Media  Global Economy  2014.09.19

The fall in the price of rice and countermeasures against it

English translated version of "Business Prospect" on NHK Radio Channel 1 on August 19, 2014

1.The rice harvest season will come next month. What are your thoughts on the price of rice which is important for all consumers in Japan as their staple food?

It is a concern that the increase in consumption tax affects low-income households more severely than others because a larger share of low-income households' income is spent on food. This condition, known as regressivity, is a problem concerning the raising of consumption tax. A way of alleviating this negative effect is to introduce a "reduced tax rate" for foodstuff (a lower rate applied to foodstuff than those applied to other goods and services). Since an increase in the consumption tax in Japan to 10% is planned for October 2015 the introduction of a reduced tax rate for foodstuff is under study. Due to the status of rice as the staple food in Japan, a price rise could have further damaging effects on the living standards of low-income earners.

Fortunately, however, the price of rice is falling now. I have received a flyer from a rice store near my home, which advertises the reduction in price of Koshihikari rice produced in Niigata Prefecture from 4,700 yen for ten kilograms to 3,580 yen: a 24% price cut.

2.Why is the rice price falling?

It is because there is a significant surplus.

Two years ago we had the richest harvest for four years. Nonetheless, the rice produced in 2012 was sold by JA Zen-Noh (the National Federation of Agricultural Cooperative Associations) to wholesalers at a price of 16,500 yen per sixty kilograms. This price was higher than that in 2011 when the rice price was higher than usual due to the aftermath of the Great East Japan Earthquake. It was also 30% higher than the price in 2010 when the rice produced in that year was priced at 12,700 yen. It was bizarre that the price rose despite the yield increase. 2013 saw a richer harvest than the previous year, but the price remained at a high level of 14,500 yen.

The reason the price of rice soared despite the rich harvest was that the rice supply was restricted by JAs in the market. A reduction of supply in spite of a yield increase produces excessive stock. In June 2011 there was 1.8 million tons of rice held in reserve in the private sector. This remained at the same level in 2012. In June 2013 it increased to 2.24 million tons and was expected to increase to 2.57 million tons in June 2014. However, the inventory level in June 2014 was actually decreased slightly to 2.22 million tons. This was because a public entity organized by JAs and wholesalers' associations to support the rice industry purchased 350 thousand tons of rice, spending about 22 billion yen to take it off the market. However, the inventory level in 2014 was still higher than that of normal years. In comparison to the level in 2012 there is a surplus of 420 thousand tons this year. In addition rice cultivation acreage was not reduced to the level targeted by the acreage reduction program. Assuming that this year's rice yield stays at an average level, it is expected that 190 thousand tons of rice will be added to the current stockpile because of the yield from rice paddies in excess of the upper limit set by the rice acreage reduction program. This will increase the surplus stock to about 600 thousand tons which represents about 10% of the total annual amount of rice distribution.

Excessive stock will result in a rise in inventory costs which will have a negative impact on JAs' business operations. If JAs release their excess stock on to the market, the rice price will go down.

3.To what extent do you think the market price of rice may be decreased?

There is a rice futures market where the price for rice to be delivered in the future is fixed. When they crop it in spring, rice producers do not know at what price they will be able to sell rice in the autumn because the price depends on yield. To avoid the risk of price fluctuations producers conduct transactions in the futures market. For example, if at the time of planting in April a producer agrees with a buyer to sell the crops in October at a price of 10,000 yen they can secure that price whatever the actual price is in October. The price determined in the futures market is one predicted by the market participants based on a variety of information available at the time of transaction.

Looking at the current situation in the rice futures market, the futures price seems to be determined taking the current excessive stock into account. The futures price for rice to be delivered this October is set at 8,810 yen per sixty kilograms. This is 30% lower than the previous year when it was priced at 12,350 yen. The actual sales price in October is expected to come close to the current level of the futures market. If the rice harvest is rich this year, the price could go down further.

4.What impact does the fall in rice price have on farmers?

The Japanese government has been guaranteeing the income of rice farmers by inflating the rice price. However, most rice farmers do not earn their livelihood by farming. Seventy percent of rice farming households operate with farmland of less than one hectare. They spend less than 30 days in a year engaged in rice farming due to improvements and the accessibility of fertilizers, pesticides, rice planting machines and so forth. They are mainly working for companies and farming at the weekend. They cannot earn any income from rice farming because the overheads are too high. They make a living from their jobs as company employees.

Therefore, there is no need to guarantee rice farmers' incomes by inflating the price of rice. In addition, although rice acreage reduction has been expanded for a decade or more to reduce the supply of rice, the price has fallen by 30 percent in this period. This shows the failure of the rice acreage reduction program intended to maintain a high price.

Full-time rice farmers who earn their income from rice farming, though they are in a minority, will be affected by a reduction in price. To compensate for the losses caused by lower prices, direct subsidies can be made from a government fund for these full-time farmers as the US and Europe do.

A traditional countermeasure after a fall in prices is for the government to purchase rice from the market (later using it for livestock feed). Thus, taxpayers' money has been spent by the government to maintain the market price. The government purchase is restricted solely for the purpose of creating a stockpile which is to be released in an emergency. The government's excuse for creating the excessive inventory was the necessity to increase the level of the reserve. However, it is a contradictory policy for the government to, on one hand study the possible introduction of a reduced rate of consumption tax to reduce regressivity while on the other hand increasing the price of rice through intervention in the market. It is a good opportunity for the government to change its policy to a direct subsidy for full-time rice farmers affected by price drops while leaving the price of rice to be determined by the market.

(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 August 19, 2014.)