ERADICATING rural poverty should be linked to self-sufficiency in our food security.

This, in turn, entails empowering the rural economy (and by extension the economy as a whole) to be “self-sufficient”.

The link between rural poverty eradication and agriculture has always been recognised under successive Malaysia Plans.

For example, under the Third Malaysia Plan (1976-1980), agriculture remained “the dominant sector of the economy” essential for “the attainment of the objectives of the New Economic Policy (NEP)”.

Nonetheless, a self-sufficient rural economy requires concerted and sustained state planning and intervention that go beyond the formulation of national strategic blueprints.

Think sectoral and sub-sectoral policies and programmes that are also organised along state-level lines, based on granular data.

It also means that we need to strike the appropriate balance between our domestic needs and exports – between what might be called an “import-substitution” agriculturalisation and export-orientated agriculturalisation, at least over the medium-term period (five years).

This is to give our local agricultural sectors and related industries time to grow and develop, and which could be measured by our import dependency ratios (IDR) and self-sufficiency levels (SSLs).

If need be, the state must be prepared and committed to command(eer) resources from the private sector to promote food security; but at the same time ensure that the private sector can flourish and thrive in providing agricultural produce that allows us to have food security.

The partial abolition of the approved permits (APs) – as ever-only a temporary solution – is a step in the right direction.

In other words, we need to have both forms of agricultural “protectionism” and “liberalisation” executed in tandem and synchronisation.

In protecting our agricultural sector, as part of the agenda to eradicate rural poverty, we need to tackle the issue of speculation and financialisation of food produce head-on.

This has to do with the transformation of forwards and futures contracts on which both the farmer/food producer and the markets depend for price stability (future) and discovery (spot) – paralleling the abuse of APs – as embodied by “derivatives”.

We should learn from the great food crisis of 2008, which followed the onset of the great financial crisis, when the derivatives on mortgage-backed securities (MBS) such as credit default swaps (CDS) and collateralised debt obligations (CDOs) exploded.

As primarily epitomised by the hedge funds, the speculators turned their attention to food crops and commodities.

When speculative activities in the international clearing markets that distort prices (and encourage hoarding activities in turn) are effectively addressed and regulated, then input costs and essential/strategic food commodity items wouldn’t be subject to wild fluctuations and held “hostage”.

On the one hand, there’s price gouging at international level but on the other hand, there’s also the speculators acting in concert with each other to manipulate prices for their financial benefit.

Sometimes, the speculator is the middleman and vice-versa.

Needless to say, both speculation and profiteering distort the market (instead of blaming subsidies as is usually the case in the mainstream).

This isn’t at all to diminish the role of supply-chain bottlenecks but merely to point out the other reality.

Addressing this would go a long way to addressing food price inflation (purchasing power of consumers) and input costs inflation (purchasing power of farmers/producers).

Our poverty eradication agenda as embodied by the NEP – of which a drastic/radical update and “inversion” (up-side down reforms) are sorely needed – shouldn’t be hampered and held back by geo-financial vicissitudes when this is something that’s even more within our control (internationally and domestically).

For example, the Bursa Malaysia Derivatives or BMD is an open futures market with a high degree of foreign interest.

Therefore, we might need to further regulate this area by imposing certain requirements for foreign speculators.

One of which is the condition that there must be physical purchases of stocks (the underlying assets), ie crude palm kernel oil (CPKO), which can also be used to make chicken feed.

That is, no cash settlement, physical settlement only (at the clearing process).

In turn, these underlying assets must be sold back to local buyers within a specified time-period, no longer than three months.

This practice could be replicated once BMD is further liberalised to allow for trading in rice and other food items.

This purely market-driven process has to run in parallel with acute state intervention – ie the state as the stockpiler-of-the-last resort to ensure that prices don’t deviate too much.

As such, our agricultural sector and, by extension, the rural economy would be both open and protected at the same time.

To begin with, the changes need to occur at a domestic level. Although rural poverty has reduced to 12.4% on the whole, pockets of deprivation still exist across Malaysia.

The rural hardcore poor are trapped in a vicious cycle as a kind of a developmental subaltern.

Policy-wise, the rural hardcore poor are included within the same development plans. In reality, they are excluded and marginalised in terms of actual outreach.

The competition between agricultural and industrialisation policies saw the former giving way to the latter – in terms of land use and space.

Within the wider agricultural sector, commodities took priority over food crops.

There is a need for a paradigm shift and solution to resolve the policy and existential tensions.

One in which we need to rebalance our national strategic portfolios to accord greater space to food agriculture as a matter of human and national security on the back of the fourth industrial revolution technology or digitalisation to allow for spatial overlap.

When the NEP was first introduced in 1970, agriculture’s share of the economy accounted about 30% or roughly one-third of the country’s GDP, but since declined to 10.5% in 2000.

According to the Department of Statistics Malaysia (DOSM), agriculture contributed only 7.4% to GDP in 2020.

Within the wider agricultural sector, the agri-food sub-sector contribution was at 48.2% in 2020, valued at RM52 billion.

Notwithstanding, of the estimated 5.3 million hectares of agricultural land in 2020, only 900,000 hectares (16.75%) are devoted to the agri-food sub-sectors, while a whopping 4.2 million hectares (80.7%) is devoted to the primary commodities such as oil palm and rubber.

The current inflation phenomenon has heightened the exposure to our food insecurity and vulnerability to price shocks – heavily dependent as we are on food imports.

By inclusion, inflationary pressures have severely impacted our farmers as they are hit by a triple whammy of rising feed costs, prolonged labour shortages, and continuing price ceilings/controls – all of which eats into their already thin profit margins.

For example, a padi planter under the Muda Agricultural Development Authority (Mada) in Kedah – which contributes somewhere between 40% to 45% of the nation’s total padi output – now has to pay RM78 for fertiliser which used to cost RM50. Pesticides hitherto costs RM48 but is presently selling for RM90.

In 2016, the average or mean income of padi planters under Mada was only a meagre RM2,527 a month.

It has to be highlighted that in addition to such disproportionate levels of income, most of the padi farmers are also in debt to both government and private entities.

It has been reported that 300,000 padi planters are “drowning” in debt and, hence, the problem becomes intergenerational and, by extension, structural.

The trend is also similar for other farmers – be it vegetables or poultry, etc.

On top of that, there’s the structural issues of the middlemen that are more often than inextricably linked to political connections, which isn’t limited only to the APs).

In short, the global cost-push and supply-side inflation has only worsened the structural woes faced by our agri-food farmers – the unsung heroes of the nation.

Efforts to improve the situation can be made through the systematic expansion of contract farming, directly between the farmer and manufacturer or retailer (without the intermediation of the middlemen).

Pertubuhan Peladang Kawasan (PPK) of Kuala Langat is an eminent example of this (Agri-Tech Malaysia – Onward and Upward, Emir Research, April 15, 2022).

Contract farming has also been practised in the broiler chicken industry since the 1980s (see The Impact of Public-Assisted Contract Farming Programmes in Malaysia, Journal of Agribusiness Marketing, Vol. 7, 2015).

The integrators –MNCs in food manufacturing – provided basic inputs like day-old chicks and feed to the farmers. In turn, the farmers agree to sell back the fully grown broilers to the integrator at mutually agreed prices.

Contract farming would improve the efficiency of the supply chain and increase farmers’ income and profit. It is therefore superior to government subsidies.

This form of supply chain management (SCM) allows farmers to be connected to the global value chain (GVC) via MNCs and other private sector players.

A more integrated SCM will ensure competition among supply chains, whether anchored by the public sector as via Fama or the Federal Agricultural Marketing Authority or private sector where digitalisation will ensure the winning edge.

It’ll also empower farmers with the critical exposure to market supply and demand dynamics in real-time since any information asymmetry is removed.

Empowering farmers with contract farming is key towards achieving a sustainable and self-sufficient rural economy. – June 3, 2022.

* Jason Loh and Rosihan Addin are part of the research team at Emir Research.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.