Media  Global Economy  2018.01.24

Why Do Rice Prices Rise?: Farmers aren't poor. The acreage-reduction policy only hurts the taxpayers / consumers.

The article was originally posted on Webronza on November 29, 2017

Wholesale prices for rice sold by the National Federation of Agricultural Cooperative Associations and others to wholesalers are rising again this year. Prices have climbed 10.0%, 8.6% and 8.2% over the past three years, increasing by a total of about 30% over that span. As a result, the prices that consumers pay for rice at supermarkets and other locations are also rising.

How are rice prices set?

As taught in politics and economics textbooks in Japanese high school, rice prices are determined by supply and demand. This is the same as all other goods. If demand, or consumption, grows, then prices will rise, while a decline in demand results in lower prices. If supply, or production, grows, then prices will fall, while a decrease in supply results in higher prices. This is simple economics.

The consumption of rice has been declining over the long term. In recent years, consumption has been flat or has decreased slightly. There has been no increase in consumption that would lead to higher prices.

What about production? The rice crop situation index for rice produced this year was 100, which means the harvest was normal. So the harvest did not cause prices to rise. In other words, looking at factors only in the market, there is absolutely no reason for rice prices to rise.

Then why do rice prices rise?

If so, that would mean rice prices are being artificially manipulated. The government's acreage-reduction policy does just that.

The acreage-reduction policy is a policy of paying subsidies to farmers to reduce their production / supply of rice, which leads to higher rice prices, with the aim of increasing farmers' sales revenue and agricultural cooperatives' sales commission revenue.

Farmers benefit because they receive subsidies and also see rice prices rise. Meanwhile, the general public and consumers face the twin burdens of a higher taxpayer burden and a higher consumer burden.

Simply reducing rice production would give the impression that this is a backward-looking policy that provides no benefit to the people. So the government presented the plausible objective of increasing the nation's food self-sufficiency rate by getting farmers to switch (known as a "change of crops") from growing rice to crops such as wheat and soybeans, which have a shortage of domestic production, causing the nation to rely on imports.

LDP lawmakers with ties to agriculture interest groups embrace feed rice

However, most rice farmers are part-time farmers, so they have neither the skills nor the time to grow crops such as wheat and soybeans instead of easily-grown rice. This led to the practice of "growing to dispose," in which wheat or soybeans are planted but not harvested, allowing for acreage-reduction subsidies to be received by claiming that a change of crops was conducted.

The Ministry of Agriculture, Forestry and Fisheries tacitly allowed this because it just wanted to reduce rice production. Although more than 300 billion yen in taxpayers' money was being spent every year on acreage-reduction and change of crops, the food self-sufficiency rate was actually declining instead of increasing. This led to the Liberal Democratic Party turning their attention to rice used as animal feed. For farmers, rice cultivation is the same whether it is destined for human or animal consumption. In 2009, the LDP began paying subsidies to farmers who changed crops to feed-use rice.

Increased production of feed-use rice by strengthening acreage-reduction

After the LDP returned to power, it sharply increased acreage-reduction subsidies for production of feed-use rice in 2013. The amount of these acreage-reduction subsidies was set so that they were roughly equal to sales revenue from food-use rice at the time the acreage-reduction policy was revised. So for farmers, it became more profitable to grow rice for consumption by cows and pigs rather than by the people, since they earn revenue from the sale of feed-use rice and also receive the other subsidies in addition to these acreage-reduction subsidies.

Thus the acreage-reduction policy was strengthened. The production of feed-use rice increased while production of food-use rice decreased, and this is the reason that rice prices have risen for three consecutive years.

Acreage-reduction will continue next year and beyond

This is the content of the "abolition of the acreage-reduction policy" that Prime Minister Abe proudly boasted of accomplishing after no one else has been able to do so for 40 years. Although this is fake news, some major newspapers reported this as framed by Abe. A true abolition of acreage-reduction would have led to a sharp decline in rice prices and massive opposition by agricultural cooperatives and others in the agriculture industry, but none of those reporters realized this. There is no way that a task that could not be touched for 40 years can be realized easily without objections from the pressure of the agricultural cooperatives. To understand this, just look at how vigorously agricultural cooperatives politically resisted reforms of agricultural cooperatives. High rice prices realized by acreage-reduction are core interests for agricultural cooperatives.

This was when the government decided to end allocation of rice production targets (or acreage-reduction targets, depending on your perspective) in 2018 (and this was reported as abolition of acreage-reduction), but the government and the Ministry of Agriculture, Forestry and Fisheries decided to support supply-demand adjustment by the private sector in 2018 and afterward, based on the view that production adjustment (acreage-reduction) is important.

It was newly reported that the National Federation of Agricultural Cooperative Associations and others will create a private-sector nationwide organization to allocate targets, a task that had been handled by the government, but it was already decided back in 2013 that the private sector will take over production adjustment. This and the increase of subsidies for feed-use rice are both key contents of the 2013 revision of the acreage-reduction policy. So national newspapers are wrong in arguing that these two steps run counter to the aim of abolition of acreage-reduction. There was no abolition of acreage-reduction to begin with.

Farmers are not poor

Every political party calls for increasing the income of farmers, but even rice farmers -- whose income is one of the lowest among farmers -- earn about the same as the national average income. Pig farmers earn net income of 15 million yen a year, almost four times as great as the national average.

Ever since the mid-1960s, the income of farmers has been higher than the income of salaried workers' households. Most rice farmers are either elderly pensioners or part-time farmers, and the income earned from rice is zero or negative.

Even if the acreage-reduction policy is abolished and rice prices decline, the farmers can earn rent revenue by leasing the land to full-time farmers, so they do not suffer a loss but gain. A decline in rice prices would impact agricultural cooperatives since their sales commission revenue will decrease, but for rice farmers the acreage-reduction policy serves no purpose.

In other words, the taxpayers / consumers are the only ones being hurt by the acreage-reduction policy. The only reason that increasing the income of farmers has become the biggest theme in agricultural policy is because it wins votes in elections.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on November 29, 2017.)