Now Is the Time for the Agricultural Big Bang

Senior Fellow, RIETI

Bid Farewell to Independent Farming
Stimulate Demand by Scrapping Acreage Reduction in Stages

The agricultural sector is attracting attention for its potential to accommodate the rising number of jobless people. Japan's aging farming population is often considered the reason why agriculture is experiencing a manpower shortage, but wages tell a different story. Total agricultural production in 2007 was only ¥8.20 trillion, less than the ¥9.07 trillion net sales reported by Panasonic in fiscal year ended March 31, 2008. Compared with the 310,000 people who work for Panasonic, the total agricultural workforce comprises nearly 3 million people. Agriculture's ¥4.7 trillion share of gross domestic product (GDP) amounts to a per-capita annual income of ¥1,570,000 - only ¥130,000 per month.

Agriculture is not experiencing a manpower shortage, but rather an oversupply of labor. The only thing happening there is the aging of surplus farmers. Agriculture has aged due to low earnings that have driven away potential entrants. It is impossible to create agricultural employment without profits. Even though many people might attend a briefing session designed to recruit new farmers, few of them will actually start farming.

* * *

In 2005, 5,086 business entities reported agricultural sales in excess of ¥100 million. The total amount included 2,470 farming households and 2,616 other entities. One farming household that earned over ¥2 billion specialized in cultivating vegetable seedlings on only four hectares of sloping farmland, while a flower-grower's household made ¥1.5 billion by outsourcing labor-intensive production based on seedling cultivation to subcontractors in other countries. As these anecdotes suggest, many farming households that achieve high profits with corporate-style management operate in domains such as flowers and vegetables that do not require large plots of farmland.

In contrast, agriculture that requires a high degree of land use, such as rice cultivation, has declined under heavy protection in the form of high tariffs and a lot of subsidies. This category includes a large number of small farms where profits are low, farmers are growing old, part-time farming is on the rise and farmers are abandoning their fields with greater frequency. These trends have resulted from policy errors. For this type of agriculture to increase earnings and accommodate unemployed workers from other sectors of the economy, a dramatic policy shift must take place. The management scale for rice farmers averages around 1 hectare. Agricultural income per household exceeds ¥11 million among farming households that manage 20 hectares or more of land. Japan must develop rice farming from the standpoint of sustaining farmland resources, which are also indispensable for its food security as well.

Rice farming cost and income

Earnings are net sales after costs. To increase earnings from the land-use type of agricultural production, farmers must reduce costs by expanding scale, consolidating farmland and increasing the yield per unit area (unit crop).

However, large-scale conversions of farmland to other use of land have been randomly occurring for a variety of reasons, one of which being the inadequate enforcement of land-use restrictions based on urban and farming zones (zoning regulations), and land-conversion restrictions based on the Agricultural Land Act. Another reason involves rising prices for farmland, which have made it impossible for farmers to purchase farmland because land prices have risen higher than the capitalized value of agriculture. Prices were driven higher and higher on expectations for conversion, which persuaded owners to refrain from leasing farmland out of fear that it might become irrecoverable when conversion opportunities come about. A third reason is the retention of small part-time farmers as a result of high rice prices and acreage reduction policies. For these reasons, farmland has not been consolidated for full-time farmers, in the form of either purchase or lease, and the expansion of scale has failed to occur.

The limited acreage of farmland in the hands of full-time farmers, which is preventing economies of scale, is due to the acreage reduction policy that has been in effect for 40 years. Costs fall when the unit crop rises, but farmers have no choice but to reduce their acreage with the rise of the unit crop when consumption remains constant. Subsidies then must be increased to encourage farmers to reduce more acreage. The government has tried to avoid additional expenditure. This situation impedes unit crop increases through breed improvement. As stated above, government policies have prevented Japanese agriculture from achieving its full economic potential. These polices have also caused farmland resources to deteriorate.

* * *

If a person attempted to establish an agricultural business venture by setting up a joint stock company with startup capital secured from investors, the Agricultural Land Act would not permit such an initiative unless a majority of the investors are already involved in farming and would be involved in farming-related work for the company. Interested parties are thinking twice about entering agriculture because having a bad result after borrowing money will leave them in debt. The diversification of business risk through the issuance of shares is an advantage of joint stock companies. However, the current farmland policies have closed the door on individuals and companies interested in the pursuit of farming through the manner described above.

The latest amendment to the Agricultural Land Act enables ordinary companies to participate in farmland leases. The change represents a step forward, but the companies are still not able to directly own farmland. Joint stock companies are prohibited from owning farmland because the Agricultural Land Act must adhere to the farmland reform principles of "the indentitiy of the ownership and the cultication of farmland," which stipulate that farmland owners must be cultivators. The Agricultural Land Act does not permit the separation of ownership and management.

Even when restrictions on lessees are eased, the lack of farmland leases will continue as long as farmland owners have expectations of land conversion. Those expectations will be removed when the Agricultural Land Act, limiting the transfer of rights over farmland, is abolished and zoning is firmly established as it is in the European Union (EU). This will open the door to large-scale expansion through land purchases and leases, and long-term investments in farmland such as soil improvements. The international competitiveness of Japanese agriculture will also improve if joint stock companies, financed by ordinary investors, can implement large-scale farming through the use of skilled agricultural workers. It will be an agricultural Big Bang, achieved through the separation of ownership and management.

* * *

Part-time farmers suffering from high operating costs will stop cultivating on their own and lease out their farmland when the acreage reduction program is phased out in stages and rice prices fall. Farmland will be consolidated by full-time farmers who will expand the scale of farming and enjoy lower costs as subsidies are paid directly to parties such as full-time farmers and motivated new farmers above a certain production level, which in turn will reinforce their capacity for rent payment. The risk-hedging functions of futures trading will stabilize farming household income and eliminate the need for fiscal measures to backstop falling prices because a futures market for rice will be established as a supplementary step. Not only will jobs be created but agricultural production will advance when workers with training and experience in areas such as business administration, merchandise development and marketing are drawn into agriculture in pursuit of the enhanced earnings resulting from the measures outlined above.

Fiscal burdens will remain at their current levels as the number of parties entitled to subsidies is limited. In addition, lower prices will slash the burden on the consumer. The price of rice grown in Japan fell from ¥20,000 per 60 kilograms ten years ago to ¥14,000 as a result of a decline in domestic demand. At the same time the price of the rice that Japan imports from China rose from ¥2,000 to ¥10,000 per 60 kilograms. In my estimate, the price of rice harvested in Japan would drop to around ¥9,500 and domestic demand for rice would expand to nearly 10 million tons if the acreage reduction program were abolished. These changes would free Japan from the need to import minimum-access rice, rendering moot the problems of alleged contamination, as the price of domestically grown rice would fall below that of imported rice. Japan will no longer need to make backward-looking responses in World Trade Organization (WTO) and Free Trade Agreement (FTA) negotiations because customs duties will be unnecessary.

Declining prices will enable growers to meet new demands. The improvement of rice varieties for better-tasting rice has progressed in Japan as a result of acreage reduction. Japanese rice, which leads the world in taste, will be able to compete in the Asian market once its pricing improves. Exporting will become possible just by abolishing the acreage reduction program. The price conditions for active exporting will emerge when the export scale is expanded further. The export price of rice will also rise higher. The price will rise at the same time as prices for Chinese agricultural products climb higher in step with increasing labor costs in China's rural areas, due to the resolution of three agriculture-related issues that caused the per-capita income in China's urban areas to reach a level more than three times that of rural districts.

Substantial downsizing of agriculture and farmland is inevitable considering domestic food demand in this age of population decline. Maintaining agricultural production by adding export demand to domestic food demand in peacetime leads to food security in times of crisis because it ensures the availability of farmland resources through sustained domestic production. In peacetime, rice can be exported and foods such as wheat and beef can be imported. In times of crisis, rice that had been channeled for export can be consumed to keep hunger at bay. Food security has been used as an excuse for opposing trade liberalization up to this point, but in this age of declining population free trade will be necessary to ensure food security.

Food and agricultural policy decided within the narrow agricultural administrative triangle formed by the agricultural cooperatives, Diet members linked to agriculture and forestry, and the Ministry of Agriculture, Forestry and Fisheries must be consigned to history. New policy developments and greater awareness of the issues are emerging, as was apparent in a symposium held by the Tokyo Foundation on May 15 and attended by Shigeru Ishiba, the Minister of Agriculture, Forestry and Fisheries, and in another symposium on general agricultural administration held by the 21st Century Public Policy Institute on May 25. I expect Japanese citizens to commence an active debate on agricultural policy based on the outcomes.

>> Original text in Japanese

* Translated by RIETI.

May 19, 2009 Nihon Keizai Shimbun

July 28, 2009

Article(s) by this author