El Niño and Politics Grip the Global Rice Market

The rice market has been quite lackluster in the past few months except for the steady downward slide of Thai rice prices because of uncertainty in the continuation of the pledging scheme. Between February 2013 and March 2014, the Thai price for 25% broken rice declined by 37% from US$584 to $366 per ton. During the same period, the large spread of $150−200 per ton between Thai and competitor prices (India, Vietnam, and Pakistan) more or less disappeared and, in some cases, the Thai price fell below some competitor prices.

The failure on the part of the Thai government to raise funds for the continuation of the pledging scheme because of ongoing political turmoil and the caretaker status of the government has led to a steep decline in Thai rice prices in the past several months. The auctioning of rice by the government from current stocks has also been putting downward pressure on market prices.

The government has now completely stopped procuring rice from farmers. Left in the lurch, farmers have been selling their crop in the open market at a much lower price than the higher pledging price promised by the government.

The decline in rice prices has enabled Thailand to export more in the international market. In the first quarter of this year, Thai rice exports increased to 2.2 million tons compared with 1.5 million tons during the same time a year ago (data source: Thai rice exporters association homepage, accessed on 11 May 2014). However, stiff competition from other exporters such as India and Vietnam has kept Thai exports somewhat in check. The recent failure of Thailand to win the Philippine tender for 800,000 tons of rice is a good example of the extent of competition in the rice market right now. Vietnam’s state-owned agencies Vinafood 1 and 2 were awarded the contracts because of lower price quotations. Thailand is unlikely to obtain any relief in the near term as the supply situation in both India and Vietnam is very good.

Where Is the Market Going?

Global rice demand is projected to remain strong in 2014-15. According to USDA, global rice use in 2014-15 is estimated to rise by nearly 7 million tons, a 1.3% growth above the previous year. FAO even forecasts a much stronger consumption growth of 2.5% in 2014-15. However, on the supply side, the looming monsoon disruption from El Niño has cast uncertainty on the prospects of the main rice crop in many rice-growing countries in Asia. India and Southeast Asia are predicted to receive the brunt of El Niño in the form of deficit rainfall. The Indian Meteorological Department now (as of 24 April 2014) predicts that monsoon rainfall in India this year is likely to be 95% of the long-term average, with a model error of ±5%.

But, the good news is that the global rice stocks-to-use ratio is at a much more comfortable level of 23.5%. This is more than 5 percentage points greater than what it was during the rice crisis in 2007. In terms of absolute numbers, global rice stocks have increased by 36 million tons from 75 million tons in 2007 to 111 million tons in 2014 (PSD, USDA). The occurrence of moderate drought in parts of South and Southeast Asia due to El Niño could easily be handled by the large global stocks.

However, severe drought in some key rice-growing countries in the region can trigger panic in rice-consuming countries and this could prompt them to curtail the flow of rice to the global rice market. On top of that, the two largest exporters, India and Thailand, will have new governments on board in the next few months. In the case of India, the government stocks of 30.5 million tons as of 1 April, although at a very comfortable level, have declined by 5 million tons from 35.5 million tons at the same time last year (Food Corporation of India website, accessed on 26 April 2014). If the monsoon falters on the subcontinent, then the new government will be under pressure to restrict exports to safeguard domestic food supply and keep enough in the warehouse to meet the requirements of the National Food Security bill. In the case of Thailand, it is becoming more and more evident that the rice pledging scheme is unlikely to make a comeback, at least not in the present form. Without the rice pledging scheme, it is a no-brainer that Thai farmers will plant less rice in the wet season. But, that should not be a problem for the global market as Thailand has plenty of stocks to make up the shortfall.

Overall, the monsoon holds the key to what will happen to rice prices in the second half of the year. The market is well positioned to handle a moderate drought and other incidences of extreme weather. Thai rice stocks can come in handy in case of significant monsoon disruption in key rice-growing countries to keep the market stable.