Philippine Markets Newsletter

Temperature is not an accurate indicator for the AFF industry

September 4, 2023

The Philippine Statistics Authority divides the country’s economic sectors into three: Agriculture, forestry, and fishing; Industry; and Services.

Today, we will be looking into the Agriculture, Forestry, and Fishing industry as a whole, and see what is the best indicator to project its performance.

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The Agriculture, Forestry, and Fishing (AFF) industry contributes around 10% annually to GDP.

As the name suggests, this sector mainly tallies commodities that the Philippines produces to sell, trade, and consume. The volume of the agricultural crops and various types of fishes depends on the output of the farmers and fishermen.

Usually, people think that the output of these commodities are greatly affected by the temperature and climate. For example, when there is an extended rainy season, the output for agricultural crops lowers. This leads people to assume there is a direct correlation between the climate and industry performance.

However, that is not really the case.

When a spike in the country’s average temperature occurs, it typically signals the beginning of the dry season, which tends to reduce the risk of crop damage from natural disasters.

However, as depicted in the graph above, these temperature fluctuations do not significantly impact the performance of the AFF industry. So what do analysts look at when they want to understand the factors that affect the industry?

To effectively forecast the industry’s future performance, we must identify its primary drivers. This involves pinpointing the most significant sub-sector within the larger industry.

As of 2022, the agriculture sector contributed over 70% to the AFF industry. Following closely behind is the fishing and aquaculture sector at 12.8%, with other related production activities comprising 11.7%. The forestry sector, on the other hand, has the smallest contribution, representing a mere 0.1%.

Breaking down the agricultural sector further, palay (rice) leads as the largest contributor (17%), followed by livestock (14%), and poultry & eggs (11%).

Monitoring these key products provides valuable insights into the industry’s future direction. By analyzing the dynamics of supply and demand, we can forecast production volumes, ultimately aiding in estimating the overall industry performance.

Now, the question arises: How do we accurately monitor these agricultural products? The answer lies in the Commodity Futures Market.

The commodity futures market is a comprehensive indicator because it reflects market sentiment and the dynamic interplay of factors such as supply, demand, price trends, climate impact, and international trade. These prices are continually shaped by ongoing trading and negotiations, providing real-time insights into commodity pricing.

Instead of relying on a vague annual average temperature to forecast the industry’s growth, a more accurate approach involves tracking the futures prices to see how market participants are projecting the prices to be.

The chart illustrates a clear correlation between the future prices of Rough Rice and the gross value generated by the AFF industry. Specifically, when running a regression, the two variables show a 0.44 correlation, indicating a moderate positive correlation.

It is observed that when Rough Rice future prices rise, the quarterly industry output declines, and conversely, when prices decrease, the industry output increases. This pattern shows the product’s price elasticity: higher prices deter buyers, while lower prices stimulate demand.

Temperature and climate is a factor that affects the AFF industry. However, it is not an indicator to project the output of the industry because it does not have a strong correlation. Instead, look at the futures market if you want to gauge the direction of the sector.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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