November 6, 2012 12:33 pm

Indonesia to reimpose food price controls

Indonesia is planning to rebuild a powerful food price-setting body that was dismantled in the wake of the Asian financial crisis amid allegations it was corrupt, inefficient and abused its monopoly power.

Under the dictatorship of General Suharto, the Bureau of Logistics (Bulog) controlled the prices for nine key food staples in the world’s fourth most populous nation. But most of its powers were taken away at the behest of the International Monetary Fund, when it bailed out Indonesia following the 1997-1998 financial crisis that led to Suharto’s downfall.

As part of a growing raft of protectionist economic policies, the government wants Bulog to once again set minimum farm prices and maximum consumer prices for key staple commodities including rice, soybeans, sugar, corn and meat.

The move comes as the world economy suffers its third agricultural commodities price shock in five years, following the crisis of 2007-08, a spike in prices in 2010-11 and the current increase in grain costs.

Agricultural experts say that the controversial proposal defies a recent pledge by Asia-Pacific leaders to promote “open and transparent market mechanisms” and that it will hinder rather than help Indonesia’s goal of achieving food security at a time when global food prices remain volatile and memories of the 2007-2008 crisis are still fresh.

Sutarto Alimoeso, the head of Bulog, told the Financial Times that the move has been accelerated by the summer drought in the US, which drove soyabean prices to a record high and hit Indonesian consumers hard given that soyabean-based tofu is a staple food.

“When there were big fluctuations in soy bean prices, everybody asked where’s Bulog?” he said. “For our people, agriculture is their life and the government should protect them. We can’t have free markets for strategic foods.”

A food law recently passed by Indonesia’s parliament outlines the shift toward more government control over food pricing but Mr Alimoeso said that the details are still being discussed and negotiations may not be concluded until a new president is elected in 2014.

Agricultural commodities exporters and importers have actively used policy tools to try to insulate themselves from rising food prices, in what analysts said were “beggar-thy-neighbour” policies. Consumers have hoarded supplies and cut import tariffs, while exporters have restricted, or even banned, sales overseas. During the 2007-08 food crisis, roughly 30 countries imposed export restrictions, including Vietnam in rice and Argentina in corn and soyabean.

Although the economy has been booming, nearly half of Indonesia’s 240m people still live on less than $2 a day, including many of the country’s 40m small-scale farmers.

Many of these smallholders grow rice, of which Indonesia is the world’s largest per capita consumer. But rather than benefiting from minimum government price guarantees, economists say they stand to lose out because most are net rice buyers. As a result the Indonesian government is forced to subsidise rice for poor farmers, with the double market intervention costing the country as much as $20bn a year, according to an estimate by one western diplomat working on agriculture in Indonesia.

“The current policy setting will result in inflated food prices and poor people paying for them,” he said. “With some climate change-driven bad seasons, we could see genuine food shortages again.”

The Organisation for Economic Co-operation and Development argued in a recent report that Indonesia’s renewed attempts to restrict food imports and exports was “misplaced”.

“Food self-sufficiency does not address the core elements of food security . . . in particular because the use of import protection to increase the returns to farmers also increases food costs for consumers and hinders the competitiveness of the agricultural sector, thereby limiting agricultural productivity growth.”

Samarendu Mohanty, head of research at the Philippines-based International Rice Research Institute, said that if governments want to help subsidise farmers they should focus on cash transfers to improve productivity rather than enforcing minimum prices, which often benefit traders more than smallholding producers.

Mr Alimoeso said that Indonesia was making some progress toward increasing productivity and that it hoped to import less than 1m tonnes of rice this year, compared with 1.8m tonnes last year, as a result.

Additional reporting by Javier Blas in London

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