Chapter One: The Tree of Life

The Philippine coconut industry is a formidable pillar of the national, economic and
cultural heritage of the country.

It is important to the national patrimony, as it is a source of valuable commodity and a

renewable asset, vital components to the building of a strong nation.

The coconut tree is called the tree of life for its myriad uses to humanity. The coconut oil
is valuable as a raw material for several edible and non-edible industrial commodities, such as
margarine and soap, as well as lauric acid or glycerine-based industrial chemicals, i.e. oleo
chemicals. Coconut meat is used as animal feed. Desiccated coconut, a coconut meat
derivative, is used in confectionaries. Coconut water finds use as vinegar and for
intravenous/medical purposes. Other products are charcoal and activated carbon, which are
made from the nut shell, and coconut peat and coconut fibre (coir) which is extracted from the
husk of the fruit and further processed into rubberized coir for car seats, beds carpets and
stuffing materials in mattresses.

Coconut meat derivatives also include coconut chips, virgin oil, and medium chain
triglycerides (MCT). Lately the health benefits of coconut oil have been much publicized.
Research and clinical observation have shown that medium-chain fatty acids, like those found in
coconut oil, may provide a wide range of health benefits.

The growth of the industry has led to the dramatic development of downstream
industries manufacturing soaps, detergents, toiletries, plastic grease, imitation leather,
incendiary materials, synthetic resins, and industrial cosmetics. Some vertical integration has
occurred in the industry which now has a developing oleo-chemical industry.

HISTORY

The colorful history of the Philippine coconut industry is entwined to the important
chapters of history not only of the nations but also the whole world itself.

The five vital phases of the emergence and growth of this industry are categorized as
follows: (1) the periods of emergence; (2) the American colonial period; (3) the post-
independence period; (4) the levy period (5) the present – the recovery and rehabilitation period.
Highlights of these periods are as follows:

EMERGENCE OF AN INDUSTRY – SPANISH COLONIAL RULE (1521 – 1849)

The Spanish colonial government issued edicts decreeing the3 planting of coconut in the
country, even stipulating the number of trees to be planted according to social classes and
imposing on each adult the planting in an area of at least 200 square feet. This period also saw
the introduction of crude coconut oil processing, the exportation of husked nuts and copra, and

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the increased use of coconut in the manufacture of margarine and explosives. Philippine
coconut exports were also granted tariff preference.

AMERICAN COLONIAL PERIOD (1900-1946)

The period of world depression in the early twentieth century cut back the demand of
coconut products despite its preferred position in the U.S. market, which has acquired a taste of
margarine. The two world wars ushered post-war depressions which was most acute after the
First World War. This saw the closure of many mills as demand for coconut-based products
declined. This period also saw the imposition of a U.S. cent excise tax on the so called ‘coconut
cow,” which was perceived to be a threat on the U.S. dairy industry.

POST-LEVY PERIOD (1986-2004)

This saw the end of the levy collections and the restoration of market forces through the
dismantling of the Unicom monopoly. A series of litigation and judicial decisions led to the re-
conversion of the “privatized” coconut levy fund to the government by the Supreme Court.

This also saw the proliferation of small coconut farmer organizations and attempts at
replanting and farm rehabilitation with the support of the World Bank.

INDUSTRY PERFORMANCE

COCONUT PRODUCTION

Coconut production in the Philippines has been stagnant and has been going down
relative to overall world production figures. Indonesia, for instance, now outpaces the
Philippines in terms of

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of the 40 nuts per tree, way below its potential. The major reasons for this underperformance
are:

- The vast majority of the land is planted with unselected seeds with low genetic
potential.
- Poor management practice contributes to the low yields. Only one percent of the
coconut parcels are fertilized, even though this would improve the yield substantially.
Actual labor input has been found to be only 50% of what is recommended and
planting density in some areas is less than that is prescribed.
- One-third of the coconut trees are senile, i.e., they have passed their productive
period.
- Coconut has been planted on land not suitable for the tree crop, such as those in
high areas.

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With active planting, management and adoption of new technology, production could
well increase by 200-300%. A recent study made by the Philippine Coconut Authority
(PCA) showed that after three to four years of fertilization, the average copra yield
increased by 210%.

AREA PLANTED TO COCONUTS

Nearly one-third of 27 percent of the country’s total agricultural land is planted to

coconut. However, coconut hectarage has generally been on the decline. From 3.27
million hectares in 1980, coconut hectarage has decreased to the present level of 3.26
million hectares. On the average, the area planted to coconuts has been falling
annually.

In the Philippines, 68 out of 79 provinces are coconut areas. Of the 3.21 million
hectares of land planted to coconut, more than half or 51.93% (1,641 thousand
hectares) is accounted for by Mindanao, 29% (961 hectares) by Luzon and 19% (612
hectares by the Visayas.

NUMBER OF BEARING TREES

The number of bearing trees, (some 325 million) has declined as a result of
massive factors as the: (1) negative effects of the Agrarian Reform Program; (2) land
conversion for housing and industrial purposes; (3) the shift to the production of other
crops; and (4) the need for immediate cash from the sale of coco lumber.

NUT PRODUCTIVITY PER TREE

The nation harvests about 14 billion nuts. This suffers in comparison with the
average nut productivity of Indonesian and Indian coconut trees, which are in excess of
1 MT per hectare.

COCONUT PROCESSING

Coconut processing is commonly practiced at the farm level. An average of 91

percent of total coconut produced is processed into copra. To a certain extent, village-
level processing of other coconut products, such as nata de coco, coconut vinegar,
coconut oil, coco coir, and coco charcoal is undertaken by small coconut farmers’
organizations or cooperatives. Large-scale coconut processing is generally done by
coconut oil mills, desiccating plants, oleochemical companies and the like.

DISTRIBUTION AND CAPACITIES OF OIL MILLS

As of April 2004, there are 97 oil mills distributed nationwide. Most of the oil mils
are concentrated in the Southern Tagalog region, Northern and Southeastern Mindanao.
Total oil milling

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DOMESTIC CONSUMPTION

In the period 1990 – 1997, domestic consumption of manufactured coconut oil in

copra terms exhibited an increase of 4.1%, home-made oil with 2.6%, and food nuts by
1%. In 2003, coconut oil for oleo chemical manufacture accounted for 33% of local
consumption.

EXPORTS

At current prices, coconut products are among the top ten agricultural exports in
the country. On the average, the Philippines exports 80 percent of total coconut output.
Coconut products accounts for the biggest share of the country’s agricultural commodity
exports. Export earnings reached an aggregate value of US$ 771.11 million during the
period 1994-2003. This accounted for approximately 5 percent of the country’s
merchandise export earnings and 10 percent of the total export earnings generated from
the top ten agricultural crops in the same period.

The Philippines is among the world’s largest producers and exporters of coconut
products. It accounts for 23 percent of world production and ___ percent of world
exports. Until recently, the country used to supply more than 80 percent of the world’s
total export requirements for coconut products. The Philippines also holds the distinction
of being the top exporter of coconut oil in the world.

The coconut export mix consists of traditional and non-traditional coconut

products. Traditional coconut products like copra, coconut oil, desiccated coconut, and
copra meat account for 90 percent of total export earnings and the remaining 10 percent
is from non-traditional coconut products, such as oleo chemicals, refined glycerine, nata
de coco, coco cream powder, alkanolamide, makapuno and liquid coconut milk (Table
3). The United States is the primary market, accounting for about half of

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There is big market potential for coco chemicals like fatty alcohols and acids,
methyl esters, tertiary amines, alkanomides and glycerin. These products are used in
various applications such as soap and detergent production.

When further processed downstream, coco chemicals serve as ingredients in

cream, shampoo and toothpaste formulations and other cosmetic products. Coconut
chemicals are also used in the manufacture of lubricants, paints, plasticizers, textile and
leather auxiliaries, cellophane manufacture, and explosives, among others.

At the local front, the commercialization of coconut flour as well as greater use
for coconut is being pursued.

MARKETING CHANNELS

Coconut has multi-layered and complex marketing channels, from the points of
production to domestic and international markets (Figure I-1). The bulk of copra is sold

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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.

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The coconut industry contributes about 6 percent to the country’s agriculture

gross value added (GVA) and 1.2 percent to the gross national product (GNP).

Coconut oil is one of the country’s primary export earners. Moreover, Philippine
coconut products account for 5.4 percent of world coconut exports. It is among the top
net foreign exchange earners with average earnings of over US$ 750 million annually.
The Philippines is, in fact, the largest exporter of coconut products and the second
largest producer of coconut in the world, after Indonesia, accounting for 23 percent of
global output.

Coconut production (in copra terms) accounts for 3.83 percent of total production
of agricultural crops. An estimated 18 million Filipinos are directly or indirectly
dependent on the sector. Majority are small farmers and rural workers who comprise 70
percent of the population with incomes below the poverty line. There are some 3.4
million coconut farmers of which 1.9 are farm workers. Considered the poorest among
the poor, they have an average income of only P10, 000/ha/year.

Moreover, it can be said that the coconut sector is a veritable microcosm of

Filipino society. The problems and issues confronting it reflect the challenges the nation
faces. The most prominent challenge is the maldistribution of nation’s resources.

Some 80 percent of the total agricultural land of 12.2 million hectares belongs to
only 20 percent of the population. Following the same iniquitous pattern in land
ownership is income distribution. The widening gap between the very rich and very poor
is glaring. On top of this, people in the countryside are deprived of basic social services
such as health, education, nutrition, sanitation, electricity, communication and
employment.

As such, the state of poverty among the small coconut farmers is characterized
not only by subsistence or hunger, but also by powerlessness and lack of human dignity.

Socioeconomic disparities are magnified in the sector. While it accounts for 3.21
million hectares of agricultural land, only on third (or 1.06 million hectares) is held by the
majority (or 91%) of coconut farmers, who each own five hectares or less. The small
holders who comprise some three-fourths of the coconut farm population are without
ready access to vital farm inputs. Unorganized and unrepresented, they are vulnerable
to exploitation. The small coconut farmers wield little power to influence decisions
affecting their lives and to bargain for needs that would work to their advantage.

The Philippine coconut industry is a vital natural resource abundant in the

countryside. If properly harnessed, it can be the driving force to attain sustainable and
equitable agro-industrial development, consistent with the national strategy to deliver

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from poverty and uplift the quality of life of millions of Filipino coconut farmers and their
families.

The right policy initiatives and programs can transform the coconut-producing
regions into centers of economic growth with globally competitive coconut and related
industries clustering in the countryside.

Fifty percent (50%) of the national labor force live in the countryside whereas 20
million Filipinos are affected directly or indirectly by the coconut industry. Development
of the industry will engender rural employment and will optimize farm labor resulting from
farm productivity, crop diversity and high-value coconut production.

Encouraging the growth of coconut-based enterprises in the countryside will

discourage the exodus into urban areas and end the diaspora of Overseas Filipino
Workers. Rural labor will have to be trained to acquire proper skills and know-how to
achieve high productivity and global quality and to meet the labor standards of emerging
new coconut-based industries.

Other benefits of the coconut industry are as follows:

1. Food and Fuel Security

In addition to the traditional food uses of the coconut, the value and income from
livestock raising and intercrops compatible in coconut farms will guarantee decent
minimum sustenance for millions of households in coconut communities.

Vegetable oil, charcoal and husks from the coconut are proven alternative fuels
for household, industrial and automotive uses. In times of fuel crisis, the country can
draw from its indigenous, renewable and environment-friendly energy source, the
coconut.

2. Ecology

The 300 million coconut trees today plus the millions more coconut from
replanting will conserve and promote a sustainable and ecologically sound agro-
industrial development of the industry.

3. International Trade and Investment

The Philippines can keep its leadership and regain the pride of the
coconut industry, as the number one and most reliable and long-term producer of
coconut products in the world market. The industry can continue as a leading
and stable source of foreign exchange with new and high-value products to
present and non-traditional markets. The Philippines can be the haven of
coconut processing with modern and cost-effective technologies from Philippine
and foreign investors and inventors.

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 4. Peace and Order

Social unrest prevalent in certain coconut regions will be addressed. A

balanced and equitable development of the coconut industry will largely support
our national aspiration for a just and lasting peace. Political stability in these
areas will reinforce and accelerate development of the industry.

5. ASEAN Regional Complementation

The Philippine coconut industry has its industry peers in many ASEAN countries.
The industry can be a common focus to foster economic cooperation and promote
the cause of ASEAN, peace, trade, and investment in the region.

PROBLEM OF THE INDUSTRY

The problems confronting the coconut industry revolve around low productivity and low
farm incomes. But a closer look will show that the industry is confronted with a multi-faceted
malaise, including excess capacity, financial access and inefficient supply system.

1. Low Productivity

Coconut production has been on the decline. The problem of low productivity and
stagnant production, whether in terms of declining coconut production, coconut
hectarage, number of bearing trees or nut productivity per year, can be attributed to
the following factors:

a. Low-yielding coconut varieties

There is a widespread use of low-yielding coconut varieties due to the lack of quality
coconut seedlings. More than 98 percent of the total coconut land area is planted to
tall trees which bear fruit after seven years and reach senility after 60 years.
Moreover, yield is approximately one-half that of hybrids.

At the same time, yields have stagnated or even fallen slightly in recent years.
Annual mean nut production per palm was around 50 units during the 1980s.

b. Poor agronomic or farm management practices

Most coconut areas are dependent on rainfall or have irrigation system. Moreover,
only one percent of the coconut parcels regularly receive fertilizer (Manicad, 1993).

c. Senility of coconut trees

Based on PCA estimates, about 25 percent of coconut bearing trees are senile or
over 60 years old. The existing coconut plantations in the Philippines, primarily local
varieties, are ageing, and too little replanting is carried out to prevent a reduction in
the total area under coconut. The area under coconut in the Philippines, which has
remained stable at around 3.3 million hectares since the early 1980s, has fallen by
10 percent since 1988. Today, around 3 million hectares of coconut trees remain.

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d. Unsuitable land or poor soil nutrition

Due to years of neglect, the soil fertility of most coconut farms in the country has
remarkably deteriorated resulting in low coconut productivity. A Philippine Coconut
Authority study showed that widespread deficiencies in nitrogen, chloride, sulfur and
potassium caused low yields in many coconut areas in the country. Nutritional
deficiency can reduce coconut productivity by about one ton of copra per year.

e. Indiscriminate cutting of trees

As of 1996, 2.5 million hectares of coconut trees have been cut, half of which were
still considered productive. Among the reasons for the unabated cutting of coconut
trees are: a) the forest log ban made traditional forest lumber very scarce, thus the
demand for coconut lumber grew; b) correspondingly, farmers received higher
incomes from coco lumber compared to the low price of coconut; c) in an effort to
evade land reform under the CARP (or the Comprehensive Agrarian Reform
Program), some landlords cut their coconut trees or converted their coconut lands;
and d) Senility of trees.

f. Land conversion of coconut lands

Aside from escaping the coverage of the CARP, coconut lands have been converted
to producing other more profitable crops or to non-agricultural uses especially in
areas where massive felling of coconut trees has occurred.

g. Infrastructure constraints

Poor rural infrastructure hinders the development of rural markets for farmers’
products, both from coconut and intercrops. Due to lack of funding, the provision of
irrigation support to small farmers and the construction of feeder roads and building
facilities have not been carried out or completed. This has kept the transportation
and storage costs at a very high level, which puts an additional downward pressure
on farmgate prices. This also implies that the poor farmer who lacks means of
transportation has no other choice than to sell his/her produce via a middleman.

h. Natural calamities

Weather disturbance also have an adverse impact on coconut production.

i. Lack of access to credit from formal sources

Small farmers have poor access, if at all, to capital for investing in modern coconut
varieties or technologies and cannot afford to wait for the seven-year maturation of
coconut trees that replanting requires. They lack sustained access to credit from
formal source, considering that banks generally regard small-farmer lending as risky.
Farmers have no access to institutional credit because they are not entitled to land,
especially in the case of tenants or land under the land reform program.

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j. Lack of resources for research and extension services

Resources for research and extension work, especially in the continuing value
formation, technical skills, and entrepreneurial skills development of small coconut
farmers, have been inadequate. Moreover, there is no efficient and effective
mechanism for the transfer of technology, which makes adoption of modern
technologies slow.

k. Tenure-related problems

Majority of producers are small-scale coconut farmers, but there is a small minority
which controls half of the coconut lands in the country. The landed elite have
minimal investments in coconut production and copra drying because they receive
income from rental payments and lucrative trading.

l. Inadequate intercropping in coconut lands

Studies show that less than 40 percent of the coconut farmers in the country practice
intercropping. Of the 3.1 million hectares planted to coconut, 70 percent is not
intercropped. This is partly explained by the fact that many landlords prohibit
intercropping because they fear that this will affect coconut productivity and that their
land will be easily subjected to land reform. Another reason for the failure to practice
intercropping is the lack of capital among small coconut farmers and the difficulty in
finding markets for the intercrops.

a. Low Farm Incomes

Statistics show that about 90 percent of coconut farmers live below the poverty line.
In the last two decades, coconut farmer and workers have not experienced any
improvement of their real income from coconut production. Moreover, it is
impossible to support a family only on income from small-holder coconut farming.
This in turn impedes producing more and investing in productivity.

Apart from low incomes, there is also an inequitable distribution structure. Data from
the Department of Agriculture indicate that the coconut industry is marked by a highly
skewed distribution of income. Traders and processors who make up 2.5 percent of
the industry get 26 percent of the income. Large coconut farm owners who make up
8.5 percent of the industry get 49 percent of the industry income. The remaining 25
percent of the income is divided among 89 percent of families of small coconut
farmers and farm workers.

The general lack of efficient cultural and management practices contributes to the
low income of coconut farmers. Although plowing, cover cropping and fertilization
either alone or in combination with each other, would increase the yield of coconut
trees, most coconut farms use none or very little of these cultural practices.

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Other contributing factors to low income are:

a. Subsistence farming

The major causes of low farmer incomes can be attributed to about 90 percent of the
farms which are engaged in subsistence farming.

b. Tenancy

Tenancy under very unfavorable sharing arrangements is still widespread. The

perpetuation of all disincentives for productivity and quality-enhancing activities and
the lack of access to institutional credit due to non-entitlement to land, results in a
very low income.

c. Inefficient marketing system

Coconut farmers are also besieged by marketing problems such as the low and
unstable farmgate prices of their produce. This is attributed to a number of
marketing inefficiencies in the industry such as many layers of middlemen, expensive
transport and handling costs, cartelized pricing from coconut processors/exporters,
and lack of an effective market information system.

d. Concentration of market power

Market power in the coconut industry is concentrated in the traders. Copra traders
link farms to the oil mills and stabilize copra supply to these mills. But there is often
only one or a few price-dictating traders, while the farmers are generally numerous
and have no option but to take prices as given. In effect, traders have market power
to extract considerable surpluses from copra markets, thereby eroding farmer’s
incomes, despite favorable market prices elsewhere.

The prevailing cash-advance system hinders the development of a truly efficient

market and deprives the farmer of other outlets for their produce and opportunities to
obtain a better price. The “pasa” pricing system with its arbitrary deductions persists
despite PCA regulations, further depressing farmgate prices. Moreover, cartels
operating in the towns and provinces have given the middlemen the opportunity to
extract excess profits by depressing producer prices.

The price system hardly responds to farmers’ welfare considerations and farmers
have no incentive to improve productivity. Moreover, traders often delay purchase to
hold copra farmgate prices down.

e. Fluctuating production

The problem of low and fluctuating production has in turn resulted in uncompetitive
prices of coconut products. For example, in the past few years, coconut oil prices
have surpassed those of competing raw materials such as ethylene products.

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 Coconut oil export prices are generally higher than those of the other vegetable oils
in the world markets. The rapid expansion of palm kernel oil production, initial copra
quality, and the complexity of the marketing circuit (large number of middlemen and
excessively long transport times) lead to substantial deterioration, which in turn
results in weight losses.

2. Excess Capacity

There is a significant excess crushing capacity in the Philippines in relation to copra

production. In three of the last eight years only 50 percent of the total crushing
capacity has been used, with most of the other years running at below 40 percent.
The shortage of copra for oil extraction began at the end of the 1970s and the early
1980s and has since worsened due to the combined effect of stagnating nut
production and the installation of new crushing plants. However, it is worth noting
that these new units are generally smaller than the old ones.

As the oil mills in the Philippines are large and relatively few, it is easy for them to get
together to prevent a price war. This collusion has developed into a monopoly in the
case of the Coconut Industry Investment Fund oil mills. Coconut oil suppliers to the
world market have to contend with numerous natural or synthetic substitutes.

The main consequence of under-used installations is the abandonment of the quality

criterion for copra purchasing. The resulting quality problems are high oil acidity and
high aflatoxin levels in the cake. The existence of aflatoxin in cake could be a
serious handicap for its main use as animal feed.

The poor reputation of Philippine copra is a serious obstacle to any attempts to

promote by-products, such as copra cake. Given the strong competition from other
oil cakes or from better quality copra, an increasing concern about health and diet
leading to more stringent quality criteria could well prompt importers to look for other
sources of supply.

As they cannot speculate on world market prices and have limited bargaining power
for copra purchases, traders see reducing production costs as a way of making
profits. This results in a halt to investments, a reduction in wage expenditure, and
the closure of non-viable units. Under these circumstances, quality aspects take the
backseat. Building up considerable stocks, traders can in fact stop buying for a while
to bring down the price paid to producers. As with the industrialists, quality aspects
are a minor worry to traders.

From farm levels to mill gates, the marketing chain is made circuitous by layers of
middlemen, leaving farmers as residual claimants to the final value of their products.

A circuitous marketing system for the commodity that passes through so many
channels brought about by transportation and warehousing deficiencies and
inadequacy in infrastructure, leaves the farmer a residual claimant to the final value
of his product.

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 Reacting to all these problems, the coconut farmer is cutting down his trees.
According to reports from the Philippine Coconut Authority, coconuts are being cut at
the rate of 1.5 million trees a year. With 75 million or 25 percent of the 300 million
coconut trees barren and unproductive, a big threat to the supply capability of the
industry now looms large in the horizon.

3. Problems of Financial Access

The problem of rural credit is not mainly a financial problem, i.e., a problem of
lending funds and their recovery. Cooperative/commercial banks have historically
given no thought to organizing small/marginal farmers to enable them to get
necessary credit and convert credit into various farm inputs and to help them in
marketing their produce. A comprehensive organization is therefore needed to give
adequate support for credit and other services to small/marginal farmers, if they are
to be assisted in modernizing agriculture. Otherwise they would continue with their
traditional low productivity techniques of production.

Accordingly, an integrated credit service, which should be accessible to

small/marginal farmers and farm workers and which should cover not only complete
range of agricultural activities but also ancillary occupations and artisans providing
various types of services to the farming sector, has been developed by some
governments.

An efficient input delivery system, on the other hand cannot be accomplished without
an effective farm organization. Various models of farm organizations and structures
should be placed at the service of the farming sector.

4. Inefficient Supply System

The estate farms in Malaysia and Indonesia have been able to minimize the cost of
production for palm oil by reducing the distance traveled by the raw material from the
farm to the processing plant. For example, an 80,000 hectare estate farm (basically
a circular plantation) with a processing plant located at the center will only require
about 16 kilometers of distance traveled from the circumference of the estate farm.
On the average, it will take only 8 kilometers for the palm oil to reach the processing
plant.

In the Philippines the average distance traveled by copra to destination is estimated

at about 128 kilometers. This means that the present distribution of oil mills in the
country is not optimized. Therefore, the cost of transportation is much more than
that of the palm oil estate farms in Malaysia or Indonesia. Thus, the cost of
transporting copra from the farm to the mill gate is normally at the expense of the
farmer.

A linear programming exercise showed that the distance traveled per kilo of copra
from farm to mills covered a minimum average distance of 25 kilometers (from

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Laguna farm to San Pablo Oil Mills) and an average distance of 800 kilometers from
Calbayog, Samar to Granex in Iligan City, Lanao del Norte.

This reflects the less-than-optimal location of milling capacity in the county, a

practice tolerated by an oligopsonistic industry which allows the passing on of
transportation costs to the farmers. This needlessly increases transaction costs
making coconut products less globally competitive.

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