Rice Production in Indonesia - Supply and Trade Regulations

Supply and Trade Regulations

The government was intensely involved in the rice economy, both to stabilize prices for urban consumers and to expand domestic output to achieve national self-sufficiency in rice production. Various governmental policies included the dissemination of highyield seed varieties through government-sponsored extension programs, direct investment in irrigation facilities, and control of the domestic price of rice through the National Logistical Supply Organization (Bulog), the government rice-trading monopoly. In the 1970s, Indonesia was a major rice importer, but by 1985 self-sufficiency had been achieved after six years of annual growth rates in excess of 7 percent per year. From 1968 to 1989, annual rice production had increased from 12 million to over 40 million tons, and yields had increased from 2.14 tons of padi (wet rice growing) per hectare to 4.23 tons per hectare.

The most significant factor in this impressive increase in output and productivity was the spread of high-yield rice varieties. By the mid-1980s, 85 percent of rice farmers used highyield variety seeds, compared with 50 percent in 1975. High-yield varieties were promoted together with subsidized fertilizer, pesticides, and credit through the "mass guidance" or Bimas rice intensification program. This extension program also offered technical assistance to farmers unfamiliar with the new cultivation techniques. The new technology was not without its own problems, however. Several major infestations of the brown planthopper, whose natural predators were eliminated by the heavy use of subsidized pesticides, led to a new strategy in 1988 to apply the techniques of integrated pest management, relying on a variety of methods aside from pesticide to control insects and rodents. To help reduce pesticide use, in 1989 the subsidy on pesticides was eliminated.

Government investments in irrigation had also made a significant contribution to increased rice production in Indonesia. From FY 1969 to FY 1989, 2.5 million hectares of existing irrigated land were rehabilitated, and irrigation was expanded to cover about 1.2 million hectares.

Because the government objective of price stability for urban consumers could potentially undermine efforts to increase production by reducing the profitability of the rice crop, Bulog's operations evolved to take into consideration producer incentives as well as consumer costs. Domestic rice prices were permitted to rise gradually during the 1970s, although they were generally held below world rice prices. However, domestic prices were kept above world prices in several periods during the 1980s. Bulog influenced the domestic rice price by operating a buffer stock on the order of 2 million tons during the 1980s. When domestic prices fell, Bulog purchased rice through village cooperatives, and when prices rose above the price ceiling, Bulog released buffer supplies. The margin between the producer floor price and urban ceiling price was sufficient to permit private traders to operate profitably, and Bulog's distribution of rice was limited to under 15 percent of total rice consumed domestically in a given year.