The volatile politics of rice

by Michael Richardson

A campaign promise that helped bring Thailand’s Prime Minister Yingluck Shinawatra and her political party to power in July elections is roiling the global market for rice, Asia’s staple food that is now eaten by nearly half the world’s population.

They promised their government would alleviate poverty in the countryside and raise rural income levels by buying unmilled rice, known as paddy, from Thailand’s eight million rice growers at 15,000 baht ($480) per ton — double the pre-election price.

The program to increase the minimum guaranteed price for farmers, which has just taken effect, seems tailor-made to keep more supplies at home and drive up the export price.

In anticipation, international prices for various types and grades of rice have increased by over 15 percent since July. There are fears that they will go higher still, adding to inflation pressures in Asia when governments are reluctant to raise interest rates as economic growth slows.

This is happening as Japanese consumers grow anxious at the prospect of a looming domestic rice shortage, following reports that the crop in Fukushima prefecture, the fourth-largest rice-producing region in Japan, has been contaminated by radiation from the damaged Fukushima No. 1 nuclear plant.

Thailand, Southeast Asia’s second largest economy after Indonesia, is the world’s top rice exporter, accounting for around one-third of global sales.

The London-based International Grains Council recently lowered its forecast for Thai rice exports in 2012 by 9 percent, to 8 million tons, as high government procurement prices slow shipments. It said that Thailand’s foreign rice sales next year are likely to be 20 percent lower than in 2011.

Indonesia, a leading rice importer this year, has already cancelled a planned purchase of Thai rice because it considered the price to be too high.

Ammar Siamwalla, head of Thailand’s Development Research Institute, says that the government’s strategy, backed by exiled former Prime Minister Thaksin Shinawatra, Yingluck’s brother, is to control the lucrative rice-export sector.

It is not the first time the Thai government has intervened in the market. During the global food crisis in 2008, it paid above-market rates in buying 5.4 million tons of rice to boost farmers’ incomes.

Local prices rose to a record 17,000 baht ($550) per ton in April that year, while export rates reached an unprecedented $1,038 per ton the following month, after China, India and Vietnam curbed shipments, leading to popular protests in a number of rice-importing countries.

Underlying causes of the upward spiral in internationally traded rice prices included surging demand, bad weather, and a rapid rise in costs of oil-based fertilizer as the price of oil shot up in 2008. Market intervention by governments, either to support local rice farmers or limit exports to conserve stocks, aggravated the food crisis, triggering panic and unrest in some consuming countries.

Will the social and political fall-out be similar this time? The Thai government appears to have two options in handling the surplus rice, which it must sell abroad at up to $870 per ton, well above the current market price of $640 per ton for high-grade rice, if it is to avoid a substantial loss.

It can either stockpile rice in the hope that the global price will rise, or it can export at subsidized prices that would cost Thai taxpayers billions of dollars.

The markets appear to be betting that the Thailand will withhold rice. There is growing concern about future global food security, as population increases and demand for staples rises.

The International Rice Research Institute (IRRI) in the Philippines has warned that the world needs to produce 8-10 million tons more rice every year to ensure a reliable supply of the grain and keep the price affordable.

In this context, the Thai government’s policy is misguided. Big farmers stand to gain most of the benefits because they produce most of the rice crop.

Instead, Thailand should let the rice market work freely and focus on helping growers, especially those with small and marginal farms, become more productive. Higher productivity means greater supply and thus lower prices.

An Australian study published last month found that new rice varieties developed by IRRI and planted, often with further improvements by local scientists, in Indonesia, Vietnam and the Philippines improved yields by up to 13 percent between 1985 and 2009, enabling farmers in those countries to harvest an extra $1.5 billion worth of rice per year as a result.

Market manipulation and fears about future food security may have caused the recent spike in rice prices. But there is no objective reason for the upward spiral to continue, unless China and other major rice consumers suddenly become big net importers or bad weather cuts production of leading exporters.

Aid agencies and officials are warning that mainland Southeast Asia’s worst flooding in decades may hit rice harvests in Thailand, Vietnam, Cambodia and Laos.

However, global rice stocks are high and before the Southeast Asian floods, the world was heading for a second successive year of record milled rice output. An International Grains Council forecast on Sept. 22 put 2011-12 production at 461 million tons, up by just over 2 percent on the previous crop year.

Carry-over stocks in the five top exporters — Thailand, Vietnam, the United States, India and Pakistan — were projected to reach 33 million tons. World trade in rice amounts to about 32 million tons.

Meanwhile, India has lifted a four-year export ban on non-basmati rice, allowing local rice traders to export up to 2 million tons of the grain.

So if there was greater confidence in the market mechanism, the price of rice would be stable or falling, not rising.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.