Rice Crisis or Reality Check?

Spiraling food costs. Everyone is talking about it in Asia – over morning coffee, on the trains, over family dinners, even during the elevator ride up to work.  In particular, the surging price of rice.  At the end of 2007, rice was priced at $360 a metric ton.  Last week, medium-grade Thai rice (considered a market benchmark) hit $795 a ton.  The Thai Rice Exporters Association expects rice prices to hit $850 a ton this week.  And according to experts, we should expect to see the $1,000 per ton undreamt of price ticket sometime in the next three months.  

Asia is panicking. By the end of March, 35 countries had recorded food riots. In the Philippines and Indonesia rice hoarding is taking place. The governments of Vietnam, India and Cambodia have taken steps to curb exports in order to ensure domestic supplies. Chinese Premier Wen Jiaobao took the unprecedented step of guaranteeing rice supplies to Hong Kong and Macau after soaring prices triggered panic buying.

Rice isn’t the only soft commodity to experience a sudden price surge. According to the United Nations’ Food and Agriculture Organization (FAO), food costs worldwide spiked 23 percent from 2006 to 2007. Grains rose 42 percent; edible oils 50 percent, and dairy products 80 percent.  Corn, wheat and soybean futures have all set new records on the Chicago Board of Trade this past quarter.  But rice is probably the most politically sensitive commodity on the market.

Rice is the staple for half the world’s population. In Asia, rice isn’t just an important staple – it is part and parcel of life.  The Chinese word for rice is the same as the word for food. In Thailand, when you call your family to a meal you say, "eat rice". In Japan, the word for cooked rice is the same as the word for meal. Rice in Asia, is life. 

"Many countries and consumers are confronted by two choices. Cut consumption or cut something else to pay for the rice.  People in Asia simply will not substitute. This is the situation for the months ahead until the market finds it supplies", says Abdolreza Abbassian, secretary of the Intergovernmental Group for Grains, FAO. 

Finding supplies will be difficult this year. The United States Department of Agriculture predicts demand to exceed supply, with 2007/08 global rice production expected at 421 million tons against a forecasted consumption of 424 million tons.  Water shortages and a sharp coldspell in China, floods in Bangladesh, India, Indonesia and Vietnam, excessive rainfall in North and South Korea, a typhoon in the Philippines and severe drought in Australia have all drastically reduced rice harvests. And global rice stocks are 4 percent below a year earlier and the smallest since the 1983/84 season.  Moreover, ninety percent of rice produced in countries like Thailand, is consumed by its own domestic market, leaving a very small percentage for export purposes. 

As fears and worries over rising rice prices mount, finger-pointing has become the norm in public forums. Everyone and everything from speculation by hedge funds, the rising costs of fuel, the diversion of crops to biofuels, poor government agricultural policies to hoarding and profiteering by farmers and middlemen have been blamed.

Reality Check

And yet for all the doubling and tripling of food costs, economists are pointing to the fact that current food prices are cheap relative to real inflation.

"When we look back over the last 40 to 60 years, we've seen prices far higher than this. If you look back after World War II, 1947-1949, prices were significantly higher than now.  We saw this again in 1972-74, when Russia bought U.S. stockpiles. As far as bull market is concerned, prices are certainly high at the moment, but in inflation-adjusted terms, it's very very cheap compared to those all time highs," says Peter McGuire, managing director of Commodity Warrants Australia. 

Data provided by JPMorgan shows that global inflation in the last decade averaged at under two percent annually in industrialized countries and was slightly above five percent in developing countries.

According to the FAO, in real terms, current commodity prices are similar to the highs experienced during the Asian financial crisis in the 1990s, and are much lower than the levels observed in the 1970s. 

"We believe grain prices in general, especially wheat and maize, have been exceptionally low for a long time.  It’s a reflection of the way the U.S. and Europe encouraged surplus production. This discouraged developing countries from producing food because they couldn’t produce at subsidized prices of industrialized nations," FAO’s Abbassian remarks.

Abbassian adds that while food prices are at record levels, it is important to remember that, "past prices were artificially low.  So the true price is somewhere between the record prices now, and the low prices 20 years ago". In the longer term, the FAO expects prices to come down, but doesn’t expect them to go back to the artificial low prices of the previous two decades. 

Lim Say Boon, chief investment strategist with Standard Chartered Wealth Management feels that there’s a lot of catching up to be done in terms of price levels. "Prices are very very low relative to inflation. Real inflation-adjusted prices are at a 50-year low for the entire agricultural commodities complex, not withstanding the nominal price increases we've seen in the recent months," Lim says. 

So what does this mean for us, the people having fried rice for lunch?  For the wealthy and middle class consumers, rice and wheat price increases are a pricier inconvenience that they can and will have to bear with. But if prices go higher, it will be a disaster for the poor, who spend most of their disposable income on food.

Record high global grain prices have already compromised humanitarian aid efforts of international organizations such as the UN’s World Food Program (WFP). In 2006, WFP provided some 88 million people in 78 countries with much needed starvation-prevention food aid. As result of record world grain prices, WFP has been forced currently to launch an "extraordinary emergency appeal" for $500 million to continue its vital humanitarian work.           

"At best, we’re at the same number of people last year who needed food assistance.  So, a simple calculation would conclude that only half the people can be helped this year if WFP cannot secure enough food supplies," says FAO’s Abbassian.

© 2009 CNBC.com