The global rice market has been in a subdued state since 2010 (Fig. 1), during which time the prices of many other agricultural commodities such as wheat, soybeans,cotton, and sugar have shot up in the backdrop of weather-induced supply losses. Both cotton and sugar prices have reached all-time highs during this period.
The Food and Agriculture Organization food price index, in recent months, has exceeded the level it reached in 2008, but the number of hungry people is estimated to have risen by only 44 million compared with 100 million during the 2008 food crisis. Interestingly, the lower rice prices have kept a lid on the rise in the number of hungry people during the current food price spike—a shining example of the importance of keeping rice prices affordable for the one billion hungry people in the world.
The lower rice prices can be attributed to good harvests and to the comfortable inventory in the major rice producing countries in 2010-11. Rice prices have weakened by more than 10% in the last few months because of good spring harvests in Thailand and Vietnam in March. In addition to the abundant supply in major rice exporters, favorable weather and comfortable inventory in the Philippines have kept the world’s largest rice importer away from the global market. According to the United States Department of Agriculture (USDA), the Philippines’ rice imports for 2010-11 will be 45% lower, from 2.2 million tons in 2009-10 to 1.2 million tons in 2010-11.
Moreover, inventory in India, the second-largest producer of rice, is also at a very comfortable level, with procurement stocks of nearly 28 million tons by April 2011. Now, they have a problem of “too much” rice and the gravity of the situation was reflected in a news report published by The Hindu Business Line on 30 May 2011. The article reported that farmers in the tiny village of Achanta in West Godavari District of Andhra Pradesh were forced to sell their summer rice to private traders at prices lower than the minimum support price (MSP) because of a lack of storage space for the Food Corporation of India, the public agency in charge of procuring rice from the farmers.
In protest, 3,500 farmers in the village have declared a “crop holiday” for the upcoming kharif season. According to the report, similar stories have been heard in many other villages in the region.
Apart from India, Thailand is also entering its 2011-12 marketing year with an inventory close to its all-time high. The change in the government rice policy from a mortgage scheme to a price insurance program late last year has moved publicly held stocks to private holdings, with an overall level that is more or less the same as that of 2009-10. Global rice stocks are at their highest since the 2007-08 rice crisis, according to the USDA’s May 2011 PSD database.
In addition to comfortable inventory,the world is also going into the main rice season with a normal forecast of the Southwest monsoon on the Indian subcontinent. Premonsoon showers have been active in many parts of India. The monsoon already arrived in the southern state of Kerala in the last week of May and is expected to spread to other parts of the country in the first half of June.
The monsoon is significant to the global rice market. Back in 2009, delayed and irregular monsoon kept the market on edge for 2 months before calming down, thanks to India’s prudent handling of its procurement stocks to avoid agitating the international market.
Rice area in Asia for the coming season is also unlikely to shift to other crops despite higher prices because of the strong push by the national governments to keep rice production stable through interventions. For example, the 15–17% increase in India’s MSP for rice is likely to keep rice area intact in the coming season. Similarly, for Thailand, both of the campaigning political parties intend to raise the guaranteed price for the farmers, ahead of the general election in July 2011. The opposition party—favored to win the election—has promised to bring back the old rice mortgage scheme and significantly increase the pledging price. The national governments in other rice-growing countries in the region are also likely to implement programs to keep rice area disturbed, keeping in mind domestic food security. The USDA predicts that the 2011-12 rice area in most Asian countries will either increase or stay the same as last year’s with the exception of Japan, where rice area is projected to decline slightly because of the tsunami. Rice production in Pakistan is also likely to recover this year as area lost to last year’s severe floods is brought back into production but is expected to face competition from high cotton prices in some parts of the country.
The higher prices for competing crops such as wheat, soybeans, and maize are likely to prompt farmers in countries such as the United States and Brazil to switch from planting rice to any of these crops. The USDA’s May 2011 rice outlook report says that U.S. rice area for 2011-12 is estimated to decline by 17% and rice production by 13%. A similar shift is also likely to happen in Brazil, where lower prices for rice relative to other competing crops will encourage farmers to plant primarily more soybeans. The USDA report predicts a production drop of 17% in Brazil in 2011-12 because of smaller area planted to rice. Likewise, some decline is expected in Uruguay and Argentina as some rice areas are converted to soybean farms.
Furthermore, inclement weather in the U.S. is almost certain to push its rice production down. The recent flooding in the southern part of the country has affected the progress of rice crops in some rice-growing states and its impacts on rice production are yet to be ascertained.
Also, the ongoing drought in the eastern, central, and southern parts of China, particularly in two major rice-growing provinces, Hunan and Hubei, is definitely a major concern for the global rice market. Both Hunan and Hubei produced more than 41 million tons of rice in 20091 and the ongoing drought is likely to damage early-season rice crops in these provinces.
Other drought-affected provinces are Jiangxi, Anhui, and Jiangsu. If the dry spell persists, it will significantly affect China’s rice production and it may force the country to enter the global market to increase its domestic supply. Fortunately, Chinese rice stocks are at a relatively comfortable level and should provide adequate buffer to temper the moderate shortfall in this season’s production.
Depleted stocks, however, will make China vulnerable to more weather shocks in the next crop year.
This situation can change quickly as the rains arrive, but, at this point, it is difficult to gauge the extent of the damage to production. In fact, flashfloods have been reported in many parts of the drought-affected areas as of 7 June because of the continued rainfall since the first week of the month. This does not mean, however, that the drought is over.
Some damage has already been done and crops are unlikely to fully recover even if the rain becomes regular for the remainder of the season. Nonetheless, regular rainfall from now on will benefit the late-season crop, which will be planted in July. In the worst-case scenario, if the rain withdraws again and rice production is affected, it will be difficult to predict what China will do to make up for the shortfall. If China decides to import significant volumes of rice, it will be even harder to predict how other countries will react and how high the price will go.
The main rice season has just begun. It is almost certain that Mother Nature has a few more surprises up her sleeve similar to last season’s floods in Pakistan and the prolonged monsoon in parts of India. Even if the current rice crop escapes with only some minor weather damage, it is still critical that wheat and maize production recover from the severe weather-related shortfalls in 2010. Global stock-to-use ratios for wheat and maize are estimated to decline by nearly 3% in 2010-11 to offset the production shortfall (Fig. 2). Another bad year for wheat and maize may be too much for the global market to handle and, if that happens, it will definitely have an adverse effect on rice prices.
Looking ahead into 2011-12,global rice consumption will be strong because of higher prices for other food items. This will prompt the poor people in the developing and least developed world to eat more rice. According to the USDA, global rice consumption in 2010-11 was reported to be 448 million tons on a milled basis. Based on our estimates, demand will grow by 2% in 2011-12 to 455–460 million tons. Thus, global production of 460 million tons of milled rice is likely to keep the market stable. Apart from weather uncertainties, politics will also play its part in shaping the market in the coming few months.
Thailand’s general election in July will certainly have some effect depending on who wins. If the Thai opposition leader wins and carries out his election promises, global prices are likely to move upward. However, if the current government wins the election and raises the insurance price from 11,000 to 12,000 baht (US$360 to $392) per ton, this will have an opposite effect on the global market. It will push prices further down.
We also have the “1,000-pound gorilla,” such as that in India, which can flood the market with the reversal of its ban on nonbasmati rice exports and bring the global rice market to its knees.
Good world rice production and the resumption of India’s exports in 2011 can put significant downward pressure on this market. Overall, the global rice market is headed for some dull moments in the next few months and prices are likely to remain range-bound. However, weather-related problems such as large-scale flooding and drought as well as policy shifts in rice-growing regions can quickly transform the market from directionless to either a bear or a bull market.