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James J. Fox
Earlier this year, BULOG, the Indonesia Food Logisitics Board, indicated its intention to import 5.1 million tons of rice during the financial year from 1 April 1997 to the end of March 1998. So far this financial year BULOG has imported 2,938,386 tons of rice. To achieve its import target, BULOG is expecting to have landed in Indonesia 1) over 1 million tons in October, 2) an additional 890,000 tons in November and 3) approximately 650,000 tons in December, for a total of 2.54 million tons by the end of the year. The total for this new import target (over 5.43 millions), if it is achieved, will significantly surpass BULOG's originally proposed import target of 5.1 million tons.
This massive import strategy will be coupled with a greater distribution of rice from BULOG stocks. Indications are that BULOG will maintain the October release at 250,000 and set the release for November at around 475,000 to 500,000 tons, for December at 600,000 to 650,000 with a similar amount to be released in January and slightly less in February.
If this strategy is achieved, imports will virtually balance rice released for distribution and stocks of rice at the end of February will still be at 2 million tons. This will leave warehouses full of rice at the start of the next harvest.
Present estimates put the 1998 rice crop at 46.4 million tons of unhusked rice. This is slightly less than Indonesia's previous El Nino-affected rice harvest, in 1994, of 46.6 million tons. It is well below Indonesia's highest ever rice crop of 51.1 million tons achieved during the La Nina year of 1996.
The possible crop loss for 1998, when compared to the peak harvest year of 1996, would amount to 4.7 million tons of unhusked rice. Five million tons of unhusked rice is equivalent to 3.25 million tons of husked rice. This figure would represent the maximum that Indonesia would need to import to attain the same level of rice stocks as was available in the bumper year of 1996 and would still meet the normal consumption levels assumed by population increase since 1996.
Starting with an initial rice stock of 1.4 million tons at the beginning of January, BULOG has already imported 4.42 million tons of unhusked rice from January through September. This is more than a million tons over the forecast losses for this year. Yet BULOG has indicated its intention to import at least another 2.54 million tons by the end of this year or shortly thereafter.
The more pressing and far more serious problem is that of rice affordability. The sale of subsidised rice through BULOG's special market operations is a government effort directed to help alleviate this critical problem.
BULOG's current strategy, however, is to buy high priced rice abroad, store it at a considerable cost, and then to release this rice at subsidised prices on local markets, thus depressing Indonesian farmers' rice prices and reducing incentives to farmers to plant more rice. The government, in turn, is obliged to provide subsidies for farmers' inputs, particularly fertiliser, thus lowering the costs of production and reintroducing incentives removed by subsidised rice prices.
The question raised by all of this is why BULOG has adopted an almost exclusive policy of buying rice abroad rather than from Indonesian rice farmers as it has done for more than twenty years, even during years of reduced production (as in 1994). This question will become more acute in the coming year.
The Bureau of Meteorology (BMG) has now forecast an early arrival of the rainy season with the probability of normal or above normal rainfall for all regions of Indonesia. Despite the possibilities of flooding, there are excellent prospects that the coming year will produce a bumper crop. Confronted with a large harvest and with its own stockpiles at a high level, it will become increasingly difficult for BULOG to justify and retain its import strategy, but even harder to return immediately to local purchasing.
WATCHPOINT: What does the government's rice strategy indicate about the extent to which lessons about intervention in the economy have been taken to heart in Jakarta?
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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