Media Global Economy 2013.10.01
1. In relation to the TPP negotiations it is reported that rice and other agricultural products are priced higher in Japan than in the international market. What characterizes Japan's rice market?
As is true of all products, supply and demand determine the price. An increase in demand pushes the price up, and a decline in demand makes the price go down. In contrast, the price goes down when supply increases, and it goes up when supply decreases.
The demand for rice in the Japanese market has consistently fallen over a long period of time. Accordingly the price of rice has fallen during this period. The wholesale price of rice produced in 2010 was 25% lower than that produced in 2001. There was no sudden drop, but the price has been on a steady downward trend. This reflects the gradual reduction in demand and consumption of rice.
Needless to say, the production of agricultural products is affected by weather, so the size of harvests and supply of crops fluctuate accordingly. In the case of rice, a crop situation index indicates the volume of a harvest by comparing that year's harvest per unit area with the average volume of the harvest in past years. If the crop situation index is 100 for a given year, this means that this year's harvest is the same as an average year. If the index is greater than 100, it represents a large harvest. If it is smaller than 100, it indicates a poor harvest.
Although the price of rice is generally on a downward trend as mentioned above, it surges in cases of poor harvests. For example, in 2003 the crop situation index was 90 meaning that it was a poor harvest. As a result, the price of rice increased by 30% from the previous year. This illustrates the fact that the price of rice responds to the laws of supply and demand like any other product.
2. What do you find in the recent rice market?
The demand for rice has been on a moderate downward trend. Accordingly the price of rice is, on the whole, also falling. Turning to the supply side, the crop situation index of 2012 was 102 as announced by the Ministry of Agriculture, Forestry and Fisheries (MAFF) last year, which indicates a good harvest for the first time in four years. So, logically, there should have been a drop in rice price because of an increase in supply and a decrease in demand.
However, the reality was that the wholesale price of rice (the transaction price between Japan Agricultural Cooperatives ("JA") and wholesale dealers) produced in 2012 hovered around 16,500 yen per 60 kilograms. The wholesale price of rice produced in 2011 was 15,215: 20% higher than that produced in 2010. This was caused by the aftermath of the Great East Japan Earthquake. The wholesale price of rice produced in 2012 was about 10% higher than that of 2011 meaning that 2012 rice was priced as high as 130% of the rice produced in 2010. This is a peculiar situation where the price climbs despite a decline in consumption and an increase in supply.
3. Why do you think this irregular movement occurred in the market?
A special payment arrangement is provided for rice farmers in Japan to fill a long time-gap between harvesting and consumption. The JA makes an initial payment to farmers when they harvest rice, and adjusts the amount of such payment when it sells rice to wholesale dealers. The volume of the JA's collection of rice has been declining. The JA offered farmers a higher temporary payment than in average years in order to strengthen its collection capability. MAFF officials stated last October that the price of the last year's rice was raised because of the JA's increase in initial payments which was passed on to the wholesale price determined through negotiation with wholesale dealers.
However, according to the realities of supply and demand, the price of rice must go down sometime in the near future. If this were to happen farmers would have to reimburse the difference between the amount of initial payment and the actual wholesale price. This situation would inevitably disappoint farmers. However, in reality, this will never happen.
As I mentioned earlier, the price of rice is largely determined in the same manner as any other product. On the other hand, it should be noted that the price of rice as well as its production is significantly affected by the then-current government's policies and wrangling between political parties and with the JA. Until 1995, since before World War II, the price of rice was determined by the government under the Food Control Law. The government purchased rice at the producer's price which was fixed by the government at a higher level than could be determined by supply and demand in the market. Therefore, production of rice significantly expanded and the government accumulated a large surplus of rice. It cost 3 trillion yen to dispose of the surplus, and led to the rice paddy set-aside program.
In addition to the rice paddy set-aside program, by which supply of rice is manipulated to keep the rice price higher, the individual household income support system was introduced in 2010, under which the government compensates rice farmers for the difference between the guaranteed price and the actual market price so that farmers do not suffer from any financial hardship due to a decline in the market price.
The price of rice might fall sometime in the near future, and the JA might ask farmers to pay a part of the initial payment back to the JA. In such a case, farmers would be compensated under the individual household income support system, and thus would be unaffected by the fall in the rice price. Ultimately, no farmer will voice dissatisfaction with the JA even though they set the initial payment higher than the market price.
4. What are the conditions of distribution of rice after JA sells it to wholesale dealers?
When wholesale dealers pay a higher price to the JA, they want to pass it onto retailers in order to maintain their profit margin. However, this is not easy. Although the actual retail price in the market can rise to some extent as a reflection of the higher wholesale price, wholesale dealers sometimes fail to pass on the entire increase in wholesale price to retailers. Against this background, the rice futures-trading market attracts attention of wholesale dealers who see it as an alternative means to establish the price of rice other than through the negotiation with the JA. The Japanese government approved a pilot project for rice futures-trading two years ago. However because the JA did not join the market the volume of transaction was small. The project was expected to be cancelled, but the commodities exchange has managed to obtain government approval to extend the project period for two more years. Wholesale dealers are trying hard to stimulate trade in the futures-trading market. They intend to suppress the price negotiated with the JA to the level of the transaction price established in the futures market (therefore the JA opposes the futures market).
The retail price of rice has increased recently. As a result, demand in rice is continuing to fall. The total demand for rice was 13.41 million tons at its peak, which has decreased to as low as 8 million tons at the moment. I believe that the futures-trading market must be stimulated in order to maintain and develop rice production in Japan.
(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on September 3, 2013.)