World market rice prices tripled between April 2007 and April 2008, with most of the increase coming early in 2008. While the world market price is an important indicator of scarcity, rice-consuming and -producing households do not buy and sell directly on the world market. Thus, an important question for food security is the extent to which changes in world prices are transmitted, or passed through, to domestic consumers and producers. Price transmission from world to domestic markets is influenced by many factors, but two of the most important are exchange rates and government policies. Inadequate infrastructure can also play an important role, but this is less relevant in the Asian context, where infrastructure is much better than in Africa, for example.
Exchange rates
Even before the sharp increase in early 2008, world rice prices had been steadily increasing since early 2004: they increased 44% from the first quarter of 2003 (Q1 2003) to Q1 2007 in inflation-adjusted US-dollar terms. But, for many Asian countries, this “headline” price increase was illusory because the US dollar was steadily depreciating against a wide range of regional currencies. For example, during these 4 years, the Philippine peso strengthened against the dollar from 54.2 in 2003 to 46.1 in 2007. Thus, the world price as measured in Philippine pesos did not increase nearly as much as the world price as measured in US dollars. In Figure 1, the left column for each country makes this adjustment (using inflation-adjusted exchange rates), showing that world rice prices during this time typically increased much less in inflation-adjusted domestic currency terms than in inflation adjusted US-dollar terms, although Bangladesh was an exception.
Government policies
In addition to exchange rate movements, domestic rice policies such as procurement, storage, and variable tariffs also determine how world prices are transmitted to domestic markets. Many Asian countries actively try to stabilize domestic prices, and the right column for each country in Figure 1 shows that, for several countries, the change in domestic consumer (either retail or wholesale) prices was much less than the change in world prices during this time, even when the change in world prices is adjusted for exchange rate movements.
Bangladesh, India, the Philippines, and Vietnam all fall into this category of countries that stabilize domestic prices. For all of these countries, the volatility of domestic consumer prices during the past few years has been less than that of world prices, thus justifying the use of the term “stabilizer.” As one example of the results of this type of stabilization, Figure 2 shows the evolution of monthly domestic retail rice prices in India between 2003 and 2007. Clearly, domestic prices were more stable than international prices during this time.
Historically, Indonesia has also stabilized domestic rice prices, but, in recent years, its trade policy has been dominated by domestic political considerations that have served to destabilize domestic prices by restricting imports.
Thus, in Indonesia, the increase in domestic consumer prices from Q1 2003 to Q1 2007 was actually greater than the increase in world prices in real rupiah terms.
Thailand and China during this time acted more as “free traders.” Thailand has some government intervention in terms of procurement and storage, but domestic prices nevertheless follow world prices very closely. China does not allow the private sector to trade at all, much less without restriction, so it is not a free trader in the sense that economists use the term. But, at least through the early part of 2007, it was allowing changes in international prices to be reflected more or less fully in domestic consumer prices.
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