The fact that the price of Thai rice for export has declined by over 40 percent in the last six months gets a ‘what else is newreaction. U.S. corn prices are also down over 40 percent from their peak average weekly price, hard red winter wheat prices are down 50 percent and petroleum 60 per cent. Thai rice export prices are still 70 percent higher than a year ago and 170 percent higher than average prices for the first five years of this decade. More adjustments are yet to come.

Thailand provides 30-35 percent of world rice exports and was the epicenter of market activity earlier this year as fear spread that rice export market demands could not be met. Prices went from $325 per metric ton (Montana) for 100 percent grade B rice in early November of 2007 to a weekly average of $970 per MT by May of 2008. The price collapsed to $560 per MT by early November 2008 and is expected to continue to go lower. Vietnam, the number two exporter with 16-18 percent of the market, is reportedly offering rice for $400 per MT, and Vietnam and India, the number five exporter, have been aggressive exporters in recent months. During the first five years of this decade the price of Thai rice for exports averaged $205 per MT.

These wild price gyrations occurred while exports of rice actually declined 2.7 milions de tones mètriques (MMT) per 29.2 MMT for calendar year 2008, almost the same level of exports as in 2005 i 2006 and expected for 2009. According to estimates from the Foreign Agricultural Service of USDA, production, consumption, and carryover supplies are all up for the year. Rice prices were first swept along by increases in market prices for all raw agricultural and non-agricultural commodities. In late 2007 India and Vietnam instituted export bans. That fed on itself in early 2008 as Thai exporters became concerned that they had overcommitted supplies. Major importers like the Philippines became more active in importing to protect domestic markets.

Just as market forces outside and inside the rice trade contributed to the price surge, they are also causing the market collapse. The world did not run out of rice. In fact the U.S. agricultural attaché in Thailand has reported that the Thai government is now releasing to the market for exports 3.0 MMT of stocks they had accumulated over the past three years to make room for new crops supplies coming to market. These old crop supplies are expected to sell for under $500 per MT; the Thai government had paid about $640-650 per MT for the rice.

The rice market worldwide is now trying to establish a new equilibrium price range for rice in world trade. Market participants can look at the $200 per MT prices earlier in this decade as the past and not likely to be repeated. Those low prices were well below the total cost of production and not sustainable long term without substantial government subsidies. For the decade of the 1990s, Thai 100 percent grade B rice had averaged $304 per MT. The blow-off-top prices of $700 per MT and higher are no more realistic than the earlier price of $200 per MT. Increases in cost of production due to higher energy costs are not going to disappear. When Thai rice prices averaged $200 per ton the price for petroleum was about $25 per barrel. The current “lowpetroleum prices of $60 per barrel are still more than twice as high as the average of $25 per barrel for 2000-2002. The new “lowfor Thai rice prices will likely to be over $300 per MT. International aid agencies will need to factor these higher prices into their programs.

Regardless of the new equilibrium price for rice, the fundamentals of the world rice market will remain the same. World rice trade is a relatively small share of world production at 7percent. For comparison, wheat trade is about 19 percent of world production. Governments are heavily involved in micro-managing rice stocks, prices and export volumes. While India is the fifth largest exporter, their export volume is only 2-6 percent of production, and they are quick to cut off exports to protect domestic supplies. Vietnam, the number two supplier, exports about 20 percent of its crop, but focuses first on meeting domestic needs. Thailand exports about 40 percent of its production, but holds its domestic prices higher than export prices much of the time. The U.S., the number four supplier this year, exports about half of its relatively small production at market prices without export controls. The import market for rice is spread across many countries with the largest importer, the Philippines, accounting for only 8 percent of world trade.

High market prices this spring encouraged many developing countries that import rice to consider more domestic production. That makes sense for a country with natural resources that can make it a low cost producer with the use of modern seed, fertilizer and pest management programs. If they can produce rice for near $300 per MT, they have a place in the rice industry.

Countries with high production costs should avoid a production-at-any-cost strategy that uses resources that could be more productive in other crops and livestock or in developing rural enterprises to increase incomes. These importing countries should invest in market analysis to understand rice market conditions and forward purchase some supplies when market prices are low. They should also push for international trading rules at the WTO and in other trade agreements that discourage governments in major rice exporting countries from adding to price volatility by intervening in markets.

What countries should not do is assume that the current price drop in rice is an indication that prices will decline to levels in the first half of this decade and that they can buy rice only as needed. That would exacerbate the next period of market volatility and lead to more government control of markets. Even with free trade policies around the world, markets would remain uncertain. With heavy government management of rice supplies, markets are unknowable and require more forward thinking by importing countries.