Agricultural and Food Policy
 Agri Outlook Radio
Number 160
Why are rice prices so high and why are rice consumers from parts of the Caribbean,
to Asia, to Africa angry and/or even rioting over rising rice prices?
(12:43 minutes)
Audio/Video Script:
Dr. Bobby Coats
Extension Economist and Professor
University of Arkansas, Division of Agriculture
Part 1: An extended bull market in commodities
Until proven otherwise I continue my assumption that we are building a
foundation for an extended bull market in commodities. Said differently a
huge expanding global economy with an expanding appetite for commodities is in
the making.
Global demand for commodities is growing and with this demand global
investors and speculators find commodities an increasingly attractive
investment. This is especially true for rice.
Now consider that rice globally has been significantly undervalued for the
past seven plus years. Now consider world rice stocks are dangerously low and
world demand continues to rise with the global bull market for commodities in
the making. The consequence: explosive price strength is one outcome and
secondly, many of the world’s poor consumers, who spend a large part of their
income on food, are facing devastating economic hardship. They become angry with
riots being one consequence.
The poor have become casualties of the some of the global economy’s negative
problems. Credit problems, currency issues, and resulting inflation are good
examples.
Part 2: A case for strong demand for commodities
Despite the global economy’s
negatives there is more right than wrong economically and politically in the
world. There are 3-billion plus Asians and others whose increasing standard of
living will grow the global economy and demand for commodities beyond most if
not all expectations.
We must understand that countries have, do, and will protect their
agricultural sector – hence their food, and especially rice. One only discusses
the degree of protection. Keep in mind a country’s ability to engineer adequate
protection of their food sector while meeting or attempting to embrace expanding
global trade commitments is difficult. Protectionism up to this point has
limited rice price strength. Now governments are limited in their ability to
manage price, due to tight global stocks, dollar weakness, continued global
growth, inflation, and the emergence of a bull market in commodities with heavy
speculative activity.
In a world filled with risk and uncertainty rice has real value to
governments and individuals. The world is and always will be volatile,
dangerous, and unpredictable, so food security is high on most country’s
priority list of security concerns. Think not? Then try discussing open trade in
rice with developing countries China and India, or for that matter developed
countries Japan and South Korea.
In general commodity prices for the past three decades have been moving
sideways in a channel. Over the decades rice prices would revisit previous lows
and highs. Rice prices were reasonably predictable. U.S. rice producers remained
profitable by increasing their efficiency, productivity and/or somehow keeping
there per unit costs competitive. For many U.S. producers a key factor in
keeping per unit costs competitive required they subsidize their operations with
off-farm income.
Part 3: Consider the following about rice
In the past one has wondered if U.S. commercial rice and cotton farms, or
other row crop farms, had a viable future, due to the global economy’s
inconsistent growth of the past 20 years, protectionism, and what at least seems
a willingness of U.S. trade negotiators to trade away parts of the ag sector for
the good of all.
Globalization or the movement toward increasingly open markets and free trade
over the past two decades has yielded global economic activity that ranges from
extremely strong to deeply recessionary with accompanying strong to weak
commodity prices. The last deeply recessionary period was the late 1990’s
through the early 2002.
In 2001 U.S. farm market rice prices were selling for around the same price
producers received in the 1950’s, which is why the 2002 farm bill extended the
traditional farm bill safety net.
On rice, now consider:
One cannot overstate rice’s importance in feeding the
world’s population.
Rice is one of the most protected commodities in the world.
Only some who have never been hungry will wonder why.
Global rice demand continues to increase with consumption
exceeding production in 5 of the last 7 years. The good news is that
global rice production has exceeded global rice consumption in 2 out of
the current 3 marketing periods.
A major global weather problem has not occurred in over a
decade. Given tight global supplies of rice and other food and feed
commodities then a significant global weather problem in the near future
could become more than a little problematic.
Rice prices must now reach a level that grows global supply
to more sustainable levels needed to meet the demands of a global
consumer with increasing food demands.
These rising rice prices though alarming to many of
the world’s consumers especially the very poor in emerging
markets and developing countries are required to assure the
needed future global supply of rice.
Our U.S. rice producers 2008 cost of production will
be about twice their 2002 costs.
Inflationary costs will continue to increase their
cost of production.
2008 should see most U.S. rice producers’ cash
flowing but prior to 2008 half to two-thirds of our producers
struggled with cash flow issues.
A review of the past decade shows rice producers
and row crop producers in general have been dealing with
accelerated change and levels of risk exposure that they have
never experienced on their operations.
The dollar’s weakness is a plus for U.S. exports but it is also
a factor in rising global rice prices. I expect the dollar to continue
to weaken.
Today’s world rice supplies are adequate, but extremely
tight. The 2007/08 marketing period ending stocks at 77.2 million tons
will exceed the previous three marketing periods so I expect global rice
stocks to build with these improving rice prices.
Part 4: On the question of what worries me about tight rice supplies?
First, my
immediate concern is if consumers in poor countries started hording rice because
they fear a rice shortage, or individuals hoard for profit beyond the present
experiences. Then an engineered shortage might spiral out of control causing
major economic and political consequences.
Second, I worry about a catastrophic
weather event occurring before the rice supply demand balance improves.
Third,
all countries should be concerned about their food security but increased food
protectionism and reduced global food trade would be a real negative for the
global consumer.
Part 5: Will the expected new farm bill do anything to reduce rising rice
prices and rice price volatility?
The expected new farm bill will increase rice producers’
dependence on the market and significantly reduce their safety net. Given the
explosive dynamics of the current domestic and global economic setting of the
past 4 to 6 months and our increased understanding of these economic events,
then the current proposed new farm bill will provide a safety net that is
significantly less supportive than the previous farm bill for rice farmers.
Inflationary costs and a reduced safety net will be problematic for rice
producers, especially the bottom 2/3rds of our rice producers.
Part 6: Is there a bubble in commodities?
Absolutely not. This is the beginning not
the end of the global bull market in commodities. When the average investors are
heavily invested in commodities, then let’s talk about a bubble, say ten
plus years from now.
This emerging bull market in commodities will be dangerous. Commodities will
not participate equally, so fundamentals and future expectations surrounding
each commodity should be followed closely. Expect price volatility, expect
corrections, almost no reasonable situation should be unexpected. Individuals
should always seek professional assistance.
Part 7: What can be said about the outlook for U.S. long grain rice
prices?
U.S. long grain 2007/08 estimated ending stocks have only been lower twice
since 1982. They were lower in 1995 and 2003.
USDA’s Prospective Planting Report shows in 2008 U.S. all rice acreage of
2.77 million acres, which is slightly higher than the 2007 acreage of 2.76
million acres. The report shows 2008 U.S. long grain rice planted acreage at
2.07 million acres, which compares to 2007 acreage of 2.063 million acres.
World rice supply is one issue of concern and world rice prices is another.
Many of the Asian countries are harvesting new crop rice, so global rice
supply is expected to improve and remain at record levels. Global rice stocks
are expected to improve but remain dangerously low. Remember, dangerously low
global stocks have been the norm over the past 5 marketing periods.
Global rice supply then appears adequate, but will availability to needed
countries and individual consumers become a bigger issue? I expect not, at least
I anticipate global governments will take steps to limit severe supply
availability problems.
If one assumes the global economy shakes off current economic weakness issues
and regains trend economic growth, then the market would have to provide the
U.S. and global rice producer a price adequate to cover the inflationary cost of
production increases experienced since 2002.
The trend in U.S. rice prices remains up. Let me reiterate this emerging bull
market in commodities will be dangerous for a number of reasons. Expect price
volatility, expect corrections, almost no reasonable situation should be
unexpected. Individuals should also seek professional assistance.
This has been Bobby Coats Extension Economist University of Arkansas Division
of Agriculture.
Back to Agricultural and
Food Policy Radio
|
