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.