Reform of agricultural cooperatives

English translated version of "Business Prospect" on NHK Radio Channel 1 on June 24, 2014

1.The Council for Regulatory Reform of the Japanese government has produced its second interim report, in which it proposes reform of agricultural cooperatives. Would you first explain what an agricultural cooperative is?

Agricultural cooperatives are one form of cooperative. There are other forms of cooperatives such as consumers' cooperatives. Conceptually, a cooperative is an association organized voluntarily by persons who can enjoy social or economic benefits generated by their mutual cooperation. The purpose of cooperatives is to gain greater bargaining power by uniting those who do not have such power as individuals. In the case of agricultural cooperatives, a number of small-scale farmers join together to increase their bargaining power when buying agricultural materials and inputs from distributors and to obtain the best price when selling their produce.

The governing principle of a cooperative is that it is owned and controlled by its users who benefit from goods or services which a cooperative provides. While a joint-stock company sells its products and services to the general public, and have stockholders who obtain dividends from profits, a cooperative sells its products or provides its service to its members who contribute financially to form the cooperative. The members make all important decisions regarding the cooperative.

However, agricultural cooperatives are significantly different from consumers' cooperatives.

2.What is the difference?

It derives from the origin of agricultural cooperatives. The predecessors of agricultural cooperatives were industrial cooperatives operating under the Industrial Cooperatives Act before World War II. Originally, they were cooperatives voluntarily organized by rich farmers and landlords, and functioned mainly as a credit association which provided finance for the members. In 1930 farmers and farming communities in Japan were severely hit by the Showa Economic Crisis which occurred following The Great Depression. Many poor farmers were forced to sell their daughters into prostitution. In order to overcome the crisis the then Ministry of Agriculture and Forestry (MAF) led all farmers to join industrial cooperatives established in every town and village, and expanded industrial cooperatives' functions to carry out all activities necessary to support farmers including the purchase of agricultural materials and inputs, the sale of agricultural produce and financial activities for farmers.

The industrial cooperatives were transformed to government-controlled organizations during World War II. Then, they were further transformed into agricultural cooperatives after World War II. Just after World War II when Japan suffered food shortages, the government adopted the rice rationing system to supply rice to all citizens, especially to the poor. However, at the time of the food shortages rice farmers tended to sell rice on the black market where they could gain more profit. This hindered the government in collecting enough rice to maintain the rationing system. Therefore, the government transformed the former government-controlled organizations into agricultural cooperatives which were expected to collect rice from farmers to be delivered to the government. The General Headquarters of the Allied Forces (GHQ) had planned to dissolve all wartime government-controlled organizations completely and to let farmers set up agricultural cooperatives voluntarily. Some MAF officials agreed to this policy. However, the urgent need to collect rice outweighed the idealism of the voluntary organization of agricultural cooperatives.

The organization of agricultural cooperatives in Europe and the United States is different from that in Japan in that the former are voluntarily formed by farmers for each individual product such as dairy products or vegetables, or for each function such as the purchase of machinery or distribution of products. For example, the famous orange brand Sunkist is derived from the name of the cooperative organized by orange farmers in California and Arizona for sale of oranges. Quite differently from those in Europe and the US, every agricultural cooperative in Japan engages in a variety of business activities ranging from those related to agriculture to banking and insurance businesses because they grew out of the pre-war industrial cooperatives. Due to the fact that the Japanese agricultural cooperatives also evolved from the wartime government-controlled organizations, they became agricultural monopolies, and are criticized for being a pyramid-style organization where local agricultural cooperatives are dictated by the agricultural cooperative associations at the higher national and prefectural level. In this way the Japanese agricultural cooperatives show significant differences from the organizational principle where members control the cooperative.

3.What is proposed in the second interim report recently published by the Council for Regulatory Reform (CRR)?

The recent proposal has been considerably watered down from the first draft due to the opposition of JA agricultural cooperatives and to accommodate the ruling party's requests.

First, aiming to encourage local JAs to develop their own local farming activities the CRR originally proposed that the provisions of the Agricultural Cooperative Law authorizing the national and prefectural unions of JAs to advise local JAs be deleted. This is intended to eliminate top-down control of superior bodies of JAs, which is not consistent with the cooperative's governing principle. However, the original proposal is modified to state that "it will be decided after being studied by the JAs."

The CRR's original proposal also stated that the National Federation of Agricultural Cooperative Associations (Zen-Noh), which engages in the processing and sale of agricultural produce collected from local JAs, is to be converted into a joint-stock company. Zen-Noh is a huge conglomerate which has 80% of the market share of fertilizers and 60% of the market share of agricultural chemicals and machinery. This huge conglomerate is exempted from the Anti-Monopoly Law because of its legal status as a cooperative. It also enjoys various benefits, such as a lower corporate tax rate of 19% while normal companies are taxed at 25.5% and exemption from the fixed assets tax. A decrease in the price of agricultural materials and foodstuffs could be expected if Zen-Noh loses of the aforementioned privileges and is forced to compete with companies on an equal footing. However, the proposal was changed to state that "it is encouraged that a change of legal status to a joint-stock company is considered" with conditions that "it will examine in detail whether removal of exemption from the Anti-Monopoly Law may cause any problems, and that it may find that there are not." It is Zen-Noh itself that will study and decide on any change of status.

4.How do you evaluate the second report of the CRR?

The JAs put forward their counterargument against the CRR's first report saying that the government should not interfere with JAs as they are private organizations. The CRR's second report reflects this argument by letting not the government but the JAs study and judge whether or not or how far agricultural cooperative reform will be realizes. However, while banks are prohibited from engaging in securities and other businesses not specified in the Banking Act and life insurance companies are not allowed to deal with general insurance, JAs in Japan are allowed to carry out all business activities including distribution of agricultural produce, funeral service, banking, life and damage insurance handling and so on. This wide range of special privilege is granted to JAs under the Agricultural Cooperatives Act. The JAs themselves were created by this Act. This Act was not made by JAs but enacte in the compromise between the GHQ and the MAF to collect rice for the government at the time of food shortages just after World War II. It has never been amended substantially since its enactment in 1947. Therefore, it is natural and reasonable for citizens in Japan to discuss how the Agricultural Cooperative Act should be today.

I do not believe it is easy to effect agricultural cooperative reform since JAs have been untouchable for more than 60 years. Such reform is a daunting task which may take more than 10 years to accomplish. But I think that the CRR has done an excellent job by putting forward the proposal of the agricultural cooperative reform. We are just embarking on reform in Japan.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on June 24, 2014.)

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