Unit 02-A: Agricultural Policy and a New Direction for Agriculture in Japan
The 21st Century Public Policy Institute, Keidanren
I believe that in order to increase Japan’s agricultural output, we ultimately have no choice but to rely upon the small proportion of the nation’s farms which produce a high output. My expectations in this respect are particularly high for farms under advanced farm management, management which produces sales volumes of 50 million yen or more per year. While constituting less than 1% of Japan’s farms, these enterprises produce one-third of the nation’s agricultural output.
Agricultural business strategies of this type are known by a variety of names – contract farming (planned production), agriculture-commerce-industry cooperation, integration, the “sextiary sector*,” etc. – but their common basis is agriculture positioned within a food chain flowing from downstream to upstream, with agricultural production based on market needs.
Agricultural business strategies of this type are known by a variety of names – the “sextiary sector,” agriculture-commerce-industry cooperation, integration, contract farming, etc. – but their basic premise is agriculture positioned within food chains flowing from downstream to upstream, with agricultural production based on market needs.
A food chain can be considered as a linked chain of functions related to the supply of food, stretching from the growing or raising of agricultural products, through processing and distribution, to consumption. None of these functions exists independently of the others; they are mutually related within a single flow until ultimate consumption (or sale) of the product, and each operates in cooperation with the others.
When a food chain is created, mutual links between processes are close, and information is able to flow in both directions between upstream and downstream. Because of this, factors including the quality, form and price of the product and the distribution routes demanded by the market can be known prior to production, and production can be planned accordingly. Production of this type is necessarily production based on the needs of the consumer, or in other words, “market-oriented” production.
A number of cases will be taken up below in order to consider the level of diffusion of these business strategies.
* The “sextiary sector,” (sometimes called the “sixth sector,”) is a Japanese term referring to the diversification of agriculture into agriculture-related manufacturing and services such as food processing and restaurant management. The concept of a “sixth sector” originates from the idea of combining agricultural production (Primary industry: 1) with processing (Secondary industry: 2) and distribution and sales (Tertiary industry: 3) to generate a synergistic relationship (1+2+3=6).
1. Developing a new agriculture through the creation of food chains
Food chains are being created by a variety of processes which seek to add value to agricultural products; in Japan, these processes are termed “the sextiary sector,” “agriculture-commerce-industry cooperation,” and “integration.” The “sextiary sector” is being brought into existence where agricultural policy is actively striving to create food value chains. Here, agricultural producers are increasing their profitability by expanding from the simple sale of agricultural products into high value-added industries such as food processing or the service industry. By contrast, the frameworks termed agriculture-industry-commerce cooperation and integration involve companies taking the initiative to create more rationalized food chains. Production based on the needs of processing and marketing companies results in the realization of high value-added agricultural products. This category includes Calbee, Nippon Ham, Ise Farm and Frieden. While the “sextiary sector” and integration differ in the fact that farmers and companies are their respective driving forces, they each involve the creation of food chains based on vertical divisions of labor. Agriculture-industry-commerce cooperation, by contrast, involves the creation of food chains based on a horizontal division of labor between farmers and companies.
Planned production based on contracts, marketing activities and the acceptance of orders is also increasing in areas involving the production of fresh produce rather than processed foodstuffs, specifically the rice and vegetable agriculture industries. In the case of rice agriculture, a model in which rice distributors take the needs of the food services industry and similar sales channels into consideration and play a coordinating role with rice producers has recently become increasingly common in Japan. Large-scale farms including Uchida Farm (Kumamoto Prefecture; 50ha), Tanaka Farm (Tottori Prefecture; 100ha), Yokota Farm (Ibaraki Prefecture; 100ha), Sometani Farm (Chiba Prefecture; 108ha), and Fukuhara Farm (Shiba Prefecture; 160ha) are among the businesses which have adopted this model and consequently increased their size.
In the area of vegetable agriculture, a pattern in which farmers conduct direct marketing activities to retailers and restaurants, leading to the receipt of orders and the introduction of planned production, can be widely observed. Wagoen in Chiba Prefecture, Top River in Nagano Prefecture, Misuzu Life in Nagano Prefecture and Yasai Club in Gunma Prefecture are among these.
In cases in which the food services industry and logistics companies involve themselves in the production of fresh produce, we are seeing a model of planned production based on the particular needs of specific companies and the volumes of produce they require. Valor in Gifu prefecture, Seven Farm in Chiba and other prefectures, Watami Farm in Hokkaido and other prefectures, and AEON AGRI CREATE in Saitama Prefecture are among the businesses employing this model. As we have seen, corporate involvement in agriculture is leading to the creation of food chains based on a vertical division of labor; in other cases, food chains are being created involving a horizontal division of labor.
In each case, elements including the quantity to be shipped, the period for delivery, and price are decided prior to production, and production is planned in order to enable the targets to be met. Whether the development of a food chain is an explicit goal or not, food chains are created between the participants in market-oriented planned production.
It has been indicated that cases in which corporate involvement in agriculture and the development of a “sextiary sector” have failed have been due to an inability to realize sales channels as anticipated. These failures have been due to the adoption of a “product-oriented” approach. A product-oriented approach prioritizes the inclinations and circumstances of the agricultural producer in deciding on specific products and production volumes. It might be said that for such an approach, the entire process is over when the product appears. In the case of agriculture, however, the adoption of a “market-oriented” approach, the cultivation of sales channels, and the creation of a food chain are at the apex of Key Factors for Success (KFS).
2. Realizing growth in agriculture by means of advanced farm management
The shared point in all of these initiatives is the fact that they are market-oriented businesses involved in food chains. But the adoption of a market-oriented approach is not as simple a matter as it may appear. Agriculture is an industry which innately involves high levels of uncertainty, due to factors including environmental conditions and insect damage. Even when production plans are formulated based on the needs of the market, production often fails to proceed according to plan. This necessitates a large number of corrections and solutions. Advanced farm management implements these solutions proactively in order to increase output. This increases the scale of farms and boosts productivity, realizes high value-added agricultural products, and increases employment and ties between farm managers in farming communities.
With regard to the achievement of increased productivity, the reorganization of all agricultural production procedures based on contracts, for example rice farmers extending their cropping period by deciding on the specific fields to plant and the date to plant by calculating backwards from the date of shipping, reduces machinery depreciation costs and enables the economic allocation of labor resources, resulting in significant cost reductions. This approach enables farm management to look towards 100ha operations, as indicated above. This is because when prices and the volume of production are decided on prior to production, it is possible to introduce measures to increase profits in accordance with the specific arrangement. Such efforts to increase productivity are not restricted to rice farming.
Advanced farm management collects and makes use of all of the data involved, making it possible to conduct focused management (for example, by deciding on the critical amount of stock feed to be produced or allocating the use of machinery on rice farms). This ensures competitive and technological superiority.
Agriculture-commerce-industry cooperation, integration, “sextiary sector” approaches, and similar forms of farm management do not merely increase productivity, but also enable the realization of a high value-added agriculture, through the manufacture of processed products and the development of agricultural services (pick-your-own farms, tourist farms, etc.).
Advanced farm management also expands employment. With around 50ha under cultivation, a rice farm subject to this type of management will require part-time and temporary workers. Again, this is not restricted to rice farms. Any farm being managed to produce sales in the 100 million yen bracket will rely a great deal on part-time workers. When we reach the 200-300 million yen bracket, the farms begin to employ full-time workers. Wages are not necessarily high, but the farm’s output will be increased by at least 10 million yen per full-time worker, a figure which sufficiently clears the conditions necessary for the employment of full-time workers among Japan’s farm managers.
In an attempt to ensure opportunities for employment of the elderly, Japan has adopted agricultural policies skewed towards rice farming, for example, by artificially maintaining the price of rice. As a result, agriculture has become an unappealing industry: 72% of all of the nation’s rice farms (840,000 households out of 1.17 million in 2010) are in the red and have no prospect of entering the black. The offspring of farming families are not taking over farms from their parents, and new blood is not coming into the industry. The average age of Japan’s farmers, 66 at present, is increasing annually. The discussion above demonstrates that the choice open to us is to discontinue the policy of maintaining the price of rice in order to provide employment in farming villages, and to expand employment opportunities by increasing quality and productivity through the introduction of advanced farm management.
Advanced farm management also contributes to increasing the number of farm managers. There are two routes towards the realization of this goal: Making farm employees independent, and the fostering of managers by farming families.
Farm employees can be made independent by allowing an employee who has displayed ability on a farm to establish a separate business under the farm’s name, or by establishing an employee education function which aims from the beginning to make employees independent. There is an increasing trend in the area of advanced farm management towards the establishment of systems of education to foster management successors. It has been indicated that it is difficult to develop from a traditional farmer into a farm manager, but the number of farmers who are becoming incorporated in production and sales systems which create food chains, with the result that they operate their farms as farm managers, is increasing. In the area of vegetable farming, results are being produced by production management and sales systems; in livestock production consignment systems are in use. In addition to this, agriculture-commerce-industry cooperation is producing outcomes in this regard, and farm M&A are also contributing to the realization of high-productivity farm management.
３． Creating the environment for the development of new agricultural businesses
Nevertheless, the food chains which are being created by advanced farm management do not yet possess sufficient strength. The system fails to realize its full potential to the extent that it relies on contracts. Advanced farm management in Japan is not yet actively opening up new markets or engaging in product development, to say nothing of working to create export opportunities. The realization of increased productivity relies to a significant extent on the individual efforts of farm managers, and as a result the level of the industry as a whole is not improving. The “sextiary sector” is realizing value-added production, but the scope is not expanding beyond the individual food value chains created by individual farms, and there is little ripple effect on surrounding enterprises. Above all, advanced farms are positioned as maverick operations within the agricultural industry (i.e. the sector defined by the triangle of administration, agricultural cooperatives, and politics); for example, the number of farms under advanced management is not even 1% of all agricultural enterprises.
There are reasons why the mainstream of Japan’s agricultural industry confines itself to product-oriented production, beginning with agricultural policy. Every country engages in product-oriented agriculture to a greater or lesser extent, but the situation in Japan is fixed in place by the systems in effect.
As examples, in relation to rice we have the Staple Food Act (Act for Stabilization of Supply-Demand and Prices of Staple Food), and in relation to vegetables, meat and flowers we have the Wholesale Market Act. In the area of unpasteurized milk production, we have the Act on Interim Measures concerning Compensation Price for Consumers of Milk for Manufacturing Use. All of these systemic measures serve to isolate producers from consumers. In the case of rice, price negotiations on a transaction basis between the National Federation of Agricultural Cooperative Associations and wholesalers, in the wholesale market system, competition within the market, and in the area of unpasteurized milk, milk price negotiations between designated unpasteurized milk producers’ bodies and milk product makers, are also functioning to isolate the two sides.
However, changing this structure will be very difficult. This is not merely because the number of advanced farms is low and the system does not possess adequate strength, but also because the main approach of protectionist agricultural policies is to artificially maintain prices by adjusting the level of production. In the cases of rice and unpasteurized milk production in particular, laws systematize the adjustment of production. It is necessary for producers to maintain production at a level at which it can be controlled, and as a result, agricultural production becomes sealed off in its own realm. Having been placed in this position for an extended period, Japan’s agricultural sector has succumbed to the delusion that it is independent of changes in the broader social environment, and this has created a culture which refuses to cooperate or engage with other industries, rendering the creation of food chains a difficult matter.
If we take actual agricultural business into consideration, cooperation with other industries including marketing and processing industries, is important not merely in Japan, but throughout the world. The agricultural sector is not a uniquely independent sector in the world of industry; it is involved in food chains, and has an organic relationship with the materials production and supply sectors and the product processing and marketing sectors. I want agriculture to become one of the sectors which supports economic growth in Japan. However, despite the fact that there is a practical transition to advanced farm management underway, Japan’s main agricultural sectors remain backward-looking in this area.
In order to realize reforms, we will first need to address protectionist policies, replacing policies focusing on price (artificial maintenance of the price of rice, etc.) with a system of direct payments, and replacing the laws that isolate production from distribution with a system that promotes the creation of food chains. We must also create an environment which makes it possible to build more extensive networks between agriculture and other industries. It will be essential to reconsider the price maintenance system, upgrade distribution networks, and to expand the involvement of companies from outside the sector in agriculture, and it will be necessary to reform the policy environment in order to do so.