Rice Self-Sufficiency: Fixed and Flexible Approaches

The Case of Indonesia

Ronnie S. Natawidjaja and Irlan A. Rum
The lead author is the director of the Center for Agrifood Policy and Agribusiness Studies at Padjadjaran University, Bandung, Indonesia.

Contents
Executive Summary ...............................................................................................................1 I. II. 1. 2. 3. 4. 5. 6. Introduction .....................................................................................................................2 Public Policy on Rice and Food Security .........................................................................2 Political Economy of Rice Self-Sufficiency ...................................................................2 Trade Policy.................................................................................................................4 Inputs and Food Subsidies ..........................................................................................6 Price Stabilization Policy ..............................................................................................7 Government Rice Procurement and Rice Stock Holdings ............................................8 Rice for the Poor (Raskin) ............................................................................................9

III. BenefitCost Analysis of Rice Self-Sufficiency ................................................................10 1. 2. 3. 4. The Current Self-Sufficiency Policy ............................................................................10 Fixed Self-Sufficiency ................................................................................................11 Flexible Self-Sufficiency Policy with Quota.................................................................12 Flexible Self-Sufficiency with Tariff.............................................................................12

References ...........................................................................................................................15 Appendixes ..........................................................................................................................16 Appendix 1: BenefitCost Analysis of Fixed Self-Sufficiency Policy (No Trade).............16 Appendix 2: BenefitCost Analysis of Current Self-Sufficiency Policy ...........................17 Appendix 3: BenefitCost Analysis of Flexible Self-Sufficiency Policy with Quota .........18 Tables and Figures Table 1: National Rice Production and International Trade, 20002010 .................................4 Table 2: Distribution of Rice for the Poor ................................................................................9 Figure 1: Monthly Rice Production in Indonesia, 20042008 ..................................................3 Figure 2: Domestic Rice Prices in Indonesia and International Rice Prices, 20042011 .........5 Figure 3: Government Subsidy and Budget to Secure National Food Security .......................6 Figure 4: Government Purchase Price and the Actual Market Price for Rice and Paddy, 20042011 ..........................................................................................................................7 Figure 5: BULOG Rice Stock Holdings, 20042010 ...............................................................8 Figure 6: BenefitCost Ratio of the Current Self-Sufficiency Policy ......................................11 Figure 7: BenefitCost Ratio of the Fixed Self-Sufficiency Policy .........................................11 Figure 8: BenefitCost Ratio of Flexible Self-Sufficiency Policy with Quota ..........................12 Figure 9: BenefitCost Ratio of Flexible Self-Sufficiency Policy with Tariff............................13

Executive Summary
Rice is not just a commodity but occupies a most important position in Indonesian politics and society.1 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. The argument has gained even stronger support from the Parliament and interest groups following the food price crisis in 2008. Along this trend, the Indonesian government has adopted a policy of food self-sufficiency, which implements at least 90% self-sufficiency. The policy allows the Bureau of Logistics (BULOG), the state agency which deals with food distribution and price control, to import about 10% of total rice requirements. However, there are no clear rules or standards on what determines the need for rice imports, how much imports are necessary, and when imports can be made. The issue of rice importation is further complicated by the unclear basis of decision-making and multiple authorities. These problems have generated heated debates and greater uncertainty in the rice market, further increasing rice prices during critical times to the disadvantage of the poor. By controlling the domestic market through restrictions on imports and exports and by isolating this from the international market, the government has been able to set stable rice prices. However, rice prices have not returned to the seasonal price level and have tended to be higher than the previous year (in real value). By the end of 2009, rice prices in Indonesia were already higher than international market levels, and were still rising. This seems to demonstrate that man-made, isolated stabilization mechanisms can be rigid and costly. The ensuing higher costs of food only hurt the poor and the areas most vulnerable to chronic food insecurity. There are better alternative policies to achieving the objective of food security according to the New Food Law 18/2012. The benefitcost analysis shows that the best and more protrade approach is a flexible self-sufficiency policy with a tariff mechanism. The tariff was calculated to be appropriately set at 32% ad valorem tax. For the tariff policy to be effective, the challenges are on border control and the high cost of monitoring. The analysis also shows that a flexible self-sufficiency policy with a quota mechanism could be the second-best alternative. This policy gives almost the same benefitcost ratio with a tariff policy. However, this policy is less preferred from the trade agreement perspective. The analysis demonstrates that the fixed 100% rice self-sufficiency policy is the most expensive and less effective policy to achieve the desired policy objective.

This working paper was presented at the Second ASEAN Rice Trade Forum on 45 June 2013 in Yogyakarta, Indonesia. Technical assistance for the forum was provided by the Asian Development Bank (ADB), with financing from the Japan Fund for Poverty Reduction. The lead author, Ronnie S. Natawidjaja, is the director of the Center for Agrifood Policy and Agribusiness Studies (CAPAS) in Padjadjaran University, Bandung, Indonesia, while Irlan A. Rum is a research assistant in the same institute.

2 | Second ASEAN Rice Trade Forum 2013

I.

Introduction

Rice has become the most important food commodity in Indonesian politics. The success or failure of a president and his ministerial cabinet is partly determined by their programs in guaranteeing food availability and price affordability. In Indonesian history, having enough rice has been an old cultural symbol of prosperity. This special extra-sensitive position of rice in Indonesian politics has created dilemmas for government policy. According to the New Food Law No. 18/2012, food security has been defined as a situation wherein individuals at all times have physical, social, and economic access to sufficient, diversified, safe, and nutritious food that meets his/her dietary needs, food preferences, and religious beliefs for an active and healthy life. The law also emphasizes that food security conditions should be developed based primarily on domestic production and the ability to define food preferences (food sovereignty) based on local specific needs and resources. However, regardless the formal definition described above, food security is often misunderstood as securing (protecting) our food needs. Thus, the rice self-sufficiency strategy seems to be the only solution to the problem. This misunderstanding on the definition of food security has been exploited for mainly political gains. With a population of 230 million, it is not surprising then that in Indonesia, the fear of not having enough food and being dependent on other countries is a popular issue. It makes the food self-sufficiency program always a politically popular move to gain recognition for patriotic personalities or project strong nationalism. The attachment of rice to food security is unavoidable since rice has been the single main staple food for Indonesia in the last 30 years. The Ministry of Agriculture spends most of its budget for programs to improve rice production by all means possible even if these programs may only work temporarily or for short periods. Self-sufficiency on rice has become a must for every Cabinet. The policy instruments used to support such strategy are broader control policy (trade restriction), seed and fertilizers subsidies, government procurement, and reserved and subsidized rice distribution for the poor (Raskin). The self-sufficiency policy has drained much funds from the national government as well as district or city county governments. In the current Cabinet, the policy has been expanded to include four other important food commodities: corn, sugar cane, soybean, and cattle beef. This working paper is based on parts of the country study report for the Food Security Goals with Good Policy Project led by the University of Adelaide and funded by AusAID. The paper is divided into three main sections: the first section describes current public policies on rice and food security in Indonesia; the second provides benefitcost analyses on different policy options for rice self-sufficiency; and the last section presents the conclusions.

II.

Public Policy on Rice and Food Security

1. Political Economy of Rice Self-Sufficiency Rice occupies a most important position in Indonesian culture; it is not just a commodity. Having enough rice to feed everyone is seen as a mark of national prosperity and sovereignty. Lumbung, the traditional 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 in the past. 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. Thus, it is

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 3

important to understand that from the political economic perspective, the government needs to demonstrate its ability to control the rice market in order to gain public confidence. The argument has gained even stronger support from the Parliament and interest groups following the food price crisis in 2008. Along this trend, the Indonesian government has adopted a policy of food self-sufficiency. The policy implements at least 90% self-sufficiency. Domestic market is isolated, with no direct link to the international rice market. The Bureau of Logistics (BULOG), which deals with food distribution, imports about 10% of rice requirements at the time of the lowest stock level in the country (Nov-Jan) (Figure 1). During this period, the national stock of rice usually goes below one million tons. Figure 1: Monthly Rice Production in Indonesia, 20042008 (Thousand Tons)
12,000 10,000 8,000 6,000 4,000 2,000 0 Jan
Source: BPS.
Peak of the 1st Harvest

Peak of the 2nd Harvest

2004 2005 2006 2007 2008

Peb Mar Apr Mei

Jun

Jul

Ags

Sep

Okt Nov Des

However, in the current system, there is no clear rule about what determines the need for rice imports, how much imports are necessary, and when imports can be made. The Ministry of Agriculture always claims that domestic production is improving and have enough rice for the year but the Ministry of Trade usually argue that the price tend to increase because very limited rice available. During this time, the domestic market is vulnerable to issue, gossip and speculation, the issue of rice importation is further complicated by the unclear basis of decision-making and multiple authorities. These problems have generated heated debates and greater uncertainty in the domestic rice market, further increasing rice prices during critical times to the disadvantage of the poor. Still, the current rice policy has resulted in more stable although much higher rice prices than the international rice price levels in the last 5 years (see Figure 2). Higher rice prices have benefited rice traders and rice millers more than the rice farmers. The price of rice at farm gate level remains relatively low. As a result, the Nilai Tukar Petani index, which functions as a farmers terms of trade index tracking price trends of expenditures relative to incomes for rural producer households, has continued to decline. The policy has been very costly to consumers who have had to pay higher prices, and especially harmful to the poor and small-scale farmers. Adding the cost of input subsidies that in trend increase every year, the current policy is even more costly to the economy. The following section examines each policy instrument that support the Food Security Policy in Indonesia through the Rice Self-sufficiency strategy such as: rice trade policy (border

4 | Second ASEAN Rice Trade Forum 2013

control), input and food subsidies, price stabilization policy, government procurement and reserve stock policy, and rice for the poor policy. 2. Trade Policy In the last 20 years, Indonesia had experienced many changes in its rice trade policy. The changes were aimed to protect its domestic rice/paddy producers in order to improve their welfare and food security of the poor. The rice policy regimes in Indonesia can be divided into 4 periods: (1) the monopoly period, which cover the period prior to the monetary crisis in 1997; (2) the free trade period, during 1998-1999; (3) the tariff barriers period, during 20002003; and (4) the non-tariff barriers period since 2004 (Sawit and Lokollo, 2007). After 30 years under government monopoly control since 1960s, trade liberalization actually began in 1995 when Indonesia started to implement the AoA. This required Indonesia to reduce and abolish its subsidies on agricultural inputs such as pesticides and fertilizers. However, in 1998 Indonesias domestic rice production declined, and the economic crisis was accompanied by a major social conflict. The drop in domestic production can be attributed in part to the economic crisis, but also to the severe drought related to the ElNino phenomena which accounted for a 4-5 per cent reduction in domestic rice production. The shortage of rice caused prices to flare temporarily and, in view of the importance of rice in the Indonesian diet, the combined effect engendered social panic and conflict. At the same time many people dropped into the poor category, although prior to the economic crisis the poverty rate had been decreasing. The Government knew from previous experience that sufficient rice supplies could mitigate this panic so, in line with the IMFs advice, at the beginning of 1998 Indonesia liberalized rice imports and applied a zero tariff. Table 1: National Rice Production and International Trade, 20002010
Year National Production in Milled Rice Eq. (000 Ton) Rice Imports (000 Ton) Rice Export (000 Ton) Net (000 Ton)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: BULOG, MOA.

34,352 32,472 32,831 33,329 33,573 34,856 34,795 36,911 38,894 39,202 41,382

1,354 637 1,786 1,425 236 189 438 1,405 286 450 686

1 4 4 1 2 43 1 2 1 0 0

-1,353 -633 -1,782 -1,424 -234 -146 -437 -1,403 -285 -450 -686

The increased supply of cheaper imported rice on the domestic market caused the price of domestically produced rice to fall. Combined with the increase in production costs due to the suppression of input subsidies, the decrease in the price of rice constricted farmers net incomes even further. The Government subsequently reintroduced tariffs for imported rice in an effort to protect local production, but on the whole trade liberalization has increased Indonesias import dependency on rice, decreased its self-sufficiency ratio and generally affected rice production in Java. In 2000, the Government imposed an import tariff for rice at IDR 430 per kg which equivalent to 30 per cent ad-valorem tax. As of 1 January 2002 Indonesia has also been implementing the regional trade agreement among members of the ASEAN Free Trade Area (AFTA), which effectively involves applying a 0-5 per cent tariff for agricultural products by 1 January 2010. However, rice is included in

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 5

the list of sensitive products that benefit from a longer period before the tariff has to be reduced to 0-5 per cent. The difficulties, the mismanagement, ineffectiveness of tariff to protect the local industry, became the reason for the Government to apply the rice import ban and the quantitative restriction for rice import. Table 1 shows that there was an import surge during 2000-2004 period. In January 2004, the rice import was restricted (see Trade and Industrial Ministerial decree No.9/MPP/Kep/1/2004). This policy has a strong support is backed up by the Parliament and the farmers organization. The import restriction is applied within and during several months period. They are period of: (i) a month before main harvesting season, (ii) during the harvesting season, and (iii) two months after the harvesting season. Out of those months, the imported rice was controlled by the quota. The private sector role is again excluded from a rice trade (export and import) in Indonesia. Figure 2: Domestic Rice Prices in Indonesia and International Rice Prices, 20042011
15,000 13,500 12,000 10,500
Rp/Kg
Thai 15% Viet 15% Indonesia IR II

9,000 7,500 6,000

4,500
3,000 1,500
Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr Jul Okt Jan Apr
2004
Source: BULOG.

2005

2006

2007

2008

2009

2010

2011

The import quota was given to the importer-producers (IP) and to the registered-importers (IT). Rice import was not opened for the general importer. The Government, then, applied more strict trade policy, and had banned the rice import for all month throughout the year. Based on the fact, the implementation of the import restriction could avoid smuggling more effectively. Since 2004, the rice import drastically declined. The import average declined to 221 thousands ton/year during 2004-2005 periods. The inter-season movement of paddy prices was then back to its normal. As seen in the figure, domestic rice price in Indonesia remain stable during 2008 price shock. There were three important factors behind Indonesias stable rice prices in 2008 (Saifulah, 2010): an appropriate rice policy and policy response to crisis, a large increase in food production, and the effectiveness of BULOG operations to maintain available rice stocks and provide access for the people. However, strangely enough the domestic market rice price has becoming higher every year (Figure 2). That trade restriction has made the domestic rice market in isolation from the international market. The market mechanism has been partially replaced by government mechanism in the domestic market and has impacts to the increasing of the rice price even after the world price declining and return to its normal trend. It is interesting to compare the domestic rice price in Indonesia with Thailand. The current rice price in Indonesia at the consumer level is

6 | Second ASEAN Rice Trade Forum 2013

higher than those of Thailand but at the farm gate is lower. So, it is quite unfortunate that most farmers in the production centers did not enjoy the high price since the gaps between consumer price and farm gate price become much wider. This is a sign of problem in Indonesian domestic rice market structure that need to be investigated further. 3. Inputs and Food Subsidies Government subsidy is an important policy instrument of self-sufficiency strategy to increase production and productivity in the short run and keeping up with the increase in demand. Included in the subsidy program are: input subsidies for seed and fertilizers, and subsidy on credit interest. The program is also providing food subsidy to the poor through rice for the poor (Raskin) program describe in the last section of the chapter. However, these subsidy programs are under heated debate again. The trigger is on the high and keeps increasing budget allocation for the subsidy, especially the input subsidies. In 2004 the budget allocated for fertilizer subsidy was only IDR 1.2 billion, however in 2009 budget allocated for fertilizer subsidy was IDR 17.5 billion plus a subsidy for free seed distribution (subsidized) as much as IDR 1.3 billion. Figure 3 demonstrates the spike that created by the increasing burden in input subsidy which was questioned by the parliamentary member and also international development agency like World Bank. The issue is central around heavy burden to the budget allocated for private goods (fertilizers and seeds) and hampering the development program that should be more focus on poverty reduction and employment creation. The budget review and proposed new mechanism to support farmer is expected to finish this fiscal year. Figure 3: Government Subsidy and Budget to Secure National Food Security (Milllion IDR)
50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Coordinating Ministry of Economy.

Food Subsidy for the Poor Subsidy on Programmed Kredit Subsidy on Seed Subsidy on Fertilizer Transfer to Regional Government PKKP Function Routine Expences and Development

There has been question whether the subsidy programs have any meaning at all in term of maintaining the rice production growth to achieve self-sufficiency in rice. In theory, the amount of money that compensates farmers to grow rice in 2004 was IDR. 30.82 per kg of rice, IDR 117.93 per kg in 2007, and IDR 384.39 per kg in 2009. With the subsidy on seed (free) and subsidized fertilizer price, farmer prefer to grow rice over other commodity. The subsidy is basically compensating farmers opportunity cost of cultivating other more profitable commodity.

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 7

This is how the government gives incentives to farmers and increases the national production of rice. Without the subsidy it is afraid that the production will decline, farmers shifted to other more profitable crop. However, to increase productivity, farmers not only need incentive to do it but also need by technology to break through the productivity constraint. 4. Price Stabilization Policy Since the increases in food price contribute significantly to the price inflation and also the fall of farm gate price at the peak of harvest season impacts rural farm household income, price stabilization policy is an integral and important part of the food security program. In-2007 rice price inflation contributes 0.52% to the inflation which was 0.62% during that time. Another word, rice inflation contributes 84% to the national rate of inflation, higher than the average contribution during usual time that month of the year which is 50-60% (Bank of Indonesia, 2007). The major challenge for the government is to determine the domestic price level that would provide incentives for producers (mostly small-scale farmers) but keep rice price affordable for consumers, especially the poor family. Thus, the price level and method used for price stabilization are sensitive issues in term of rice policy (Saifullah, 2010). Figure 4: Government Purchase Price and the Actual Market Price for Rice and Paddy, 20042011
8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000

GKP

Rp/Kg

Source: BULOG.

The government uses a policy instrument called Government Purchase Price (GPP) as a mechanism used to stabilize rice prices. Several factors are considered by the government in setting the GPP, including paddy production costs, the world rice price and market situation, and possible effect on consumer prices and inflation (Saifullah, 2010). The GPP for paddy is usually determined with the aim of giving farmers a 20-30% profit above their production costs. He also added that the GPP has also been set to correspond with international price movements. Movement of market price for rice and paddy and the GPP during 2004-2011 is demonstrated in Figure 4. The figure above shows that during 2004-2011, the GPP for rice increased by 81.4% in nominal value. On the other hand, the rice price at the Cipinang wholesale market was

Apr Mar Feb Jan Des Nop Okt Sep Ags Juli Juni Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan Des Nop Okt Sep Ags Jul Jun Mei Apr Mar Feb Jan
2004 2005 2006 2007 2008 2009 2010 2011

8 | Second ASEAN Rice Trade Forum 2013

increased by 175.9%. The paddy price was increased in higher rate. The GPP for paddy was increased by 118.3% and the farm gate paddy price was increased 136.4%. The GPP price setting clearly aimed to benefit farmer which at the same time controls inflationary impact at consumers level by setting lower value for GPP for rice. Looking at the seasonal cycle, the domestic rice price tends to decrease during the main harvest season from March to May. The price moves up again during the low harvest season, beginning October until the next harvest season. As described by Figure 2, the peak of rice price often happening during November-January as the rice stock depleted. This is actually the period where price stabilization mechanism is very important. However, ironically, Figure 5 indicates that at the same time BULOG rice reserved also at the lowest since procurement time is also over. The controversial solution is always option of importing rice during this period which steer debate on inability of BULOG to maintain stock and failure of Ministry of Agriculture in producing enough rice. BULOG always suspected to gain short term profit by importing and not buying from the farmer. 5. Government Rice Procurement and Rice Stock Holdings Government every year allocate budget to procure paddy/rice from the producers area using the GPP price at the peak of harvest season. BULOG as the national food logistic company positioned as the government contractor to procure paddy/rice. The budget allocated was IDR 2.1 billion in nominal price in 2000, increase to IDR. 4.8 billion in 2004 (increase by 118%) and increase again from 2004 to 2009 by 169% to become IDR. 12.9 billion (Figure 3). The ballooning budget is quite a burden to the budget allocation, but considering high priority important of the rice price issue and food support for the poor, no one seem to mine with the huge budget. The question on the effectiveness of government procurement and rice distribution for the poor are always around in various workshop and program evaluation session, but there have been no significant improvement. Figure 5: BULOG Rice Stock Holdings, 20042010
3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 0.0
Jan Feb Mar Apr Mei Jun Jul Agust Sep Okt Nop Des

2010
Source: BULOG.

2009

2008

2007

2006

2005

BULOG procures about 7% of the national rice production to be allocated for rice for the poor distribution, rice support for disasters area, price stabilization, and national iron stock. Every year, at the peak of harvest season, the Ministry of Finance released a budget to procure paddy/rice. It is expected that the action will give psychological effect to the intermediaries in the market and give farmer better bargaining position by referring to the standard price GPP.

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 9

The actual execution of funding disbursement to BULOG is always late, making the policy less effective in favoring price at the farm gate. Figure 5 shows the monthly stock holding of rice at BULOG from 2005-2010. The BULOG stock condition in the figure is just mirroring the rice volume in the market (Figure 1), as a function of the monthly rice harvest in Indonesia. In the sense that the stock holding at BULOG is merely terminal of rice procured by the government and distributed in the same year. Seem there is no intention for BULOG to create a reserved system to cover the deficit time of the year (November-January) with installment of grain silo or alike to secure the deficit time. With large facility of storage network nationally, BULOG should be able to do more active role in handling intra seasonal and intra island logistical gap. Another solution is to connect to the regional rice reserved rather than operating own country reserved which is going to be very costly. 6. Rice for the Poor (Raskin) The Raskin Program was developed based on the BULOG success in protecting the poor in the event of Asian Economic Crisis in 1998. The rice procured by BULOG is distributed to a registered poor family. Objective of the Rice for Poor program is to reduce an economic burden of poor household by giving food assistance in a form of subsidized rice. Since average household consumed 40 kg per month, the program gives 10 kg per month for every household which mean reducing 25% from the amount of rice needed for consumption. The subsidized rice for the poor is sold for IDR 1000 per Kg, where the market price in 2007 was about IDR 4500 per kg. Table 2: Distribution of Rice for the Poor
Year Rice Distributed (ton) Number of Recipients (Household)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: BULOG.

1,350,000 1,501,274 2,349,600 2,059,276 2,061,793 1,991,897 1,624,500 1,736,007 3,342,500 3,329,514 2,972,961

7,500,000 8,700,000 9,790,000 8,580,313 8,590,804 8,300,000 10,830,000 15,781,884 19,100,000 18,500,000 17,500,000

BULOG has played an instrumental role in sheltering the poor in the event of rice price crises in 2008 (Saifullah 2010). The recipients of subsidized rice were increasing in the event of the world rice price crisis. Saifullah also described that the allocation for poor families was 10 kg/HH/month for ten months (about 1,91 million tons per year in total) was increased to 15 kg/HH/month for ten months (about 2.77 million tons per year) since February 2008. As prices jumped even further, the duration of rice allocations was increased in April 2008 to 12 months (3,34 million tons per year). In contrast, a study by Sulton Mawardi et al (2007) indicated that the rice for the poor program implementation have not been able to achieved its goal because of inaccurate

10 | Second ASEAN Rice Trade Forum 2013

target group and implementation procedure. The subsidized rice for the poor have been distributed to wider range of household than its designate, including not poor household. Only 53% from the subsidized rice recipient is poor household. As the result poor household received a lot less amount of the subsidized rice. The situation is even worse since frequency of distribution is also less than it was promised, some poor household already on the list did not even received any support, and the actual price charge to the poor household is more then what suppose to be charge. World Bank (2005) calculated that in average the value of rice subsidy received is only about 2.1% of the actual designated poor household per capita expenses. Most of the subsidy goes to non targeted household.

III. BenefitCost Analysis of Rice Self-Sufficiency

1. The Current Self-Sufficiency Policy In this policy scenario, rice is maintained at 90% self-sufficiency and allows BULOG to import about 10% with direct mandate from the government. With this policy scenario, domestic market is practically isolated; there is no direct link to the international rice market and all rice import is facilitated by BULOG. The imported rice in domestic market is sold at the regular price which is higher than the international price and leaving quite a bit profit for the importer. What is more troubling with the current policy, there is no clear rule about what determines the need for rice imports, how much imports are necessary, and when to import. At the time of the lowest stock (Nov-Jan), domestic market is vulnerable to issue, gossip and speculation. Multiple authorities on rice import decision generated heated debates and greater uncertainty in the rice market, further increasing rice prices during critical times to the disadvantage of the poor. As described earlier in the previous section, the Ministry of Agriculture always claim that domestic production is improving and have enough rice for the year but the Ministry of Trade usually argue that the price tend to increase because very limited rice available. During this time, the domestic market is vulnerable to issue, gossip and speculation, the issue of rice importation is further complicated by the unclear basis of decision-making and multiple authorities. The current rice policy has resulted in more stable but much higher rice prices than the international rice price levels. Included in the total benefit of the current policy is the total value of rice production at domestic price. While in the total cost there are 4 main cost components: 1. 2. 3. 4. Cost of rice production Cost of seed and fertilizers subsidy Cost of government rice procurement Cost of rice import by BULOG

The average benefit-cost ratio of the current self-sufficiency policy for 10 years (20002010) is 1.00, which is described in Figure 6. The figure shows from 2000 to 2005 the policy resulted in economic loss, the BC ration is lower than one. Only during 2006-2008 when world food price under the price shock the policy creating positive economic gain (see Figure 6). When the international market starting to adjust and the price started to decline, the domestic price becoming higher than the international price. Thus the current policy create economic loss after the food price crises.

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 11

Figure 6: BenefitCost Ratio of the Current Self-Sufficiency Policy

1.08 1.06 1.04 1.02 1.00 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

2. Fixed Self-Sufficiency In this policy scenario, rice is fixed at 100% self-sufficiency, relying only on domestic production. No rice trade is allowed, completely isolating the domestic rice market. There is a little bit savings from not importing rice, since the need for rice import for Indonesia is actually quite small. However, to match the growing demand on rice and compensating for rice land conversion, government need to spend additional budget to keep additional 1500 ha of land available for rice production. The total benefit of the policy includes the total value of rice production at domestic price and total saving from buying rice import. The total cost components include the following: 1. 2. 3. 4. Cost of rice production Cost of seed and fertilizers subsidy Cost of government rice procurement Cost of rice land expansion (to keep up with demand)

The average Benefit Cost Ratio of the Fully Self-sufficiency Policy for 10 years (2000-2010) is 0.98. Compare to the current policy, this policy is a lot more expensive and create heavy burden to the government budgetary. The annual Benefit Cost Ration of the Fixed Selfsufficiency Policy is described in Figure 7. Figure 7: BenefitCost Ratio of the Fixed Self-Sufficiency Policy
1.04
1.02 1.00 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

12 | Second ASEAN Rice Trade Forum 2013

3. Flexible Self-Sufficiency Policy with Quota Similar to the current policy, in this scenario rice is maintained at least 90% self-sufficient, allowing for import about 10% but through quota. Fixed amount of rice import quota is set before the end of each year according to production and consumption prediction. The New Food Law No. 18/2012 mandated the government to set up new institution called National Food Authority at the latest by 2014. The National Food Authority has to decide on the amount of import quota needed and put it into transparent bids to avoid corruption. With this policy set up, Indonesia will still be able to maintain its self-sufficiency policy objective but with more efficient, less harmful mechanism and consistent with international market price trends The total benefit of the policy includes total value of rice production at domestic price and saving from price adjustment to the international market. With this policy, domestic price will be lower than the current price level and more consistent with the international price level. The total cost of the policyincludes: 1. 2. 3. 4. Cost of rice production Cost of seed and fertilizers subsidy Cost of government rice procurement Cost of rice imported

The average Benefit Cost Ratio of the Self-sufficiency Policy with Quota for 10 years (20002010) is 1.042. The annual Benefit Cost Ration the Self-sufficiency Policy with Quota is described in Figure 8. The figure shows from 2002 to 2007 the policy created positive egonomic gain. Only in the early two year and during the peak of food price crises the policy resulted in economic loss, the BC Ratio was below one. Compare to Figure 6 and 7, this policy demonstrated to be a better alternative. Figure 8: BenefitCost Ratio of Flexible Self-Sufficiency Policy with Quota
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

4. Flexible Self-Sufficiency with Tariff Similar to the Self-sufficiency Policy with Quota, in this scenario rice is maintained at 90% self-sufficiency, allowing for import about 10% but controlled through tariff mechanism. According to the WTO, tariff barrier is a preferred mechanism from the trade agreement perspective. In this policy scenario, tariff is set at 32 percent ad-valorem tax to achieve an

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 13

import target similar to the amount controlled by quota. However, the challenge with the mechanism is on a border control and high cost of monitoring for the tariff policy to be effective. The total benefit of the policy includes total value of rice production at domestic price, gain from price adjustment to the international market and income from import tariff. Similar to policy with quota, with this policy domestic price will be lower than the current price level and more consistent with the international price level. Similarly, the total cost of the policy is includes: 1. 2. 3. 4. Cost of rice production Cost of seed and fertilizers subsidy Cost of government rice procurement Cost of rice imported

The average Benefit Cost Ratio of the Self-sufficiency Policy with Tariff for 10 years (20002010) is 1.043. The annual Benefit Cost Ration the Self-sufficiency Policy with Tariff is described in Figure 9. The figure is very similar with Figure 8 only economically better because of additional economic gain from the tariff. Figure 9: BenefitCost Ratio of Flexible Self-Sufficiency Policy with Tariff
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

III.

Conclusion

Rice is not just a commodity for Indonesia. Having enough rice to feed everyone is seen as a mark of national prosperity and sovereignty. The tiny grain is not only the main staple food but a powerful icon that has carried into modern-day. Thus it is important to understand that from the political economic perspective, the government need to demonstrate its ability to control rice market in order to gain public confidence. Indonesian government has been adopting a policy of food self-sufficiency. The policy implements at least 90% self-sufficiency. Domestic market is isolated, no direct link to the international rice market. BULOG imports about 10% at the time of the lowest stock (NovJan) in the country. The most challenging problem is how to keep rice production expanding in respond to the increasing demand. While land available is getting more limited, land conversion from agriculture to non agriculture is very high, especially in Java. With a population of 230.6 million and growth rate of 4.5 million annually supply expansion become very difficult task.

14 | Second ASEAN Rice Trade Forum 2013

Controlling domestic market with restriction for import and export, government have been able to control more stable price but price has not returning to the seasonal price position and tend to increase higher from the previous year (in a real value). By the end of 2009, rice price in Indonesia was already higher than the international market and increasing. This is to demonstrate that a man made isolated stabilization mechanism is rigid and costly. High cost of food will hurt the poor and the area most vulnerable to chronic food insecurity. However, there are better alternatives policies to achieve the objective of food security according to the New Food Law 18/2012. The best and more pro-trade is a flexible selfsufficiency policy with a tariff mechanism. The tariff was calculated to be appropriately set at 32 percent ad-valorem tax. The challenge is on a border control and high cost of monitoring for the tariff policy to be effective. The second alternative 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 objectives.

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 15

References
Banerjee, A. V., & Duflo, E. (2007). The Economic Lives of the Poor. Journal of Economic Perspectives , 141-167. Dawe, David and Tom Slayton (2010) The World Rice Market Crisis of 20007-2008. In David Dawe (ed). The Rice Crisis: Markets, Policies and Food Security. The food and Agriculture Organization of the United Nations and Earthscan. Dawe, David (ed). (2010). The Rice Crisis: Markets, Policies and Food Security. Food and Agriculture Organization of the United Nations and Earthscan. Deaton, Angus and Shankar Subramanian (1996). The Demand for Food Calories. Journal of Political Economicy 104 (1). Indonesian Food Security Council and World Food Program, 2009. A Food Security and Vulnerability Atlas of Indonesia. Dewan Ketahanan Pangan, Departemen Pertanian RI and WFP. ISBN: 978-979-99549. Natawidjaja, R., et al (2008b) Supply and Value Chain Analysis of Rice in West Java. Bank Indonesia Jawa Barat Regional Office. Natawidjaja, R., T. Perdana, E. Rasmikayati, T. Insan Noor, S. Bachri, T. Reardon, and R. Hernandez. (2007). Horticultural Producers and Supermarket Development in Indonesia. The World Bank. Report No. 38543-ID. Saifullah, A. (2010). Indonesia's Rice Policy and Price Stabilization Programme: Managing Domestic Prices during the 2008 Crisis. In David Dawe (ed), The Rice Crisis: Markets, Policies and Food Security. The Food and Agriculture Organization of the United Nations and Earthscan. Sawit, M. Husein and E.M. Lokollo (2007). Rice Import Surge in Indonesia. ICASEPS and AAI. Sulton Mawardi, et al., 2007. Efektivitas Pelaksanaan Raskin (Effectiveness of Rice for the Poor Program Implementation). SMERU Research Report downloaded from www.smeru.or.id. Thomas, D., and J. Strauss (1997). Health and Wages: Evidence on Men and Women in Urban Brazil. Journal of Econometrics, 77 (1). World Bank (2005) Pangan untuk Indonesia.In Indonesia Policy Briefs: Gagasan untuk Masa Depan. Downloaded from http://siteresources.worldbank.org/ INTINDONESIA/ Resources/Publication//feeding.pdf World Bank (2006) Making the New Indonesia Work for The Poor. Jakarta: World Bank. Dowloaded from http://siteresources.worldbank.org/INTINDONESIA/Resources/ Publication/MakingtheNewIndonesia.pdf

16 | Second ASEAN Rice Trade Forum 2013

Appendixes
Appendix 1: BenefitCost Analysis of Fixed Self-Sufficiency Policy (No Trade)
Year 2000 51.90 34.62 36.08 -1.46 BULOG HPP 0.15 MoA FAO FAO MoT FAO 2424.22 87.46 2110.91 2427.55 84.03 2.21 5.55 1.36 0.26 9595.00 3.38 90.83 91.80 0.99 2001 50.46 33.66 34.92 -1.26 2537.09 88.58 2182.01 2509.31 84.46 2.44 6.25 0.64 0.25 10266.00 1.62 90.21 93.14 0.97 2002 51.49 34.34 36.17 -1.83 2826.06 102.22 2364.23 2718.86 93.38 4.56 6.88 1.80 0.23 9261.00 3.88 106.10 104.81 1.01 2003 52.14 34.78 36.42 -1.65 2785.85 101.47 2324.32 2672.97 92.95 5.49 7.23 1.63 0.25 8571.00 3.50 104.96 105.67 0.99 2004 54.09 36.08 36.47 -0.39 2850.76 103.96 2413.31 2775.31 100.12 6.11 7.69 0.39 0.23 9030.00 0.81 104.78 113.93 0.92 2005 54.15 36.12 36.27 -0.16 3475.05 126.05 2790.00 3208.50 115.89 9.07 9.00 0.19 0.28 9751.00 0.51 126.56 133.96 0.94 2006 54.45 36.32 36.06 0.26 4462.68 160.93 3423.33 3936.83 142.99 8.65 9.60 0.46 0.29 9141.00 1.22 162.15 161.24 1.01 2007 57.16 38.12 37.80 0.33 5157.74 194.95 3887.50 4470.63 170.44 15.37 10.23 1.41 0.32 9142.00 4.07 199.02 196.04 1.02 2008 60.25 40.19 41.20 -1.02 5484.53 225.98 4175.00 4801.25 192.95 28.34 11.36 0.29 0.64 9772.00 1.80 227.78 232.65 0.98 2009 64.40 42.95 42.18 0.77 6011.99 253.60 4600.00 5290.00 227.23 33.52 11.68 0.25 0.51 10356.00 1.32 254.92 272.42 0.94 2010 66.47 44.34 43.35 0.99 7097.04 307.65 5060.00 5819.00 257.99 39.53 12.49 0.69 0.46 9078.00 2.84 310.49 310.01 1.00 Total/ Mean 616.96 411.51 416.92 -5.41 4101.18 1752.86 3211.87 3693.65 1562.42 155.29 97.96 9.09 0.34 9451.18 24.95 1777.81 1815.67 0.98

Particulars Rice (paddy equivalent) production (mt) Rice (milled equivalent) production (mt) Domestic consumption (mt) Volume gap (mt) Unit price (IDR/kg) Total value (trillion IDR) Unit cost (IDR/kg) Unit cost include margin (IDR/kg) Final cost (trillion IDR) Government subsidy (trillion IDR) Incremental production cost (trillion IDR) Volume saved from importation (mt) Import price (USD/kg) Official exchange rate (USD/IDR) Total saving from import (trillion IDR) Total benefit Total cost Benefit cost ratio

Source FAO 0.66 FAO

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 17

Appendix 2: BenefitCost Analysis of Current Self-Sufficiency Policy

Particulars Domestic consumption (mt) Domestic production (mt) Unit price (IDR/kg) Total value (trillion IDR) Unit cost (IDR/kg) Unit cost include margin (IDR/kg) Final cost (trillion IDR) Government subsidy (trillion IDR) Import volume (mt) Import price (USD/kg) Official exchange rate (USD/IDR) Import cost (trillion IDR) Total benefit Total cost Benefit cost ratio FAO MoT MoA HPP 0.15 BULOG Source FAO Year 2000 36.08 34.62 2424.22 83.92 2110.91 2427.55 84.03 2.21 1.36 0.26 9595.00 3.38 83.92 89.62 0.94 2001 34.92 33.66 2537.09 85.39 2182.01 2509.31 84.46 2.44 0.64 0.25 10266.00 1.62 85.39 88.51 0.96 2002 36.17 34.34 2826.06 97.06 2364.23 2718.86 93.38 4.56 1.80 0.23 9261.00 3.88 97.06 101.81 0.95 2003 36.42 34.78 2785.85 96.88 2324.32 2672.97 92.95 5.49 1.63 0.25 8571.00 3.50 96.88 101.94 0.95 2004 36.47 36.08 2850.76 102.85 2413.31 2775.31 100.12 6.11 0.39 0.23 9030.00 0.81 102.85 107.05 0.96 2005 36.27 36.12 3475.05 125.51 2790.00 3208.50 115.89 9.07 0.19 0.28 9751.00 0.51 125.51 125.47 1.00 2006 36.06 36.32 4462.68 162.09 3423.33 3936.83 142.99 8.65 0.46 0.29 9141.00 1.22 162.09 152.86 1.06 2007 37.80 38.12 5157.74 196.63 3887.50 4470.63 170.44 15.37 1.41 0.32 9142.00 4.07 196.63 189.88 1.04 2008 41.20 40.19 5484.53 220.41 4175.00 4801.25 192.95 28.34 0.29 0.64 9772.00 1.80 220.41 223.10 0.99 2009 42.18 42.95 6011.99 258.24 4600.00 5290.00 227.23 33.52 0.25 0.51 10356.00 1.32 258.24 262.06 0.99 2010 43.35 44.34 7097.04 314.65 5060.00 5819.00 257.99 39.53 0.69 0.46 9078.00 2.84 314.65 300.36 1.05 Total/ Mean 416.92 411.51 4101.18 1743.63 3211.87 3693.65 1562.42 155.29 9.09 0.34 9451.18 24.95 1743.63 1742.66 1.00

18 | Second ASEAN Rice Trade Forum 2013

Appendix 3: BenefitCost Analysis of Flexible Self-Sufficiency Policy with Quota

Particulars Domestic consumption (mt) Domestic production (mt) Domestic price (IDR/kg) Adjusted price (IDR/kg) Benefit from price adj (trillion IDR) Total value (trillion IDR) Unit cost (IDR/kg) Unit cost include margin (IDR/kg) Final cost (trillion IDR) Government subsidy (trillion IDR) Import volume (mt) Import price (USD/kg) Official exchange rate (USD/IDR) Import price (IDR/kg) Import cost (trillion IDR) Total benefit Total cost Benefit cost ratio FAO MoT MoA HPP 0.15 BULOG adj Source FAO Year 2000 36.08 32.47 2424.22 2451.44 -2.21 79.60 2110.91 2427.55 78.82 2.21 3.61 0.26 9595.00 2492.27 8.99 77.39 90.02 0.86 2001 34.92 31.42 2537.09 2532.88 0.33 79.59 2182.01 2509.31 78.85 2.44 3.49 0.25 10266.00 2526.57 8.82 79.92 90.11 0.89 2002 36.17 32.55 2826.06 2557.64 21.85 83.26 2364.23 2718.86 88.51 4.56 3.62 0.23 9261.00 2155.01 7.79 105.10 100.86 1.04 2003 36.42 32.78 2785.85 2532.27 20.78 83.01 2324.32 2672.97 87.62 5.49 3.64 0.25 8571.00 2151.91 7.84 103.79 100.95 1.03 2004 36.47 32.82 2850.76 2543.32 25.23 83.48 2413.31 2775.31 91.09 6.11 3.65 0.23 9030.00 2082.17 7.59 108.70 104.80 1.04 2005 36.27 32.65 3475.05 3160.06 25.71 103.17 2790.00 3208.50 104.75 9.07 3.63 0.28 9751.00 2687.58 9.75 128.87 123.57 1.04 2006 36.06 32.46 4462.68 3746.42 58.12 121.59 3423.33 3936.83 127.77 8.65 3.61 0.29 9141.00 2672.04 9.64 179.71 146.06 1.23 2007 37.80 34.02 5157.74 4252.83 76.96 144.67 3887.50 4470.63 152.08 15.37 3.78 0.32 9142.00 2895.46 10.94 221.63 178.40 1.24 2008 41.20 37.08 5484.53 5794.36 -28.72 214.87 4175.00 4801.25 178.04 28.34 4.12 0.64 9772.00 6259.10 25.79 186.15 232.17 0.80 2009 42.18 37.96 6011.99 5729.14 26.85 217.51 4600.00 5290.00 200.83 33.52 4.22 0.51 10356.00 5304.86 22.38 244.35 256.73 0.95 2010 43.35 39.01 7097.04 5914.56 115.33 230.75 5060.00 5819.00 227.02 39.53 4.33 0.46 9078.00 4140.83 17.95 346.09 284.50 1.22 Total/ Mean 416.92 375.23 4101.18 3746.81 340.21 1441.49 3211.87 3693.65 1415.39 155.29 41.69 0.34 9451.18 3215.25 137.48 1781.70 1708.16 1.04

Rice Self-Sufficiency: Fixed and Flexible Approaches--The Case Of Indonesia | 19

Appendix 4: BenefitCost Analysis of Flexible Self-Sufficiency Policy with Tariff

Particulars Domestic consumption (mt) Domestic production (mt) Domestic price (IDR/kg) Adjusted price (IDR/kg) Benefit from price adj (trillion IDR) Total value (trillion IDR) Unit cost (IDR/kg) Unit cost include margin (IDR/kg) Final cost (trillion IDR) Import Tariff (IDR/kg) Government subsidy (trillion IDR) Government revenue (trillion IDR) Import volume (mt) Import price (USD/kg) Official exchange rate (USD/IDR) Import price (IDR/kg) Import cost (trillion IDR) Total benefit Total cost Benefit cost ratio FAO MoT MoT MoA HPP 0.15 BULOG adj Source FAO Year 2000 36.08 32.47 2424.22 2451.44 -2.21 79.60 2110.91 2427.55 78.82 797.53 2.21 2.88 3.61 0.26 9595.00 2492.27 11.87 80.26 92.90 0.86 2001 34.92 31.42 2537.09 2532.88 0.33 79.59 2182.01 2509.31 78.85 808.50 2.44 2.82 3.49 0.25 10266.00 2526.57 11.64 82.75 92.93 0.89 2002 36.17 32.55 2826.06 2557.64 21.85 83.26 2364.23 2718.86 88.51 689.60 4.56 2.49 3.62 0.23 9261.00 2155.01 10.29 107.60 103.35 1.04 2003 36.42 32.78 2785.85 2532.27 20.78 83.01 2324.32 2672.97 87.62 688.61 5.49 2.51 3.64 0.25 8571.00 2151.91 10.35 106.30 103.46 1.03 2004 36.47 32.82 2850.76 2543.32 25.23 83.48 2413.31 2775.31 91.09 666.29 6.11 2.43 3.65 0.23 9030.00 2082.17 10.02 111.13 107.23 1.04 2005 36.27 32.65 3475.05 3160.06 25.71 103.17 2790.00 3208.50 104.75 860.03 9.07 3.12 3.63 0.28 9751.00 2687.58 12.87 131.99 126.69 1.04 2006 36.06 32.46 4462.68 3746.42 58.12 121.59 3423.33 3936.83 127.77 855.05 8.65 3.08 3.61 0.29 9141.00 2672.04 12.72 182.79 149.14 1.23 2007 37.80 34.02 5157.74 4252.83 76.96 144.67 3887.50 4470.63 152.08 926.55 15.37 3.50 3.78 0.32 9142.00 2895.46 14.45 225.13 181.90 1.24 2008 41.20 37.08 5484.53 5794.36 -28.72 214.87 4175.00 4801.25 178.04 2002.91 28.34 8.25 4.12 0.64 9772.00 6259.10 34.04 194.40 240.42 0.81 2009 42.18 37.96 6011.99 5729.14 26.85 217.51 4600.00 5290.00 200.83 1697.56 33.52 7.16 4.22 0.51 10356.00 5304.86 29.54 251.51 263.89 0.95 2010 43.35 39.01 7097.04 5914.56 115.33 230.75 5060.00 5819.00 227.02 1325.07 39.53 5.74 4.33 0.46 9078.00 4140.83 23.69 351.83 290.25 1.21 Total/ Mean 416.92 375.23 4101.18 3746.81 340.21 1441.49 3211.87 3693.65 1415.39 1028.88 155.29 44.00 41.69 0.34 9451.18 3215.25 181.48 1825.70 1752.16 1.04