Wednesday, December 21, 2005

Fertilizer: what's going on?

Kompas' business section today has an article with head reads like this: "The Government to Run 'Market Operation' to Stabilize Fertilizer Market". Then there's a subhead: "The Supply (of Fertilizer) is Sufficient -- But Farmers Queue".

Econ new students, do not trust news like that. What you are taught as the "Law of Supply and Demand" is still the correct one. That is, when the supply is "sufficient", there's no need for any intervention. In fact, there should not be any farmer standing in line.

Here's an alternative (I'm trying not to use the term "better" -- I respect your right to choose) explanation. The supply of fertilizer is "sufficient". Now, due to high demand, market forces bid the price up. However, the know-everything government thinks that the price is "wrong". Hence, the "ceiling" price below the competitive market equilibrium price. The result is simple: excess demand. You can call this a "shortage" of fertilizer. But shortage is not necessarily the same as "scarcity". The fertilizer might be there safe and sound in the storage, but the supplier is not willing to sell it. Why? It's simple. Because the price has to be low -- even though farmers are standing in the demand line. (Look at the last paragraph of the article. That KTNA chairman's suggestion makes a very good sense. Yet, it can even be better if he says: the government should let the price works its way. The farmers need the fertilizer. They are willing to pay to get them. Why does the government need to get in the way? (Note the statement by the Minister. He blames the farmers of "overusing" fertilizer. This is so typical of government officials. They always think farmers are stupid. While in fact, farmers know what they are doing. Think about this: if it is indeed an overusing; what triggers an overusing? Artificially low price).

This is not unique to fertilizer. Think about the fuel (BBM). You see the pattern? When the price is forced to stay below its natural level, you're basically giving a room for speculation -- as indicated by the first paragraph of the article. Of course you can prevent this, in the name of protecting the people form high price, but only with the strongest monitoring. Mind you, monitoring is costly. I'm not surprised with the news at all. The way I wasn't surprised by the long queue in all SPBUs (gas stations) couple of months ago. There's every incentive for the suppliers to smuggle out seeking for higher price somewhere else, though illegally. Or, keep the stuff in the storage, waiting for price to get freed.

Finally, be careful with the political economics behind all that. Look who has the authority to distribute the fertilizer: is there one? Two? Many? Is it competitive? Also, who produces it? (You can go on to: Is the producer state-owned?) If you believe that supply is "efficient", yet farmers are queuing, that means something is wrong with the mechanism. And most commonly it is because the price is distorted. When today an official --usually from an enterprise that has monopoly rights granted by the government -- says supply is sufficient; then tomorrow he says the country needs import to safeguard the stock; then the next day his company gets a sole authority to import (i.e. import monopoly right), then you're looking at a rent-seeking activity. Remember the rice story? This fertilizer story is pretty much the same. Only that, in the rice case the price is distorted above the competitive market price, in the fertilizer case it's the opposite (just like the BBM case). Both are harmful to the economy.

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