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Rice Shortage: The Real Story

Thursday, 24 Apr 2008 | 2:49 PM ET

This story about rice shortages -- which we covered yesterday and has today reached the "general" media -- is a good example of how the public can misunderstand an event.

There are two things going on here:

1) stories about food commodity prices rising over the past few months has attracted speculative investment, and

2) a few stories in the popular press about the increasing price of foodstuffs has caused a small percentage of the population to act, by buying much larger quantities of certain foodstuffs than they normally would. A small percentage (my guess is maybe 3-5 percent of the households) may actually be "hoarding," that is, buying far larger quantities of food than they could consume in several weeks.

But is there a physical shortage of rice? The answer seems to be no; but if that is so, why is CostCo limiting sales?

The answer lies in how a modern economy works: just-in-time inventory has become the standard. Under this methodology, stores do not stock large supplies of food, clothing, or anything else; they rely on computer models to accurately predict supply and demand. They rely on a supply chain that replenishes the products on a daily basis.

According to NewScientist:
1) a typical city has a 3-day supply of food;
2) a typical hospital has a 2-day supply of oxygen

Sound shocking? It hasn't bothered anyone, and it works fine, as long as something strange -- like hoarding -- doesn't occur.

Because when hoarding occurs, when even, say, 10 percent of your customers suddenly buy 10 times the amount of a single product than they normally would buy, the product is quickly exhausted and the supply chain will have trouble immediately providing the product.

So there is not a physical shortage of rice; there is a problem with the supply chain because hoarding has stressed the system.

Of course, if everyone decided to start hoarding, there would be a problem with the actual supply of rice. My point is that this story happened for a different reason.

Don't get me wrong -- there are long-term factors increasing demand for protein-based foods, and the grains that are used to feed the livestock.

Potash this morning included a long essay in its earnings report, noting that people in developing countries where populations are increasing "require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains."

But that long-term issue is a far cry from the so-called shortage of rice we are seeing.


Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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