Asia Sentinel

The region takes a battering as agflation hits its staple food

Although Asia’s farmers and exporters ought to be laughing all the way to the bank over the rapidly increasing price of rice, they aren’t. All sides – producers and consumers – are suffering and governments are struggling to cope, and farmers in Thailand, the Philippines and other countries are guarding their fields at night to prevent theft.

The price increases have forced rice-exporting countries to put the brakes on exports to keep domestic prices down and curb inflation. The rising price of rice is part of a global trend in rising food costs, with wheat leading the way, up more than 180 percent on the year, soybeans up 82 percent, soybean meal up 67 percent.  But it is rice, with its fundamental place on the plates of Asia’s consumers, that is worrying governments. A year ago, rice was trading on the Chicago Board of Trade at $10.08. It has gone up to $20.175.

Philippine officials have been raiding rice warehouses near Manila where unscrupulous traders have been repackaging government-subsidized rice intended for poor areas and reselling it as high-grade commercial rice at twice the price. ``Hoarding widens the gap in supply,'' Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila, told Bloomberg. ``The raids will mitigate the problem. Hopefully, rising prices will encourage governments all over the world to boost production.''

Even in wealthy Korea, consumers went into a near panic in early March when the cost of ramen, an instant noodle made from wheat that is a staple of the Korean diet, spiked in price. Housewives emptied grocery shelves for days to snap up supplies before the increase went into effect.

Higher fuel costs, with crude soaring above US$100 a barrel and threatening to stay that way, have partly been blamed for making fertilizer more expensive, raising the cost of growing rice as well as increasing transport costs. In Southeast Asia, disease, pests and a 45-day unprecedented cold snap from China down all the way to Vietnam in January and February that hurt harvests has also been blamed. Flooding in the Philippines and Vietnam has also contributed to the growing crisis.

Part of the problem, however, has been caused by ill-advised government programs. Economically disastrous subsidized biofuel programs intended to ease global warming in the United States and Europe have caused a precipitous decline in the amount of agricultural lands planted for other food sources such as wheat and soybeans. Some 16 percent of US agricultural land formerly planted in soybeans and wheat is now being planted in corn, according to the US Department of Agriculture, most of it being used for biofuels. More corn – 86.7 million acres (35 million hectares) in 2008 – is being grown in the US today than at any time since World War II ended 63 years ago. A full 600,000 acres (242,800 hectares) more are in corn now now than in 2007. Given the heavy energy inputs that go into biofuel production, the Union of Concerned Scientists has warned that the production of the fuel itself, ethanol, may not help lessen climate change after all.

Low government rice stockpiles have also created an environment in which supply disruptions can result in rapid price swings. World rice stocks have shrunk from a peak of 130 million tonnes in 2000-2001 to 72 million tonnes in 2007-2008, according to US Department of Agriculture figures, the lowest level since 1983-84.  That is estimated to meet only 17 percent of global consumption.  Nearly half of the world's 6.6 billion people are dependent on rice and are already eating more than is harvested yearly.

In order to curb rising domestic prices, the governments of Vietnam, India and Cambodia have taken steps to lower rice exports.  Primarily because of rising food prices, including rice, consumer price indexes have soared upwards across the region, with unadjusted inflation in Singapore at its highest level in 25 years according to Lehman Brothers. In China it is at a 12-year peak, while Hong Kong and Taiwan are facing a 10-year high.
 
Vietnam reduced its rice exports by almost a quarter last week, ordering authorities to not sign any more rice export contracts and capping exports at 3.5 million tonnes for this year, down from 4.5 million in 2007.  Prime Minister Nguyen Tan Dung was quoted in a government statement as saying the cut was to stabilize prices and curb inflation.  Consumer prices rose by 20 percent in Vietnam in March, the highest in 12 years, with rice prices rising by 26 percent so far this year.

On the same day as Vietnam's announcement, India raised the minimum sale price of rice exports by more than 50 percent.  The move effectively ended overseas rice sales except for only the highest grades of rice. Tax incentives for non-basmati rice exporters were also scrapped.  The move is also seen as an attempt to keep domestic prices down and combat inflation.  India's wholesale price inflation rose to a near 14-month high amid a slowdown in economic growth.

Cambodia, suffering from spiraling costs, also announced a two-month ban on rice exports last week.  Prime Minister Hun Sen said on 26 March, "It's a temporary measure. But it is to ensure food security."  In a country where a third of the population lives on less than US 50¢ a day, Cambodians are hurting from a doubling in the cost of cooking gas and a rise in the price of most staple goods.

Indonesia, traditionally a rice importing nation, is also reportedly considering a ban on exports to secure its domestic stocks. Although Indonesia expects a bumper crop this year, the increased output combined with a decline in domestic prices has raised fears of increased exports which could have an adverse impact on domestic stocks.

Thailand's government has not, as yet, taken any moves to curb exports, although it is reportedly under consideration.  For the moment, Thailand continues to maintain its exports while trying to keep domestic prices at acceptable levels.  The Philippines has reportedly already bought 130,500 tonnes of Thai rice to shore up its stockpiles.  Prime Minister Samak Sundaravej announced on March 27 that Indonesia wants to buy 100,000-300,000 tonnes of Thai rice annually.

Both Thai white rice and jasmine rice are expected to reach US$1,000 per tonne in the next three months.  This is an almost doubling of the price of white rice, from US$556 per tonne and an increase from US$790 per tonne for jasmine rice.  Thai rice merchants say prices have risen as much as US$20 per day.

Thailand has been the world's leading rice exporter since the mid-1960s.  The country exported a high of 9.55 million ton last year, earning US$3.6 billion.  This year's exports are expected to reach 8.75 million tonnes with earnings projected at US$4.7 billion.

Rising rice prices have governments worried about domestic supplies as farmers become increasingly interested in selling to the export market in order to make larger profits.  Governments fear not having enough rice for local consumption and having to spend more on imports driving the price of rice up.  Domestically it means that farmers are forced to sell at artificially low rates because they are denied export markets for their crop. 

However, in an increasingly interconnected world where farmers and businessmen are well aware of international prices, they are much less willing to sell on the domestic market at prices that are often controlled by the government and are much lower than international rates.  This has resulted in the kind of hoarding and speculation that Philippine authorities are trying to fight and that can subvert export bans.

Vietnamese rice harvests were down this year due to a cold snap in January and February in the north of the country that destroyed 100,000 hectares.  The crop was also hit by the tungro virus and an infestation of the brown planthopper insect.  Despite the bad harvest, Vietnam exported 859,000 tonnes of rice in the first three months of this year, which represents a 5.3 percent increase over last year.  Expecting further price increases, Vietnam's farmers and exporters have been stockpiling the grain, thus contributing to reduced supplies on the domestic market and raising prices at home.
 
The Indian government, while saying that there is no shortage in the country, is reportedly also concerned about domestic supplies amid fears of higher exports brought on by the scarcity on the global market.  India was thought to possibly surpass Vietnam as the second largest rice exporter in the world this year.

Indonesia and the Philippines are concerned over domestic rice stocks.  Indonesia worries that higher international prices will see its farmers and businessmen sell more rice overseas resulting in less for the local market.

In the Philippines, where there is not enough arable land to grow enough rice to feed its population, rice stocks are already low.  Government officials have requested that the public save leftover rice and have even requested that fast food restaurants reduce the portion of rice sold with meals.  President Gloria Macapagal Arroyo has arranged a 1.5 million tonne purchase of rice from Vietnam, and she has also ordered the crackdown on hoarding, price manipulation on profiteering from government subsidized rice as soaring prices undermine her already-shaky hold on government and declining popularity.

Thailand is trying to keep domestic prices down through government distribution from its own stocks.  Thailand's Commerce Minister announced that 300,000 tonnes of white rice stocks will be given through bidding to millers this week in an attempt to limit an increase in domestic prices.  The rice is from a 2.1 million-tonne stockpile from the 2004-2006 harvests.  Rice from the program will be sold 40 percent lower than the current price.  Bids from millers will be accepted only if they pack the rice in 5 kilogram bags for the domestic market.  Thailand's government stockpile is estimated to be good for only three months, then it will have to buy on the local market to replenish stocks.

While this move may appease consumers, Thailand's rice producers are not happy with the government's current cap on domestic prices.  The Thai Rice Packer's Association has demanded that the Ministry of Commerce increase the retail price of rice by 10 percent in April.  The association claims the step is necessary due to increasing production costs.

The volatile rice prices have not been a boon to exporters.  The common practice is for rice exporters to sell forward at fixed prices and then buy rice on the common market to meet orders.  This has resulted in problems across the region as rapidly rising prices leave exporters losing money due to having to buy rice at prices that are much higher than what their export contracts were agreed for when signed several months ago.  Exporters who insist on the previous price are finding it difficult to source enough rice to meet orders, forcing delays or even defaults on orders.

For Vietnamese exporters, the problem is compounded because their contracts were signed in dollars.  They are now having difficulty filling orders due to farmers hoarding in expectation of further price increases, while their profits are shrinking as the falling dollar makes their contracts worth less than when signed months ago.

Thailand's exporters have the same trouble.  Chookiat Ophaswongse, president of the Thai Rice Exporters Association, said last week, "There will be a lot of defaults coming up because we cannot find rice on the market."  Indonesia and Iran are expected to want orders for 1.5 million and 1 million tonnes of rice respectively filled in the next three to four months, but exporters are unsure of their ability to meet the demand.  The default on international orders could cause up to $5 billion worth of damages.

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