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Cablegate: Experts Urge New Approach to Rice Policy

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RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0848/01 1190955
ZNR UUUUU ZZH
R 280955Z APR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8842
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 1886
RUEHBJ/AMEMBASSY BEIJING 4987
RUEHBY/AMEMBASSY CANBERRA 2408
RUEHUL/AMEMBASSY SEOUL 4550
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 000848

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DEPT FOR EAP/MTS AND EB/IFD/OMA
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COMMERCE FOR 4430/KELLY
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
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SINGAPORE FOR SBAKER
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USDA/FAS/OA YOST, MILLER, JACKSON
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USDA/FAS/OGA CHAUDRY, DWYER
USTR WEISEL, EHLERS

E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: EXPERTS URGE NEW APPROACH TO RICE POLICY


A) Jakarta 762 B) Jakarta 684 C) Jakarta 286 D) Jakarta 780

1. (SBU) Summary. The vast majority of Indonesia's population,
including a large number of farmers, stands to lose from high rice
prices, panelists stated at a forum hosted by the Centre for
Strategic and International Studies (CSIS) on April 24. In contrast
to this view, President Susilo Bambang Yudhoyono recently stated
that high food prices are a blessing for Indonesia. Experts urged
the Government of Indonesia (GOI) to introduce measures to
revitalize the agriculture sector and allow a larger share of
farmer's and the rural population to benefit from higher rice
prices. Experts expect rice prices in Indonesia to rise this year
due to increased smuggling and hoarding, despite a better harvest.
The margin between local and international prices is close to $700
per metric ton. Historically high world prices are a function of
export restrictions rather than excess demand, according to the
Forum's experts, and require international cooperation to control.
The GOI is considering modifying current subsidies to alleviate the
pain of rice price increases, but has no concrete plans to invest
significantly in longer term agriculture sector improvements,
according to a key GOI agriculture policy official. End Summary.

Experts Urge Policies that Benefit Majority
-------------------------------------------

2. (U) The Forum's speakers examined the links between rice prices
and poverty in Indonesia and concluded that the vast majority of
Indonesia's population stands to lose from high rice prices.
According to their research, high rice prices will negatively impact
as much as 80 percent of the population. The real beneficiaries
from high rice prices are the 6% of rice farmers who own more than a
half hectare of land. Illegal traders could also gain significantly
from the growing gap between Indonesian and world rice prices,
currently close to $700 per metric ton. In contrast to other
economies, high rice prices tend to lower real incomes in rural
areas in Indonesia, the experts warned. In contrast to the
findings, President Susilo Bambang Yudhoyono recently stated that
high food prices are a blessing for Indonesia because of the benefit
high prices provide to the agriculture sector.

3. (SBU) The most effective way to stabilize prices over the long
term is to invest in agriculture infrastructure and allow farmers to
make crop decisions based on market prices rather than storing rice
or subsidizing prices, according to the economists at the Forum.
The experts conducted the research presented at the Forum during a
period of low international world prices. As a result, the authors
concluded that Indonesia should remove import restrictions that keep
Indonesian rice prices high relative to the rest of the world and
hurt the overwhelming majority of the Indonesian population. In the
current environment, the presenters urged the GOI to focus on
improving household purchasing power and the ability of the
agriculture sector to respond to market signals. Cash transfers are
an effective immediate term solution to increasing household
incomes, according to many Forum participants. However, the experts
urged the GOI to 1) invest in irrigation and roads in rural areas;
2) reduce land use restrictions; and 3) increases extension services
and seed approvals that allow farmers to improve productivity and
raise incomes in the sector. Although building stockpiles and
subsidizing rice production can also smooth volatility in rice
prices, these methods are much more costly than market-based
responses, according to the Forum's speakers.

Indonesian Rice Data: The Rice Puzzle
-------------------------------------

4. (SBU) The Forum experts also urged the GOI to improve data
collection in the agriculture sector, which is extremely unreliable
and hampers effective policymaking. The researchers found that
there is a 17 percent overestimate of rice production in Indonesia.
GOI survey estimates also ignore factors such as industrial use,
leading to an underestimation of consumption. The data problems
have created the long-standing "Rice Puzzle", where Indonesia is an

JAKARTA 00000848 002 OF 002


actual rice importer, but the data indicate that they should have
large surpluses. The forum participants believe rice prices are the
only reasonable indicator of the demand-supply balance in
Indonesia.

Pressure on Rice Prices Mounts, Intl Cooperation Key
--------------------------------------------- ------

5. (U) Indonesian rice prices could rise significantly this year if
international rice market conditions remain tight. The forum
panelists expect this year's rice harvest to be at normal levels
(not the bumper harvests reported in the local press) and to meet
the majority of domestic demand. However, if international prices
remain at current levels or move higher, the incentive for traders
to smuggle rice out of the country or to hoard rice in anticipation
of local price increases will be strong. USDA estimates that the
Indonesian government will need to import 1.1 million metric tons
(MMT) (the price of which is now $1.3 billion, putting additional
pressure on government finances) in the current crop year even
without an uptick in smuggling. Yet the volume of inter-island
trade has doubled in recent weeks, with most of the movement from
Java to Sulawesi, from which small shipments can easily be smuggled
to the Philippines. Large price increases could devastate low
income Indonesians who spend a quarter to a third of their income on
rice.

5. (U) The forum participants also urged the GOI and countries
around the world to cooperate with their neighbors in order to
thwart or reverse the current run up in international rice prices.
Restrictions on rice exports in India and Vietnam, which has quickly
spread to other countries, rather than a surge in demand, sparked
the run on rice prices, according to the Forum's researchers. They
assert that international rice stocks are sufficient to meet
international demand. The experts worry that individual nations
will remain focused on their own immediate interests at the expense
of rice importing countries in a classic "prisoners dilemma." While
export restrictions may keep local prices low in the short-run, they
also contribute to larger long-term local and international price
increases by encouraging smuggling and hoarding and discouraging
rice farmers from investing in technology to increase supply.

The GOI: Focused on the Here and Now
-------------------------------------

6. (SBU) According to Bayu Krisnamurthi, the Deputy Minister from
the Coordinating Ministry for Economic Affairs, Indonesia is
considering shifting or increasing some food subsidy programs, but
is unable to undertake longer-term measures to revitalize the
agriculture sector. Bayu complained that until the GOI can confirm
that current market trends are permanent rather than speculative it
is impossible for the Indonesian government to gauge an appropriate
policy response. Difficulties in measuring farm output also hamper
the government from developing strong policies to improve the
farming sector, according to Bayu. Bayu also downplayed hopes that
Indonesia would work with its neighbors to try to stabilize rice
prices across Asia, stating that he had not heard of plans for such
discussions. Instead, the GOI plans to maintain export restrictions
and expects that the current crop will meet domestic demand.

HUME

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