The government is part of the problem
The shortage of McDonald’s French fries earlier this month in Malaysia is symbolic of a much bigger national problem. Many food items are in short supply and subject to rapidly rising prices. Many local producers have been ravished by flood, or ceased production due to production costs rising above permitted selling prices set by the Domestic Trade Ministry, while many consumers are facing financial difficulties and struggling to purchase their household food needs. The market prices of many vegetables have risen 200 percent over the last six months, while some wet markets and supermarkets have been without eggs and chicken meat stocks.
This is likely to be exasperated with the beginning of Ramadan, Muslim fasting month on 1st April, where food consumption actually counter-intuitively rises. In the short-term, the invasion of Ukraine has sent oil prices well over US $100 per barrel, which will lead to higher input and freight costs.
Some analysts claimed that rising prices and shortages are the result of supply chain glitches, natural disasters, and labour shortages. However, the food crisis cannot be considered just a cyclic issue as there are deep structural issues involved.
Food Security – The elephant in the room
Malaysia imports nearly 60 percent of its food needs, which makes the nation dependent on producers around the world. Consequently, food security is a major issue for the country, where Malaysia only produced 46 percent of its vegetable, 70 percent of its rice, 61 percent of its fruits, 25 percent of its beef, 11 percent of its mutton, and 5 percent of its dairy requirements in 2019.
The food import bill in 2020 was RM 55.5 billion.
Five million hectares of land is cultivated with palm oil, and 1 million hectares with rubber, while only 1 million hectares are utilized for food production, mostly in the hands of small holders. Even though there is much unused land available, using the land presents some problem with inheritance laws that have fragmented land holding ownership, and a deep lack of interest by the younger generation to become farmers.
This has been an issue for many decades
The late and former director general of the Malaysian Agricultural Research and Development Institute (MARDI), Dr Yusof Hashim warned then prime minister Dr Mahathir Mohamed of the dangers of a narrowly-diversified agricultural sector back in the 1980s. However, Malaysia’s Government linked company (GLC) and corporate controlled palm oil industry was making low risk, high monetary returns (RM4,000/Ha. Mid 1990s), that most other crops couldn’t match.
Mahathir set his sights on developing a high-tech economy with his pet projects like the Multimedia corridor, to the determent of developing agriculture. Thus, agriculture was neglected during the 1990s, until Mahathir’s first retirement in 2003.
Even today, crude palm oil yields are around RM 7,000 per hectare, and worth RM 54.62 billion in exports of crude oil (CPO) and another RM 32 billion of value-added products. Together with rubber exports of another RM 64.01 billion, the mentality within the corridors of power within Putra Jaya has been that the value of commodity exports far exceeds the nation’s food import bill, thus alleviating any need to bump up local food production.
The government has only given ‘lip service’ to food security
Under Abdullah Ahmad Badawi, who came to office as prime minister in 2003, much more effort was put into revitalizing the agricultural sector. Badawi launched the biotechnology initiative and economic development corridors across the country, which made a major focus on agriculture. These programs were continued under Najib Razak.
However, Putra Jaya developed the solution that agriculture development would be led by government agencies and GLCs which would be benevolent to local communities. This resulted in a great wastage of money, resources, and corruption by bureaucrats, turning their new little empires into gravy trains. GLCs used the opportunity for land grab.
One example was labelled as the ‘cowgate’ scandal at the time, when then minister Shahrizat Abdul Jalil received grants and loans of RM 250 million to set up a National Feedlot Centre (NFC) to develop 40 percent self-sufficiency in beef production by 2010. Instead, the money went into the purchase of properties and condominiums for the family.
Bureaucrats and consultants came up with culturally untenable ideas as creating paddy estates, which would lease small-holder land to make economically viable land holdings, and hiring land owners as labourers. The latest idea is smart farming, with high intensity investments in technology benefitting consultants and nobody else.
Monopolies and regulation are preventing food security
Over the last two decades cronies have moved into and taken over strategic parts of the Malaysian food chain.
Syed Mokhtar Albukhary took over the sugar business from FELDA, where sugar prices have dramatically risen. Through his vehicle Tradewinds, Syed Mokhtar took a controlling interest in Padiberas Nasional Bhd (Bernas) which has a monopoly on the import of rice into Malaysia.
Bernas crippled the Chinese rice millers by importing cheap low-grade rice the mills couldn’t compete with. Most paddy farmers in the Northern Malaysian states are now in debt due to depressed prices created by Bernas. Syed Mokhtar’s Gardenia Bakeries owned by Syed Mokhtar and controlling 60 percent marketshare, raised the prices of its products in December last year, with its competitor Massimo following, owned by Federal Flour Mills.
The government has changed the equity requirements for freight forwarders. Local companies are now required to have a 51 percent Bumiputera equity stake in their companies to renew licenses. This is forcing long established players in the industry to divest to Bumiputera interests.
With UMNO back in power, industry sources told the writer that a play is being made for undisclosed interests to take over the broiler industry in the country. The industry has been hit with rising feed prices, substantially adding to production costs. Late last year the government set a maximum price of RM 9.10 per kilogram retail. This is well below the current poultry (chicken) monthly price of USD 2.89 per kg (RM12.40 per kg) on the Mundi Index.
The Domestic Trade ministry’s maximum price has caused companies producing chicken for the wholesale and retail markets to cease production. Other producers have switched to producing value-added chicken-based products not subject to price controls, or selling chicken through the black-market.
The government has allowed some 35 companies import chicken on a temporary basis to alleviate chronic shortages in the market. These highly sort after import permits were, according to industry sources not given out fairly. There are wide spread claims by players within the industry that a cartel of companies is preparing to enter the market as producers, once existing producers have closed down.
The APs or import permits given out to companies have unrealistic terms and conditions according to industry sources. The permits stipulate the supplier and source country. These import permits have taken months to obtain from the Malaysian Department of Veterinary Services (DVS), and according to a company CEO who wished to remain anonymous, involved requests for unspecified payments to obtain the required signatures for approval.
Currently the whole chicken supply chain in Malaysia is in total turmoil. The poultry industry was previously one of the best managed and self-sufficient farming sub-sectors in the Malaysian economy. Now it almost destroyed due to the government manipulating prices to the point of driving producers into bankruptcy.
The high prices of chicken outside of Malaysia, now in excess of RM12 per kilogram, from suppliers that authorities will allow to be imported, makes it unlikely the import quotas on the APs have actually been taken up. Those companies using the APs are converting the chicken into finished consumer products, that are beyond government price controls, or end up being sold on the black market.
It appears regulation of the food industry has led to massive corruption and diversion of strategic food industries to cronies. Restrictive market regulation is only presenting responsible politicians and bureaucrats opportunities for self-benefit. For cronies, the opportunities to create monopolies. The issues of food security and corruption within the regulated food chain fall under the responsibility of the Minister for Agriculture and Food Industries Dr Ronald Kiandee. The minister will have a lot of questions to answer over the coming months.