This article first appeared in Forum, The Edge Malaysia Weekly on January 30, 2023 - February 5, 2023

There is little reason to believe that Malaysia’s paddy and rice industry has a brighter future than its current state without getting back to an effective value chain development trail.

After half a century, the single rice trading desk has remained. Reaping the privilege of the so-called exclusive rights is a privatised state trading enterprise that must fulfil importation responsibilities, even when shocks rear their head, or even act pre-emptively when necessary.

Public debate to date has focused on the concession. Pundits are arguing over whether deregulation should have occurred sooner, and whether the trustee should have provided more aid to increase local paddy production.

But such questions are not particularly to the point: importing rice achieves its intended outcome by filling the demand gap, but it does not solve the problem that local production is uncompetitive; greater imports will not lead to higher self-sufficiency.

In stark contrast to the industry’s general struggle, Bernas’ stellar profit records suggest that market concentration is a crucial factor in the current conundrum. The entity has grown from strength to strength. It is now a conglomerate, anchoring not only the rice importation monopoly, but also the restricted access to certified seeds, the tight control of paddy and rice procurement and near impossibility of sugar and bread manufacturing.

As such, the private conglomerate has undeniably acquired the driver’s seat in the market and governance across all stages of the rice value chain. And whatever supply constraints and opportunities apply, the conglomerate is in the pole position to benefit.

By now, the conglomerate should be ready and more than able to reduce its reliance on importation to survive, but the industry as a whole is certainly not, for now and years to come.

The relevant question, now that trade liberalisation is desirable, is what to do in preparation for its achievement. Competition among sources will make imports more efficient but will dampen the demand for local rice. Yes, advocates claim that corporate profits can be redistributed to local paddy farmers, who remain poor as an outcome of long-term unproductivity. But nothing is harder on farmers than having virtually no freedom to choose paddy varieties, farm-gate marketing channels, and no bargaining power — all of which characterise the existing policy and market regimes.

To begin with, imported rice must be of differentiated quality. Product traits and attributes should reflect the household segment they serve, and the “correct” importation obviously is not generic white rice — on a par with and of lower quality than local white rice. But there is substantial danger in eliminating such generic importation too rapidly at this stage, especially since Bernas has given up its established joint ventures in rice-exporting countries.

Importantly, global food inflation has risen sharply; so much for the potential collusion between Thailand and Vietnam that previously had importing countries scared.

The international threat has occurred at a time when farm input costs have inflated significantly. The effects may have been limited because of the high level of global production surpluses; but whatever the reason, Thailand’s open appeal for commensurate returns to farmers implies that policymakers should review policies on ex-farm guaranteed minimum price, and consequently ex-mill, wholesale and retail ceiling prices, as well as subsidies and incentives in relation to the inflated cost of production.

Despite the claim that price stabilisation policies would provide a greater farm return, paddy farmers still have not invested in agricultural technology to any substantial extent. Instead, the use of inputs has intensified, but paddy yields have only stagnated for the last decade. Inefficiency is growing.

Revised more than a decade ago, price stabilisation policies have severely suffocated rice enterprises. The number of mills had reduced by approximately one-third to fewer than 160 by 2015. Capital expenditure for upgrading has remained a challenge. Procurement and wholesaling have been consolidated. In parallel, the number of meehoon manufacturers has fallen significantly, and there has been no significant downstream initiative. At all stages, new ventures are virtually absent.

These issues point to a quiet “premature de-industrialisation”.  There are deterrents to many developments which could upgrade today’s value chain, especially varietal improvement, paddy productivity growth, milling efficiency growth, and value-adding. In the current circumstances, a complete trade liberation that creates competition between imported and local rice is likely to accelerate de-industrialisation.

Yet, for all the din and roar over trade liberalisation and the price stabilisation policies, there is less disagreement than one might think. Most commentators on both the left and the right believe that local paddy and rice production should become competitive. The controversy stems from questions such as how local farmers and millers should rise to meet the future competition, and how pre-emptive the downstream players should be.

Policymakers may want to maintain the status quo until either the local industry collapses, or the concentration of power and governance becomes too large to fail (and even then, they might complain about a lack of perfect timing for political and/or social feasibility). By contrast, those more concerned with the well-being of the value chain and paddy farmers argue for a gradualist approach, whereby there would be significant and progressive institutional and policy reform, which should be paced to avoid accelerating de-industrialisation.

In navigating this divide, we should remember that today’s international rice market is different from that of the late 1960s. The globalised rice trade is more far-reaching, and products are more diversified to meet more diverse demand. It would be the height of ignorance to assume 1960s solutions for the problems facing Malaysia in 2023.

Accordingly, the debate should be turning to what else the government can do, both to enhance our food security and re-­engineer our rice economy, and to which political and economic ideas are more likely to guide us to the objectives we seek.

Even most of those who have commented recognise that today’s paddy and rice value chain is driven largely by the conglomerate, and that while none of the outcomes could have been predicted with much precision, the bottom line of our food security is now influenced by its business conduct and performance, as well as its patronage system.

Short-sighted policy prescription has again imposed enormous costs on society. In a turbulent world beset by multiplying risks, our rice economy is utterly lacking in resilience and vibrancy. Worse, many of these risks were foreseeable — and, indeed, foreseen. Economists had warned about the dangers of an anti-competitive business environment, policies, and behaviours.

While these developments may be inescapable due to the animal spirits of the corporation, their effects have been exacerbated by negligence of governance in relation to the veto power held by the public administrator. Many of today’s biggest problems — and their consequences for the industry — can be addressed only by a concerted chain of corrections.

They call for wisdom in public administration and policy. Long-term thinking is necessary to restore the critical mass and increase productivity. Industrial strategies should seek to enable value chain development and to tackle hidden risks to food security.

Premature de-industrialisation calls for value chain redevelopment solutions, many of which have yet to receive proper attention. Such industry-wide measures must necessarily encompass institutional, governance, policy and market corrections to ensure objectives would not be achieved at the expense of paddy farmers and the broader rice economy.

To address farmer welfare issues, policymakers should consider at least varietal improvement, output-based subsidy and incentive, fair and transparent marketing methods and diversified end-use to make paddy farming more viable. To fix the productivity stagnation, we need to incentivise innovation adoption.

When these factors align, a reinforcing cycle becomes attainable for development. Therefore, a policy mix is desirable to encourage value chain productivity and innovation growth when competition is imminent, but still aiming to reduce the reliance on importation over the longer term.

We also need stronger laws and enforcement on competition, so firms do not have the incentive to curtail development as a way to extract the very last drop from their investment.

Equally importantly, we need to explore how to attract new ventures. Because the industry is close to being the property of a private conglomerate, the industry as a whole is influenced by that conglomerate’s business priorities. Natural barriers to entry are likely to persist, and a series of split-ups and/or buyouts may prove necessary.

Clearly, today’s paddy and rice policy and market regimes have produced one large winner and many losers in nearly all respects, with a significant impairment of industrial capacity.

It could have been and should still be more supportive of co-development.

Tey Yeong Sheng is a senior researcher at the Institute of Tropical Agriculture and Food Security at Universiti Putra Malaysia and an associate research fellow of the Institute of Strategic and International Studies Malaysia

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