Paddy Price Stabilisation Fund

Nov 08, 2009 Editorial

To deal with the recent vicissitudes in the rice industry, the government has adopted a commendably interventionist policy. We dealt with some of them a week ago in “Rice Interventions”.
During the recent Parliamentary debate on the Rice Factories (Amendment) Bill – to compel payment by millers to farmers within 42 days – the Minister of Agriculture cogently addressed the objections of those that may harbour doubts that the policy was somehow not in accordance with “free-market” principles. Even the “freest” of markets has a role for governments – it is the consequence that matters.
In our previous editorial, we had raised some questions on two previous interventions – both funded as grants by the EU. The first was a $1.5 billion fund mediated by GBTI to provide “low interest commercial credit to operators of the rice sector”. The other provided some $2 billion to make the entire industry “more competitive”.
In a letter in our Saturday’s edition, “Let us address the rice industry’s real concerns” a correspondent echoed our questions and raised some others. The gravamen of the apprehensions all have to do with the biggest problems with all Government interventions – what economists call “rent seeking” and the average citizen knows as “corruption”.
As the writer pointed out, it is imperative that in all its interventions the agencies involved demonstrate “transparency and accountability in utilising monies belonging to the state”. In the absence of such practices not only will the particular initiative be destroyed but the cynicism generated in the productive group targeted for assistance will foster resentment against the state for years to come. A vicious cycle will ensue.
With the foregoing as a caution, we hearken to another intervention in the rice industry floated by Minister Persaud – a Price Stabilisation Fund (PSF). While the details are sketchy, a GINA release claimed that “Government will be supporting the RPA in setting up the fund as it will aid farmers especially with pricing for paddy. Once the price for paddy reduces below its production cost, farmers will be compensated through a voucher system and government will start the fund that will be continued by way of contributions from rice farmers and millers.”
Is this the same “permanent revolving intervention fund for rice farmers” that was mentioned when the $400 million was disbursed? The lack articulation of a coherent overarching plan for the government’s role in the industry suggest an ad hoc approach that does not bode well for the proposed PSF.
Several exporting countries have PSF’s but it is often assumed without discussion or evidence that price stabilisation benefits the farmer and is beneficial to the economy. This is arguable. Generally PSF’s do this by collecting a proportion of farmers’ revenue when prices are high and paying it out when prices are low.
Another assumption is that the fund will provide, at no cost, a perfect transfer of welfare from one period to the next. This has never been found to be the case.
The cost of administering the fund will have to be factored in. Will it be invested to keep up at least with inflation or just in liquid T-Bills to meet seasonal demands? Will the RPA establish its own investment unit generating administrative and accounting overhead or will it utilise an independent investment house? In some countries, a large proportion of the stabilisation funds have disappeared through excessive administrative costs, losses in a high-risk environment, or corruption.
Then, if price changes are random, the fund may pay out year after year, because of an unpredictable run of bad years. If the prices are cyclical, the fund will fail if it starts operation after prices have started their downward swing. Will the Government commit to backstopping the fund in the lean years?
However, we believe if the plans for a PSF are well thought out it will be positive primarily because of how farmers make their decisions. If they assume that this year’s price will continue to hold next year then price stabilisation is expected to result in stable production intentions. And this is what we need for the success of the industry.

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