Why is the Price of Rice so High?

Every year, about 30 million tonnes of rice are traded on the global market. Last year, the world produced an estimated 645 million tonnes of rice. 90 percent of that was produced in Asia, where high rainfall and low labour costs make it an ideal crop to produce. China and India grew over half of the total crop.

Recently the price of rice shot up and the markets have been finding it difficult to settle. There had been a steady decline in yield growth over the past 15 years because of poor harvests and a decrease in funding for agricultural research but at the “start of 2008, a whole lot of other factors converged, and there was a huge jump,” explained Adam Barclay from the International Rice Research Institute (IRRI) in the Philippines.

“These factors included the increase in the price of oil, which made production and transport a lot more expensive. For example, fertiliser price is very heavily dependent on the oil price and the cost has become much higher. We had several bad weather events, cyclones in Bangladesh late last year, Burma this year, pest problems in Vietnam and drought.”

Rising global prices led some Asian governments to ban or restrict exports and this created a panic in the market as people feared rice would run out.

Misallocation of stocks

Tom Slayton from the Washington-based Center for Global Development, an independent think tank working to reduce global poverty, said there was enough rice but it had not been allocated efficiently.

He blamed one country in particular: “This has not been a production short fall but a political decision out of India. India is officially forecasting that food production this year will be 10 million tonnes larger than last year, that it will be a record and that the stocks today are much larger than they were even five months ago.”

“But because of the state elections, which are due to be held before November, and the parliamentary election, due in May 2009, the ruling government made a political decision so that their political prospects would be better if they were to ban exports.”

A precautionary measure

Pramod Kumar from the New Delhi-based National Council for Applied Economic Research disputed this argument, saying that Delhi’s decision to ban exports was more likely a precautionary measure as global prices rise and inflation in India almost reaches double digits.

He agreed that oil price hikes and the resulting increase in transport costs were having an impact on rice but he disagreed with the government’s analysis of the situation: “I think the Indian government’s ban on exports of rice is out of the ‘psycho-fear’ that the global situation might percolate.” In reality, he said, there was no “crisis-like situation” in India.

Whatever its motives, the Indian government’s decision to ban exports left the over 30 million tonne rice market with a hole of four million tonnes; resulting in panic buying. Asian governments, especially in the Philippines, the continent’s leading importer of rice, started hoarding the precious grain.

Classic speculative bubble

“A classic speculative bubble” was taking shape, explained Slayton of the Center for Global Development.

“Everybody in the supply and the demand chain decided to stock up on extra quantities of rice -- each individual decision may have been rational but the end result was a disaster.”

A disaster which started to settle only when some governments, in Vietnam for instance, lifted their partial ban on exports, and Japan announced it would export some of its stockpiles to third countries such as the Philippines and Sri Lanka.

Japanese stockpiles

Japan has an estimated 1.7 million tonnes of rice stored in warehouses. Tokyo reluctantly agreed to import rice during the World Trade Organisation’s Uruguay Round in the late 1980s and early 1990s but the government has been unwilling to release the imported rice into its heavily-subsidised domestic market.

Much of the stock, imported mainly from the United States, Thailand and Vietnam, is used in processed food, animal feed or simply left to deteriorate.

Experts from the Center for Global Development have suggested that Japan should divert these imported stocks to third countries, through the World Food Programme.

Only short-term relief

There is a general consensus that this would relieve the market on a short-term basis and experts hope the Japanese rice stocks will be released as soon as possible. The World Trade Organisation and the US are currently reviewing whether this would violate WTO regulations.

There is also some pressure on China to export more rice. But Adam Barclay from IRRI suggested that the price of rice would nonetheless remain high for some time: “We’re starting to see the price settle down now but the consensus is that when it does it will settle at a level significantly higher than it was six or 12 months ago, before this sharp increase. The concern is that there will be a fundamental increase in the price of rice at least in the foreseeable future, for several years and possibly beyond.”

Barclay thought the long-term solution lies in agricultural research and the implementation of new improved technologies. In the meantime, protests against rising food prices continue across Asia.