Bad policy means a worse harvest

`It is a policy with no benefit that will reduce revenues and decrease competitiveness in the rice industry.'

The Cabinet recently issued a new policy. Starting this year, the prices for planned purchasing, guided purchasing and surplus purchasing for paddy (unhusked rice) will each be raised by NT$2.

Premier Chang Chun-hsiung (張俊雄) said that 230,000 rice farmers will benefit from the policy, which is expected to generate an estimated NT$21,000 increase in revenue per hectare.

As researchers in agricultural economy, we find the policy difficult to accept.

We find reasons to oppose this hike in purchasing prices from the vantage of international standards -- WTO support for decreasing domestic subsidies, for example -- the income of rice farmers and attempts to increase competitiveness in the rice industry.

First, let us model the possible increases in the quantity of rice production and area of cultivated land once the policy is implemented.

Because guided and surplus purchasing will each be raised by NT$2 per kilogram, the new prices will be NT$23, NT$20 and NT$18.60 respectively.

The harvest will be an estimated 1,920kg, 1,200kg and 3,000kg per hectare in the first season, while last year's average harvest for the first crop was 6,138kg.

In the previous eight years, the price for the first crop of paddy never rose above NT$18.60, remaining between NT$15.62 and NT$18.04. If the rise in purchasing price leads farmers to increase the area of cultivated land when the future domestic market price is below NT$18.6, then they will sell their total output to the government. The government will have purchased more than 1 million kilograms of paddy from the first crop.

But does it have adequate storage capacity? Will this develop into full-scale purchasing that was last witnessed in 1973? How will this policy be funded if it continues year after year?

If this scenario eventuates, government purchasing expenditure will rise from between NT$7 billion (US$216 million) and NT$8 billion to NT$29.2 billion annually, an increase of at least NT$20 billion, not including storage and management costs.

As price-guaranteed purchasing of paddy is an intervention in rice production and price formation, it is considered by the WTO to be a domestic subsidy that must be reduced. The government's new policy is therefore going against international agricultural trends.

How might Taiwan respond to enquiries from other countries during the next round of the WTO's Doha negotiations?

Finally, and most importantly: the income of rice farmers. In the short term, this policy appears to increase their income. However, in the long run, it is a policy with no benefit that will reduce revenues and decrease competitiveness in the rice industry.

For example, the government's paddy purchase policy has been in place for 40 years. As the Cabinet said, the purchasing price has not changed in 14 years. In terms of planned purchase prices, the bar for the past 14 years was set at NT$21 per kilogram -- and quantities were limited.

Because this policy the price of rice will not go up even if the cost of rice production increases in the form of more expensive fertilizers, fuel and rising wages.

Internationally, wheat, corn and rice -- priced in 1998 at US$130, US$95 and US$240 respectively -- rose to US$200, US$160 and US$330 last year. Thus the hikes in international grain prices have been as high as 54 percent, 68 percent and 37 percent respectively.

Why is it that the domestic price of rice has always remained at between NT$17 and NT$18 instead of rising with international prices?

The main reason is the government's purchasing and fallow policies. They prevent domestic prices from returning to the level they would be at under normal market conditions. Therefore, while the purchasing policy appears to increase the revenue of rice farmers, it has in fact had the opposite effect.

There are many alternatives in looking after farmers and encouraging sustainable agricultural development, such as offering direct subsidies -- which is, according to Huang Kun-pin (黃昆濱), the 75-year-old rice-farming protagonist in the documentary Let It Be (無米樂), the better option.

On the other hand, raising the purchasing price of paddy is the worst, and most unacceptable, solution. The government should carefully reconsider its position.

Chang Ching-cheng is a research fellow at the Academia Sinica's Institute of Economics. Chen Chi-chung is a professor at the Department of Applied Economics at National Chung-Hsing University.

Translated by Angela Hong