Why Indonesian Farmers Sell Unhulled Paddy, Not Milled Rice

Most rice farmers in Indonesia sell their harvest as unhulled paddy rather than milled rice, a practice driven by a confluence of supply chain dynamics and economic realities.

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Most farmers, especially smallholders, do sell paddy directly, not milled rice. They are not yet capable of selling it as milled rice.

Farmers, particularly those with small landholdings, typically sell their paddy directly to middlemen or collectors immediately after harvest. This immediate sale provides quick cash, essential for settling debts, purchasing fertilizer for the next planting season, and meeting household needs. The alternative of milling the paddy into rice involves additional costs, such as milling fees (often 10% of the milled output) and the risk of grain breakage or spoilage, which many small farmers cannot afford or manage.

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Farmers need capital and tools: milling into rice requires costs. The pattern is that farmers pay 10 percent of the milled rice as a milling fee.

Furthermore, the existing supply chain is structured around paddy as the primary commodity traded at the farmer level. Government agencies like Bulog also focus on procuring unhulled paddy during harvest seasons. While larger farmers with extensive land and their own milling facilities might sell milled rice directly to consumers, the common practice for small to medium-scale farmers is to dry the paddy and sell it as is.

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Harvest is identical to needing money to pay debts, next season's fertilizer, and household needs. Farmers sell paddy, wet or dry, to collectors for immediate cash.

Selling paddy offers immediate financial relief and shifts the price risk to the middlemen or millers. However, this convenience comes at a cost. The price per kilogram of paddy is significantly lower than that of milled rice. For instance, with a government-set price for paddy and a higher price for milled rice, farmers effectively lose out on the price difference. Additionally, farmers often find themselves in a weak bargaining position, with middlemen frequently dictating the price of paddy at the farm gate.

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Paddy is more durable and less prone to damage than rice. Small farmers usually do not have proper warehouses to store large quantities of rice.