Rice prices and reality

Rice prices and reality

The confirmation by chief of the National Logistics Agency
(Bulog) Beddu Amang early this week that the producer price of
rice will be raised by at least 10 percent early next year
removed the confusion caused earlier by statements from the
agriculture ministry. Minister of Agriculture Sjarifudin
Baharsjah's statement last month that the government would not
increase the rice price until the end of this year was accurate.
Nonetheless, the remarks gave the impression that rice farmers
would not receive any annual increase since price changes are
traditionally announced between October and November, with the
increase usually taking effect at the beginning of the following
harvest season in February or March.

As Beddu asserted, the producer price of rice should be raised
at least by an amount equivalent to the rate of inflation. Such
an adjustment will help prevent the farmers' terms of trade from
being eroded by general price increases (consumer price index).
After all, the price they receive is the factor that most
encourages the farmers to continue cultivating rice crops.

A significant price incentive is more crucial now than ever.
National rice output has been decreasing for the last two
consecutive years, which forced Bulog to import more than one
million tons last year. True, weather conditions will affect
output, as will the steady decrease in the acreage harvested due
to the conversion of farmland in Java for industrial and housing
projects. However, the amount of acreage harvested could easily
decrease at a faster pace if rice farmers are not given terms of
trade equal to or better than those of other crop growers.

Determining the price level of rice is indeed a delicate
exercise given the special economic, social and political
importance of the national staple. The problem is that quite a
number of rice buyers also consist of non-rice farmers and farm
laborers.

There are three major challenges facing the government when
determining the producer price of rice. The first calls for a
price which is neither too far below international levels nor a
major source of inflationary pressure. Both are important to
stimulating the development of new rice fields, which is now
possible only outside of Java.

The second challenge requires Bulog to manage its market
operations in such a way that the rice market provides a
reasonable range of price fluctuations to generate fairly
attractive margins to traders. Such leeway will encourage the
traders to take on part of the storage operations, thereby
alleviating Bulog's burden of stock management.

The third challenge is for the government to ensure that the
increase in the producer price of rice will not trigger price
increases in other goods. We doubt that a higher rice price will
trigger price increases in other goods because, unlike oil fuel
or other commodities used as inputs for the production of goods,
rice is a direct consumer item. The increase in prices that
follows any increase in the rice price, similar to the trend
every time the government raises civil servant wages, is more
psychological in nature. As long as the supply of general
consumer goods is kept adequate and their distribution smooth,
the rise in the producer price of rice will not likely have a
significant impact on the consumer price index.