The Mistakes in Agricultural Policy that Have Hindered Structural Reforms and the Merits and Demerits of JA Agricultural Cooperatives

Senior Fellow, RIETI

High rice price has kept small, part-time farmers in business

The Agricultural Basic Law enacted in 1961 attempted to increase farmers' incomes by increasing the size of Japan's small farms while cutting costs. Income is equal to sales (price times production volume) minus cost. Even for a commodity such as rice, whose consumption and sales volume cannot be expected to rise, farm income could have been boosted if costs had been reduced.

Rather than take this approach, however, policymakers opted to raise the price of rice in order to boost farmers' incomes. Even after the Staple Food Control Law was abolished in 1995, the price of rice has been maintained through a cartel arrangement called "production adjustment." Because the high price of rice gives small-scale, part-time farmers no incentive to give up farming, the development of large-scale, business-oriented farmers, who should be the country's main food suppliers, has been hindered and structural reforms in the agriculture sector have failed. Compared to 200 hectares in the United States, average farm size in Japan has grown only slightly from 0.9 hectares to 1.2 hectares over the past four decades. Structural reform has been especially slow in the rice sector. Domestic rice, the price of which was lower than the international market price until 1953, is now protected by a hefty tariff of 500%. Although full-time farmers produce 74% of Japan's wheat, 83% of its vegetables and 96% of its milk, they account for only 37% of the rice grown in Japan. All of this has occurred against a backdrop of agricultural decline in Japan, with agriculture's share of gross domestic product dropping from 9% to 1% over the past 40 years, and the percentage of farmers aged 65 and older rising from 10% to 60%.

Japan's overall protection of its agriculture sector is at roughly the same level as that of the U.S., and only around one-third that of the European Union. However, because Japan protects its farmers through high prices that are maintained by tariffs rather than direct subsidies from state coffers as in the U.S. and the EU, it is criticized abroad for being protective of its farming sector by its rigid opposition to tariff reductions, while at home the government is blasted for damaging the nation's interests because its position on agricultural issues stall negotiations in the World Trade Organization and talks on free trade agreements.

If the government were to reduce the price of rice by scrapping production adjustment and offering direct subsidies only to full-time farmers, farmland would be transferred from small, part-time farms to full-time farmers. Moves to increase farming scale and reduce production costs would gather steam, making it possible for Japan to deal with lower tariffs. However, there is strong opposition to both lowering the rice price and to limiting the types of farms eligible for or targeted by government policies.

Efforts by JA agricultural cooperatives to defend themselves have speeded the decline of agriculture

Japan Agricultural Cooperatives or "JA" is a comprehensive agricultural organization rarely seen in other countries. It was created at the government's initiative to revamp the wartime control associations to which all farmers belonged. These cooperatives handled many businesses related to farming and farming communities such as the purchase of inputs, sales of farm produce, and provision of credit (finance). In the postwar period, these businesses were brought into JA to ensure food delivery.

Because the majority of Japan's farmers grew rice, raising its price became the central agriculture policy objective of JA. This also served the interests of JA since higher rice prices translated to more revenue from commissions of selling rice and higher sales of inputs, such as chemical fertilizers and pesticides, at higher prices. Since 1960, the use of agrochemicals has surged. The original aim of the collective purchase of inputs by cooperatives was to allow members to obtain lower-cost supplies by enhancing their negotiating power in the market. However, for the cooperatives themselves, it is more profitable to sell inputs to members at higher prices. Also, because the revenues from higher rice prices are deposited in farm cooperative by farmers and added to the balance sheets of farm cooperatives, these assets have increased. If the price of fertilizer, for example, is raised, loans extended to agrochemical makers by JA assets earn higher yields. Thus despite the decline of agriculture in Japan, the JA cooperatives have flourished under high rice prices in their comprehensive role, both as sellers of inputs and farm produce and as financiers.

Weekend farmers do not run their operations along strictly business lines, thinking about how to lower their production costs or how to sell their produce more profitably. They are simply producers. JA cooperatives, which offer a full set of inputs and sell their produce in total, are convenient for these part-time farmers. Under the one member, one vote system stipulated by the Agricultural Cooperative Law, the opinions of part-time farmers, who are by far the majority, are certainly reflected in the operations of the JAs, which in turn maintain their political clout by having a large number of part-time farmers as members rather than a small number of full-time farmers. Thus, although many JA cooperatives have merged to improve management and organizational efficiency, since the days of the Agricultural Basic Law, they have consistently opposed any structural reforms aimed at fostering business-minded full-time farmers and expanding farming scale.

Farmers with a spirit of enterprise should bring about structural reforms by forming their own agricultural cooperatives

Successful structural reforms, such as Japan's postwar agrarian reforms, the reform of Japan National Railways, the financial sector's "Big Bang" and the agricultural reforms in New Zealand and the EU have three things in common: strong political leadership; recognition by the public that reforms were necessary, important and urgent; and active pro-reform groups within the sector which was the target of reform.

We are now beginning to see some JAs headed by people who are actively fostering full-time farmers and who feel that full-time farmers and their part-time counterparts should not have an equal say in how the cooperatives are run. A former senior official of one JA cooperative who opposed the high price of inputs several years ago has set up his own cooperative in Hokkaido and imported fertilizer from South Korea at two-thirds the domestic price. By 2003, some 40 agricultural corporations across the country had set up agricultural cooperatives under the Law on the Cooperative Association of Small and Medium Enterprises.

Even in a declining farm sector, there are not a few success stories, with roughly 2,000 farming households logging annual sales of more than ¥100 million. Many of these large farmers do not depend on the JAs and are "thinking entrepreneurs" who purchase supplies cheaply, develop their own marketing networks, and try to respond to consumer needs. Such business-oriented farmers, who up to now have had no choice but to go their own way because they have not been treated fairly by JAs, should set up their own agricultural cooperatives and form an economic and political alliance of pro-reform groups. In reality, the agriculture-related businesses of the JAs, which deal with small farmers, are deeply in the red. They are making ends meet thanks to profits from their credit business, especially the international operations of the Norinchukin (JA) Bank. I believe the time will be ripe for structural reforms in the farming sector when the JAs shed their agriculture-related businesses and specialize in the credit business, while the primary business of farming is carried out by agricultural cooperatives voluntarily organized by business-minded farmers.

>> Original text in Japanese

* Translated by RIETI.

September 20, 2005 Keizaikai

September 27, 2005

Article(s) by this author