This article first appeared in The Edge Malaysia Weekly on June 6, 2022 - June 12, 2022

EVEN before Prime Minister Datuk Seri Ismail Sabri Yaakob said on June 1 that the government would no longer subsidise chicken breeders from July 1 but would instead channel cash directly to people in need of assistance so that they could continue to afford to purchase chicken, it was already obvious that the existing system was far from perfect and needed a recast.

“As expected, the subsidy approach with breeders was not working. Thus, they are now diverting the subsidies to consumers,” says Julia Goh, senior economist at UOB Malaysia.

Indeed, if nothing else, the fact that calls to boycott chicken for a month made the front page of a mainstream paper shows that supply was clearly not meeting demand at the government-determined retail price cap for chicken and eggs. And that is despite the headline increase in government subsidy allocation to RM729.43 million, from RM528.52 million, to help chicken breeders adhere to the maximum retail price of live and standard chicken of RM5.60 per kg and RM8.90 per kg respectively, between Feb 5 and June 5. The retail price ceiling has since been extended to June 30, according to a Domestic Trade and Consumer Affairs Ministry statement dated June 2.

Pictures of under-sized birds showing up on dinner plates — and in social media — also lend credence to reports of chicken being underfed by breeders battling a surge in the prices of corn and soy meal feed, which makes up about 70% of costs.

Evidently, on top of a mismatch in size and supply, there was also a disbursement bottleneck, going by how Ismail Sabri told reporters on June 1 that less than 10% of more than RM700 million in subsidies made available to chicken breeders had been claimed so far.

“Wouldn’t you claim subsidies if you’re struggling with high cost?” laments an industry insider who reckons that ground information on claims filed at district levels may have taken some time to reach the state offices and Putrajaya.

Pending an official announcement of the removal of the price ceiling on chicken on July 1, industry players contacted by The Edge are still waiting with bated breath. As one says, “A lot can happen between now and July 1.”

What is certain is that the cost price increase for whole chicken in recent months is reflected in government statements.

Domestic Trade and Consumer Affairs Minister Datuk Seri Alexander Nanta Linggi had said in a statement dated Feb 2 that whole chicken would retail above RM10 per kg without intervention, when announcing the current RM8.90 per kg price ceiling that was initially applicable from Feb 5 to June 5 this year — a third reduction in the price ceiling from RM9.50 per kg for Deepavali (Nov 1 to 7, 2021) as well as RM9.30 per kg (Dec 7 to 31, 2021) and RM9.10 per kg (Jan 1 to Feb 4, 2022) under the Keluarga Malaysia Maximum Price Scheme (SHMKM).

Just four months on, Ismail Sabri said prices for chicken could have reached RM12 per kg without the ceiling-cum-subsidy, but many, including smaller breeders and traders, had sold the birds at RM8.90 per kg despite not getting subsidies (which were raised from 60 sen per kg for February and March to RM1.40 per kg in April and May) to comply with the retail price cap for fear that the ministry would take action against them.

Even as Russia’s invasion of Ukraine hits the 100-day mark on June 3, there is still no telling when global supply disruptions will end — shoring up realisation of the need to bolster food security amid rising food protectionism globally (see “What under-sized fowls on dinner plates say about food security”).

Rising food prices and diminishing supplies as a result of the Russia-Ukraine war are likely to “last through 2024 and possibly beyond”, analysts at S&P Global Rating wrote in a note dated June 2, titled “The global food shock will last years, not months”.

As there is no way of predicting how long supply chain disruptions will last and the country’s subsidy bill is already expected to reach RM71 billion this year — with some RM30 billion from fuel subsidies alone — Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says offering consumers who need help with targeted subsidies and/or food vouchers is “a more viable approach” for most policymakers.

That is given finite fiscal resources and possible trade-offs that need to be considered if a lot of resources have to be spent on keeping prices artificially low for all instead of just the targeted groups, another economist concurs.

In France, for instance, where inflation was 4.8% in April, the recently re-elected president Emmanuel Macron pledged to raise welfare and issue food vouchers to help the country’s poorest households cope with rising prices instead of controlling inflation.

It is also the most vulnerable that are being given extra aid in the £15 billion (RM82.7 billion) support package announced in May in the UK, where inflation hit a 40-year high of 9% in April and 10 million Britons are estimated to have cut back on food amid a rise in food and energy prices.

Likewise, economists say targeting subsidies to help lower-income groups in Malaysia maintain a good amount of animal protein as part of their daily nutritional intake, even as chicken and eggs are allowed to retail at market prices, would also be a “good practice round” for policymakers, given that the removal of blanket subsidies in favour of targeted ones for fiscal sustainability is long overdue.

“Just like with global monetary policy, we cannot have years and years of [price] distortions and assume that we will always have the money. No matter how noble the purpose [for price distortions/subsidies], there are also consequences and, at some point, we will have to pay,” says Khazanah Nasional Bhd head of research Nicholas Khaw.

“With items like petrol, where the distortion is huge [the rich benefits far more than the rest], targeting [subsidies] makes sense even when you account for the trade-off risks [possible exclusion/inclusion errors].”

Overall, UOB’s Goh reckons that Malaysia is likely to see “more upside risk to prices until the reopening effect wanes and higher prices weigh on spending and demand”. There is also a “moderating effect” from higher interest rates, she adds.

Most experts expect a gradual rationalisation of subsidy in Malaysia, where food inflation has inched higher to reach 4.1% in April even though headline inflation remains relatively low at 2.3%, helped by sizeable subsidies.

“[Subsidy rationalisation] needs to be done in sequence. It cannot be one big bang — chicken, cooking oil, fuel, electricity, gas, public transport [and so on] all lifted at one go. [A rise in] inflation is inevitable,” says SERC’s Lee, who expects “at least one more” round of price increase for goods and services. Apart from supply chain disruptions, prices were already inching higher from labour-related adjustments, including a higher minimum wage, as well as interest rate normalisation.

Lee — who, like most economists, is supportive of the introduction of a broad-scale consumption tax — reckons that the timing of the reintroduction of the goods and services tax (GST) and how well policymakers can help the most vulnerable in society and businesses cope with higher prices would be key determinants of the impact of the move that is being mulled over by policymakers for fiscal sustainability. While there “will definitely be a one-time impact on inflation” when GST is reintroduced, part of the additional income could be used to extend targeted aid, he says.

Whether there is a pay-off or repercussions from policy changes that affect consumer prices and the cost of doing business would also depend on “execution and how well policymakers are able to manage the impact”, Lee adds.

Apart from targeted cash transfers, effective monitoring against profiteering is another way the government can ensure that businesses do not pass on 100% or more of the higher cost to consumers, he says.

Sustainability efforts may get a boost as well, given that consumption patterns could change when people have to pay real (non-subsidised) or close to market prices — thus helping to balance the supply and demand dynamics.

“Ultimately, prices will still increase [with targeted aid]. But it’s a decision to allow market forces to dictate the price and suppliers to adjust [and reach a new equilibrium],” says Goh.

Rather than being overly concerned about what headline numbers may look like in the short term, the country will see a net benefit from necessary structural changes for sustainable growth if the more vulnerable groups in society, who receive timely and adequate aid, also move forward.

See also “Slow disbursement of subsidies hurts poultry players’ cash flow”

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