Conflict of farm survival, stability

By H.S. Dillon and S.R. Tabor

JAKARTA (JP): Both food security and macroeconomic stability are important, and both suffer sometimes from overly complicated definitions. The former basically means that everyone can afford to eat and that the nation has enough food on hand, in both good times and bad.

For the nation, the level of rice production is a concern, since the world rice market is thin and since such a large share of the poor population are involved in producing rice. And unless the farming community makes a decent return from rice production, we cannot expect them to contribute to food security and to climb out of poverty.

Macroeconomic stability basically refers to stable prices and an ability to pay your bills. When inflation is too high, savers are penalized and those who work for a wage find that their take- home pay no longer makes ends meet.

The ability to pay your bills simply means that you aren't spending much more than you earn --- that's today; and that you didn't borrow more than you can afford to pay back, or get trapped in debt, in days gone by.

Since money is mobile, traders, investors and even the man on the street has to feel confident that the return they expect on their savings in Indonesia is competitive with what they will get abroad. If not, the money flies out first class.

Indonesia now finds itself at a terrible cross-roads. On the one hand, global rice prices are hitting unprecedented lows. Thai and Vietnamese rice is currently selling at US$125 per ton for 25 percent brokens (or about medium quality in the cities here), whereas two years ago the going price was $250.

In theory, there is a import tariff of Rp 450 per kilogram, but in practice most traders and bureaucrats collude to circumvent the tariff and rice comes in at close to world market prices. This means that the landed price in Indonesia is about $150 per ton, or some 15 cents per kilogram of milled rice.

Can Indonesia's farmers compete with rice selling at 15 cents per kilogram in the big city ports. Well, the price of rough rice (gabah) in Java tends to be about 50 percent to 60 percent of the retail rice price.

If world market conditions stay the way they are and the tariff continues to be avoided -- de facto free trade prevails meaning that the equivalent farm gate price at harvest time will be about 7 cents per kilogram for unhusked rice (gabah).

Here is where the conflict between macrostability and farm survival arises. If the consultations with the International Monetary Fund proceed well the Paris Club hands over another dose of breathing space; asset sales are accelerated; some measure of investor confidence returns; and political stability is restored, then perhaps (albeit optimistically) the exchange rate could return to Rp 7,000 per dollar.

At that exchange rate, Indonesia's rice farmers would earn about Rp 490 per kg for their gabah at harvest time. The average rice farmer in Java cultivates just under a third of a hectare of paddy. Even a pretty good rice farmer in Krawang, West Java, producing three crops of rice per year on a third of a hectare and five tons of gabah per hectare each season, would produce just five tons of unhusked rice in a year.

If we value this five tons of gabah at Rp 490 per kg then their gross earnings from a full year of feeding themselves and those in the cities would be Rp 2.45 million. Subtracting the cost of fertilizer and hired labor, the best of Indonesia's rice farmers might be left with Rp 1 million at the end of the year.

Can a farm family survive on this? Can they send their children to school? Can they themselves afford to eat nutritious foods so that they can work harder, smarter and ultimately more productively? The answer is, at this combination of prices and exchange rate, no way.

Many government officials believe that Indonesia must increase rice productivity to ensure that national rice needs are met. Can we expect productivity improvement when the rice price falls so low? Farmers are reasonable and rational people.

Why should the farmers (or how can they) invest to improve their lands; to try new technology or to enhance their skills, when what they earn is insufficient to meet their day-to-day food needs? Can they use their "savings" to pay for good quality agro- inputs -- but what savings?

Some argue that the solution is to abandon rice farming and to encourage farmers to grow high value crops wherever possible. No doubt this may be one of the long-term solutions to combating rural poverty. But in the near term, taking lands out of irrigated paddy is costly -- and the farmers can't afford expensive capital works.

Diversifying from a crop you can eat -- paddy -- into assorted high value cash crops is a risky business. If there are no buyers, you are stuck with a product that will go to waste. Indonesia's food markets are far from stable, efficient or competitive. While this may be a minor irritation for paddy, it is a disaster for perishables and other high value crops.

And moreover, if a large segment of the farm community quickly abandoned paddy, then national food security would be undermined.

And here is where the conflict with "free market" macrostabilization lies. If the macroeconomy continues down the path toward "permanent instability", than the rupiah will get weaker and weaker and weaker.

If this happens, it does offer a measure of short-term price production to the farming sector. For example, at an exchange rate of Rp 14,000 to the US dollar (is this impossible?) and modest price inflation, gross returns from rice farming would be closer to Rp 5 million per year and a family's net annual income closer to Rp 3 million.

This is certainly not a spectacular income, but at least it is a tad above starvation wages.

So that is the choice we face in the short run. Either enforce free trade, stabilize the macroeconomy and watch as our farm community is thrust into bankruptcy, or -- if we are pro-poor, we must hope that confidence is not restored, the exchange rate weakens and our farming sector can afford to just barely survive for another season.

Obviously, in the long run, we need both. We need a just and prosperous farm sector that is able to feed themselves and feed the nation, and we need a stable and sustainable macroenvironment. Thanks to the collapse in global grain (and certain other agricultural commodity) prices, these two objectives are at loggerheads, particularly if we continue to mechanically insist on what has come to be a de facto free trade regime.

The IMF and the World Bank are quick to stress the importance of preventing systemic collapse by financing the bailout of the dodgy banks and, if truth be told, the even dodgier corporations.

Government has run up debts of close to 60 percent of gross domestic product to stop these dodgy banks from going to the wall. But at this point in time, the farming population, which accounts for about 70 percent of the nation's poor and near-poor, are threatened with "systemic collapse".

And what do our development partners recommend -- free trade and lower rice prices. Something is morally wrong with a nation in which so much is spent to prevent the collapse of a handful of mismanaged banks and when those who ostensibly work to eradicate poverty seemingly ignore the imminent bankruptcy of the most vulnerable segment of the population.

We should at least try to be consistent in our policy-making. We do need macrostability but the poor must also be taken care of. Bailing out the bad banks, bankrupt conglomerates, a drifting central bank and an opaque MOF is certainly not the first priority. The first priority is to see that the poor can survive until better times.

H.S. Dillon is Executive Director of Center for Agriculture Policy Studies in Jakarta, and S.R. Tabor is Director of Economic Management Service International in Leiden, The Netherlands.