The Rice Crisis

What's behind the current food shortages: Is the increase in ethanol production to blame or is hoarding the problem?

Image details: Thai Producers Struggle To Meet Increasing World Demand served by picapp.com

As world rice prices set new records daily, the World Bank has warned that the crisis could further impoverish 100 million people (BusinessWeek.com, 4/25/08). What's behind the current food crisis and what can the world do to dig itself out from the problems? Here are a few of the key issues to consider.

Has the increase in corn cultivation for producing ethanol in the U.S. and Europe affected the price of rice?

Yes, indirectly. As farmers in the U.S. and Europe plant more corn in place of wheat to produce ethanol, the price of wheat has risen as supplies have tightened. Faced with higher wheat prices, people are substituting rice in their diets, particularly so in Africa. And, of course, the demand for ethanol as an alternative fuel is linked directly to the soaring price of oil. Moreover, the cost of rice production has increased significantly because fertilizer, transportation, and processing costs have shot up along with skyrocketing oil prices.

And how did that spill over to Asia?

India and Vietnam, the world's second- and third-largest rice exporters, saw the prices of soybeans, wheat, and corn skyrocket. In an attempt to keep a lid on domestic inflation, in late March both countries announced export restrictions. The idea was to ensure plenty of domestic stock of rice so prices wouldn't rise. But it backfired, because as soon as international prices shot up domestic traders jacked prices up at home anyway, leading to panic buying and hoarding.

But is there a worldwide shortage of rice?

No, there is an artificial shortage because of measures taken by governments of rice-exporting nations.

Who is doing the hoarding?

It's happening at several levels throughout the supply chain by traders, millers, wholesalers, and retailers. The appeal of rice for speculators is that it is easy to store and transport. However, this kind of speculation is extremely risky because the futures market in rice is not very liquid, so it it's difficult to hedge one's bets. There are 15 different benchmark prices for rice depending on quality, and the market is far from transparent.

How is Thailand, the world's biggest rice exporter, faring in all this?

At first blush, Thailand appears to be sitting pretty. The spot price of Thai fragrant rice is about $1,100 per ton, compared with about $320 at the end of last year. However, exporters make their contracts several months in advance of delivery, and Thai Rice Exporters Assn. President Chookiat Ophaswongse says several exporters face huge losses because they are buying rice from traders at today's prices but delivering that rice to buyers at prices from early in the year, before the latest price spiral started. Some exporters have renegotiated, others have defaulted on their deliveries. Chookiat says higher prices will cause exports to fall 20%-25% in the second quarter, to about 780,000 tons per month, compared with the first three months of the year.

If this is mostly speculation and government interference in trade, will prices fall eventually?

Up to a point. Once the price spikes, speculators and hoarders will try to unload their stocks, pushing prices down, but there is a lot of pent-up demand from major importers such as Iran and Indonesia that have not purchased any international rice in 2008.

Why don't farmers just plant more rice?

Because they can't. The majority of rice farmers consume most of what they grow already and plant rice on every available acre of land. What's more, rapid urbanization and, in China, desertification has led to a decrease in the available supply of farmland. The increase in biofuels has encouraged palm oil plantations instead of rice paddies. Also, as incomes rise in the region, people substitute more meat for rice in their diet, which requires more land to raise livestock and produce the same amount of calories.

Is a second "green revolution" possible?

In theory, yes, but it will take time. International Rice Research Institute director general Robert Zeigler says the time lag between new biotech discoveries and implementation on the farm is about 15 years. He also notes there has been underinvestment in rice research by multinational companies because it's primarily grown by poor farmers in developing countries.

Can't planting genetically modified rice help increase supply?

Yes, many varieties are readily available, but the problem is convincing the farmers to buy the seeds. Because rice is self-pollinating, farmers are accustomed to keeping their own seeds. Although hybrid rice is also self-seeding, each succeeding generation is less productive, and many farmers would rather save their cash than buy new seeds every year. "[Genetically modified seed] should be an important part of our toolbox, but it isn't a silver bullet," Zeigler says.

Who is getting hurt the most by soaring food costs?

The poorest populations in the world, for whom rice is a staple and spend the greatest percentage of their incomes on food. The World Bank estimates that 100 million people are at risk. Sub-Saharan African nations are particularly vulnerable because they import 40%-50% of their rice needs. But only 8% of the world's rice output is traded, so most rice-consuming countries actually feed themselves.

What about relief agencies. Can they obtain the food they need?

In theory, yes, the supply is available since much of relief food is actually sourced locally, so the drop in rice available for export has no direct impact. But since prices have risen so much, their budgets are stretched to the limit. On May 1, the World Food Program in Cambodia will stop buying locally produced rice, which it had been using to provide breakfast to 450,000 needy school children. It's abandoning the program because of spiraling prices. And the government of the Philippines, which is the world's largest rice importer, has only been able to buy part of the rice it imports because exporters have not responded to its tenders in full.

What short-term methods could boost supply?

More investment in irrigation. Better storage methods and low-cost devices such as moisture meters, which could help farmers avoid wastage. Also, greater use of hermetically sealed bags would prevent infestation.