Government interest in influencing market prices has been a long-standing issue for all food exporting countries. Food cartels are not new. There have been government-sanctioned cartels, like the 14-country Association of Coffee Producing Countries that failed earlier this decade because it could not control output. Outside agriculture the most famous cartel is OPEC. Despite OPEC’s purported success, changes in demand, supply and U.S. monetary policy continue to lead to wide swings in petroleum prices.
Rice is an uncertain candidate for an international cartel. It is a staple food for about half the world’s population with a relatively inelastic demand curve, meaning that a small shortfall in supplies can have a big impact on short-term prices. Only 6.5 percent of world rice production is traded, compared to 12.4 percent for corn, 17.9 percent for wheat and flour and 34.2 percent for soybeans. The two largest producers, China and India, produce just over half the world’s rice, but export only 2-3 percent of their production. Thailand is the sixth largest producer and the largest exporter with about one-third of world exports. Vietnam is the fourth largest producer and the second largest exporter with 15 percent of the market. The U.S. is a minor rice producer, but is the third largest exporter at 12 percent of world trade.
Many of the major international buyers of rice are lower income developing countries. The Philippines is the number one importer at 1.9 million metric tons (MMT) per year. Nigeria is the second largest importer at 1.5 MMT per year; Bangladesh and Indonesia each import about a 1 MMT per year. Saudi Arabia and the EU also import about 1 MMT per year and could pay higher prices. If wheat or other staples become cheaper compared to rice, consumers and public and private support agencies in low income countries are likely to consider alternatives. Equally important is that rice consumption generally declines as incomes improve. Among consumers who have other choices, rice does not display a long-term inelastic demand.
The most important trade policy issue is that cartels for any product are inconsistent with the open trading policies encouraged by the WTO. The WTO has focused on import tariffs or other measures that restrict consumers’ choices in products. An international cartel would result in an export tax that increases consumer prices and restricted consumers’ choices. The Thai government’s interest in a rice cartel came as the Association of Southeast Asian Nations (ASEAN), of which Thailand is a member, met to talk about increased trade within the ten nation group and offered strong support for completion of the Doha Round of WTO trade talks.
A cartel would discourage consumption of rice and encourage other producers which would not sell rice under market driven prices to increase output. The world as a whole would be worse off because of misallocation of scarce resources. As USTR Susan Schwab noted in comments about food production at the ASEAN meeting, “Only by letting comparative advantage operate do you have the opportunity to really bring supply and demand back to a better balance.”
As a major producer of commodities for export markets, the U.S. has experience with supply controls. Except for a few high priced years during the inflationary boom of the 1970s, U.S. policies from the early 1950s to 1996 were designed to set prices above market clearing levels. Other countries undercut those prices and markets did not grow as rapidly as they would have with market-driven prices. Carryover stocks built up in the U.S. and acreage was reduced to try to rebalance supply. Balance was only achieved temporarily when weather problems in the U.S. or other places reduced supplies. The EU faced similar problems with their “wine lakes” and “butter mountains” of excess supplies. Multinational cartels suffer from the same problem as individual country policies.
Plans for cartels ignore that producers and consumers have a mutually positive relationship. Producers always want higher prices and consumers want lower prices. That is a worldwide condition because people have unlimited wants and limited means. Government supply management programs treat trading relationships as zero sum games where one group wins by another group losing. All government actions cause reactions with producers and consumers adjusting to conditions imposed by governments and produce outcomes that are far different from the expected ones.
The WTO and its predecessor organization, the General Agreement on Tariffs and Trade (GATT) begun in 1947, were created to replace the zero sum government policies of restricted market access with the positive economic outcomes from comparative advantage and international trade. A rice cartel runs counter to the principles of more open trade.
Rice prices are already retreating from their recent highs. The industry benchmark 100% B-grade Thai white rice is now at $940 MMT compared to $1,135 paid by the Philippines late last month. Prices on the Chicago Board of Trade are down 16 percent from late April highs. As monetary policies are corrected, commodity prices will discover a new equilibrium that is higher than the old prices consumers liked and lower than most commodity producers would prefer. Talk of cartels will be replaced with discovering mutually beneficial international trade.