All’s Not Well in the Rice Market
On the surface, rice markets remain calm and stable, but underlying market sentiments are rapidly changing because of weather disruptions in many rice-growing nations. The global rice market faces the possibility of a production shortfall in the major rice-growing regions in South and Southeast Asia and also in China because of El Niño events. So far, the market has been quite nonchalant about this possibility because of large buffer stocks in key rice-growing countries. Global rice stocks, at least on paper, have increased by 36−80 million tons since the rice crisis in 2007 (USDA: 36 million tons; FAO: 80 million tons). However, the majority of these increases in rice stocks have occurred in three countries (India, China, and Thailand) and they have largely been held by the state agencies.
Among these three countries, the Food Corporation of India (FCI), the nodal agency of the Indian government for rice procurement, publishes the procurement stock level on its website on a monthly basis, whereas China has always been secretive about its grain reserves. According to FAO, the current rice inventory in China is close to 100 million tons, whereas USDA puts it close to 50 million tons. Despite these large stocks, China has emerged as the largest importer of rice in the world in the past couple of years and nobody can provide a satisfactory answer as to why China is suddenly importing so much rice. Similarly, Thai rice stocks have ballooned in the past couple of years because of the pledging scheme implemented in late 2011, but there is a lot of confusion among government officials and rice traders and millers on the level of pledged rice stored in thousands of warehouses spread across the country. The Thai military government is now investigating 1,800 warehouses across the country to ascertain the quantity and quality of the stored rice.
El Niño Effects
Many rice-growing countries in South and Southeast Asia are cautiously optimistic about rainfall distribution in the next couple of months that will determine the fate of the biggest crop of the year and is likely to shape the direction of the market. In the case of India, the largest exporter in the world, where the wet season crop accounts for more than 85% of the total crop, the southwest monsoon arrived in many rice-growing states 7 to 10 days late and has weakened in many parts of India since then. In the eastern state of Odisha, the monsoon arrived in the third week of June and soon after disappeared. In many parts of the state, paddy transplanting has not started yet. The agricultural director of the state told the media on 9 July that, if rain does not return by the next week (15 July), then a million hectares of land cannot be planted with rice this season, that is, a quarter of the total rice in the state. But, fortunately, rainfall started today (12 July) and is expected to continue for the next few days. This should speed up transplanting in the state. Several southern states such as Andhra Pradesh, Telangana, and Karnataka also face similar situations because of deficit rainfall so far. The fate of millions of hectares of rice land is dependent on the revival of monsoon in the next couple of weeks.
Although the current government rice stocks of 25.5 million tons (as of 1 July 2014) are at a very comfortable level, they have declined by 6 million tons from the 31.5 million tons at the same time in 2013 (Food Corporation of India website, accessed on 10 July 2014). In order to control rice prices, the government has recently allocated 5 million tons of rice for sale through the Public Distribution System at heavily subsidized prices.
The new government will be under pressure if planting is substantially reduced because of the late revival of monsoon and it may take measures to restrict exports, at least of nonbasmati rice, to safeguard the domestic food supply and keep enough in the warehouse to meet the requirements of the domestic food subsidy program.
The first line of action of the government will be to impose a minimum export price for nonbasmati rice exports to keep more rice in the domestic market similar to what it has done for onion in the past few weeks. In mid-June, the government imposed a minimum export price of US$300 per ton and further increased the minimum export price to $500 per ton after two weeks. If domestic rice prices continue to rise even after the imposition of a minimum export price, then some form of quantitative export restrictions or even an outright export ban on nonbasmati rice is definitely a possibility.
India’s actions to combat drought will largely decide the fate of the global rice market in the next few months. Its influence as the largest exporter of rice is a lot greater now than what it used to be in 2007. If India remains open for business, the rice market will behave rationally and prices will be determined by fundamental factors. However, if India imposes any export restrictions, particularly quantitative restrictions, then the market might panic.