Daily Management Review

Rice Countries: Why Consumers Pay So Much?


Almost 16% of the 250 million Indonesians live on $ 1.90 a day or less. 6% of 15 million people in Cambodia has to limit themselves with about the same amount. In both countries, rice is the main crops that provide poor people with more than half of the calories a day.

Yet, Cambodians in need have a significant advantage. Since January 2014 to April 2015, the average wholesale price per kilogram of rice in Cambodia was about $ 0.40, and about $ 0.70 - in Indonesia.

There are several reasons why the Indonesian rice is more expensive. Firstly, the country is- a net importer, while Cambodia grows more than consumes. In addition, Indonesia consists of numerous and remote from each other islands. At the time, the infrastructure is very bad condition, what automatically increases the transport costs.

However, the representative of the Food and Agriculture Organization of the United Nations, David Dawe believes that transport accounts for only a fraction of the price gap. The main reason is the policy pursued by the authorities.

Like many Asian countries, Indonesia wants to be self-sustaining itself with rice. It is trying to help farmers become more competitive through investment in agriculture and infrastructure. Although, the government (as well as authorities of other countries in the region) manipulates the rice market through various subsidies, customs duties and other support mechanisms for domestic producers.

All these interventions, albeit with good intentions, raise consumer prices and swash the poorest in the region.

Asia consumes 90% of the world's rice grown, making flour, noodles and puddings. Steamed rice consumed at breakfast in expensive hotels in Hong Kong and primitive village huts in Hunan. Alcohol made from rice (be it Japanese sake, or rice whiskey in Thailand) is drunk in karaoke halls and roadside stalls.

During the "green" revolution in the 1980s, use of new high-yielding varieties of rice briefly allowed Indonesia and the Philippines to achieve self-sufficiency. However, most of the last century, they were importers.

Rice exporting countries located on the mainland have a significant advantage, especially due to the presence of large river deltas. They create perfect conditions for cultivation of fastidious culture (it is also easier to create a transport infrastructure on the mainland).

Peninsular and island states (such as Indonesia, Malaysia and the Philippines) do not have large marshy areas. Their farmers produce more rice per hectare, but there is much less land for agricultural cultivation.

Many governments are unwilling to recall the sharp jump in the price of rice in 2007-2008. They call it the reason for the increase in domestic production that would reduce dependence on fluctuations of the international market. In reality, the rice market is relatively stable: production largely meets or even exceeds the rate of population growth in Asia. World prices for rice are more volatile than the other two main crops: wheat and corn, which also rose sharply in 2007-2008.

However, as a rule, countries, trying to reduce its dependence on imports, have domestic prices higher than the exporting countries. Governments of the Philippines and Japan set the minimum allowed price for farmers and maximum allowed prices for consumers. Vietnam (exporting country) uses quotas to restrict the rice exported abroad, which helps to stabilize domestic prices, yet paves the way for smuggling.

Governments regulate not only the volume of trade, but also buy rice directly. For more than ten years, the Chinese authorities have been purchasing rice from local farmers (at prices higher than the market) to fill state reserves.
In theory, the Indian government also guarantees farmers a price not below a certain level. Nevertheless, many of them do not get such an opportunity. In 2013, the Parliament approved the Law "On the National Food Security". It claims that poorest part of India's population is guaranteed the right to buy rice at below market price in special state stores (the chain totals 60 thousand shops).

However, such an inefficient control system (the central government buys rice and sends it to the states for distribution to stores) creates conditions for corruption and the black market. According to independent estimates, more than half of the grain does not reach the destination. Meanwhile, tons of food, destined for the poor, rot in huge government warehouses.

As a result of such interventions, billions of people are paying the price, which is significantly higher than the market’s. High prices reduce the purchasing power of the population and increase level of poverty in rice-importing countries.

source: economist.com