Profitability and Competitiveness of Rice Farming in Malaysia: a Policy Analysis Matrix

Profitability and Competitiveness of Rice Farming in Malaysia: A Policy Analysis Matrix Fazleen Abdul Fatah Universiti Teknologi MARA Shah Alam, Selangor, Malaysia [email protected] Stephan Von Cramon-Taubadel Georg-August-University of Goettingen Göttingen, Germany [email protected] ABSTRACT In recent years, the Malaysian rice sector has experienced structural changes to improve its competitiveness within a dynamic environment that is influenced by political, technical, economic, and international trade challenges. Using a policy analysis matrix and a rich dataset on rice producing households in four of Malaysia’s granary areas, the competitiveness of rice production in Malaysia is analyzed. The empirical results show that rice production is competitive in three of the four granary areas, the exception being Ketara granary area. To fully understand the importance of the competitive farms, they must be identified and studied by further research using disaggregated data. The finding suggests that government policy should focus on encouraging structural changes capable of enabling the local farms to grow enough to earn sufficient income, generate social profits, and thus improve the sector's competitiveness. Keywords: Policy Analysis Matrix, competitiveness, self-sufficiency, rice production, Malaysia JEL Classification: D2, Q18 32 Fazleen Abdul Fatah and Stephan Von Cramon-Taubadel INTRODUCTION it exceeded the long-term trend in recent years from 2006 to 2013 (Figure 1). Between 2005 Overview of the Rice Sector and 2013, the harvested area increased from 660,000 hectares (ha.) to 690,000 ha. Overall Rice plays an essential role in Malaysian paddy yield in Malaysia has increased from society as it fosters agricultural activity and 3.36 metric tons per hectare (MT/ha) in 2005 to contributes to the nourishment of a rising 3.91 MT/ha in 2013. This increase in production population. Rice accounts for 4.1 percent areas and yields has been attributed to the of total agricultural value added. In 1995, rice government’s investments in infrastructure, occupied 6.9 percent of the total agricultural high-yielding varieties, generally favourable land in Malaysia. This value increased growing conditions, and higher productivity to approximately 9.7 percent by 2005 partly (USDA 2012). due to the opening of new regions for rice Consumption of rice in Malaysia has production. As a significant pillar of Malaysian increased consistently since the 1990s and agricultural production, the rice sector is also will continue to do so due to population an important source of employment. growth and the increasing number of tourists Furthermore, rice is a daily staple food and the and immigrant workers in Malaysia (USDA major source of calorie intake in the country, 2013). Additionally, rice is also a raw as Malaysians consume between 2.5 and input for highly demanded food products 2.7 million tons of rice annually. such as vermicelli. Current rice production Even though Malaysia’s rice production in Malaysia is not able to meet growing has fluctuated over the last two decades, domestic demand. Malaysia only produces Figure 1. Rice production, consumption, yield, and harvested area in Malaysia (1980–2013) 1000 ha/1000 mt kg/ha 3000 4500 4000 2500 3500 2000 3000 2500 1500 2000 1000 1500 1000 500 500 0 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Yield (KG/HA) Area Harvested (1000 HA) Production (1000 MT) Consumption (1000 MT) Production Trend Linear (Production (1000 MT)) Source: USDA (n.d.) Asian Journal of Agriculture and Development, Vol. 14 No. 2 33 70 percent of its total rice requirement, are crucial for establishing food security and imports the remaining 30 percent from and effectively addressing poverty. suppliers such as Thailand, Vietnam, and Furthermore, the Malaysian rice sector Pakistan. Clearly, as the population increases struggles to increase its competitiveness and rice consumption grows, the gap between within a dynamic environment of political, demand and the supply of rice will continue technical, economic, and trade challenges. to widen. Malaysia’s lack of self-sufficiency Globalization and international trade, which in rice production results in dependence are vital to Malaysia’s development, expose on rice imports, which cost the country millions the rice sector to competition with producers of Malaysian Ringgit (MYR) annually and in other countries. As a member of the World increasing its trade deficit. Trade Organization (WTO), Malaysia is A series of dramatic changes in rice bound by the results of the Uruguay Round markets occurred globally, precipitated by Agreement on Agriculture. These commitments a hike in the price of petroleum and world food include rules and regulations in the areas prices, coupled with the tripling of the rice of domestic support, export subsidies, and price in Thailand and other major exporting market access in agriculture. Whether or not countries in 2008 (Jamora and Von Cramon- Malaysian rice production is profitable from Taubadel 2012; Rosegrant and Sulser 2002). a comprehensive economic perspective depends The 2008 food crisis led to an increase in input on its comparative advantage, under conditions costs and reduced profits for rice in Malaysia. of no subsidies or with the limited subsidies While the input costs placed further financial that are permitted under WTO rules. Therefore, pressure on farmers, they continued to struggle an assessment of comparative advantage to maximize profits and make ends meet. can be helpful to assess how rice production Similar to other developing countries, Malaysia can contribute to poverty reduction and food being a net importer of rice was caught in the security in Malaysia. tension of the food crisis (Tey and Radam 2011; Timmer 2007). The Evolution of Rice Market Policies By definition, the concept of food security in Malaysia entails emphasis on providing adequate amounts of food in the context of food production Malaysia is one of the most liberalized (the primary interest at the national level), trading nations with low tariffs on most while simultaneously ensuring that affordable commodities and products (Ahmad and Tawang and nutritious food is easily accessible 1999). Low tariffs on staple food imports can (the primary interest at the household and be interpreted as an attempt to find a individual levels) (FAO 1983). In response compromise between the objective of to increased efforts to achieve food security, stimulating production to increase food new initiatives have been enacted to ensure security, and the objective of ensuring citizens have access to sufficient food supplies. that food is available to consumers at Malaysia has more than 100,000 farmers affordable prices. As rice is considered to who depend solely on rice production and their be a strategically important commodity, the employment in the rice industry to live above Malaysian government intervenes more in the poverty level (Md. Wahid, Nik Hushim, the rice market than in other commodity and Chamhuri 2014). Thus, robust planning markets. Policy measures for rice include: and a coherent commitment from all parties (1) a monopoly on imports; (2) controlled prices for milling, wholesale, and retail rice; 34 Fazleen Abdul Fatah and Stephan Von Cramon-Taubadel (3) fertilizer subsidies; (4) price support; In the Third National Agriculture Policy (5) provision of drainage and irrigation (1998–2010), eight granary areas were facilities; (6) spurring innovation; and designated as permanent rice growing areas (7) public investments in research and responsible for achieving at least 65 percent development (R&D). self-sufficiency. The Eight Malaysia Plan The Malaysian government has been (2001–2005) increased this target to 72 percent, intervening in the rice industry since the and the Ninth Malaysia Plan (2006–2010) country’s independence in 1957. The transition increased it further to 90 percent. However, from colonial to post-independence government these targets were not met. The Minister of shifted the rice policy towards achieving Agriculture and the Agro-Based Industry self-sufficiency and reducing dependence announced that Malaysia is determined on imports. As explained by Rudner (1975), to achieve its target to end rice imports and the newly-elected independent government become entirely self-sufficient by 2020 targeted to achieve food self-sufficiency (Mohd Zin 2014). by 1963. The rice sector was targeted to be Aiming for 100 percent self-sufficiency 65 percent self-sufficient in order to ensure is a political goal that is based not only its accessibility and availability, particularly on economic but also on other considerations during a food crisis. Beyond this 65 percent, such as national sovereignty. Nevertheless, the government argued that it is cheaper economic analysis can provide information to import rice from the world market so on the economic costs of pursuing this goal, as to release arable lands to more lucrative and and thus contribute to a comprehensive cost- profitable industrial crops that yield high value benefit analysis of self-sufficiency policy. products and provide more export earnings. A key distinction to be made here is between Table 1 presents the major policy changes the private and social profitability of rice in the Malaysian rice sector. production. If rice production is not privately Table 1. Major policy changes in the Malaysian rice sector Year Major Policy Change Late 1950s Provision of fertilizer subsidy scheme, Guaranteed

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