The Price of Rice

On the News Tab, KXB posted a link to an article in Time about the skyrocketing global price of rice, which has the potential to destabilize economic conditions (and governments) all over Asia. For those who haven’t been following it, the price of rice has more than doubled in the past six months, peaking recently at more than $23.00 per hundred pounds. (See this Guardian article for more detailed numbers. Incidentally, the rising price of food has already led to riots in Haiti.)

The Time article points out that the problem isn’t that rice production has fallen (though part of the reason for the tight supply in Bangladesh in particular is the destruction caused by last year’s cyclone). Rather, the global demand simply seems to be rising faster than the supply, and many individual nations have been banning rice exports, destabilizing the market.

In India, the interaction between state regulators and the recently liberalized market is particularly complex:

Take India, for example, where rice prices are rising fast, contributing to 7% inflation last month, the highest in more than three years. The country is not suffering from a classic case of tight supplies. National rice production this year should hit 94 million metric tons, up more than 2 million metric tons from last year and more than 20 million metric tons from 2003’s crop, which was devastated by a bad monsoon. Nor have shortages hit a government-run rice-distribution program that helps feed India’s poor. That program bought 20.6 million metric tons last year. This year, procurement, from both domestic growers and importers, is expected to rise to 25 million metric tons, according to Manoj Pandey, a senior government official. “It’s not a question of low production or low procurement,” says Pandey.

What has changed is that, because of economic reform, the government has gradually eased its control over the rice trade during the past 15 years. India is now more open to the world — and more exposed to global price fluctuations. Farmers and traders across India are now selling to the highest bidder. That means a lot of Indian rice that was once sold domestically is instead sold abroad for higher prices — which in turn drives up domestic prices. The government, in an effort to keep as much rice as possible at home to quell inflation, has banned exports of nonbasmati rice and adjusted price controls to discourage exports of aromatic basmati rice.

(link)

The measures aren’t working. As the article goes on to state, instead of pushing the price of rice back down, the government’s ban on exports has led to hoarding on the part of sellers, who would rather not sell than sell at reduced prices.

The question I have for those who understand these issues better than myself is this: what should the Indian government do, keeping in mind that the vast majority of Indian consumers of rice cannot afford the current price?

34 thoughts on “The Price of Rice

  1. Instead of completely banning the sale of nonbasmati rice abroad, the Indian government should make it just slightly more expensive to sell it abroad and encourage rice growers to sell within India. Of course, I’m no economics expert so maybe we should call someone who IS.

  2. I saw in the news recently about farmers in Maharashtra committing suicide…not sure if it linked to the price of rice and/or inflation.

  3. Farmers in india commit suicide .it is not a news at all.cotton/coconut/rice/ginger/pepper….it does not make a difference .

  4. What the government should be doing in investing, and allowing private companies to invest,in farming through irrigation, post harvest facilities etc. In addition, how about improving the decrepit road and electricity networks in the villages so the farmers can deliver goods to the market with minimum wastage and cost. How about letting the market dictate the price of produce rather than forcing farmers to sell at an artificially low price. How about removing import tarrifs on grain so the prices are cheaper. And, I do not know where i read it, but in Kerala, the worker’s paradise, the local governments do not allow mechanized farming because of unemployment concerns. (I will try to find and post a link to the Kerala story).

  5. 2 · TheBrownReasonakaTheBrownChamp said

    I saw in the news recently about farmers in Maharashtra committing suicide…not sure if it linked to the price of rice and/or inflation.

    That is due to failure of the cotton crop and associated issues including rural credit and money lending, power supply and irrigation.

    As for rice, the government should let market forces play its part and reduce tariffs if any on rice imports. Rice exports are mainly basmati to the west along with other long grain rice forms. Indians also consumes other food grains wheat, sorghum (jowar),millet (bajari) along with short grain rice; so you could have so form of substitution in the short run.

    PDS or the Public Distribution System is one huge black hole where efficiency goes to die. Its riddled with corruption, wastages and has never helped the extremely poor people.

  6. The Bush government is partly to blame for this, as I argued in the other thread. It not just me Jeffery Sachs of – End of Poverty was on CNN just a few minutes ago and echoed the same sentiment (in different words. Basically we are taking a food resource and subsidizing it and driving our F-150 trucks to our desk jobs)

    The other problem is the bubble in OIL price. This is partly because of the US Fed keeps cutting interest rates to avoid recession. We like to think that the Fed is independant, but it is not. They act like little bitches of the powerful in the whitehouse. It seems to me that since this is an election year, the republicans will try to avoid recession at ANY cost. That cost is going to be run away inflation and run away OIL prices which are a proxy for the low Dollar. As the Dollar goes low against Euro and other main world currency, OIL goes higher.

    I am sincerely hoping that Republicans lose in a huge way for causing this worldwide mess and making lives of poor people worse the world over.

    And yeah, this shows that the Globalization gini is out of the bottle.

  7. Recently Paul Volcker, on Charlie Rose said :

    in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

    I hope the present Fed listens to Volcker and stops being politically motivated and does its job.

  8. I must be missing something (and, given my lack of any detailed knowledge about agricultural economics, I undoubtedly am), but why would opening up the agricultural sector to world markets increase price volatility? I would think the opposite–the “world” price of commodities should be less subject to India-specific events (e.g., flood, drought) than the “purely intra-India” price would be, so I would think exposure to world markets would dampen rather than exacerbate price fluctuation. . . There’s got to be more to the story, I think . . . .

  9. the Indian government should capitalize on the advent of the current market. The government should start by competing with foreign market prices and buying the rice practically wholesale from the farmers before selling to foreign markets at a higher controlled price. That way the people are treated fairly and the Republic could profit from current trends in demand. win-win.

  10. The government should start by competing with foreign market prices and buying the rice practically wholesale from the farmers before selling to foreign markets at a higher controlled price.

    Well, but that’s a huge implicit “tax” on farmers (compared to letting them get close to world prices through private brokers). Such a policy strikes me as (a) dubious from a distributive justice perspective and (b) depresses the incentive of farmers to produce more rice (more efficiently), which is dubious from both a hunger and an efficiency (in terms of suppliers reacting to market price incentives) perspective. If you want higher taxes on someone in India it hardly seems like starting with rural farmers is the way to go.

  11. This problem is serious and will continue to get worse over the next few decades as water shortages increase.

    It’s not unforeseen, however I wonder how environmentalists will address this issue with eco-friendly energy issues.

  12. what should the Indian government do, keeping in mind that the vast majority of Indian consumers of rice cannot afford the current price?

    How much rice is consumed in India anyway? I have not seen much rice consumption anywhere in Northern parts of India. Is it bigger in the South?

  13. In my country Sweden, the staple food has for centuries been potatoes (rice does not grow well in the Scandinavian climate).

    Might Indian farmers be encouraged to grow potatoes instead? :-S

  14. Pagal_Aadmi_for_debauchery………rice is pretty much the staple grain for south India as well as East India. A typical south Indian meal (with some variations across Andhra, TN, Karnataka and Kerala) will have 2-4 courses of rice eaten with rasam/sambhar/some powders (like gongura)/ending with yogurt/buttermilk. Similarly, east Indian food (Orissa, Bengal, Assam and even Bihar) is also rice centric. The diet is more wheat based only in Punjab/HP/UP and a few other northern states.

    As far as the issue at hand goes, one suggestion has been to allow the market to decide the price of rice, instead of the government capping the price of rice (which will result in hoarding). But simultaneously, the government could continue to buy/stock rice at the price the market decides, and then ensure efficient distribution to the people who need it, at a lower rate. I’m not quite sure how it will all play out though.

  15. Part of the problem is that the Indian government is trying to please two different constituencies that have differing goals – farmers want a high price for their crop, while consumers want a low price. Given the heavy debt burdens that many Indian farmers carry, to deny them a chance to sell their crops at higher price so they can pay off their debts quickly is a bad idea. Secondly, the “cheap” or subsidized rice is often of poor quality – why should a farmer make sure that rice that will be sold at a fixed price be as good as rice that is sold at a market price?

    Agriculture employs nearly 2/3 of India’s labor force, while producing only one-quarter of GDP. It is extremely inefficient. It would be better to take those farmhands and put their labor to better uses.

  16. 3 · dipanjan said

    Let them buy rice futures.

    IHT is run by the New York Times i.e. their reporting is behind the curve — India banned futures trading on rice more than a year back

    How about letting the market dictate the price of produce rather than forcing farmers to sell at an artificially low price. How about removing import tarrifs on grain so the prices are cheaper.

    Tariffs are being reduced on food commodities in a lot of places. Food prices are being kept low to prevent price shocks from hitting everyone. (Yeah, Indian farmers get a raw deal from globalization). Here’s an interesting paper that highlights many of the problems they face.

    It would be better to take those farmhands and put their labor to better uses.

    The Billion dollar question: How?

  17. Yeah I had the same question as Rob (#11). Also if price increases within India is a problem, why could they not simply ban these price increases within India? No? Aren’t there some commodities that are considered essential, and therefore cannot go through dramatic price increases? Did I just make that up? Clearly, not an economist:)

  18. The Indian government has brought this upon itself BY banning rice futures trading. Markets provide and distribute information not only to government officials, but to individual farmers. When they banned futures, the ‘shot the messenger,’ preventing farmers from knowing when, if and how to change their farming patterns to suit the market. There are many technical ways of dealing with this crisis. The best way out now would simply be to allow the market to import rice. The absolute worst thing that they could do is to ban exports. Now many farmers who would have otherwise earned more money, will be forced to sell at lower prices. They will switch from rice to more profitable products. Eventually, and certainly ironically, in about 4-5 months you will see that there is an even greater shortage of rice. How sad that this is what governments do, especially when we entrust them to look after our long term interests.

    Why are people so concerned about rice being a ‘staple’ for certain groups. It is ‘ok’ for people to switch temporarily from rice to other staples. People are not cows or sheep, we have the capability of eating and liking many different foods. This is absolutely NO reason to take such drastic measures anyway.

  19. to roger23 and others:

    this is not a economics/distribution problem alone. i hope you realize this is hitting at a more fundamental level—there simply isn’t enough food. today it is rice, tomorrow it will be other crops—don’t be ridiculous with the “oh i am a wheat fellow” crap.

    the story gets worse. india’s food production is slated to drop 15% from current levels over the next century due to climate change, while ironically, china’s and europe’s will improve by that amount due to the same climate change. what you are seeing is a potential food security disaster in southern latitudes, that has the capability to enslave south asia for another millenium. don’t give the story of futures trading without knowing what you are talking about.

  20. don’t be ridiculous with the “oh i am a wheat fellow” crap.

    “Let them eat Chapathis!”

  21. and about allowing exports and “market” dictating prices—read a bit about tariffs that your liberal democracies of the west put up to make sure that never happens. europe and the US are a bigger contributor to world poverty than you may think.

  22. bytewords. You could not be more correct about the dubious moral ground of western democracies when it comes to preaching free trade. However I contend that ANY country that places ANY tariff or subsidy, either export or import hurts itself AND EVERY other country as well. The tariffs and subsidies of the United States are self-damaging. Democracies do contradictory things, that is their nature. Luckily the evident idiocy allows us to see the horrible result of government intervention. In China,etc. they are probably making worse mistakes, yet you won’t know about it until 15 years later you hear of the deaths of 20 million.

    I am in support of absolutely true free trade. Where no government, either western or eastern, has the right to impose its jurisdiction over independent entities and people engaging with each-other with mutual consent.

  23. You are right about the change in food production, only if you believe that technology is not going to dramatically increase productivity. Food productivity per person/per acre is about 15 times higher in Israel, for example, right now than in India. If India can acquire that level of production in 15 years, and there is no good reason why this can’t or won’t happen, then obviously there is no problem. In addition, it is not ‘slavery’ to have to import food. As someone once said, there are two ways for the United States to make cars…build them in Detroit, or grow them in Iowa. There is no reason for one to be better than the other. If it is more inefficient for Indians to grow crops, then they will switch to manufacturing, or something else…while China and Europe utilize their relative advantage in food production. Only free trade will allow this. Free trade will notify farmers in India today, that they should be sending their kids to school, to learn math, science, english, whatever. Killing free trade is killing the messenger.

  24. 22 · roger23 said

    The Indian government has brought this upon itself BY banning rice futures trading.

    3 · dipanjan said

    Let them buy rice futures.

    A very interesting article claiming that an increasingly volatile market is making the time-honored futures mechanism unreliable, and increasing farmers’ risk, and that this increased risk too will increase the price of grains.

  25. Another interesting article out of the Asia Times.

    The global food crisis is a monetary phenomenon, an unintended consequence of America’s attempt to inflate its way out of a market failure. There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar.

    There is a 90% regression fit between rice price and Euro/US$ on 1-year chart. Even tighter is the correlation between rice and the price of oil, another store of value against dollar depreciation. Spengler is a psudonym. Speculations on eco-blogosphere peg him for a Brit or Euro old Africa hand.

    On the local news front, Costco, Mountain View is now rationing. [link] And on a more optimistic note, India may harvest record rice and wheat crop after adequate sunshine and rainfall boosted yields. [link]

  26. Dipanjan, That Euro/Rice chart is amazing. Love it when the datapoints corroborate the theories. The problem is that ECB will not cut rates and the politically motivated US Fed will not stop from cutting rates and (making money free .. again) But on the other hand, George Soros recently made a statement in a high profile European eco. meet that the Euro cannot replace the US $ as the currency of choice for the world. That gives me hope that as soon as this trade in Euro (and OIL) is unwound the commodity trade will also be over and prices will stabilize. Waiting anxiously for the next move by US Fed.

  27. The FED will most likely cut the rate by 25bps. Although there are indications from the ECB that it may follow BOE or the US FED if a major European bank reveals large losses. You are right wait and watch.

  28. i don’t care, i like roti instead anyways.

    How old are you?

    Why are people so concerned about rice being a ‘staple’ for certain groups. It is ‘ok’ for people to switch temporarily from rice to other staples. People are not cows or sheep, we have the capability of eating and liking many different foods. This is absolutely NO reason to take such drastic measures anyway.

    Maybe you haven’t seen this.