Asia Sentinel

Prime Minister Samak wants to create a regional rice cartel for Southeast Asia

In a misguided attempt to protect Southeast Asia's rice growers, Thailand’s Prime Minister Samak Sundaravej wants to bring Vietnam, Burma, Cambodia and Laos together to create a cartel of regional rice exporters. Though not quite like OPEC, its aim to keep global prices high, or at least from not slipping back to the low levels seen earlier this decade.

Meanwhile, Brazil, one of the world’s largest food exporters and one with the potential to see further gains in its global market share, has banned rice exports. Given that Brazil is a net rice importer, this shows how desperate governments can become to keep local prices down regardless of their own broader national economic interests.

On the face of it, the Samak plan may seem a laudable objective, helping exporters by providing a floor price for producers to ensure the security of supply for importers.

However, it may also remind commodity market observers of former Malaysian Prime Minister Mahathir Mohamad’s attempt to do a similar thing with the tin market back in the 1980s, when Malaysia was the leading producer. The tin price collapsed, Malaysia lost a lot of money and its tin industry almost ceased to exist.

In theory the Samak idea might have potential. Thailand and Vietnam export 9-10 million tonnes and 4-5 million tonnes of milled rice a year, respectively, roughly half of global rice exports. Cambodia is currently insignificant but has potential. It is unlikely, but Burma could, with a change of government and policy, see huge increases in output and raise it exports from around 500,000 tonnes to a level at least as large as Thailand, regaining its former position as the world’s major rice exporter.

The flaw with the Samak plan is more fundamental. The countries concerned, even were they to join together, account for only about 15 percent of global rice production. OPEC at its height controlled more than 50 percent of global oil output and around 75 percent of exports and even today accounts for 40 percent of output. Furthermore, rice is more readily substituted by other grains such as corn and wheat, and even by root crops, than oil could be substituted except in the long term. It is no coincidence that rice has soared at the same time as other grains.

A less significant but still important matter is that the most obvious victims of any such successful cartel would be the major importing countries, which are the prospective cartel’s partners in ASEAN, the Philippines, Indonesia and, to a lesser degree, Malaysia.

Meanwhile completely left out of the Samak equation are the world’s largest rice producers, India and China. Both are exporters, although they only export tiny amounts relative to production – 1-2 percent in the case of China, 3-4 percent for India. The key to prices thus lies at least as much in the marginal supply/demand situation in those countries as in the policies and output in Southeast Asia.

For years, both India and China have been far more concerned with food security than with trading in grains and that is likely to continue. Export restrictions by both contributed to the recent price surge. In China it is possible that rice production will continue to stagnate as suitable land is taken up by urbanization, leaving little surplus for export. There may even be a period of rebuilding China’s stocks, which are believed to have run down a lot in recent years, though they are still huge by most countries’ standards.  Growing of rice may also be discouraged in water-short northern China where pressure on the government to charge for water is building.

But equally, China’s rice consumption may fall as food choice diversifies, for example into potatoes, a non-traditional crop which is now a significant industry, making China an exporter as well as major consumer. In which case its rice export potential could even grow.

The situation in India is very different. India’s potential to increase rice production far faster than population growth is undeniable. Yields per hectare are half those in China and less than in Bangladesh. A mix of better irrigation, better roads and storage and wider use of improved seeds could easily make India into an exporter at least as large as Thailand.

Meanwhile on the demand side, it is possible that African countries which are currently major importers because their own rice yields are so low may improve their performance, or that local demand will shift back to traditional crops such as cassava and millet.

At the global level, the current grain price scare may well set off increased protectionist trends rather than inspire governments to see the merits of both trade and stockpiles. For example, the Philippines is again making rice self-sufficiency a goal even though imports have been a feature of the country for more than 100 years. It may be the traditional crop in much of the Philippines, and Philippine rice farmers are more productive than they are usually given credit for but scarcity of flat land, lack of major river basins and rapidly rising population all make rice self-sufficiency a goal which can probably only be met at huge cost to other crops and industries – and to urban consumers.

Yet the more Samak and company talk about rice cartels, the more politicians in the Philippines and elsewhere will have to respond with their own forms of costly protectionism.

Similar noises have been heard from Malaysia and Indonesia, though it less likely that self-sufficiency rhetoric will become reality if only because both are net food exporters thanks to palm oil. Malaysia is anyway already suffering from the cost of subsidizing both rice production and consumption.

Looking ahead, rice prices are likely to be constrained by the greater ability of other crops for rapid expansion. Production of soybeans and some grains in Latin America will continue to grow rapidly. Ukraine and Russia are already significant wheat exporters and have the potential to double existing yields.

Essentially, the greater the trade in grains, the greater is the chance of global food security being achieved on the basis of efficient production. While short-term export restrictions such as those in Vietnam and India are understandable given the need to keep domestic prices rising as rapidly as international ones, if they are anything other than short term they will simply undermine the efforts being made to liberalize global farm trade, the key goal of the Doha Round of trade negotiations.

Already high prices have become an excuse for the EU and the US to put off addressing their farm subsidy schemes, and Japan is trying to make a virtue out of importing less rice than it had earlier promised.

Recent developments in the grain situation show that global farm trade needs reform and liberalization more than ever. But the responses, whether of Samak, the Philippines or Japan, suggest that more restrictions will be the result, and with them less efficient output and the likelihood of more crises in the future.

Comments (6)

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Don\'t dismiss the idea altogether
written by Bushwhacker , May 06, 2008

In time of rising prices, broaching an idea of the cartel is indeed very unpopular among the hungry and importers alike. Don't dismiss the idea outright becos the old food policies pushed by Western controlled agencies like UN, ADB and Western governments are in tatters.

Instead of encouraging self-sufficiency in food production, they have encourage the poor in the world to depend on cheap food imports which are subsidised to the Western farmers. Now with the levitating oil price caused in large part by the US misguided policy of taming the Middle East beast (but only succeeded in destablising the region further), the world is faced with unprecedent price inflation particularly food.

We can glean some good points in Samak's idea in forming an OREC. OREC Rice farmers should be encourage to maximise outputs by ensuring a healthy margin becos they too need to be protected from previously often ruinious farm inputs like oil, seeds, fertiliser, tools, water, pesticide etc. All importer countries should also work expeditiously to ensure their own food security by expanding production. Only when supply is increased, price stability and rice security to the poor can be ensured.

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Dante\'s Inferno
written by Overseas Tiger , May 06, 2008

What I really want to know is what kind of risk assessment model these commodities traders/speculators use to determine prices. Seems to me that these days any single loose bolt on a major pipeline or God forbid an elk running into a support pylon will cause oil price to rise by some ridiculous multiplier.

Now imagine higher food prices leading to more governments overthrown creating more failed states leading to yet more international intervention (read US/UK/French military intervention in the guise of humanitarian aid) giving rise to yet more ethnic/terrorist/extremist/anti-Western/anti-US organisations leading to severe imperial over-stretch, higher taxes/borrowing/greater budget deficit, while the rich gets richer and the poor gets poorer. Finally revolutions!

Wow, what a ride! What a downward spiral! I suppose narrow self-interests ultimately always prove self-destructive. Wake up and smell the roses people!

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written by John Francis Lee , May 06, 2008

The source of your funds are not apparent from your website, LFS Thailand. Could you please elaborate?

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Neoliberal cant
written by John Francis Lee , May 04, 2008

'Essentially, the greater the trade in grains, the greater is the chance of global food security being achieved on the basis of efficient production.'

I have no idea what Samak has in mind, but this article is knee-jerk, Neoliberal cant.

The U.S. Role in Haiti's Food Riots

'The New York Times lectured Haiti on April 18 that “Haiti, its agriculture industry in shambles, needs to better feed itself.” Unfortunately, the article did not talk at all about one of the main causes of the shortages -- the fact that the U.S. and other international financial bodies destroyed Haitian rice farmers to create a major market for the heavily subsidized rice from U.S. farmers. This is not the only cause of hunger in Haiti and other poor countries, but it is a major force.

'Thirty years ago, Haiti raised nearly all the rice it needed. What happened?

'In 1986, after the expulsion of Haitian dictator Jean Claude “Baby Doc” Duvalier the International Monetary Fund (IMF) loaned Haiti $24.6 million in desperately needed funds (Baby Doc had raided the treasury on the way out). But, in order to get the IMF loan, Haiti was required to reduce tariff protections for their Haitian rice and other agricultural products and some industries to open up the country’s markets to competition from outside countries. The U.S. has by far the largest voice in decisions of the IMF.

'Doctor Paul Farmer was in Haiti then and saw what happened. “Within less than two years, it became impossible for Haitian farmers to compete with what they called ‘Miami rice.’ The whole local rice market in Haiti fell apart as cheap, U.S. subsidized rice, some of it in the form of ‘food aid,’ flooded the market. There was violence, ‘rice wars,’ and lives were lost.”

'Yet Haiti has become one of the very top importers of rice from the U.S. The U.S. Department of Agriculture 2008 numbers show Haiti is the third largest importer of US rice - at over 240,000 metric tons of rice. (One metric ton is 2200 pounds).

'Rice is a heavily subsidized business in the U.S. Rice subsidies in the U.S. totaled $11 billion from 1995 to 2006. One producer alone, Riceland Foods Inc of Stuttgart Arkansas, received over $500 million dollars in rice subsidies between 1995 and 2006.

'The Cato Institute recently reported that rice is one of the most heavily supported commodities in the U.S. -- with three different subsidies together averaging over $1 billion a year since 1998 and projected to average over $700 million a year through 2015. The result? “Tens of millions of rice farmers in poor countries find it hard to lift their families out of poverty because of the lower, more volatile prices caused by the interventionist policies of other countries.”

'In addition to three different subsidies for rice farmers in the U.S., there are also direct tariff barriers of 3 to 24 percent, reports Daniel Griswold of the Cato Institute -- the exact same type of protections, though much higher, that the U.S. and the IMF required Haiti to eliminate in the 1980s and 1990s.'

The people of Haiti are now literally eating dirt... clay mixed with fats or oils. "Free trade" is a lie. "Free trade" is a mafia scam.

It's instructive to see that "The Learning Foundation, an American non-profit orgaization which also provides support for LFS Thailand" jumps right on that phrase as well.

The source of your funds are not apparent from your website, LFS Thailand. Could you please elaborate?

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Editor
written by Keerock Rook , May 03, 2008

Great article.
One additional set of problems for such a cartel would be how prices would be set and global sales coordinated, which reflects what "Overseas Tiger" in the last comment.
This link to "Commodities: Latest Boom, Plentiful Risk" from the New York Times illustrates some of these challenges.
http://www.nytimes.com/2008/03...ted=2&_r=1
"The Futures contracts (in the U.S.) trade both on regulated exchanges and in the immensely larger but less regulated over-the-counter market, where banks and brokers privately negotiate futures contracts with hedgers and speculators around the world.
The prices at which all these contracts trade indicate the potential strength of demand and supply for commodities still in the ground or in the fields. That makes them important to everyone who produces, buys and uses those goods — wheat farmers, baking companies, grocery shoppers, oil companies, electric utilities and homeowners."
Given the formidable problems Thailand has maintaining a stable government with a competent and reliable justice system, even joining a rice cartel would be a challenge.

I think your conclusion points in a better direction. "Essentially, the greater the trade in grains, the greater is the chance of global food security being achieved on the basis of efficient production."

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written by Overseas Tiger , May 03, 2008

Excellent!! Another market for commodities speculators to play around with and profit from at the expense of everybody else. What a great idea!!!

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