``Inflation is like sin; every government denounces it and every government practices it." - Frederick Leith-Ross 1887 -1968 civil servant and authority on international finance
We have cited the negative impacts of the ongoing rice crisis in How Surging World Rice And Food Prices Could Impact the Philippines and Rice Crisis: The Superman Effect And Modern Agriculture to the heightening the risks of social instability, more intrusive government policies which may hamper market mechanisms that may have a lasting side effect and harm the economy over the long run aside from impairing the balance sheets of the national government. In addition, we attributed the inefficiencies and imbalances of the industry to the lack of market signals aside from the webs of laws that has severely distorted the marketplace.
Combined, these added risks may impose a hefty risk premium to our asset class, where the hurdle rate of investments returns must significantly be greater relative to the given risk environment. And with today’s risk averse environment, high risk premiums represents an unattractive proposition for investors.
Yet, in vigil to the unfolding crisis, what we have observed was that anecdotally speaking, the problem of rice shortages is one concerning government “subsidized” National Food Authority (NFA) rice more than a general or nationwide rice shortage.
We don’t see people lining up for commercial rice because commercial rice partially reflects market prices. Whereas subsidized rice is entirely and artificially sold cheap to the “poor”, at a loss to the account of the government and charged to future taxpayer’s money in order to buy political stability. As an aside, we don’t see “riots” in the street yet (as reported by some news accounts) although we do see snaking queues for NFA rice.
The problem is that government subsidies have been compounding on the dysfunctional government controlled market for rice. The greater the price difference between commercial rice and subsidized rice, the greater the tendency to have a “crisis”, as some people have used such opportunity to “arbitrage” for profit -buy subsidized NFA rice, repackage and resell them at commercial rates, thus leading to more speculative pressure.
The following news reports depicts of the harsh realities from perverted government policies,
``The governor also directed the mayors to assess economic conditions in their areas, investigate the reported adulteration of rice through the mixing of cheaper NFA rice with commercial supply, and to submit periodic reports and recommendations to his office.” (Inquirer.net)
``Justice Secretary Raul Gonzalez personally caught at least one dealer mixing National Food Authority (NFA) and commercial rice in his home
As we have written earlier, government policies create the incentives from which the people respond to, yet they get arrested from skewed regulations.
Yes, there is indeed a global rice problem. But the problem in the domestic setting is a basically an adverse side effect from hefty political subsidies.
Price Signals Work In Some Areas
Just consider; record food prices have started to impact investments decisions elsewhere in the world.
For instance,
Amazingly, even in Afghanistan the food crisis have borne a rare positive unintended effect, swapping heroin for wheat, this excerpt from Telegraph’s Con Coughlin (highlight mine),
``In parts of Helmand Afghan farmers are this year sowing wheat instead of poppy - not because they have suddenly been converted to the argument that producing heroin is not in the national interest.
``Market forces have been the deciding factor - with wheat prices doubling in the past year, and the street price of heroin falling, it is now more cost effective to grow wheat.”
In the US, farmers have started to opt out of the cropland conservation program which HAD KEPT THEM FROM CULTIVATION to cash in on the booming agriculture industry pls. refer to figure 6. See how government policies even in the
In the past, depressed food prices benefited consumers, yet the program was designed aimed at sustaining US farmers by effectively curbing supply through subsidies. Farmers were paid for not producing on their cropland!
Figure 6 New York Times: As Prices Rise, Farmers Spurn Conservation
This from New York Times’ David Streitfeld
``Born nearly 25 years ago in an era of abundance, the Conservation Reserve Program is having a rough transition to the age of scarcity. Its 35 million acres — about 8 percent of the cropland in the country — are the big prize in this brawl…
``Such problems were never contemplated when the Conservation Reserve was conceived as part of the 1985 Farm Bill. Participants bid to put their land in the program during special sign-ups, with the government selecting the acres most at risk environmentally. Average annual payments are $51 an acre. Contracts run for at least a decade and are nearly impossible to break — not that anyone wanted to until recently…
``The program peaked late last summer, with more than 400,000 farmers receiving nearly $1.8 billion for idling 36.8 million acres. Put all that land together and it would be bigger than the state of
Price Signals Don’t Work On Some
As you can see, market prices have impacted investment decisions in some parts of the world, but others have not responded to the price stimulus because agricultural inputs (as fertilizers, seeds and fuel) have likewise risen and have posed as a deterrent to increasing production.
This excerpt from MSN’s analyst Jim Jubak (underscore mine),
``There, higher costs for fuel, seed and fertilizer have led farmers to cut back on planted acreage. The promise of higher prices for crops harvested in the future doesn't work if you can't afford the materials you have to pay for now, especially when credit comes at ruinous interest rates -- if it's available at all. Farmers in these areas also don't have access to the commodities futures market, so they can't lock in today's higher prices for future grain delivery.
``That means paying today's high costs is too big a gamble for poorer farmers, who can't afford to bet that grain prices will be as high tomorrow as they are today. All this has led to situations like this one: In
As we have previously argued, the lack of commodity markets have prevented farmers in developing countries as the
Whereas the complete dependence on the traditional networks (traders or merchants) for the sales of their products and limited access to funding has been a major obstacle to the farmers to increase output since they are subjected to market inefficiencies emanating from a wall of laws, distortive subsidies and are in bondage to special interest groups for their markets.
Technically speaking the market price signals have not filtered to these economic agents enough for them to allocate capital and resources efficiently.
Copious But Fallow Agricultural Lands
Yet, the irony is that the
``The Total area devoted to agricultural crops is 13 million hectares. This is distributed among food grains, food crops and non-food crops. Food grains occupied 31% (4.01 million hectares), food crops utilized 52% (8.33 million hectares) while 17% (2.2 million hectares) were used for non-food crops.
``For food grains, the average area utilized by corn was 3.34 million while rice occupied 3.31 million hectares.
``Of the total area under food crops, coconut accounted for the biggest average harvest area of 4.25 million hectares. Sugarcane with 673 thousand hectares; Industrial crops with 591 thousand hectares; 148 thousand hectares for fruits; 270 thousand hectares for vegetables and rootcrops; 404 thousand hectares for pasture and 133 hectares for cutflower.
``According to land capability, 78.31% of the alienable and disposable land are prime agricultural areas, 6.1 million hectares are highly suitable for cultivation.
Statistics are a mirage. The assumption presented here is that these all these lands are in production, but somewhere somehow this doesn’t account for the complete picture as Philippine agriculture land is punctuated with idle lands following years of underinvestment.
In fact, last year, the Philippine government arranged to lease over ONE MILLION hectares or close to 10% of the country’s agricultural property to the China’s Jilin Fuhua Agricultural Science and Technology Development Co., Ltd. (Fuhua Co.) because of idle, uncultivated or undeveloped properties!
This from Gemma Bagayaua of GMA Newsbreak, ``Would you rather let a million hectares of agricultural land remain undeveloped due to lack of capital or lease them to a foreign company?
``This, according to a ranking official of the Department of Agriculture (DA), is the government’s main consideration when it decided to lease to
``The DA says that the memorandum of understanding (MOU) with the Chinese company is just an additional strategy to meet the department’s goal under the Medium Term Philippine Development Plan (MTPDP), which is to develop two million hectares of agricultural land…
``Fuhua Co. intends to plant hybrid rice, corn, and sorghum in these lands. The contract is expected to bring in about US$3.87 billion in investments.
As you can see low productivity from the lack of capital investments brought upon by market contorting policies are essentially responsible for this recent crisis.
Bottom line: the government’s predicament can be resolved by inducing more investments to the industry by eliminating these supply rigidity barriers through dramatic reforms by eliminating or reducing subsidies, by opening the industry to competition and the development of a commodity spot and futures market for increased capital access and for pricing efficiency. Yes, there will be some social costs, some people will starve with temporary high prices. But private socio-civic groups can work with government to provide for charitable donation instead of placing the burden squarely on the government.
The rice cropping cycle is a short one (3-6 months) from which fallow lands can easily be cultivated and contribute to the supply output and stabilize the present situation. Thus I think, this problem can be settled in the medium term.
Unfortunately, with the populist tendencies tilted towards more socialism, the next step by the leadership would probably be to force other croplands into rice production, thereby yes, providing short term solutions of having sufficient supplies but at the expense of the farmers (rice prices will go down and squeeze income) or for other crops which we will see prices go to the roof (think sugar, vegetables and others).
Philippine Peso and The US Dollar Burdened By Socialization
Finally, many argue that the Philippine Peso will fall as a consequence to the increased subsidies by the Philippine government. Our view is that they are only partially correct because in the analysis of the valuation of currencies requires studies on BOTH the circumstances underpinning the currencies to which are valued against. To illustrate, if the Philippine Peso is gauged against the US dollar (which is the traditional benchmark), then the factors in support of the probable value of the currencies, both the
True enough, the present actions to subsidize the poor with cheap rice by the Philippine government may impair its fiscal conditions, BUT the
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