Friday, October 27, 2023

Supply-focus food security over price-focus subsidy

Letter to Editor from Ahmad Ibrahim to FMT dated October 23rd 2023 blamed price control policy for compromising food security. It emphasised a point this blogger had against the Jihad Inflasi measures by then Prime Minister, Ismail Sabri and executed by Annuar Musa.

Recently in the budget 2024 debate in Parliament, former Agriculture Minister, Dr Ronald Kiandee urged the government not to oppress food producers as done by Annuar Musa. [His speech at 2:33:20 in the video below or the snippet in his FB here.]   

In one sweep, Annuar prejudicially labeled food producers as cartel without understanding the operational issues and taken actions detrimental to the industry and food supply chain.

Malaysians, including Ronald's own party member indirectly, tend to do so and are ever too reliant on subsidy to control prices. Price control made food production not financially viable, the mechanism resulted in supply shortage, and overdependent on import. 

Malaysia's globally competitive chicken industry was killed by the export restriction imposed by populist seeking Ismail and control freak Annuar. They were naive and arrogantly in-denial to acknowledge the larger margin from export provided the financial buffer to sustain the competitive margin of the local market.

The same happened for importer monopolised rice, in which government policy contributed to further shortage of padi, import dependency, and perpetually prolong the high rice price.

Rice problem

Ministry of Agriculture seemed to encourage major millers to form a cartel to fix price ceiling on local padi farmers at RM1,250 per metric tonne in which padi farmers supposedly be given RM500 per metric tonne subsidy. 

The problem with the subsidy mechanism is that it is not ensured to reach smallholding padi farmers. When BERNAS was recently allowed to raise prices of imported rice, government subsidy essentially benefited BERNAS.  It disrupted the retail rice pricing structure.

In the past, imported rice was cheaper than export. The subsidy mechanism involved a price floor for local farmers. Local rice are mixed with imported rice to raise quality and dilute the higher local padi cost.

Relaxing of import price naturally led to public rush for local rice. Rice millers naturally took advantage of the significant price differential. Only experts could visually differentiate the imported and locally produced commodity. 

Not all millers are bad apples hoarding rice to create artificial shortage. Most of local rice are taken up by government social program, wholesale purchases by restaurant and food service operators and beehoon factories. There were not enough to fulfill the sudden surge in demand for local rice.  

To be fair to rice millers, cost of padi feedstock were bid to RM1,600-RM1,700 per metric tonne following drought in the northern states and curb in export by India and other countries. The retail price of RM26 per 10-kg bag was no more profitable that an established miller up north closed shop. 

The rice supply chain problem will persist because BERNAS and Ministry of Agriculture bully attitude towards local rice producer will result in a fall in production. BERNAS and conflicted MOA officio will happily print money from import. However, it will not sustain with rice producing country focusing on their own food security.

The lower volume of padi milled will translate to reduced rice seedling and shortage is inevitable. Cost of seed have gone up. With  existing clones no more disease resistant, more problems brewing for the coming months ahead. 

The public, including politicians from both side of the divide, seemed to be in-denial of the real problem of our food security. It originated from Mahathir for foregoing agriculture, particularly food production and obsession with industrialisation in areas Malaysia has no tradition.

Even brashly vocal UMNO Ketua Pemuda is reluctant to point his gun at Syed Mokhtar and BERNAS. The failed to fulfill the condition on the rice concession that require maintaining rice stockpile of 6 months for Sabah and Sarawak, and 3 months for Peninsular.

No action was taken by the Director General for Kawal Selia Beras at MOA cum member of Board of Director of BERNAS.

And, it was Ismail Sabri who extended BERNAS concession by 10 years on insistent of Muhyiddin. In return, BERSATU received the disputed RM195 million donation plus an additional RM105 million more that is not part of the case against Muhyiddin 

Food security

The two experiance highlighted that food security policies should be focus on sustainable supply. If local rice farming could improve from 3-4 metric tonne per hectare to say 6 metric tonne per hectare, Malaysia can be self sufficient. 

Using technology, high yield seedlings, advanced farming method and efficient water management, countries such as Taiwan are consistently producing more than 10 metric tonne per hectare. If Malaysia can emulate it, it can be exporter.

The increase in awareness against gluten will increase demand for rice globally. There is commercial prospect for food security in rice.

The FMT article below:    

Price controls hinder efforts to achieve food security

Market-oriented policies and targeted interventions are generally more effective.

Letter to the Editor - 23 Oct 2023, 10:57am

From Ahmad Ibrahim

Food security is a global agenda. One contributing factor to the urgency on the need to be food secure is the rising cost of food. No doubt, supply chain disruptions through flare-ups of conflicts around the world have contributed much to the price rise.

The bigger concern is the ready availability and affordability of food itself. For Malaysia, its overdependence on imports has become a national concern, not to mention the ballooning of the food import bill, which creates more stress on the economy.

We have for years resorted to price controls to cushion the impact of high food prices on the population. Price controls, while well-intentioned, are generally not the most effective way to achieve food security. The announcement in the 2024 budget to phase out price controls on chicken and eggs is viewed as a positive sign for local production.

Economists agree that price controls can create market distortions. When prices are fixed below the market equilibrium, producers are discouraged by the low margins, and this can lead to shortages as consumers buy more due to the lower prices. This imbalance can disrupt the supply chain and lead to inefficiencies.

Price controls can reduce the incentives for farmers to produce more food. When they are not able to fetch fair market prices for their products, they may reduce their output or shift to other more profitable crops. This, in turn, can lead to reduced overall food production.

In some cases, price controls can even lead to a focus on quantity over quality. Producers may cut costs and compromise on safety and quality standards to maintain profitability when prices are constrained. This is bad for health and nutrition.

It is no secret that price controls can also lead to the black market or illegal trading of certain products. When prices are artificially low, a parallel market with higher prices can emerge, which can exacerbate supply chain issues and hinder government efforts to ensure food security.

Price controls do not address the root causes of food insecurity, such as logistical challenges, post-harvest losses, and poor infrastructure. These structural issues need to be addressed separately to improve food security.

Price controls can lead to the misallocation of resources. When the government intervenes in the market to set prices, it may be diverting resources that could be better used in other sectors, such as agriculture infrastructure or technology improvements.

Price controls often provide short-term relief but do not address long-term food security concerns. Sustainable food security requires investment in agriculture, research, infrastructure, and education.

Implementing and enforcing price controls can be administratively challenging. It requires significant government resources and can be prone to corruption.

Also, market participants may react to price controls by reducing investments, innovations, or production. This can have long-term negative effects on the food supply.

Price controls may also not account for global market dynamics. Food prices are often influenced by international factors such as weather, trade policies, and global demand. Local price controls may not effectively shield consumers from these global influences.

Instead of relying solely on price controls, a more comprehensive approach to achieving food security should include measures like supporting farmers with infrastructure, technology, and training to increase production and efficiency. The government could consider creating efficient and transparent markets that allow supply and demand to determine prices.

Implementing targeted social safety nets that provide assistance to those most in need, rather than trying to control prices for everyone is also an option.

Additionally, we can encourage diversified food production and sustainable agriculture practices; not to mention implementing risk management strategies to address the impact of external factors on food prices.

Other measures include investing in research and development to improve crop yields and resilience, and improving transportation, storage, and distribution infrastructure to reduce post-harvest losses and enhance food availability.

While price controls may be tempting as a short-term solution, they are not a sustainable strategy for achieving food security in the long run.

A combination of market-oriented policies and targeted interventions is generally more effective in addressing the root causes of food insecurity. In fact, price controls hinder food security.

Ahmad Ibrahim is a member of the Tan Sri Omar Centre for STI Policy at UCSI University.

To satisfy the yearning of Malaysian including the BERSATU politicians to worsen Malaysia's fiscal problem with continuing subsidy, Johari Gani offered a workable solution. No more subsidy but cash transfer to the targetted poor. 

There was a recent complaint of chicken price increase after the announcement to float chicken and egg prices. It turned out there was a major crackdown by police on syndicate repackaging non-halal imported chicken as halal. Market responded and price stabilise without any subsidy intervention. . 

Makes no more economic sense for subsidy to all the population. 

Economics is about managing and optimising scarce resources 

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