WTO/FTA　Negotiation and Recent Trend of Rice Market

---with respect to the implication on rice consumption level----

Masaru KAGATSUME

Professor,

Graduate School of Agriculture,

Kyoto University

<Contents>

1. Introduction

(1)Outline of Agricultural Negotiation Result of the Uruguay Round on Rice

(2)Shifting into the rice tariffication system in April, 1999

2. Reform of Rice Distribution System

3. Situation of Rice Import & Reserve Stock

4. Determining Factors of Rice Demand

1. Introduction

(1) Outline of Agricultural Negotiation Result of the Uruguay Round on Rice

When GATT Uruguay Round had concluded in 1994 and the liberalization process started, Japan did not choose the option of Tariffication on Rice. Instead of this, Japan has accepted the minimum access option and maintained the Import Quota system and State Trade system.

As for minimum access measures, the government has charges the mark-up through the state trade from the imported rice. The minimum access quantity was started in 1995 with importation of 4% equivalent of the domestic consumption in basis period (1986-1988) and this was planned to increase to 8% equivalent in final year of the agreement 2000. This means rice import had to be increased every year by 0.8% of base year total consumption. In volume terms, 379 thousand tons of milled rice was imported in 1995 and this was planned to increase to import of 758 thousand tons milled rice in 2000.

The Mark-up charge was set based on the gap between selling price and buying price of the imported rice (Thailand Rice) purchased by the government food agency in the basis period (1986-1988). This is sort of specific tax of maximum \292/kg.

In addition to these, the simultaneous buying-selling system (SBS) was introduced in order to establish reasonable domestic market evaluation of the imported rice following the minimum access. The same system was applied to the rice processing commodities.

Japan had followed this system for a few years but in April, 1999, Japanese government had changed her mind and decided to shift to the tariffication system from minimum access system, based on the judgment that import increase and negative impacts on domestic rice industry under the minimum access system would be bigger than under the tariffication system.

(2) Shifting into the rice tariffication system in April, 1999.

The agreement on tariffication under Uruguay Round required for the first tariff rate quota ( minimum access ) to be increased from import of 3 % of domestic consumption in base year to 5% i.e. 0.4% increase per year. But Japan accepted the minimum access option with more compromised way, i.e, increasing rice import from 4% to 8% of the base year consumption i.e. 0.8% increase per year. So, after Japan shifted to the tariffication system, the annual growth rate of the minimum access quantity had reduced by 50% in comparison with the case of continuing the non-tariffication with special measures (i.e. 0.8% per year to 0.4% per year). The details of this rice import increase were as follows.

In 1999, under the old minimum access system, rice import would be 767 thousand tons ( paddy ) but under the tariffication system, this would be reduced to 724 thousand tons in paddy base. In milled rice base, these reduction were from 682 thousand tons to 644 thousand ton in milled rice base ). As for year 2000, this rice import reduction was from 852 thousand tons to 767 thousand tons in paddy base. In milled rice base, this rice import reduction would be from 758 thousand ton to 682 thousand ton in milled rice base. These changes are summarized in the following way.

a) abolishment of licensing of rice trading.

Licensing system of rice export-import is abolished, following this, the compulsory selling of rice imported through permission to government is abolished.

b) implementation of payment to government for rice import.

For rice which is imported under the second (over quota) tariff rate, the government can charge one part of second tariff rate as a payment to the government ( \292/kg ).

This payment to the government from the rice import is appropriated for the imported food administration account of the staple food administration special account.

c) implementation of the notification system on rice import-export.

The rice import-export have to be notified to the government.

d) setting the second ( over quota ) tariff rate.

<1> the basic primary rate( \402/kg ) is set to be tariff equivalent based on the agricultural agreement

<2> the second ( over quota ) rate is calculated based on the agreement. The rest of the second rate from which the payment to government is deducted was set to be the preliminary rate.

Second rate of which, preliminary rate

1999 \351.17/kg \59.17/kg

2000 \341/kg \49/kg

<3> rice can be protected by the special emergency tariff system ( special safeguard system)

Figures 1 to 4 show the detailed contents of rice tariffication after 1999 in Japan. Also these figures explain the comparison between old minimum access system and new tariffication system and their differences in terms of impacts on domestic rice producers.

Figure 1 Content of rice tarification in Japan

Figure 2 The mechnism of the switching to tariffication

Figure 3 Comparison of minimum access quantity before and after tariffication system

Figure 4 Comparison of minimum access quantity before and after tariffication system

Since the acceptance of rice tariffication, border protection measures are almost deregulated and very trivial level in Japan.. Currently the border protection measures are taken for the limited agricultural commodities. In the case of rice, wheat dairy products, former import quota system has already changed to the tariff rate quota system. Even in these cases, the tariff rate equivalent are not so high for majority of agricultural commodities. The agricultural commodities, which have kept exceptionally high tariff rate equivalent, are Rice ( 490% ), wheat ( 210% ), barley ( 190% ), butter ( 330% ), SMP ( 200% ), silk ( 190% ), vegetables ( 3% ), fruits ( 6-20% ). All other agricultural commodities have only negligible levels of tariff rate or no tariff. However, even now, Japanese agricultural policy are misunderstood as being still very protective.

Maybe, this is due to the facts that until recently Japan has been refusing to import even one grain of rice for long time.

At the time of negotiation of WTO new round, the chairman of agricultural committee, Mr Harbinson had announced the Modality Proposal. The characteristics of his proposals are that two measures of tariff peaks and tariff escalation should be deleted. Japan has been adopting these two measures to some extent. Although the number of agricultural commodities which has exceptionally high tariff rate, are small, more than 90% of tariff rate are considered as tariff peaks. In Japan,　those commodities of Rice(490%), wheat(210%), barley(190%), butter(330%), SMP(200%) and silk(190%) are blames as examples of tariff peaks. IN this relation, the modality proposal Mr Harbinson requires that as for the commodities which have tariff rate of more than 90%, the tariff rates should lower by 60% as average of those commodities and 45% as minimum tariff reduction of each commodity, as for commodities which have tariff rates of 15% to 90%, their tariff rate should be lowered by 50% as an average among those group and at least by 45% for each commodity and as for the commodities which have tariff rates of less than 15%, their tariff rates should be lowered by 40% as the average among these commodities and at least by 25% for each commodity. These rules tried to mitigate or delete the tariff peaks. The tariff escalation is defined as the protective measures which try to set higher tariff rates to the more highly processed commodities depending on the extent of processing. This protective measures are considered to be damaging to the industrialization process of LDCs. Japan tended to be criticized in this point so far.

2. Reform of Rice Distribution System

Rice Distribution System has long been controlled by Food Control Law enacted in 1941. Under the Food Control Law, Government bought rice at the higher producer price and sold it to the consumer at the lower consumer price. Which had caused huge budget deficit and surplus rice. And so, in order to curtail the budget deficit based on government rice, government began to introduce paddy field diversification scheme. Also, government introduced Voluntary Distributed Rice system, where the consumer price was higher than the producer price in 1969. The weight of this Voluntary Distributed Rice in total rice market has been expanding and became more dominant part than the government distribution rice. In addition to these 2 channels of rice market, the freely (unregistered) distributed rice channel had emerged illegally and gradually expanded to the similar weight to the government distribution rice channel and voluntary distribution rice channel. The rice distribution channels under the Food Control Law has been changed and revised several times. In 1990, Voluntary Distributed Rice Price Formation Organization was established and rice prices began to be guided by the market situation of voluntary distribution rice rather than the government distribution rice.

In 1992, New Agricultural Policy was introduced and following this, at long last, the food control law was abolished in 1995 when New Food Law was introduced. Under the New Food Law, new rice distribution system, so called, the Planned Distributed Rice system was introduced. In this distribution system, rice prices were expected to be guided by the Planned Distributed Rice price which was formed by the kind of auction style organized by rice price formation center. In this system, all of Planned Distributed Rice had to be traded by the registered market dealers. The rice distribution channels under the Planned Distributed Rice system are shown in the following Figure 5.

However, the weight of unplanned distributed rice trade has gradually expanded and so, the price formation system by this center did not function effectively. So, this Planned Distributed Rice system was also abolished in April 2004. Since then, rice distribution channels were totally deregulated and liberalized. Now, rice can be retailed at convenience stores. This new rice distribution system is shown in Figure 6.

Figure 5 Rice Distribution Channels under the Planned Distribution Rice System

Figure 6 Rice Distribution after abolishment of Planned Distribution Rice System

3. Situation of Rice Import and Reserve stock

Rice import situation in 2003 fiscal year was as follows. Under the minimum access system based on the Uruguay Round Agreement since 1995, rice import has maintained at the level of 0.77 million tons of paddy, of which SBS rice import was 0.10 million tons.

Moreover, 0.08 million tons of glutinous rice were imported in order to stabilize supply. This was twice level of the usual year.

All of the 0.10 million tons of SBS imported rice were sold out through auction although only 0.05 million tons ( half of the predicted amounts ) of SBS import rice were sold in the previous year 2002.

Rice import in 2004 fiscal year was almost similar to preceding year. Until the new agreement in WTO is realized, the Minimum Access import is maintained at the same level of 2000 and so, 0.77 million tons of paddy were imported in 2004. Also, 0.10 million tons of paddy are imported under the SBS import system through the 4 auctions a year.

The demand for the minimum access rice is shown as following Figure 7.

Figure 7 Demand for the Minimum Access Rice

And reserve stock of rice was accumulated at the level of 1.63 million tons at June 2003, which was exceeding optimal reservation level of 1 million tons. However, this stock decreased to the level of 0.73 million tons at June 2004 due to strong demand by wholesaler and production declined after August 2003.

On the other hand, the rice stock by wholesalers increased to 0.76 million tons at February 2004, increased by 0.43 million tons from preceding year.

As for the rice reserve tock policy, Japanese government has set optimum stock level to be 1 million tons. This is planned to be managed by Revolving Reserve stock method by 0.5 million tons a year and not by Set Aside method

The trading of reserve stock rice would be changed from Arbitrary Negotiation (Direct trading) system to Auction trading (bidding) system

As already explained, rice import is carried out through the 2 routes. One is SBS import system and the other is general ( normal ) import. The recent situations of both import routes are shown in the following figures ( Figures 8 and 9 on SBS import rice and Figures 10 and 11 on MA general import rice, respectively). In this figure 8, it is shown that as long as SBS import rice is concerned, the share of China as the import source is expanding sharply and the traditional rice trade partners such as USA, Australia and Thailand have been stagnated in Japanese SBS rice import market. However, it should be noted that the weight of SBS rice import is not large and as small as 0.10 million tons which is less than one seventh of total rice import. And interesting thing is that in the case of SBS rice import from China, both buying price in trade market and selling price in Japanese wholesale market are gradually rising recently while they used to be lower than other exporting countries in the past. In the case of general rice import, the traditional rice trade partners such as USA, Australia and Thailand have been keeping the more significant shares than China (Figure 10). Generally speaking, SBS import rice is used for processing demand mainly through the wholesale dealers and MA general import rice is used for reservation stock and food aids through the government distribution channel. In the case of SBS import, importers offer the set of imported price and selling price to the domestic wholesale dealers to the government. And then, government admits their imports depending on the highest price margins between the two prices until total rice imports become scheduled import quantity under the tariff rate quota system. In this way, it has been arranged for the imported rice not to disturb the domestic rice market for food.

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Figure 8 Quantity of SBS import rice

Figure 9 Selling-Buying price gap of SBS import rice

Figure 10 Quantity of MA general import rice

Figure 11 Average Price of MA general import rice

4. Determining Factors of Rice Consumption Demand

According to the market behavior theory, factors affecting rice price gaps are categorized as follows. First of all, these affecting factors are classified into quality related factors and non quality related factors. The quality related factor consists of taste element and crop characteristics element. And the non quality related factor consists of advantage-in-marketing element and brand power element. The component parts of taste element are appearance, flavor, stickiness softness and smell. The component parts of crop characteristics element are stem strength, tolerance against falling, tolerance to cold weather and disease. The component parts of advantage-in-marketing element are blend suitability and shipment timing. The component parts of brand power element consist of brand powers in variety name and in local brand name. Taste element and brand power element are considered as the consumer side conscious elements. The crop characteristics elements and advantage-in-marketing element are considered as the producer or supplier side conscious elements.

Table 1 Factors affecting on Rice Consumption Demand and Price

According to the research results based on the cluster analysis, rice varieties and brands are categorized into 4 regions formed by combination of dichotomy in their taste levels and dichotomy in their price levels (Table 1). If rice price are determined perfectly by its taste evaluation only, all rice varieties and brands should be located in the diagonal regions, in other word, in the region of combination of high evaluation in taste and high price rice or combination of low evaluation in taste and low price rice. However, in Osaka rice market, there are some varieties and brands in the non-diagonal regions in other word, in the region of combination of high evaluation in taste and low price rice or combination of low evaluation in taste and high price rice. These results show that rice prices are not determined perfectly by their taste evaluation only.

Table 2 Relations between Rice Price and Taste Evaluation (Osaka Market)

In order to confirm these results, the hedonic regression analysis was carried out. Dependent variable is rice price gap and explanatory variables are each elements of rice price affecting factors which were shown in the above Table 1.

According to the results of hedonic regression approach, the variable of Uonuma local brand dummy has the most significant and biggest impacts on price gaps between the rice brands classified by the producing areas. Nextly, the variable of Niigata local dummy has secondly significant and biggest impact and the third was Koshihikari dummy as the important determining factor of price gaps among rice varieties and brands.

The interesting fact is that the factors of taste element of the rice quality related factors, such as appearance, flavor, stickiness, softness or smell, did not show strong impact at all. Also, crop characteristics elements, such as stem strength, tolerance against falling, tolerance to cold weather or tolerance to disease, did not show strong impacts on price gaps among rice varieties and brands (Table 3).

As for the non-quality related factors such as blend suitability or shipment timing,

they were not significantly affecting on price gap. Judging from those results, it is pointed out that the most important one among 4 elements of rice price gap determining factors was brand power elements which consist of brand power in variety name and brand power in local brand name.

Table 3 Results of Hedonic Regression Analysis