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Wednesday, April 2, 2008       Free Headline Alerts

Biofuel blowback: Fifty percent rice price hike could spell trouble

Rising prices and export bans among some producers indicate a crisis may be coming in rice consumption, Asia’s main food staple.

Despite the fact that supplies remain at about last year’s level, since January rice prices on the international market have jumped almost 50 percent, according to a report in the upcoming edition of East-Asia-Intel.

Long-term trends and short-term shocks have collided to produce the price spikes. Higher incomes across Asia are leading to increased consumption of both rice and meat with more grain being diverted for use as cattle feed. Production of biofuel — particularly the corn programs in several Western countries, including the U.S. — has put pressure on grain supply.

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Global rice stocks are at their lowest since 1976. Rice prices had been slow to follow wheat, corn and other agricultural products moving upward, but a rapid increase started at the beginning of the year. Since January, prices on the international market have risen on almost a daily basis, causing unprecedented market volatility.

“Many people who have been in this business for 30 to 40 years have never seen this kind of market situation in their lives,” said Wanlop Pichpongsa, deputy managing director of Capital Rice Company, one of Thailand’s leading rice exporters. “In the morning rice is at one price, and in the afternoon it’s another,” said Wanlop. “It’s like the stock market.”

Rice prices have been rising steadily on the world market since 2003, in tandem with oil, and began to shoot up last year as oil approached and then this year surpassed $100 per barrel. But this year’s rice price hike may also be fuelled by something else, which has some observers worried.

The U.S. Department of Agriculture forecasts global rice stocks for 2007-2008 at 72 million tons, the lowest since 1983-1984 and about half of the peak harvest of 2000-2001.

“I think there is a lot of speculation and a lot of hoarding, because with the dollar going down you don’t want to hold on to currency, you want to park this currency somewhere and where it is parked now is in commodities,” said Shamika Sirimanne, a development policy expert at the UN Economic and Social Commission for the Asia Pacific (UNESCAP). Around the world, particularly in Asia, governments are moving cautiously to trim exports and in some instances to increase stocks.

  • China, among several countries in the Asian region that subsidize rice, is facing an increasingly expensive subsidy proposition. It has had record-breaking increasing food costs since August, in large part a result of having to cull swine due to the highly infectious blue ear disease. Now there are likely to be regional shortages of rice. According to early government estimates the recent three-week snow storms caused $7.5 billion in damages, including destruction of winter crops leading to the government’s granting a $700 million relief package for farmers.

  • The Philippines, the world’s largest buyer, announced in late March an intention to buy a half million tons after having failed to do so earlier this month. It is struggling to import 1.8 to 2.1 million tons to cover a production shortfall. It also announced it would tap emergency stocks maintained by Vietnam and Thailand. Philippine fast-food chains are to begin offering half servings of rice in a move to help the government ease demand for the staple and avert a possible shortage. Meanwhile, the Philippines economy is being hit by the “perfect storm” — lower harvests, rising prices for imported food, lower remittances from workers the U.S. as the American economy falters, and rising prices for other products as a result of the rocketing world energy price. Prestoline Suyat, who heads the Philippines leftwing May One Labor Movement, warned that "hunger and poverty may eventually lead to riots."

  • India faces no rice shortage this year. But its stockpiles of wheat are down and in January New Delhi announced a ban on all rice exports except its high quality basmati, reducing export subsidies even on quality grain. India is the world’s second largest rice producer after China and a significant exporter for over 20 years, accounting for 12 to 15 percent of world trade. But acreage planted to rice has stagnated, output has turned flat and yields continue to be low with wide regional variations. If recent production trends are any indication, in the next couple of years India, with its rapidly increasing population — soon to be the world’s largest at more than 1.4 billion — will drop out of the world export market. Meanwhile, wheat imports that started again in 2006 now look to become a permanent feature of the Indian economy along with edible oils and legumes. It looks like rice too will join this list soon along with corn as another candidate for large imports. But the global price spike following large-scale diversion for ethanol has made imports a new burden on the Indian economy.

  • Both Vietnam and Cambodia, major exporters, followed India’s lead in March by ordering an increase in stockpiles. Vietnam has been hit by a virus called tungro and infestations of the brown plant-hopper insect. Farmers are complaining that despite a 50 percent increase in price of rice in the last three months, prices have doubled for fertilizer, insecticides and labor. Furthermore, to curb rising food costs and inflation, Hanoi has cut rice exports by a million tons this year.

  • Only in Japan, where government policy is to discourage rice production because of a diet change to more bread and bulging government-subsidized stocks, prices have been falling in recent months. Rice production has been declining on an area reduced by 20 percent since 1994-1995. But last fall the government bought a quarter of a million tons for its stockpile behind highly protected tariffs and quotas even though the levels are based on minimum access obligations for imported rice under the GATT agreement.

    Although the United States produces less than 2 percent of the world's rice, it is a major exporter, accounting for 10-12 percent of the annual volume of global rice trade. Latest U.S. Department of Agriculture estimates of exports for 2007/08 were raised by a million tons. The stronger forecast lowered the stocks forecast by 4 percent to the lowest since 1980/81. Despite domestic rice prices being at their highest since 1980/81, U.S. acreage for rice due to seed supply issues in 2007-08 declined. Record yields helped offset some of the drop in planting area. But rice remains one of the more expensive crops to plant, and even more so with rising fuel and fertilizer costs. Once the new federal farm bill is implemented, this could influence U.S. acreage planted in 2009.

    “There is less land, less water and less labor available for rice growing across Asia,” said Duncan Macintosh, director of the International Rice Research Institute in Manila. “Agricultural labor in countries like Thailand is increasingly shifting to industrial sectors. And rice is the most labor- and water-intensive crop.”

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