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State intervention backfires as rice prices hit multiyear high

Jakarta Post - March 13, 2023

Deni Ghifari, Jakarta – Rice, one of the most tightly regulated commodities in the country, increased in price throughout 2022, which has industry experts asking whether the protective measures themselves could be driving inflation.

According to the Information Center for Strategic Food Prices (PIHPS), the price of rice of the Medium I quality class reached Rp 13,200 (86 US cents) per kilogram on Tuesday, up 11.8 percent year-on-year (yoy).

Rice prices rose every month of 2022, with a noticeable increase starting in July, and with no signs of a slowdown seen since. The government has flooded the market with stockpiled supplies, to no avail.

"Even [distributing] 400,000 tonnes [of rice] in two months has not been effective enough to put the brakes on the price increase," the National Food Agency's (Bapanas) food supply and prices director Maino Dwi Hartono, said on Friday.

Maino revealed that the rice production forecast for 2023 was 55.4 million tonnes and that the preliminary projection pointed to nine months of deficit this year, complicating efforts to stabilize prices.

Presidential Regulation (Perpres) No. 125 of 2022 puts Bapanas in the driver's seat of the price stabilization program, with the State Logistics Agency (Bulog) acting as stock manager and distributor.

The program is called Stabilization of Food Supply and Prices (SPHP), and the rice distributed under the program is marketed under the same label. The purpose of the SPHP program is essentially the same as that of the Supply Availability and Price Stabilization (KPSH) program, which was effective from 2018 to 2022.

"What we went through in 2022 puts us in a state of anticipating anything with a stabilization effort," Maino said, adding: "We will evaluate the challenges in the field every month".

He explained that SPHP rice was only to be distributed from Bulog straight to retailers, not through big private distributors, which was meant to control the price at the consumer level.

Government intervention to control rice prices is nothing new, with a similar effort implemented in 1998 under the Rice for the Poor (Raskin) program, the only difference being that the SPHP program was designed to adjust to the market, meaning the distribution volumes adapted to market conditions.

When the price in the market is too high due to scarcity, Bulog is meant to ship out more SPHP rice to bring the price down, and the opposite applies when the price is too low.

Maino revealed that Bulog was meant to distribute 1.2 million tonnes of rice in 2023 and to stock up just as much in reserves, as last year's low stocks of around 400,000 tonnes disrupted the market psychologically.

One more difference between Raskin and the KPSH/SPHP programs is that the former worked; it stabilized rice prices.

The KPSH strategy has yielded no satisfactory results given that the price has been consistently rising despite the volume being distributed, and experts have expressed doubts as to whether the SPHP would make any difference, given that the two are essentially the same.

KPSH and now SPHP rice is distributed through so-called market operations (OP), and, so far, this is the only planned downstream outlet for the latter.

Sutarto Alimoeso, chairman of the Indonesian Rice Millers and Entrepreneurs Association (Perpadi), told The Jakarta Post on Tuesday that the SPHP could work well if it could get five things right, namely timing, volume, quality, price and distributor.

"The 400,000 tonnes in two months didn't work, because that was not enough," said Sutarto, emphasizing that the deficit was bigger.

Sutarto said the key problem was one of efficiency, given that grain from farmers typically passed through four or five middlemen before reaching mills, resulting in a Rp 350 margin from the farm gate.

Indonesian Political Economy Association (AEPI) agriculture expert Khudori argued that the SPHP was often not well aligned with market conditions, while Bulog was instructed to procure a fixed amount of rice regardless of those conditions.

This limitation meant Bulog distribution dropped by as much as 28.8 percent with the switch from the Raskin regime to the KPSH, revealed Khudori.

"That affected Bulog's performance in upstream procurement and downstream stabilization," Khudori said on March 3.

The Raskin program, on the other hand, gave Bulog a fixed figure in downstream outlets, which translated to certainty – something of importance when dealing with rice, given that it is a brittle product that will spoil when stored too long, so piling up reserves could destabilize prices.

Association of Agriculture Experts (Perhepi) advisory board member Husein Sawit, on the other hand, argued that the KPSH/SPHP attempts to correct the price at the consumer level were harming farmers, as it set a narrow range between the price floor and the price ceiling.

This narrow price band, argued Husein, would disincentivize stockpiling by the private sector, which in turn resulted in low absorption of grain from farmers and explained the steadily declining grain price in the past three years.

"The government must focus on the efficiency of this sector before it can ever press [the market to stabilize prices]," said Husein on March 3.

"There's no need for massive market intervention; that's only needed in times of scarcity, during major holidays and new year," he added.

He argued that the government could never take over the private sector's role in this, given that the private sector absorbed around 95 percent of national rice production.

Setting price floors and ceilings for the Bulog product, Maino said, was one way for the government to control prices, and in doing so it distinguished between three different zones.

The price bands were set at Rp 8,300 to Rp 9,450 for the first zone, Rp 8600 to Rp 9,950 for the second and Rp 8,900 to Rp 10,250 for the third.

This arrangement, explained Maino, was decided in consideration of distribution cost margins.

All in all, Husein, Sutarto and Khudori agreed that the price would "reach a new equilibrium" due to the higher input costs for fuel, labor, transportation and fertilizer.

Source: https://asianews.network/state-intervention-backfires-as-rice-prices-hit-multiyear-high