The Price of Rice
When I read this post by one of the associate bloggers at Joe Gandelman’s The Moderate Voice, it piqued my interest. The post quotes briefly from this New York Times article about possible unrest from the sharp rise in the price of rice that’s gone on recently:
HANOI — Rising prices and a growing fear of scarcity have prompted some of the world’s largest rice producers to announce drastic limits on the amount of rice they export.
The price of rice, a staple in the diets of nearly half the world’s population, has almost doubled on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.
Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.
Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.
Reports of the increases in prices are various. The graph on the right, gleaned from the WSJ, reports a more than 30% increase in rice futures in 2007. This article reports a whopping 60% increase in the price of rice on world markets from March of 2007 to March of 2008.
What could cause such a sharp increase?
The NYT article suggests several reasons for the increase
- Increased demand due to greater affluence in China and India
- Reduced output by some growers due to poor weather conditions.
- Farmers abandoning rice production for more profitable crops.
- Reduction in acreage devoted to rice due to urbanization.
Unfortunately, the article doesn’t attempt to quantify any of these costs nor to identify which factors are more important than others.
One additional obvious factor would be the rising cost of petroleum which influences several aspects of rice production including transportation costs, the cost of mechanized cultivation, and the cost of fertilizer. The price of oil has nearly doubled since its January 2007 price of $50 per barrel. Major rice consuming countries including China, India, and Pakistan all subsidize oil consumption, i.e. the price at which gasoline is sold is below the world price and the respective governments of these countries pick up the tab. Egypt has only recently abandoned oil subsidies. Oil subsidies are a commonplace in many rice consuming countries in Africa and the Middle East.
Ironically, these subsidies render the countries more vulnerable to increases in the world price of petroleum since it encourages more petroleum-intensive means of production than might otherwise be the case.
However, rice isn’t made of oil. However important its cost is to rice production I wouldn’t think that the increase in the price of oil would lead to such a dramatic increase and, indeed, reports like this one from India and this one from Pakistan suggest that the cost of oil amounts to 25% or less of the cost of rice cultivation. This report from South Korea suggests that the cost of oil contributes 10% or less.
While I might imagine a combination of all of the factors above producing a 30% price increase within a year, I’m skeptical that they could produce a 60% increase, particularly as world rice production continues to increase.
What other factors might be involved? One possibility that I think might be considered is that government policy, both in net rice consuming and net rice producing countries is influencing rice production and prices. All of the major rice consuming countries have a labyrinth of price controls, import duties or bans, export taxes or bans, and rice storage policies that have the specific intent of influencing prices. While this is politically prudent it’s also inevitable that these policies will have unforeseen secondary effects.
Also, nowadays knowledge of world market prices reaches even the most remote corners of the world:
At the same time, prices set in international rice trading now have an increasingly important effect on prices within countries. This has been particularly true in an age of Internet and mobile phone communications when even farmers in remote areas can learn about distant prices and decide whether their own buyers are giving them a fair price.
Could hoarding or a modern equivalent be a factor?
Lest we be too self-satisifed with our own position and the prospect of American rice farmers benefiting from higher prices on the world market, I doubt that will happen. One consequence of our own government’s lax policies is that genetically-modified strains of rice that have been banned in many countries have escaped from test plots here and have infected no one knows how many rice fields in the United States. Lots of rice-consuming countries, whether motivated by a policy of food independence, fears of genetically-modified crops, or just plain opposition to imports, have regulations that prohibit rice from the United States from being imported without having been certified as free of unapproved GM strains. This, in turn, raises the cost of American rice and renders us less competitive.
In the end I have fewer answers than questions and close with the question I asked above. Why is the price of rice rising?