The Grain Chain: Gauging Malaysia’s Food Security


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Wheat is growing increasingly important in today’s world as a change of diet, improved living standards and increased awareness of healthy living spur demand for high quality bread and bakery items.

In fact, demand for wheat-based products is expected to be in line with population and economic growth.

However, grains are an almost a fully-imported commodity, whereby Malaysia imports 100 per cent of its wheat and soybean meal. In fact, almost 98 per cent of its grain corn requirement from producing countries such as Australia, the US, Brazil and Argentina.

In 2016, Malaysia imported 1.7 million metric tonnes (MT) of wheat, 4.1 million MT of grain corn and 1.3 million MT of soybean meal in 2016. Current production capacity of 1.8 million MT per year will not be able to cope with the future demand of wheat flour.

This leads to the issue of food security and stockpiling – in 2015, Malaysia’s food import bills alone hit almost RM45.4 billion while exports were only RM27 billion which left a deficit of more than RM18 billion.

If this situation persists, specialists say Malaysia will not be able to provide continuous food supply to the people and is likely to face food crisis in the future.

This is a growing concern as low-income rural people are more susceptible to food crises due to the larger family size, the number of school children and unemployed mothers.

According to the Global Food Security Index (GFSI) 2017 report, Malaysia’s ranking dropped to 41 out of 113 countries. More worryingly, Malaysia’s GFSI score fell by 3.2 points, from 69.4 in 2016 to 66.2 in 2017, which puts us among the top 10 countries with the highest drop in our GFSI scores.

According to UNI Malaysia Labour Centre (UNI MLC) president Datuk Seri Mohamed Shafie Mammal, Malaysia’s fall in the GFSI score and ranking is largely due to a deterioration in the index’s ‘availability’ score.

“This score measures factors such as the sufficiency of supply, public expenditure on agricultural researcn and development, agricultural infrastructure, volatility of agricultural production, political stability risk, corruption, urban absorption capacity and food loss,” he said in an exclusive interview with BizHive Weekly.

“Although Malaysia has enough poultry, fishery and eggs supply, we are still relying on imports from foreign countries in various food commodities such as rice, fruits, dairy milk, beef and grains.

“As a matter of fact, Malaysia imports 100 per cent of its wheat and soybean meal with almost 98 per cent of its grain corn required from producing countries such as Australia, US, Brazil and Argentina. Hence, the country is exposed to externalities – geopolitics, global weather conditions and country relations,” he forewarned.

“It is important for a nation that is highly dependent on imports to fulfil its national food requirement and have adequate stockpiling on essential commodities to avoid potential crisis.”

Shafie highlighted that wheat previously has never been considered as staple food. However, the consumption of wheat-based food has gradually increased over the years.

“In general, the increase in consumption of this commodity is 60 per cent from 2008 to 2017 when compared to rice consumption, which showed a 10 per cent increase during the same period of time.

“It has become part of the staple food as more Malaysians consume wheat-based products such as pasta, noodles, roti canai, bread and confectionery.”

Some of the industries that have high use of wheat include food and beverage, livestock (used as animal feed) and confectionary.

Eye on Malaysia’s wheat value chain

Meanwhile, concerns arise over the effectiveness of Malaysia’s wheat value-chain and regulatory process of grains importation.

This comes as there are no special Approved Permits (AP) system for grains import except for rice, and suppliers usually furnish the Certificate of Origin only for declaration purposes, according to UNI MLC.

“Since there is no special requirement for import of grains, the flour and animal feed millers import the grains themselves through their offshore trading offices in tax havens via transfer pricing whereby the landed prices in Malaysia are artificially inflated to show a higher cost of production.

“Imported physical goods do not go to Singapore or other countries and there is no value-added process conducted in ‘low tax regime’ countries,” Shafie said. “The grains are directly shipped from producing countries but payments are made to ‘low tax regime’ countries.”

On this note, Shafie said Singapore was commonly used because it is shipping and commodity trading hub and a favourite because of low tax regime and preferred city for large trading companies.

“Shipments are direct to Malaysia but invoicing is routed through Singapore where most feed millers and flour millers have their management offices,” he added.

UNI MLC noted that the millers or related parties to millers usually set up trade offices in Singapore where the IE (International Enterprise Singapore) which is an arm of Ministry of Trade and Industry Singapore. It provides very favourable corporate tax of ten per cent or lower, whereas in Malaysia, the corporate tax rate is 25 per cent.

“The millers are the main importers and they control the supply chain,” he added. “No other players could import grains because the millers will not buy from them. There may be elements of ‘transfer pricing’ in the process, which may not benefit the consumers.”

When the grains are processed in Malaysia, UNI MLC noted that in general, there is no ceiling price requirement within the industry. The millers determine price based on their product grades.

However, the 1kg general purpose flour has a ceiling price fixed by the Ministry of Domestic Trade, Cooperatives ad Consumerism (KPDNKK) and subsidies by KPDNKK.

This falls back to the fact that Malaysia does not have a grain policy or grain board or grain projection and have been relying almost 100 per cent on imports, which depends on international pricing.

“Malaysia has implemented a stockpile policy for rice which is a staple food for Malaysians decades ago. Wheat previously have never been considered as staple food.

“However, the consumption of wheat-based food has gradually increased and become part of the staple food for many Malaysians. Grain corn and soybean meal are used to produce animal feed for mainly poultry industry,” he said, adding that figures from the Department of Veterinary Services’ estimates each Malaysian average consumed more than 50kg of chicken meat and more than 20kg of eggs per year.

“Malaysia is aiming to be self-sufficient by 2050, where we no longer need to import food as there would be enough local food production to sustain people by then and with surplus to export.

“The level of food security in Malaysia is stable but fragile because it is supported by food imported from foreign countries but it is fragile because the 2008 (rice crisis) situation can happen again if we rely too much on imported food.”

 

Image: UNI MLC
image: UNI MLC

Issues surrounding wheat pricing

Meanwhile, another concern is the practice of transfer pricing which leads towards the country ending up ‘subsidising’ for grains in particular flour (wheat), yet the prices of these commodities have not reduced, to the detriment of consumers.

UNi MLC unveiled information that some of the importations came from countries such as Hong Kong, Dubai, Singapore and Indonesia – which are not exporting countries.

The only process required prior to grains arriving at the mills is blending of various types of grain for specific grade flour production. Singapore does not have any special capabilities in blending that any of the Malaysian mills have. In fact, all flour and feed mills in Malaysia have their own blending capability.

This is evident that passing through tax haven countries are only for the purpose of tax evasion.

However, there is no obvious reason for price hike in Malaysia especially in the flour products and animal feed.

The reason for this is based on following three facts: wheat and corn prices in the global futures market had declined over the past two decades in US dollar term; the flour mills and feed mills in Malaysia are more than 30 to 40 years old which means they have been fully depreciated and there is no reason for higher cost because there is no significant new investment; and transportation and logistics costs have also reduced significantly due to reduction in crude oil prices, modern transport and handling technology and fuel-efficient vessels.

When asked if importers practise ‘transfer pricing’ when the grains flow to Singapore, Shafie said that most importers do, and that the uplift was meant to pay for expertise provided like, logistics, purchasing, management and networking.

There are claims that the millers in Malaysia are operating at a loss or barely breaking even, to justify their request for subsidy from the Malaysian government.

On this claim, Shafie said, “Most are public listed companies — their information is easily available. None of the flour mill or feed miller is closed, except Kuantan Flour Mill, because of smallness, bad location and poor management.

“Which means, most of the millers are profitable.”

Although the price of the country’s multi-purpose wheat flour has been controlled by the Malaysian government since May 2007 in an attempt to alleviate the cost of living for low-income earners, there were talks of removal of subsidies of late.

Also, pricing issues arise from the inefficiencies of millers being main importers as they control the supply chain.

“No other players could import grains because the millers will not buy. The current way of importing is very inefficient for Malaysia to have. For example, 10 importers all importing in small quantities and not taking advantage of freight savings if vessels and commodities are co-ordinated by a single importer,” UNI MLC said.

“Be it Singaore, Thailand, Indonesia or elsewhere, single importer is more efficient than various importers. If Malaysia introduce single importer, their commodity prices will be lower than all other countries. Malaysia has the capability to do it and it makes economical sense.”

Looking at flour, the association noted that every flour mill has its own clientele and each formulate for customers according to specific needs.

“Each has their own strategy when selling. Some use credit as a tool, others use protein and other fineness of flour or lower moisture content. So all the millers have different prices, very hard to compare.”

Solutions to improve grainy outlook

From this, Shafie called on the government to become the main importer for wheat.

With the national central importer model, the transfer pricing will be eliminated through supervision and regulation by government agencies, he added.

“It is also important that in order for us to ensure the availability of the particular commodity, we must have a mechanism of stockpile for commodities whether onshore or in producing countries to secure supply of the commodities,” he said.

Wheat imports are expected to remain at 1.7 million tonnes in 2016/2017 due to depreciation of Malaysian currency as it becomes expensive to import. For 2017/2018, Malaysia imports of wheat are likely to increase marginally by three per cent to 1.75 million tonnes with expectation of the Malaysian currency to recover by late 2017.

Steady increases in trade volumes and complexity in recent years have significantly changed the operating environment for the international trading community, he added.

“They have also highlighted the negative impact of inefficient border procedures on governments, businesses and ultimately on the customer and the economy as a whole.

“These ‘hidden’ costs of trade are so high – as much as 15 per cent of the value of the goods traded in some cases. This is a problem for all trading nations, and finding ways to make the whole process of trading simpler and smoother.

“Having a National Central Importer particularly for grains will make the process of trade easier.”

UNI MLC noted that the governments will gain because efficient border procedures make them able to process more goods and improve control of fraud, thus increasing government revenue.

Meanwhile, businesses gain because if they can deliver goods more quickly to their customers they are more competitive. Consumers gain because they are not paying the costs of lengthy border delays.

When asked what sort of policy implementation would be suitable for the authorities to curb cartel-controlled scenario, bring down price of wheat, and ensure that prices of flour are more reasonable, UNI MLC said the Government should control all the imports of grain and regulate quality of end products to ensure consistency and transparency.

 

by: Ronnie Teo
Published on The Borneo Post


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