Sunday, April 13, 2008

Agri Econ 1: Food Prices and Government

My two articles last month and today...

MARCH 19, 2008

Lent and food prices

Lent is among those big “retreat days” for Filipinos due to the 4-days weekend. Many of those living and working in Metro Manila and other big cities retreat “back to the provinces or far away municipalities” and enjoy less stressful life where the air is cleaner and food prices are cheaper. But not this year’s Lent, it seems.

Recently, food prices in both global and domestic markets have been rising rather steeply. In 2007 for instance, world food prices have risen by almost 40 percent. And just this year, Philippine rice imports value have increased from $474 per ton in January to $708 per ton this month, an increase of 49.4 percent in just 2 months! And mind you, these are rice imported from our neighbors in the region, mainly from Thailand and Vietnam.

The volume of rice importation has also been increasing recently too. In other years, average importation was around 1 million MT a year. In 2007, rice import was 1.8 million MT, and this year, projected imports will be 2 million MT.

A country imports rice or chicken or shoes or any other commodity to plug the gap between a low domestic supply and high domestic demand. The higher the gap between the two, the higher will be the inflationary pressure of the undersupplied commodity. Hence, the need to import the projected gap in order to stabilize the price.

So food prices are the result of the supply-demand dynamics. As demand increases, supply must increase by similar rate, at least. If the increase in supply is larger than the increase in demand, then that country will experience price decline (or “deflation”) of that commodity, or it must export the surplus supply to stabilize domestic price, say to its previous year’s level.

Domestic demand, say of rice, is affected by many factors like change in appetite and preference, change in income, but the biggest factor is population growth. The Philippines’ population on average increases by 1.8 million people a year, net of death and migration. If each person is consuming 0.2 kilos of rice a day (roughly 4 cups equivalent), then consumption in one year is around 73 kilos per person. With 1.8 million new people a year, that’s 131.4 million kilos or 131,400 MT a year increase over the previous year’s total demand.

Domestic supply, say of rice, is also affected by many factors, like total hectarage devoted to riceland, irrigation, occurrence of very strong typhoons, price of fertilizers and other inputs, adoption of more high-yielding varieties, and so on. But the biggest factor is profitability of the farmers to continue producing rice, or stop planting and convert his riceland into a cattle pasture area and become a tricycle driver or construction worker in the cities. Hence, the bigger the projected profitability of producing rice, or corn, chicken, tilapia, pork, beef, etc., the bigger will be the incentive to expand production. Which stabilizes price, and consumers will not complain of steep hike in food prices.

Very often, food producers are faced with some non-natural obstacles if not enemies, that reduce their incentives to expand food production. The natural obstacles are of course those strong typhoons or prolonged drought or pest attack, other natural calamities that can wipe out potential harvests. Non-natural obstacles are man-made. These are the thieves and robbers, lazy neighbors and friends who always ask for free food, cartelized traders and wholesalers who depress farm prices, and the government food bureaucracy.

Smart food producers and traders can find ways to control or lessen the damage caused by robbers, lazy neighbors, and cartelized wholesalers. But confronting the food bureaucrats in government is difficult. Examples are bureaucrats from the Agriculture and Trade Departments who are quick to declare “price control” of those commodities whose prices have drastically increased because supply has suddenly dropped due to natural obstacles perhaps, or demand has suddenly shot up due to special events like a big fiesta or change in taste and preference.

Another group of food bureaucrats are those from the Agrarian Reform department. Some of their guys are on the prowl watching who are the dynamic and successful food producers with medium- or large-size agricultural lands, perceived to have “weak” political connection, and come up to them and tell them that their land will soon be for distribution to their farm workers. It has been noted by many local economists and agri-business observers that the endless, no-timetable agrarian reform, is among the biggest hindrances and disincentives for agricultural investment and efficient corporate agri-business endeavors.

Of course the silent but big hindrance to more food production, even if they are not directly engaged in the disincentive business, is the thick layer of bureaucracy in the food and non-food agencies. Taxes and fees have to be high and plentiful, partly to finance the salaries and perks of hundreds of thousands of government people working in air-conditioned offices. It is said for instance, that there are some 13,000 reasons why agrarian reform should continue forever – the 13,000 employees and officials of the Department of Agrarian Reform.

So, for long-term solution to steep food price hikes, the volume of food bureaucrats will have to be reduced; and the various taxes and regulatory fees that finance their salaries and offices need to be reduced. Then more people will be encouraged to become actual food producers, traders, processors and other food entrepreneurs, and not just food bureaucrats extracting rents and blood from those who actually produce food.

The political and economic Lent will be expected from the political and food bureaucracy. Then people and average food consumers will not experience the daily Lent of high food prices.

APRIL 13, 2008

Rice shortage due to government intervention

First of all, while many people who try to analyze the current food price hikes phenomenon call this as "rice or food crisis", I do not believe that it is already in a crisis situation. A "crisis" situation is where you have a 50-50 chance of either surviving or dying in a particular condition, say a patient in an intensive care unit (ICU). I'd go along with a few who simply call this a "rice shortage" problem that can be solved by more rice supply, both in the short- and long-term.

Most of the literatures that come out recently analyzing the problem in the Philippines and abroad blame the government for "not doing enough" -- ie, not intervening enough -- in earlier years. They mean the government did not: build more dams and irrigation canals, more warehouses and other post-harvest facilities; did not undertake more research and extension work; did not produce more subsidized fertilizers and hand tractors; did not provide more agri credit; did not reforest enough watershed areas; etc.

The list can be endless, depending on how statist the person who is talking of writing. That is, the more statist and socialist-oriented a person is, he's likely to say that government should "provide everything" for agriculture and the farmers. Of course they won't say that they also advocate that the government should also "take everything" from the people to finance those "provide and subsidize everything" projects.

I am of the opinion that government should not provide everything and take everything; not even provide many things and take away many taxes and fees. The reason why rice -- and other food crops' -- supply has not kept up with demand is precisely because of too many government intervention. People respond to incentives and shy way from disincentives. If there is not much profit from producing rice, then there will be less people who will produce rice, and there may be less land that will be devoted to planting rice.

When governments say they are increasing the budget for agriculture, the first thing that they increase is the number of personnel, consultants, and officials in their respective Ministry or Department of Agriculture, plus those in related agencies like Ministry or Department of Agrarian Reform, state agricultural colleges, etc. And those plenty of personnel will require more salaries, more bonuses, more offices, more trainings, more travels, more cars, and later on, more pension and retirement funds. Then some local governments follow suit, and expand their own local agriculture bureaucracies, financed from their local taxes and fees.

I think one of the important moves if societies are to improve their agricultural and food production capacities, is to abolish those Agriculture Ministries or Departments, and cut the taxes that the state collect from the private sector that finance those expensive bureaucracies. Since rational people would not want to be jobless for long and die hungry, many of those currently in government agricultural and related bureaucracies will likely become farmers themselves or become traders and/or processors of raw agricultural products. And this expands rice and food supply. When supply grows faster than demand, then the price will go down, and people will have lots of food at cheap and affordable prices, and there will be less hunger and malnutrition in society.

But when government Agriculture Ministries or Departments are abolished, who will build the dams and irrigation canals? The warehouses and post-harvest facilities? Who will do more rice and agri crops R&D? Who will provide cheap credit, and so on?

Good question, and the quick answer is -- the productive people themselves. For one, many of those infrastructure and facilities are currently being provided by the private sector, and they are being operated despite zero taxes financing, at least in the Philippines.

When people know that there is an agency whose job is to provide lots of subsidies to them and they won't go to prison if they cannot pay back those subsidized credit, subsidized fertilizers, seeds and hand tractors, then they will get and abuse those government services without necessarily raising their farm output. For instance selling a few bags of fertilizers and seeds to other people and use the proceeds to drink and party.

Okay, abolition of those monster Ministry or Department of Agriculture is unpalatable and unacceptable due to big political risks. Then the next move will be drastic reduction of those bureaucracies, including privatization of some of their attached agencies and bureaus. In the Philippines for instance, the privatization of the government grains trading monopoly, National Food Authority (NFA) has long been proposed and discussed. The cost to taxpayers, as well as price distortion due to its trading monopoly function -- for many years, it is the grains importation monopoly; and in some municipalities, it is the single biggest buyer of farmers' palay (unmilled rice) output.

Rice shortage that result in high rice prices will naturally create incentives for farmers of other crops to shift back to producing rice. And other investors, including micro- and small businessmen, will flock to a sector (like rice) that experience high prices and high profitability, and leave those sectors that experience low income, if not losses.

Market failure, as some statists call this, always invite and create market solutions. The "failure" or displacement is temporary, the same way that high profitability in one sector is also temporary once entry of other players and competitors is not hindered -- a contestable market situation.

It is government failure that needs to be corrected by going back to the market, and not by "more government" intervention.

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