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Analysis: Govt 'flood the market' strategy insufficient to curb rice prices

Jakarta Post - September 20, 2023

Tenggara Strategics, Jakarta – The government, in an attempt to rein in rising rice prices, has employed various instruments such as social assistance (Bansos) programs and market operations to flood the market with rice from the national reserves.

However, rice prices have skyrocketed above initial projections made several months ago when the plan was drafted. As of Sept. 12, average retail prices of rice reached Rp 12,740 (US$83 cents)/kilogram and Rp 14,390/kg for medium rice and premium rice, respectively. Market experts now estimate that the government needs to disburse several times more rice than what has been allocated.

The most recent Bansos program was to disburse 10 kg of rice to roughly 21,353 households from September to November through social assistance (Bansos) programs. This would equal expending 213,530 tonnes of rice from the national reserves every month for a total of 640,590 tonnes over the three months.

Based on the calculations from the Institute for Demographic and Poverty Studies (IDEAS), an injection of 12.5 to 19 percent of the market demand for rice is necessary to stifle rising rice prices. Meanwhile, the 640,590 tonnes of rice provided through the three months of Bansos programs is equivalent to only roughly 8 percent of market demand. This means that the Bansos programs would have needed to supply between 1 million and 1.5 million tonnes of rice to stop the increase in rice prices.

Furthermore, another reason why the Bansos programs alone are not enough to curb the rising rice prices is that there is a supply scarcity at the retail level. The Market Vendors Association (APPSI) has reported that traders are struggling to source rice from mills, private suppliers and the State Logistics Agency's (Bulog) bulk rice. This scarcity of rice is illustrated by data from the Cipinang Central Rice Market (PIBC), which shows that, as of last week on Sept. 6, the total stock of rice in the markets only reached 25,800 tonnes, which is far below the 30,000 tonnes estimate for secure stock levels.

In the case of Bulog's bulk rice, Bulog president director Budi Waseso recently explained that bulk rice is missing from the PIBC because Bulog changed the market operations disbursement scheme for rice. Previously, market operations were carried out in the form of bulk rice delivered to the PIBC to be bought by traders. Now, Bulog distributes bulk rice directly to retail outlets, both modern markets and traditional markets, in the form of pre-packaged bulk rice. This change was done as a response to oligopolistic practices by market players that kept prices high during market operations at the start of the year.

On the other hand, traders at the PIBC responded to this change with criticism. They argued that they are not capable of lowering the retail price of their rice without the bulk rice from Bulog. For them, the new market operations fail to solve the scarcity in rice supply.

Furthermore, there are still more externalities that continue to hike rice prices. El Nino, which began last month, is projected to cause a long drought that will negatively impact rice harvests for the period from September to December. Based on estimates from Statistics Indonesia (BPS), rice production during the period of El Nino will reduce by around 5 percent, further exacerbating the low market supply.

What's more

The rising price of rice has been an issue not only for consumers, but also for the government. It was revealed back in March, when the government announced that it would be performing continuous market operations throughout the year, that the price inflation was driven by rising prices of unhusked rice. Moreover, these rising unhusked rice prices surpassed the government's buying price and subsequently became a significant obstacle to Bulog's absorption capacity.

While the government raised its buying price of dry unhusked rice grains (GKP) from Rp 4,250/kg to Rp 5,100/kg in April through National Food Agency (Bapanas) Regulation No. 6/2023 on government buying price of rice and grains, the market price of GKP rose again in July and reached an average of Rp 5,764/kg, which surpassed the updated buying price.

Due to the price increases occurring at such an early level of the production line, it is difficult to solve with market operations alone because market operations require an expenditure of national rice reserves, which is obtained from stockpiling rice from the mills before it is sold to wholesalers and traders. Meanwhile, the mills are reluctant to supply their grain to the government because its buying price is below the market's.

What we've heard

Apart from the drought factor, several government sources have mentioned that the persistence of the high rice prices are also due to the change in Bulog's market operations scheme, which was initiated five months ago.

These sources point out that the change in the market operation is evident in the distribution pattern of cheap imported rice, which is no longer being channeled to traditional markets. Consequently, rice traders are having difficulty obtaining rice from the Stabilization of Food Supply and Prices (SPHP) programs. Even if some of it does trickle into the market, only a handful of traders manage to get rice from the SPHP.

Apparently, Bulog has opted to distribute rice directly to consumers through retailers or via a low-cost market scheme in certain regions. With this approach, Bulog hopes to closely monitor the distribution of the SPHP rice. Bulog also argues that it refrains from supplying cheap rice to the market because rice from the SPHP program is sometimes repackaged by market traders and sold to consumers at prices higher than the market rate.

The problem lies in the limited quantity of rice, typically packaged in 5-10-kilogram bags, offered through the low-cost market scheme or directly through retailers. Traders also struggle to become retailers of SPHP rice despite reaching out to Bulog's branch offices. Bulog's market operations model in the past few months has failed to create a shock therapy effect in the market.

Another source suggests that there are other reasons behind Bulog's change in market operation scheme. One of them is due to PT Suri Nusantara Jaya, one of Bulog's partners, failing to reach an agreement with long-time rice traders to become the sole distributor of Bulog's rice.

Meanwhile, the rice supply for this operation is heavily dependent on imported rice, the prices of which have also increased as India has halted its rice exports.

In the past, Suri Nusantara was mainly a distributor of frozen buffalo meat imported by Bulog from India. Through PT Lima Dua Lima Tiga, Suri Nusantara Jaya is affiliated with Delta Wibawa Bersama, where former Bulog CEO Djarot Kusumayakti serves as president commissioner.

The Agriculture Ministry's proposal to immediately replant newly harvested fields without delay has also created new problems. In the fields, rice paddies are potentially infested with mice and other pests in the post-harvest period. Moreover, due to an ongoing drought and low field productivity, the likelihood of crop failure is also increasing.

In the field, many rice-milling companies have also gone out of business. Some have folded because they could not obtain a supply of rice. Meanwhile others became uncompetitive or were purchased by larger companies. One of the companies often mentioned as acquiring many local rice mills is Wilmar Padi Indonesia. Wilmar's growing monopoly over the mills has become a concern for the rice trade.

To mitigate the turmoil, the government has hastily distributed Bansos in the form of rice to low-income groups for the next three months. They will receive 10 kilograms of rice per family per month.

On the other hand, the shortage of affordable rice supplies in traditional markets has pushed President Joko "Jokowi" Widodo to order Bulog to distribute SPHP rice back through traditional markets, which include the PIBC. This instruction came after Jokowi realized the absence of affordable rice in the Cipinang market during his visit there.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2023/09/20/analysis-govt-flood-the-market-strategy-insufficient-to-curb-rice-prices.htm