On Dec. 26, the Cabinet decided that beginning with this year's first crop, the government's purchase price for paddy rice would be raised by NT$2 per kg, as the price had not been adjusted since 1993 and production costs have risen by an estimated 11 percent since then. While appearing to benefit rice farmers by raising their revenue, in reality, the measure is disadvantageous to the development of the rice industry as a whole.
The overall effects of a policy should be observed, as short-term benefits may have undesirable consequences in the long run. Raising the price will stimulate production but hurt the long-term revenue of paddy farmers.
In order to join the WTO, Taiwan reduced the area of rice cultivation by 110,000 hectares over 10 years -- from 364,000 hectares in 1997 to 263,000 hectares in 2006. With the higher purchase price, originally fallow fields will be re-cultivated. This will boost the economy of farming villages, but it will also raise farm labor costs, ultimately causing revenues to decline.
The rise will also cause trade on the paddy market to slow. If the purchase price of public grain is raised at a time when the recent price of paddy has not exceeded NT$20 per kilogram, farmers will sell their entire stock to the government and grain traders will not be able to function.
In 2006, the total paddy output was 1.558 million tonnes, of which 244,000 tonnes were purchased as public grain and 1.314 million tonnes went into the public market. If the purchase price were raised by NT$2, the amount of rice on the public market would fall to 832,000 tonnes, removing 482,000 tonnes of trade volume. The originally torpid paddy market would become even more so. From a free market perspective, this is extremely harmful to the industry.
Raising government subsidies also does not accord with national policy. Taiwan promised the WTO that the total domestic paddy subsidy would not exceed NT$5.06 billion (US$156 million). Based on figures from 2006, the cultivated area for this year's first crop would be an estimated 155,248 hectares, with about 484,000 tonnes in purchases. The second crop area will be 107,940 hectares, with 242,000 tonnes in purchases. Assuming the international price is NT$9 per kg, the total domestic paddy subsidy would be NT$10.169 billion -- twice the amount which Taiwan promised. If the nation is shown to have increased rather than decreased its subsidies, it will have a negative effect on the next round of international negotiations. This policy should be reconsidered.
Lee Yuan-ho is professor and department head at Fo Guang University's Department of Economics.
Translated by Angela Hong
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