Column Global Economy 2016.11.29
A Japanese national paper has published a story regarding a certain trading company currently importing rice who claim that they import rice at 150 yen, the estimated import price set by the Ministry of Agriculture, Forestry and Fisheries but has actually been importing at a price of 100 yen. The difference (50 yen in this case) being paid to a wholesaler as a rebate. As a result of this, the wholesaler has been selling the imported rice at a lower price (150 yen) than the 200 yen price set for domestic rice by the Ministry of Agriculture, Forestry and Fisheries.
The Ministry of Agriculture, Forestry and Fisheries had stated that there will be no effect on Japanese rice agriculture even if rice imports from the US and other countries increase due to the TPP. Therefore, the Democratic Party firmly state that until the truth of this matter is uncovered they will not approve the TPP or deliberate on the budget bill, both of which were planned on the assumption that the TPP will not influence Japanese rice agriculture. This problem is becoming the biggest obstacle to the approval of the TPP in the National Diet.
What is the system for rice imports?
Through the WTO Japan guarantees a mandatory import quota of 770 tons of rice without tariff but with mark-ups as mentioned below as well as that under a prohibitively high tariff. This imported rice is called minimum access rice. An incident of stained rice in 2008 was attributed to minimum access rice. This rice had been stored for a long time before being requested by a foreign country for use as aid. In the meantime the rice had grown mould. Traders who purchased the mouldy rice cheaply from the government resold it as high-price staple rice. A scandal ensued.
A special quota of 100 thousand tons, called the SBS (simultaneous buy and sell system), which is for staple rice is included in the quota of 770 tons.
This special quota was established in the GATT Uruguay Round due to US demands for the right to sell rice directly to users and consumers. This is a system where foreign suppliers (sellers) and Japanese buyers each tender bids at the same time. The bid which has the highest margin (the difference between the buyer's price and the seller's price) is selected. This price difference is called a mark-up, and the Ministry of Agriculture, Forestry and Fisheries collects the difference.
What is price manipulation of imported rice and the rebate?
I will explain the problem using example numbers.
First, the Ministry of Agriculture, Forestry and Fisheries establish an estimated price for domestic sales of rice, let's say 200 yen, and an estimated price for the import price of rice for example 150. This price difference is the lowest mark-up: 50 yen.
In a case where a pair of trading companies bid 210 yen for the declared price of domestic sales, 150 yen as the declared import price and 60 yen as the mark-up, this bid is selected if there are no offers with a higher mark-up.
The problem this time, called price manipulation, was a case when the declared import price was 150 yen but the actual import price was 120 yen and the difference between declared import price and actual import price, 30 yen, was paid to the wholesaler in Japan as a rebate. As a result, the actual sales price was 180 yen, and the rebate from the trading company (30 yen) was deducted from the declared sales price of 210 yen.
This price is lower than the estimated domestic sales price of 200 yen set by the Ministry of Agriculture, Forestry and Fisheries. The Ministry of Agriculture, Forestry and Fisheries had explained that the price of the SBS rice would be at the same level as low price domestic rice, so there would be no influence on domestic rice farmers even if the import quota of rice from the US and Australia was expanded.
I heard the Democratic Party is going to investigate errors in the explanation given by the Ministry of Agriculture, Forestry and Fisheries after receiving information from a newspaper. In addition, the Japan Agricultural Cooperative has been requesting the Ministry of Agriculture, Forestry and Fisheries find out the facts and take necessary measures due to increasing anxiety and distrust about the possibility that the distribution of low price imported rice will have an influence on domestic rice.
Is this the real issue?
The issue raised by the report is that imported rice might be sold at a lower price than domestic rice therefore influencing demand for domestic rice causing a decline in the rice price.
However, is this true?
Consumption of staple rice in Japan is about 8 million tons, most of it domestic rice. On the other hand, SBS rice in the minimum access quota is only 100 thousand tons, so there will be no influence on the total demand and supply even if the imported rice is sold at a discount. Also, due to the decline in the price of domestic rice and the rise in the price of imported rice, only 12 thousand tons of rice out of 100 thousand tons quota was imported in 2014. A reduction in the price of imported rice was not necessary; the price of domestic rice was low and there was no need to import rice.
When Japan first decided to accept the minimum access rice in 1993, there was an agreement in the Japanese cabinet that a condition must be that the minimum access rice should not influence domestic rice demand. Based on this, Japan has been using ordinary imported rice as animal feed and foreign aid and trying not to use it as staple rice in the domestic market. Also, regarding imported rice such as SBS rice which is supplied in the domestic market, the Japanese government purchases the same amount of domestic rice as imported rice from the market. In a total market of 8 million tons, when 100 thousand tons of imported rice is supplied, the government purchases 100 thousand tons of domestic rice to put into the rice market in order to balance this.
Price is decided at the level which demand is equal to supply. As long as this does not change, the price will not drop. The price of domestic rice changes depending on the volume of domestic rice production, not due to the influence of SBS rice.
Regarding the import quota which will be expanded as the result of the TPP, it will be treated in the same way as the previous import quota, so will not influence domestic demand and supply of rice. As for the explanation by the Ministry of Agriculture, Forestry and Fisheries that the TPP agreement will not influence domestic rice farmers because the price of the SBS rice is the same as low price domestic rice, this was just an inaccurate explanation. Just bear in mind that the Ministry of Agriculture, Forestry and Fisheries is a public office which knows little of economics.
Moreover, the Japan Agricultural Cooperatives were behind the JA Akita incident, where they made up a bogus transaction using a fair rice market system and inflated the rice price. So I do not think the Japan Agricultural Cooperatives deserve to criticise such business practices.
The real issue is different
Let us suppose that the quality of imported rice is the same as domestic rice. Would the wholesalers give a discount on the imported rice which could be sold at 210 yen and sell it at 180 yen? They would not. If they could purchase from a trading company at a low price, it would be profit for the wholesaler.
Then, under what conditions does this wholesaler need to sell the imported rice at 180 yen? It is when the quality of the imported rice is lower than the quality of domestic rice. Such cases are a real issue.
The Ministry of Agriculture, Forestry and Fisheries seems to consider that price manipulation and rebate dealing are not illegal as long as the mark-up is paid. Then, why do the estimated domestic sales price and estimated import price need to be established?
If the bid is chosen based only on the size of the mark-up why do the domestic sales price and import price need to be established. However, since the estimated price is established, wouldn't companies who bid without following the estimated prices be breaking the law?
However, as the aforementioned case shows, both the actual domestic sale price and the actual import price merely became lower than their declared prices for the Ministry by the difference between actual import price and estimated import price (30 yen). Neither the import company nor the wholesaler made an illegal profit as a result of price manipulation. It is not these companies' fault but the fault of the Ministry of Agriculture, Forestry and Fisheries who established impractical estimates prices. If there is a difference in quality between domestic rice and imported rice, the Ministry of Agriculture, Forestry and Fisheries should have considered this and established the estimated domestic sales price.
The upper limit of the mark-up agreed in the WTO is 292 yen per a kilogram. Since the price of domestic rice is 200 yen, rice cannot be imported at 292 yen. (Incidentally, the tariff on rice outside of the import quota is 341 yen.) The Ministry of Agriculture, Forestry and Fisheries has been setting the two estimated prices and the mark-up at an appropriate level to ensure the mark-up is under 292 yen. It is an obscure process where outsiders cannot know how the price is decided.
Such uncertainty caused problems like the one mentioned earlier.
A more pressing problem is the policy for rice, where a subsidy for acreage reduction is paid to farmers in order to reduce rice production which considerably inflates the price rice consumers have to pay.
If Japan abolishes the acreage reduction policy, rice production will increase and the price of rice will drop to between 120 and 130 yen. It will be lower than the price of imported rice. Then no tariff or minimum access would be needed. Rice demand will be satisfied by domestic rice alone, and rice exports will increase too. Moreover, price manipulation and rebate dealing in the SBS system will stop.
Then no tariff or minimum access would be needed. Rice demand will be satisfied by domestic rice alone, and rice exports will increase too. Moreover, price manipulation and rebate dealing in the SBS system will stop.
If the Democratic Party is going to investigate price manipulation and rebate dealing, I, would like them to present the Liberal Democratic Party with a counterproposal to abolish the rice policies which impose a burden on the Japanese people both as taxpayers and as consumers. To merely oppose is not the only job for an opposition party.