Price signals the best guide

Tue, 04/29/2008 12:40 PM  |  Opinion

Our highly corrupt public institutions, our long and porous coastline and the wide disparity between local and international prices form the best infrastructure for export smuggling.

Hence, President Susilo Bambang Yudhoyono's great concerns over the high risk of rice export smuggling to our neighboring countries Malaysia and the Philippines are simply understandable.

We should therefore welcome the government's decision last week to raise by 10 percent the floor price of rice amid the skyrocketing prices of this food grain in the international market.

Even though the measure was rather late, as it was introduced only almost eight weeks after the start of this year's first harvest when many farmers had already sold their surplus to wholesalers and retailers, the new floor price of Rp 4,300/kilogram narrowed the disparity between domestic and international prices which currently fluctuate widely between US$700 and $1,000/metric ton (Rp 6,350-9,200/kg).

However, actual rice prices in the domestic market can be much higher than the government-fixed floor prices because they are simply price references which serve as the threshold for the National Logistics Company (Bulog) to intervene in the market by making purchases, especially during the harvest season when prices tend to fall as much as 30 percent.

Market prices should always be the best guide for the government to set import and export policies, and experiences have shown that farmers respond better and more quickly to market price signals than to government market interventions which at best create only unsustainable artificial prices.

Certainly the government could not raise the floor rice prices too steeply in line with the skyrocketing prices of the international markets because more than 80 percent of the people are net rice consumers and more than 75 percent of the farmers are themselves rice consumers.

A comprehensive poverty survey conducted by the World Bank and several national institutions in 2006 concluded that the 11.25 percent increase in the poverty head count to almost 17.6 percent of the population between February 2005 and March 2006 was caused by the 33 percent rise in the price of rice, not by the 125 percent increase in fuel prices in October 2005.

The study found the unconditional cash transfer the government provided to poor families had more than offset the negative impact of the fuel price increase.

The biggest challenge now is to ensure that Bulog has enough money to make purchases whenever needed to defend the floor prices. Bulog said it needed to increase its working capital from Rp 13 trillion ($1.4 billion) to Rp 15 trillion to procure 3 million tons for its buffer stocks, or slightly less than 10 percent of the national consumption of around 32 million tons this year.

This stock level is considered sufficient to support Bulog price-stabilization market operations to supply subsidized rice to 19.1 million poor families, which this year is estimated at 150,000 tons a month, and to meet urgent or contingency needs in the event of emergency situations such as natural disasters and crop failure.

Without an adequate level of buffer stocks, the domestic market could fall into the hands of trading speculators who could jack up prices as they like.

Since rice stocks are strategic reserves, both in economic and political perspectives, there should not be any difficulty in reaching a political consensus on budgetary appropriation or subsidized loans for Bulog as long as this state company maintains high standards of accountability and operating efficiency.

Bulog's market intervention, however, should be designed in such a way that the price movements on the market still allow for both reasonable income for farmers to encourage them to continue producing the staple and for a fair profit margin for wholesalers and traders.

It doesn't make any economic or political sense for Bulog to manage more than 10 percent of national consumption as buffer stocks. The bulk of national stocks should be held by private traders.

In fact, up to the early 1970s, before Bulog was established, our villages used to run rice barns to hold their production surplus as stocks for contingency needs in case of crop failure or natural disasters.

We need both an adequate buffer stock to maintain price stability as well as an efficient rice trade by the private sector within Java and between islands because consumption takes place all year long while rice harvest occurs only twice a year in Java, which accounts for almost 80 percent of national output, and mostly once a year outside Java.

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