Tuesday, May 06, 2008

Agri Econ 2: Rice Laissez Faire vs. Subsidies

As rice and other food prices were spiking in many parts of the world, governments were making matters worse by constraining what farmers and traders can store and export on suspicions of “hoarding”. In the Philippines for instance, some traders have refused buying rice from farmers sometime last month after the government’s grains regulation and marketing body, aided by the police have raided some traders and accused them of hoarding, a crime with stiff penalties.

Discouraging, if not prohibiting, bulk storage of rice removes the incentives for current and future profit and hence, people would rather stop producing since there is penalty in stocking supply.

Governments should better step away from regulating, directly or indirectly, rice production, milling, trade and distribution. Grape farmers, cattle farmers, aquaculture farmers, etc. are generally left on their own in the production to distribution aspect of their sub-sector; why should rice farming be exempted and heavily regulated in cases of price spikes?

If rice farmers and/or rice traders cannot stock their surplus rice for sale in anticipation of bigger demand or higher price in the coming weeks and months, many of them would not stay in that sector, and better move to other less-regulated sectors where profit will be higher. Many government agencies are in the business of stockpiling and hoarding, from government food/rice authority, the central bank stockpiling forex and gold reserves, etc., why would rice farmers and traders be treated differently?

Many people still cannot appreciate the virtue of laissez-faire applied in rice farming and agriculture in general. Their mind is too fearful of “market failure” and market abuse, forgetting that government failure and government abuse are often staring them in their faces.

Markets are composed of individuals, you and me, rich or poor, producer or consumer, politician or voter, governor or governed. So when we talk of “free market”, we are talking of “free individuals”. One individual has the freedom to be industrious and get rich someday, while another individual has the freedom to be lazy, poor and miserable. One individual has the freedom to become a farmer and food producer, while another individual has the freedom to become a consumer and a professional street demonstrator attacking high food prices, high oil prices, high drug prices, etc.

If we cannot be laissez-faire with rice farming, what’s the implication - government will subsidize all farmers, including the inefficient, if not lazy ones; then government will hike and hike various taxes to sustain the subsidy? I think that’s what Mr. Kim of North Korea is doing.

Last March 17, 2008, I wrote this

Zero Govt Credit is Possible

The WB recently held a "Partial Credit Guarantee Conference" and they learned that credit guarantees are the favorite scheme used by SME groups and government agencies involved in small credit lending. They also observe that "schemes where the government is in charge of choosing borrowers and recovering loans have typically higher loan losses."

In a small rice farming village in northern Philippines that I visit regularly, I notice that government credit program is zero, but the credit market is alive. The system is locally-called "tampa": for every PhP 1,000 of loan, the farmer-borrower pays the lender 3 sacks of 50 kilos/sack of unmilled rice.

Loan repayment is high because the lenders and borrowers know each other. Bad borrowers are easily blacklisted, or lent small amount only, until he/they improve their credit image among the neighbors. In case of disasters like strong typhoon that destroys or wipes out the rice harvest, the lender can wait for the next crop, or the borrower can pay in kind like chicken or goat or other farm animals.

Lesson: zero govt involvement in lending is possible, and is often desirable. No taxes and bureaucracies needed, no political patronage and small-time-cronyism.

* See also: Agri Econ 1: Food Prices and Government, April 13, 2008

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