Venezuela puts price ceiling on rice

[Forum Troll]

The Telegraph

Venezuela's Hugo Chavez tightens state control of food amid rocketing inflation and food shortages

Venezuela's public finances are unravelling, with oil prices at $40 a barrel, while the national budget is calculated at $60 a barrel. Inflation is running at over 30 per cent, yet with the new measures Mr Chavez is seeking to ensure that his core support, the poor, can still fill their shopping baskets with food.

"If any industry wants to ride roughshod over the consumers, with a view to getting better dividends, we are going to act," said Carlos Osorio, the national superintendent of silos and storage. "For the government, access to food is a matter of national security."

Production quotas and prices have now been set for cooking oil, white rice, sugar, coffee, flour, margarine, pasta, cheeses and tomato sauce.

White rice, the staple for many Venezuelans, can now only be sold at a price of 2.15 bolivares (71p) per kilo. Private companies insist that production of that kilo costs 4.41 bolivares (£1.46) and that government regulations are impossible to fulfil and companies will quickly go broke. Companies that are dedicated to rice production must ensure that 80 per cent of their efforts are dedicated to white rice. The new regulations set production percentages, as companies were rebranding their products to avoid the government controls, like flavouring the rice, as the price restrictions apply only to white rice.

"Forcing companies to produce rice at a loss will not resolve the situation, simply make it worse," said Luis Carmona of Polar, a rice company that has been singled out by the government for trying to sidestep restrictions.

Government price controls on basic goods have been in place, in various forms, since 2003. But the restrictions have forced Venezuela to become increasingly reliant on imports of these products as local farmers will not supply the selected food staples at government prices.

Mr Chavez last month won a referendum allowing him to stand indefinitely for re-election. With that now achieved the Venezuelan leader, who has vowed to turn his South American nation into a model Socialist state, is now taking some unpopular decisions needed to stabilise his floundering economy.

Despite this being the early 21st century with a lot of past historical experience, it looks to me like an entire nation's government is failing Econ 101. Placing a ceiling on the price that can be charged for rice (below the cost of production!) makes any rice producer have to limit production to not go quickly broke when operating at a net loss. It discourages anybody new from being foolish enough to enter the business. Skipping the price ceilings and having welfare help the poorest pay for the food, like the food stamps we have in the U.S., would avoid that problem, but Venezuela is just crippling its own food production industry with this method. No wonder they are getting more dependent on imports.

[Mayabird]

Actually, there's more.

Originally posted at LA

Venezuelan leader orders troops to take over rice plants

(CNN) -- Venezuelan President Hugo Chavez has ordered troops to immediately take over rice-processing plants in his country, accusing some businesses of ignoring prices set by the government.

Venezuelans recently approved a referendum allowing President Hugo Chavez to run for a third term.

"What are some of the sectors of the agricultural industry doing? They buy rice from producers, and they don't want to produce regulated rice," Chavez said in a televised address Saturday.

"Well, I've ordered the intervention, starting right now, of all those sectors of the agricultural industry."

Chavez did not say how long the takeover will last, but warned that some companies could be nationalized if they tried to interrupt supplies.

U.S.-owned Cargill, with 2,000 employees spread among 22 locations in Venezuela, is among the major rice processors in the country.

Since winning re-election in 2006, Chavez launched a campaign to nationalize strategic segments of Venezuela's economy, including cement companies, a steel mill and oil ventures.

Last month, Venezuelans approved a Chavez-backed constitutional referendum that allows him to run for a third six-year term in 2012.

[K. A. Pital]

Yeah, because food crises should not be solved with rationing - instead, let the poor people starve by the will of the almighty market. Right? Is that what you mean by "Econ 101", Forum Troll? What if welfare was already used, but failed because of rampant inflation - how would you deal with that? Put out even more money? That would just lead to money de-valuing; putting out food stamps en masse (Venezuela has LOTS of poor) would make food stamps get a value, and money lose value accordingly, sending the prices higher yet again.

Incidentally, I love how First World people comment smugly on the economic solutions of another. If your economy imploded due to an economic crisis to the same extent as Venezuela, would you be content with welfare transfers the value of which is continously wiped out by inflation, or would you ask for more decisive solutions?

[Beowulf]

If a farmer loses money on every bushel of rice he sells, what's his motivation to plant his next crop of rice? Oh, I know! You threaten to stick him against a wall and shoot him if he doesn't, right?

[Guardsman Bass]

Yeah, because food crises should not be solved with rationing - instead, let the poor people starve by the will of the almighty market. Right? Is that what you mean by "Econ 101", Forum Troll? What if welfare was already used, but failed because of rampant inflation - how would you deal with that? Put out even more money? That would just lead to money de-valuing; putting out food stamps en masse (Venezuela has LOTS of poor) would make food stamps get a value, and money lose value accordingly, sending the prices higher yet again.

Putting the price ceiling below the price of production is not "rationing"; it's artificially causing food production in the country to contract, since farmers will now have to either cut production or go bankrupt. What it is is fucking stupidity on Chavez's part, no doubt because he's under massive political pressure to increase the availability of food.

Incidentally, I love how First World people comment smugly on the economic solutions of another. If your economy imploded due to an economic crisis to the same extent as Venezuela, would you be content with welfare transfers the value of which is continously wiped out by inflation, or would you ask for more decisive solutions?

I fail to see how causing rice production to drop by setting the price ceiling below the price of production (thus forcing farmers to either go bankrupt or cut production) is a "decisive solution", unless you think getting more dependent on food imports (which is what will probably come of this) is a good result.

[K. A. Pital]

If a farmer loses money on every bushel of rice he sells, what's his motivation to plant his next crop of rice?

Your solution?

I fail to see how causing rice production to drop by setting the price ceiling below the price of production (thus forcing farmers to either go bankrupt or cut production) is a "decisive solution"

It's pretty simple. High production, but low accessibility isn't really any better than low production but high accessibility. There can be a status quo where both are equally bad, there can be situations where one is worse than the other. The question is, how many people can be fed with the rice, and surprisingly this is not a direct function of how many tons of rice is produced, because if the price is too high to buy, these tons of rice are as worthless to these people as if they were not existing at all.

Yeah, price ceiling is stupid because Chavez controls only parts of his national industry, so he can't just re-arrange resources to subsidize rice production from other sectors easily, making low-priced rice still viable to make through transfers. If he had such an ability, he could do much better.

[Beowulf]

If a farmer loses money on every bushel of rice he sells, what's his motivation to plant his next crop of rice?

Your solution?

A magical thing called a subsidy. It compensates for the difference between the production cost and the price you want people to pay. What's yours?

[K. A. Pital]

A magical thing called a subsidy.

I thought there are problems with that in the Third World (1) subsidies to agriculture are already offered (2) due to overall lower resources, not as many subsidies can be given (3) inflation wipes out value.

But yeah, subsidies are the solution. I don't know why they are not using it. Are they so short on cash?

[Forum Troll]

Yeah, because food crises should not be solved with rationing - instead, let the poor people starve by the will of the almighty market. Right? Is that what you mean by "Econ 101", Forum Troll? What if welfare was already used, but failed because of rampant inflation - how would you deal with that? Put out even more money? That would just lead to money de-valuing; putting out food stamps en masse (Venezuela has LOTS of poor) would make food stamps get a value, and money lose value accordingly, sending the prices higher yet again.

Incidentally, I love how First World people comment smugly on the economic solutions of another. If your economy imploded due to an economic crisis to the same extent as Venezuela, would you be content with welfare transfers the value of which is continously wiped out by inflation, or would you ask for more decisive solutions?

Well, it looks like others in the thread already addressed this and the problem of price ceilings increasing production shortages (something well known from past history), as well as how a price ceiling is not the same as rationing.

For food stamps causing inflation, how much that occurs depends on how they are paid for. If you have your government resorting to the equivalent of just printing too huge sums of money, that would worsen inflation, as opposed to payment from the tax pool or from the Euros that are gotten from overseas sales. If some of that, some inflation, is nevertheless unavoidable, then you have the food stamps having a corresponding frequent adjustment.

Subsidies can also be a way to go, reducing the cost of production, reducing the resulting market sale price, reducing the monetary amounts of the food stamps themselves needed.

The one thing you don't do, which is the opposite of a solution, is anything that harms the incentive and the very practicality of farmers growing as much rice as otherwise possible. If they've invested years into a business, they may try to keep it up as long as they can even if operating at a loss, but they'd just start running lower and lower, not even going to be able to afford enough fertilizer to properly do the next crop. You can't expect them to operate at a loss for long.

[Darth Yoshi]

Maybe they're being affected by the plummeting price of crude? A quick search says that the primary export is petroleum.

[Rogue 9]

Petroleum isn't that much lower compared to a few years ago; it's only "plummeting" in relation to last summer. And Chavez is still a dictatorial asshole with no clue how to manage an economy; what else is new? Maybe eventually the electorate will get a clue and kick him to the curb when he seeks that third term that he viciously assraped the electoral system to get. (Wheeee, let's keep sending the referendum back over and over until we get the right answer!) But I doubt it, mainly because I don't trust him to not rig the election.

[Guardsman Bass]

There can be a status quo where both are equally bad, there can be situations where one is worse than the other. The question is, how many people can be fed with the rice, and surprisingly this is not a direct function of how many tons of rice is produced, because if the price is too high to buy, these tons of rice are as worthless to these people as if they were not existing at all.

In other words, you'd rather have a large group of people competing over a smaller group of rice, rather than a larger amount of rice that a smaller group of people can afford. I fail to see how trying to move to the former helps alleviate hunger.

As is, I'm guessing Chavez will seize parts of the rice business in Venezuela, then subsidize the price from the government revenues. Which would help keep production up (in theory, at least) while keeping the price low ...as long as the Venezuelan government can afford the subsidies. As is, they were sitting on about $42 billion in foreign currency reserves, along with $39 billion in a National Development Fund (although only $9 billion was left for discretionary spending) at the end of 2008.

[[R_H]]

Maybe they're being affected by the plummeting price of crude? A quick search says that the primary export is petroleum.

From the article:

Venezuela's public finances are unravelling, with oil prices at $40 a barrel, while the national budget is calculated at $60 a barrel. Inflation is running at over 30 per cent...

Perhaps that's also the reason why he's not going with a subsidy instead of a price ceiling.

[Darth Yoshi]

Oh wow, that'll teach me to not read the article carefully.

Still, this is why over-reliance on a single export is stupid.

Maybe I'm just showing off my economic ignorance here, but wouldn't a price ceiling increase affordability in the short term? It'll take time to scale back production, and in the meantime the existing stock is still available. Perhaps Chavez is trying to hold out long enough for a miracle to happen or something.

[K. A. Pital]

Still, this is why over-reliance on a single export is stupid.

After Latin American nations basically turned into nothing but petrochemical and other raw "resource colonies" of the USA, it's hard to see how they can have something else as an export. These nations do not have viable industries of their own. How many Third World nations do have diversified economies? Find me some.

It'll take time to scale back production, and in the meantime the existing stock is still available.

Yup. In the immediate term, it might help. However, if Chavez doesn't start giving out subsidies a year or so down the line, he will ruin the agricultural production of Venezuela.

[Guardsman Bass]

Still, this is why over-reliance on a single export is stupid.

After Latin American nations basically turned into nothing but petrochemical and other raw "resource colonies" of the USA, it's hard to see how they can have something else as an export. These nations do not have viable industries of their own. How many Third World nations do have diversified economies? Find me some.

Mexico has a fairly diverse economy, although the greatest share of its export earnings still come from oil.

These states have all had control of their own economies for decades now, they all did shit like this or did Import Substitution Industrialization, and they're stuck with the results. It's not the US's fault that the only real valuable export Venezuela sends to it is oil; perhaps if Chavez had actually tried to build-up the local industries instead of milking the oil cash cow . . .

It'll take time to scale back production, and in the meantime the existing stock is still available.

Yup. In the immediate term, it might help. However, if Chavez doesn't start giving out subsidies a year or so down the line, he will ruin the agricultural production of Venezuela.

We're talking about agriculture, right? It doesn't take that long to scale back "production"; they'll simply plant less at the next growing season. He's basically burning up the stocks they have, although we don't know what those are at. Of course, this will probably make agricultural producers rather wary in the future .. .

Seeing as how this is Chavez, it's definitely a good bet that he'll lob some subsidies at them (or, more likely, he'll nationalize the land-holdings directly, then divert state funds into them) if things don't improve after all the stocks are eaten.

[K. A. Pital]

Mexico has a fairly diverse economy

Narcotics and oil still being primary drivers? At least Mexico was more or less industrialized early on.

These states have all had control of their own economies for decades now

They should've become superpowers, right? I never said they weren't in control. Although technically, with the "Washington consensus", they were "in control" of implementing on an agreed crash course.

...perhaps if Chavez had actually tried to build-up the local industries instead of milking the oil cash cow . . .

Perhaps he did that. He started many industrial projects in fact. Too bad the economic crisis won't make many of them bear fruit in a long time, but such are the fortunes.

[CJvR]

Perhaps he did that. He started many industrial projects in fact. Too bad the economic crisis won't make many of them bear fruit in a long time, but such are the fortunes.

Perhaps he did, but then running around nationalizing stuff most likely killed even more projects. Not many will invest in a place that will steal your stuff once it starts making profit. If the AG sector really is producing at a loss at the current fixed prices then Chavez is on the edge of doing some serious damage to Venezuela, in particular as operating it as a goverment operation at a loss will be just as painful to the regime as it was to the old owners. Although the oil will prevent it from going the way of Zimbabwe all those billions of $ pissed away in political grandstanding must sting now.

[K. A. Pital]

Perhaps he did, but then running around nationalizing stuff most likely killed even more projects.

Depends. Projects in profitable sectors (read: oil and gas extraction) might not be exactly what Venezuela needs right now. It needs to diversify it's economy to stop being a petrochemical appendage. I agree that Chavez would ruin agriculture when he forces it to operate at a loss, and this sort of damage is not something easily restored - once you ruin your agriculture, it becomes hard to press out the import food dealers.

Not many will invest in a place that will steal your stuff once it starts making profit.

Oil and gas cartels invested into the place in years, did little for the life standard of the common Venezuelan.