COLUMN-Asia rice prices look unsustainably high as supply rises: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, March 1 (Reuters) - Asian rice prices are remarkably stable and unsustainably high considering the mountain of the grain that is piling up across the region.
And it's not just a Thailand story, although the government's intervention scheme certainly has resulted in record inventories building up in a country that was until last year the world's biggest rice exporter.
But stockpiles are also building up in India, which may see inventories rise to more than 34 million tonnes this year, or about double what Thailand has in storage.
The question is why are prices not falling, and rapidly, given the massive over-supply of rice, the staple food for almost two-thirds of the world's population?
Ultimately it's because the market is tighter than the supply situation would imply, but there is every chance this is starting to change and prices should start to decline.
Benchmark Thai 5 percent broken rice <RI-THBKN5-P1> was $570 a tonne last week, little changed from a week earlier.
It has been trading in a relatively tight range since October 2008, when it stabilised after the massive run up in commodity prices in 2007-08 that was followed by the crash during the global recession.
Thai rice has been in a $400 to $620 a tonne range over the past 40 months, notwithstanding market concern about the government's intervention scheme, launched by Prime Minister Yingluck Shinawatra after she won power in May 2011.
Over the same period Thailand's rice exports have plunged from around 10 million tonnes a year to less than 7 million in 2012 as the government chose to stockpile rather than sell rice at less than the price it paid farmers under the scheme.
Thailand now has an estimated 17 million tonnes of rice in storage and this could rise above 20 million tonnes in the next few months.
It's clear that Thai rice prices are being held up by the government choosing not to sell, but Vietnamese rice prices have also been stable in recent years, albeit at a discount.
Vietnamese 5 percent broken rice was $405 a tonne last week and it has been in a range between $345 and $585 since October 2008.
However, recently its discount to Thai rice has widened to $170 a tonne, the most on record, eclipsing the $155 a tonne from January 2009.
This may be a sign that Asian rice prices are finally responding to the supply glut, as the Vietnamese price is now a better indicator of market conditions than the Thai marker, which is severely distorted by the government intervention.
Vietnam expects to export about 7.5-7.6 million tonnes of rice in 2013, slightly down on the record 7.72 million last year.
However, outward shipments in the first two months of the year were 844,000 tonnes, about 23 percent higher than the same period a year ago, according to government statistics.
India, which took over as the world's top exporter last year, would also like to ship more this year, but is expected to be hamstrung by congested port and rail facilities.
Indian traders also say they are being undercut on prices by Vietnam, Pakistan and Myanmar, another sign that Asian rice prices are finally starting to reflect the realities of supply.
Even Thailand is talking a good game on selling rice, with the authorities saying they will sell 7 million tonnes this year in government-to-government deals.
The problem is the government suffers from a serious credibility problem over rice, with previous announcements of sales denied by the alleged buyers and traders reporting insufficient port activity to indicate exports actually happening.
However, given the intervention scheme's massive cost to Bangkok's budget, it's likely that the government will get more aggressive in trying to shift rice, even if it's economical with the truth over actual volumes and prices.
If Thailand does export more, and India and Vietnam at least maintain last year's export levels, then more supply will reach global markets.
This is especially the case if Pakistan, the world's number four exporter, and ninth-ranked Myanmar also boost exports.
On the demand side, major buyers Indonesia and the Philippines are both trying to become more self-sufficient in rice, leaving China as the X-factor for the market.
Chinese imports surged 306 percent last year to 2.34 million tonnes, with Vietnam and Pakistan the big beneficiaries at the expense of Thailand.
Imports jumped again in January, rising 732 percent to 303,963 tonnes, with 89 percent coming from Vietnam and Pakistan.
China is importing rice because the price is cheaper than domestic supply, but whether this will continue for the rest of 2013 is uncertain as the Chinese are believed to have adequate stockpiles.
If China does continue to import at the same rate of recent months, it will lend support to Asian rice prices, but even so the additional supplies likely to hit the market should overwhelm any increase in demand.
(Editing by Miral Fahmy)