Media  Global Economy  2015.02.16

Issues of food and agricultural policy this year

English translated version of "Business Prospect" on NHK Radio Channel 1 on January 06, 2015

1.There were some media reports regarding the shortage of butter last year. What are your thoughts on the issues regarding food and agricultural policy this year?

There are some big issues this year:
- Countermeasures against a fall in the price of rice. The price of rice fell by around 20% last year;
- The TPP negotiations will come to the boil this year;
- The fundamental reform of agricultural cooperatives for which Prime Minister Shinzo Abe has shown enthusiasm. If it takes place it would be the first time in sixty years.

Before going into the details of these issues I would like to mention the shortage of butter which occurred last year.

Milk is a strange product. It is processed into butter and powdered skim milk. In summer cows get tired from the heat and yield less milk. However, human consumption of milk increases because of the heat. As a result there is a shortage of milk in summer. In such times, suppliers produce milk by adding water to butter and powdered skim milk (which are stocked in winter and reconstituted into milk). This is marked as "processed milk."

Some explain that the shortage of butter is caused by a decrease in production of raw milk due to the retirement of large numbers of dairy farmers. This is incorrect. The number of dairy farming households had declined from approximately 420,000 in 1963 to 30,000 in the year 2000. It continued to decrease gradually and reached the current level of 20,000. There was no significant number of retiring dairy farmers last year to justify the claim that this has caused the shortage of butter.

In addition, raw milk is processed into butter and powdered skim milk simultaneously. So, if raw milk were in short supply a shortage would also have applied to skimmed milk powder as well as butter. This was not the case however. Farmers may be concerned that an increase in production of raw milk to meet the demand for butter might have the knock-on effect of creating an oversupply of skimmed milk too.

The domestic supply of butter was insufficient, but if you turn your eyes to the international market, dairy products including butter were in oversupply due to an increase in production in Europe and a drop in Russian purchases. The price of dairy products significantly decreased. The strange thing is that such an excess of cheap butter in the international market did not flow into the Japanese market.

This is because the import of butter in the private sector is effectively banned by the high import duty, and an import quota with a lower duty rate is used exclusively by the government organisation (Agriculture & Livestock Industries Corporation) which belongs to the Ministry of Agriculture, Forestry and Fisheries (MAFF). MAFF is reluctant to import dairy products to avoid supply-demand imbalances as it tends to cause a drop in milk price. When it does import butter it does so at the minimum level. As a result, it is rare for an import of dairy products to be made at an appropriate time and satisfy the demand in the domestic market. The elimination of the import duty may damage domestic dairy farmers, but this can be counterbalanced by paying a government subsidy directly to farmers as the EU and the US do.

2.You mentioned the import duty. What possible developments in the TPP negotiations do you foresee?

As a result of the US mid-term election, a majority of both upper and lower houses of the US Congress is held by the Republican Party which promotes free trade. In the US, Congress has the authority to negotiate trade agreements with foreign states. I would think that the post-election Congress will pass a law providing the government with the authority to negotiate the TPP agreement this year. However, Congress may not give carte blanche, but rather make the law conditional upon a complete elimination of tariffs in other countries.

After the mid-term election results President Obama may try to make a "legacy" in the history of his administration. He will not be able to achieve much in domestic politics because the Republicans will oppose anything he wants to do. So, he may want to conclude the TPP agreement, which the Republicans will support.

There was the case of President George H.W. Bush who lost the presidential election against to the challenger Bill Clinton. President Bush wanted to achieve something during the remaining days of his administration, and finalised the important part of the agricultural negotiations in the GATT Uruguay Round negotiations. It was done in a short period of time after he lost the presidential election despite the fact that the negotiations on agricultural issues had been long-stymied by the opposition of the EU. The agreement reached with the EU by President Bush was called "Blair House" agreement. It comes from the name of the official state guest house close to the White House in Washington D.C. where the agreement was made.

Taking these situations into account, I would think that while the TPP negotiations will be accelerated this year, it is probable that the US will insist on the elimination of tariffs, which is backed by the Republicans. The Abe government may face difficulties which require serious political decisions.

3.What do you think about the progress in measures against the decline in the price of rice or reform of agricultural cooperatives?

The agricultural industry is calling loudly for market intervention by the government to increase the price of rice after the fall in price last year. I disagree with an increase in the price of rice. This contradicts the introduction of a reduced rate of consumption tax on rice and other foodstuffs decided recently by the government because an increase in consumption tax on these goods will affect lower-income households. I would think that the fall in the price of rice is favourable for low-income consumers.

Part-time farmers who earn less of their income from farming are not affected by the fall in the price of rice. Full-time farmers who are affected by a drop in prices can be supported by direct payment from government funds.

Agricultural cooperatives are exempted from the anti-trust laws because of their legal status as cooperatives. As a result, the price of agricultural materials and inputs, such as fertilisers, pesticides and machinery, which take up a large part of production costs, are set higher. This results in a higher price for agricultural produce and foodstuff. Zen-Noh, the national federation of agricultural cooperatives, should be converted into a joint-stock company, to which the anti-trust laws are applicable. Then, we can expect a reduction in the price of agricultural produce.

There is a long-standing agricultural policy whereby the supply of rice is restricted by the acreage reduction program, for which an amount of 400 billion yen of taxpayers' money is paid to farmers, and the price of rice is increased, with the result that consumers are forced to pay an amount of 600 billion yen for rice each year. Rice and other agricultural produce whose domestic price is higher than international price are protected by high import duties. Do increasing food prices due to higher tariffs really serve the national interest? The agricultural policy implemented by the government so far has always been of an increasingly regressive nature as has the increase in consumption tax.

A direct payment to farmers out of government funds assists farmers and gives consumers benefits regardless of occurrences like the shortage of butter, a decline in the price of rice or the elimination of tariffs due to the TPP agreement. The objective of agricultural policy should be the stabilisation of the food supply. I would think that if this is made clear, policy direction will also become clear.

(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 January 06, 2015.)