Agricultural Economics Expert of IPB Responds to the Premium Rice Chaos
The case of a rice factory raid in Bekasi, was responded by the agricultural economist of Bogor Agricultural University (IPB), Prof. Dr. M Firdaus. He is one the Professor Chair Holders of Faculty of Economics and Management of Bogor Agricultural University (FEM IPB). In his responds, he stated that, "The cause of premium rice chaos problem when viewed from the government point of view is the desire of the government to appeal that rice prices are to be stabilized at affordable levels for the billions of consumers. We know that Food, especially rice, is the biggest contributor to inflation recently.
Further Vice Dean of FEM IPB stated, the problem has become more attractive if seen from the economic and business point of view as rice trade is the object of the rice business. Of course the business goal is to make a profit. One of them by processing, for example, buy rice from farmers and then processed and is being sold to supermarkets until rice reaches to consumers.
He said rice traders buy rice at a price that is more expensive than the price provided by the government through Harga Pembelian Pemerintah (HPP Government Purchase Price). They then do the processing and resell it at a very high price with the name of premium rice.
According to him, the government considered that rice traders purchased rice products from farmers which were subsidized by the government (government subsidies of 30 trillion per year), so as if the entrepreneurs or traders take action or take advantage for for taking more unusual profit. The merchants should sell their products not too expensive according to the government's wishes.
"The government is questioning how to fix a reasonable price in order to make rice traders as profitable as possible, (by government calculations). Buying rice from the producers in low price, process them through milling, then selling in high rice. This is the main problem, "he said when giving his statement in front of the media crew at IPB Campus, Dramaga, Bogor, on Monday, 24 July 2017. Responding to this premium rice chaos, Prof. Firdaus explained in detail the current conditions in the field about rice trading process.
Prof. Firdaus highlighted the Highest Retail Price (HET) of premium rice set by the government of Rp 9,500. According to him, this price is impossible to be applied because we see that the minimum purchasing price from the producers is Rp 7,000-an, it is impossible to resell premium rice to consumers through supermarkets at a price of Rp 9,000.
"Method to calculate rice traders' return on invested capital, the price must be Rp 12 thousands. If the traders or supermarkets want to take profit is minimum Rp 15 thousands. Traders must buy rice from farmers at Rp 7,500, then additional expenses for transportation to the warehouse, processing fee such milling will be needed, "he said.
He said, milling is a crucial step in post-production of rice, but it doesn’t take a longer time, the rice does not experience physical changes. "In general, milling process is removing husk and removing bran are done separately, then packaging, only that. Freight costs from the milling site to packaging will more that Rp 2 thousand. For premium quality rice and to be sold in supermarkets they will have a 30 percent listing fee. Then the purchase price in producers and supermarkets was doubled. Normally 30 percent will be allocated for the cost of processing, 70 percent profits which will divided by two for supermarkets and distributors. Is Rp 7 thousand to Rp 9 thousand will be enough to cover all those processes, is it possible? If the methods are applicable for rice business, as rice gets subsidies from the government, then what about the other products? Is it logical methods? Is the HET calculation correct? HET for medium rice is still okay, but if premium rice is not possible, "he explained.
Prof. Firdaus also explained on the research he has been implementing since 1998 about the characteristics of rice in 22 retail markets in Jakarta (up to Cipinang parent market). Pandan wangi (Fragrant pandanus) rice sold in the market actually is not 100 percent pandan wangi, but only 40 percent. His research in Cianjur also revealed that none of the mills sell 100 percent of pandan wangi rice, because the price could reach Rp 40 thousand per kilogram.
"It is impossible to put prices for pandan wangi rice at Rp 15-20 thousand. That's probably contain 20-30 percent of pandan wangi rice only. The rest is probably Ciherang rice, because it is almost similar. Ask the rice traders there (Cipinang Market) that happened and why, "he said.
According to him, this is not a lie, because dehusking and milling process removes the outer part of paddy (husk and bran) to make it edible. Thus, the process of rice does not change shape. For example coffee powder. When coffee beans are sold by farmers the price may be only Rp 3 thousand per kilogram, but when it was sold at Starbuck the price rose sharply. Is the coffee shape different? Is the retailers lie, I don’t think so? Consumers have also similar assumption. Consumers need only product safety assurance. They want to buy a high-priced rice because there is a perception that the rice premium rice and is not mixed with plastic rice, they contain no bleaching and other chemicals. This is why consumers want to pay highly.
"Premium rice uses good packaging and there is a kind of guarantee indirectly. Is this a lie to the consumer, I don’t think so. Consumers pay the quality, both physical and because of the guarantee of information. Processed well, not broken, do not use bleach and packaged properly. Yes they are premium rice, "he explained.
Then whether the high-priced rice cause farmers life are prosperous. The government assumes that farmers have been subsidized, it is questionable whether farmers really receive the subsidies. From various researches on the effectiveness of subsidies, the results of research conducted by Prof. Firdaus in cooperation with the world bank revealed that only 40 percent of the subsidies reached the farmers.
Are there other ways to improve the welfare of farmers? There is. According to Thailand and Vietnam experiences, their governments do not subsidize inputs but price subsidies. If the farmer’ prosperities is our target, they can’t sell their rice products at Rp 3,700, but they should put price at Rp 5,000. However, if the farmers sell at Rp 5,000-, then the price of medium rice in the market can’t be Rp 9,500. So if we still want buy the rice products of farmers at Rp 3.700, so that the price of medium rice in the market would be Rp 9.000, then the government must subsidize farmers by of Rp 1,300 (output subsidy).
"Therefore the price of medium quality rice Thailand is about Rp 6 thousands, premium quality rice is about Rp 10 thousands. Our government plays more on input subsidies (30 trillion per year), they are for fertilizer subsidies whose effectiveness may not be high. Therefore we have to consider the future policies of our rice subsidies, "he said.
From the economic point of view, the government no longer implements the base price but uses HPP Harga Pembelian Pemerintah (the Government's purchase price). The basic price will be applicable when farmers have mass harvest (Panen Raya), the government must buy the rice of farmers at a base price, it will guarantee that farmers will have stable price and the Bulog function will be significant. While HPP is a reference price to purchase farmers rice. The price of farmers rice should be above the HPP, there is no obligation for government to buy farmers rice.
"We urge that role of BULOG must be well-functioning. BULOG must be optimized and given flexibility. The law or concept of the National Food Agency (BPN) currently on the President's table shall be ratified. A food agency whose level can coordinate up to the ministry level, "he added.
In addition, the government should first discuss with the Ministry of Trade (KEMENDAG). How KEMENDAG will react. It's not fair if the proposed policies will be applicable only to rice. The 30 trillion subsidies are for horticulture, cattle, potatoes and even chili. Should all be treated equally? The government should be consistent. True or not whether traders take profit, the unfair methods of trade must be proven in the court KKPU, "he said.
The solution is, if the government consistently plans to improve the farmers then the government must reconsider the mechanism of subsidy, its effectiveness, and its methods. Second, the government must reconsider the HPP policy.
"The HPP has no consequences whatsoever to the farmers. We should return to the floor price and ceiling price policy. Third, we know the conditions of our small-scale farmers who plant rice, now there are so many victims, therefore we have to revitalize the institutional functions, whether the BPN or Bulog, either one must be maximize. If Bulog is the solution, then it should be given its freedom and authority to do its jobs, "he said. (Wied)
