Clove monopoly fails

Clove monopoly fails

There was nothing really surprising about the fact that the
seminar held by the Saraswati foundation on Tuesday came to the
conclusion that the 58-month old semi-private monopoly, the Clove
Stock Management Company (BPPC), has failed to accomplish its
mission of ensuring better earnings for farmers.

In fact, the monopoly was doomed to failure from the outset
because it was assigned to do something which runs counter to the
market forces and to carry out a mission, which is not only
irrelevant for a private institution, but which even most
international commodity pacts have failed to accomplish.

Nonetheless, the views of the seminar's panel of economists
can serve as a well-meaning reminder to the government that it
must cope with the negative repercussions of the monopoly's
operations.

Besides failing to accomplish its task, the monopoly has had a
damaging impact which may continue to affect the clove industry
and village cooperatives for years to come.

Evidence of this damage can be found in the sharp
deterioration in the farmers' trust in their village cooperatives
at a time when the government is launching a drive to encourage
the farmers to join the cooperatives, which are considered one of
the mainstays of the economy. Many clove growers have been
declared administratively unqualified to withdraw the compulsory
savings of Rp 1,900 for every kilogram of cloves they sold. They
feel they have been cheated by their cooperatives, which
collected the funds, because the administrative requirements for
the withdrawal of their savings were not announced until two
years after the collection of the savings started.

Minister of Cooperatives and Small Enterprises Subiakto
Tjakrawerdaya recently acknowledged that only 24 percent of the
Rp 157.7 billion in compulsory savings collected in 1992 could be
returned to the farmers because many farmers could not meet
the requirements for reimbursement. The remainder has been
registered as the assets of cooperatives.

The monopoly also has made things much more difficult for
clove-cigarette companies because they are now subject to several
economically unsensible rulings issued by the government to help
the monopoly to sell its stocks. Regulations, such as those which
set the minimum clove content of every clove blended cigarette,
and the ones which link purchases of cigarette duty bands from
the government with clove procurement invoices from the monopoly,
have been hurting small and medium-scale companies.

Given the failure of the monopoly, it is perhaps high time for
the government to review the function of the Clove Stock
Management Company (BPPC). However, it is clearly not viable to
outright free clove trading because the farmers could fall victim
to oligopsony once again because the four largest cigarette
companies alone account for more than 90 percent of the domestic
clove demand.

We suggest a partially open market mechanism whereby cigarette
companies are free to buy directly from village cooperatives at
the government-mandated floor prices, with the Federation of
Village Cooperatives acting as the buffer-stock manager to defend
those prices.

We reckon the federation and its member cooperatives have
accumulated the equivalent of hundreds of millions of dollars in
the forms of savings and equity funds from the farmers over the
past four years. Those funds can be used to finance its market
operations: Buying cloves at a time when the prices tend to fall
below the floor prices and sell stocks in case of supply
shortage.

Such an arrangement will be much better for the cigarette
companies, compared to the tight restrictions they are facing
under the present system of monopoly. That scheme also will
enable the farmers to gain a greater portion of the final price
of the spice. At present BPPC sells cloves to cigarette companies
at more than Rp 10,000 per kilogram, much higher than the actual
average price of Rp 2,825 the farmers got last year.

Of most importance, however, is that the floor producer price
should be set in such a way so as to discourage imports and
smuggling. We think cigarette companies have probably learned a
lesson and that this should discourage them from engaging in any
kind of oligopsony in the future.