Japan’s free-trade nemesis built on part-time farmers empire
Bloomberg | Aug 3, 2012
Japan’s free-trade nemesis built on part-time farmers empire
By Aya Takada and Yuriy Humber
Japan’s government wants it. Mitsubishi Corp. backs it. Toyota Motor Corp. says they need it to compete. Yet, whether Japan joins the biggest attempt at a global free-trade pact may hinge on part-time rice farmers like Tadashi Hirose. And he doesn’t much like it.
Hirose, 59, loses money on his 14 hectares (35 acres) of rice and azuki beans in southwest Hokkaido, forcing him to supplement his income with a job at a construction company. Still, he says Japan joining the so-called Trans-Pacific Partnership trade pact would destroy a livelihood his family’s known for more than a century and drive the whole of Hokkaido, the top rice producing region, into the red.
“Even if our market is shrinking, why give it away to other countries,” Hirose said.
The reason why part-time farmers like Hirose could block Japan’s entry to what U.S. President Barack Obama called a “21st century” trade deal is an agricultural cooperative called JA Group. JA dominates Japan’s corn and rice trade, runs a bank with $532 billion in customer deposits or up with Barclays Plc. (BARC)’s $568 billion. Its 10 million members, about 8 percent of Japan’s population, translates into political clout.
JA organized protests on Tokyo streets that pressured Prime Minister Yoshihiko Noda to stay away from TPP talks in July. Seven countries, including Australia and the U.S., seek to join the four original signatories in a pact to bind economies with $20.5 trillion in output, or 30 percent of the global total.
Want In
The TPP started in 2005 with Brunei, Chile, Singapore and New Zealand as a pact to open trade of goods, services and government procurement among members, building on the principles of the World Trade Organization. Among its goals are abolishing export duties and subsidies for agricultural goods.
“Because of the rural bias in Japan’s electoral system the farming lobby is very powerful, even though as a percentage of the economy, it accounts for 1 percent,” said Risaburo Nezu, a former trade negotiator for Japan’s government and now a senior fellow at the Fujitsu Research Institute. “But any Japanese prime minister today will be thinking: ‘I want in.’”
In a round of TPP talks in July, “significant progress” was made in areas including customs, cross-border services and state procurement, said Carol Guthrie, a spokeswoman for the U.S. Trade Representative’s office.
Like many countries negotiating the TPP, the U.S. also faces some domestic opposition, including from Washington, D.C.- based Public Citizen advocacy group that says the accord will mean job cuts, not job creation. In contrast, companies from Pfizer Inc. to General Electric Co. (GE) want the U.S. to join.
World Apart
In no country is the issue likely to be as divisive as in Japan. Located just two cars lanes apart in downtown Tokyo, the headquarters of JA Group and Keidanren — the country’s biggest business lobby that includes Toyota — are a world apart when it comes to TPP.
While Keidanren argues on behalf of export-focused makers that Japan needs accords like the TPP for its cars, televisions and games consoles to compete with emerging Asian rivals and to relieve the pressure of a strong yen, JA Group says the accord will kill domestic agriculture.
“Joining TPP is very important to maintain our competitiveness,” Satoshi Ozawa, chief financial officer at Toyota told reporters in Tokyo. “I strongly believe that the export companies and the agriculture sector can grow together under a new structure.”
Not according to the post-TPP models of Japan calculated by JA’s Norinchukin Research Institute.
Cheap Meat
Once Australia, the U.S, and New Zealand gain better access to Japan’s 127 million consumers, more than 25 percent of local rice output will cease, according to Norinchukin Research. If Japan’s $48 billion worth of agricultural products protected by high import duties were open to all foreign farmers, 99 percent of wheat, almost all sugar, and most beef production would not be competitive, Tetsuro Shimizu, the institute’s joint general manager said.
Farmer Hirose adds that it costs about 70 yen a kilogram to produce milk in his hometown of Biratori, 780 kilometers north of Tokyo, while New Zealand does it for 20 yen, he said in an interview at his home with neighboring farmers.
“When I go with my wife to the supermarket I see that foreign meat sells very well,” chimed in Hirose’s neighbor Yuichi Marubashi, a 51-year-old breeder of wagyu cattle. “The problem is, everyone wants to buy cheap,” he said in between sips of canned coffee.
No Generation
Sitting next to him in blue overalls, rice and tomato farmer Shinichiro Itoya said he too buys Australian beef, winning a friendly jab in the ribs from Marubashi and sparking laughter from the other three farmers.
Joking aside, Itoya said he’s worried that lower cost imports could kill off his farm. He added that’s also a waste of good land as he spent two years farming in Idaho and pastures in Japan are as good or better than the U.S., which needs irrigation.
Of Biratori town’s 200 farmers Hirose expects 120 will remain in business within a decade as the generation to replace those retiring isn’t there. With local schools shutting and the government pushing for TPP, Hirose sees the writing on the wall.
“I don’t want to stop rice production,” Hirose said. “I don’t want to sell my paddies, but I cannot see any hope in the future. I don’t want my son to take over the farm.”
Remove import tariffs on meat, sugar, dairy and wheat — markets worth about 1.76 trillion yen ($22 billion) — and Japan’s producers would lose out to companies including Tyson Foods Inc. (TSN) of the U.S. and Fonterra Cooperative Group Ltd. of New Zealand, according to Norinchukin Institute. Japan already imports about half its pork and beef, two thirds of its sugar and almost 90 percent of its wheat.
Why Now?
Losing what’s left of those markets to imports is a price too high for Japan whatever benefits TPP brings to its flagship industrial brands, said JA senior executive director Shigeo Fuji.
“The way Toyota became a model company was via ‘kaizen,’” Fuji said, referring to the mantra of constant improvement popularized by Asia’s biggest automaker. “They used leadership and engineering. It had nothing to do with accords like TPP. Why do they need it now?”
What’s more, according to Fuji agriculture cannot be viewed only in economic terms. Japan’s narrow islands are no match for the breadth of Australian and U.S. plains, and hence its food trade requires a ring fence.
Not all Japanese farmers agree. Hokkaido wheat and soybean grower Yoshimasa Miyai says Fuji’s view is propaganda.
Plain Stupid
Miyai says he reads Japan’s top business newspaper, the Nikkei, from cover to cover every day and monitors dollar and euro exchange rates to pick the most opportune time for importing tractors from Deere & Co. (DE) and equipment from Germany’s Amazonen-Werke H Dreyer Gmbh.
As he gives a tour of his 110 hectare farm in western Hokkaido, Miyai rattles off the cost of every grain silo, power generator, sprinkler and spare bolt in his domain.
Unlike 90 percent of Japan’s farmers who make 1 million yen ($12,800) in annual sales, Miyai boasts a revenue that is 100 times larger and profit of 15 million yen. He stopped growing rice in 1970 in line with state policy to prevent oversupply of the nation’s main staple food. By following state directives, Miyai gets incentives that make up 70 percent of his revenue.
“Rice is what I eat, not what I grow. It’s plain stupid to work hard and still make a loss, like 99 percent of the farmers,” Miyai said. “Farming’s not about money? Don’t believe it.”
Plus-Minus
In a red and creme check shirt, Miyai, 54, sits in his cabin office decorated with posters of women posing next to tractors and the annual calendar of the LaLaToo troupe, a Sapporo transvestite club. A fan of Las Vegas casinos and flying planes, Miyai’s view on TPP is grounded in one simple principle: farming always depends on state incentives.
“If Japan joins TPP this country will become more affluent, then farmers will get more benefits,” Miyai said. “There’ll be an impact, sure, but if you judge purely on a plus-minus basis, it’s definitely a plus” for the nation.
Even a farmer with Miyai’s views is a JA member since it distributes state payments and offers more than just the purchase of produce.
Japan’s first agricultural cooperative started in the 1830s during the late Edo period. During World War II, Japan had more people working in farming than any other industry, according to the U.S. Library of Congress. The current structure of Japan’s agricultural industry and its lobbying influence is owed in part to the U.S.
Family Farm
At the end of the war, U.S. occupation authorities broke up large landholdings and forced owners to sell parcels of pasture to farm workers at low prices, Miyai said. This led to smaller farms and more farmers under the wing of JA’s cooperative structure that became independent from the state in 1948 as part of post war economic reforms.
Japan’s current agricultural minister, Akira Gunji, was a former regional secretary-general of JA’s labor union before he entered politics in 1998.
JA set up a support network for small farmers as many of their workers and family members left rural areas to seek factory jobs. Those who remained to till the land were the elder generation, coining the term “sanchan nogyou” to describe the nation’s agriculture as being based on the labor of “oji-chan, oba-chan, and oka-chan” — the grandpa, the grandma and mum.
Subprime Bank
Once retired, many of the workers from the cities would return to the family plot to continue cultivating the inheritance as a way to supplement pensions and to maintain the family tradition.
As a result, of Japan’s 2.53 million farmers about 400,000 work full time. For the rest, farming provides about 1 million yen a year, or less than 15 percent of their income, according to Tokyo University professor Masayoshi Honma. Japan’s farm size averages 1 to 2 hectares, among the smallest in the world.
The average farm size is not a reflection of JA’s business. The group, which outpaces Japan’s century-old trading houses Marubeni Corp. (8002) and Mitsubishi when it comes to corn imports and rice sales, also owns two banks, retails fuel, insurance, and dabbles in tourism.
JA’s Norinchukin Bank has sold as much debt as the country’s No.2 lender Sumitomo Mitsui Financial Group. (8316) During the global crisis sparked by the bankruptcy of Lehman Brothers Holdings Inc., Norinchukin Bank was revealed as Asia’s biggest loser from buying U.S. securitized products with about $8.3 billion in realized and unrealized losses.
JA Control
JA’s set-up means the group is more interested in maintaining the size of its membership than the broader interests of agriculture in Japan, said Tokyo University’s Honma. JA has 9.55 million regular and associate members, who are mostly part-time farmers with an average age of 67.
The whole JA empire, including its banking, depends on the deposits of its members and the non-agriculture services to turn a profit, Honma said.
JA charges farmers 20 percent more for fertilizer than regular retailers, said Teruhiko Sasaki, 47-year-old farmer in Iwamizawa town in Hokkaido. As a JA member and borrower, Sasaki said he cannot stop buying JA’s fertilizer even though the expense accounted for 9 percent of his sales.
Meanwhile the price JA pays rice farmers has dropped. In Biratori town, JA paid Hirose 11,500 yen per 60 kilogram pack of rice last year. In 1985 the average price was 18,668 yen, he said.
Yakuza Prices?
“JA are worse than the yakuza with the prices they charge for fertilizer and other goods,” Hirose said. “JA doesn’t focus enough on benefits to farmers.” For example, the town’s JA office, where Hirose’s son works, employs 140 staff or almost as many as the 200 farmers in the area, he said.
JA provides more than products, said Nahoko Motohiro, a spokeswoman for JA-Zenchu, or the Central Union of Agricultural Co-Operatives, in response e-mailed questions on prices.
“We also provide consultations to farmer-members for free, unlike other retailers,” she said. “JA also sets a price benchmark in regional markets that other retailers discount off.”
JA’s membership adds influence to the rural vote, which is harnessed mainly through the Liberal Democratic Party that ruled Japan for almost 55 years until 2009, Honma said.
“They call it the iron triangle: JA, the LDP, and the agriculture ministry,” Honma said. After 30 years of sitting on government committees on agricultural reform, Honma said he has seen almost none because JA, the bureaucrats and rural politicians want to maintain their power above all else.
Outside Auditor
“We can’t even force JA to get an outside auditor,” he said. “That would be a critical step” in assessing the real profits and losses of Japan’s agricultural system.
What Japan’s agricultural policy has done so far is simply protect farmers and that has weakened their competitiveness, said Tetsuhide Mikamo, the director of research at Marubeni, Japan’s biggest trading house in agricultural products.
The nation’s agricultural production peaked at about 12 trillion yen two decades ago, Mikamo said. Its value has dropped to 8 trillion yen a year, 25 percent of which comes from rice, he said.
Trade pacts like TPP in removing the import hurdles, such as the 341 yen a kilogram tariff on rice — equivalent to 778 percent of the price — will force Japan’s farmers to become more competitive and diversify supply sources, Mikamo said.
Rice Price
Just through consolidating the 1 hectare rice paddies that most farmers have into larger fields run by companies the cost to produce the crop would drop by 30 percent, according to Marubeni research.
A move toward company-run farms as opposed to individuals is starting in some parts of Japan, although the country lacks people with experience of managing such operations, farmer Sasaki, who opposes TPP, said. A rice grower with less than 20 hectares is unlikely to turn a profit, he said.
“Small farmers should quit or at the very least lease their land to larger farmers,” Tokyo University’s Honma said. “Many farmers support me in secret because with JA against TPP it’s hard for them to speak up. The enemy is JA.”
Yoshio Hachiro, head of Democratic Party of Japan’s TPP project team, indicated that the government is ready to push for change.
Approaching Endgame
“There are some systems that we don’t need to keep when we try to enhance our trade relations with other countries,” Hachiro told reporters in Tokyo. “This is a chance to sell more high-quality Japanese products overseas. Japan should be more confident in opening up its market.”
Japan could cut its costs to produce a 60 kilogram bag of rice to as low as 5,000 yen were full-time farmers to accrue land of 50 hectares or more and improve yields with modern technology, Honma said. As part-time farmers quit Japan’s rice could become competitive abroad, he said.
To JA’s Fuji and Norinchukin’s Shimizu such calculations are nonsense. Japan’s mountainous terrain won’t accommodate such large farms and targeting exports is futile due to the price difference with growers in China and Southeast Asia, Fuji and Shimizu said.
“About 20 to 30 hectares is about as big as you can get in Japan before you hit a mountain,” Fuji said. “The Japanese politicians who push for TPP, they don’t understand agriculture, they have no idea about farming,” added Shimizu.
One issue the two sides agree on is the situation cannot continue. Japan’s population is shrinking, aging, and losing wealth. The farmers are too, says Ken Kobayashi, chief executive officer of Mitsubishi, Japan’s biggest trading house.
“Sooner rather than later the farming structure must change, and it won’t be because of TPP,” Kobayashi, who favors Japan joining, said. “This is an issue of food security.”
To contact the reporters on this story: Aya Takada in Tokyo at atakada2@bloomberg.net; Yuriy Humber in Tokyo at yhumber@bloomberg.net
To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
