Rice Smuggling Threatens Indonesia, Philippines

The Philippines’ massive purchases of rice at sharply increased prices from its neighbors are creating a fast-buck opportunity for traders in Indonesia, where prices are controlled, to smuggle the commodity out through Singapore for eventual sale in the Philippines.

Rice in government-controlled storage in Indonesia sells for US$436.80 per tonne at a time when the Philippine government and rice traders are offering up to US$1,000 per tonne in Vietnam and Thailand. The skyrocketing rice price and the attendant smuggling opportunities are generating political concerns in both countries, with Indonesian President Susilo Bambang Yudhoyono last week ordering government officials to prevent rice smuggling to other countries.

A top political source in Jakarta last week said the government is increasingly worried that rising rice prices and potential shortages could cause political unrest. “This is rice, and that means trouble if it goes wrong,” said the source. Yudhoyono has also sent a letter to United Nations Secretary General Ban Ki-moon urging him to take measures to ease speculation in commodity markets.

Meanwhile, in Manila, Senator Loren Legarda earlier warned of the possibility of social unrest and political instability for Philippine President Gloria Macapagal Arroyo’s already shaky government, which has endured a continuing series of coup attempts and impeachment moves fuelled by corruption scandals. Both countries are facing rising deficits on the amount of funds they must pour into adjusting subsidies to control rice prices. The Philippine National Food Authority said it could post a loss of as much as US$1 billion for 2008, compared to a US$762.1 million deficit last year.

After steady gains against the US dollar that made it the world’s second-best performing currency, the peso fell by 3.1 percent in March before stabilizing; the Indonesian rupiah fell 1.1 percent in the same period as both governments began bracing for budget deficits. Arroyo said earlier this month that the Philippines likely wouldn’t meet its goal of balancing its fiscal budget in the current year.

Still, it is debatable how real the global rice shortage actually is. Much of it is due to a complex set of factors, including hoarding, speculation and decisions by some rice-exporting nations, notably Vietnam and India, both of which have announced different forms of export restrictions to protect domestic consumers. On Monday, Thai exporters said they wouldn't participate in a Philippine rice tender next week because Manila said it wouldn't guarantee contracts. Exporters appear to be holding onto stocks at a time when importers like the Philippines are desperate to bolster their stocks. Hoarding – including by growers and traders in the Philippines itself – has added to the problems.

Some of the broader food price dilemma has been laid at the door of the United States and the European Union for promoting corn-based ethanol production, which caused the US, for instance, to divert massive amounts of land previously planted in soyabeans into subsidized corn for ethanol. Some 30 percent of the US’s corn crop is expected to be diverted to ethanol in 2009. France’s agriculture minister, Michel Barnier, told the Financial Times last week that “it is the Americans’ biofuel targets that are destabilizing the world” as other crops rise in price to fill the need. The UN’s Food and Agriculture Organization disputes that reasoning, saying biofuels are responsible for about 10 percent of the rise in food prices.

But it is the Philippines, where the so-called miracle rice that raised yields across the region was developed at the International Rice Research Institute in the 1960s, that has earned everybody’s notice. Two books, both asking why the Philippines can’t grow more rice, have become popular reading. It is common practice to blame the Philippine government for the domestic rice shortage, and there are reasons to do so. The country’s infrastructure, after decades of neglect, is woefully inadequate for transport. As much as 25 percent of rice is lost to insects, rats and other problems.

But according to an IRRI spokesman, the Philippines doesn’t do that bad a job growing rice. Productivity is quite high, the spokesman said, with Filipino farmers producing 3.4 tonnes of rice per hectare as against Thai farmers, who produce only 2.4 tonnes per hectare. And the quality is high.

“Although it is not widely known, Filipino farmers receive a much higher price for their palay (unhusked rice at harvest) than do farmers in neighboring countries,” according to the book, “Why does the Philippines Import Rice?” published by IRRI. By and large, they live in better houses, and are more likely to have electricity, running water and hygienic toilets than other farmers. They hire the majority of labor that works their farms, spending about 18 days a year per person at the fundamental task of growing rice.

The Philippines’ problem boils down to land and people, the IRRI spokesman says. They have too little of the former and too many of the latter. The Philippines is an archipelagic nation of 7,105 islands, few of them with estuarine areas ideal for growing rice. As in much of Asia, the possibility of increasing planting areas is nearly exhausted. Yield increases have begun to slow as well. Added to that, the Philippines population is perhaps the fastest growing in the region and one of the fastest growing in the world.

The country’s population has now topped 90 million, with three babies being born every minute, according to one estimate. The population has doubled since the late 1970s and is expected to double again over the next 30 years unless family planning gets seriously underway. Until the country can do something about that, which appears highly unlikely given the primacy of the Catholic Church, its rice shortages will continue no matter how fast its farmers increase productivity.