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The
price of a commodity is not always determined by its
production cost. In many cases, an item’s price is
driven largely by what buyers are willing to pay for it,
and this is most evident in biddings and auctions or
open-market trade.
A piece
of clothing, for instance, once owned or worn by royalty
or a celebrity, can sell in the thousands of dollars in
a public auction even if its actual cost may not even
exceed $100. For collectors assign significant value to
the clothing’s ownership lineage, and willingly pay a
premium for the privilege of becoming the item’s next
owner—whether or not the clothing will actually be used
or worn or simply displayed privately or publicly.
For such
is the nature of bidding or auction—success comes to
those who patiently wait for the perfect opportunity to
top the best offer and thus ensure the purchase. And,
evidently, the bidder with deeper pockets enjoys a
distinct competitive advantage.
In the
case of commodities, price largely depends on the
dynamics of demand and supply, and more so on buyers’
appreciation of such dynamics, particularly in the case
of future trades. As one agrees today to consummate a
purchase or a sale of a commodity at a given time in the
future, the contract price today may depend largely on
demand-and-supply circumstances at that future date.
Certain events or factors that will most likely affect
the price in the future will be also considered in the
price—regardless of whether the affect is to raise or
dampen it.
In the
case of rice, when the Philippines went to the global
market this year to close a purchase contract, sellers
realized several factors: (1) Philippine production was
low and a supply shortfall was imminent; (2) the
Philippines has enough foreign exchange considering the
peso’s appreciation against the US dollar and the large
remittances by overseas Filipino workers; (3) grains
were in short supply globally given the significant
increase in food demand with the booming economies of
large-population economies such as China and India; (4)
the Philippines was most likely desperate for supply
given the political ramifications of a rice shortage;
(5) the Philippines was the largest importer of rice
globally; (6) rice- and fertilizer-exporting countries
were slowly but surely temporarily squeezing supply as
they look to ensuring supply stability in their
respective local markets; and (7) in crisis, there is
always a good opportunity to make money, even if such
profit-making venture may be detrimental to others or,
most likely, precipitate another crisis in one way or
another.
As the
Philippines approached the global grains market, sellers
had already second-guessed its intentions and its
weaknesses. As the world’s biggest rice importer went
short of declaring to all that its local production was
in trouble, rice exporters and traders saw an
opportunity to capitalize on the fact that global demand
was outstripping supply—and that those desperate for the
staple, like the Philippines, will most likely pay
through the nose just to secure a steady supply of
grains over the short term. After all, the Arroyo
administration’s own political fortunes seemed to
partially depend on keeping people happy with rice
retailed at government-subsidized prices. Ultimately,
this confluence of events contributed to rising world
rice prices.
The sad
part is that one cannot prohibit or begrudge rice
exporters for seemingly taking advantage of the
situation. Market forces were at play, and the
prevailing price was the result of prevailing
supply-and-demand circumstances. The worst part is that
there are now rumors of how the government may have
agreed to alleged “overpricing” during the purchases
just because some local people were also in the position
to make some money on the side.
More
than a decade ago the
Philippines
faced a crippling power crisis that left many areas,
including Metro Manila, wallowing in darkness.
Industries and businesses closed as a result. This
prompted Congress to grant special or emergency powers
to the Ramos administration if only to resolve the
crisis. And resolved it was, with local and foreign
power companies granted concessions and incentives to
encourage their investment in the power sector.
A decade
later, the country is again facing a possible power
crisis. Meantime, largely because of concessions to
power-industry investors as well as rising oil prices,
Philippine electricity rates are now among the highest
in Asia—high enough to discourage further investments in
power-intensive export industries such as electronics
and garments. Worse, along with allegations of onerous
terms for long-term power contracts, rumors abound of
how some people also made money from the crisis by
monopolizing coal-supply contracts.
Indeed,
in crisis, there is always opportunity. One can only
imagine how the present rice situation, if indeed it is
a legitimate supply crisis and not just the result of
price manipulation, is creating tremendous opportunities
for the unscrupulous both in the government and the
private sector.
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