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esides the rupiah exchange rate, for the Indonesian economy the price of rice has always been a threat to its macroeconomic stability. An increase in rice prices has always been a trigger for inflation and as such it heavily influences the monetary policies of the central bank.

It also affects the purchasing power of the vast majority of the people and poverty alleviation efforts. Because rice is fundamental to the Indonesian diet its price has become a highly charged economic, social and political issue.

So it is understandable that during the long dry season resulting from the presence of El Niño, such as we are going through now, the government is taking some immediate steps to ensure that the production and supply of rice WILL not be seriously affected by the drought that is predicted to reach its peak in October.

The drought has hit several rice producing areas and The National Disaster Mitigation Agency (BNPB) has reported that as many as 16 out of 34 provinces in the country are now experiencing drought.

If preventive measures are not taken immediately, harvest failure could be widespread, hurting rice production. Consequently, the rice price WILL rise, triggering higher inflation, reducing the purchasing power of low income people and increasing the poverty rate. With the economic growth rate still weak the effect of a rice price hike could be more severe.

Any incidents of price hikes of rice should be studied and analyzed properly so that proper action to control them can be taken. The incidents of price hikes for rice in February this year, when the government could not find the real reason behind the price rise, should not happen again. In February, rice prices suddenly shot up by 16 percent. Stocks at the Cipinang warehouses in Jakarta dropped to a historic low.

After some flurry of activity, the government still failed to find the real reason for the price rise. To make things easy it labeled unscrupulous traders and a '€œrice mafia'€ as the culprits. If you don'€™t know the reason, then how can you take action? The government should look more deeply into the market dynamics that occurred in February because the same dynamics could occur again when a rice production shortfall hits the market.

The vast majority of Indonesians are net consumers and therefore are hurt by higher rice prices. Farmers and the poor would be directly affected by higher prices. One-fifth of Indonesian farmers are net rice consumers as well, as they do not produce enough for themselves.

So are the poor both in urban and rural areas. These people spend most of their income on rice. So as net consumers, they would be hit if rice prices rise.

According to a World Bank estimate, rice consumption per capita in Indonesia declined from 96 kilograms in 2013 to 85 kg in 2014. Despite this decline, total aggregate consumption continues to rise because rice remains the most important staple for the growing population. Rice production remains under pressure because of the continuing rise in demand.

Another problem is that there is a great diversity in the type of rice consumed by people in different regions. As there are many problems in transport and information on rice production across the country, it means rice does not move smoothly from one place to another, from areas with production surpluses to areas with excess demand, at any one time.

According to Central Statistics Agency (BPS), rice production this year is estimated to reach 47.6 million tons while consumption would be 31.2 million tons. So there would be a surplus of 16.4 million tons of rice. In the past, the quality and the accuracy of data used to estimate rice production was always questionable.

This time it is put into question again as the estimate is not consistent with the reality in the market where there is a continuing increase in prices and the need to import rice.

The fact is that there has been a decline in both production growth and yield growth of rice for the last 30 years. From 2000 to 2011, the annual increase of rice production was only 2.2 percent. In the 1970s and 1980s under president Soeharto'€™s government, rice production growth was 4.3 percent. During his regime the rice yield grew by 3 percent annually. Now, the yield growth is only 1.1 percent.

Declining yield means declining productivity. Rice productivity in Indonesia has been declining and its productivity now is below that of neighboring countries such as Thailand and the Philippines. The reason why rice productivity is low is because the average operational farm size is small, smaller than in the neighboring countries. The average farm size in Indonesia is one hectare, while in the Philippines it is two hectares and in Thailand three hectares.

And farming is highly labor intensive, meaning they don'€™t use advanced technology. Small farm size does not inhibit achieving high productivity, but it reduces the potential for higher economies of scale and mechanization.

Farm productivity has also suffered from 15 years of neglect by the government in constructing new dams and irrigation networks and also from low spending on research and agricultural extension services.

To contain a rice price spike, the government has employed several instruments: market operation as executed by Logistics Agency (Bulog), a rice for the poor scheme (Raskin) and, in the extreme case, it resorts to rice imports.

But these measures are short term and ad hoc in nature and are not effective as the volume is relatively small, or only around 10 percent of total consumption.

President Joko '€œJokowi'€ Widodo has embarked on ambitious plans to build several dams and irrigation networks. If this could be achieved, it would significantly improve rice productivity on the farms and put rice production on a stronger footing. But if it fails, the long-term trend of rice price increases cannot be reversed.
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The writer, an economist, is a commissioner at a publicly listed oil and gas service company. This is his personal view.