VZCZCXRO9584
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 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
COMMERCE FOR 4430/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
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