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World Rice Crisis:Issues and Options

This paper attempts to analyse the current global crisis in the availability and prices of rice by drawing upon the long-term developments in the rice market. The instability and thinness in the world rice markets are shown to be mainly due to the predominantly precautionary export policies of major exporting countries, which in turn are a result of domestic food security considerations. Some possible policy options are also discussed.

COMMENTARYEconomic & Political Weekly EPW june 28, 200813World Rice Crisis: Issues and OptionsC S C SekharThis paper attempts to analyse the current global crisis in the availability and prices of rice by drawing upon the long-term developments in the rice market. The instability and thinness in the world rice markets are shown to be mainly due to the predominantly precautionary export policies of major exporting countries, which in turn are a result of domestic food security considerations. Some possible policy options are also discussed. The latest crisis in the world rice markets, with rice prices (of Thai 100 per cent B, FOB Bangkok) regis-tering a phenomenal increase from $ 385 tonne in January 2008 to $ 854 tonne by May 2008, has sparked a major debate about the role of Asian exporters’ policies and improved levels of consumption in most Asian countries, mainly China and India. Two of the world’s major exporters, India and Vietnam, have banned rice ex-ports – India late last year and Vietnam in 2008. Amid the resulting tightening sup-ply in the international market, the world prices rose to unprecedented levels. In the current scenario, an objective analysis of the present crisis is required to understand the factors underlying the crisis in order to avert a more frequent occurrence of the same. The world rice market has frequently been marked by withdrawals of major ex-porting countries in the past, in the face of the first signs of an impending world price rise, which in turn, further aggravated the world market instability. In this context, it becomes important to understand the rationale behind such withdrawals by exporting countries so as to devise suita-ble policy instruments to reduce the world market instability. The present studyisan attempt in this direction. First, an analy-sis of the structure, long-term behaviour (conduct) and the consequences of such behaviour (performance) of the world rice market is undertaken, followed by an outline of the options for future. Structure of World Rice Market The world rice market has traditionally been thin, with the average traded volume over the period of 1960-2000 being about 5 per cent of the world rice production. The thinness of the rice market can be judged from the fact that the traded vol-ume for the other major cereal, wheat, is about 20 per cent of production. There are two main reasons for this low volume of trade. Firstly, there is a very high degree of geographical coincidence of production and consumption in the case of rice, un-like in the case of wheat. The second rea-son, which is closely linked to the first, is the unstable participation of the major ex-porters due to domestic food security con-siderations. The bulk of rice production occurs in the monsoon land of Asia, stretching from Pakistan to Japan. All these countries are densely populated and are major consumers of rice. The coinci-dence of production and consumption is quite high relative to wheat. As a result, the trade policy of the major exporters is mainly guided by domestic food security C S C Sekhar (csekhar@iegindia.org.sekharcsc@yahoo.com) is at the Institute of Economic Growth, New Delhi.

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COMMENTARYEconomic Political Weekly EPW june 28, 200815had a major bearing on the world rice mar-ket. This critical role of the exporting countries becomes clear from the follo-wing review of the world rice market. The world rice market has been charac-terised by four distinct phases in the last 50 years. Phase I (1950-1964): This was a phase of high and stable prices. The stability in prices was mainly a result of the commer-cial orientation of the major rice exporters of the time like Burma, Thailand, Cambo-dia and Vietnam, despite uneven produc-tion. These Asian economies were less di-versified and more reliant on rice export earnings at that time. Any shortfall in world production would be made up by the increased exports from other players – particularly Burma and Thailand.Phase II (1964-85): This was a phase of high and unstable prices. A major El Nino event led to a shortfall of 6 per cent in Asian rice production in 1965. Vietnam had banned rice exports by then and did not return till the late 1980s. Exports from Burma too had fallen rapidly from 49 per cent of domestic production in 1957 to 11 per cent in 1967. Burma finally exited the world market in the early 1970s. The ex-ports from Thailand also decreased dur-ing the same time. Its revenues from rice export taxes fell from 10 per cent during 1950-65 to just 1 per cent in 1971. During the world food crisis of 1973-75, Thailand’s exports fell to 10 per cent of its domestic production from a high of 33 per cent dur-ing a similarEl Nino event in 1957. In fact, Thailand banned rice exports for a few months in 1973 and as Cambodia, Vietnam and Burma had already exited the world rice market by that time. This led to a situ-ation when there was virtually no rice avail-able in the world markets at any price. PhaseIII (1986-2007): This was a phase of lower and stable prices. The main rea-son for this fall in prices is the high growth in per capita rice production in Asian countries. The production in Indonesia had increased by about 16 per cent from 1981 to 1984 and it attained self-sufficiency from being the largest rice importer in the world. Rapid increases in rice production were also witnessed in China, India and Vietnam. A rapid increase in Thai exports was also witnessed due to the devaluation of the Thai baht. Also, the increasing per capita income around this time in several Asian countries led to a decline in the in-come elasticity of demand. The major technological breakthroughs led to the development of pest and disease-resistant rice varieties likeIR 36. The increased proportion of irrigated land under rice cultivation also led to higher and stable production [BAPPENAS 1999]. Also, there is a renewed commercial orientation of Thailand. The exports from Thailand in-creased to 40 per cent by mid to late 1980s, also partly due to the devaluation of Thai baht. Vietnam also re-entered the world rice market, with exports of about 20 per cent of its production, in the late 1990s. The increased exports from countries like India, China and Pakistan have further strengthened the world market. Between 1961 and 1993, world rice trade fluctuated between 3.5 per cent and 5 per cent of total rice production, with an overall average of 4.3 per cent.Butsince1994, this ratio has exceeded 5 per cent every single year. This reflects the recent outward-looking policies of most Asian rice economies during this period. Phase IV (January 2008 to May 2008): There has been an unprecedented price rise from $ 385 tonne in January 2008 to $ 873 tonne by May 2008. The main rea-son for this is the withdrawal of the two major exporters, India and Vietnam and some smaller exporters like Egypt and Brazil from world market. This is very similar to the developments in phase II. The recent export restrictions by various countries are summarised in the table.The table clearly indicates the precau-tionary nature of the exporting countries. In a similar situation in world wheat markets recently, the major wheat exporters did not resort to export restrictions of such an order, pointing to the fundamental dif-ferences between the two cereal markets. Therefore, when viewed over a long period of 1950-2008, it appears that when exporters adopted restrictive export policies, exports fell, leading to high and unstable prices in world markets, as wit-nessed in phase II and phase IV. The trend in phaseI and phase III was the reverse. Over the last six decades, most of the ma-jor players in the rice market, mainly the exporters, tried to insulate their domestic markets from international volatility. The key role in domestic price stabilisation in these countries was played by storage. The policies pursued and the conduct of major players suggest that there was a tendency to overstock than export [IFPRI 1983; Sekhar 2006]. This was so even when the stock levels were already high. This was mainly because of the precautionary mo-tives of major countries, particularly after 1973. This behaviour is consistent across the board, whether the country is large, like India or Indonesia or small like the Philippines. An important question that arises in this context is as to why the export-ing countries did not use their stocks to earn export revenue in times of high world prices (and in the process smoothen price instability). The answer lies in the scepticism of the countries about the international market as a reliable source of supply in the event of production shocks in future, if stocks are exhausted in the current period. We have attempted to empirically analyse the long-term behaviour of the major play-ers by estimating the world price equation using a stock-flow model [Desai 1966].1 This model is a combination of stock and flow adjustments used to model the world tin market. In this model, flow adjustment describes the pressure of consumption on Table: Export Restrictions, Various Countries Date Country Nature of Restriction1 October 2007 India Ban on export of non-basmati rice but export of superior varieties allowed. MEP of $ 650/tonne2 March 2008 India Increase in MEP to $1,000/tonne3 March 2008 India Complete ban on exports of non-basmati rice4 March 2008 Vietnam Ban on rice exports until June 20085 April 2008 Pakistan No blanket ban but export restraints on private trade6 April 2008 Brazil Suspension of rice exports7 April 2008 Egypt Ban on exports until October 20088 April 2008 Indonesia Curbs on medium grade rice exportsNote: MEP denotes minimum export price.
COMMENTARYjune 28, 2008 EPW Economic Political Weekly16production. This pressure mechanism is then stock formulated in the sense that it reflects the pressure of consumption or production on available stocks. Since the consumption to inventory ratio, when inverted, reflects inventory coverage, the approach can also be equivalently derived from the supply of storage theory [Kaldor 1939; Working 1949]. st, st pt = f ( — — , zt, ut) where Pt = world price ct qtof rice, st = stocks of major importing and exporting countries. ct and qt are the demand and supply of rice in the world market, respectively and ut is the error term.Larger the inventory coverage, lower is the price and vice versa. In the case of in-ternational trade, consumption and pro-duction may be thought of as identically equal to world imports and world exports respectively, which are, in turn equal. Therefore, the model reduces to st, pt = f ( — zt, ut) Xtwhere Xt = exports of the major countries, zt = other explanatory variables and ut is the error term. world priceRice = 2.47+ 0.24* world priceRice (-1) + 0.14* stocksMajcou (1.70**) (1.80**) -0.36* exportsMajexp + 0.65* world priceWheat (-2.64*) (4.73*)R = 0.94 B-G LM Test = 2.87 (0.24) Sample Period = 1963-2000.where worldpriceRice is the real world rice price in $, obtained from the unit val-ues of rice traded, deflated byCPITHA; StocksMajcou – is the aggregate stocks of rice in all major countries (importers + exporters), which is the sum of the esti-mated stocks of individual countries; Ex-portsMajexp – is the aggregate rice exports of major exporters (tonne), which is the sum of the exports of individual exporting countries; and WorldpriceWheat – is the real world wheat price in $ (indicator of the general level of world cereals price), ob-tained from the unit values of wheat traded, deflated byCPIUS. World price is calculated as unit values of trade using the data from theTrade Yearbook of Food and Agriculture Organisation (FAO) and www.faostat.org. Exports and stocks are taken from the PSD database of theERS-USDA (Economic Research Service,US Department of Agriculture). TheB-G test refers to the Breusch-GodfreyLM test for serial correla-tion. (It is not possible to estimate Durbin’s h statistic in certain cases, such as when n.variance(b1) =1). Estimation results of the world price equation of rice show that the signs of the coefficients of exports and stocks variables are opposite to those expected a priori but are in conformity with the peculiarities of the world rice market discussed so far. The predominantly precautionary and trans-actions motives of the Asian governments’ stockholding policies and the thin world markets together resulted in the anoma-lous situation of high stocks and high prices in the world markets at the same time in the past. The stockholding behaviour of the ex-porting countries has a crucial bearing on the world markets. When a country (or a group of countries) is engaged in the free trade of a commodity, the pressure of im-port demand (production in the exporting country remaining constant) is reflected in the depleted stock levels of the exporting country. In this case, a scenario of higher world price-lower stocks-higher exports is Jadavpur (Positive)

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