SESSION 3.

Rice Self-Sufficiency: Fixed and Flexible Approaches The Case of Indonesia

Ronnie S. Natawidjaja and Irlan A. Rum
Director and Research Assistant, Center for Agrifood Policy and Agribusiness Studies, Padjadjaran University, Bandung, Indonesia

Sufficiency in rice is an old cultural symbol of prosperity

Rice occupies a most important position in Indonesia. Having enough rice to feed everyone is seen as a mark of national prosperity and sovereignty. The lumbung, the rice barn found in every island and among all ethnic groups, is extensively used as a nationally recognized cultural symbol of prosperity. Rice has historically epitomized food security as guaranteed to all citizens by the ruling power (king or sultan) in a locality. The tiny grain is not only the main staple but a powerful icon that has carried into modern-day Indonesia. It is difficult to argue how a country can survive or let alone aspire to greatness without having control of this basic commodity.

Self-sufficiency becomes a political objective

The argument has gained even stronger support from the Parliament and interest groups following the food price crisis in 2008. The new Food Law 2012 strongly stated that food Security in Indonesia has to be based on local food availability and food sovereignty. Indonesian policy of self-sufficiency has been defined as at least 90% self-sufficient in trend and which still allows BULOG to import about 10%.

Rice Production and Consumption in Indonesia (Milled Rice)

Million Tons
50

45

40

35

30

25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Consumption

Production

Indonesian Rice Imports

Million Tons
2.00 1.80 1.60

1.40
1.20 1.00 0.80 0.60 0.40 0.20 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Monthly Rice Production in Indonesia 2004-2008 (Thousand Tons)

Peak of the 1st Harvest

Peak of the 2nd Harvest

Sources: BPS,

Current Rice Self-Sufficiency Policy

Rice is 90% self-sufficient in trend, allows BULOG to import about 10%. There is no clear rule about what determines the need for rice imports, how much imports are necessary, and when to import. Multiple authorities on rice import decisions have generated heated debates and greater uncertainty in the rice market, further increasing rice prices during critical times, to the disadvantage of the poor.

Government Total Subsidy on Food Security

Trillion IDR
45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00

0.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Current Rice Self-Sufficiency Policy

Domestic market is isolated, no direct link to international rice market and imports are facilitated by BULOG. The current rice policy has resulted in more stable but much higher rice prices than the international rice price levels. At the time of the lowest stock (Nov-Jan), the domestic market is vulnerable to issues, gossip and speculation.

Domestic and International Rice Prices

15,000 13,500 12,000 10,500 9,000 7,500

Thai 15% Viet 15% Indonesia IR II

Rp/Kg

6,000
4,500 3,000 1,500
Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar Mei Jul Sep Nop Jan Mar
2004 2005 2006 2007 2008 2009 2010 2011

Benefit-Cost Ratio of the Current Policy

The Total Benefit: Total value of rice production at domestic price The Total Cost: Cost of rice production Cost of seed and fertilizers subsidy Cost of government rice procurement Cost of rice import by BULOG The Benefit-Cost Ratio = 0.99

Benefit-Cost Ratio of the Current Policy

B/C Ratio
1.08

Average Benefit Cost Ratio = 0.99

1.06 1.04 1.02 1.00

0.98
0.96 0.94 0.92 0.90 0.88 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fixed Rice Self-Sufficiency Policy

Rice is 100% self-sufficient, no trade is allowed. So, domestic rice market is completely isolated There is little savings from not importing the rice, since the need for rice import is actually quite small. To match the growing demand for rice and compensating for rice land conversion, the government needs to spend additional budget to keep a certain amount of land available for rice production. The Benefit Cost Ratio = 0.96

Benefit-Cost Ratio of Fixed Rice Self-Sufficiency Policy

The Total Benefit: Total value of rice production at domestic price Total savings from buying rice import The Total Cost: Cost of rice production Cost of seed and fertilizer subsidy Cost of government rice procurement Cost of rice land expansion (to keep up with demand) The Benefit Cost Ratio = 0.96

Benefit-Cost Ratio of Fixed Rice Self-Sufficiency Policy

B/C Ratio
1.04 1.02 1.00

Average Benefit Cost Ratio = 0.96

0.98
0.96 0.94 0.92 0.90 0.88 0.86 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Flexible Rice Self-Sufficiency Policy with Quota

Rice is 90% self-sufficient in trend, allows for import of about 10% through quota. Fixed rice import quota is set before the end of each year according to production and consumption prediction. The National Food Authority is mandated by the Food Law No. 18/2012 to decide on the amount of import quota needed and to put this into transparent bids to avoid corruption. Indonesia will still be able to maintain its self-sufficiency policy but with more efficient, less harmful results and consistent with international market price trends

Benefit-Cost Ratio of Flexible Rice Self-Sufficiency Policy with Quota

The Total Benefit: Total value of rice production at domestic price Total savings from price adjustment to international market The Total Cost: Cost of rice production Cost of seed and fertilizer subsidy Cost of government rice procurement Cost of rice imported The Benefit Cost Ratio = 1.05

Benefit-Cost Ratio of Flexible Rice Self-Sufficiency Policy with Quota

B/C Ratio
1.40

Average Benefit Cost Ratio = 1.05

1.20

1.00

0.80

0.60

0.40

0.20

0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Flexible Rice Self-Sufficiency Policy with Tariff

Rice is 90% self-sufficient in trend, allows for a controlled import through tariff. Tariff barrier is a preferred mechanism from the trade agreement perspective. Tariff is set at 32% to achieve an import target similar to the amount controlled by quota. However, for the tariff policy to be effective, the challenge with respect to the mechanism is on border control and the high cost of monitoring.

Benefit-Cost Ratio of Flexible Rice Self-Sufficiency Policy with Tariff

The Total Benefit: Total value of rice production at domestic price Total savings from price adjustment to international market Income from tariff The Total Cost: Cost of rice production Cost of seed and fertilizer subsidy Cost of government rice procurement Cost of rice imported The Benefit Cost Ratio = 1.07

Benefit-Cost Ratio of Flexible Rice Self-Sufficiency Policy with Tariff

B/C Ratio
1.40

Average Benefit Cost Ratio = 1.07

1.20

1.00

0.80

0.60

0.40

0.20

0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Conclusion
Politically, the rice self-sufficiency policy is a must for Indonesia. However, there are better alternative policies to achieve the policy objective of food security. The best and a more pro-trade option is a flexible selfsufficiency policy with a tariff mechanism. For the tariff policy to be effective, the challenges are instituting border control and the high cost of monitoring. The second best option is a flexible self-sufficiency policy with a quota mechanism. The policy gives the same benefit-cost ratio with tariff policy. However, this policy is less preferred from the trade agreement perspective. The fixed 100% rice self-sufficiency policy is the most expensive and less effective policy to achieve the policy objective.

For information, contact:

Dr. Ronnie S. Natawidjaja

ronnie_sn@yahoo.com