Monday, February 11, 2013

Beef price: what the .... were they thinking about?

Hi everyone. This is my first blog in this Café after 3 years

I rarely purchased weekly magazine until the current corruption scandal on beef import quota. Partly is because the case involves PKS party, a staunch promoter of government by faith (or something around that idea).

But as we all know, while faith is necessary for those wanting to pursue heaven, it may still require additional efforts to ensure sound principle of governance. The recent corruption case on beef import is self-evident that political interest overrode good faith and basic economics principles.

In front of cabinet members, the ministry of agriculture faithfully embarked in a series of jaw dropping maneuver promising self-sufficiency in beef by 2014.  This supposedly to be achieved through program to increase supply of domestic cattle industry and protecting it with limit on how much beef can be imported (quota). To back up the story, proponents of this program often refer to “cow census” and suggest that we should have faith that there are enough cows across Indonesian islands to satisfy consumers demand.

No doubt, promoting development of domestic cattle industry is a good idea. Local and small cattle breeders in Java and Sumatra can benefit from sound government program to improve their competitiveness. There are also few other locations in Indonesia that are suitable for large scale private cattle ranch industries, providing there are adequate ports and ships to transport them to consumers around the country.

But the outcome of self-sufficiency in beef was sealed when import quota was drastically reduced in mid 2012 (instead of keeping the rate of increase constant).

Indeed, the “cow census” might have misled the government to think that there is enough cows for consumption. The fact is that not all cows are available for immediate slaughter, some households use cows as savings for their rainy days. The national consumption figure for beef, which is likely derived from Susenas, is also likely underestimated because it does not capture beef consumed outside the house (i.e., buying bakso, eating rendang, sate Padang, etc.)

What is happening represents a very basic economic principle: in the absence of import, domestic cow industry will never produce beef at the quantity where supply equals to consumers demand. Instead, they will produce beef at the quantity where marginal cost of slaughtering the last cow equals to marginal revenue from selling it to consumers (in slightly technical jargon: MC = MR) and set equilibrium domestic price of beef higher than price level where more import were allowed.

Media commentators can blame importers or domestic cow industry for allegedly forming cartels to influence price. Although this may not be ruled out, the fact remains that there is little or no incentive for a rational domestic cow breeder or slaughter house to supply consumers beef at competitive quantity and price levels As simple as that.