Reason behind JA's Opposition to Rice Futures Trading－Trial Listing for a Fourth Extension. No Rice Futures Trading without Abolition of the Rice Acreage Reduction Program－

On August 7, it was announced that the current trial listing of rice futures trading was approved for a fourth extension. When the third extension had been approved two years ago, I wrote an analysis on the matter in an article titled "People Protesting the Opening of Japan's Rice Free Market." Although the matter is politically unspectacular, it symbolizes Japan's agricultural policy on rice. I would like to once again discuss the matter from a different angle.

Difference between agricultural and industrial products in adjusting supply and demand

The Japan Agricultural Cooperatives (known as JA) group, which is the core of the so-called agricultural policy triangle consisting of the JA group, the Ministry of Agriculture, Forestry and Fisheries (MAFF), and the lawmakers affiliated with farm organizations, opposes rice futures trading for the official reason that "speculative trading will lead to instability of rice prices which has been a staple food for Japanese people."

However, futures trading is all the more necessary for rice, which is a primary product whose prices tend to be unstable.

In industrial products, adjustment of supply and demand is basically made by the quantity supplied (increasing and decreasing inventory). Downturn in demand is coped with not by lowering product prices, but by increasing inventory. Conversely, growth in demand is met by breaking down inventory. As a result, product prices remain unchanged and stable. It was John Maynard Keynes who focused on this point and achieved his then groundbreaking studies in economics science.

In contrast, adjustment of supply and demand in primary products, such as agricultural products, is basically made by product prices. When demand and supply become tight due to higher demand or lower supply, prices of products rise. In the reverse case, prices decline. This was the kind of economy studied by orthodox economics science before Keynes.

In other words, it is common for prices of agricultural products to fluctuate up and down reflecting supply and demand. Prices of vegetables rise when their supply becomes short due to bad weather. Vice versa, abundant harvests lead to price declines. The same applies to rice in the market economy.

Why is futures trading conducted in primary products?

Needless to say, lower prices cause inconvenience to producers. If prices of televisions were halved, the number of televisions purchased may double. If such is the case, sales income (multiplication of price by supply amount) would not change for companies.

However, in food products, since the capacity of human digestion is limitfixed, people cannot eat twice the usual amount just because food prices have been halved. The market can absorb only a slight supply increase even if prices were halved. In other words, agricultural and food products have the feature of having to considerably reduce prices to cope with slightly increased supply. This is said to be the inelasticity of food demand in economics science.

If prices fall drastically due to a slight increase in supply amount, sales will decrease. This is called the phenomenon of "impoverishment of farmers because of a bumper harvest."

Futures trading is the very means created to avoid such situations.

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. It is a means for producers to mitigate the risks of price fluctuations and conduct business in a stable manner. It is a risk-hedging behavior.

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 (60 kg) 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. If the amount of rice production increases due to a bumper crop, the farmer would conversely earn higher sales income than those who did not participate in futures trading.

Should futures trading be abolished because it is speculative?

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. Futures trading is common for primary products such as agricultural products whose prices fluctuate.

Today, the position of rice in Japanese people's livelihood is declining. Crude oil and currencies hold much greater importance. If the JA group's claim that rice futures trading cannot be accepted due to its speculative nature were to be correct, shouldn't futures trading of crude oil and currencies be immediately abolished?

The futures grain price of the Chicago Board of Trade fluctuates reflecting the demand and supply of the entire market. If this were to be abolished, what should serve as benchmark for grain producers in the world to increase or decrease grain production?

If the futures price rises higher, producers seek to increase grain production, leading to a decrease in spot price realized in the future. This has the effect of stabilizing the market. If a person claims that the Chicago Board of Trade should be abolished due to speculation in the U.S., the person's mind would be questioned. As the late Kenichi Takemura would have said, "the rule of common sense according to the JA group is nonsense in the world."

Furthermore, the JA group's claim is not even the rule of common sense in Japan.

The world's first futures market was the Osaka Dojima Rice Exchange established in 1730 in Edo period. It was the Japanese who invented futures trading. At the time, rice was the center of the economy rather than agriculture. Rice played the role of a currency. Incomes of daimyo (feudal lords) were earnings from annual rice tax and samurai stipends were paid in rice. The JA group says that "rice should not be used for speculation," but rice at that time was far more important as Japanese people's staple food compared to today. The rice futures market had long served as the center of the Japanese economy for two hundred years.

The Dojima rice market was closed in 1939, as the government took direct control over the rice market due to wartime food shortages.

Today, are we in a controlled economy? There is no reason behind the JA group's claim. However, due to JA's opposition, the Dojima rice futures market, which was invented by the Japanese and could be listed as a World Heritage site, remains on a trial basis and cannot be officially listed.

Why does JA oppose futures trading?

The real aim of the JA group is to stabilize and maintain high rice prices.

The rice acreage reduction policy is nothing less than realizing a situation that is the opposite of "impoverishment of farmers because of a bumper harvest." If a bigger rice supply results in drastic price reductions, rice prices may conversely be significantly raised by reducing supply. Since rice prices go up much more than the reduced production of rice, an increase in sales would result and the JA group's sales commission income would also increase.

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 high rice prices. The ruling Liberal Democratic Party (LDP), on behalf of the JA group, did not permit the MAFF to approve futures trading for long.

The trial of rice futures trading was finally approved in 2011 as the government changed to the Democratic Party of Japan (DPJ).

JA's newspaper, Japan Agricultural News, continues to state strong concerns to its farmer readers over the lowering of rice prices due to increased rice production. On behalf of the JA group, the MAFF also strongly instructs prefectures and local governments (hence rice producers) that production should correspond to the demand for rice, which means to reduce rice production in line with the diminishing demand.

No futures trading without abolition of rice acreage reduction

Under such circumstances, the extension of the trial of rice futures trading was approved.

As a matter of fact, the Osaka Dojima Commodity Exchange this time aimed to move to a full-fledged "permanent listing" from the current trial basis but, after it was pointed out by the MAFF that the transaction volume was not met for the permanent listing, switched to extend the trial trading.

If transaction volumes are not enough and adequate, the permanent listing of rice futures will be denied. However, the JA group, which has control of 40 percent of the rice distribution, rejects futures trading. Not only that, the more important and fundamental point is that the agricultural policy triangle is disrupting the preconditions for which producers seek rice futures trading.

As has repeatedly been noted in my WEBRONZA articles, the discontinuation of the rice acreage reduction (Gentan) policy is fake news spread by the Abe Cabinet, and what actually had been conducted was the strengthening of the rice acreage reduction policy through provision of increased rice acreage reduction subsidies to farmers growing rice for animal feed ( "No More of the False Report of Abolition of the Gentan Policy!" ). While the national government abolished its allotment of target amounts of rice production to prefectures, the MAFF has rather strengthened its instructions to reduce rice production to prefectures. The policy response is in no way designed to reduce rice prices.

In other words, although rice is an agricultural product, adjustment of supply and demand is made not by price but by quantity just as with industrial products. The method employed is the rice acreage reduction policy that has been strongly instructed by the national government with generous subsidies.

The percentage of rice production in Japanese agriculture has dropped below 20 percent. There is no reason to treat rice differently from other items. And yet, the national government cannot break the policy of using the administered or quasi-administered rice price to guarantee rice farmers' income from the age of the food control system. The rice price maintained by the government's rice acreage reduction program could be termed a semi-official or quasi-administered price. Rice is not yet under the market economy.

Rice prices fluctuate as with other agricultural products if the government does not intervene. If rice producers use rice futures trading to avert the negative impact of rice price declines as mentioned above, the taxpayers' burden of over 400 billion yen (fiscal expenditure), which the government spends for maintaining the rice price through the rice acreage reduction program and rice purchase at times of price declines, would not be necessary. Futures trading contributes to alleviating the fiscal burden.

However, the JA group, whose sales commission income is determined by the spot price, cannot reap the benefit of futures trading and bears the full brunt of spot market price declines. Futures trading brings benefits to producers and taxpayers but is undesirable for the JA group. It serves as a measure and means against rice price declines for rice producers but not for the JA group. This is the reason why JA insists on maintaining spot market rice prices.

Price fluctuations caused by changes in supply and demand are preconditions for primary products such as agricultural products to be listed on the futures market. The agricultural policy triangle has been disrupting this precondition for rice futures.

Under such circumstances, producers have no incentive to use futures trading. If rice prices do not fluctuate, there is no need to hedge risks. I cannot possibly believe that an adequate transaction volume required for the permanent listing would be gathered in two years' time.

There will be no fifth extension of the trial rice futures trading. The permanent listing will not be realized unless the agricultural policy triangle changes its policy. It truly is a case of "no rice futures trading without abolition of the rice acreage reduction policy."

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(This article was translated from the Japanese transcript of Dr. Yamashita's column in "RONZA" on August 4, 2019.)