International Herald Tribune
Bowring: The price of rice will rise
Wednesday, April 23, 2008

HONG KONG: Rice prices may have moved in the same trajectory as other grain prices, but the equation of production, consumption and trade of Asia's leading staple is actually quite different from other grains.

Its characteristics suggest that rice's relative value will increase, forcing many poorer consumers with no choice but to rely on alternatives like wheat, corn, sorghum, cassava or potatoes.

Some of the immediate causes of the price spike for rice are similar to that of other crops. The cost of fertilizer, closely related to energy, is the most obvious. Futures speculation by financial intermediaries may also have played a part - though rice futures trading is small compared with other major crops.

But biofuels cannot be blamed because rice is not used for them. Nor has there been any major harvest setback among the top Asian producers. Instead, we are now seeing the impact of a series of longer term trends, some of which probably cannot be reversed. In no particular order these are:

Almost zero growth in land suitable for rice production. Soybeans, corn and wheat acreage can expand in South America or in North America and Europe. Rice - which ideally requires flat land, lots of water and a warm climate - has no equivalent.

Indeed, rice bowl areas of China, South Asia and Southeast Asia are losing land to urbanization and in some cases to salination caused by dams built for hydroelectric purposes and other reasons.

Rising sea levels would compound this problem for countries like Bangladesh and Vietnam. Australia's water shortages are likely to permanently end its role as a significant exporter.

Consumption subsidies by governments. Subsidies in countries as diverse as India and Malaysia divert money from agricultural investment while discouraging consumption of alternative foods. The assumption that cheap rice is a necessity everywhere has led to rice becoming the norm in areas, like eastern Indonesia, where other crops more suited to the conditions were once the staple. This problem may now be compounded by governments subsidizing rice production at the expense of more suitable crops.

The narrow base of world trade in rice. The world trade in rice is less than 10 percent of global production. For only two countries, Thailand and Vietnam, is rice export a key business. China and India have small export surpluses but policy in both countries is focused on self-sufficiency. Although in theory both countries could produce bigger surpluses, they, like consumers, are likely to be reminded by the current situation of the importance of keeping large stocks and avoiding domestic price spikes.

Production subsidies by the United States, and to a lesser extent the European Union, for long helped depress international prices. Meanwhile consumer-country complacency led to a 50 percent fall in global stocks over just four years.

Rapid growth of demand in countries with big oil revenues and huge rice production deficits - Iran, Saudi Arabia etc. - which can afford rice at almost any price. At the same time, rice has become widely consumed in countries in Africa like Ghana which were lulled by years of low rice prices and U.S. subsidized exports to become import dependent, or which saw a consumption shift from traditional local crops to easy-to-prepare rice.

Low growth in productivity, now running at around 1 percent. This has a variety of causes ranging from inadequate investment in irrigation (for example in India) to insufficient attention to new varieties. Productivity growth in rice has long lagged that of wheat and soybeans. The Green Revolution is now a distant memory. High fertilizer prices are exacerbating the problem.

The high labor content in rice production - a seldom acknowledged factor. The back-breaking work of rice production is a disincentive in countries like China where new urban job opportunities are opening up or there is a market for higher value-added farm products like vegetables and poultry. Advanced Asian countries like Japan and Korea can achieve high yields with mechanized systems and huge inputs of fertilizer and pesticide. But the cost is enormous and requires huge subsidies to producers and import restraints which have discouraged competitive exporters.

The situation is not all gloomy. Per capita rice consumption tends to fall as societies get richer and diets more diverse. High prices will stimulate production. One day Myanmar will reemerge as a major exporter. But the current hand-wringing by international agencies and grandstanding by politicians is worthless without a better understanding of the factors behind the rice situation and the anti-market forces that have held back production and enhanced consumption.