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Reasons for the rise in rice prices

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Here's an article on the rising rice prices.

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.

Acknowledgement:
Philip Bowring, International Herald Tribute. Published on April 23, 2008. Available:
http://www.iht.com/articles/2008/04/23/opinion/edbowring.php

Analysis:
I have been wondering about the reasons for the rise in rice prices for quite some time before reading this article. What are the reasons for this rise in rice prices? Is it a sudden increase in demand or a sudden drop in supply due to natural disasters?

This article has suggested many reasons that have contributed to the rise in rice prices. The main reason for the rise in rice prices is the general drop in supply and the rise in demand. This has lead to a shortage and thus leading to a rise in rice prices.

Why would there be a decrease in supply :
1. The area of land allocated for the production of rice is limited. Furthermore, more land that is suitable for the production of rice is used for other purposes due to increased urbanisation. This has lead to a decrease in supply of rice grains.

2. Labor intensive
The production of rice is labour intensive. As countries such as China get more developed, less people are willing to work in the rice farms since they may be able to get jobs that provide them with better pays. This leads to lower growth in productivity of rice and thus causes a drop in supply.

3.Withholding supply
Some countries like China and India are limiting rice exports and keeping stocks in the country to prevent domestic price spikes. This contributes to the drop in supply as well.

Why would there be a increase in demand?

1. There is a rapid increase in demand for rice in countries that have big oil revenues and huge rice production deficits such as Iran and Saudi Arabia. These countries import a large amount of rice since it is a type of staple food. These countries are able to afford higher rice prices since they are generally rather rich due to the oil revenues. This has lead to the shortage of rice in other parts of the world.

2. US (and maybe EU)subsidies for rice production has resulted in low rice prices for the past few years as well as subsidised exports. As a result, many countries such as Ghana are increasingly import dependent. Hence there is a increasing rise in demand for rice.

So this overall rise in demand and decrease in supply has lead to a shortage, leading to the rise in prices.

I think rice should be considered as a rather price inelastic good since it is a type of stable food and almost a type of necessity for most families. Furthermore, many types of food(such as bee hoon) require rice grains. Hence, in the short term, thought there is a rise in rice prices, the demand for rice would not fall too much. Most people would require some time to switch to the consumption of other types of staple food such as potatoes. However, in the long term, the demand for rice would most likely fall as more people get used to consuming other types of stable food. Hopefully this would in turn lead to a drop in rice prices, according to the law of demand. The write of the article has also predicted such an outcome. According to the writer, "Per capita rice consumption tends to fall as societies get richer and diets more diverse." Hence, there is a slight glimmer of hope for all people who love eating rice.

Sylvia

posted by Ying Zhen @ 9:01 PM