The global food crisis and the local rice price rise

By Dr. Parakrama Waidyanatha

The unprecedented escalation of food prices globally is alarming, and the World Food Programme has expressed grave concern that, unless the international aid agencies and rich countries act swiftly, there can be mass starvation in several countries. Over a 100 million poor who spend 50 - 70% of their earnings on food are the most affected.

Food prices have risen by 83% globally over the last three years, with the fastest increase being in the last year. Some countries such as India and China have been able to contain the price increase to less than 10% last year, whereas it was 55% for Sri Lanka and over 100% for several other countries such as Cambodia and Bangladesh.

The price of rice in the world market has more than doubled over the last year, and in Thailand, the world’s largest exporter, it has nearly trebled, reaching a price of US$ 950 per MT now from US$ 383 in last January.

The prices of the other two major food grains, wheat and corn have also risen by 130 and 38% respectively over the last year. According to analysts, the global rice stocks are the lowest since 1976, and the prices may rise until the end of next year exceeding even US$ 1000 per MT.

The Asian Development Bank in one of its recent reports on the subject argues that there is in fact no issue of a physical world food shortage, but one of distribution and access, the food producing countries reluctant to trade their excess stocks and the poor not having the buying power.

The large rice exporters, India, China, Vietnam and Egypt have banned exports causing serious difficulties in importing countries such as Bangladesh.

ADB also argues that export bans and price controls can be counterproductive. Sri Lanka too found it difficult to secure rice imports at the end of last year to replenish shortfalls but was fortunate to have bought 85000 MT at US$ 450 per ton.

Fodder for fuel

Many reasons have been attributed for the tightening of grain supplies such as high energy costs, climate change and consequent adverse weather( the drought in Australia, the cyclone in Bangladesh), diversion of croplands for industrial and other uses(China has diverted 4 million ha or 12% of its prime rice lands for such uses), growing affluence in rapidly developing economies, and production of biofuel out of grain.

As seen in Fig. 1, the U.S is diverting an amount equivalent to its entire export volume of corn for biofuel; this amount is expected to increase in the future, and one of Hillary Clinton’s election slogans ( as also the view of the other presidential contenders too), is: ‘from Middle East to Mid West (the U.S Corn Belt) for energy’.

Arvind Subramaniam, Senior Research Fellow at the Peterson Institute for International Economics, Washington,DC remarks that ‘food is now fodder for fuel’! Estimates show that a moratorium on biofuel production would reduce corn prices by 20% and wheat prices by 10%.

When starvation and human misery are looming large in such massive proportions, must not the U.S and other countries converting food grain to biofuel, suspend it until at least the food crisis eases. There are the technologies, land and water yet to produce enough food to feed the world. What are necessary are right policies.

True, all the above causes have contributed to the current food crisis, but what is not visible is the aggravation of the crisis due to price speculation by both big and small traders and middlemen the world over, and Sri Lanka is no exception.

The prices were peaking at that time. The farmgate price of paddy is an all time high, but the cost of production is relatively low(essentially on account of the massive fertilizer subsidy), enabling the farmer to have made an unprecedented profit, which in fact is heartening, as the farmer is usually always exploited! But how much paddy the farmer had in stock is the question. The margins retained by the millers and the other stakeholders do not appear unreasonable.

However, the ‘real life’ situation is different in that at the peak of the harvest, when bulk of the paddy is put in the market, the prices drop drastically and the large millers/stockists, then procuring paddy at low prices, get a big margin in pitching their rice prices at later paddy market prices.

The big millers claim, however, that their storage capacities permit only the purchase of about 5% of the total national production and hence cannot control the market. On the other hand, the Paddy Marketing Board(PMB) which usually purchased only 5-8%, and at best, only about 10% of the national production, had a tangible impact on price regulation. So the millers’ version is contestable.

During the recent rice price hike, the large millers were accused of hording large paddy stocks and causing an artificial shortage. On the other hand, the millers argue that their investments are huge, and are also obliged to provide stable employment for their workers.

Insurance

The margins they retain, they claim, are reasonable. A single large mill is said to mill 500MT rice/day, and working at full capacity these several mills can mill the entire national paddy production.

So the potential for monopolistic control of the rice market is evident, and it is up to the government to monitor and regulate operations of all players to ensure fair play.

The government should have legislation and instruments in place to ensure verifiability of paddy/rice stocks held by millers/stockists/traders and even producers. In addition it should ensure a buffer stock of 150 - 200 thousand tons of rice as an insurance against the risks of adverse weather and market failure.

The paddy and rice prices usually drop with the Maha (February/March) harvest and rise again after September when most of the following Yala crop is also sold.

The paddy prices which dropped from about Rs 15/Kg (Nadu) and Rs18/kg (Samba) in January 2007 to about Rs 13 and Rs 15 respectively in March/April, rose unusually rapidly from July /August reaching unprecedented prices of Rs 32 - 35 just prior to the 2008 Sinhala and Tamil New Year. The rice prices rose correspondingly reaching Rs 74 - 85 depending on the brand.

Only the government price regulations brought down the prices to the present levels after the new year. In the expectation of stemming the escalating prices, the government put its stocks (some 110,000 MT) in the market early, in July /August, which it normally does after September when the prices usually begin to rise, but it was of no avail, the reason being the shortfall was much larger.

Apart from about a 7% crop shortfall for 2007 as against 2006, the rice millers/stockists had already sold 350-400 thousand MT of low quality rice for animal feed production.

They, thus aware of the serious shortfall and the rapidly rising world rice prices and hence the government or the private sector’s inability to import rice at competitive prices, presumably proceeded to manipulate the market to their advantage.

Interestingly, at least some farmers aware of the rapidly increasing prices held back part of their Yala production, and perhaps for the first time in the history of the rice/paddy market, the farmers too have had a stake in the paddy market!

It is evident from the rice/paddy price ratios, that the farmers have had a comparative advantage as a result of the price hike. If the government could continue to regulate this ratio close to 2 through appropriate interventions, its impact on stimulating paddy production would be substantial.

In other words, the price of paddy should remain at Rs 30 to 35 per kg and the retail prices should not exceed the present levels so as not to hurt the consumer. The consumer too has little grounds to complain at these prices, given the current world rice prices

A win - win situation?

In the high potential areas, at the usual yield of 2 to 2.2 MT/Ac/season and at a paddy price of Rs 15 - 16/kg, the profit margin inclusive of imputed costs, is about Rs 20,000.

Therefore at the prevailing prices, it should double. With the heavy fertilizer subsidy of about 400% of the actual cost, the fertilizer cost is only 12% of the cost of production, whereas labour and machinery constitute about 50% and 25% respective Therefore, some reduction of the fertilizer subsidy would appear prudent with such attractive paddy prices, a tangible advantage to the government.

The millers margin might be marginally reduced at the controlled prices but given the massive milling capacities, their profits should be yet huge.

The wholesale dealers, retailers and other players should fall in line and be content with slightly reduced margins because if these cost/ price profiles are maintained, the likely benefit of increased produce volumes arising from increased cultivation should mitigate any losses from reduced margins. It could thus be a win -win situation for all.

Mismanagement and corruption, unfortunately, led to the closure of the PMB, but subsequent state interventions in the paddy market, mostly of an ad hoc nature, had hardly the desired impact in ensuring a fair price for the farmer or the consumer.

In the marketing chain all players other than the farmer and consumer are organized, and effective state intervention is necessary, either by way of active farmer organizations or a viable marketing mechanism to ensure fair play for the farmer and the consumer.

Professionally and financially strengthening the recently established Agricultural Produce Marketing Authority as also providing adequate storage space for grain are formidable challenges for the government in this regard.

The future

Sri Lanka has the physical resources and the technologies to produce its entire rice requirement and even an exportable surplus, but for the low returns from rice farming in the past particularly from the low potential areas (wet zone). Out of the last five years(2003 - 2007), in 2005 and 2006, we produced 98 and 100% of the requirement, whereas in 2003 and 2007 it was 90 and 94%.

In 2004, the production was only 78% being affected by bad weather. If the producer prices could be maintained attractive as at present, much of the abandoned paddy fields particularly in the wet zone would be re-cultivated. Peace in the Eastern Province would mean cultivation of the paddy fields there in entirety.

It is to be noted that, for example, in 2007 although we reached an all time record national yield of 4.3 MT paddy/ha, but fell 7% short of the national requirement, the major reason being nearly half of the Eastern Province, which contributes 29% of the national production, remaining uncultivated because of the war.

With relative peace in the East and good producer prices and the international demand for rice, the conditions, not only for producing our entire rice requirement but also an exportable surplus, truly exist.

Technology

There had been no recent technological innovations in the scale of the Green Revolution, but continued application of conventional breeding technologies and some new technologies have kept tangible productivity increases over the years, both locally and globally.

For example, hybrid rice technology developed several years ago in China has doubled Chinese rice productivity, although it has not caught up in Sri Lanka or other countries in the same scale hitherto. GM technology has been held in abeyance for crop breeding due largely to the risk of genetic aberrations in existing conventional crops and other related species through accidental genetic combinations.

This risk for rice has been overcome by Chinese scientists of the prestigious Zhejiang University (through the creation of a selectively terminable GM modified rice) and this could lead to industrialization of GM rice production.

However, given the magnitude of the global food crisis, a second technology revolution, green or otherwise, should seem necessary, but investments in research in agriculture locally and globally are woefully inadequate.

In Sri Lanka agricultural research funding has been declining, and there is scant attention for it. There are only rhetoric and slogans; not technological programmes. For example, there yet exists a gap of the order of 100% between research yields and farmer yields in rice. In the high potential areas, the farmer yields average about 5 tons of paddy/ha whereas the research yield is double.

Large scale field (‘yaya’) demonstrations have shown that merely by correct use of a simple package of technology, this gap can be easily covered at no additional cost. Is it then now not the most opportune moment to re-demonstrate this package in thousands of fields across the country mobilizing fully the available research and extension workers! The results could be amazing!

Internationally too attention recently for agricultural research has been dismal. For example the annual investment in public international agricultural research is a meagre US$ 100 million as against US$ 700 million by just one private agricultural firm, Monsanto.

There is thus the urgent need to reactivate the international agricultural consortium and step up investments if we are to expect tangible technological innovations in a global scale. The next ‘Revolution’ need not necessarily be ‘Green’ or in crop breeding, but possibly in reducing dependence on fossil fuel for food prices are inextricably linked to fuel prices.

To be continued