Boosting farmers' income

Maintaining a stable supply of basic food and ensuring food security is the ultimate objective of the government following last week's decision to raise the producer (floor) price of rice by 16.67 percent. Farmers will continue to grow rice if their earnings remain higher than that from other crops. However, the food crop sector cannot be separated from other sectors of the economy. Hence, fertilizer prices were increased by 21 percent in a bid to further reduce government subsidies on that agrochemical.

Most farmers expect the measure to have little impact on their real incomes as the rice price increase was introduced simultaneously with a rise in the price of fertilizer. Agronomists have estimated that fertilizer alone usually accounts for up to 30 percent of rice production costs. This means farmers will have to increase their working capital as well.

The government has been facing a dilemma with regard to the price of rice, the national staple. Its price cannot be increased too steeply because it would cause strong inflationary pressures and the number of landless farmers and farm laborers who depend on the open market for their staple remains quite large. This means a high rice price would hit hard not only the fixed low- income people in urban areas but also millions of others in rural areas.

It is nonetheless essential to prevent rice farmers' terms of trade from being eroded by the general price increase (consumer price index). If it is not, there is the risk farmers will shift to other crops, thereby threatening food security.

There are at least two other problems besetting the rice economy. One of them is the declining size of farm land held by farmers in Java. The latest agricultural census in 1993 concluded that farmers in Java only held an average 0.47 hectare and the number of farming households with less than 0.50 hectare of land totaled 11 million.

The small landholding has been exacerbated by what agronomists see as the diminishing returns of rice crops. Even though national rice output has been increasing, larger production has been generated mostly by rice-crop expansion. In fact, according to the latest data available from the Central Bureau of Statistics, the rice yield per hectare declined from 4.38 tons in 1993 to 4.35 tons in 1994. One can easily see how rice growers survived without an annual increase in the price of the staple.

Many may ask why the government has to increase the price of fertilizer. It is true the agrochemical is made from natural gas which is abundant in the country, but the rice economy will never be more efficient and competitive unless it is gradually freed from government subsidies. Sound macroeconomic management demands a gradual, if not abrupt, abolition of such market distortions. This has become even more imperative in light of Indonesia's participation in the ASEAN Free Trade Area in 2003 and the larger Asia-Pacific free trade region in 2020.

The latest increase in the rice price is not insignificant despite the 21 percent increase in the fertilizer price, and an inflation rate of only 6.7 percent last year. What is more important though, is that the producer price should be the minimum gained by rice farmers during the peak harvest season when the market demand tends to be depressed.

We have learned from experience that what is mandated by the government will not automatically materialize in the marketplace. Farmers may still receive much less than the floor price because of collusion between cooperative officials and traders or due to farmers' failure to meet the minimum quality standards. It is the responsibility of the government to prevent such collusions and to help farmers fulfill quality standards, otherwise the floor price policy will not be effective.