Five reasons why agricultural reform will be a tough slog

Articles in list format supposedly get more “shares” than those aspiring to be more than a glorified set of bullet points. Today’s column will test that proposition using a subject that defies a more coherent explanation anyway: Japanese agricultural regulation.

1. It’s mostly about carbs

Simply put, Japanese agricultural policy ensures consumers overpay for carbohydrates, particularly rice. This dates back to the Meiji Era, when tenant farmers paid their rents in grain, giving wealthy landlords an incentive to lobby for import prohibitions.

For much of the postwar period, rice has been an important tool for redistributing wealth to rural populations. For decades the government used a wartime rationing law (repealed in 1995!) to buy up the nation’s rice crop at artificially high prices and resell it to consumers. This became such a fiscal burden that it was replaced with the current policy of paying farmers not to grow (too much) rice. Since bread and pasta are alternative sources of calories, the government also artificially inflates the price of wheat (90 percent of which is imported) by interjecting itself between foreign exporters and domestic suppliers, adding a hefty mark-up and fees that are used to subsidize domestic producers and to fund the occasional flour-related foundation staffed by former agriculture bureaucrats.

Unsurprisingly, rice and wheat are two of the five supposedly “sacred” commodities that must be protected at all costs by high tariffs, a stance complicating the Trans-Pacific Partnership (TPP) free trade negotiations.

2. It’s not really about food security

Thanks to the TPP there has been a lot of doom-mongering in the news about declining food security. The threat is usually explained using graphs showing Japan’s food self-sufficiency in steady decline. Government statistics show Japan producing 73 percent of its food requirements in 1965 compared to a lowly 39 percent today.

Accepting this narrative requires ignoring the tremendous growth in affluence over the same period: Japanese people can now afford to eat more, and a greater variety of food, including more imports. Furthermore, the government statistics are almost mendacious, being based on calorific food values. Since the government has been paying farmers to grow less calorie-laden rice, the decline arguably reflects a successful policy, not a crisis. When self-sufficiency is measured in terms of production values, there has still been a decline, but not nearly so dramatic: 86 percent in 1973 to 65 percent in 2013, a level higher than in the U.K.

3. Everyone’s farming on the weekend

The typical article about Japanese agriculture features a rural village where even the spriest resident is a septuagenarian. A farmer looking mistily at his fields bemoans how few young people are taking up the plow.

A shortage of young people doing just about anything is certainly an issue for Japan, but the fact that so many farmers are senior citizens is problematic for another reason: They are drawing pensions. For them, farming is likely a supplementary source of income and nutrition rather than a business.

The same is true for the great majority of agricultural households. Japan is a nation of weekend farmers, with white- and blue-collar workers working small plots for a second income or even just a source of food. As much as 20 percent of the rice produced in Japan never makes it to market, being consumed by the people who grew it or circulated to friends and family by takkyūbin (express home delivery) without any money changing hands (officially, at least).

In 2013 Japan had about 2.5 million farming households, of which about 900,000 did little or no commercial farming. Of the 1.46 million households that did, only 420,000 farmed exclusively, with a further 210,000 looking to farming as their primary source of livelihood. For the remaining 830,000, farming was a source of extra income and food.

Thus, up to 70 percent of Japanese agricultural households may look to farming as an activity that puts food on the table, but mostly just in the literal sense. For them it is not a standalone business (a good thing, because most would be in the red). Some may also be motivated as much by access to the government subsidies, tax breaks and other benefits that come from being a “farmer” as they are by whatever income they get from growing food for other people. The majority of farmers may have very different economic incentives from those of the minority for whom agriculture is a full-time business that must be efficient and profitable.

Yet through sheer numbers, the weekenders have more clout at the ballot box, and as customers and stakeholders. This makes it hard to implement changes that could benefit agriculture as an industry but harm it as a way of life — a heavily subsidized way of life.

4. Farmland is special

Agricultural land reform was a key part of America’s effort to democratize postwar Japan. During the Occupation, vast tracts of farmland were confiscated from large landowners and given to the tenants who tilled them. The system of property law that resulted was based on the principle that a farm should be owned, worked and managed by the same household.

To ensure that new owner-farmers were never again reduced to sharecropper status by debt or hard times, farmland was subjected to stringent restrictions on sales, leases and other forms of alienation, particularly to nonfarmers. These onerous restraints are counterbalanced by lower property and estate taxes (which probably encourages clinging to “farmer” status). Even so, the number of households with fallow or abandoned farmland has continued to grow, reaching about 1.4 million in recent years.

For many farm families, the most profitable use of farmland may not be growing things on it, but selling it off to real estate developers. Qualities that make for good farmland — light, climate, location, accessibility — also make for good housing developments and shopping malls. Conversion of farmland to other uses generally requires the approval of the local farming committee, which may well consent if the community benefits. Absent such a project, it may still be possible for individuals to turn a field into a parking lot or a rice paddy into a rental property. Some such conversions may be illegal, but enforcement is weak while faits accomplis are strong.

Some observers warn that the gradual, irrevocable loss of agricultural land resulting from this process is the real food-security issue. Farmland is a finite commodity representing the food-growing potential of the nation. Once a field has become a petrol station, it is never going back.

In recent years the government has been encouraging agricultural efficiency by developing a process for aggregating scattered, unused plots into single larger plots suitable for corporate farming. Yet until recently it has been impossible for most corporations to lease, let alone own, farmland. Some of these strictures are being relaxed, with the isolated Hyogo village of Yabu being designated as a tokku special zone where corporate farm ownership and other agricultural policy experiments will be conducted.

Broader acceptance of corporate farming, however, may come at the cost of opaque, highly subjective criteria designed to ensure that only the “right” type of corporations succeed and that local farmers are kept happy. Whether land-use regulation will ever become transparent enough to make farming a broadly attractive avenue for large-scale investment remains to be seen.

5. JA is the vampire squid

Goldman Sachs was once famously described as a vampire squid on the face of humanity. Some critics have a similar view of JA-Zenchu, the Central Union of Agricultural Co-operatives, which has its beak in every profitable aspect of farming. It also has investment-bank-grade political influence. A couple of years ago it mobilized an anti-TPP petition signed by 11 million people. An article in last year’s Japan Agricultural News (the JA mouthpiece) featured pictures of senior figures from every major political party — including both the LDP and the Communists — all wearing the same anti-TPP bandanna. Now that’s clout!

JA was born from postwar adversity as part of a system to ensure food got to markets. It is organized similar to the government, with national, prefectural and municipal tiers that once played a much greater, quasi-official role in the implementation of agricultural policy.

Legally, however, each individual JA is a member-based cooperative, supposedly run by members for the benefit of members. In theory, this should involve leveraging the massive bargaining power of the JA network to procure better prices for farming inputs and favorable market access for produce grown by members. What actually happens (in some communities, at least) is that the local JA becomes a “company town” where members are overcharged for fertilizer and other things they buy from the co-op while being underpaid for produce, which is rendered generic by being sold under the JA brand.

Some members are even coerced into buying things they don’t need as the price for using the JA network, for which there is often no viable alternative. JA enjoys exemptions from anti-monopoly laws for joint purchasing and procurement, but this narrow privilege is often exceeded. JA features frequently in Fair Trade Commission cautions about anti-competitive behaviors such as refusing to sell seeds to members who don’t also buy fertilizer, or refusing loans to members who buy their PVC piping from a DIY store instead of the co-op. Some attribute the limited penetration of organic farming in part to JA discouraging the practice due to the profitability of its agricultural chemical sales.

Collectively, the JA network is a world-class financial institution with total deposits approaching ¥100 trillion. Much of the cash gets hoovered up to the Norinchukin Bank in central Tokyo (far from any rice paddies), which provided some of the dumb money that helped make the last global financial crisis possible, racking up a ¥1.5 trillion loss in the process.

Some critics warn JA may cause Japan’s next financial crisis. Lightly regulated compared to other financial institutions, JA is also free from many of the restrictions on nonbanking activities applicable to real banks. (JA’s financial arm brazenly refers to itself using the Japanized English banku, circumventing the statutory prohibition on nonbanks referring to themselves as ginkō, or banks.) Not only does JA profit by selling members farming supplies, tractors and insurance, but it can also lend them the purchase money — profit opportunities that can encourage lax lending standards. JA can also use the capital base of its depositary operations to expand into new, potentially risky businesses such as funeral homes, resulting both in unfair competition and systemic risks of the type banking regulations are designed to prevent.

With a few exceptions, such as the dairy industry, which has its own cooperatives, the JA network extends to every type of farming, which in practice means rice is king and cooperatives may tend to cater more to the interest of part-time rice farmers than full-time diversified farms. Some large-scale farmers have concluded that it makes more business sense to go it alone rather than accept the exploitative aspects of JA membership.

Prime Minister Shinzo Abe — who campaigned on a promise to double farming incomes — has been trying to reform agriculture and JA as part of his deregulation initiative. Current proposals would see the top tiers of the JA hierarchy restructured, with more autonomy given to individual cooperatives and the removal of some of JA’s antitrust exemptions. But reforming JA and reforming agriculture now mean different things.

In fact, one of the most interesting corporate governance issues in Japan today may be the one currently faced by JA. Originally the cooperatives were for farmers, and even now one must satisfy that criteria to be a full voting JA member. The co-ops soon developed exceptions that first allowed members’ families, then nonfarming “associate members” (which may now include many JA employees) to use the banking and other services offered by the network.

With farmers declining in number, voting JA members are now outnumbered by nonfarming associate members, whose value as customers comes from JA’s nonfarming businesses. This leaves some wondering not only whose interests JA is — or should be — pursuing, but whether the network can still reliably deliver agricultural votes as it has in the past.

Colin P.A. Jones is a professor at Doshisha Law School in Kyoto. Law of the Land appears on the second Thursday Community Page of the month. Comments:

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