trade).

The business support organizations (such as the United Coconut Association of the
Philippines or UCAP) should be able to help organize the farmers and encourage them to
semi-process. For a start, they may inform the farmers of the new market trends, market
demand, standards imposed by importers, etc. Then, they can invest on technologies that
would allow a group/coop of farmers to semi-process. This is a step towards duplicating
what the sugar industry did.

Export Competition/Subsidies

The Philippines did not schedule any export subsidies in its WTO commitments. All
export taxes on agricultural product exports ended in 1996. All export strategies and
implementation are mainly pursued by the private sector with minimum assistance from
Government. The industry supports the elimination of all government subsidies
especially trade-distorting support extended by developed countries to the oilseed sector.
The increasing subsidies by developed countries have resulted in export dumping in
developing countries like the Philippines turning many of these countries into net food
importers undermining their food security and rural development goals. In this regard, the
industry needs to craft a responsive industry strategic plan that would include a roadmap
backed up with a competition policy and resources to increase farmers’ productivity and
enhance their competitiveness.

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VII. Introduction

Oilseeds (also covering oils and meals) are among the most important for world
agriculture and often subject to frequent government interventions. This held true in 2003
and 2004, which were particularly intense years from a policy standpoint. The Philippines
together with other developing countries were still adjusting their policies to meet the
commitments they had taken under the Uruguay Round Agreement on Agriculture
(AoA), a process finally completed in 2004. Meanwhile, both developed and developing
countries were very much engaged in the international trade debate putting an end to the
bi-polarization that had characterized previous rounds of negotiations, when the
contrasting positions of the United States (US) and the EU almost always dominated the
discussions.

Although no final agreement had been reached on the modalities that will govern the
process of global liberalization under the WTO Doha Round, many governments took the
initiative of unilaterally reforming their specific commodity policy regimes. Those
reforms were generally directed towards reducing market distorting policies, in particular
those related with domestic support to producers. The basic principles underlying the
reforms closely followed those devised for the WTO negotiations, with a clear tendency
for governments, especially of developed countries, to curb market-related support to
producers classified as "Amber Box". Generally, partial compensation for the related
losses was granted to producers through larger direct payments under production-limiting
programs classified as "Blue Box", or under fully production-decoupled or minimally
production distorting programs, classified as "Green Box". These tendencies clearly
resulted in a cut in sector-specific support and in an increase of assistance channeled
under non-commodity specific programs.

Many new policy measures were also enacted in response to developments in world
markets. The period witnessed a tightening of market conditions and stronger world
prices in the case of oilseeds, meals and oils (as well as rice and dairy products). For
those commodities experiencing surges in world prices, import tariffs were often reduced
to stabilize domestic prices as a means to reduce the impacts on consumers.

VIII. Profile of the Philippine Coconut Industry

Coconut trees are grown in tropical countries mainly for the high oil content of the
endosperm (copra), which is widely used in both food and non-food industries. Besides
the valuable contents of the nuts, the palm yields husks, shells, leaves and the stem which
are used as raw materials for more than 100 products and by-products including coco
flour, desiccated coconut, coconut milk, coconut chips, candies, bukayo or local
sweetened shredded coconut meat, latik, coconut water, cocochemicals, fodder for
livestock, fuel (charcoal and coco methyl ester or CME), fiber (coir/net), building
materials, household products, health and medicine and nutraceuticals (virgin coconut
oil), among others. Large production areas, in particular, are found along the coastal
regions in the wet tropical areas of Asia in Indonesia, India, Sri Lanka, Malaysia and the

14
Philippines. In these countries millions of people make a living from the coconut palm
and its many products.

A. Domestic Production and Consumption

The industry continues to be a significant player in the national and export economy with
331 Million bearing trees1 spread over 3.258 million hectares (27% of total agricultural
land) in 68 provinces supporting 25 million Filipinos directly or indirectly. In 2005,
national production stood at 2.61 metric tons (MT) copra terms with domestic
consumption at 0.58MT copra terms and exports at 2.072MT copra terms. (See Annex 1:
Philippine Coconut Production)

B. External trade

According to the Philippine Coconut Authority (PCA),2 the industry is heavily dependent
on the export market at 75% of annual production, making the Philippines the world
leader in coconut trade, the bulk of coconut of which is converted into coconut oil, and
hence, the prices of other coconut – based local products are dependent on the price level
of coconut oil. Coconut products continue to be the largest agricultural export of the
country averaging US$748.1M annual revenue over the last 5 years (2001-2005). It
contributes 5.23% to the Agricultural GVA, 1% of the GNP annually (1995-2004) and a
2.12% contribution to merchandise exports. The Philippines accounts for 59% share in
the world trade for coconut (traditional products) and commands 64% share of the world
coconut oil registering a ten year average (1996-2005) of 1,770.74 MMT worth
US$69,043,119,000 (FOB) with desiccated coconut and activated carbon showing
consistent export performances. (See Annex 2: Export of Traditional Coconut Products.)
The non-traditional products which basically consisted of coco chemicals had a ten year
average for the same period of 76.88 MMT with a value of US$7,684,866,000. The
virgin coconut oil (VCNO), the coco biodiesel (CME) and coco coir (geotextile) have
been identified as emerging by-products with potential markets. (See Annex 3: Export of
Non-Traditional Coconut Products).

IX. Problems and Constraints

Despite the known multiple uses of coconut, the industry faces an uncertain future. This
is mainly due to the long neglect of the sector in terms of productivity-enhancing
investments which is fast catching up as regards the growing loss of competitiveness of
the industry in its traditional and non-traditional products and lauric oil. According to the
report of Dr. Intal3, in 2000, the country’s coconut yield was only 75% of Indonesia’s and
63% of India’s. As of 2005 data, Indonesia is now the world’s largest coconut producer
(16,300,000 MT vs RP’s 14,500,000 MT)4 and is projected to replace the Philippines as

1
According to the Coconut Industry Reform Movement (COIR, Inc.), there are about 491 million coconut bearing and non-
bearing trees.
2
Philippine Coconut Authority 2005 Industry Situationer
3
Intal, Ponciano, et al, “Terminal Report: Formulation of Investment Policy Report and Indicative Investment Plan for
Agriculture and Fisheries Research, Development and Extension for 2001-2010
4
www.fao.org

15
the world’s largest exporter of coconut oil in the next decade. (See Annex 4: Philippine
Coconut Productivity vs. Other Countries, 1990, 1995 and 2000 and Annex 5: Ranking of
Countries in Coconut Production: 2005). According to PCA’s Coconut Industry Kit of
2004, palm kernel oil has surpassed coconut oil in terms of total volume in world trade
cornering about 51% of world imports of oils and fats in 2004. (See Annex 6: World
Imports of Oils and Fats, 2000-2004). As regards other major products, Thailand
dominates world’s trade in coconut cream and milk, and Sri Lanka and India dominate
the world trade in coco coir and husk. According to the same report, the most promising
and large lauric oil derivative, the oleochemicals, is increasingly relying on palm kernel
oil and rapeseed oil. The decline in the volume of the cocochemicals exports in the 1990s
contrasts with the emergence of Malaysia as a significant player in the world
oleochemical market is indicative of the loss of competitiveness of the world coconut
industry in general and the Philippine coconut industry in particular.

Both government and industry stakeholders have centered on low productivity as the
main barrier to the industry’s development. Low productivity is tantamount to low
income. In this regard, various solutions have been applied such as fertilization,
replanting programs and reproduction of hybrid varieties to achieve greater yield – the
greater the yield, the higher income for the country.

The industry highlighted the following factors that becloud the future of the country’s
coconut industry:

A. Low farm productivity due to:

1) Senile trees
2) Tall trees: 98% of the total land planted is planted to tall trees which bear fruits
after seven years and yield approximately 0.5 that of hybrids
3) Absence of fertilizer application especially in nutritionally deficient coconut land;
4) Improper harvesting and post-harvest practices resulting in poor copra quality
5) Inadequate intercropping in coconut lands (less than 40% of coconut farmers
practice intercropping)
6) Logging (coco lumber) and shifting into non-coconut

B. Farmers’ Poverty. As to the farmers’ poverty, livelihood projects were part of the
solution. But time and again the coconut farmers were branded as non-bankable and
could not easily avail of loans from neither rural banks nor the United Coconut
Planters Bank (UCPB) itself, which was mandated to solve the perennial credit
problems of the coconut farmers.

C. Value Adding: Farmers especially the small ones sell their copra without any added
value to traders who buy their products at low price. Farmers must add value to their
products by going into semi-processing to enhance the diversification of their
product. This though is hampered by the lack technology and funds to finance this
activity.

16
D. Transport. More feeder roads and irrigation support are needed to coconut farmers to
lower transport costs and increase productivity respectively.

E. Processing
1. Lack of Infrastructure Support
i. Common Service facilities. There are no common drying facilities
made available to farmer groups which could help the small farmers
lower the aflatoxin levels in their copra and be able to produce better
quality coconut coir/husk.
ii. Lack of processing infrastructure in the non-traditional coconut by-
product sector.
b. Under-capacity in the oil milling/desiccated coconut sector. The capacity
of the milling sector is 5 MMT but only about 2.9 MMT was produced in
2005.
2. Underinvestment in Research and Development and Extension Services
i. Basically due to a lack in funds, research, development and extension
services has stayed in the backseat. The bulk of the coconut products
are exported in practically raw form as crude coconut oil, copra meal,
copra, desiccated coconut and young coconuts.
ii. New product discoveries are not adequately disseminated to farmers.
These new innovations should be disseminated widely in order to
encourage farmers to semi-process or diversify their products.
3. Financing
iii. For decades government has allocated minimal funds to develop the
coconut industry.
iv. Banks refuse to extend loans to farmers. These are funds can be used
by farmers in order to increase their productivity. These may finance
their replanting, intercropping, purchasing of fertilizers and semi-
processing and product diversification.

F. Marketing. The supply chain of coconut has a complex marketing channel- from the
points of production to its domestic and international markets. The bulk of copra is
sold to village buyers before the copra reaches the mills. Copra pricing is largely
influenced by world prices of coconut oil as well as domestic copra supply
conditions. However, the multi-layered marketing channels have resulted in reduced
farmers’ income with an average traders’ gap of P2.5/kg of copra, equivalent to 24%
of farmgate price or 20% of millgate price.

a. Low Farm gate prices

i. The problem is caused by so many layers of middlemen, high cost of
transport and handling and cartelized pricing from coconut processors/
exporters.
ii. Zero or very little value adding made by the farmers thus the
proliferation of middlemen.

17
 b. Misconception on the health implications of coco oil. The notion that
“tropical oils are bad, especially coconut oil” has adversely affected the
coconut industry. A recently approved amendment to the US nutritional
labeling policy requires a declaration of trans-fatty acids content on food
labels, separately from saturated fats content. Effectively, this indicates that
US Food and Drug Administration (FDA) agrees that trans fat and saturated
fats are entirely different substances.5 However, the Philippine coconut
industry claims that the new regulation do not distinguish the types of
saturated fats viz. long chain saturated fats (mostly animal fats) and medium
chain saturated fats (coconut oil, palm kernel oil), which have different effects
on blood lipids. Coconut oil contains saturated fats that improve beneficial
cholesterol (HDL), unlike soybean and corn oils, which contain trans-fatty
acids that increase bad cholesterol (LDL).However, the latest American Heart
Association food guide still calls for reduced intake of saturated fats
(irrespective of type) from 10% to 7% of caloric intake.

c. Low domestic demand due to lower prices of palm oil. Only about 20% of
the country’s coconut oil is locally consumed. Recently due to the serious
competition of lauric and vegetable oils in the world market like palm oil and
palm kernel oil, the government is slowly realizing the need for the production
of non-traditional products and by-products from coconut. This is further
enhanced by lower tariff of palm oil products in compliance with ASEAN
Free Trade Area – Common Effective Preferential Tariff (AFTA-CEPT).

X. Market Potentials

World demand for coconut oil is increasing due to coconut oil’s high lauric fatty acid
content for use primarily in detergent and cosmetic industries as well as the surge of
demand for environment- friendly products. There still exist a big market potential for
coco chemicals like fatty alcohols and acids, methyl esters, tertiary amines,
alkanolamides and glycerine. These products are used in various applications such as
soap and detergent production. The industry is also looking at enhancing the market for
coco peat, geotextiles, and activated carbon among other coconut by-products. These
have already found a market in Western Europe, particularly in the United Kingdom; and
the demand is growing in the Middle East, South Korea, Israel, Australia, New Zealand,
Greece, Japan and the U.S. The emergence of new coconut products such as VCNO,
CME, and food and nutraceuticals, etc., opens a lot of windows of opportunities to the
farmers to add value to their products. Given the coconut industry’s immense
contribution to the economy, there should be a solid and greater commitment in the
allocation of financial resources for the sector if we want to tap the full potential of the
“Tree of Life”.

Cognizance of the emergence of non-traditional products, there seems to be a need for

market development and research that gives more emphasis on the use of coconuts for

5
This was UCAP’s position when it participated in the debate when US FDA opened the subject for discussion via its
Advanced Notice of Proposed Rule Making.

18
fresh fruit, milk extraction, coco water, and other food and nutritional by-products and its
industrial uses and positioning these as health and environment-friendly products.

A. Virgin coconut oil: The drugstore in a coco bottle

There had been increased interest in the benefits of virgin coconut oil in the international
and domestic markets. The Philippine VCNO exports from 2001-2005 registered an
average volume of 155 MT worth US$53,676,000 (FOB) with an average growth of
1749% for the said period. The result was an increase in the number of registered VCNO
producers from 45 to 148.

This made the Philippine scientific community busy sifting through scientific truth on
VCNO's health-enhancing claims, as extra caution is being recommended now that new
encouraging prospects drive the oil's popularity. The increasing demand for VCNO
elicited curiosity among small and big entrepreneurs, which renewed vigor in the once
near-stale coconut industry. Coconut farmers now stare at a creamy income-generating
option from the "tree of life" after a long slump. Scientists believe that VCNO provides
many dermatologic and cosmetic uses, improves digestion, nutrient absorption, and even
helps in regular bowel movement. Anecdotal observations suggest that coconut oil
influences the immune system's signaling and repair process. Dr. Dayrit cited in his
paper6 that the latest medical potential of this coconut oil is the anti-bacterial, anti-viral,
and anti-fungal activity of its medium chain fatty acids, particularly lauric acid in its
monoglyceride form. He stated that initial trials the anecdotal reports that coco oil can
beneficially reduce the viral load of HIV patients.

However, the difference in the minor constituents of RBD coconut oil and VCNO has not
been studied, and so with markers for cold-process and heat-process VCNO. To
safeguard and regulate the VCNO subsector, the PCA issued Administrative order no. 01
Series 2005 to enforce standards in the production and marketing of VCNO. Likewise,
the veracity of health claims for VCNO over ordinary coconut oil and the effect of heat
processing still require validation by studies in large number of subjects.7

B. Coco Chemicals

The global concern for the environment has filtered into the country so much so that the
focus of advertisement for cleaning detergents is biodegradability. Food processing,
textile manufacturing and personal care products are shifting to natural chemicals for
medical reasons.

• Coco Biodiesel

Coco Biodiesel (CME) has highlighted the success of tapping alternative fuel source that

6
Dayrit, Conrado,”Coconut Oil in Health and Disease: Its and Monolaurin’s potential as cure for HIV/AIDS”,
http://www.coconutoil.com/Dayrit.pdf
7
Carandang, Aristotle P., “RP Scientists Looking into Vco Health, Commercial Potentials” 06
February 2006, http://www.bic.searca.org/news/2006/feb/phi/06b.html

19
will accelerate our energy independence from the dwindling traditional oil resources in
the world.

The Philippines has launched the use of biodiesel, particularly, CME. CME is derived
from coconut oil and is more appropriately known as Coco-Biodiesel. Compared with
other forms of biodiesels, the medium carbon chain of Coco-Biodiesel offers excellent
lubricity, solvency, and detergency. Studies show that the addition of Coco-Biodiesel
results in better combustion, less pollution, and more engine power; the engines run
smoothly & with longer maintenance intervals. The country’s 10-year average volume of
export from 1996-2005 was accounted at 1,573 MT worth about US$148,266,000 (FOB)
with an average growth rate of -10.24%. The negative growth may be attributed to the
absence of a policy that mandates the use of CME.

With the recent opening of Chemrez Inc.’s P650-million plant, the biggest and most
modern facility in Asia, the Philippines is looking at the US, Australia, China, France,
Netherlands and Italy as potential markets for coco-biodiesel. The country’s existing
export markets are Germany and Japan. The passage of the Bio-Fuels Bill mandating the
use of 1 percent blend of coco-biodiesel will serve as catalyst for the expansion of the
market. The country now produces about 110 million liters of CME per year.

• Refined Glycerine

Glycerine has about 1,500 end-uses which include pharmaceuticals, cosmetics and
toothpaste (28%); tobacco (15%); food (13%); polyether polyols for urethanes (11%) and
the rest for alkyd resins, cellophanes, explosives and other miscellaneous uses throughout
the industry. The Philippines is among the major exporters in Asia of refined vegetable
glycerine from coconut oil, exporting an average of 10,231.74 MT from 1996-2005 with
an annual average growth rate of 4.1% (volume) for the said period. Its major markets are
the Asia and Pacific (76.43%) and US (20.21%). The Philippines also maintains a small
share in the EU and Middle East, Africa and Latin America.

The other two major exporters are Malaysia and Indonesia from palm oil. The US is a net
importer of glycerine and largest tallow-based8 market in the world, collecting large
inputs of refined product from Malaysia and Indonesia. In Europe and US, vegetable-
derived glycerine products for food, cosmetics and toothpaste uses are gaining popularity.

• Fatty Alcohol

In Southeast Asia, vegetable oil such as palm kernel oil and coconut oil are used as the
main raw material for fatty alcohol production. Fatty alcohols are blended with fatty acids
used in the manufacture of esters which are used in cosmetics, soaps, detergents, and
personal care while fatty acids are used for wood preservation. The Philippines ten-year
average export (1996-2005) was recorded at 15,729.98 MT worth around
US$1,699,948.00 with an annual average growth rate of 0.06296% (volume). Its major

8
There are 3 basic types of glycerine based upon derivation: tallow-based, vegetable-based and synthetic.

20
markets include Asia Pacific (57.86%), US (20.29%), EU (16.23) with small market
shares in Latin America, Middle East, and Africa.

In addition to the US, Germany, France, Italy, Spain and the UK are the big five markets
that amounts to over 80% of the EU cosmetic market. In Germany alone, the market
volume for body care products has been estimated at 8 billion Euros.

• Alkanolamide

The increased consumption of nonionic surfactants is due to their use in detergent

formulations. The nonionics most used in detergent formulations include alkanolamide
derivatives of fatty acids. The built nonionic detergents are obtaining an increasingly
large proportion of household laundry market because low foaming detergents are needed
in automatic rotary-drum washing machines. The Philippines ten-year average volume of
export (1996-2005) was recorded at 2,153.93 MT worth US$243,198,000 (FOB).

Industrial detergent uses of nonionics include anti-static action, aw wool scouring in

textile operations, germicidal cleaning in restaurants, removing water-soluble soils in dry
cleaning operations and washing of floors and walls.

C. Coco Coir: RP’s safety nets

Utilization of coir products is ever growing as economically progressive countries have

started shifting from synthetic to natural materials. Global concern for environment
protection necessitates the use of earth-friendly and replenishable products. Creating
value added products from coconut coir and dust create opportunities for small farmers
and their families who weave the erosion control nets on household looms. In addition,
cocopeat (coir dust) is widely used for agriculture and horticulture purposes, having been
accepted as a very good replacement for peat moss. Coir boards are good construction
materials for mass housing.

The country’s latest rated production capacity of coir was estimated at 36,676.8 MT/year.
However, 2005 coir production was only 4,350 MT. Average export volume of coir from
1995-2004 was recorded at 1,501.44 MT with a value of $866,230 (FOB). Tope five
export markets were Japan (30.8%), Taiwan (26.09%), USA (14.96%), PROC (14.37%),
and Australia (4.24%).

According to DTI, the Philippines is expected to generate some $4.3M in revenue and
create 1500 jobs with the export of some 250 metric tons of coco fiber products to China
starting 2006.

D. Coco food for healthy living

Coconuts are both an energy food and a protective food. The mature coconut is an energy
food because it contains a lot of fat. Coconut toddy, coco cream, green nuts and coco
water, among others are health or protective foods because they contain large amounts of

21
vitamins and minerals that are necessary for good health. The Philippines exports coconut
milk powder and liquid coconut milk, coconut flour, makapuno, nata de coco, frozen
coconut meat, coconut water, coconut vinegar and fresh coconuts.

Market trends show that players in the world's $1,000 million market for "sports
beverages" may find themselves facing an unexpected new competitor: coconut water.
The Food and Agriculture Organization (FAO) has taken out a patent - its first ever - on a
new process that would allow manufacturers to bottle coconut water that is biologically
pure, very tasty and full of the salts, sugars and vitamins demanded by both sweating
urban joggers and serious athletes.

Coconut water is a natural isotonic beverage, with the same level of electrolytic balance
as we have in our blood. A new cold sterilization process was invented that retained its
flavor and all its nutritional characteristics. FAO found the answer in microfiltration
technology: filter the water through a medium - such as porcelain or a polyacrylic gel -
that retains all microorganisms and spores and renders the permeate commercially sterile.

XI. Review of Policies and Programs of the Coconut Industry

A number of policies, laws and programs covering the various areas of the coconut
industry have evolved since the Spanish time. The industry has gained some milestones
however the policies have always been geared towards export-orientation, leaving small
coconut farmers who until now still lack access to market, technology, training and
capital and information, at the mercy of middlemen. During the last couple of decades,
80% of raw materials coming from coconuts are exported and the remaining 20% are
processed domestically. Despite the huge income the coconut industry delivers to
government coffers, the problems and constraints identified earlier have not been
effectively addressed. Said perennial concerns particularly domestic support in terms of
productivity enhancing investments and poverty-alleviating mechanisms for the farmers,
if not urgently addressed will adversely affect the competitiveness of the coconut industry
wherein the livelihood of 1.4 million farmers and 1.9 million farm workers largely
depend on.

According to the report prepared by the team of Dr. Ponciano Intal entitled “Formulation
of Investment Policy Report and Indicative Investment Plan for Agriculture and Fisheries
Research, Development and Extension for 2001-2020”, there are two basic but
interrelated factors that should be urgently addressed through responsive policy
interventions, namely, improvement of yield as against the industry’s competitors like
Malaysia and Thailand; and increase in the R&D and extension services in coconut by-
products with higher added value like cocochemicals, VCNO, coco coir, CME and food
and nutraceuticals amidst a declining importance of coconut oil and copra and due to the
rising demand for more competitive alternative products like palm oil and soybean oil in
the vegetable oil market and palm kernel oil and rapeseed oil in the lauric oil market.
Coconut oil competes better in the non-food sector where requirement is more exacting
that is based on chemical properties only unique to palm kernel and coconut oil.
However, it is the unstable supply of coconut oil that pushed coconut end-users to look

22
for other sources of lauric fatty acid.

In addition, the policies and programs of the government have also been influenced by its
trading partners, the advent of globalization, regional integration (ASEAN-AFTA) and
multilateral trade regimes like the WTO.

A. An Overview of International Trade Policies

According to an FAO report9, despite the trend towards liberalization under the WTO
umbrella, oilseed production continued to be influenced by various government support
policies. To stimulate oilcrop production and increase the sector's productivity, various
indirect forms of support (such as input subsidization) were also used. Price support for
oilcrops continued to be applied in some countries (See Annex 7) with a view to
protecting farmers' income and to providing sufficient supplies for domestic markets.
Support policies came in the forms of production support; indirect income support; and
other indirect production support measures; marketing support, consumption support; and
export and import measures.

a. Production Support Policies

Production support policies in a number of countries have been accompanied by

measures to enhance the commercialization of their oilseeds and its by-products. Such
measures included the provision of loans for downstream commercial operations,
transportation and warehouse subsidies, support for product quality control and modern
processing techniques and other measures aimed at adding value to the domestic
production chain and at enhancing competitiveness of the oilcrop sector. (See Table 1)

Table 1: Production Support Policies of Selected Countries

Country Production Support Policy

Thailand The government supports farmers' incomes and market price
stabilization through the imposition of minimum purchase prices at
which crushers have to buy oil palm fruit branches from producers.
China Concerned about the country's increasing dependence on imports, a
multi-pronged program encouraging domestic soybean production is
currently under consideration by the Government. Measures
contemplated include among others, the introduction of forward
contract prices for soybean farmers so as to guarantee a fixed minimum
price at harvest; the improvement of the country's transportation and
marketing infrastructure, as weaknesses in the latter are seriously
hampering the development of domestic markets for oilseeds and its
products; support for research on high-yielding varieties and other
measures to increase profitability in oilcrop production.
India India’s tendency to announce support prices at harvest time and not

9
FAO, “Review of Basic Food Policies”, Commodities and Trade Division, Rome, 2003,
http://www.fao.org/docrep/007/y5073e/y5073e04.htm

23
 before sowing resulted in a reduced influence planting decisions.
Furthermore, oilseed support levels have typically been below those of
other crops, in particular cereals, fruits and vegetables, while state
procurement operations have been very limited in the case of oilcrops.
As a result, the bulk of oilseed cultivation is confined to rain-fed land
and average crop yields remain below the 1 ton/ha mark.
Japan The government supports soybean producer incomes by providing a
subsidy when market prices fall below a target price which reflects the
country's high costs of production. There are no limits to the amount of
production subsidized. Total government outlays for soybean
production subsidies have grown regularly since 1994, and the
incentive offered through these policies appear to be the major factor
behind the strong growth in soybean planted area since the mid 1990s.
EU The government continued to the support production of olive oil with
specific reference support prices. Support to the olive oil sector was
mainly provided in the form of production aid for growers, with public
storage and export subsidization playing a limited role. Although a
system of maximum guaranteed quantities remained in place, most
producing countries continued to exceed their thresholds, irrespective
of the resulting cuts in the level of production aid granted to their
producers.
US The government’s marketing loans for oilseeds and other loan eligible
arable crops, with an impact comparable to that of coupled deficiency
payments, continued to be provided with a view to minimize potential
loan forfeitures and subsequent government accumulation of stocks.
Separate loan rates apply to soybeans, groundnuts and the so-called
'other oilseeds'. In essence, the loan program protects producer incomes
from the impact of low market prices and, as the soybean loan rate was
more attractive than the rates offered for the two main competing crops,
maize and wheat, a steady expansion of soybean plantings occurred.
The resulting supply expansion contributed to price depression as the
marketing loan program prevented the accumulation of public stocks.

b. Indirect Income Support Policies

Under the Uruguay Round AoA and the on-going negotiations within the WTO regarding
further liberalization of agricultural markets, several countries, especially developed
ones, preferred to rely on measures that are exempt from reduction commitments, in
particular income support payments that are not directly linked to production levels or
market prices. In this regard, the 2003 FAO report cited several countries with indirect
income support. (See Table 2.)

24
 Table 2: Indirect Income Support Policies of Selected Countries

Country Indirect Income Support Policy

EU European farmers continued to receive the direct income support payments
introduced in 1992, though the following modifications were introduced in
2000: i) the income stabilizing mechanism adjusting payments upward when
market prices for oilseeds fell was discontinued; ii) the coverage of the
scheme was extended to include also small producers; and iii) over the 2000-
2002 period, oilseed payments were gradually reduced and eventually
aligned with those offered for cereals and other arable crops.

As to production limiting measures, mandatory set-aside of 10 percent of

cultivated land continued to apply to all arable crop producers applying for
direct income support. Furthermore, the ceiling imposed since 1994 on the
EU's total oilseed area remained in place. While this threshold was surpassed
and led to penalties in previous years, the total area under oilcrops has
remained below the ceiling since 1999, largely as a result of the gradual
reduction in compensatory payments for oilseeds.

The EU Commission has submitted a proposal aimed at guaranteeing

farmers - through a single, unified annual income payment per farm not
requiring any production - a stable income, while the allocation of resources
would be driven primarily by market forces. Besides being fully decoupled,
payments would be made conditional on environmental, food safety and
other standards as well as to modulation, which implies ceilings and
progressive reductions on total payments per farm.
US From 1999 to 2001, direct income payments were granted to oilseed farmers
through emergency ad hoc assistance bills. The purpose of these payments,
which where largely decoupled from current production levels, was to assist
producers experiencing poor market conditions. In 2002, this assistance has
been incorporated in new farm legislation (Farm Act Bill) that covers the
period until 2007. While this confirms the emphasis on decoupled income
support measures, it is important to note that, in the new Act, part of the
income support payments are linked directly to the development of domestic
market prices when these fall below established target prices.
Mexico Farmers with a history of soybean production continue to receive direct
payments, which have been adjusted upward in 2001 and 2002. These
payments are not linked to current production levels. The scheme that will
last until 2007 also offers farmers the option of obtaining all future payments
in one amount - an offer meant to stimulate investment in production
diversification and market-oriented ventures.

c. Other Indirect Production Support Measures

The 2003 FAO report noted that various indirect forms of production support continued
to be used, mostly to stimulate productivity and total output of certain oilcrops, thus
raising a country's self-sufficiency level in oilseed products (and reducing import
dependence) and/or increasing exportable surpluses. Often such schemes have been
implemented in combination with measures limiting importation. During the period under
FAO review, the use of improved seed material and other agricultural inputs as well as
oilseed R&D programs continued to receive support in numerous countries including
Indonesia, India, Malaysia, Pakistan, Sri Lanka and Mexico.

25
Furthermore, faced with a general deterioration of market prospects, the coconut industry
continued to receive special attention in major producing countries. In Indonesia, support
measures tended to emphasize intercropping, rehabilitation measures and product
diversification.

Attracted by high productivity levels in oil palm production, a number of countries in

Asia (the Philippines, Thailand), Latin America (Colombia, Suriname) and Africa started
supporting programs to foster the development of oil palm cultivation and marketing,
either to raise availability of domestically produced vegetable oils or to supply the
steadily expanding world market for palm oil. However, in a move that would reduce
production in the short run, to face a period of excess stocks and depressed prices,
Malaysia offered oil palm growers financial incentives for each hectare of land they
replanted, thereby temporarily reducing land under production and thus output. The
replanting of nearly 200,000 hectares was subsidized, and the corresponding reduction in
oil production has been estimated at 540 000 tons, or close to 5 percent of total domestic
output.

d. Marketing Support Policies

Production support policies in a number of countries have been accompanied by

marketing support to enhance the commercialization of oilseeds and by-products e.g.,
provision of loans for downstream commercial operations, transportation and warehouse
subsidies, support for product quality control and modern processing techniques and
other measures aimed at adding value to the domestic production chain and at enhancing
competitiveness of the oilcrop sector. (See Table 3)

Table 3: Marketing Support Policies in Selected Countries

COUNTRY Marketing Support Policies

India The progressive withdrawal from direct market intervention in India has been
accompanied by efforts to guarantee the orderly operation of markets through
various regulatory services such as quality control and certification.
Thailand To support or stabilize domestic palm oil prices, the Government continues to be
ready to carry out palm oil intervention buying at state-determined prices, an
option that was last used in 2001, following a significant drop in farm-gate prices
for oil palm fruit branches.
China The Government has collaborated closely with crushers in the development of a
forward contract price for soybean farmers to stimulate soybean production.
Mexico The government has promoted forward contract purchases and commodity
hedging programs for oilcrops and products.
Malaysia A number of measures were aimed at encouraging the production of highly
processed palm oil products so as to increase trade in finished, high-value
consumer goods.

e. Consumption Support Policies

A number of countries continued to support the use of oils and fats intended for human
consumption with the overall goal of improving the nutritional status and productivity of

26
their people. Specific measures were also related to domestic market and trade policy
goals such as raising consumption from domestic sources and reducing dependency on
imports or ensuring adequate supplies in countries where domestic production is
primarily export oriented. Table 4 shows some of the countries with policies oriented
towards consumption.

Table 4: Consumption Support Policies of Various Countries

Country Consumption Support Policy

India India's food subsidy bill includes provisions for distribution of
vegetable oil below market prices.
Argentina Vegetable oil export charges were raised with a view to protect
consumers from domestic shortages and consequent price surges.
China Consumption of oilcrop products has been promoted e.g., soymilk
and other soy-based food.
EU Legislation has been introduced to improve quality control of olive
oil to protect its consumers.

f. Emerging Policy Trends on New Oilcrop Varieties

A number of countries continued to support R&D and E programs on new end-uses for
oilseeds and its products, in particular for non-food purposes. Of particular relevance at
both the policy as well as the market level are the production of bio-diesel from oilcrops
and the development of new oilcrop varieties and products through genetic modification.

High added value by-products are also emerging like biodiesel. In this regard, an
increasing number of countries, both developed as well as developing, are introducing
policies that encourage the production of bio-diesel from oilcrops. The rationale for
supporting bio-diesel programs is threefold: 1) They are an environmentally friendly
alternative to fuels produced from non-renewable resources; 2) They are from
agricultural feedstocks such as oilcrops offer new outlets for products confronted with
increasingly saturated markets; and 3) Domestic bio-diesel production can help in
reducing dependency on imported petroleum.

It should be noted that, under the prevailing market conditions, regular provision of
public subsidies and/or tax breaks to oil refiners are required to guarantee the economic
viability of bio-diesel production from oilcrops. However, in a number of countries, the
commitment to meet specific targets regarding the reduction of greenhouse gas emissions
has increased the interest in bio-diesel production.

The EU includes some of the world's leading producers of bio-diesel, a result of fiscal
concessions and other national support programs. With regard to Community level
legislation in this area, environmental concerns are playing an increasingly important
role. An alternative fuels directive currently under consideration would establish
minimum levels of biofuels as a proportion of all sales of petrol and diesel from 2005
onward. The current cultivation of energy crops on compulsory set-aside land would not

27
be sufficient to meet the proposed medium term biofuel goals. Currently, about 1 million
ha of arable land are being used to grow crops - primarily rapeseed - for bio-diesel
production. Reportedly, 2010 projections would require between 2 and 4 million hectares
if all bio-diesel were to come from energy crops, or less - but still more than 1 million -
when also recycled cooking oil and other products were used as feedstock. In its latest
review of agricultural policy, the EU Commission has proposed the introduction of a
'carbon credit' which would function like a non-crop specific aid for energy crops. Aid
would be paid to farmers who enter into contracts with biofuel processors. The proposed
maximum supported area is 1.5 million ha.

In the United States, where soyoil is the preferred feedstock for bio-diesel, the production
and consumption of biofuel is encouraged under several programs. Support measures
include tax exemptions, loan guarantees, and direct subsidies for the construction of
refineries and purchasing requirements for certain state and federal agencies. Under the
2002 Farm Act, a program educating government and private entities as well as the
public about the environmental benefits of bio-diesel use has been introduced. Legislation
about future mandatory utilization of renewable fuels is currently under debate. Private
investment into (and output of) oilcrop-based bio-diesel is reported to have increased
substantially in recent years.

Encouraged by supportive government policies, production and use of bio-diesel was also
reported from the Republic of Korea, Thailand, and the Philippines, whereas the
following countries started to support research on vegetable oil-based fuels and/or are
considering the introduction of legislation promoting biofuel utilization: India, Viet Nam,
Mexico, Australia, and Brazil.

In Malaysia, Indonesia and the Philippines, research into the production of diesel from
palm and coconut oil continued to be supported by the government and the private sector
is encouraged to invest into specialized processing plants. Palm oil diesel production is
reported to generate some valuable by-products that could contribute to the self-financing
character of these operations. Future plans to use palm oil diesel as fuel in power plants
could provide an important additional market outlet for palm oil.

In terms of government policies on the production and sale of genetically modified

organisms (GMOs), domestic and international markets for oilcrops and the respective
oils and meals have been increasingly affected by this development because, for crops
like soybean and rapeseed, the share of global supply derived from genetically modified
varieties has expanded strongly. To meet consumer concerns about the safety of GMO
products for humans and the environment numerous governments have introduced
regulations to control the release of GMOs as well as the sale of products derived from
GMOs. In the absence of a binding international treaty to govern domestic legislation in
this area, approval criteria, testing methods, identity preservation and labeling
requirements differ from country to country, and exporting countries are concerned that
national regulations could be used to restrict imports under the guise of food safety
concerns.

28
Some of the world's key exporters of oilseeds and its products such as the United States,
Canada and Argentina, where legislation has favored cultivation of GM varieties and
domestic oilseed output is now dominated by GMO material, are concerned about the
non-approval of new GMO varieties and the introduction of stricter control measures in
the EU. However, using the identity preservation mechanism some producers in these
countries are able to market GMO free products. Also other countries have introduced or
are considering introducing legislation to closely regulate the sale of GMO products.
Among them are several large importers of oilseeds and its products, notably China,
Japan, India, Indonesia, Thailand, the Republic of Korea, Mexico, the Philippines,
Turkey, the Russian Federation and several Eastern European countries. Some exporting
countries are making efforts to gain GMO-free status for certain crops, so as to secure
access to markets requiring non-GMO products. Examples for such production and
exportation of non-GMO oilseed crops include Brazilian soybeans, Australian rapeseed,
and Indian soymeal.

g. Import Measures

Several countries have made active use of import control measures. One of the main
factors triggering this development was the general decline in world market prices for
oilseed products observed during 1999-2001, which strongly stimulated imports, and
adversely affected domestic oilseed production and crushing. Although international
prices started to recover towards the end of the period, many countries have continued to
make use of trade measures to protect their domestic industries from international
competition. However, the recovery in international prices has been rather slow and
world markets continued to be distorted by support programs implemented in some
important exporting countries. Reliance on import control policies to protect domestic
interests has been also related to the reduced use of price guarantee and government
procurement schemes and other forms of direct market intervention.

The 2003 FAO report stated that the main import policy instrument is tariffs, as the
conversion of non-tariff barriers into tariffs mandated by the AoA has now been
completed in most WTO member countries. In general, individual countries' tariff policy
measures have been implemented in compliance with country-specific AoA
commitments, although, during the period under FAO review, several developing
countries decided to raise applied tariff rates to levels close to their AoA bound limits.
Various technical measures, focusing in particular on food safety issues, have played an
important role in the import market for oilseeds and its products.

From mid-2001 onward, duties on most oil imports have been calculated using
government determined base prices rather than actual trade prices - a system introduced
to combat under-invoicing and other irregularities including dumping. For the
importation of certain edible oils, tariff rate quotas with reduced in-quota duties
continued to be applied. However, these quotas have remained underutilized. Tariff
escalation favoring the importation of crude oils over refined oils and thus protecting the
domestic oil refining industry remained in place. The overall tariff structure has favored
the importation of oils over that of oilseeds, which also tended to benefit domestic

29
refiners as opposed to seed crushers. Trade also continued to be affected by several non-
tariff entry barriers, including strict quarantine regulations for oilseeds, labeling
requirements and privileges granted to state trading enterprises. Furthermore, for a short
spell in 2001, vegetable oil imports were permitted only through specific, government
designated ports, and, more recently, the introduction of special safeguard measures as
well as legislation that would ban the importation of oils originating from genetically
modified seeds has been considered. Table 5 shows a number of countries with policies
supporting high tariffs.

Table 5: Tariff Policies of Selected Countries

Country Policies on Tariffs

India One of the world's major consumers and importers of vegetable oil, India’s increased
reliance on tariffs stems from the gradual removal of all quantitative import
restrictions. In recent years, the country has witnessed a surge in cooking oil imports
triggered by relatively low world market prices and by the weak performance of
domestic oilcrop production and low efficiency in domestic processing. In an effort to
stem the flow of imports and the downward pressure on domestic producer prices, the
government has maintained high tariffs on vegetable oils and some other products
(coconut and copra), in some cases raising the rates to the maximum level permitted
under the country's WTO commitments.
China Control over imports continued to be achieved primarily through quantitative import
restrictions, licensing requirements and various non tariff measures. Oilseed (soybean)
imports continued to be particularly affected by these policies. Regarding oilseeds and
its products, China agreed to freeze its relatively low tariff rates on oilseeds and
meals. Furthermore, import market for edible oils is to open up gradually. All
quantitative restrictions applying to the main imported oils are to be phased out by the
year 2006. Binding tariff rate quotas have been put in place for the key imported oils.
The agreed quotas will be above (and the corresponding tariff rates below) those
applied before WTO accession. Oilseed imports also continue to be subject to
stringent phytosanitary regulations, in particular quarantine inspection procedures.
Thailand Tariff rate quotas continued to apply to the key imported oilseeds and vegetable oils.
While in-quota duties were attractive and volumes allowed ample imports remained
subject to control through a quota allocation mechanism. In addition, domestic
purchase obligations for traders importing oils also remained in place. Soymeal
importation has been fully derestricted, although the government remains responsible
for the nomination of importers. With regard to technical measures, starting January
2003, exporters shipping soybeans and soybean meal to Thailand were required to
prove that their products are free from any form of contamination, whereas importers
need to apply for import permits in advance.
Indonesia The government is considering means of controlling soybean importation, including
the introduction of import duties up to the maximum level allowed under the country's
WTO commitments. To allow better monitoring of import flows, since May 2002,
traders who wish to import soybeans (and some other products) were required to be
officially registered.
Mexico Import duties for coconut and palm oil have been raised to the WTO bound rate in an
effort to stimulate production of vegetable oil from domestically grown crops.
Together with new support payments to producers, this measures aims at increasing
the competitiveness of domestic crops at a time when soybean tariffs have been
phased out under the NAFTA and when duties on soybean imports from Brazil have
been reduced significantly due to a new bilateral agreement.
Japan The government continues to protect its crushing industry by applying import charges
on soybean and rapeseed oil at the maximum level allowed under its WTO

30
 commitments, as opposed to oilseeds, which enter the country duty free. Significantly
lower rates are applied to tropical oils, which are neither produced in the country nor
serve as substitutes for domestically produced oils.
EU Non-tariff measures - in particular sanitary and food safety control regulations - have
become increasingly relevant. Furthermore, the application of strict rules on aflatoxin
contamination in groundnuts has led to a temporary halt in groundnut imports from
certain origins. Finally, prospects for trade in genetically modified oilseed varieties
continue to be affected significantly by EU legislation governing the
commercialization of GMO products.
USA Country-of-origin labeling (COOL) requirements have been made stricter for selected
commodities including groundnuts - a measure that could lead to increased
consumption of the domestic product at the expense of imported groundnuts.

To overcome the adverse effects of technical measures on specific trade flows, a number
of countries have entered bilateral agreements on the mutual recognition of sanitary or
related regulations. For example, Brazil and China have reached a joint phytosanitary
accord that will facilitate Brazil's export of soybeans into China.

h. Export Measures

As a result of high export availabilities of oilseed products and below average growth of
import demand, competition for export markets continued to be strong, inducing
countries with export-oriented production to maintain and in some cases increase their
efforts to promote exportation of oilseeds and its products. While use of export
subsidization schemes remained limited, exports have been promoted by a variety of
other incentives. (See Table 6)

Table 6: Export Measures of Selected Countries

Country Export Subsidy Schemes

EU EU's export subsidization scheme for rapeseed, olive oil and butter/butter oil remained
in place. However, in recent years, market conditions did not warrant refunds on
rapeseed and olive oil exports. By contrast, exports of butter and butter oil continued to
rely on subsidies, although overall outlays have remained well below WTO commitment
levels.
USA Exportation of oilseeds and its products continued to be promoted under various
programs, in particular schemes providing export credit guarantees. Under the new 2002
Farm Bill, the said scheme has been expanded through an increase in guarantee
coverage and by increasing the number of eligible commodities and countries. During
the period under review, the oilseeds complex has become the leading commodity group
supported by the scheme, with soybean exports benefiting the most. The oilseeds and
oils sectors also received support through a number of other programs aimed at the
promoting the US agricultural exports, notably the Emerging Markets Program, the
Market Access Program, the Foreign Market Development Program and the Quality
Samples Program. These programs have been reauthorized through 2007 under the new
Farm Bill, including some increase in funding.
Malaysia The 5% export tax applying to refined palm oil was removed in September 2001,
whereas for the years 2001-2003, a certain amount of crude palm oil was allowed to be
exported free of duty. Furthermore, to facilitate export operations, export credit
guarantees continued to be provided to selected importers and government-to-
government barter contracts were signed with India and China. In addition, programs to
stimulate consumption in importing countries were conducted in various nations in Asia,

31
 the Near East and North Africa, and countries interested in improving the
competitiveness of their palm oil industry were provided with technical assistance and
joint venture capital.
Indonesia Export promotion policies concentrated on the negotiation of barter agreements and
joint venture initiatives. In addition, the country's export taxes on the various oil palm
products have been lowered further from the level established in March 2001, with a
view to protect the interests of domestic refiners as well as end-consumers.
China As opposed to partial tax rebates granted previously, exporters of soymeal became
eligible for full reimbursement of value added tax from March 2002 onward - a measure
that was aimed at promoting soymeal exportation and that complemented China's import
policies in favor of the domestic oilseed crushing sector.

Boxes 1 and 2 highlight the export measures of the EU and the US that affect the
Philippine coconut industry.

Box 1
The Rise of Protectionism? The Case of the US and EU

The RP-EU Trade Relations

The EU has a largely open market with a simple average MFN tariff of 4.2%.
However, within the agricultural sector the EU's policy to maintain high levels of self-
sufficiency in primary agricultural products has resulted in above average import
tariffs for agricultural goods, with a simple average estimated at 17.3%. Furthermore
the EU spends US $50 billion on the Community Agricultural Policy (CAP), making
agriculture the EU's largest single expenditure.

The EU has issued a policy allowing the Philippines to enjoy a zero tariff from the
previous five percent effective January 2005 on the export of coconut oil (CNO)
which will give the country an advantage over Indonesian CNO exporters. The EU has
issued a directive reducing tariff of CNO under its GSP (Generalized System of
Preference) compared to the CNO of Indonesian origin effective January 2005.
However, the EU has included CNO to their compliance with the international
standard on aflatoxin level. This might affect the Philippines export to EU which was
recorded around 38 to 40 percent of the 1.1 million MT CNO export to EU as of 2003.

The EU also issued in August 2003 a policy reducing allowable aflatoxin content on
copra meal from around 200 parts per billion (PPB) to a very low 20 PPB. It also
reduced allowable PAH content to 50 PPB on copra meal. However, only the
reduction in allowable PAH content is applicable to CNO. According to UCAP, the
reduction of tolerable limit for aflatoxin to 2o PPB has caused the loss of the EU
market for copra meal. Fortunately, the growing livestock industry in Korea, Vietnam
and other Asian countries has opened an alternative market for copra meal. Per UCAP,
currently there is no officially set maximum tolerance level, although trade groups
(RP’s PCOPA and EU’s FOSFA) have agreed to a 50 PPB threshold based on B(a)P,
above which a penalty system is in place which is slapped on the contract price.

32
 Box 2
RP-US Trade Regime

After 333 years of Spanish colonization, it did not take long for the US to discover the virtues of the
coconut oil, its cooking qualities (flavor, stability, versatility), its food value especially as margarine
and shortening and its industrial uses, particularly that of lauric acid in soap-making. Coconut was
allowed to enter the US untaxed, boosting coconut export earnings from the US by 40% of the total
earnings of the country by 1919.1

However, the growth of the soybean industry and the strong lobby of the American oil producers and
the dairy industry in the US against the Philippine coconut oil importation has led the US Congress to
pass the Revenue Act of 1934 (HR 7835) slapping a three cents per pound excise tax on coconut oil
trebling the price of the coco oil making it uncompetitive. The Filipino coco farmers suffered from the
resulting low prices of the coconut for the next thirty years until finally the Act was repealed in 1966.
A good part of this tax was reverted to the Philippine government during the time of President Quezon
but with string attached, that is, not a single cent should be used for the development of the coconut
industry.

In the 70’s, the continued concerted attacks of the American Soybean Association and other
competitors of the coconut finally succeeded in banishing coconut oil from the American food. It was
during this time that the notion that “tropical oils are bad, especially coconut oil” reached its height.
Starting this period, the US Food and Drug Administration began requiring manufacturers to report the
amount of saturated fat on the final product label. A recently proposed amendment to the US nutritional
labeling policy would add trans-fatty acids to saturated fats on the label without distinction between the
two. The Philippine coconut industry claims that the new amendment would be confusing and
misleading to consumers as it implies both components have identical health impacts; coconut oil
contains saturated fats that improve beneficial cholesterol (HDL), unlike soybean and corn oils, which
contain trans-fatty acids that increase bad cholesterol (LDL). 1

Another case is the ongoing US debate over country-of-origin labeling (COOL). The Farm Security
and Rural Investment Act of 2002 required country-of-origin labels on a wide variety of products. Only
products that originated and were entirely produced in the US could be labeled "Product of USA." US
agricultural industries widely supported the proposed legislation in the name of empowering consumers
through information on the products. The labeling requirements just reflect today's complex supply
chains (e.g., "born in the United States, raised in Canada, processed in the United States"). It can also
be used to discredit or limit market access of agricultural products from developing countries like the
Philippines through a variety of policy instruments, notably stringent SPS regimes.

The recent passage of the US Farm Security and Rural Investment Act (the 2002 Act) which replaced
the Federal Agricultural Improvement Reform Act of 1996 (the 1996 Act) provides a framework for
farm and commodity programs for the period 2002-2007. oilcrop producers continue to remain eligible
for marketing loans and subsidized crop and revenue insurance, some important changes have been
introduced by the 2002 Act: (i) farmers with a recent history of oilseed production are now eligible for
the first time for annual fixed direct payments; (ii) new counter-cyclical payments covering oilseeds
and other arable crops have been introduced; and (iii) the regime for groundnuts has been completely
redesigned. The marketing loan program remains basically unaltered: in essence, when the prevailing
local market price falls below a fixed price (the loan rate), farmers receive the difference. The Direct
Payment Program continues the Production Flexibility Contract payments introduced in 1996 wherein
direct payments are granted regardless of current prices and are meant to assist farmers in adjusting to a
market-oriented environment with less direct government intervention in markets. The newly
introduced counter-cyclical payments replace and regularize the Market Loss Assistance payments
authorized since 1998 through supplemental ad hoc legislation, thus adding an additional safety net
mechanism to the regular US Farm Program. Under this scheme, subsidies are paid when a crop's
"effective price" falls below a fixed target price

33
XII. Policies Governing the Philippine Coconut Industry

The many products from the coconut tree, in particular the oil expressed from the meat of
its mature fruit has provided 3.5 million coco farmers where 85% are small farmers with
employment and livelihood and has helped sustain the healthy lives of the Filipino people
for centuries now. Most of these earnings come from the export of traditional coconut
products such as copra, copra meal, coconut oil and desiccated coconut and lately
emerging high value by-products such as VCNO, CME and geotextile. However, the
Philippines has not been exporting copra since 2003 except for the 38MT exported in
2004. In response to evolving market environment, the Philippine government focused on
strengthening its institutional capabilities; improving productivity; enhancing processing,
utilization and market and development; and increasing international competitiveness.

A. Institutional policies and capabilities of the Philippine government: Tracing

its roots

In 1940, the National Coconut Corporation (NACOCO) was created to promote the
growth and development of the industry. In 1954, it was later renamed as the Philippine
Coconut Administration (PHILCOA) with the same function and responsibilities.

Ten years after, PHILCOA expanded its scope of operations and renamed as Philippine
Coconut Research Institute (PHILCORIN) an agency created to monitor, evaluate and
conduct researches on the coconut.

It was in 1971, at the height of the Period of Expansion when the Coconut Coordinating
Council (CCC) was created in lieu of PHILCORIN and was tasked to supervise,
coordinate and evaluate the implementation of the coconut self-sufficiency program of
the government. In the same year, the Coconut Investment Fund was created to be used
exclusively to pay the subscription by the Philippine government for and in behalf of the
coconut farmers to the capital stock of said company.

PD 232 created the PCA on June 30, 1973 with a Governing Board composed of eleven
members who shall meet as often as a necessary on matters regarding the improvement of
production, processing and marketing. It absorbed and assumed the powers and functions
of the then CCC, the PHILCOA and PHILCORIN. As of date, it is the sole government
agency that is tasked to develop the industry to its full potential in line with the new
vision of a united, globally competitive and efficient coconut industry. But due to lack in
resources, this agency has become ineffective in the delivery of its mission and vision for
the coconut industry.

The creation of the Philippine Coconut Producers Federation or more popularly known as
COCOFED was the only recognized organization representing the coconut farmers. The

34
series of presidential decrees assured COCOFED of its share in investments from the
Coconut Consumer Stabilization Fund (CCSF).

The establishment of the UCPB was made possible also through a Marcos presidential
decree. Coco levy funds were used by the PCA to set up this bank. The UCPB acted as
the financing arm entrusted with a substantial portion of the levy funds. Then later, the
Coconut Industry Development Fund (CIDF) and the Coconut Industry Investment Fund
(CIIF), both coming from the mother CCSF, were formed. In effect, farmers’ money was
deposited to UCPB interest free. The mandated purpose was to provide “permanent
solution to the perennial credit problems of the coconut farmers” (PD 755).10

The Philippine Peasant Institute (now Centro Saka, Inc. or CSI) believed that the policies
of the State adversely affected many coconut-processing industries such as oil mills and
desiccating plants that in 1993, they suffered from shortage of raw material supply and
were operating at rates well below capacity. Some of the coconut factories in Quezon
have to import copra or husked nuts from other provinces as far as Mindanao and
Visayas. This development was confirmed by the Association of Philippine Coconut
Desiccators and by the UCAP.11 Table 7 highlights the policies and laws that were
enacted by the Philippine government.

Table 7: Chronology of Policies Governing the Philippine Coconut Industry

Policy
RA 6260 (1971):
Coconut Investment
Fund
PD 230 (1973): Export
Tax
PD 232
PD 276 (1973): Coconut
Consumer Stabilization
Fund
PD 582 (1974): Coconut
Industry Development
Fund
PD 755 (1975): Credit
Policy (CocoBank)
PD 961 (1976):
Description/Mandate
The Fund was to be used exclusively to pay the subscription by the Philippine
Government for and in behalf of the coconut industry farmers to the capital
stock of said company (the Coconut Investment Company)
The PD amended the Tariff and Customs Code creating Title III in Book I –
Export Tariff set at 6% for copra, 4% for coconut oil, 4% for copra meal and
cake, and 4% for dessicated coconut.
“It shall be the policy of the State to promote the accelerated growth and
development of the coconut and other palm oils industry so that the benefits
of such growth shall accrue to the greatest number”, so that “the coconut
farmers (shall) become participants in, and beneficiaries of, such growth and
development.
This PD established the fund with levy initially at P15/kg of copra resecada or
its equivalent in other coconut products and by-products.
The fund was meant for coconut replanting program. Even with this fund, the
government still relied on a national program using funds from the Small
Coconut Farms Development Program which was implemented using a
US$120 Million load from the WB.
This approved the credit policy as recomm3nded by PCA and provided
readily available credit facilities to the coconut farmers at preferential rates
through the implementation of the “Agreement for the Acquisition of a
Commercial Bank for the benefit of the coconut farmers” executed by the
PCA.
PCA made into an independent public corporation reporting directly to and
supervised by the Office of the President
This Decree was the first codification of the laws dealing with the

10
Faustino, Joey and Corpuz-Aquino, Jowie, “A Vision towards Genuine Development in the Coconut Industry”, COIR,
Inc.
11
ibid

35
 development of the coconut and other palm oil industry.

PD 1468 (1978): Revised Revision of the Code eventually led to the charter of PCA as a public
Coconut Industry Code corporation.
LOI 926 (1978): This addressed the PCA on the rationalization of the Coconut Oil Milling
Creation of UNICOM Industry by providing concrete assistance and support to the cooperative
endeavor.
PD 1841 (1981): This PD created the fund which shall be collected and used for socio-
Coconut Industry economic and development programs for the coconut farmers. In 1986, the
Stabilization Fund government sequestered the various industrial and commercial enterprises
organized and financed with proceeds from the coconut levy.
EO 1016 (1985) The order identified mature coconuts and coconut seedlings as controlled and
prohibited and banned products for exportation and subject to Certificate of
Exemption prior to exportation by the PCA.
PD 1960 (1985) The PD provided for the formation of cooperatives in order to achieve
economies of scale in production, marketing and milling.
E.O. No. 116 (1987) The PCA was officially declared as an attached Agency of the DA. The
declaration of transfer to DA from the Office of the President was enacted to
provide overall coordination and monitoring of policies and programs of
various sectors in agriculture. The attachment was confirmed and
incorporated in the Administrative Code of 1987.
EO 259 (1987) This required the progressive use of coco chemicals as components of soaps,
shampoos and detergents in order to increase local demand for coconut oil.
RA 6657 (1988): In 1989, the Supreme Court declared that the coconut levy funds are clearly
Comprehensive Agrarian affected with public interest and maintained the sequestration of the levies by
Reform Law the PCGG. In 1993, the SC restored PCGG control over the fund and
suspended the lifting of the sequestration.
EO 273 (1990): Value This order provided for a value added tax for a host of agricultural products
Added Tax including copra. Copra producers are exempted from VAT and exporters are
zero rated but prices move down from the top of the marketing chain to farm
gates. Consequently, buyers slapped 10% VAT on farmers via lower price
quotes effectively reducing the incomes of the farmers by at least 10%.
EO 288 (1995) This reduced the duties on imported coconut and copra oil and its fractions. It
aimed at increasing the inflow to the country of said products. The lower tariff
rates allowed the free entry of other vegetable oils such as palm, palm kernel,
soybeans and sunflower seeds.
RA 8048 (1995) The Coconut Preservation Act of 1995 aimed at regulating the cutting of
coconut trees.
EO 277 (1995): Coco This order directed that the funds shall be treated as public funds and to be
Levy as Public Fund used for the purposes they were levied. The pertinent laws specify that the
levies shall be used for the development of the coconut industry and for
investments that will benefit the coconut farmers.
RA 8435 (1997): An act prescribing urgent related measure to modernize the agriculture and
Agriculture and Fisheries fisheries sectors of the country in order to enhance their profitability,
Modernization Act of and prepare said sectors for the challenges of globalization through an
1997 adequate, focused and rational delivery of necessary support
services, appropriating funds therefore and for other purposes.

EO 481 (1998): Use of The order directed the use, disposition, and administration of the coco levy to
the Coco Levy Funds to rehabilitate the coconut industry.
rehabilitate the Industry
EO 312 (2000) Use of the coco levy as emergency measure to alleviate the plight of the
coconut farmers.
EO 313 (2000) Farmers Assistance Fund

36
R.A. 6260 ruled that a levy amounting to P0.55/100 k copra was to be collected on every
first sale. This levy was collected for purposes of putting up capitalization for the
Coconut Investment Company – to be owned, capitalized and administered by the
coconut people. The amount was to be collected for a period of ten years or until the
amount of P100 million is reached. Cocofund receipts were to be issued for this purpose.

However, according to a paper by the COIR entitled “A Vision towards Genuine

Development in the Coconut Industry12, the manner in which the receipts were issued
resulted in a situation wherein the effective owners became hard to determine. Reports
have it that a great volume of the copra purchases at the first sale was without cocofund
receipts. A large quantity of the receipts remained in the warehouses of end-users to
whom the PCA advanced the receipts.i This resulted in the registration of receipts to
non-copra producers as well.

From 1973 - 1982, under the Marcos administration, a coconut levy was imposed via
Presidential Decree 276 as amended. P.D. 276 states that, “a levy, initially, of P15 per
100 kilograms of copra resecada or its equivalent in other coconut products, shall be
imposed on every first sale,” effective August 20, 1973. This levy (CCSF) was initially
intended to subsidize domestic consumption of coconut-based commodities premised on
a crisis brought about by an abnormally high price in the world market for fats and oils.

Same paper also stated that through the issuance of a series of other presidential decrees,
the original purpose was soon changed to “investment for coconut farmers” and made to
appear as “private” funds even though it was exacted from the millions of coconut
farmers. The CCSF levy which started at the rate of P15 ballooned to P100 per 100 kilos
of copra during the nine-year period, depending largely on its export price, or P60 on the
average. The burden was shouldered by the small coconut farmers for the coco levy was
deducted from the usual price of the copra they sell in accordance with the levy rates.

The policy by the Board of Investment (BOI) of allowing the crushing of imported
soybean in the country has seriously threatened the coconut oil in the domestic market.
Since EO 288 reduces the duty on imported soybeans, soybean oil would saturate the
domestic market and may paralyze the coconut oil sales in the local market.

B. Philippine Coconut Programs and Projects

In view of the problems and issues that beset the coconut industry, a number of programs
and research projects have been implemented and conducted, respectively focusing on
coconut processing, crop production and varietal improvement. To date, the PCA has
initiated new programs that include new planting, intercropping, and livestock raising and
growing of oil palm among others to achieve the twin objectives of enhanced
productivity an increased income.

12
Faustino, Joey and Corpuz-Aquino, Jowie, “A Vision towards Genuine Development in the Coconut Industry”, COIR,
Inc.

37
According to the PCA13, the positive record of the coco sector in the face of vagaries of
weather conditions, lack of budget, limited resources, and stiff competition from global
coconut alternatives is the favorable result of the development options adopted which
have significantly contributed to the stable performance of the sector. Based on the 2005
accomplishment report of the PCA, there were about 26 major programs under several
areas, among which are the following:
1. Farm Productivity. The triad objectives of the PCA Strategic Program called
Agribusiness Land Development Program consists of a) increasing the income of
the coconut farmers from P13,000/ha to P28,000/ha in 2006 and P15,000/ha in
2010; b) generate additional 1-3 jobs per hectare; and c) increase coconut
productivity from 638 kg/ha to 2,000 kg/ha by 2010. The strategy calls for
planting and replanting, intercropping (crop and livestock), seed farm
establishment, and rehabilitation thru fertilization.
2. Research and Development through seednut/seedling production, makapuno
commercialization (embryo-cultured makapuno-ECM), cadang-cadang disease
containment and eradication program, ADB-funded PCA-Cogent poverty
alleviation program, and integrated pest management (IPM).
3. Village-level, Small and Medium Enterprise Development involves the whole nut
approach whereby the utilization of husk, kernel shell and water is maximized for
job creation and income augmentation.
a. Husked-based products: husk, coir, fiber, twine.
b. Kernel-based products: VCNO
c. Shell-based products: charcoal
d. Water-based products: vinegar, nata de coco, coco water
4. Trade and Markets includes registration of traders and processors,
investment/trade promotions showcasing the versatility of the coconut in the form
of coco-flour, geotextiles, biologs, coir dust, bath soaps and emerging commercial
winner VCNO, direct copra marketing assistance program, and copra quality
improvement.
5. Farm Services aim at facilitating the organization of new cooperatives,
strengthening of existing ones and accreditation of CFOs/COOPs. This includes
farmers data bank, training of coconut farming and processing technologies and
capability building, extension services, farm mechanization (Small scale irrigation
project), coconut farmers safety net program such as upgraded insurance under
COCOLIFE and micro-finance and credit under UCPB-CIIF, NLSF, PCFC, LBP
and QUEDANCOR, etc.
6. Oil Palm Development Project focuses more on its complementation rather than
competition with the coconut industry.

The Coconut Industry Investment Fund (CIIF) Oil Mills Group, the biggest and the most
integrated conglomerate in the Philippine coconut industry is focused towards the global
competitiveness of the Philippine coconut industry. The group produces clean and quality
products complying with the requirement of Good Manufacturing Practices + Hazard
Analysis and Critical Control Points (GMP+HACCP).

13
Philippine Coconut Authority Accomplishment report: CY 2005

38
The UCPB-CIIF Foundation is the Social Development arm of the UCPB Group. It was
set up in 1997 to carry out the Group's mandate to uplift the living conditions of small
coconut farmers. The Foundation's flagship program for these small farmers is the
Countryside Economic Development Program (CEDP) aimed at transforming the
community of small coconut farmers into a self-reliant economic & social unit. The
CEDP provides a package of assistance that includes technical & management skills
training, market linkages & socialized credit. The assistance is channeled through
accredited farmer cooperatives and rural financial institutions. An apprenticeship
program for children of coconut farmers is also jointly undertaken by the foundation with
Shell Pilipinas Foundation. The scholars train on modern farm techniques and practices,
which they then apply in their communities upon completion of their apprenticeship.

4. Evaluation of Implications of the Negotiated Formulas and Modalities

Based on the Designation and Treatment of Special Products, Special
Safeguard Mechanism and S&D Framework

In 1995 the Philippines acceded to the WTO in the belief that its membership of the
rules-based body would bring about economic benefits, primarily to the rural sector,
through increased efficiency of industries required by exposure to global competition.
Jobs were promised and new industries were expected to emerge. Hence, these are but
some of the parameters that will guide the assessment of the Philippine coconut industry
vis-à-vis WTO commitments.

The implementation of the WTO Uruguay Round commitments in 1995 came with the
increasing realization, especially by the agriculture stakeholders, that the promised gains
were not forthcoming. The liberalization implied by the commitments was perceived as
too fast and beyond the country’s capacity to comply. Serious accusations were made
about the government’s lack of consultation with the affected sectors, and blame directed
towards government negotiators whom stakeholders felt were not only vastly uninformed
about the situation in the field, but were also regarded as ‘blind’ advocates of rapid
liberalization and therefore insensitive to their needs. Stakeholders believed that
inadequate consultation had resulted in this serious disconnection between the
government negotiating position and the complex realities in the field. There was an
immediate call for a participatory and bottom-up approach to the domestic process in
agricultural trade negotiations. In this regard, the Task Force on WTO Agreement on
Agriculture (Re)negotiations (TF-WAR) was established composed of government
agencies, farmers’ groups, people’s organizations, as well as industry groups, for
transparency and representation in the formulation of the Philippine negotiating position
in the new round of WTO talks. The government has also joined like-minded groups like
the G20, CAIRNS Group or organized the SP and SSM Alliance.

After seven years of the Philippines ratification of the GATT-UR, agriculture remains
one of the most contentious issues in the UR round of negotiation that began in 1986 and
still continues to be controversial under the WTO. It should be recalled that the inclusion
of agriculture aims at establishing a “fair and market-oriented trading regime” by
eliminating so-called “trade barriers” and trade-distorting” support in agriculture. The

39
rules by which a more level playing field in the world’s agricultural trading system can
be achieved are outlined in the main (3) pillars of the AoA, namely, market access,
domestic support and export competition.

A. Trade Negotiating Issues

1. Market Access

Market access calls for the tariffication of all non-tariff barriers and the progressive
reduction of tariffs over a period of time. The provisions on the domestic support and
export competition require member states to reduce agriculture subsidies that distort
trade.

Market access is basically the coconut industry’s (UCAP) main concern since around
80% of the country’s coconut products (mainly vegetable oil) are exported abroad
making the coconut under offensive products. However, UCAP noted that there are non-
trade distorting which can also be production distorting barriers in developed countries
like SPS and subsidies. New US FDA regulation requiring the declaration of trans-fatty
acids in food labels became effective January 01, 2006. Trans-fats, which are known to
increase the risk of heart disease, among others, are not present in coconut oil because it
does not need to be partially hydrogenated.

The Philippines together with other WTO members adopted a two-tiered tariff system
(Tariff Rate Quota or TRQ) in which a lower tariff applies below a certain quantitative
limit and higher tariffs to imports beyond that limit.14 According to the DA Policy
Planning Office, tariff levels are to be reduced from the base period levels to a final
bound level by the end of the implementation period. The bound levels set a maximum
tariff that can be imposed by each country but in practice applied tariff level (those that
are actually applied) are often lower in many countries like the Philippines. For instance,
among major importers of palm oil in the country, the bound tariff is higher than the
applied rate.

Countries that undertook tariffication like Indonesia, Korea, Malaysia, Mexico, Thailand,
and the Philippines were required to offer minimum access commitments (or minimum
access volume – MAV) in the AoA. TRQs were generally established for two categories
of agricultural commodities: non-tradables and politically sensitive staples. TRQs are
often reported for agricultural products such as oilseeds. In case of oilseeds, TRQs may
have substituted for state-trading enterprises (STEs) as a way of controlling imports. In
over half of the cases in which TRQs are reportedly being used, applied tariffs are
utilized.

Under the minimum access commitments, UCAP and farmers’ groups like CSI aired their
concerns about the entry of cheaper coconut oil substitutes e.g., palm oil and palm kernel

14
Ash, Mark and Hoffman, Linwood, “Upcoming World Trade Negotiations: Issues for the Oilseed sector,
http://www.ers.usda.gov/briefing/wto/PDF/HOFFMAN2.pdf

40
oil into country. UCAP news15 reported that based on the National Statistics Office
reported that the Philippine import of vegetable oils in March totaled 19,916 MT, rising
modestly by 9.4% from March in 2005 at 18,202 MT. The increase was largely on
account of soybean oil which massively expanded volume last year at 665 MT more than
six-fold to 4,433 MT. Import of palm oil while dropping by 15.2% from 16,759 MT to
14,214 MT remained the leading imported vegetable oil representing 71.4% of aggregate;
soybean oil contributed 22.3%.

The first quarter of 2006 import stood at 63,539 MT, exceeding by 22.1% a similar
period in 2005 volume at 52,058 MT. Palm oil topped the list at 53,106 MT, higher by
26.2% from year-ago. Soybean oil followed at 7,777 MT, a leap by 220.6% from prior
year at 2,426 MT. Respective market shares were 83.5% and 12.2%.

According to UCAP news, Malaysia remained the top supplier of vegetable oils in March
2006 contributing 16,773 MT or 84.2% of total import. Palm oil at 12,360 MT and
soybean oil at 4,161 MT were the major imports from Malaysia respectively comprising
73.7% and 24.8% of total vegetable oils uptake from the country. Other oils from
Malaysia were palm kernel oil (190 MT), rapeseed oil (38 MT), and corn oil (24 MT).

Import from Indonesia was solely palm oil at 1,387 MT sharing 7.0%. Singapore sold
902 MT of vegetable oils consisting of palm oil (480 MT), soybean oil (254 MT),
rapeseed oil (113 MT) and corn oil (55 MT). Completing the top four origins was
Denmark which exported 551 MT. Denmark was the major source of rapeseed oil and
corn oil respectively shipping 359 MT and 192 MT.

The problems arising from an import surge can be serious for country’s vulnerable
coconut sector. The Philippines and its poor coconut farmers have a limited capacity to
adjust to sudden upsurge in agricultural or food supply. The problem may become more
acute if margins between applied and bound tariffs shrink as part of the overall
liberalization of a new round. The issue therefore is whether developing countries should
be given access to a new safeguard instrument designed to allow them to protect
themselves against import surges or periods of unduly low world prices. In this regard,
the Special Safeguard provision contained in Article 5 of the AoA allows the countries
the right to impose additional tariffs to protect local products from sudden import surges
or fall in world prices. Commitment schedules made member states showed that mostly
developed countries availed of this provision and only 21 developing countries were
eligible to use this option.16

2. Domestic Support

All developed countries will make substantial reductions in distorting supports, and those
with higher levels are to make deeper cuts from “bound” rates (the actual levels of
support could be lower than the bound levels). The way to achieve this will include

15
http://www.ucap.org.ph/news2.htm
16
WTO and Philippine Agriculture: Seven years on Unbridled Trade Liberalization and Misery of Small Farmers”,
Development Forum, No.1, Series 2002.

41
reductions both in overall current ceilings (“bound levels”), and in two components —
Amber Box (and de minimis)17 supports. WTO data shows that there are 34 member
countries that can use it but the Philippines is not one of them. The third component, Blue
Box supports18, will be capped; at the moment the Blue Box has no limits. Current
proposals on the de minimis levels include: no change; higher levels for developing
countries and/or transition economies; lower levels or abolition for developed countries,
etc.

Under domestic support, the Aggregate Measure of Support (AMS) will be reduced by
20% from the average base year (1986-1988) in equal installments over six years.
Commitments on domestic support (AMS) in the AoA were made overwhelmingly by
developed countries. While AMS spending in the US and EU was lowered, the Green
Box expenditures inversely increased.19 According to Development Forum (No. 1, Series
2002), the EU, Japan and the US account for 90% of agricultural subsidies. In the US
alone, domestic support to agriculture has risen to US$28B in 2000.

The Philippines under the de mininis is allowed to implement trade-distorting support up

to 10%. The Philippines also supports product-specific commitments under domestic
support. However, the increasing subsidies in developed countries has resulted in export
dumping in developing countries turning many of these countries including the
Philippines into net food importers undermining their food security and rural
development goals.20

The Philippines enjoys AoA’s special differential (S&D) treatment (Green Box) which
comes in the form of longer implementation periods. However, according to the DA
Policy Planning Office, the AoA also provides concessions to developed countries
through the green and blue boxes which are categories of exemptions under the subsidy
reduction rule. These kinds of subsidy are allowed according to the rules if they are
intended to meet social or environmental objectives. However, the DA Policy Planning
Office noted that these boxes are also used to replace the lost production support and
export subsidies of developed countries subjected to reduction under the WTO regime.

While noting the potentials of S&D treatment in the Framework Agreement, the
important objective of developing countries of gaining reduction in trade-distorting
support and protection by developed countries should not be forgotten. The danger for
developing countries is that if too much of their negotiating effort is put into gaining
S&D treatment, less attention might be paid to gaining significant reduction in market
access barriers and tighter controls on domestic support policies in developed countries.21
17
Currently developed countries are allowed a minimal amount of Amber Box support (“de minimis”). For support that is
not given to specific products, this is defined as 5% of the value of total agricultural production. For support given to a
specific product, the limit is 5% of production of that product. Developing countries are allowed up to 10% of these. The
framework says de minimis will be reduced by an amount to be negotiated, with special treatment for developing
countries, which will be exempt if they “allocate almost all de minimis support for subsistence and resource-poor farmers”.
18
In WTO terminology, subsidies in general are identified by “Boxes” which are given the colors of traffic lights: green
(permitted), amber (slow down — i.e. be reduced), blue(production-limiting).
19
WTO and Philippine Agriculture: Seven years on Unbridled Trade Liberalization and Misery of Small Farmers”,
Development Forum, No.1, Series 2002.
20
ibid
21
Matthews, Alan, “Special and Differential Treatment in the WTO Agricultural Negotiations”. Institute of International
Integration Studies Discussion paper No. 61, January 2005

42
Experience to date with the implementation of AoA has revealed a number of major
shortcomings. The huge imbalance in the amount of Green Box and trade-distorting
support provided to developed country farmers/producers compared to that available to
developing country farmers, leaves many developing countries like the Philippines (that
have no safety net in place) fearful that further liberalization of the coconut sector will
place their small farmers exposed to unfair competition like the entry of cheaper palm
and soybean oil and palm kernel oil.

Coconut under Special Products: Opportunity to Strengthen the Industry

To address the sudden upsurge of imports, the Special Products (SP) concept was
introduced in the August 1 Framework Agreement which was agreed by Members as a
modality for further elaboration in the recently adopted framework agreement for the July
2004 Package. It is an S&D treatment mechanism providing flexibility for developing
countries in recognition of the inherent difficulties they face in implementing their WTO
commitments. Under the SP, developing countries will have less onerous commitments in
reducing barriers for certain sensitive products, the number and modality of which are to
be agreed. Paragraph 41 of the Agreed framework states that “developing country
members will have the flexibility to designate an appropriate number of products as
Special Products, based on criteria of food security, livelihood security and rural
development needs. These products will be eligible for more flexible treatment.
Paragraph 7 of the Hong Kong Ministerial Declaration in 2006 states that “developing
country members will have the flexibility to self-designate an appropriate number of
tariff lines as Special Products” guided by indicators based on the said criteria. The
Declaration further states that “Special Products and Special Safeguard Mechanism shall
be integral part of the modalities and the outcome of negotiations in agriculture”.

In this regard, the coconut industry of the Philippines (UCAP) taking into account
growing competition from coconut oil substitutes like palm oil and palm kernel oil
supports the inclusion of the coconut under the SP. They welcome the provision for
longer time frame in order to implement reforms in the industry. However, the concept
of a minimum threshold below which further tariff reductions would not be required does
not appear explicitly but could be incorporated into the treatment for SP. The framework
text also commits to the establishment of SSM for use by developing countries but is
silent on the scope and mechanics of such as mechanism. Along this line, Mr. Raul
Montemayor, Chairman of the Asian Farmers Committee, International Federation of
Agricultural Producers,22 forwarded that SP should automatically enjoy SSM privileges
especially in the case of the price-based SSG which are biased against developing
countries (the case of SSG volume triggers which do not have enough control over import
surges or price decline).

22
Montemayor, Raul, “Possible Modalities for the Special Safeguard Mechanism (SSM)”, delivered before the informal
dialogue on Special Products and the Special Safeguard Mechanism: Strategic Options for Developing Countries, 25
November 2005, Geneva, Switzerland, http://www.ictsd.org/dlogue/2005-11-25/2005-11-25-docu.htm

43
The various stakeholders like UCAP, CSI, COIR, DA and PCA fear that the entry of
coconut oil substitutes and its by-products would eventually displace the coconut oil from
the domestic market. The penetration of substitutes in the country’s domestic market may
lead to permanent changes in the pattern of consumption of the population as well as the
structure of the local processing industry which would increasingly rely on imports for its
operation23 i.e., palm oil used by McDonald’s and Jollibee’s fast food chains. The
flexibilities of the SP provisions should be used to address this situation.

However, there are still some basic issues that are being considered, namely, SP as
exceptions will diminish expected market access gains, south-south trade, either SP or
SSM, linking SP & SSM to market access liberalization, and views on the indicators. In
this regard, several modalities were suggested by various groups allied with the
Philippines, namely:

• The hardline: no further market access commitments for all SPs irrespective of
coverage scope
• Nominal cuts, extended implementation periods, TRQs, indicator
filters/thresholds
• G33: a tiered approach on 20% of agriculture tariff lines as SPs ‘guided by an
illustrative, non-exhaustive, non-prescriptive and non-cumulative list of
indicators’

The following is the G33 flexibility tiers for SPs:

• 50% of SPs (10% of total lines) not subject to tariff reductions
• 15% (3% of total lines) not subject to tariff reductions by virtue of ‘special
circumstances’
• a further 25% (5% of total lines) to be subjected to 5% tariff reduction
• remaining 10% (2% of total lines) to be subjected to 10% tariff reduction

Other treatment elements of G33 include:

• automatic access of SPs to the SSM
• no new TRQ commitments & tariff capping
• exported products with notified product-specific AMS
• one indicator at the national, regional or household level is enough

3. Export Competition

The framework states clearly that all forms of export subsidies (the most trade-distorting)
will be eliminated within a specified schedule. The elimination will work in parallel for
all types of subsidies, including those in government-supported export credit, food aid,
and state-sanctioned exporting monopolies. The negotiations will also develop disciplines
on all export measures whose effects are equivalent to subsidies. The negotiated date will
mark the end of export subsidies as listed in members’ reduction commitments

23
Bernal, Luisa, “Methodology for the Identification of SP and Products for eligibility under SSM by developing countries”,
International Trade in Agriculture and Sustainable Development, October 2005,

44
(“scheduled”); all export credits, export credit guarantees or insurance programs with
repayment periods beyond 180 days; those with shorter repayment periods but failing to
conform with disciplines that are to be negotiated; trade-distorting practices of state
trading enterprises that are considered to be subsidized (“the issue of the future use of
monopoly powers will be subject to further negotiation”); and food aid that does not
conform with various disciplines, which will also be negotiated.

The Philippines supports the elimination of export subsidies over a three-year and six-
year period for developed and developing countries, respectively. UCAP stressed that the
coconut industry does not receive any government subsidies. . All export taxes on
agricultural product exports ended in 1996. PCA reiterated this point and that though
there are research studies funded by both private and government, no export subsidies are
being extended to the coconut sector. According to the PCA, their budget is not even
enough to operationalize their plans and programs yet alone to conduct further research
projects especially on emerging high value coconut products like the VCNO, CME and
cococoir.

The increasing competition from supposedly healthier and cheaper substitutes of coconut
oil like palm oil and palm kernel oil pulled down the prices of coconut oil and other
coconut-based products. The SPS measures under the WTO depressed further prices due
to non-compliance of standards set by importing countries like the US and EU. CSI also
noted that the fixed pricing scheme of palm oil has boosted its competitiveness in the
world market.

5. Identification of Strengths, Gaps and Weaknesses

Amidst the backdrop of globalization, rising competition and the identified issues and
concerns faced by the coconut industry, there is no existing comprehensive industry
strategic plan for the coconut sector that will be able to assess the impact of various
factors like technology adoption, utilization of various traditional and non-traditional and
high value products and by-products, among others. Such a plan should be able to address
the gaps, weaknesses and threats and enhance the industry’s strengths and seize
opportunities offered by the international market. In this regard, this paper has identified
a number of strengths, gaps and weaknesses based on previous studies, interviews and
position papers of various stakeholders.

A. Strengths

1. The Philippines CNO supply is a dominant factor in world price

determination implying that large fluctuations in CNO export supply from
the Philippines could change world CNO price drastically
2. Vast lands planted to coconut
3. Varied products

45
 B. Gaps

1. Human Resource (Capability Building)

a. There is a wide gap between what the Farmers know and the new
trends in industry. They have very little knowledge of what the
market demands, the quantity and the standards impose on his/her
traditional product.
b. There is no value adding at the farmers level, hence they must be
encouraged to semi-process (through common service facilities if
they cannot access credit) their product in order to increase
income. However, this is hampered by several factors e.g., lack of
funds/credit
c. Entrepreneurship among coconut farmers is lacking and should be
developed.

2. Processing/Manufacturing (Technology)
a. New technologies that would allow the Philippines to process
produce and export high – end coconut by-product
b. Common Service facilities that would allow groups of farmers to
semi-process their products.

3. Marketing
a. A very huge gap between the export and domestic market. A
concerted effort between all stakeholders must be made to increase
domestic consumption which would mean lesser reliance on palm
oil or other imported alternatives.
b. Market promotion plan/strategies to expand local consumption of
coconut products is lacking.

4. Productivity. There is a widening gap between the Philippines and a

number of competitor countries across a wide range of coconut products
and by-products

5. Research and Development and Extension Services. There is under

investment in coconut R&D and E resulting in loss of competitiveness of
the country’s coconut products and by-products.

6. Policy. There is a need for a more responsive state policy that protects the
small and vulnerable coconut farmers by providing access to affordable
credit, technology, training, market and information.

C. Weaknesses

The following are some of the key weaknesses of the coconut industry:

46
 1. Minimal domestic market base for coconut products (eg. CNO, coir,
VCNO, CME). As a major supplier of CNO, the country supplies more
than 70% of its traditional coconut products.
2. There is no existing comprehensive competition policy. The country has
so many laws but there is no single body/agency that will be the lead
implementer.
3. Lack of processing technologies in the non-traditional coconut by-
products
4. Lack of competency and knowledge in SPS measures and technical
standards and accreditation

6. Recommendations and Roadmap

The country’s coconut industry with large inter-industry linkages in processing and
manufacturing needs to a have a clear strategy to move forward to address the identified
weaknesses, policy and technological gaps and external threats such as rising competition
from coconut oil substitutes amidst stagnant yield of the country’s coconut. Any strategic
plan will have to have significant impact on the industry’s research and development
program that would boost productivity, enhance competitiveness and empower the small
farmers through increase in their incomes, better quality life and addressing the more
basic issue of asset reform.

A. The Need for Responsive Domestic Support Policies

The study leads to a conclusion that any attempt to enhance market access and boost
competitiveness of the coconut industry should address the basic issues and concerns of
the supply chain which entails the following:

• Improving productivity powered by organized and enlightened small coconut

farmers and farm workers;
• Liberating the small coconut farmers and farm workers from the bondage of the
soil and providing them with the necessary support services (knowledge/training,
technology, and access to market, information and capital);
• Breaking up of merchant monopolies
• Involving the small coconut farmers and farm workers in processing, marketing
and management.
• Facilitating the small farmers’ and farm workers’ access to technological research
and development at the ground level.
• Engaging the effective participation by the small coconut farmers and farm
workers in governance and policy-making.

A close partnership between scientists and coconut farmers is needed to identify and use
the genetic diversity that exists to maximize the productivity of coconut palms for a wide
array of products. Farmers' expertise on characteristics and adaptation of coconut
populations for multiple uses is a vital resource to be maintained along with the diverse

47
populations which can provide the genetic basis upon which future multi-purpose
coconut improvement will depend.

The country’s roadmap should take into account how far should the industry move
towards products with higher value additions like the food and nutritional commodities.
The move towards this direction would require post harvest infrastructure of a totally
different kind of that developed for copra-based marketing system.24

B. Strategies for Negotiations

a. Market Access

Market access is the main concern of the industry. Hence, targeted interventions should
focus on enhancing market access. Market access for coconut products also calls for
working with trading partners especially in addressing standards and SPS issues like
cadang-cadang and aflatoxin levels. Hence, the following technical assistance programs
are outlined:
• SPS measures (harmonization with international standards) e.g., EU/EC Trade-
related Technical Assistance with NEDA, DTI,DA, BoC for compliance with EU
product standards and SPS requirements aimed at facilitating trade and customs
reforms.
• Technical barriers to trade (overcoming market access)
• Tariffs and tariffication measures (understanding and implementation of complex
guidelines and schedules)

As regards applied and bound tariffs for the coconut products, the industry would like to
increase the tariffs of the coconut oil from 3% to its WTO bound tariff line of 15%. They
believe that this would give them more time to strengthen their sector and enhance their
competitiveness.

b. Domestic Support

In general, the Philippine level of trade-distorting domestic support, in terms of input

subsidies and price support for rice, corn and sugar, totaled P6.0 billion from 1995 to
2000 or P1.0 billion per year. These subsidies are way below the de minimis level of 10
percent of the value of production, and therefore, the Philippines is not obligated to
reduce such support. However, there has been a conscious effort to phase out input
subsidies in favor of a more enduring support for productivity such as irrigation and
market infrastructures. The industry supports the inclusion of the coconut under the
Special Products which would provide them more flexibility and time to strengthen the
industry amidst global competitors like palm and soybean oil.

24
Intal, Ponciano, et al, “Terminal report: Formulation of Investment Policy Report and Indicative Investment Plan for
Agriculture and Fisheries Research, Development and Extension for 2001-2010

48
The industry requires technical assistance in the area of direct investments and
development of market place (possible forward market for major agricultural products
like coconut), information technology and e-commerce (e-trade).

The business support organizations (like UCAP) must help organize the farmers and
encourage them to semi-process. For a start, they may inform the farmers of the new
market trends, market demand, standards imposed by importers, etc. Then, they can
invest on technologies that would allow a group/coop of farmers to semi-process, a step
towards duplicating what the sugar industry did.

c. Export Competition/Subsidies

The Philippines did not schedule any export subsidies in its WTO commitments. All
export taxes on agricultural product exports ended in 1996. All export strategies and
implementation are mainly pursued by the private sector with minimum assistance from
Government. The industry supports the elimination of all government subsidies
especially trade-distorting support extended by developed countries to the oilseed sector.
The increasing subsidies by developed countries have resulted in export dumping in
developing countries like the Philippines turning many of these countries into net food
importers undermining their food security and rural development goals.

In this regard, the industry needs to craft a responsive industry strategic plan that would
include a roadmap backed up with a competition policy and resources to increase
farmers’ productivity and enhance their competitiveness.

The country requires assistance to help build the capacities of agencies responsible for
the implementation of legislative policy and technological adjustments in respect of
commitments in WTO including ASEAN-CEPT, particularly in the anti-dumping and
anti-import surge measures (building up administrative capacities), comprehensive
competition law and trade and environment.

In lieu of government subsidies, support is needed in the following RD&E Strategic

Framework for the Coconut Industry:

1. Coconut planting/replanting
2. Improved management of coconut farms
3. Basic and strategic research on coconut physiology and pest control
4. Development of new and novel products and uses for coconuts focusing on
nutraceuticals, health products, etc. (such as coconut water)
5. Integration of viable enterprise modules
6. Establishment of integrated coconut processing centers and modular type dryers
7. Improvement of processing technologies using biotechnology
8. Market testing, development and promotion (downstream high value products)
9. Clinical research on HIV/AIDS and general effect on immune system using
VCNO

49
 10. New possibilities for value-adding to VCNO
11. VCNO quality control and compliance to international standards e.g., GMP and
HACCP
12. Refinement of biofuel technology
13. Market strategy/plan for emerging coconut by-products

To complement the R&D priorities, facility upgrading and human resource development
particularly in the social science fields (especially in government institutions like PCA,
DA, and other SUCs) must be given adequate funding. The limited number of socio-
economic and marketing studies on coconut could be largely attributed to the lack of
qualified manpower.

The strategy to trade negotiation particularly in the WTO should be coupled with internal
reforms. The two policy areas should be complementary. An unfavorable external trading
regime could roll back internal reforms assuming that the latter is in the right direction.
But it is the internal reforms that build the foundation for a dynamic agricultural
development.

The coconut industry together with the farmers’ groups and national government
agencies believe that the three pillars of market access, domestic support and export
competition cannot be negotiated separately. Reform commitments in the three pillars
must be integrated and interlinked.

50
References:
Agriculture Negotiations: Backgrounder, August 2004 Framework: Domestic Support

Ash, Mark and Hoffman, Linwood, “Upcoming World Trade Negotiations: Issues for the Oilseed sector,
http://www.ers.usda.gov/briefing/wto/PDF/HOFFMAN2.pdf

Bernal, Luisa, “Methodology for the Identification of SP and Products for eligibility under SSM by
developing countries”, International Trade in Agriculture and Sustainable Development, October 2005

Carandang, Aristotle P., “RP Scientists Looking into Vco Health, Commercial Potentials” 06 February
2006, http://www.bic.searca.org/news/2006/feb/phi/06b.html

Dampor, Bon Clarence, “Comprehensive Analysis of Asian Coconut oil and Global Competitiveness
Philippine Coconut Products”, Masteral thesis submitted to the Department of Agricultural Economics,
College of Agriculture, UPLB, April 2004

Dayrit, Conrado,”Coconut Oil in Health and Disease: Its and Monolaurin’s potential as cure for
HIV/AIDS”, http://www.coconutoil.com/Dayrit.pdf

FAO, “Review of Basic Food Policies”, Commodities and Trade Division, Rome, 2003 and 2005,
http://www.fao.org/

Faustino, Joey and Corpuz-Aquino, Jowie, “A Vision towards Genuine Development in the Coconut
Industry”, COIR, Inc

http://www.fao.org

http://www.fao.org/docrep/007/y5073e/y5073e04.htm

http://www.icispricing.com/il_shared/Chemicals/glycerine.pdf

http://www.intracen.org/worldtradenet/docs/networking/country_papers/paper_philippines.pdf

http://www.senate.gov.ph/publications/ER%202004-12%20-
%20Third%20Quarter%20Economic%20Report%20Sustaining%20Growth%20in%20Agriculture.pdf

http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp61.pdf

http://www.ucap.org.ph/021005.htm

http://www.ucap.org.ph/030305.htm#wk9nw9

http://www.ucap.org.ph/061704.htm

http://www.ucap.org.ph/news2.htm

http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd27_boxesframework_e.htm

Intal, Ponciano, et al, “Terminal report: Formulation of Investment Policy Report and Indicative Investment
Plan for Agriculture and Fisheries Research, Development and Extension for 2001-2010

Matthews, Alan, “Special and Differential Treatment in the WTO Agricultural Negotiations”. Institute of
International Integration Studies Discussion paper No. 61, January 2005

51
Montemayor, Raul, “Possible Modalities for the Special Safeguard Mechanism (SSM)”, delivered before
the informal dialogue on Special Products and the Special Safeguard Mechanism: Strategic Options for
Developing Countries, 25 November 2005, Geneva, Switzerland, http://www.ictsd.org/dlogue/2005-11-
25/2005-11-25-docu.htm

New Sports Drink: Coconut Water, http://www.fao.org/AG/magazine/9810/spot3.htm

Philippine Coconut Authority 2005 Industry Situationer

Statistically Speaking, http://www.nscb.gov.ph/headlines/StatsSpeak/121304_rav_typhoons.asp

Thornsbury, Suzanne and Fairchild, Gary, “King or Pawn? Consumer Preferences in International Trade”,
http://www.choicesmagazine.org/2004-1/2004-1-07.htm

WTO and Philippine Agriculture: Seven years on Unbridled Trade Liberalization and Misery of Small
Farmers”, Development Forum, No.1, Series 2002.

52
 Annex 1: Philippine Coconut Production

3.5
3
2.5
2
1.5
1
0.5
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Area planted to Coconut (In Million 3.15 3.31 3.1 3.14 3.14 3.15 3.18 3.13 3.14 3.28
Has)
Coconut Production (in MMT, nut 2.2 2.6 2.5 1.37 2.57 2.84 2.32 2.55 2.38 2.6
terms)
Year

Area planted to Coconut (In Million Has) Coconut Production (in MMT, nut terms)

53
 Annex 2: Export of Traditional Coconut Products

1500

1000

500

0
2001 2002 2003 2004 2005
Copra 15.68 2.74 0 0.04 0
Coconut oil 1,417.97 944.66 1,184.11 959.15 1,154.64
Copra meal 753.08 385.45 510.12 364.24 430.29
Desiccated coconut 79.67 106.96 106.94 106.06 125.72

Copra Coconut oil Copra meal

Desiccated coconut Coco shell charcoal Activated Carbon

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 Annex 3: Export of Non-Traditional Coconut Products

60,000.00
50,000.00

40,000.00
30,000.00
Cocochemicals
20,000.00
VCO
10,000.00
CME
0.00 Coco coir
2001 2002 2003 2004 2005
Cocochemicals 27,845.0 37,171.2 44,663.9 48,982.0 58,553.2
VCO 1.8 19.11 102.83 176.61 475.29
CME 0 732.87 688.91 598.13 826.55
Coco coir 3.2 2.3 2.4 3 3

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 Annex 4: Philippine Coconut Productivity vs. Other Countries

(Coconuts yield in MT/ha.)

10.00

8.00

6.00

4.00

2.00

0.00
RP Indonesia India Thailand Malaysia Vietnam China
1995 3.98 5.54 5.25 4.21 4.13 6.74 8.17
2000 4.08 5.80 5.00 4.30 3.88 5.49 9.46

1995 2000

Source: Intal, Ponciano, et al, “Formulation of Investment Policy Report and Indicative Investment Plan for
Agriculture and Fisheries Research, Development and Extension for 2001-2020”

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 Annex 5: Rank of Countries in Coconut Production

Production Production
Rank Commodity
(Int $1000) Footnote (MT) Footnote
1 Indonesia 1,474,172 C 16,300,000 F
2 Philippines 1,311,380 C 14,500,000 F
3 India 859,180 C 9,500,000 F
4 Brazil 274,380 C 3,033,830
5 Sri Lanka 176,358 C 1,950,000 F
6 Thailand 135,660 C 1,500,000 F
7 Mexico 86,732 C 959,000 F
8 Viet Nam 85,014 C 940,000 F
9 Malaysia 64,212 C 710,000 F
10 Papua New Guinea 58,786 C 650,000 F
11 Tanzania, United Rep of 33,463 C 370,000 F
12 Myanmar 31,654 C 350,000 F
13 Vanuatu 28,489 C 315,000 F
14 Ghana 28,489 C 315,000 F
15 China 22,610 C 297,500 F
16 Solomon Islands 24,961 C 276,000 *
17 Mozambique 23,967 C 265,000 F
18 Côte d'Ivoire 21,706 C 240,000 F
19 Dominican Republic 16,279 C 180,000 F
20 Jamaica 15,375 C 170,000 F
No symbol = official * = Unofficial figure
figure C = Calculated figure
F = FAO estimate
Production in Int $1000 have been calculated based on 1999-2001 international prices
Source: http://www.fao.org

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Annex 6: World Imports of Oils and Fats, Annual, 2000-2004 (in ‘000 MT)

60
50
40
30
20
10
0 Sunflowerse other food animal
Soybean Palm Rapeseed Coconut Groundnut non-food oils
ed oils fats/oils

2000 18.4 8.3 42.6 5 5.2 0.7 7.8 1.2 10.9

2001 20.02 6.27 46.22 2.96 5.67 0.003 7.72 0.93 9.57
2002 21.71 5.52 47.44 2.96 4.56 0.58 7.49 0.76 8.98
2003 20.54 6.32 52.30 2.28 4.49 0.48 7.37 0.71 8.16
2004 19.5 5.8 51.2 3.1 3.9 0.5 7.3 0.7 7.9

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 Annex 7: Oilseeds, oils and fats support prices in selected countries

Local currency per tonne US$ per tonne

Commodities/
Countries Real Prices
Nominal Prices Nominal Prices
(deflated by CPI 1995/96=100)
d/
2000 2001 2002 2003 2000 2001 2002 2003 2000 2001 2002 2003
Copra
India (Rupee) 32 500 33 000 33 000 33200 22 569 22 103 21 526 22312 723 699 676 763
Groundnuts
(unshelled)
India (Rupee) 12 200 13 400 13 550 14000 8 472 8 975 8 839 9409 271 284 278 322
a/ (
USA US$ 672 672 disc. disc. 595 578 disc. 672 672 disc. disc.
b/
USA 145 145 disc. disc. 128 125 disc. 145 145 disc. disc.
c/
USA - - 391 353 - - 334 - - 391 353
Olive Oil
EU (Ecu/Euro) 3838 3 838 3 838 3838 3 537 3 448 3 667 3282 3 536 3 434 3 546 4127
Rapeseed
India (Rupee) 11 000 12 000 13 000 13400 7 639 8 037 8 480 9005 245 254 266 308
Pakistan (Rupee) 12 500 12 500 12 500 15750 8 809 8 538 8 401 9746 233 202 208 273
USA (US$) 205 205 205 212 181 176 181 185 205 205 212 212
Soybeans
Brazil (Reals) 162 170 183 250 113 111 113 124 89 72 68 81
India (black) 7 750 7 950 7 950 8400 5 382 5 325 5 186 5645 172 168 163 193
India (yellow) 8 650 8 850 8 850 9300 6 007 5 928 5 773 6250 192 188 181 214
Pakistan 10 250 10 250 10 250 11250 7 223 7 001 6 888 6962 191 165 171 195
Rep. of Korea (grade
2 087 2 296 n.a. n.a 1 718 1 816 n.a. n.a 1 845 1 778 n.a. n.a
2) (000 Won)
USA (US$) 193 193 184 184 171 166 157 160 193 193 184 184
Sunflowerseed
India 11 700 11 850 11 950 12500 8 125 7 937 7 795 8401 260 251 245 287
Pakistan 12 500 12 500 14 000 15750 8 809 8 538 9 409 9746 233 202 233 362
USA 205 205 212 212 181 176 181 185 205 205 212 212
Butter
EU 3282 3282 3282 3282 3025 2949 2879 2807 3024 2937 3032 3529
US (grade A) 1453 1555 1956 2315 1333 1395 1734 2022 1453 1555 1956 2315
Canada (CAD) 5541 5726 5901 6106 5111 5229 5340 5333 3730 3697 3757 4284
n.a. = not available
disc. = discontinued
a/
prices for production within marketing quota
b/
prices for production additional to marketing quota
c/
in 2002, quota related support prices for groundnuts have been replace by a unified loan rate
d/
values are preliminary because at the time of writing indices available did not yet cover the entire year.

Source: http://www.fao.org/docrep/007/y5073e/y5073e04.htm

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