Here is the Economics On How and Why Malaysia Maintain its Price Ceiling for Chickens and Eggs .. And Why the Floating of These Prices Could be Big

Sensitive topic, I know. Malaysia has been maintaining this subsidy or price ceilings on chicken and egg prices for as long as I can remember. We have been so used to it that the raising of chicken and egg ceiling prices last year got everyone heated about the increasing cost of living. I get it, I complained too about the higher prices.

This is even more important now to talk about this as this news article in the Edge by Mat Sabu is proposing that prices of chicken and eggs be “floated”, to “overcome food shortages”. In a nutshell, basically, these prices will be set by the market — aka more expensive for regular Malaysians. I can already imagine my mum complaining about the higher prices in the supermarket now.

Price ceiling in economics, is … a complicated topic to talk about. Even economists disagree with each other on whether price ceilings actually work or not. For many of you, price ceiling just means that the seller cannot sell a particular product past a certain price. It is good for consumers like us, but bad for companies or sellers that are selling these products.

I am not an expert to be honest even though I have studied it for the past 10 years and is actually a practicing economist. I just feel like economists are just glorified news reader and that anyone can be an economist if they just read enough and understand how markets work. Really, it’s that simple.

However, I do feel like many of us do not actually understand how or why price ceilings are there in the Malaysian market. Let me just give my thoughts on this and hopefully, you will get a better understanding of it.

Basically, the Government Pays for Lower Prices of Chicken and Eggs for Us

That’s right. We are actually paying less for chicken and eggs because the government pays the difference. The standard chicken price of RM9.40 per kg that you see in the market is actually way below the market price. This chicken price chart by IndexMundi tells us how much we have been paying for chicken all these years and the price have actually more than doubled during the pandemic.

Let’s say the price ceiling of chicken is RM9.40 and the market price of chicken is about RM15.00. The government needs to subsidise the difference of RM5.60 per kg for Malaysians for sellers to sell at RM9.40. These sellers can’t be selling at a loss in the market as they will just quit.

But herein lies the problem with price ceiling and subsidies. Let’s look at it from the consumer point of view aka you. If the price of chicken goes up, you tend to buy less chicken cause they are expensive. If prices go down, you buy more of them. But do sellers actually want to sell chicken at below market prices? No. If let’s say the government for some reason do not subsidise the difference between the market price and price ceiling, the seller is actually selling at a loss, and they may not want to produce that much chicken. What happens now is that we want more chicken but sellers do not want to produce them. Boom! There is a shortage of chickens.

A shortage is no joke. It’s what gets Malaysians fighting in the wet market among each other to buy that few chicken. Punches are exchanged, slaps are reciprocated, feelings are hurt, and the dentists are happy with broken jaws and missing teeth. If you are selling the chickens, looking at this, you know … EVERYONE wants to buy your chicken. You might not even want to sell it at RM9.40 per kg then. You cheat the system by selling them at higher prices to your customers but you do it in a dodgy back-alley, away from the eyes of the government. Anddd that’s how black markets are formed. When things go on the black market, the government loses control and they hate that they can’t collect tax.

Chicken and Eggs are so Important to the Malaysian diet that the Government has to Maintain the Price Ceiling … With Money from Us?

Guess what? Chicken and eggs are the second and fourth biggest in our diet. Data by DOSM shows that we eat about 46.1 kg of chicken and 20.8 kg of eggs in 2021. Can you imagine not being able to eat fried chicken? Or Nasi Lemak without egg? That will be the end of the world for me.

Of course then, I want my chicken and eggs cheap. The government should absolutely keep prices cheap and affordable for everyone. But then, I did wonder to myself then. Who pays for these subsidies? Duh, the government. But where does the government get their money from? Hmm. It comes from us then, taxpayers. What???? We are paying the government to lower the price of chicken and eggs for us? We might as well just buy the chicken straight from the chicken seller then.

So how much the government spends then on subsidies? According to this report here, the government spent about RM1.8 billion for chicken and egg subsidies in 2022. That’s a lot of money there. However, we shouldn’t look at this so one-sided. The policy is supposed to benefit people who need them the most — B40 households. And it has been actually beneficial for this income group as they probably do not pay as high as a tax compared to the other income groups. We do know that the B40 households spend a bigger proportion of their income on food and necessities.

Floating of Chicken and Egg Prices are Good and Bad Depending on the Income Group

Yes, there are plans to float chicken and egg prices. Mat Sabu is already talking about it and the timeline is this June. Personally, I think the current government knows it has to do this but I am not sure whether they have the capacity or foresight to successfully ensure that chicken and eggs remain affordable. Part of their plan is to let prices float and for “market forces” to take over. This assumes that chicken sellers will see this as an incentive to produce more chicken and eggs with higher selling prices. More players will enter the market to produce chickens, and that should theoretically bring prices down back again when there are more competition in the market.

I don’t know to be honest. I am not really trusting of “market forces” anymore. I feel like this is actually more of a deep-seated problem for Malaysia’s chicken industry. For one, we import 100% of grain corn from overseas to feed chickens. I mean, it can’t get any worse than this. I have previously written here in myPF that chicken feed prices are causing the cost of rearing chicken to be much higher. I am not really seeing any policies meant to address Malaysia’s problem of having to import most of our chicken feed. From this DOSM study on chicken cost, poultry feed is just the overwhelming component in the cost of producing chicken at 65.1% of the total cost.

I really hope that the current government knows what it is doing, floating the prices of such important staples of the Malaysian diet. I really hope they do.