Media Global Economy 2017.10.12
The proposed permanent listing of rice futures, which are being traded on a trial basis, has been postponed again due to opposition from the Japan Agricultural Cooperatives (known as JA) group and the ruling Liberal Democratic Party of Japan (LDP). This means the trial of rice futures trading has been extended three times since it started in 2011.
The world's first futures market was the Osaka Dojima Rice Exchange
A futures contract is an agreement to buy or sell an asset at a certain future date for a certain price agreed upon at the present time. Nowadays, the assets underlying futures contracts include not only agricultural products, but also a wide range of assets from gold and crude oil to currencies and indexes. The Chicago Board of Trade grain futures contract is used as a benchmark for world grain prices.
As a matter of fact, the world's first futures market was the Osaka Dojima Rice Exchange established in 1730. However, the free rice market was closed in 1939, as the government began to implement direct controls over the rice market due to wartime food shortages.
The staple food control system in which the government had controlled rice prices and distribution was abolished in 1996, and this gave rise to the possibility of a revival of rice futures trading. In 2005, the commodities exchanges in eastern and western Japan applied along with the Ministry of Agriculture, Forestry and Fisheries (MAFF) to get rice futures listed. However, the application was denied by the then LDP government, which had strong ties with JA.
Background that led to the revival of rice futures trading in 2011
In 2005, a fraud involving rice transactions by JA Zen-Noh Akita Headquarters was brought to light. In this case, employees of the headquarters illegally sold rice entrusted to them by farmers, thereby fraudulently obtaining government subsidies. In addition, using the official auction system of the National Rice Exchange and Price Formation Center established for the purpose of forming fair rice prices, JA Zen-Noh Akita kept rice prices at artificially high levels through fictitious transactions with its subsidiary rice-wholesaler.
Subsequently, endeavoring to maintain desired rice prices, JA quit using the National Rice Exchange and Price Formation Center, and instead shifted to negotiation transactions with wholesalers. Commanding a share larger than 50% of the rice distribution market, the JA group was capable of exercising considerable influence over rice prices through negotiation transactions with wholesalers. As a result, the National Rice Exchange and Price Formation Center saw the number of its users decrease dramatically and was dissolved in March 2011, depriving MAFF officials of the opportunity to secure plum post-retirement jobs.
However, JA's strategic change backfired. The individual household income support system introduced in fiscal 2010 by the then Democratic Party of Japan (DPJ) is a system in which the government pays farm households the difference between certain production costs and the market price for their produce. The market price serving as a basis for calculating the difference must be objective and unsusceptible to manipulation by interested parties.
The commodities exchanges reapplied for trial listing of rice futures products so as to provide an objective price index of rice. It was the very reason provided to them for JA's shift to negotiation transactions. In 2011 when political power was transferred from the LDP to the DPJ, the MAFF approved the application, reviving Japanese trading in rice futures after a 72-year hiatus.
The MAFF, which found it increasingly difficult to reassign its retiring officials to positions in private or semi-governmental organizations, had an ulterior motive as well: they expected the revitalization of commodity exchanges to help them secure plum jobs for many retiring MAFF officials. In 2007, the MAFF parachuted an ex-vice minister onto the Tokyo Grain Exchange with a view to reviving rice futures trading.
Is a futures contract evil?
Quite a few people regard futures contracts as speculation. However, they are a means originally intended to help producers mitigate the risk of price fluctuations and conduct business in a stable manner. For example, a farmer who has entered into a futures contract prior to cropping for the sale of rice at 15,000 yen per bag can get 15,000 yen per bag, even if the rice price plunges to 10,000 yen per bag during the harvest season due to a bumper crop or dwindling demand.
The JA group claims that rice futures trading can have undesirable consequences; they argue that if rice futures prices increase, farmers may become increasingly motivated to produce rice and less willing to cooperate with rice acreage reduction, and that influx of speculative money in the rice futures market could cause wild swings in rice prices.
However, a rise in the rice futures price to 20,000 yen caused by speculation would be a good thing for farmers. Let us assume that seeing rice futures prices increase, farmers press ahead with rice production without participating in rice acreage reduction. Even if this leads to a drop in the rice price during the harvest season, farmers can actually get income based on the futures price, not on the spot market price. Furthermore, the policy of trimming rice production, which requires 400 billion yen in government spending on the acreage-reduction subsidy to raise rice prices while forcing consumers to shoulder a heavy financial burden of 600 billion yen, should be abolished for the interests of the national economy.
Futures contracts are a means originally intended to help farmers carry out stable business management. It does not matter whether they participate in rice acreage reduction or not. The U.S., where grain futures are traded, had implemented acreage reduction programs until 1995. If futures prices rise, producers strive to increase production, and consequently, spot prices realized in the future, drop to the benefits of consumers. This chain of events helps stabilize the market. Disadvantages of the futures market pointed out by JA are in fact advantages of the futures market from a national economic perspective.
Opponents of rice futures trading say: "Do not make rice subject to speculative transactions." However, over a long period of approximately 200 years when rice had far more significance as the primary staple food of the Japanese diet than at present, rice futures were traded. The JA group's argument has no basis whatsoever.
JA turning to money-market speculation
JA criticizes speculation. However, the JA Bank (Norinchukin Bank) is the very organization that, as Japan's largest institutional investor, is reaping outsized profits from investing in marketable securities on Wall Street in New York, using the tremendous amount of cash deposited in it, which has finally exceeded the threshold of 100 trillion yen.
Although trading in rice futures on a trial basis was approved in 2011, JA did not participate. Having gotten into financial trouble due to JA's non-participation, the Tokyo Grain Exchange was dissolved with rice futures traded there taken over by the Osaka Dojima Commodity Exchange. The failure to have secured sufficient listing volumes was used as a reason for the latest postponement of the proposed permanent listing. It meant that the MAFF, striving to secure plum jobs for its retiring officials, had yielded to the power of the JA group. Nevertheless, with a view to approving the permanent listing at some time in the future, the MAFF has not denied the request for permanent listing, but instead approved the extension of the current trial of rice futures trading.
Real reason behind JA's opposition
Sales commissions paid to JA are determined by sales. For JA, wanting to earn more commissions, acreage reduction is a convenient method of boosting sales because it keeps surplus rice off the market. This is why JA has been keen to push ahead with acreage reduction.
The JA group opposes rice futures trading for the same reason that it has promoted the acreage reduction program as well as negotiation transactions -- because trading in rice futures will make it impossible for JA to manipulate spot market trading. While rice farmers will benefit from a hike in futures prices, JA will not at all, since its commission revenue is determined based on spot prices. The interests of farmers differ from those of JA. JA's opposition to rice futures is nothing more than an argument aimed at protecting the interests of the JA organization, not those of rice farmers.
The JA group has actually neglected or even damaged farmers' interests in order to put its own interests before theirs. In 2007, domestic rice prices fell substantially. JA received information in advance that the distribution of seed rice had been brisk and rice had been overplanted. This prompted JA to make a pre-emptive move: they slashed the provisional price they paid to farmers from 12,000 yen in the previous year to 7,000 yen per bag. This move was intended as JA's message to farmers that if farmers entrusted sales of rice to JA, the maximum amount of money they could get would be 7,000 yen, and that JA wanted to avoid dealing in rice as much as possible, as large stocks of unsold rice would compel them to bear the interest and storage costs. Agricultural cooperatives, which were established for use by members, in effect delivered a notice to farmers that they would not collect rice produced by them while no longer serving them. At that time, this move by JA was known as the "7,000-yen shock" in the rice industry.
Agricultural reform under the Abe administration showing its true colors
As agricultural reform and deregulation such as allowing business corporations to own farmland require laws to be changed, it is necessary to get the LDP's approval to have related bills deliberated at the Diet. However, whether or not to approve a rice futures market is a matter determined only by the Minister of Agriculture, Forestry and Fisheries, and there is no room for the LDP's intervention.
The "abolition of the rice acreage reduction program" was found to be fake news fabricated by the Abe cabinet. Reform of the agricultural cooperative system was also found to be flawed. And recent developments have revealed that the administration allowed the JA group and lawmakers affiliated with it to intervene in an issue that the administration was supposed to determine by itself.
Agricultural reform under the Abe administration is showing its true colors.