RICEPEC: Thailand’s Dangerous Idea

In a misguided attempt to protect Southeast Asia's rice growers, Thailand’s Prime Minister Samak Sundaravej wants to bring Vietnam, Burma, Cambodia and Laos together to create a cartel of regional rice exporters. Though not quite like OPEC, its aim to keep global prices high, or at least from not slipping back to the low levels seen earlier this decade.

Meanwhile, Brazil, one of the world’s largest food exporters and one with the potential to see further gains in its global market share, has banned rice exports. Given that Brazil is a net rice importer, this shows how desperate governments can become to keep local prices down regardless of their own broader national economic interests.

On the face of it, the Samak plan may seem a laudable objective, helping exporters by providing a floor price for producers to ensure the security of supply for importers.

However, it may also remind commodity market observers of former Malaysian Prime Minister Mahathir Mohamad’s attempt to do a similar thing with the tin market back in the 1980s, when Malaysia was the leading producer. The tin price collapsed, Malaysia lost a lot of money and its tin industry almost ceased to exist.

In theory the Samak idea might have potential. Thailand and Vietnam export 9-10 million tonnes and 4-5 million tonnes of milled rice a year, respectively, roughly half of global rice exports. Cambodia is currently insignificant but has potential. It is unlikely, but Burma could, with a change of government and policy, see huge increases in output and raise it exports from around 500,000 tonnes to a level at least as large as Thailand, regaining its former position as the world’s major rice exporter.

The flaw with the Samak plan is more fundamental. The countries concerned, even were they to join together, account for only about 15 percent of global rice production. OPEC at its height controlled more than 50 percent of global oil output and around 75 percent of exports and even today accounts for 40 percent of output. Furthermore, rice is more readily substituted by other grains such as corn and wheat, and even by root crops, than oil could be substituted except in the long term. It is no coincidence that rice has soared at the same time as other grains.

A less significant but still important matter is that the most obvious victims of any such successful cartel would be the major importing countries, which are the prospective cartel’s partners in ASEAN, the Philippines, Indonesia and, to a lesser degree, Malaysia.

Meanwhile completely left out of the Samak equation are the world’s largest rice producers, India and China. Both are exporters, although they only export tiny amounts relative to production – 1-2 percent in the case of China, 3-4 percent for India. The key to prices thus lies at least as much in the marginal supply/demand situation in those countries as in the policies and output in Southeast Asia.

For years, both India and China have been far more concerned with food security than with trading in grains and that is likely to continue. Export restrictions by both contributed to the recent price surge. In China it is possible that rice production will continue to stagnate as suitable land is taken up by urbanization, leaving little surplus for export. There may even be a period of rebuilding China’s stocks, which are believed to have run down a lot in recent years, though they are still huge by most countries’ standards. Growing of rice may also be discouraged in water-short northern China where pressure on the government to charge for water is building.

But equally, China’s rice consumption may fall as food choice diversifies, for example into potatoes, a non-traditional crop which is now a significant industry, making China an exporter as well as major consumer. In which case its rice export potential could even grow.

The situation in India is very different. India’s potential to increase rice production far faster than population growth is undeniable. Yields per hectare are half those in China and less than in Bangladesh. A mix of better irrigation, better roads and storage and wider use of improved seeds could easily make India into an exporter at least as large as Thailand.

Meanwhile on the demand side, it is possible that African countries which are currently major importers because their own rice yields are so low may improve their performance, or that local demand will shift back to traditional crops such as cassava and millet.

At the global level, the current grain price scare may well set off increased protectionist trends rather than inspire governments to see the merits of both trade and stockpiles. For example, the Philippines is again making rice self-sufficiency a goal even though imports have been a feature of the country for more than 100 years. It may be the traditional crop in much of the Philippines, and Philippine rice farmers are more productive than they are usually given credit for but scarcity of flat land, lack of major river basins and rapidly rising population all make rice self-sufficiency a goal which can probably only be met at huge cost to other crops and industries – and to urban consumers.

Yet the more Samak and company talk about rice cartels, the more politicians in the Philippines and elsewhere will have to respond with their own forms of costly protectionism.

Similar noises have been heard from Malaysia and Indonesia, though it less likely that self-sufficiency rhetoric will become reality if only because both are net food exporters thanks to palm oil. Malaysia is anyway already suffering from the cost of subsidizing both rice production and consumption.

Looking ahead, rice prices are likely to be constrained by the greater ability of other crops for rapid expansion. Production of soybeans and some grains in Latin America will continue to grow rapidly. Ukraine and Russia are already significant wheat exporters and have the potential to double existing yields.

Essentially, the greater the trade in grains, the greater is the chance of global food security being achieved on the basis of efficient production. While short-term export restrictions such as those in Vietnam and India are understandable given the need to keep domestic prices rising as rapidly as international ones, if they are anything other than short term they will simply undermine the efforts being made to liberalize global farm trade, the key goal of the Doha Round of trade negotiations.

Already high prices have become an excuse for the EU and the US to put off addressing their farm subsidy schemes, and Japan is trying to make a virtue out of importing less rice than it had earlier promised.

Recent developments in the grain situation show that global farm trade needs reform and liberalization more than ever. But the responses, whether of Samak, the Philippines or Japan, suggest that more restrictions will be the result, and with them less efficient output and the likelihood of more crises in the future.