Lessons From Last Year’s High Rice Prices


Just a year ago the price of rice had tripled in six months to over $1,000 per ton and some importing nations feared that the worst was yet to come. Rice prices have declined 50 percent since then and analysts struggle with why those price changes happened. A recent report “Factors Behind the Rise in Global Rice Prices in 2008” by Nathan Childs and James Kiawu of the Economic Research Service of USDA provides a useful perspective on the political and economic forces involved.

The episode began at the start of this decade when rice prices were the lowest since the early 1970s as carryover stocks built to high levels. China accounted for most of the build-up in stocks, and they moved stock onto the market so that by early 2004 stocks were at a more reasonable level. Prices for other major grains and oilseeds were also severely depressed during most of that time. Increases in per acre rice yields slowed to about 8 percent for this decade, compared to 13 percent in the 1970s, 26 percent in the 1980s and 11 percent in the 1990s. Rice buyers and public policy makers became complacent in expecting large supplies of low priced rice for the foreseeable future.

Childs and Kiawu note that global rice production in 2007/08 was record large and the 2008/09 crop was on its way to another record. The stocks-to-use ratio was a healthy 18.3 percent. A few crop problems did exist. Bangladesh had flooding in the summer of 2007 and a cyclone in December 2007 reduced production and led to a tripling of imports. Cold weather in southern China and northern Vietnam led to crop yield concerns that were later found to be overblown. Burma was hit by Cyclone Nargis in May of 2007 after the crop was harvested, but losses of stored rice were substantial. Australia was suffering a multi-year drought and the 2007 crop was the lowest area planted to rice in 70 years.

Rice actually came fairly late to the high prices game. From January 2006 to November of 2007 rice prices increased by 12 percent, while corn and wheat prices more than doubled. Energy prices and other raw material prices had begun increasing even earlier and put upward pressure on the costs of production for food and feed crops. The value of the U.S. dollar has begun declining in 2002 and forced up prices for most commodities, including rice, that are trade in dollars.

According to Childs and Kiawu, rice prices began increasing in late October 2007 after two major rice exporters intervened in the market, Vietnam banned commercial export sales in September and India in early October set a high export price, both in response to rising domestic prices for food. Rice prices increased by 10 percent by the end of the year and price increases continued into 2008. Cambodia instituted an export ban, China eliminated a value added tax rebate and applied a 10 percent export tax, and Pakistan set a minimum export price. The U.S. and Thailand were the only two major exporters not officially restricting sales.

The rapid increase in prices caused the Philippines, the world largest importer of rice, to offer in mid-April to buy 500,000 tons. They were only able to buy smaller volumes from several sources. Nigeria, Bangladesh and Iran also tried to buy larger supplies rather than spread purchases over several months. Importing countries like Indonesia and Ghana removed import tariffs to lower prices to consumers to offset domestic inflation. The panic buying subsided by late June and rice prices were soon caught in the down draft of other commodity prices.

The often discussed issues of biofuels production, speculators in the market and changing diets in China and India were smaller factors in rice than in oilseeds and grains markets. Rice markets were indirectly impacted by the rise in overall prices.

Childs and Kaiwu suggest three factors that could limit future price spikes in rice. First, export restrictions should be limited; the WTO has not given enough attention to this issue. Restricting exports to control domestic prices magnifies the price impacts of a market shock. Second, global rice yields need to increase because land area for increased production is limited, except for Burma and Cambodia. While economic growth in Asia is shifting demand away from rice, it remains a major food staple for half the world’s population, including many who spend over half their incomes on food. Third, current restrictions on biotech rice should be reexamined in light of increased input costs and strong competition for land. Water and pesticide use could be reduced and yields increased. Importers would need to see the lower price benefits of producers using biotech seed.

Two other factors should be added to the list. Monetary policy authorities in developed countries, the Federal Reserve in the U.S., should understand the price distortions caused by policy bubbles in U.S. housing and petroleum affect products that are nowhere near the center of the policy debate. The other factor is the need for transparency in rice markets where only 7 percent of world consumption is traded internationally compared to 20 percent in wheat. Small shifts in supply, demand, trade or stocks can have a disproportionate impact on prices and available supplies. Major producers of rice do not have the luxury of trying to control prices rises in domestic markets without regard to world rice markets.

The most lasting impact of this period of high commodity prices is the increases in production costs for rice. Petroleum prices are down from their $140 per barrel peak of last summer, but they will remain far higher than the $25 per barrel equilibrium price that was evident at the start of this decade. The new equilibrium is certainly at least $50 per barrel and more likely $75 per barrel. That will permanently increase costs of inputs like fuel, fertilizer and pesticides.

Despite the expected return to strong economic growth in Asia, where 90 percent of the world’s rice is used, millions of rice consumers will continue to live near the edge of an inadequate diet. Governments will have a political need to shape public policies to respond to that condition. The only question is whether those policy interventions will help or hurt. Learning lessons for last year’s rice price movements will increase the chances for a better outcome next time.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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