Malaysia’s paddy and rice industries have been protected since 1971. The premise that led to protectionism was a price crisis in the late 1960s due to a severe cereal supply constraint in a highly thin and volatile global rice market. Domestically, the paddy and rice market was perceived as structurally inefficient due to a lack of integration, exploitative middlemen, poor information flow and inadequate infrastructure. In response, the government formulated a three-pronged policy objective, namely to ensure a high price for paddy producers, to achieve a targeted self-sufficiency level (SSL) in rice and to ensure quality and a stable rice price for consumers. The realisation of the policy objectives necessitated market intervention and support, which included the need for a state trading enterprise (STE), price control (farm and retail), subsidisation of input and numerous market regulations. The policy largely remains intact to date.
The first STE was Lembaga Padi dan Beras Negara or LPN (1971-1993), a single, integrated agency responsible for the overall development and formulation of national policies for the sector. As LPN became tainted with numerous governance issues and organisational weaknesses, a private corporation called Padiberas Nasional Bhd or Bernas was established in 1994 as a replacement in the hope that it would perform better. Bernas went through several transformations, during which it was listed on the Kuala Lumpur Stock Exchange in 1997, delisted in 2014 and has been a private company since.
Bernas’ purported socioeconomic functions include ensuring fair prices for producers and consumers, maintaining a sufficient rice supply and ensuring the quality and standard of rice. Its social obligations include managing a stockpile, purchasing paddy at a guaranteed minimum price (GMP) decided by the government, acting as the buyer of last resort, managing the disbursement of subsidies and providing the Bumiputra Rice Millers Scheme. In short, Bernas’ tasks are administrative, that is, implementing the government’s predetermined intervention strategies.
The paddy and rice prices have remained stable as they are predetermined and poor-quality paddy is absorbed by Bernas. Additionally, subsidies are disbursed and the rice stockpile is adequate. Bernas received a concession to import rice until 2030, a function that yields profit through the price difference. However, as proven in other economies, protectionist policies and monopolies are distortive, resulting in inefficient resource allocations that hinder growth. Malaysia is no exception.
Since 1971, the ecosystem of the paddy and rice sector has changed. The downstream sub-sector, in particular, saw a growing concentration of rice mills and Bernas consolidating control of the supply chain from the import point to the farm. Before 1970, the farm market was relatively competitive with almost 2,000 mills, 70% of which were cooperatives owned by farmers. By 2020, the sector had become concentrated, with the number of mills reduced to 178, mainly owned by large firms and Bernas.
On average, farmers have only one or two choices for buyers of their paddy. Under such an imbalanced market structure, farmers’ countervailing power is significantly reduced and they function merely as price takers. Similarly, by 2020, Bernas and its joint-venture milling partners had processed about 48% of the paddy (or 33.6% of total rice demand). Together with their monopoly on rice imports (which make up 30% of demand), Bernas controls about two-thirds of the local market share. Effectively, it has become a monopoly in the local paddy and rice complex. The problem is worsened by the monopoly held by Nafas (National Farmers Organisation) over the distribution of inputs, particularly fertiliser and pesticides, since 1980. Hence, farmers are trapped between two monopolies that limit their economic mobility beyond farms.
The recent announcement by Bernas to give farmers RM10 million and later RM50 million will not improve their livelihood much, as on average, the farmer will receive about RM50 and RM250 of these amounts respectively. It will not change the ecosystem either.
The 50-year-old market structure is showing symptoms of “premature deindustrialiation” in that the industry’s growth is slowing prematurely in its development path. This is proven by the limited investment in technology and capacity in the sector while the investment climate appears lacklustre. Such a situation is starkly at odds with the revolution in Asian rice value chains in other countries. For instance, China, India and Vietnam have witnessed technological improvement, scale expansion, quality refinement, consolidation, vertical coordination and integration. Their transformation is enhancing food security, lowering consumer rice prices, improving rice quality, and increasing rice and end-use diversity.
Serious market inefficiencies and missed opportunities are apparent in the local market. First, competition and cooperation are undermined along with all the benefits that come with it, particularly product innovation, growth and dynamism. Even though the intention underlying the establishment of Bernas is developmental rather than predatory, their import monopoly and procurement strengthening strategies (joint ventures with traders and millers) have merely increased the barriers to entry for new entrants, hence further strengthening their control of the market.
A second issue is that there has been limited upstream development. Despite the subsidies (for both input and output) and the use of good manufacturing practices, farmers at large do not earn a good income as production costs are high. Their gross return is further reduced by the high deduction rate for poor paddy at the point of sale to private and Bernas millers. Their opportunities to diversify their sources of income are limited by the two aforementioned monopolies. More than 90% of paddy farmers belong to the B40 category compared to the downstream players, including Bernas, who enjoy reasonable earnings. With low income, farm capital formulation is very limited, resulting in almost zero innovation.
Third, downstream development is virtually missing. Rice remains a single-use product. Due to high barriers to entry in the downstream sector, there are minimal small and medium enterprise (SME) establishments for paddy and rice-based products except for rice, rice flour and vermicelli. In countries like Japan and Thailand, there is a wide range of paddy and rice-based products produced by local SMEs for food and beverage, industrial, medicinal and cosmetic uses.
The above are typical economic costs of a highly protected sector where an STE holds a monopoly in the supply chain. After 50 years, despite price stability and a relatively secure supply of rice, the country has to pay a high price for these achievements, both in terms of economic and fiscal costs. The cumulative value of subsidies amounts to RM36.6 billion (1980-2021) and the sector has shown very little growth. It is highly divided (upstream versus downstream), and poverty among farmers is persistent. Moreover, paddy yield is declining (from 4.1 tonnes per hectare in 2014 to 3.6 tonnes per hectare in 2020) and so is the self-sufficiency level (from 72% to 62% during the period). Experiences from other countries (Bangladesh, Vietnam, Thailand and China) prove that food security and growth can be achieved with some degree of market liberalisation at a much cheaper cost than currently borne by the country.
After half a century, the international and domestic landscapes have changed dramatically, which renders irrelevant the premises for intervention in the 1970s. For instance, the global rice market is robust with the presence of new players (Vietnam, China and India); e-business provides a level playing field for all; and market information and advanced technologies are available to improve productivity. Hence, the old model of market monopoly by an STE is no longer applicable as information is readily available to producers, consumers and industry players to optimise their positions in the industry. The paddy and rice industry deserves structural change toward the development of a more competitive, sustainable and equitable market to achieve food security at a lower cost to society. The budget for subsidies and sustenance of the STE can be partially used for productive purposes such as improving the ecosystem through intensive R&D and extension, advanced technology application and empowering farmers with digital knowledge and greener practices.
Professor Datin Paduka Fatimah Mohamed Arshad is a senior fellow of the Institute for Democracy and Economic Affairs (IDEAS) and a fellow of the Agricultural and Food Policy Studies Laboratory at Universiti Putra Malaysia
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